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Republic of the Philippines

SUPREME COURT
Manila

EN BANC

DECISION


February 2, 1924

G.R. No. L-19495
HONORIO LASAM, ET AL., plaintiffs-appellants,
vs.
FRANK SMITH, JR., defendant-appellant.

Palma and Leuterio for plaintiffs-appellants.
Mariano Alisangco for defendant-appellant.

Ostrand, J.:

The plaintiff are husband and wife and this action is brought to recover damages in the sum of P20,000
for physical injuries sustained by them in an automobile accident. The trial court rendered a judgment in
their favor for the sum of P1,254.10, with legal interest from the date of the judgment. Both the
plaintiffs and the defendant appeal, the former maintaining that the damages awarded are insufficient
while the latter denies all liability for any damages whatever.

It appears from the evidence that on February 27, 1918, the defendant was the owner of a public garage
in the town of San Fernando, La Union, and engaged in the business of carrying passengers for hire from
the one point to another in the Province of La Union and the surrounding provinces. On the date
mentioned, he undertook to convey the plaintiffs from San Fernando to Currimao, Ilocos Norte, in a
Ford automobile. On leaving San Fernando, the automobile was operated by a licensed chauffeur, but
after having reached the town of San Juan, the chauffeur allowed his assistant, Remigio Bueno, to drive
the car. Bueno held no driver's license, but had some experience in driving, and with the exception of
some slight engine trouble while passing through the town of Luna, the car functioned well until after
the crossing of the Abra River in Tagudin, when, according to the testimony of the witnesses for the
plaintiffs, defects developed in the steering gear so as to make accurate steering impossible, and after
zigzagging for a distance of about half a kilometer, the car left the road and went down a steep
embankment.

The defendant, in his testimony, maintains that there was no defect in the steering gear, neither before
nor after the accident, and expresses the opinion that the swaying or zigzagging of the car must have
been due to its having been driven at an excessive rate of speed. This may possibly be true, but it is,
from our point of view, immaterial whether the accident was caused by negligence on the part of the
defendant's employees, or whether it was due to defects in the automobile; the result would be
practically the same in either event.

In going over the bank of the road, the automobile was overturned and the plaintiffs pinned down under
it. Mr. Lasam escaped with a few contusions and a "dislocated" rib , but his wife, Joaquina Sanchez,
received serious injuries, among which was a compound fracture of one of the bones in her left wrist.
She also appears to have suffered a nervous breakdown from which she had not fully recovered at the
time of the trial.

The complaint in the case was filed about a year and a half after the occurrence above related. It alleges,
among other things, that the accident was due to defects in the automobile as well as to the
incompetence and negligence of the chauffeur, and the case appears to have been tried largely upon
the theory that it sounds in tort and that the liability of the defendant is governed by article 1903 of the
Civil Code. The trial court held, however, that the cause of action rests on the defendant's breach of the
contract of carriage and that, consequently, articles 1101-1107 of the Civil Code, and not article 1903,
are applicable. The court further found that the breach of the contract was not due to fortuitous events
and that, therefore, the defendant was liable in damages.

In our opinion, the conclusions of the court below are entirely correct. That upon the facts stated the
defendant's liability, if any, is contractual, is well settled by previous decisions of the court, beginning
with the case of Rakes vs. Atlantic, Gulf & Pacific Co. (7 Phil., 359), and the distinction between extra-
contractual liability and contractual liability has been so ably and exhaustively discussed in various other
cases, that nothing further need here be said upon that subject. (See Cangco vs. Manila Railroad Co., 38
Phil., 768; Manila Railroad Co. vs. Compania Trasatlantica and Atlantic, Gulf & Pacific Co., 38 Phil., 875;
De Guia vs. Manila Electric Railroad & Light Co., 40 Phil., 706.) It is sufficient to reiterate that the source
of the defendant's legal liability is the contract of carriage; that by entering into that contract he bound
himself to carry the plaintiffs safely and securely to their destination; and that having failed to do so he
is liable in damages unless he shows that the failure to fulfill his obligation was due to causes mentioned
in article 1105 of the Civil Code, which reads as follows:

No one shall be liable for events which could not be foreseen or which, even if foreseen, were
inevitable, with the exception of the cases in which the law expressly provides otherwise and those in
which the obligation itself imposes such liability.

This brings us to the principal question in the case:

What is meant by "events which cannot be foreseen and which, having been foreseen, are inevitable?"
The Spanish authorities regard the language employed as an effort to define the term caso fortuito and
hold that the two expressions are synonymous. (Manresa, Comentarios al Codigo Civil Espaol, vol. 8,
pp. 88 et seq.; Scvola, Codigo Civil, vol. 19, pp. 526 et seq.)

The antecedent to article 1105 is found in Law 11, Title 33, Partida 7, which defines caso fortuito as
"occasion que a case por aventura de que non se puede ante ver. E son estos, derrivamientos de casas e
fuego que se enciende a so ora, e quebrantamiento de navio, fuerca de ladrones. . . . (An event that
takes place by accident and could not have been foreseen. Examples of this are destruction of houses,
unexpected fire, shipwreck, violence of robbers. . . .)"

Escriche defines caso fortuito as "an unexpected event or act of God which could either be foreseen nor
resisted, such as floods, torrents, shipwrecks, conflagrations, lightning, compulsion, insurrections,
destructions, destruction of buildings by unforseen accidents and other occurrences of a similar nature."

In discussing and analyzing the term caso fortuito the Enciclopedia Juridica Espaola says: "In a legal
sense and, consequently, also in relation to contracts, a caso fortuito presents the following essential
characteristics: (1) The cause of the unforeseen and unexpected occurrence, or of the failure of the
debtor to comply with his obligation, must be independent of the human will. (2) It must be impossible
to foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to
avoid. (3) The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in
a normal manner. And (4) the obligor (debtor) must be free from any participation in the aggravation of
the injury resulting to the creditor." (5 Enciclopedia Juridica Espaola, 309.)

As will be seen, these authorities agree that some extraordinary circumstance independent of the will of
the obligor, or of his employees, is an essential element of a caso fortuito. Turning to the present case, it
is at once apparent that this element is lacking. It is not suggested that the accident in question was due
to an act of God or to adverse road conditions which could not have been foreseen. As far as the records
shows, the accident was caused either by defects in the automobile or else through the negligence of its
driver. That is not a caso fortuito.

We agree with counsel that neither under the American nor Spanish law is a carrier of passengers an
absolute insurer against the risks of travel from which the passenger may protect himself by exercising
ordinary care and diligence. The case of Alba vs. Sociedad Anonima de Tranvias, Jurisprudencia Civil, vol.
102, p. 928, cited by the defendant in support of his contentions, affords a good illustration of the
application of this principle. In that case Alba, a passenger on a street car, was standing on the platform
of the car while it was in motion. The car rounded a curve causing Alba to lose his balance and fall off
the platform, sustaining severe injuries. In an action brought by him to recover damages, the supreme
court of Spain held that inasmuch as the car at the time of the accident was travelling at a moderate
rate of speed and there was no infraction of the regulations, and the plaintiff was exposed to no greater
danger than that inherent in that particular mode of travel, the plaintiff could not recover, especially so
since he should have been on his guard against a contingency as natural as that of losing his balance to a
greater or less extent when the car rounded the curve.

But such is not the present case; here the passengers had no means of avoiding the danger or escaping
the injury.

The plaintiffs maintain that the evidence clearly establishes that they are entitled to damages in the sum
of P7,832.80 instead of P1,254.10 as found by the trial court, and their assignments of error relate to
this point only.

There can be no doubt that the expenses incurred by the plaintiffs as a result of the accident greatly
exceeded the amount of the damages awarded. But bearing in mind that in determining the extent of
the liability for losses or damages resulting from negligence in the fulfillment of a contractual obligation,
the courts have "a discretionary power to moderate the liability according to the circumstances" (De
Guia vs. Manila Electric Railroad & Light Co., 40 Phil., 706; art. 1103, Civil Code), we do not think that the
evidence is such as to justify us in interfering with the discretion of the court below in this respect. As
pointed out by that court in its well-reasoned and well-considered decision, by far the greater part of
the damages claimed by the plaintiffs resulted from the fracture of a bone in the left wrist of Joaquina
Sanchez and from her objections to having a decaying splinter of the bone removed by a surgical
operation. As a consequence of her refusal to submit such an operation, a series of infections ensued
and which required constant and expensive medical treatment for several years. We agree with the
court below that the defendant should not be charged with these expenses.

For the reasons stated, the judgment appealed from is affirmed, without costs in this instance. So
ordered.

Araullo, C.J., Street, Malcolm, Johns and Romualdez, JJ., concur.









Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-47851 April 15, 1988
JUAN F. NAKPIL & SONS and JUAN F. NAKPIL, petitioners,
vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and the
PHILIPPINE BAR ASSOCIATION, respondents.
G.R. No. L-47863 April 15, 1988
THE UNITED CONSTRUCTION CO., INC. and JUAN J. CARLOS, petitioners,
vs.
THE COURT OF APPEALS, THE PHILIPPINE BAR ASSOCIATION, JUAN F. NAKPIL & SONS, and JUAN F.
NAKPIL, respondents.
G.R. No. L-47896 April 15, 1988
PHILIPPINE BAR ASSOCIATION, petitioner,
vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., and JUAN J. CARLOS, and JUAN F.
NAKPIL & SONS and JUAN F. NAKPIL, respondents.
R E S O L U T I O N

PARAS, J.:
This is a motion for reconsideration of the October 3, 1986 decision of this Court, filed by the United
Construction Co., Inc., the decretal portion of which reads:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and
environmental circumstances of this case, we deem it reasonable to render a decision imposing, as We
do hereby impose, upon the defendant and the third-party defendants (with the exception of Roman
Ozaeta) a solidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in favor of the Philippine Bar
Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception of
attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals) and an
additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum
being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per
cent interest per annum shall be imposed upon aforementioned amounts from finality until paid.
Solidary costs against the defendant and third-party defendants (except Roman Ozaeta).
SO ORDERED. (G.R. No. 47851, Rollo, p. 635)
Plaintiff-appellant Philippine Bar Association (PBA for short) decided to construct an office building on its
840 square meters lot located at the corner of Aduana and Arzobispo Streets, Intramuros, Manila. For
the plans, specifications and design, PBA contracted the services of third-party defendants-appellants
Juan F. Nakpil & Sons and Juan F. Nakpil (NAKPILS for short). For the construction of the building, PBA
contracted the services of United Construction Company, Inc. (UNITED for short) on an administration
basis. The building was completed in June 1966.
On August 2, 1968, an unusually strong earthquake hit Manila and its environs and the building in
question sustained major damage. The front columns of the building buckled causing the building to tilt
forward dangerously. As a temporary remedial measure, the building was shored up by UCCI at the
expense of P13,661.28.
On November 29, 1968, PBA commenced this action for recovery of damages against UCCI and its
President and General Manager Juan J. Carlos, claiming that the collapse of the building was caused by
defects in the construction. UNITED, in turn, filed a third-party complaint against the NAKPILS, alleging in
essence that the collapse of the building was due to the defects in the architects" plans, specifications
and design. Roman Ozaeta, the then President of PBA, was included as a third-party defendant for
damages for having included Juan J. Carlos, President of UNITED as party defendant.
At the pre-trial, the parties agreed to refer the technical issues in the case to a commissioner. Andres O.
Hizon, a lawyer and structural engineer, was appointed by the Court as commissioner.
Meanwhile, PBA moved twice for the demolition of the building on the ground that it might topple
down in case of a strong earthquake. The motions were opposed by the defendants and the matter was
referred to the Commissioner. Finally, on April 30, 1979, the building was authorized to be demolished
at the expense of PBA, but not before another earthquake of high intensity on April 7, 1970 followed by
other strong earthquakes on April 9 and 12, 1970, caused further damage to the property. The actual
demolition was undertaken by the buyer of the damaged buiding.
After the protracted hearings, the Commissioner eventually submitted his report on September 25, 1970
with the findings that while the damage sustained by the PBA building was caused directly by the August
2, 1968 earthquake, they were also caused by the defects in the plans and specifications prepared by
the NAKPILS; UNITED"s deviations from said plans and specifications and its failure to observe the
requisite workmanship in the construction of the building; and failure of PBA to exercise the requisite
degree of supervision in the construction of the building.
All the parties registered their objections to aforesaid findings which in turn were answered by the
Commissioner.
The court agreed with the findings of the Commissioner except as to the holding that the owner is
charged with full time supervision of the construction. The court saw no legal or contractual basis for
such conclusion. Thus, on September 21, 1971, the lower court rendered a decision, the decretal portion
of which, reads:
WHEREFORE, judgment is hereby rendered:
(a) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman Ozaeta),
the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date of the filing of
the complaint until full payment;
(b) Dismissing the complaint with respect to defendant Juan J. Carlos;
(c) Dismissing the third-party complaint;
(d) Dismissing the defendants" and third-party defendants" counterclaim for lack of merit;
(e) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman Ozaeta)
to pay the cost in equal shares.
SO ORDERED.
On appeal, the Court of Appeals modified the abovesaid decision of the lower court. The dispositive
portion of the decision of the Court of Appeals, reads:
WHEREFORE, the judgment appealed from is modified to include an award of P200,000.00 in favor of
plaintiff-appellant Philippine Bar Association, with interest at the legal rate from November 29, 1968
until full payment to be paid jointly and severally by defendant United Construction Co., Inc. and third-
party defendants (except Roman Ozaeta). In all other respects, the judgment dated September 21,1971
as modified in the December 8, 1971 Order of the lower court is hereby dated with COSTS to be paid by
the defendant and third Patty defendant (except Roman Ozaeta) in equal shares.
SO ORDERED.
All the parties herein appealed the aforestated decision of the Court of Appeals.
This Court promulgated on October 3, 1986 a decision in favor of the Philippine Bar Association which
modified the appealed decision of the Court of Appeals, as abovequoted (Rollo of G.R. No. L-47851, pp.
634-662).
On December 24,1986, UNITED filed a Motion for Reconsideration (Rollo of L-47863, pp. 683-707). On
the other hand, on January 15,1987, the NAKPILS filed a Motion to Refer Case to Supreme Court En Banc
and for Reconsideration of aforesaid decision (Rollo of L-47851, pp. 717-751).
On February 11, 1987, UNITED filed a Manifestation (Rollo of L-47863, pp. 796-797) that it is joining the
NAKPILS in regard to their prayer to refer the present case to the Court En Banc.
The Second Division of this Court, in a Resolution dated April 1, 1987 (Rollo of L-47851, p. 788) denied
the NAKPILS" Motion for Reconsideration.
On April 15, 1987, PBA filed its Comment to UNITED's Motion for Reconsideration (Rollo of L-47896, pp.
828-835) while on April 24, 1987, the NAKPILS filed a Motion For Leave To File Second Motion For
Reconsideratio (En Banc) (Rollo of L-47851, pp. 791-797). On May 7, 1987, PBA filed its Comment to the
NAKPILS" Motion for Leave To File Second Motion For Reconsideration (En Banc) (Rollo of L-47851, pp.
790-795). On May 14,1987, UNITED filed a Reply to PBA's comment (Rollo of L-47863, pp. 844-853),
while the NAKPILS filed a Reply to the same comment on May 22,1987 (Rollo of L-47851, pp. 798-801).
The issues raised in subject motion for reconsideration of UCCI of the decision of this Court of October 3,
1986, are as follows:
I
THE FINDINGS OF THE COMMISSIONER, AS ADOPTED BY THE TRIAL COURT, AND AFFIRMED BOTH BY
THE COURT OF APPEALS AND THIS HONORABLE COURT NEGATE THE PREMISE THAT, THE SUBJECT
BUILDING COLLAPSED; HENCE, ARTICLE 1723 DOES NOT APPLY.
II
THE LEGAL DUTY OF PBA TO PROVIDE FULLTIME AND ACTIVE SUPERVISION IN THE CONSTRUCTION OF
THE SUBJECT BUILDING IS IMIPOSED BY PUBLIC INTTEREST USAGE AND CUSTOM; FAILING IN THAT
DUTY, PBA MUST BEAR AND/OR SHARE IN ANY LIABILITY FOR DAMAGES IN THE PREMISES.
III
LIABILITY, IF ANY, FOR THE DAMAGE OF THE SUBJECT BUILDING MUST BE BORNE BY ALL THE PARTIES IN
ACCORDANCE WITH THE COMMISSIONER'S FINDINGS AND WITH DUE REGARD TO THE CONDITION OF
THE BUILDING PRIOR TO PBA'S DEMOLITION THEREOF.
IV
THE FINDING OF BAD FAITH IS NOT WARRANTED IN FACT AND IS WITHOUT BASIS IN LAW.
V
THE AWARD OF DAMAGES COUCHED IN GENERAL TERMS IS DEFECTIVE; MOREOVER IT IS
UNWARRANTED BY THE FACTS AND THE LAW.
VI
THE AWARD OF ATTORNEYS FEES IN THE AMOUNT OF P100,000.00 IS UWARRANTED.
VII
THE INTEREST OF TWELVE PER CENT (12%) PER ANNUM IMPOSED ON THE TOTAL AMOUNT OF THE
MONETARY AWARD IS IN CONTRAVENTION OF LAW.
It will be noted that not unlike the motion for reconsideration filed by petitioner Juan F. Nakpil and Sons,
which was denied in the resolution of April 1, 1987, there is nothing in the motion for reconsideration
filed by the United Construction Co., Inc. that was not fully discussed in the assailed decision of October
3, 1986.
I
United Construction Co., Inc. (UNITED for short), gave considerable emphasis on the fact that the PBA
building did not collapse as found by the trial court and affirmed by the Court of Appeals. Otherwise
stated, UNITED wishes to stress that subject building did not disintegrate completely as the term
"collapse" is supposed to connote.
Be that as it may, it will be observed that in the assasiled decision, this Court is in complete accord with
the findings of the trial court and affirmed by the Court of Appeals, that after the April 2, 1968
earthquake the building in question was not totally lost, the collapse was only partial and the building
could still be restored at the expense of P900,000.00. But after the subsequent earthquake on April 7, 9,
and 12, 1970 there was no question that further damage was caused to the property resulting in an
eventual and unavoidable collapse or demolition (compete collapse). In fact, on April 30, 1970 the
building was authorized by the trial court to be demolished at the expense of the plaintiff. Note that a
needed demolition is in fact a form of "collapse".
The bone of contention is therefore, not on the fact of collapse but on who should shoulder the
damages resulting from the partial and eventual collapse. As ruled by this Court in said decision, there
should be no question that the NAKPILS and UNITED are liable for the damage.
Citing the case of Tucker v. Milan (49 O.G. 4379, 4380) as the case in point, the pertinent portion of the
decision reads:
One who negligently creates a dangerous condition cannot escape hability for the natural and probable
consequences thereof, although the act of a third person, or an act of God for which he is not
responsible, intervenes to precipitate the loss.
II
UNITED argues that it is the legal duty of PBA to provide full-time and active supervision in the co on of
subject building. Failing to cite any provision of law to support its arguments, UNITED insists on the
inherent legal duty of the owner, reinforced by practice, usage and custom, to exercise such supervision.
Apart from the fact that UNITED seems to have completely contradicted its own view that this
construction involves highly technical matters and therefore beyond the ambit of ordinary
understanding and experience, the contrary appears to be more in accord with ordinary practice, which
is to avail oneself of the services of architects and engineers whose training and expertise make them
more qualified to provide effective supervision of the construction. In fact, it was on the suggestion of
Juan F. Nakpil, one of the petitioners herein, that the construction was undertaken on an administration
basis (Decision, p. 3). Thus, the trial court did not err in holding that charging the owner with fun time
supervision of the construction has no legal or contractual basis (Decision, p. 7).
III
UNITED points out that bad faith is a question of fact which was not established. The Commissioner, the
trial court and the Court of Appeals, all of which are triers of fact, allegedly concede that there was
negligence but not bad faith.
A careful study of the decision will show that there is no contradiction between the above finding of
negligence by the trial court which was formed by the Court of Appeals and the ruling of this Court. On
the contrary, on the basis of such finding, it was held that such wanton negligence of both the
defendant and the third-party defendants in effecting the plans, designs, specifications, and
construction of the PBA building is equivalent to bad faith in the performance of their respective tasks
(Decision, p. 28).
IV & V
UNITED takes exception to the five (5) fold increase in the award of damages from P1,189,335.00 to P5
million pesos. It is claimed that the report of the Commissioner speaks of only P1,100,000.00 so that
there is no basis for such award. It will be recalled that the estimate of the Commissioner was limited to
P1,100,000.00 for cost of repairs after the partial collapse of the building on April 2, 1968 but not after
its total collapse reswting from the subsequent earthquakes. It is therefore evident that the actual cost
of total reconstruction of the building him question was not considered by the commissioner in the
computation. Considering further the present cost of reconstruction, the new amount (arrived at almost
20 years later) is far from being excessive. It is indeed a very conservative estimate.
Any allegation that PBA could have mitigated its loss by executing an offer to purchase the building prior
to its complete demolition loses sight of the fact, that the offer was very low, considering the combined
value of the building and the lot.
In addition, there is merit in the PBA claim that the unrealized rental income awarded to it should not be
limited to a period of one-half year but should be computed on a continuing basis at the rate of
P178,671.76 a year until judgment for the principal amount shag have been satisfied. Thus, this Court
awarded an "indemnity in favor of the Philippine Bar Assodation of FIVE MILLION (P5,000,000.00) Pesos
to cover damages (with the exception of attorney's fees) occasioned by the loss of the building
(including interest charges and lost rentals) ...
As for the award of attorney's fees, there is no question that the size of attorney's fees as well as the
amount of damages, is subject to the sound discretion of the court (Magbanua v. IAC, 137 SCRA 332
[1985]). Earlier, this Court has ruled that an award of 10% of the amount of total recovery, for attomey's
fees, is reasonable. (Central Bank of the Phil. v. Court of Appeals, 63 SCRA 435 (1975]).
VI
There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No.
416 (passed pursuant to the authority granted to the Central Bank by P.D. No. 116 which amended Act
No. 2655, otherwise known as the Usury Law) is applicable only in the following: (1) loans; (2)
forbearance of any money, goods or credit; and (3) rate allowed in judgments (judgments spoken of
refer to judgments involving loans or forbearance of any money, goods or credits). (Philippine Rabbit
Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 (1985)). It is true
that in the instant case, there is neither a loan or a forbearance, but then no interest is actually being
imposed provided the sums referred to in the judgment are paid upon the finality of the judgment. It is
delay in the payment of such final judgment, that will cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum
from the filing of the complaint until paid; in other words, as part of the judgment for damages. Clearly
they are not applicable to the instant case.
PREMISES CONSIDERED, UNITED's motion for reconsideration is hereby DENIED; the NAKPILS" motion
for leave to file second motion for reconsideration is also DENIED, the latters" first motion on the same
grounds having been already denied with finality in the resolution of April 3, 1987. Needless to say, the
Motion to Refer this case to the Court En Banc is DENIED, in view of all the things stated in this
Resolution.
SO ORDERED.
Fernan (Chairman), Padilla, Bidin and Cortes, JJ., concur.
Gutierrez, J., took no part.











Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-21749 September 29, 1967
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
LUZON STEVEDORING CORPORATION, defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.
H. San Luis and L.V. Simbulan for defendant-appellant.


REYES, J.B.L., J.:
The present case comes by direct appeal from a decision of the Court of First Instance of Manila
(Case No. 44572) adjudging the defendant-appellant, Luzon Stevedoring Corporation, liable in damages
to the plaintiff-appellee Republic of the Philippines.
In the early afternoon of August 17, 1960, barge L-1892, owned by the Luzon Stevedoring
Corporation was being towed down the Pasig river by tugboats "Bangus" and "Barbero"
1
also belonging
to the same corporation, when the barge rammed against one of the wooden piles of the Nagtahan
bailey bridge, smashing the posts and causing the bridge to list. The river, at the time, was swollen and
the current swift, on account of the heavy downpour of Manila and the surrounding provinces on
August 15 and 16, 1960.
Sued by the Republic of the Philippines for actual and consequential damage caused by its
employees, amounting to P200,000 (Civil Case No. 44562, CFI of Manila), defendant Luzon Stevedoring
Corporation disclaimed liability therefor, on the grounds that it had exercised due diligence in the
selection and supervision of its employees; that the damages to the bridge were caused by force
majeure; that plaintiff has no capacity to sue; and that the Nagtahan bailey bridge is an obstruction to
navigation.
After due trial, the court rendered judgment on June 11, 1963, holding the defendant liable for the
damage caused by its employees and ordering it to pay to plaintiff the actual cost of the repair of the
Nagtahan bailey bridge which amounted to P192,561.72, with legal interest thereon from the date of
the filing of the complaint.
Defendant appealed directly to this Court assigning the following errors allegedly committed by
the court a quo, to wit:
I The lower court erred in not holding that the herein defendant-appellant had exercised the diligence
required of it in the selection and supervision of its personnel to prevent damage or injury to
others.1awphl.nt
II The lower court erred in not holding that the ramming of the Nagtahan bailey bridge by barge L-
1892 was caused by force majeure.
III The lower court erred in not holding that the Nagtahan bailey bridge is an obstruction, if not a
menace, to navigation in the Pasig river.
IV The lower court erred in not blaming the damage sustained by the Nagtahan bailey bridge to the
improper placement of the dolphins.
V The lower court erred in granting plaintiff's motion to adduce further evidence in chief after it has
rested its case.
VI The lower court erred in finding the plaintiff entitled to the amount of P192,561.72 for damages
which is clearly exorbitant and without any factual basis.
However, it must be recalled that the established rule in this jurisdiction is that when a party
appeals directly to the Supreme Court, and submits his case there for decision, he is deemed to have
waived the right to dispute any finding of fact made by the trial Court. The only questions that may be
raised are those of law (Savellano vs. Diaz, L-17441, July 31, 1963; Aballe vs. Santiago, L-16307, April 30,
1963; G.S.I.S. vs. Cloribel, L-22236, June 22, 1965). A converso, a party who resorts to the Court of
Appeals, and submits his case for decision there, is barred from contending later that his claim was
beyond the jurisdiction of the aforesaid Court. The reason is that a contrary rule would encourage the
undesirable practice of appellants' submitting their cases for decision to either court in expectation of
favorable judgment, but with intent of attacking its jurisdiction should the decision be unfavorable
(Tyson Tan, et al. vs. Filipinas Compaia de Seguros) et al., L-10096, Res. on Motion to Reconsider,
March 23, 1966). Consequently, we are limited in this appeal to the issues of law raised in the
appellant's brief.
Taking the aforesaid rules into account, it can be seen that the only reviewable issues in this
appeal are reduced to two:
1) Whether or not the collision of appellant's barge with the supports or piers of the Nagtahan bridge
was in law caused by fortuitous event or force majeure, and
2) Whether or not it was error for the Court to have permitted the plaintiff-appellee to introduce
additional evidence of damages after said party had rested its case.
As to the first question, considering that the Nagtahan bridge was an immovable and stationary
object and uncontrovertedly provided with adequate openings for the passage of water craft, including
barges like of appellant's, it is undeniable that the unusual event that the barge, exclusively controlled
by appellant, rammed the bridge supports raises a presumption of negligence on the part of appellant or
its employees manning the barge or the tugs that towed it. For in the ordinary course of events, such a
thing does not happen if proper care is used. In Anglo American Jurisprudence, the inference arises by
what is known as the "res ipsa loquitur" rule (Scott vs. London Docks Co., 2 H & C 596; San Juan Light &
Transit Co. vs. Requena, 224 U.S. 89, 56 L. Ed., 680; Whitwell vs. Wolf, 127 Minn. 529, 149 N.W. 299;
Bryne vs. Great Atlantic & Pacific Tea Co., 269 Mass. 130; 168 N.E. 540; Gribsby vs. Smith, 146 S.W. 2d
719).
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.
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)
2
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 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 del presento ofensor" (Peirano Facio, Responsibilidad
Extra-contractual, p. 465; Mazeaud Trait de la Responsibilite Civil, Vol. 2, sec. 1569). The very measures
adopted by appellant prove that the possibility of danger was not only foreseeable, but actually
foreseen, and was not caso fortuito.
Otherwise stated, the appellant, Luzon Stevedoring Corporation, knowing and appreciating the
perils posed by the swollen stream and its swift current, voluntarily entered into a situation involving
obvious danger; it therefore assured the risk, and can not shed responsibility merely because the
precautions it adopted turned out to be insufficient. Hence, the lower Court committed no error in
holding it negligent in not suspending operations and in holding it liable for the damages caused.
It avails the appellant naught to argue that the dolphins, like the bridge, were improperly located.
Even if true, these circumstances would merely emphasize the need of even higher degree of care on
appellant's part in the situation involved in the present case. The appellant, whose barges and tugs
travel up and down the river everyday, could not safely ignore the danger posed by these allegedly
improper constructions that had been erected, and in place, for years.
On the second point: appellant charges the lower court with having abused its discretion in the
admission of plaintiff's additional evidence after the latter had rested its case. There is an insinuation
that the delay was deliberate to enable the manipulation of evidence to prejudice defendant-appellant.
We find no merit in the contention. Whether or not further evidence will be allowed after a party
offering the evidence has rested his case, lies within the sound discretion of the trial Judge, and this
discretion will not be reviewed except in clear case of abuse.
3

In the present case, no abuse of that discretion is shown. What was allowed to be introduced,
after plaintiff had rested its evidence in chief, were vouchers and papers to support an item of P1,558.00
allegedly spent for the reinforcement of the panel of the bailey bridge, and which item already appeared
in Exhibit GG. Appellant, in fact, has no reason to charge the trial court of being unfair, because it was
also able to secure, upon written motion, a similar order dated November 24, 1962, allowing reception
of additional evidence for the said defendant-appellant.
4

WHEREFORE, finding no error in the decision of the lower Court appealed from, the same is hereby
affirmed. Costs against the defendant-appellant.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.
Bengzon, J.P. J., on leave, took no part.
Footnotes
1
The lead-tugboat "Bangus" was pulling the barge, while the tugboat "Barbero" was holding or
restraining it at the back.
2
Lasam vs. Smith, 45 Phil. 661.
3
Lopez vs. Liboro, 81 Phil. 429.
4
p. 89, Record on Appeal.










Republic of the Philippines
SUPREME COURT
Manila
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.

FERNANDO, J.:
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 married 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 prevail 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 car 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 stone-throwing 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 clearly 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,
Civil Code of the Philippines). It is, therefore, not enough that the event should not have been foreseen
or participated, 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 dificil o mas onerosa la accion diligente
del presente ofensor' (Peirano Facio, Responsibilidad Extra-contractual, p. 465; Mazeaud, Traite de la
Responsibilite Civile, Vol. 2, sec. 1569). The very measures adopted by appellant prove that the
possibility of danger was not only foreseeable, but actually 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, Juanita 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 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 the 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, Juanita
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., Dizon, Makalintal, Zaldivar, Teehankee, Barredo and Villamor, JJ., concur.
Castro. J., is on leave.

Footnotes
1 Decision, Record on Appeal, pp. 29-30.
2 Ibid, pp. 36-37.
3 Crame Sy Panco v. Gonzaga, 10 Phil. 646, 648. Cf. Chan Keep v. Chan Gioco, 14 Phil. 5 (1909) and Novo
& Co. v. Ainsworth, 26 Phil. 380 (1913).
4 Roman Catholic Bishop of Jaro v. De la Pena, 26 Phil. 144, 146 (1913).
5 Lasam v. Smith, 45 Phil. 657, 661-662 (1924). Cf. Yap Kim Chuan v. Tiaoqui, 31 Phil. 433 (1955);
University of Santo Tomas v. Descals, 38 Phil. 267 (1918); Lizares v. Hernaez, 40 Phil. 981 (1920); Garcia
v. Escudero, 43 Phil. 437 (1922); Millan v. Rio y Olabarrieta, 45 Phil. 718 (1924); Obejera v. Iga Sy, 76 Phil.
580 (1946).
6 Gillaco v. Manila Railroad Co., 97 Phil. 884 (1955).
7 L-21749, Sept. 29, 1967, 21 SCRA 279.
8 Cf. Petroleum Exploration v. Public Service Commission, 304 US 209 (1938).



















Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-29640 June 10, 1971
GUILLERMO AUSTRIA, petitioner,
vs.
THE COURT OF APPEALS (Second Division), PACIFICO ABAD and MARIA G. ABAD, respondents.
Antonio Enrile Inton for petitioner.
Jose A. Buendia for respondents.

REYES, J.B.L., J.:
Guillermo Austria petitions for the review of the decision rendered by the Court of Appeal (in CA-G.R.
No. 33572-R), on the sole issue of whether in a contract of agency (consignment of goods for sale) it is
necessary that there be prior conviction for robbery before the loss of the article shall exempt the
consignee from liability for such loss.
In a receipt dated 30 January 1961, Maria G. Abad acknowledged having received from Guillermo
Austria one (1) pendant with diamonds valued at P4,500.00, to be sold on commission basis or to be
returned on demand. On 1 February 1961, however, while walking home to her residence in
Mandaluyong, Rizal, Abad was said to have been accosted by two men, one of whom hit her on the face,
while the other snatched her purse containing jewelry and cash, and ran away. Among the pieces of
jewelry allegedly taken by the robbers was the consigned pendant. The incident became the subject of a
criminal case filed in the Court of First Instance of Rizal against certain persons (Criminal Case No. 10649,
People vs. Rene Garcia, et al.).
As Abad failed to return the jewelry or pay for its value notwithstanding demands, Austria brought in the
Court of First Instance of Manila an action against her and her husband for recovery of the pendant or of
its value, and damages. Answering the allegations of the complaint, defendants spouses set up the
defense that the alleged robbery had extinguished their obligation.
After due hearing, the trial court rendered judgment for the plaintiff, and ordered defendants spouses,
jointly and severally, to pay to the former the sum of P4,500.00, with legal interest thereon, plus the
amount of P450.00 as reasonable attorneys' fees, and the costs. It was held that defendants failed to
prove the fact of robbery, or, if indeed it was committed, that defendant Maria Abad was guilty of
negligence when she went home without any companion, although it was already getting dark and she
was carrying a large amount of cash and valuables on the day in question, and such negligence did not
free her from liability for damages for the loss of the jewelry.
Not satisfied with his decision, the defendants went to the Court of Appeals, and there secured a
reversal of the judgment. The appellate court overruling the finding of the trial court on the lack of
credibility of the two defense witnesses who testified on the occurrence of the robbery, and holding
that the facts of robbery and defendant Maria Abad's possesion of the pendant on that unfortunate day
have been duly published, declared respondents not responsible for the loss of the jewelry on account
of a fortuitous event, and relieved them from liability for damages to the owner. Plaintiff thereupon
instituted the present proceeding.
It is now contended by herein petitioner that the Court of Appeals erred in finding that there was
robbery in the case, although nobody has been found guilty of the supposed crime. It is petitioner's
theory that for robbery to fall under the category of a fortuitous event and relieve the obligor from his
obligation under a contract, pursuant to Article 1174 of the new Civil Code, there ought to be prior
finding on the guilt of the persons responsible therefor. In short, that the occurrence of the robbery
should be proved by a final judgment of conviction in the criminal case. To adopt a different view,
petitioner argues, would be to encourage persons accountable for goods or properties received in trust
or consignment to connive with others, who would be willing to be accused in court for the robbery, in
order to be absolved from civil liability for the loss or disappearance of the entrusted articles.
We find no merit in the contention of petitioner.
It is recognized in this jurisdiction that to constitute a caso fortuito that would exempt a person from
responsibility, it is necessary that (1) the event must be independent of the human will (or rather, of the
debtor's or obligor's); (2) the occurrence must render it impossible for the debtor to fulfill the obligation
in a normal manner; and that (3) the obligor must be free of participation in or aggravation of the injury
to the creditor.
1
A fortuitous event, therefore, can be produced by nature, e.g., earthquakes, storms,
floods, etc., or by the act of man, such as war, attack by bandits, robbery,
2
etc., provided that the event
has all the characteristics enumerated above.
It is not here disputed that if respondent Maria Abad were indeed the victim of robbery, and if it were
really true that the pendant, which she was obliged either to sell on commission or to return to
petitioner, were taken during the robbery, then the occurrence of that fortuitous event would have
extinguished her liability. The point at issue in this proceeding is how the fact of robbery is to be
established in order that a person may avail of the exempting provision of Article 1174 of the new Civil
Code, which reads as follows:
ART. 1174. 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.
It may be noted the reform that the emphasis of the provision is on the events, not on the agents or
factors responsible for them. To avail of the exemption granted in the law, it is not necessary that the
persons responsible for the occurrence should be found or punished; it would only be sufficient to
established that the enforceable event, the robbery in this case did take place without any concurrent
fault on the debtor's part, and this can be done by preponderant evidence. To require in the present
action for recovery the prior conviction of the culprits in the criminal case, in order to establish the
robbery as a fact, would be to demand proof beyond reasonable doubt to prove a fact in a civil case.
It is undeniable that in order to completely exonerate the debtor for reason of a fortutious event, such
debtor must, in addition to the cams itself, be free of any concurrent or contributory fault or negligence.

3
This is apparent from Article 1170 of the Civil Code of the Philippines, providing that:
ART. 1170. 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.
It is clear that under the circumstances prevailing at present in the City of Manila and its suburbs, with
their high incidence of crimes against persons and property that renders travel after nightfall a matter to
be sedulously avoided without suitable precaution and protection, the conduct of respondent Maria G.
Abad, in returning alone to her house in the evening, carrying jewelry of considerable value would be
negligent per se and would not exempt her from responsibility in the case of a robbery. We are not
persuaded, however, that the same rule should obtain ten years previously, in 1961, when the robbery
in question did take place, for at that time criminality had not by far reached the levels attained in the
present day.
There is likewise no merit in petitioner's argument that to allow the fact of robbery to be recognized in
the civil case before conviction is secured in the criminal action, would prejudice the latter case, or
would result in inconsistency should the accused obtain an acquittal or should the criminal case be
dismissed. It must be realized that a court finding that a robbery has happened would not necessarily
mean that those accused in the criminal action should be found guilty of the crime; nor would a ruling
that those actually accused did not commit the robbery be inconsistent with a finding that a robbery did
take place. The evidence to establish these facts would not necessarily be the same.
WHEREFORE, finding no error in the decision of the Court of Appeals under review, the petition in this
case is hereby dismissed with costs against the petitioner.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ.,
concur.
Castro, J., took no part.

Footnotes
1 Reyes & Puno, Outline of Philippine Civil Law, Vol. IV, pages 25-26, citing Lasam vs. Smith, 45 Phil. 657,
661.
2 Tolentino, Civil Code of the Philippines, Vol. IV, 1962 ed., page 117, citing 3 Salvat 83-84.
3 V. Lachica vs. Gayoso, 48 Off. Gaz. (No. 1) 205, and cases cited; Lanaso Fruit SS Co. vs. Univ. Ins. Co., 82
L. Ed. 422.























Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-47379 May 16, 1988
NATIONAL POWER CORPORATION, petitioner,
vs.
HONORABLE COURT OF APPEALS and ENGINEERING CONSTRUCTION, INC., respondents.
G.R. No. L-47481 May 16, 1988
ENGINEERING CONSTRUCTION, INC., petitioner,
vs.
COUTRT OF APPEALS and NATIONAL POWER CORPORATION, respondents.
Raymundo A. Armovit for private respondent in L-47379.
The Solicitor General for petitioner.

GUTIERREZ, JR., J.:
These consolidated petitions seek to set aside the decision of the respondent Court of Appeals which
adjudged the National Power Corporation liable for damages against Engineering Construction, Inc. The
appellate court, however, reduced the amount of damages awarded by the trial court. Hence, both
parties filed their respective petitions: the National Power Corporation (NPC) in G.R. No. 47379,
questioning the decision of the Court of Appeals for holding it liable for damages and the Engineering
Construction, Inc. (ECI) in G.R. No. 47481, questioning the same decision for reducing the consequential
damages and attorney's fees and for eliminating the exemplary damages.
The facts are succinctly summarized by the respondent Court of Appeals, as follows:
On August 4, 1964, plaintiff Engineering Construction, Inc., being a successful bidder, executed a
contract in Manila with the National Waterworks and Sewerage Authority (NAWASA), whereby the
former undertook to furnish all tools, labor, equipment, and materials (not furnished by Owner), and to
construct the proposed 2nd lpo-Bicti Tunnel, Intake and Outlet Structures, and Appurtenant Structures,
and Appurtenant Features, at Norzagaray, Bulacan, and to complete said works within eight hundred
(800) calendar days from the date the Contractor receives the formal notice to proceed (Exh. A).
The project involved two (2) major phases: the first phase comprising, the tunnel work covering a
distance of seven (7) kilometers, passing through the mountain, from the Ipo river, a part of Norzagaray,
Bulacan, where the Ipo Dam of the defendant National Power Corporation is located, to Bicti; the other
phase consisting of the outworks at both ends of the tunnel.
By September 1967, the plaintiff corporation already had completed the first major phase of the work,
namely, the tunnel excavation work. Some portions of the outworks at the Bicti site were still under
construction. As soon as the plaintiff corporation had finished the tunnel excavation work at the Bicti
site, all the equipment no longer needed there were transferred to the Ipo site where some projects
were yet to be completed.
The record shows that on November 4,1967, typhoon 'Welming' hit Central Luzon, passing through
defendant's Angat Hydro-electric Project and Dam at lpo, Norzagaray, Bulacan. Strong winds struck the
project area, and heavy rains intermittently fell. Due to the heavy downpour, the water in the reservoir
of the Angat Dam was rising perilously at the rate of sixty (60) centimeters per hour. To prevent an
overflow of water from the dam, since the water level had reached the danger height of 212 meters
above sea level, the defendant corporation caused the opening of the spillway gates." (pp. 45-46, L-
47379, Rollo)
The appellate court sustained the findings of the trial court that the evidence preponlderantly
established the fact that due to the negligent manner with which the spillway gates of the Angat Dam
were opened, an extraordinary large volume of water rushed out of the gates, and hit the installations
and construction works of ECI at the lpo site with terrific impact, as a result of which the latter's
stockpile of materials and supplies, camp facilities and permanent structures and accessories either
washed away, lost or destroyed.
The appellate court further found that:
It cannot be pretended that there was no negligence or that the appellant exercised extraordinary care
in the opening of the spillway gates of the Angat Dam. Maintainers of the dam knew very well that it
was far more safe to open them gradually. But the spillway gates were opened only when typhoon
Welming was already at its height, in a vain effort to race against time and prevent the overflow of
water from the dam as it 'was rising dangerously at the rate of sixty centimeters per hour. 'Action could
have been taken as early as November 3, 1967, when the water in the reservoir was still low. At that
time, the gates of the dam could have been opened in a regulated manner. Let it be stressed that the
appellant knew of the coming of the typhoon four days before it actually hit the project area. (p. 53, L-
47379, Rollo)
As to the award of damages, the appellate court held:
We come now to the award of damages. The appellee submitted a list of estimated losses and damages
to the tunnel project (Ipo side) caused by the instant flooding of the Angat River (Exh. J-1). The damages
were itemized in four categories, to wit: Camp Facilities P55,700.00; Equipment, Parts and Plant
P375,659.51; Materials P107,175.80; and Permanent Structures and accessories P137,250.00, with an
aggregate total amount of P675,785.31. The list is supported by several vouchers which were all
submitted as Exhibits K to M-38 a, N to O, P to U-2 and V to X- 60-a (Vide: Folders Nos. 1 to 4). The
appellant did not submit proofs to traverse the aforementioned documentary evidence. We hold that
the lower court did not commit any error in awarding P 675,785.31 as actual or compensatory damages.
However, We cannot sustain the award of P333,200.00 as consequential damages. This amount is
broken down as follows: P213,200.00 as and for the rentals of a crane to temporarily replace the one
"destroyed beyond repair," and P120,000.00 as one month bonus which the appellee failed to realize in
accordance with the contract which the appellee had with NAWASA. Said rental of the crane allegedly
covered the period of one year at the rate of P40.00 an hour for 16 hours a day. The evidence, however,
shows that the appellee bought a crane also a crawler type, on November 10, 1967, six (6) days after the
incident in question (Exh N) And according to the lower court, which finding was never assailed, the
appellee resumed its normal construction work on the Ipo- Bicti Project after a stoppage of only one
month. There is no evidence when the appellee received the crane from the seller, Asian Enterprise
Limited. But there was an agreement that the shipment of the goods would be effected within 60 days
from the opening of the letter of credit (Exh. N).<re||an1w> It appearing that the contract of sale
was consummated, We must conclude or at least assume that the crane was delivered to the appellee
within 60 days as stipulated. The appellee then could have availed of the services of another crane for a
period of only one month (after a work stoppage of one month) at the rate of P 40.00 an hour for 16
hours a day or a total of P 19,200.00 as rental.
But the value of the new crane cannot be included as part of actual damages because the old was
reactivated after it was repaired. The cost of the repair was P 77,000.00 as shown in item No. 1 under
the Equipment, Parts and Plants category (Exh. J-1), which amount of repair was already included in the
actual or compensatory damages. (pp. 54-56, L-47379, Rollo)
The appellate court likewise rejected the award of unrealized bonus from NAWASA in the amount of
P120,000.00 (computed at P4,000.00 a day in case construction is finished before the specified time, i.e.,
within 800 calendar days), considering that the incident occurred after more than three (3) years or one
thousand one hundred seventy (1,170) days. The court also eliminated the award of exemplary damages
as there was no gross negligence on the part of NPC and reduced the amount of attorney's fees from
P50,000.00 to P30,000.00.
In these consolidated petitions, NPC assails the appellate court's decision as being erroneous on the
ground that the destruction and loss of the ECI's equipment and facilities were due to force majeure. It
argues that the rapid rise of the water level in the reservoir of its Angat Dam due to heavy rains brought
about by the typhoon was an extraordinary occurrence that could not have been foreseen, and thus, the
subsequent release of water through the spillway gates and its resultant effect, if any, on ECI's
equipment and facilities may rightly be attributed to force majeure.
On the other hand, ECI assails the reduction of the consequential damages from P333,200.00 to
P19,000.00 on the grounds that the appellate court had no basis in concluding that ECI acquired a new
Crawler-type crane and therefore, it only can claim rentals for the temporary use of the leased crane for
a period of one month; and that the award of P4,000.00 a day or P120,000.00 a month bonus is justified
since the period limitation on ECI's contract with NAWASA had dual effects, i.e., bonus for earlier
completion and liquidated damages for delayed performance; and in either case at the rate of P4,000.00
daily. Thus, since NPC's negligence compelled work stoppage for a period of one month, the said award
of P120,000.00 is justified. ECI further assailes the reduction of attorney's fees and the total elimination
of exemplary damages.
Both petitions are without merit.
It is clear from the appellate court's decision that based on its findings of fact and that of the trial
court's, petitioner NPC was undoubtedly negligent because it opened the spillway gates of the Angat
Dam only at the height of typhoon "Welming" when it knew very well that it was safer to have opened
the same gradually and earlier, as it was also undeniable that NPC knew of the coming typhoon at least
four days before it actually struck. And even though the typhoon was an act of God or what we may call
force majeure, NPC cannot escape liability because its negligence was the proximate cause of the loss
and damage. As we have ruled in Juan F. Nakpil & Sons v. Court of Appeals, (144 SCRA 596, 606-607):
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud,
negligence, delay or violation or contravention in any manner of the tenor of the obligation as provided
for in Article 1170 of the Civil Code, which results in loss or damage, the obligor cannot escape liability.
The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned
exclusively by the violence of nature and human agencies are to be excluded from creating or entering
into the cause of the mischief. When the effect, the cause of which is to be considered, is found to be in
part the result of the participation of man, whether it be from active intervention or neglect, or failure
to act, the whole occurrence is thereby humanized, as it was, and removed from the rules applicable to
the acts of God. (1 Corpus Juris, pp. 1174-1175).
Thus, it has been held that when the negligence of a person concurs with an act of God in producing a
loss, such person is not exempt from liability by showing that the immediate cause of the damage was
the act of God. To be exempt from liability for loss because of an act of God, he must be free from any
previous negligence or misconduct by which the loss or damage may have been occasioned. (Fish &
Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan 49 O.G. 4379; Limpangco & Sons v. Yangco
Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657).
Furthermore, the question of whether or not there was negligence on the part of NPC is a question of
fact which properly falls within the jurisdiction of the Court of Appeals and will not be disturbed by this
Court unless the same is clearly unfounded. Thus, in Tolentino v. Court of appeals, (150 SCRA 26, 36) we
ruled:
Moreover, the findings of fact of the Court of Appeals are generally final and conclusive upon the
Supreme Court (Leonardo v. Court of Appeals, 120 SCRA 890 [1983]. In fact it is settled that the Supreme
Court is not supposed to weigh evidence but only to determine its substantially (Nuez v.
Sandiganbayan, 100 SCRA 433 [1982] and will generally not disturb said findings of fact when supported
by substantial evidence (Aytona v. Court of Appeals, 113 SCRA 575 [1985]; Collector of Customs of
Manila v. Intermediate Appellate Court, 137 SCRA 3 [1985]. On the other hand substantial evidence is
defined as such relevant evidence as a reasonable mind might accept as adequate to support a
conclusion (Philippine Metal Products, Inc. v. Court of Industrial Relations, 90 SCRA 135 [1979]; Police
Commission v. Lood, 127 SCRA 757 [1984]; Canete v. WCC, 136 SCRA 302 [1985])
Therefore, the respondent Court of Appeals did not err in holding the NPC liable for damages.
Likewise, it did not err in reducing the consequential damages from P333,200.00 to P19,000.00. As
shown by the records, while there was no categorical statement or admission on the part of ECI that it
bought a new crane to replace the damaged one, a sales contract was presented to the effect that the
new crane would be delivered to it by Asian Enterprises within 60 days from the opening of the letter of
credit at the cost of P106,336.75. The offer was made by Asian Enterprises a few days after the flood. As
compared to the amount of P106,336.75 for a brand new crane and paying the alleged amount of
P4,000.00 a day as rental for the use of a temporary crane, which use petitioner ECI alleged to have
lasted for a period of one year, thus, totalling P120,000.00, plus the fact that there was already a sales
contract between it and Asian Enterprises, there is no reason why ECI should opt to rent a temporary
crane for a period of one year. The appellate court also found that the damaged crane was subsequently
repaired and reactivated and the cost of repair was P77,000.00. Therefore, it included the said amount
in the award of of compensatory damages, but not the value of the new crane. We do not find anything
erroneous in the decision of the appellate court that the consequential damages should represent only
the service of the temporary crane for one month. A contrary ruling would result in the unjust
enrichment of ECI.
The P120,000.00 bonus was also properly eliminated as the same was granted by the trial court on the
premise that it represented ECI's lost opportunity "to earn the one month bonus from NAWASA ... ." As
stated earlier, the loss or damage to ECI's equipment and facilities occurred long after the stipulated
deadline to finish the construction. No bonus, therefore, could have been possibly earned by ECI at that
point in time. The supposed liquidated damages for failure to finish the project within the stipulated
period or the opposite of the claim for bonus is not clearly presented in the records of these petitions. It
is not shown that NAWASA imposed them.
As to the question of exemplary damages, we sustain the appellate court in eliminating the same since it
found that there was no bad faith on the part of NPC and that neither can the latter's negligence be
considered gross. In Dee Hua Liong Electrical Equipment Corp. v. Reyes, (145 SCRA 713, 719) we ruled:
Neither may private respondent recover exemplary damages since he is not entitled to moral or
compensatory damages, and again because the petitioner is not shown to have acted in a wanton,
fraudulent, reckless or oppressive manner (Art. 2234, Civil Code; Yutuk v. Manila Electric Co., 2 SCRA
377; Francisco v. Government Service Insurance System, 7 SCRA 577; Gutierrez v. Villegas, 8 SCRA 527;
Air France v. Carrascoso, 18 SCRA 155; Pan Pacific (Phil.) v. Phil. Advertising Corp., 23 SCRA 977;
Marchan v. Mendoza, 24 SCRA 888).
We also affirm the reduction of attorney's fees from P50,000.00 to P30,000.00. There are no compelling
reasons why we should set aside the appellate court's finding that the latter amount suffices for the
services rendered by ECI's counsel.
WHEREFORE, the petitions in G.R. No. 47379 and G.R. No. 47481 are both DISMISSED for LACK OF
MERIT. The decision appealed from is AFFIRMED.
SO ORDERED.
Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur.






















Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

[G.R. No. 113003. October 17, 1997]

ALBERTA YOBIDO and CRESENCIO YOBIDO, Petitioners, vs. COURT OF APPEALS, LENY TUMBOY, ARDEE
TUMBOY and JASMIN TUMBOY, Respondents.

D E C I S I O N

ROMERO, J.:

In this petition for review on certiorari of the decision of the Court of Appeals, the issue is whether or
not the explosion of a newly installed tire of a passenger vehicle is a fortuitous event that exempts the
carrier from liability for the death of a passenger.

On April 26, 1988, spouses Tito and Leny Tumboy and their minor children named Ardee and Jasmin,
boarded at Mangagoy, Surigao del Sur, a Yobido Liner bus bound for Davao City. Along Picop Road in
Km. 17, Sta. Maria, Agusan del Sur, the left front tire of the bus exploded. The bus fell into a ravine
around three (3) feet from the road and struck a tree. The incident resulted in the death of 28-year-old
Tito Tumboy and physical injuries to other passengers.

On November 21, 1988, a complaint for breach of contract of carriage, damages and attorneys fees was
filed by Leny and her children against Alberta Yobido, the owner of the bus, and Cresencio Yobido, its
driver, before the Regional Trial Court of Davao City. When the defendants therein filed their answer to
the complaint, they raised the affirmative defense of caso fortuito. They also filed a third-party
complaint against Philippine Phoenix Surety and Insurance, Inc. This third-party defendant filed an
answer with compulsory counterclaim. At the pre-trial conference, the parties agreed to a stipulation of
facts.[1]

Upon a finding that the third party defendant was not liable under the insurance contract, the lower
court dismissed the third party complaint. No amicable settlement having been arrived at by the parties,
trial on the merits ensued.

The plaintiffs asserted that violation of the contract of carriage between them and the defendants was
brought about by the drivers failure to exercise the diligence required of the carrier in transporting
passengers safely to their place of destination. According to Leny Tumboy, the bus left Mangagoy at 3:00
oclock in the afternoon. The winding road it traversed was not cemented and was wet due to the rain; it
was rough with crushed rocks. The bus which was full of passengers had cargoes on top. Since it was
running fast, she cautioned the driver to slow down but he merely stared at her through the mirror. At
around 3:30 p.m., in Trento, she heard something explode and immediately, the bus fell into a ravine.

For their part, the defendants tried to establish that the accident was due to a fortuitous event. Abundio
Salce, who was the bus conductor when the incident happened, testified that the 42-seater bus was not
full as there were only 32 passengers, such that he himself managed to get a seat. He added that the bus
was running at a speed of 60 to 50 and that it was going slow because of the zigzag road. He affirmed
that the left front tire that exploded was a brand new tire that he mounted on the bus on April 21, 1988
or only five (5) days before the incident. The Yobido Liner secretary, Minerva Fernando, bought the new
Goodyear tire from Davao Toyo Parts on April 20, 1988 and she was present when it was mounted on
the bus by Salce. She stated that all driver applicants in Yobido Liner underwent actual driving tests
before they were employed. Defendant Cresencio Yobido underwent such test and submitted his
professional drivers license and clearances from the barangay, the fiscal and the police.

On August 29, 1991, the lower court rendered a decision[2] dismissing the action for lack of merit. On
the issue of whether or not the tire blowout was a caso fortuito, it found that the falling of the bus to
the cliff was a result of no other outside factor than the tire blow-out. It held that the ruling in the La
Mallorca and Pampanga Bus Co. v. De Jesus[3] that a tire blowout is a mechanical defect of the
conveyance or a fault in its equipment which was easily discoverable if the bus had been subjected to a
more thorough or rigid check-up before it took to the road that morning is inapplicable to this case. It
reasoned out that in said case, it was found that the blowout was caused by the established fact that the
inner tube of the left front tire was pressed between the inner circle of the left wheel and the rim which
had slipped out of the wheel. In this case, however, the cause of the explosion remains a mystery until
at present. As such, the court added, the tire blowout was a caso fortuito which is completely an
extraordinary circumstance independent of the will of the defendants who should be relieved of
whatever liability the plaintiffs may have suffered by reason of the explosion pursuant to Article 1174[4]
of the Civil Code.

Dissatisfied, the plaintiffs appealed to the Court of Appeals. They ascribed to the lower court the
following errors: (a) finding that the tire blowout was a caso fortuito; (b) failing to hold that the
defendants did not exercise utmost and/or extraordinary diligence required of carriers under Article
1755 of the Civil Code, and (c) deciding the case contrary to the ruling in Juntilla v. Fontanar,[5] and
Necesito v. Paras.[6]

On August 23, 1993, the Court of Appeals rendered the Decision[7] reversing that of the lower court. It
held that:

To Our mind, the explosion of the tire is not in itself a fortuitous event. The cause of the blow-out, if due
to a factory defect, improper mounting, excessive tire pressure, is not an unavoidable event. On the
other hand, there may have been adverse conditions on the road that were unforeseeable and/or
inevitable, which could make the blow-out a caso fortuito. The fact that the cause of the blow-out was
not known does not relieve the carrier of liability. Owing to the statutory presumption of negligence
against the carrier and its obligation to exercise the utmost diligence of very cautious persons to carry
the passenger safely as far as human care and foresight can provide, it is the burden of the defendants
to prove that the cause of the blow-out was a fortuitous event. It is not incumbent upon the plaintiff to
prove that the cause of the blow-out is not caso-fortuito.

Proving that the tire that exploded is a new Goodyear tire is not sufficient to discharge defendants
burden. As enunciated in Necesito vs. Paras, the passenger has neither choice nor control over the
carrier in the selection and use of its equipment, and the good repute of the manufacturer will not
necessarily relieve the carrier from liability.

Moreover, there is evidence that the bus was moving fast, and the road was wet and rough. The driver
could have explained that the blow-out that precipitated the accident that caused the death of Toto
Tumboy could not have been prevented even if he had exercised due care to avoid the same, but he was
not presented as witness.

The Court of Appeals thus disposed of the appeal as follows:

WHEREFORE, the judgment of the court a quo is set aside and another one entered ordering defendants
to pay plaintiffs the sum of P50,000.00 for the death of Tito Tumboy, P30,000.00 in moral damages, and
P7,000.00 for funeral and burial expenses.

SO ORDERED.

The defendants filed a motion for reconsideration of said decision which was denied on November 4,
1993 by the Court of Appeals. Hence, the instant petition asserting the position that the tire blowout
that caused the death of Tito Tumboy was a caso fortuito. Petitioners claim further that the Court of
Appeals, in ruling contrary to that of the lower court, misapprehended facts and, therefore, its findings
of fact cannot be considered final which shall bind this Court. Hence, they pray that this Court review
the facts of the case.

The Court did re-examine the facts and evidence in this case because of the inapplicability of the
established principle that the factual findings of the Court of Appeals are final and may not be reviewed
on appeal by this Court. This general principle is subject to exceptions such as the one present in this
case, namely, that the lower court and the Court of Appeals arrived at diverse factual findings.[8]
However, upon such re-examination, we found no reason to overturn the findings and conclusions of
the Court of Appeals.

As a rule, when a passenger boards a common carrier, he takes the risks incidental to the mode of travel
he has taken. After all, a carrier is not an insurer of the safety of its passengers and is not bound
absolutely and at all events to carry them safely and without injury.[9] However, when a passenger is
injured or dies while travelling, the law presumes that the common carrier is negligent. Thus, the Civil
Code provides:

Art. 1756. In case of death 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.

Article 1755 provides that (a) common carrier is bound to carry the passengers safely as far as human
care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard
for all the circumstances. Accordingly, in culpa contractual, once a passenger dies or is injured, the
carrier is presumed to have been at fault or to have acted negligently. This disputable presumption may
only be overcome by evidence that the carrier had observed extraordinary diligence as prescribed by
Articles 1733,[10] 1755 and 1756 of the Civil Code or that the death or injury of the passenger was due
to a fortuitous event.[11] Consequently, the court need not make an express finding of fault or
negligence on the part of the carrier to hold it responsible for damages sought by the
passenger.[12]chanroblesvirtuallawlibrary


In view of the foregoing, petitioners contention that they should be exempt from liability because the
tire blowout was no more than a fortuitous event that could not have been foreseen, must fail. A
fortuitous event is possessed of the following characteristics: (a) the cause of the unforeseen and
unexpected occurrence, or the failure of the debtor to comply with his obligations, must be independent
of human will; (b) it must be impossible to foresee the event which constitutes the caso fortuito, or if it
can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to render it
impossible for the debtor to fulfill his obligation in a normal manner; and (d) the obligor must be free
from any participation in the aggravation of the injury resulting to the creditor.[13] As Article 1174
provides, no person shall be responsible for a fortuitous event which could not be foreseen, or which,
though foreseen, was inevitable. In other words, there must be an entire exclusion of human agency
from the cause of injury or loss.[14]chanroblesvirtuallawlibrary


Under the circumstances of this case, the explosion of the new tire may not be considered a fortuitous
event. There are human factors involved in the situation. The fact that the tire was new did not imply
that it was entirely free from manufacturing defects or that it was properly mounted on the vehicle.
Neither may the fact that the tire bought and used in the vehicle is of a brand name noted for quality,
resulting in the conclusion that it could not explode within five days use. Be that as it may, it is settled
that an accident caused either by defects in the automobile or through the negligence of its driver is not
a caso fortuito that would exempt the carrier from liability for damages.[15]chanroblesvirtuallawlibrary


Moreover, a common carrier may not be absolved from liability in case of force majeure or fortuitous
event alone. The common carrier must still prove that it was not negligent in causing the death or injury
resulting from an accident.[16] This Court has had occasion to state:

While it may be true that the tire that blew-up was still good because the grooves of the tire were still
visible, this fact alone does not make the explosion of the tire a fortuitous event. No evidence was
presented to show that the accident was due to adverse road conditions or that precautions were taken
by the jeepney driver to compensate for any conditions liable to cause accidents. The sudden blowing-
up, therefore, could have been caused by too much air pressure injected into the tire coupled by the
fact that the jeepney was overloaded and speeding at the time of the
accident.[17]chanroblesvirtuallawlibrary


It is interesting to note that petitioners proved through the bus conductor, Salce, that the bus was
running at 60-50 kilometers per hour only or within the prescribed lawful speed limit. However, they
failed to rebut the testimony of Leny Tumboy that the bus was running so fast that she cautioned the
driver to slow down. These contradictory facts must, therefore, be resolved in favor of liability in view of
the presumption of negligence of the carrier in the law. Coupled with this is the established condition of
the road rough, winding and wet due to the rain. It was incumbent upon the defense to establish that it
took precautionary measures considering partially dangerous condition of the road. As stated above,
proof that the tire was new and of good quality is not sufficient proof that it was not negligent.
Petitioners should have shown that it undertook extraordinary diligence in the care of its carrier, such as
conducting daily routinary check-ups of the vehicles parts. As the late Justice J.B.L. Reyes said:

It may be impracticable, as appellee argues, to require of carriers to test the strength of each and every
part of its vehicles before each trip; but we are of the opinion that a due regard for the carriers
obligations toward the traveling public demands adequate periodical tests to determine the condition
and strength of those vehicle portions the failure of which may endanger the safety of the
passengers.[18]chanroblesvirtuallawlibrary


Having failed to discharge its duty to overthrow the presumption of negligence with clear and
convincing evidence, petitioners are hereby held liable for damages. Article 1764[19] in relation to
Article 2206[20] of the Civil Code prescribes the amount of at least three thousand pesos as damages for
the death of a passenger. Under prevailing jurisprudence, the award of damages under Article 2206 has
been increased to fifty thousand pesos (P50,000.00).[21]chanroblesvirtuallawlibrary


Moral damages are generally not recoverable in culpa contractual except when bad faith had been
proven. However, the same damages may be recovered when breach of contract of carriage results in
the death of a passenger,[22] as in this case. Exemplary damages, awarded by way of example or
correction for the public good when moral damages are awarded,[23] may likewise be recovered in
contractual obligations if the defendant acted in wanton, fraudulent, reckless, oppressive, or malevolent
manner.[24] Because petitioners failed to exercise the extraordinary diligence required of a common
carrier, which resulted in the death of Tito Tumboy, it is deemed to have acted recklessly.[25] As such,
private respondents shall be entitled to exemplary damages.

WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED subject to the modification that
petitioners shall, in addition to the monetary awards therein, be liable for the award of exemplary
damages in the amount of P20,000.00. Costs against petitioners.

SO ORDERED.

Narvasa, C.J., (Chairman), Melo, Francisco, and Panganiban, JJ., concur.


































Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. Nos. 81100-01 February 7, 1990

BACOLOD-MURCIA MILLING CO., INC., petitioner,
vs.
HON. COURT OF APPEALS AND ALONSO GATUSLAO, respondents.

BACOLOD-MURCIA MILLING CO., INC., petitioner,
vs.
HON. COURT OF APPEALS, ALONSO GATUSLAO, AGRO-INDUSTRIAL DEVELOPMENT OF SILAY-SARAVIA
(AIDSISA) AND BACOLOD-MURCIA AGRICULTURAL COOPERATIVE MARKETING ASSOCIATION (BM-
ACMA), respondents.

Jalandoni, Herrera, Del Castillo & Associates for petitioner.

Taada, Vico & Tan for respondent AIDSISA.

San Juan, Gonzalez, San Agustin & Sinense for respondents Alfonso Gatuslao and BM-ACMA.

PARAS, J.:

This is a petition for review on certiorari of the decision of the Court of Appeals in CA-G.R. CV Nos.
59716-59717 promulgated on September 11, 1987 affirming in toto the decision of the Court of First
Instance of Negros Occidental in two consolidated civil cases, the dispositive portion of which reads as
follows:

PREMISES CONSIDERED, the decision appealed from is hereby affirmed in toto.

The uncontroverted facts of the case 1 are as follows:

1. xxx xxx xxx

2. BMMC is the owner and operator of the sugar central in Bacolod City, Philippines;

3. ALONSO GATUSLAO is a registered planter of the Bacolod-Murcia Mill District with Plantation Audit
No. 3-79, being a registered owner of Lot Nos. 310, 140, 141 and 101-A of the Cadastral Survey of
Murcia, Negros Occidental, otherwise known as Hda. San Roque;

4. On May 24, 1957 BMMC and Alonso Gatuslao executed an 'Extension and Modification of Milling
Contract (Annex 'A' of the complaint in both cases) which was registered on September 17, 1962 in the
Office of the Register of Deeds of Negros Occidental, and annotated on Transfer Certificates of Title Nos.
T-24207, RT-2252, RT-12035, and RT-12036 covering said Lot Nos. 310, 140, 141 and 101-A;

5. That since the crop year 1957-1958 up to crop year 1967-1968, inclusive, Alonso Gatuslao has been
milling all the sugarcane grown and produced on said Lot Nos. 310, 140, 141 and 101-A with the Mill of
BMMC;.

6. Since the crop year 1920-21 to crop year 1967-1968, inclusive, the canes of planters adhered to the
mill of BMMC were transported from the plantation to the mill by means of cane cars and through
railway system operated by BMMC;

7. The loading points at which planters Alonso Gatuslao was and should deliver and load all his canes
produced in his plantation, Hda. San Roque, were at the Arimas Line, Switch 2, and from which loading
stations, BMMC had been hauling planter Gatuslao's sugar cane to its mill or factory continuously until
the crop year 1967-68;

8. BMMC had not been able to use its cane cars and railway system for the cargo crop year 1968-1969;

9. Planter Alonso Gatuslao on various dates requested transportation facilities of BMMC to be sent to
his loading stations or switches for purposes of hauling and milling his sugarcane crops of crop year
1968-1969;

10. The estimated gross production of Hda. San Roque for the crop year 1968-1969 is 4,500 piculs.

The records show that since the crop year 1920-1921 to the crop year 1967-1968, the canes of the
adhered planters were transported from the plantation to the mill of BMMC by means of cane cars and
through a railway system operated by BMMC which traversed the land of the adherent planters,
corresponding to the rights of way on their lands granted by the planters to the Central for the duration
of the milling contracts which is for "un periodo de cuarenta y cinco anos o cosechas a contar desde la
cosecha de 1920-1921" 2 (a period of 45 years or harvests, beginning with a harvest of 1920-1921).

BMMC constructed the railroad tracks in 1920 and the adherent planters granted the BMMC a right of
way over their lands as provided for in the milling contracts. The owners of the hacienda Helvetia were
among the signatories of the milling contracts. When their milling contracts with petitioner BMMC
expired at the end of the 1964-1965 crop year, the corresponding right of way of the owners of the
hacienda Helvetia granted to the Central also expired.

Thus, the BMMC was unable to use its railroad facilities during the crop year 1968-1969 due to the
closure in 1968 of the portion of the railway traversing the hacienda Helvetia as per decision of the
Court in Angela Estate, Inc. and Fernando F. Gonzaga, Inc. v. Court of First Instance of Negros Occidental,
G.R. No. L-27084, (24 SCRA 500 [1968]). In the same case the Court ruled that the Central's conventional
right of way over the hacienda Helvetia ceased with the expiration of its amended milling contracts with
the landowners of the hacienda at the end of the 1964-1965 crop year and that in the absence of a
renewal contract or the establishment of a compulsory servitude of right of way on the same spot and
route which must be predicated on the satisfaction of the preconditions required by law, there subsists
no right of way to be protected.

Consequently, the owners of the hacienda Helvetia required the Central to remove the railway tracks in
the hacienda occupying at least 3,245 lineal meters with a width of 7 meters or a total of 22,715 square
meters, more or less. That was the natural consequence of the expiration of the milling contracts with
the landowners of the hacienda Helvetia (Angela Estate, Inc. and Fernando Gonzaga, Inc. v. Court of First
Instance of Negros Occidental, ibid). BMMC filed a complaint for legal easement against the owners of
the hacienda, with the Court of First Instance of Negros Occidental which issued on October 4, 1965 an
ex parte writ of preliminary injunction restraining the landowners from reversing and/or destroying the
railroad tracks in question and from impeding, obstructing or in any way preventing the passage and
operation of plaintiffs locomotives and cane cars over defendants' property during the pendency of the
litigation and maintained the same in its subsequent orders of May 31, and November 26, 1966. The
outcome of the case, however, was not favorable to the plaintiff BMMC. In the same case the
landowners asked this Court to restrain the lower court from enforcing the writ of preliminary injunction
it issued, praying that after the hearing on the merits, the restraining order be made permanent and the
orders complained of be annulled and set aside. The Court gave due course to the landowner's petition
and on August 10, 1967 issued the writ of preliminary injunction enjoining the lower court from
enforcing the writ of preliminary injunction issued by the latter on October 4, 1965.

The writ of preliminary injunction issued by the Court was lifted temporarily on motion that through the
mediation of the President of the Philippines the Angela Estate and the Gonzaga Estate agreed with the
Central to allow the use of the railroad tracks passing through the hacienda Helvetia during the 1967-
1968 milling season only, for the same purpose for which they had been previously used, but it was
understood that the lifting of the writ was without prejudice to the respective rights and positions of the
parties in the case and not deemed a waiver of any of their respective claims and allegations in G.R. No.
L-27084 or in any other case between the same parties, future or pending. The Court resolved to
approve the motion only up to and including June 30, 1968 to give effect to the agreement but to be
deemed automatically reinstated beginning July 1, 1968 (Angela Estate, Inc. and Fernando F. Gonzaga,
Inc. v. Court of First Instance of Negros Occidental, ibid.).

The temporary lifting of the writ of preliminary injunction assured the milling of the 1967-1968 crop but
not the produce of the succeeding crop years which situation was duly communicated by the President
and General Manager of the BMMC to the President of Bacolod-Murcia Sugar Farmers Corporation
(BMSFC) on January 2, 1968. 3

On October 30, 1968, Alonso Gatuslao, one of private respondents herein, and his wife, Maria H.
Gatuslao, filed Civil Case No. 8719 in the Court of First Instance of Negros Occidental, against petitioner
herein, Bacolod-Murcia Milling Co., Inc. (BMMC), for breach of contract, praying among others, for the
issuance of a writ of preliminary mandatory injunction ordering defendant to immediately send
transportation facilities and haul the already cut sugarcane to the mill site and principally praying after
hearing, that judgment be rendered declaring the rescission of the milling contract executed by plaintiffs
and defendant in 1957 for seventeen (17) years or up to crop year 1973-74, invoking as ground the
alleged failure and/or inability of defendant to comply with its specific obligation of providing the
necessary transportation facilities to haul the sugarcane of Gatuslao from plaintiffs plantation
specifically for the crop year 1967-1968. Plaintiffs further prayed for the recovery of actual and
compensatory damages as well as moral and exemplary damages and attorney's fees. 4

In answer, defendant BMMC claimed that despite its inability to use its railways system for its
locomotives and cane cars to haul the sugarcanes of all its adhered planters including plaintiffs for the
1968-69 crop year allegedly due to force majeure, in order to comply with its obligation, defendant
hired at tremendous expense, private trucks as prime movers for its trailers to be used for hauling of the
canes, especially for those who applied for and requested transportation facilities. Plaintiffs, being one
of said planters, instead of loading their cut canes for the 1968-69 crop on the cargo trucks of
defendant, loaded their cut canes on trucks provided by the Bacolod-Murcia Agricultural Cooperative
Marketing Association, Inc. (B-M ACMA) which transported plaintiffs' canes of the 1968-69 sugarcanes
crop. Defendant prayed in its counterclaim for the dismissal of Civil Case No. 8719 for the recovery of
actual damages, moral and exemplary damages and for attorney's fees. 5

On November 21, 1968, BMMC filed in the same court Civil Case No. 8745 against Alonso Gatuslao, the
Agro-Industrial Development of Silay-Saravia (AIDSISA) and the Bacolod-Murcia Agricultural Cooperative
Marketing Associations, Inc. (B-M ACMA), seeking specific performance under the mining contract
executed on May 24, 1957 between plaintiff and defendant Alonso Gatuslao praying for the issuance of
writs of preliminary mandatory injunction to stop the alleged violation of the contract by defendant
Alonso Gatuslao in confederation, collaboration and connivance with defendant BM-ACMA, AIDSISA,
and for the recovery of actual, moral and exemplary damages and attorney's fees. 6

Defendant Alonso Gatuslao and the Bacolod-Murcia Agricultural Cooperative Marketing Association, Inc.
filed their answer on January 27, 1969 with compulsory counter-claims, stating by way of special and
affirmative defense, among others, that the case is barred by another action pending between the same
parties for the same cause of action. 7

Defendant Agro-Industrial Development Corporation of Silay-Saravia, Inc. filed its answer on February 8,
1969, alleging among others by way of affirmative defense that before it agreed to mill the sugarcane of
its co-defendant Alonso Gatuslao, it carefully ascertained and believed in good faith that: (a) plaintiff
was incapable of the sugarcane of AIDSISA's co-defendant planters as well as the sugarcane of other
planters formerly adherent to plaintiff, (b) plaintiff had in effect agreed to a rescission of its milling
contracts with its adhered planters, including the defendant planter, because of inadequate means of
transportation. and had warned and advised them to mill their sugarcane elsewhere, and had thus
induced them to believe and act on the belief, that it could not mill their sugarcane and that it would not
object to their milling with other centrals; and (c) up to now plaintiff is incapable of hauling the
sugarcane of AIDSISA's co-defendants to plaintiffs mill site for milling purposes.

The two cases, Civil Cases Nos. 8719 and 8745 were consolidated for joint trial before Branch II of the
Court of First Instance of Negros Occidental. 8 On September 8, 1969, the parties in both civil cases filed
their partial stipulation of facts which included a statement of the issues raised by the parties. 9

On February 6, 1976, the lower court rendered judgment declaring the milling contract dated May 24,
1957 rescinded. The dispositive portion of the decision 10 reads:

WHEREFORE, judgment is hereby rendered as follows:

(1) In Civil Case No. 8719 the milling contract (Exh. "121") dated May 24, 1957 is hereby declared
rescinded or resolved and the defendant Bacolod-Murcia Company, Inc. is hereby ordered to pay
plaintiffs Alonso Gatuslao and Maria H. Gatuslao the amount of P2,625.00 with legal interest from the
time of the filing of the complaint by way of actual damages; P5,000.00 as attorney's fees and the costs
of the suit; defendant's counterclaim is dismissed; and

(2) The complaint in Civil Case No. 8745 as well as the counterclaims therein are ordered dismissed,
without costs.

Bacolod-Murcia Milling Co., Inc. defendant in Civil Case No. 8719 and plaintiff in Civil Case No. 8745
appealed the case to respondent Court of Appeals which affirmed in toto (Rollo, p. 81) the decision of
the lower court. The motion for reconsideration filed by defendant-appellant Bacolod-Murcia Milling
Company, petitioner herein, was denied by the appellate court for lack of merit. 11 Hence, this petition.

The issues 12 raised by petitioner are as follows:

I

WHETHER OR NOT THE CLOSURE OF PETITIONER'S RAIL ROAD LINES CONSTITUTE FORCE MAJEURE.

II

WHETHER OR NOT PRIVATE RESPONDENT GATUSLAO HAS THE RIGHT TO RESCIND THE MILLING
CONTRACT WITH PETITIONER UNDER ARTICLE 1191 OF THE CIVIL CODE.

III

WHETHER OR NOT PRIVATE RESPONDENT GATUSLAO WAS JUSTIFIED IN VIOLATING HIS MILLING
CONTRACT WITH PETITIONER.

IV

WHETHER OR NOT PRIVATE RESPONDENTS GATUSLAO AND B-M ACMA ARE GUILTY OF BAD FAITH IN
THE EXERCISE OF THEIR DUTIES AND ARE IN ESTOPPEL TO QUESTION THE ADEQUACY OF THE
TRANSPORTATION FACILITIES OF PETITIONER AND ITS CAPACITY TO MILL AND HAUL THE CANES OF ITS
ADHERENT PLANTERS.

The crux of the issue is whether or not the termination of petitioner's right of way over the hacienda
Helvetia caused by the expiration of its amended milling contracts with the landowners of the lands in
question is a fortuitous event or force majeure which will exempt petitioner BMMC from fulfillment of
its contractual obligations.

It is the position of petitioner Bacolod-Murcia Milling Co., Inc. (BMMC) that the closure of its railroad
lines constitute force majeure, citing Article 1174 of the Civil Code, exempting a person from liability for
events which could not be foreseen or which though foreseen were inevitable.

This Court has consistently ruled that when an obligor is exempted from liability under the aforecited
provision of the Civil Code for a breach of an obligation due to an act of God, the following elements
must concur: (a) the cause of the breach of the obligation must be independent of the wig 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; (d) the debtor must be free from
any participation in, or aggravation of the injury to the creditor (Vasquez v. Court of Appeals, 138 SCRA
553 [1985]; Juan F. Nakpil & Sons v. Court of Appeals, 144 SCRA 596 [1986]). Applying the criteria to the
instant case, there can be no other conclusion than that the closure of the railroad tracks does not
constitute force majeure.

The terms of the milling contracts were clear and undoubtedly there was no reason for BAMC to expect
otherwise. The closure of any portion of the railroad track, not necessarily in the hacienda Helvetia but
in any of the properties whose owners decided not to renew their milling contracts with the Central
upon their expiration, was forseeable and inevitable.

Petitioner Central should have anticipated and should have provided for the eventuality before
committing itself. Under the circumstances it has no one to blame but itself and cannot now claim
exemption from liability.

In the language of the law, the event must have been impossible to foresee, or if it could be foreseen,
must have been impossible to avoid. There must be an entire exclusion of human agency from the cause
of the injury or loss (Vasquez v. Court of Appeals, supra). In the case at bar, despite its awareness that
the conventional contract of lease would expire in Crop Year 1964-1965 and that refusal on the part of
any one of the landowners to renew their milling contracts and the corresponding use of the right of
way on their lands would render impossible compliance of its commitments, petitioner took a calculated
risk that all the landowners would renew their contracts. Unfortunately, the sugar plantation of Angela
Estate, Inc. which is located at the entrance of the mill was the one which refused to renew its milling
contract. As a result, the closure of the railway located inside said plantation paralyzed the entire
transportation system. Thus, the closure of the railway lines was not an act of God nor does it constitute
force majeure. It was due to the termination of the contractual relationships of the parties, for which
petitioner is charged with knowledge. Verily, the lower court found that the Angela Estate, Inc. notified
BMMC as far back as August or September 1965 of its intention not to allow the passage of the railway
system thru its land after the aforesaid crop year. Adequate measures should have been adopted by
BMMC to forestall such paralyzation but the records show none. All its efforts were geared toward the
outcome of the court litigation but provided no solutions to the transport problem early enough in case
of an adverse decision.

The last three issues being inter-related will be treated as one. Private respondent Gatuslao filed an
action for rescission while BMMC filed in the same court an action against Gatuslao, the Agro Industrial
Development Silay Saravia (AIDSISA) and the Bacolod-Murcia Agricultural Cooperative Marketing
Associations, Inc. (B-M ACMA) for specific performance under the milling contract.

There is no question that the contract in question involves reciprocal obligations; as such party is a
debtor and creditor of the other, such that the obligation of one is dependent upon the obligation of the
other. They are to be performed simultaneously so that the performance of one is conditioned upon the
simultaneous fulfillment of the other (Boysaw v. Interphil Promotions, Inc., 148 SCRA 643 [1987]).

Under Article 1191 of the Civil Code, 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. In fact, it is well
established that the party who deems the contract violated may consider it revoked or rescinded
pursuant to their agreement and act accordingly, even without previous court action (U.P. v. de los
Angeles, 35 SCRA 102 [1970]; Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 94
[1972]).

It is the general rule, however, that rescission of a contract will not be permitted for a slight or casual
breach, but only for such substantial and fundamental breach as would defeat the very object of the
parties in making the agreement. The question of whether a breach of a contract is substantial depends
upon the attendant circumstances (Universal Food Corporation v. Court of Appeals, et al., 33 SCRA 1
[1970]).

The issue therefore, hinges on who is guilty of the breach of the milling contract.

Both parties are agreed that time is of the essence in the sugar industry; so that the sugarcanes have to
be milled at the right time, not too early or too late, if the quantity and quality of the juice are to be
assured. As found by the trial court, upon the execution of the amended milling contract on May 24,
1957 for a period of 17 crop years, BMMC undertook expressly among its principal prestations not only
to mill Gatuslao's canes but to haul them by railway from the loading stations to the mill. Atty. Solidum,
Chief Legal Counsel and in Charge of the Legal-Crop Loan Department of the BMMC Bacolod City admits
that the mode of transportation of canes from the fields to the mill is a vital factor in the sugar industry;
precisely for this reason the mode of transportation or hauling the canes is embodied in the milling
contract. 13 But BMMC is now unable to haul the canes by railways as stipulated because of the closure
of the railway lines; so that resolution of this issue ultimately rests on whether or not BMMC was able to
provide adequate and efficient transportation facilities of the canes of Gatuslao and the other planters
milling with BMMC during the crop year 1968-1969. As found by both the trial court and the Court of
Appeals, the answer is in the negative.

Armando Guanzon, Dispatcher of the Transportation Department of BMMC testified that when the
Central was still using the railway lines, it had between 900 to 1,000 cane cars and 10 locomotives, each
locomotive pulling from 30 to 50 cane cars with maximum capacity of 8 tons each. 14 This testimony
was corroborated by Rodolfo Javelosa, Assistant Crop Loan Inspector in the Crop Loan Department of
petitioner. 15 After the closure of the railway lines, petitioner on February 5, 1968 through its President
and General Manager, informed the National Committee of the National Federation of Sugarcane
Planters that the trucking requirement for hauling adherent planters produce with a milling average of
3,500 tons of canes daily at an average load of 5 tons per truck is not less than 700 trucks daily plus
another 700 empty trucks to be shuttled back to the plantations to be available for loading the same
day. 16 Guanzon, however, testified that petitioner had only 280 units of trailers, 20 tractors and 3
trucks plus 20 trucks more or less hired by the Central and given as repartos (allotments) to the different
planters. 17 The 180 trailers that the Central initially had were permanently leased to some planters
who had their own cargo trucks while out of the 250 BMMC trailers existing during the entire milling
season only 70 were left available to the rest of the planters pulled by 3 trucks. 18

It is true that BMMC purchased 20 units John Deere Tractors (prime movers) and 230 units, Vanguard
Trailers with land capacity of 3 tons each but that was only on October 1968 as registered in the Land
Transportation Commission, Bacolod City. 19

The evidence shows that great efforts had been exerted by the planters to enter into some concrete
understanding with BMMC with a view of obtaining a reasonable assurance that the latter would be able
to haul and mill their canes for the 1968-1969 crop year, but to no avail. 20

As admitted by BMMC itself, in its communications with the planters, it is not in a position to provide
adequate transportation for the canes in compliance with its commitment under the milling contract.
Said communications 21 were quoted by the Court of Appeals as follows:

We are sorry to inform you that unless we can work out a fair and equitable solution to this problem of
closure of our railroad lines, the milling of your canes for the crop year 1968-69 would be greatly
hampered to the great detriment of our economy and the near elimination of the means of livelihood of
most planters and the possible starvation of thousands of laborers working in the sugar District of
Bacolod-Murcia Milling Co.

and

We are fully conscious of our contractual obligations to our existing Milling Contract. But, if prevented
by judicial order we will find ourselves unable to serve you in the hauling of the canes through our
railroad lines. It is for this reason that we suggest you explore other solutions to the problem in the face
of such an eventuality so that you may be able to proceed with the planting of your canes with absolute
peace of mind and the certainty that the same will be properly milled and not left to rot in the fields.

also,

In the meantime, and before July 1, 1968, the end of the temporary arrangement we have with
Fernando Gonzaga, Inc. and the Angela Estate, Inc. for the use of the rights of ways, our lawyers are
studying the possibility of getting a new injunction from the Supreme Court or the Court of First Instance
of Negros Occidental based on the new grounds interposed in said memorandum not heretofore raised
previously nor in the Capitol Subdivision case. And if we are doing this, it is principally to prevent any
injury to your crops or foreclosure of your property, which is just in line with the object of your plans.

On March 26, 1968 the President of the Bacolod-Murcia Sugar Farmer's Corporation writing on behalf of
its planter-members demanded to know the plans of the Central for the crop year 1968-1969, stating
that if they fail to hear from the Central on or before the 15th of April they will feel free to make their
own plans in order to save their crops and the possibility of foreclosure of their properties. 22

In its letter dated April 1, 1968, the president of BMMC simply informed the Bacolod-Murcia Sugar
Farmer's Corporation that they were studying the possibility of getting a new injunction from the court
before expiration of their temporary arrangement with Fernando Gonzaga, Inc. and the Angela Estate,
Inc. 23

Pressing for a more definite commitment (not a mere hope or expectation), on May 30, 1968 the
Bacolod-Murcia Sugar Farmer's Corporation requested the Central to put up a performance bond in the
amount of P13 million within a 5-day period to allay the fears of the planters that their sugar canes can
not be milled at the Central in the coming milling season. 24

BMMC's reply was only to express optimism over the final outcome of its pending cases in court.

Hence, what actually happened afterwards is that petitioner failed to provide adequate transportation
facilities to Gatuslao and other adherent planters.

As found by the trial court, the experience of Alfonso Gatuslao at the start of the 1968-1969 milling
season is reflective of the inadequacies of the reparto or trailer allotment as well as the state of
unpreparedness on the part of BMMC to meet the problem posed by the closure of the railway lines.

It was established that after Gatuslao had cut his sugarcanes for hauling, no trailers arrived and when
two trailers finally arrived on October 20, 1968 after several unheeded requests, they were left on the
national highway about one (1) kilometer away from the loading station. Such fact was confirmed by
Carlos Butog the driver of the truck that hauled the trailers. 25

Still further, Javelosa, Assistant Crop Loan Inspector, testified that the estimated production of Gatuslao
for the crop year 1968-1969 was 4,400 piculs hauled by 10 cane cars a week with a maximum capacity of
8 tons. 26 Compared with his later schedule of only one trailer a week with a maximum capacity of only
3 to 4 tons, 27 there appears to be no question that the means of transportation provided by BMMC is
very inadequate to answer the needs of Gatuslao.

Undoubtedly, BMMC is guilty of breach of the conditions of the milling contract and that Gatuslao is the
injured party. Under the same Article 1191 of the Civil Code, the injured party may choose between the
fulfillment and the rescission of the obligation, with the payment of damages in either case. In fact, he
may also seek rescission even after he had chosen fulfillment if the latter should become impossible.

Under the foregoing, Gatuslao has the right to rescind the milling contract and neither the court a quo
erred in decreeing the rescission claimed nor the Court of Appeals in affirming the same.

Conversely, BMMC cannot claim enforcement of the contract. As ruled by this Court, by virtue of the
violations of the terms of the contract, the offending party has forfeited any right to its enforcement
(Boysaw v. Interphil Promotions, Inc., 148 SCRA 645 [1987]).

Likewise, the Bacolod-Murcia Agricultural Cooperative Marketing Association, Inc. (B-M ACMA) cannot
be faulted for organizing itself to take care of the needs of its members. Definitely, it was organized at
that time when petitioner could not assure the planters that it could definitely haul and mill their canes.
More importantly, as mentioned earlier in a letter dated January 12, 1968, J. Araneta, President &
General Manager of the Central itself suggested to the Bacolod-Murcia Sugar Farmer's Corporation that
it explore solutions to the problem of hauling the canes to the milling station in the face of the
eventuality of a judicial order permanently closing the railroad lines so that the planters may be able to
proceed with their planting of the canes with absolute peace of mind and the certainty that they will be
properly milled and not left to rot in the fields. As a result, the signing of the milling contract between
private respondents AIDSISA and B-M-ACMA on June 19, 1968 28 was a matter of self-preservation
inasmuch as the sugarcanes were already matured and the planters had crop loans to pay. Further delay
would mean tremendous losses. 29

In its defense AIDSISA stressed as earlier stated, that it agreed to mill the sugarcanes of Gatuslao only
after it had carefully ascertained and believed in good faith that BMMC was incapable of milling the
sugarcanes of the adherent planters because of inadequate transportation and in fact up to now said
Central is incapable of hauling the sugarcanes of the said planters to its mill site for milling purposes.

As an extra precaution, AIDSISA provided in paragraph 15 30 of its milling contract that

If any member of the planter has an existing milling contract with other sugar central, then this milling
contract with the Central shall be of no force and effect with respect to that member or those members
having such contract, if that other sugar central is able, ready and willing, to mill said member or
members' canes in accordance with their said milling contract. (Emphasis supplied)

The President of BANC himself induced the planters to believe and to act on the belief that said Central
would not object to the milling of their canes with other centrals.

Under the circumstances, no evidence of bad faith on the part of private respondents could be found
much less any plausible reason to disturb the findings and conclusions of the trial court and the Court of
Appeals.

PREMISES CONSIDERED, the petition is hereby DENIED for lack of merit and the decision of the Court of
Appeals is hereby AFFIRMED in toto.

SO ORDERED.

Melencio-Herrera (Chairperson), Padilla, Sarmiento and Regalado, JJ., concur.



















Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 147324 May 25, 2004

PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, petitioner,
vs.
GLOBE TELECOM, INC. (formerly Globe Mckay Cable and Radio Corporation), respondents.

x-----------------------------x

GLOBE TELECOM, INC., petitioner,
vs.
PHILIPPINE COMMUNICATION SATELLITE CORPORATION, respondent.

D E C I S I O N

TINGA, J.:

Before the Court are two Petitions for Review assailing the Decision of the Court of Appeals, dated 27
February 2001, in CA-G.R. CV No. 63619.1

The facts of the case are undisputed.

For several years prior to 1991, Globe Mckay Cable and Radio Corporation, now Globe Telecom, Inc.
(Globe), had been engaged in the coordination of the provision of various communication facilities for
the military bases of the United States of America (US) in Clark Air Base, Angeles, Pampanga and Subic
Naval Base in Cubi Point, Zambales. The said communication facilities were installed and configured for
the exclusive use of the US Defense Communications Agency (USDCA), and for security reasons, were
operated only by its personnel or those of American companies contracted by it to operate said
facilities. The USDCA contracted with said American companies, and the latter, in turn, contracted with
Globe for the use of the communication facilities. Globe, on the other hand, contracted with local
service providers such as the Philippine Communications Satellite Corporation (Philcomsat) for the
provision of the communication facilities.

On 07 May 1991, Philcomsat and Globe entered into an Agreement whereby Philcomsat obligated itself
to establish, operate and provide an IBS Standard B earth station (earth station) within Cubi Point for
the exclusive use of the USDCA.2 The term of the contract was for 60 months, or five (5) years.3 In turn,
Globe promised to pay Philcomsat monthly rentals for each leased circuit involved.4

At the time of the execution of the Agreement, both parties knew that the Military Bases Agreement
between the Republic of the Philippines and the US (RP-US Military Bases Agreement), which was the
basis for the occupancy of the Clark Air Base and Subic Naval Base in Cubi Point, was to expire in 1991.
Under Section 25, Article XVIII of the 1987 Constitution, foreign military bases, troops or facilities, which
include those located at the US Naval Facility in Cubi Point, shall not be allowed in the Philippines unless
a new treaty is duly concurred in by the Senate and ratified by a majority of the votes cast by the people
in a national referendum when the Congress so requires, and such new treaty is recognized as such by
the US Government.

Subsequently, Philcomsat installed and established the earth station at Cubi Point and the USDCA made
use of the same.

On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141, expressing its
decision not to concur in the ratification of the Treaty of Friendship, Cooperation and Security and its
Supplementary Agreements that was supposed to extend the term of the use by the US of Subic Naval
Base, among others.5 The last two paragraphs of the Resolution state:

FINDING that the Treaty constitutes a defective framework for the continuing relationship between the
two countries in the spirit of friendship, cooperation and sovereign equality: Now, therefore, be it
Resolved by the Senate, as it is hereby resolved, To express its decision not to concur in the ratification
of the Treaty of Friendship, Cooperation and Security and its Supplementary Agreements, at the same
time reaffirming its desire to continue friendly relations with the government and people of the United
States of America.6

On 31 December 1991, the Philippine Government sent a Note Verbale to the US Government through
the US Embassy, notifying it of the Philippines termination of the RP-US Military Bases Agreement. The
Note Verbale stated that since the RP-US Military Bases Agreement, as amended, shall terminate on 31
December 1992, the withdrawal of all US military forces from Subic Naval Base should be completed by
said date.

In a letter dated 06 August 1992, Globe notified Philcomsat of its intention to discontinue the use of the
earth station effective 08 November 1992 in view of the withdrawal of US military personnel from Subic
Naval Base after the termination of the RP-US Military Bases Agreement. Globe invoked as basis for the
letter of termination Section 8 (Default) of the Agreement, which provides:

Neither party shall be held liable or deemed to be in default for any failure to perform its obligation
under this Agreement if such failure results directly or indirectly from force majeure or fortuitous event.
Either party is thus precluded from performing its obligation until such force majeure or fortuitous event
shall terminate. For the purpose of this paragraph, force majeure shall mean circumstances beyond the
control of the party involved including, but not limited to, any law, order, regulation, direction or
request of the Government of the Philippines, strikes or other labor difficulties, insurrection riots,
national emergencies, war, acts of public enemies, fire, floods, typhoons or other catastrophies or acts
of God.

Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that "we expect [Globe] to know
its commitment to pay the stipulated rentals for the remaining terms of the Agreement even after
[Globe] shall have discontinue[d] the use of the earth station after November 08, 1992."7 Philcomsat
referred to Section 7 of the Agreement, stating as follows:

7. DISCONTINUANCE OF SERVICE

Should [Globe] decide to discontinue with the use of the earth station after it has been put into
operation, a written notice shall be served to PHILCOMSAT at least sixty (60) days prior to the expected
date of termination. Notwithstanding the non-use of the earth station, [Globe] shall continue to pay
PHILCOMSAT for the rental of the actual number of T1 circuits in use, but in no case shall be less than
the first two (2) T1 circuits, for the remaining life of the agreement. However, should PHILCOMSAT make
use or sell the earth station subject to this agreement, the obligation of [Globe] to pay the rental for the
remaining life of the agreement shall be at such monthly rate as may be agreed upon by the parties.8

After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter dated 24 November
1993 demanding payment of its outstanding obligations under the Agreement amounting to
US$4,910,136.00 plus interest and attorneys fees. However, Globe refused to heed Philcomsats
demand.

On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati a Complaint against Globe,
praying that the latter be ordered to pay liquidated damages under the Agreement, with legal interest,
exemplary damages, attorneys fees and costs of suit. The case was raffled to Branch 59 of said court.

Globe filed an Answer to the Complaint, insisting that it was constrained to end the Agreement due to
the termination of the RP-US Military Bases Agreement and the non-ratification by the Senate of the
Treaty of Friendship and Cooperation, which events constituted force majeure under the Agreement.
Globe explained that the occurrence of said events exempted it from paying rentals for the remaining
period of the Agreement.

On 05 January 1999, 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 pay the plaintiff the amount of Ninety Two Thousand Two Hundred Thirty
Eight US Dollars (US$92,238.00) or its equivalent in Philippine Currency (computed at the exchange rate
prevailing at the time of compliance or payment) representing rentals for the month of December 1992
with interest thereon at the legal rate of twelve percent (12%) per annum starting December 1992 until
the amount is fully paid;

2. Ordering the defendant to pay the plaintiff the amount of Three Hundred Thousand (P300,000.00)
Pesos as and for attorneys fees;

3. Ordering the DISMISSAL of defendants counterclaim for lack of merit; and

4. With costs against the defendant.

SO ORDERED.9

Both parties appealed the trial courts Decision to the Court of Appeals.

Philcomsat claimed that the trial court erred in ruling that: (1) the non-ratification by the Senate of the
Treaty of Friendship, Cooperation and Security and its Supplementary Agreements constitutes force
majeure which exempts Globe from complying with its obligations under the Agreement; (2) Globe is
not liable to pay the rentals for the remainder of the term of the Agreement; and (3) Globe is not liable
to Philcomsat for exemplary damages.

Globe, on the other hand, contended that the RTC erred in holding it liable for payment of rent of the
earth station for December 1992 and of attorneys fees. It explained that it terminated Philcomsats
services on 08 November 1992; hence, it had no reason to pay for rentals beyond that date.

On 27 February 2001, the Court of Appeals promulgated its Decision dismissing Philcomsats appeal for
lack of merit and affirming the trial courts finding that certain events constituting force majeure under
Section 8 the Agreement occurred and justified the non-payment by Globe of rentals for the remainder
of the term of the Agreement.

The appellate court ruled that the non-ratification by the Senate of the Treaty of Friendship,
Cooperation and Security, and its Supplementary Agreements, and the termination by the Philippine
Government of the RP-US Military Bases Agreement effective 31 December 1991 as stated in the
Philippine Governments Note Verbale to the US Government, are acts, directions, or requests of the
Government of the Philippines which constitute force majeure. In addition, there were circumstances
beyond the control of the parties, such as the issuance of a formal order by Cdr. Walter Corliss of the US
Navy, the issuance of the letter notification from ATT and the complete withdrawal of all US military
forces and personnel from Cubi Point, which prevented further use of the earth station under the
Agreement.

However, the Court of Appeals ruled that although Globe sought to terminate Philcomsats services by
08 November 1992, it is still liable to pay rentals for the December 1992, amounting to US$92,238.00
plus interest, considering that the US military forces and personnel completely withdrew from Cubi
Point only on 31 December 1992.10

Both parties filed their respective Petitions for Review assailing the Decision of the Court of Appeals.

In G.R. No. 147324,11 petitioner Philcomsat raises the following assignments of error:

A. THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING A DEFINITION OF FORCE MAJEURE
DIFFERENT FROM WHAT ITS LEGAL DEFINITION FOUND IN ARTICLE 1174 OF THE CIVIL CODE, PROVIDES,
SO AS TO EXEMPT GLOBE TELECOM FROM COMPLYING WITH ITS OBLIGATIONS UNDER THE SUBJECT
AGREEMENT.

B. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT LIABLE TO
PHILCOMSAT FOR RENTALS FOR THE REMAINING TERM OF THE AGREEMENT, DESPITE THE CLEAR
TENOR OF SECTION 7 OF THE AGREEMENT.

C. THE HONORABLE OCURT OF APPEALS ERRED IN DELETING THE TRIAL COURTS AWARD OF
ATTORNEYS FEES IN FAVOR OF PHILCOMSAT.

D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT LIABLE TO
PHILCOMSAT FOR EXEMPLARY DAMAGES.12

Philcomsat argues that the termination of the RP-US Military Bases Agreement cannot be considered a
fortuitous event because the happening thereof was foreseeable. Although the Agreement was freely
entered into by both parties, Section 8 should be deemed ineffective because it is contrary to Article
1174 of the Civil Code. Philcomsat posits the view that the validity of the parties definition of force
majeure in Section 8 of the Agreement as "circumstances beyond the control of the party involved
including, but not limited to, any law, order, regulation, direction or request of the Government of the
Philippines, strikes or other labor difficulties, insurrection riots, national emergencies, war, acts of public
enemies, fire, floods, typhoons or other catastrophies or acts of God," should be deemed subject to
Article 1174 which defines fortuitous events as events which could not be foreseen, or which, though
foreseen, were inevitable.13

Philcomsat further claims that the Court of Appeals erred in holding that Globe is not liable to pay for
the rental of the earth station for the entire term of the Agreement because it runs counter to what was
plainly stipulated by the parties in Section 7 thereof. Moreover, said ruling is inconsistent with the
appellate courts pronouncement that Globe is liable to pay rentals for December 1992 even though it
terminated Philcomsats services effective 08 November 1992, because the US military and personnel
completely withdrew from Cubi Point only in December 1992. Philcomsat points out that it was Globe
which proposed the five-year term of the Agreement, and that the other provisions of the Agreement,
such as Section 4.114 thereof, evince the intent of Globe to be bound to pay rentals for the entire five-
year term.15

Philcomsat also maintains that contrary to the appellate courts findings, it is entitled to attorneys fees
and exemplary damages.16

In its Comment to Philcomsats Petition, Globe asserts that Section 8 of the Agreement is not contrary to
Article 1174 of the Civil Code because said provision does not prohibit parties to a contract from
providing for other instances when they would be exempt from fulfilling their contractual obligations.
Globe also claims that the termination of the RP-US Military Bases Agreement constitutes force majeure
and exempts it from complying with its obligations under the Agreement.17 On the issue of the
propriety of awarding attorneys fees and exemplary damages to Philcomsat, Globe maintains that
Philcomsat is not entitled thereto because in refusing to pay rentals for the remainder of the term of the
Agreement, Globe only acted in accordance with its rights.18

In G.R. No. 147334,19 Globe, the petitioner therein, contends that the Court of Appeals erred in finding
it liable for the amount of US$92,238.00, representing rentals for December 1992, since Philcomsats
services were actually terminated on 08 November 1992.20

In its Comment, Philcomsat claims that Globes petition should be dismissed as it raises a factual issue
which is not cognizable by the Court in a petition for review on certiorari.21

On 15 August 2001, the Court issued a Resolution giving due course to Philcomsats Petition in G.R. No.

147324 and required the parties to submit their respective memoranda.22

Similarly, on 20 August 2001, the Court issued a Resolution giving due course to the Petition filed by
Globe in G.R. No. 147334 and required both parties to submit their memoranda.23

Philcomsat and Globe thereafter filed their respective Consolidated Memoranda in the two cases,
reiterating their arguments in their respective petitions.

The Court is tasked to resolve the following issues: (1) whether the termination of the RP-US Military
Bases Agreement, the non-ratification of the Treaty of Friendship, Cooperation and Security, and the
consequent withdrawal of US military forces and personnel from Cubi Point constitute force majeure
which would exempt Globe from complying with its obligation to pay rentals under its Agreement with
Philcomsat; (2) whether Globe is liable to pay rentals under the Agreement for the month of December
1992; and (3) whether Philcomsat is entitled to attorneys fees and exemplary damages.

No reversible error was committed by the Court of Appeals in issuing the assailed Decision; hence the
petitions are denied.

There is no merit is Philcomsats argument that Section 8 of the Agreement cannot be given effect
because the enumeration of events constituting force majeure therein unduly expands the concept of a
fortuitous event under Article 1174 of the Civil Code and is therefore invalid.

In support of its position, Philcomsat contends that under Article 1174 of the Civil Code, an event must
be unforeseen in order to exempt a party to a contract from complying with its obligations therein. It
insists that since the expiration of the RP-US Military Bases Agreement, the non-ratification of the Treaty
of Friendship, Cooperation and Security and the withdrawal of US military forces and personnel from
Cubi Point were not unforeseeable, but were possibilities known to it and Globe at the time they
entered into the Agreement, such events cannot exempt Globe from performing its obligation of paying
rentals for the entire five-year term thereof.

However, Article 1174, which exempts an obligor from liability on account of fortuitous events or force
majeure, refers not only to events that are unforeseeable, but also to those which are foreseeable, but
inevitable:

Art. 1174. Except in cases 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.

A fortuitous event under Article 1174 may either be an "act of God," or natural occurrences such as
floods or typhoons,24 or an "act of man," such as riots, strikes or wars.25

Philcomsat and Globe agreed in Section 8 of the Agreement that the following events shall be deemed
events constituting force majeure:

1. Any law, order, regulation, direction or request of the Philippine Government;

2. Strikes or other labor difficulties;

3. Insurrection;

4. Riots;

5. National emergencies;

6. War;

7. Acts of public enemies;

8. Fire, floods, typhoons or other catastrophies or acts of God;

9. Other circumstances beyond the control of the parties.

Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of the parties.
There is nothing in the enumeration that runs contrary to, or expands, the concept of a fortuitous event
under Article 1174.

Furthermore, under Article 130626 of the Civil Code, parties to a contract may establish such
stipulations, clauses, terms and conditions as they may deem fit, as long as the same do not run counter
to the law, morals, good customs, public order or public policy.27

Article 1159 of the Civil Code also provides that "[o]bligations arising from contracts have the force of
law between the contracting parties and should be complied with in good faith."28 Courts cannot
stipulate for the parties nor amend their agreement where the same does not contravene law, morals,
good customs, public order or public policy, for to do so would be to alter the real intent of the parties,
and would run contrary to the function of the courts to give force and effect thereto.29

Not being contrary to law, morals, good customs, public order, or public policy, Section 8 of the
Agreement which Philcomsat and Globe freely agreed upon has the force of law between them.30

In order that Globe may be exempt from non-compliance with its obligation to pay rentals under Section
8, the concurrence of the following elements must be established: (1) the event must be independent of
the human will; (2) the occurrence must render it impossible for the debtor to fulfill the obligation in a
normal manner; and (3) the obligor must be free of participation in, or aggravation of, the injury to the
creditor.31

The Court agrees with the Court of Appeals and the trial court that the abovementioned requisites are
present in the instant case. Philcomsat and Globe had no control over the non-renewal of the term of
the RP-US Military Bases Agreement when the same expired in 1991, because the prerogative to ratify
the treaty extending the life thereof belonged to the Senate. Neither did the parties have control over
the subsequent withdrawal of the US military forces and personnel from Cubi Point in December 1992:

Obviously the non-ratification by the Senate of the RP-US Military Bases Agreement (and its
Supplemental Agreements) under its Resolution No. 141. (Exhibit "2") on September 16, 1991 is beyond
the control of the parties. This resolution was followed by the sending on December 31, 1991 o[f] a
"Note Verbale" (Exhibit "3") by the Philippine Government to the US Government notifying the latter of
the formers termination of the RP-US Military Bases Agreement (as amended) on 31 December 1992
and that accordingly, the withdrawal of all U.S. military forces from Subic Naval Base should be
completed by said date. Subsequently, defendant [Globe] received a formal order from Cdr. Walter F.
Corliss II Commander USN dated July 31, 1992 and a notification from ATT dated July 29, 1992 to
terminate the provision of T1s services (via an IBS Standard B Earth Station) effective November 08,
1992. Plaintiff [Philcomsat] was furnished with copies of the said order and letter by the defendant on
August 06, 1992.

Resolution No. 141 of the Philippine Senate and the Note Verbale of the Philippine Government to the
US Government are acts, direction or request of the Government of the Philippines and circumstances
beyond the control of the defendant. The formal order from Cdr. Walter Corliss of the USN, the letter
notification from ATT and the complete withdrawal of all the military forces and personnel from Cubi
Point in the year-end 1992 are also acts and circumstances beyond the control of the defendant.

Considering the foregoing, the Court finds and so holds that the afore-narrated circumstances constitute
"force majeure or fortuitous event(s) as defined under paragraph 8 of the Agreement.



From the foregoing, the Court finds that the defendant is exempted from paying the rentals for the
facility for the remaining term of the contract.

As a consequence of the termination of the RP-US Military Bases Agreement (as amended) the
continued stay of all US Military forces and personnel from Subic Naval Base would no longer be
allowed, hence, plaintiff would no longer be in any position to render the service it was obligated under
the Agreement. To put it blantly (sic), since the US military forces and personnel left or withdrew from
Cubi Point in the year end December 1992, there was no longer any necessity for the plaintiff to
continue maintaining the IBS facility. 32 (Emphasis in the original.)

The aforementioned events made impossible the continuation of the Agreement until the end of its five-
year term without fault on the part of either party. The Court of Appeals was thus correct in ruling that
the happening of such fortuitous events rendered Globe exempt from payment of rentals for the
remainder of the term of the Agreement.

Moreover, it would be unjust to require Globe to continue paying rentals even though Philcomsat
cannot be compelled to perform its corresponding obligation under the Agreement. As noted by the
appellate court:

We also point out the sheer inequity of PHILCOMSATs position. PHILCOMSAT would like to charge
GLOBE rentals for the balance of the lease term without there being any corresponding
telecommunications service subject of the lease. It will be grossly unfair and iniquitous to hold GLOBE
liable for lease charges for a service that was not and could not have been rendered due to an act of the
government which was clearly beyond GLOBEs control. The binding effect of a contract on both parties
is based on the principle that the obligations arising from contracts have the force of law between the
contracting parties, and there must be mutuality between them based essentially on their equality
under which it is repugnant to have one party bound by the contract while leaving the other party free
therefrom (Allied Banking Corporation v. Court of Appeals, 284 SCRA 357).33

With respect to the issue of whether Globe is liable for payment of rentals for the month of December
1992, the Court likewise affirms the appellate courts ruling that Globe should pay the same.

Although Globe alleged that it terminated the Agreement with Philcomsat effective 08 November 1992
pursuant to the formal order issued by Cdr. Corliss of the US Navy, the date when they actually ceased
using the earth station subject of the Agreement was not established during the trial.34 However, the
trial court found that the US military forces and personnel completely withdrew from Cubi Point only on
31 December 1992.35 Thus, until that date, the USDCA had control over the earth station and had the
option of using the same. Furthermore, Philcomsat could not have removed or rendered ineffective said
communication facility until after 31 December 1992 because Cubi Point was accessible only to US naval
personnel up to that time. Hence, the Court of Appeals did not err when it affirmed the trial courts
ruling that Globe is liable for payment of rentals until December 1992.

Neither did the appellate court commit any error in holding that Philcomsat is not entitled to attorneys
fees and exemplary damages.

The award of attorneys fees is the exception rather than the rule, and must be supported by factual,
legal and equitable justifications.36 In previously decided cases, the Court awarded attorneys fees
where a party acted in gross and evident bad faith in refusing to satisfy the other partys claims and
compelled the former to litigate to protect his rights;37 when the action filed is clearly unfounded,38 or
where moral or exemplary damages are awarded.39 However, in cases where both parties have
legitimate claims against each other and no party actually prevailed, such as in the present case where
the claims of both parties were sustained in part, an award of attorneys fees would not be
warranted.40

Exemplary damages may be awarded in cases involving contracts or quasi-contracts, if the erring party
acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.41 In the present case, it was
not shown that Globe acted wantonly or oppressively in not heeding Philcomsats demands for payment
of rentals. It was established during the trial of the case before the trial court that Globe had valid
grounds for refusing to comply with its contractual obligations after 1992.

WHEREFORE, the Petitions are DENIED for lack of merit. The assailed Decision of the Court of Appeals in
CA-G.R. CV No. 63619 is AFFIRMED.

SO ORDERED.

Puno*, Quisumbing, Austria-Martinez, and Callejo, Sr., JJ., concur.







MALACAANG
M a n i l a

PRESIDENTIAL DECREE No. 858 December 31, 1975

AMENDING FURTHER ACT NUMBERED TWO THOUSAND SIX HUNDRED FIFTY-FIVE, AS AMENDED,
OTHERWISE KNOWN AS THE "USURY LAW"

WHEREAS, there are transactions, which, although involving lending of funds, offer returns on
investment higher than the maximum ceilings prescribed in the Usury Law;

WHEREAS, the higher return of investment in the money market, among other factors, has drawn
money supply away from desirable areas of investment to the detriment of national interest;

WHEREAS, the interest rate, together with other monetary and credit policy instruments, plays a vital
role in directing domestic savings and capital resources to economic activities where they are needed
most;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers
vested in me by the Constitution, do hereby declare and order the amendment of Act No. 2655, as
amended, as follows:

Section 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as follows;

"Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest
for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such
rate of rates whenever warranted by prevailing economic and social conditions.

"In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum
rates for loans of low priority, such as consumer loans or renewals thereof as well as such loans made by
pawnshops, finance companies and other similar credit institutions although the rates prescribed for
these institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribe
different maximum rate or rates for different types of borrowings, including deposits and deposit
substitutes, or loans of financial intermediaries."

Section 2. The same Act is hereby amended by adding the following section immediately after Section 4
thereof, which reads as follows:

"Sec. 4-a. The Monetary Board may eliminate, exempt from, or suspend the effectivity of, interest rate
ceilings on certain types of loans or renewals thereof or forbearances of money, goods, or credit,
whenever warranted by prevailing economic and social conditions."

Section 3. Section 4-a of the same Act is hereby renumbered as Sec. 4-b.

Section 4. All Acts and parts of Acts inconsistent with the provisions of this Decree are hereby repealed.

Section 5. This Decree shall take effect immediately.

Done in the City of Manila, this 31st day of December, in the year of Our Lord, nineteen hundred and
seventy-five.

CIRCULAR NO. 416
Series of 2004

Pursuant to Monetary Board Resolution No. 1843 dated 18 December 2003, approving the amendment
to the guidelines on the adoption of the risk-based capital adequacy framework under Circular No. 280
dated 29 March 2001, as amended, the provisions of the Manual of Regulations for Banks are hereby
amended as follows:

1. Subsection X116.2 is amended to reflect (1) the reduction in the risk weight of multilateral
development banks from 20% to 0%; and (2) to remove loans to exporters to the extent guaranteed by
the Guarantee Fund for Small and Medium Enterprises (GFSME) from the list of 0% risk weighted assets,
as follows:

x x x

0% risk weight

(1) Cash on hand;

(2) Claims on or portions of claims guaranteed by or collateralized by securities issued by -

i. Philippine national government and BSP; and

ii. Central governments and central banks of foreign countries with the highest credit quality as defined
in Subsec. X116.3;

(3) Claims on or portions of claims guaranteed by or collateralized by securities issued by multilateral
development banks;

(4) Loans to the extent covered by hold-out on, or assignment of deposits/deposit substitutes
maintained with the lending bank;

(5) Loans or acceptances under letters of credit to the extent covered by margin deposits;

(6) Portions of special time deposit loans covered by Industrial Guarantee and Loan Fund (IGLF)
guarantee;

(7) Real estate mortgage loans to the extent guaranteed by the Home Guaranty Corporation (HGC);

(8) Loans to the extent guaranteed by the Trade and Investment Development Corporation of the
Philippines (TIDCORP);

(9) Foreign currency notes and coins on hand acceptable as international reserves; and

(10) Gold bullion held either in own vaults, or in anothers vaults on an allocated basis, to the extent it is
offset by gold bullion liabilities;

20% risk weight

(1) Checks and other cash items;

(2) Claims on or portions of claims guaranteed by or collateralized by securities issued by non-central
government public sector entities of foreign countries with the highest credit quality as defined in
Subsec. X116.3;

(3) Claims on or portions of claims guaranteed by Philippine incorporated banks/quasi-banks with the
highest credit quality as defined in Subsec. X116.3;

(4) Claims on or portions of claims guaranteed by foreign incorporated banks with the highest credit
quality as defined in Subsec. X116.3;

(5) Loans to exporters to the extent guaranteed by Small Business Guarantee and Finance Corporation
(SBGFC): Provided, That loans to exporters to the extent guaranteed by the Guarantee Fund for Small
and Medium Enterprises (GFSME) outstanding as of the date of the effectivity of the merger of the
SBGFC and the GFSME shall continue to have a zero percent risk weight: Provided, further, That the zero
percent risk weight shall not apply to loans renewed after the merger of the SBGFC and the GFSME.

(6) Foreign currency checks and other cash items denominated in currencies acceptable as international
reserves; and

(7) Claims on Philippine incorporated banks, which claims obtain and maintain credit ratings of at least
equal to that of the Philippine national government from a BSP recognized international credit rating
agency;

x x x.

2. Subsection X116.3 is amended to expand the list of multilateral development banks assigned a zero
percent risk weight, as follows:

x x x

u. Multilateral development banks. These refer to the World Bank Group comprised of the International
Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC), the
Asian Development Bank (ADB), the African Development Bank (AfDB), the European Bank for
Reconstruction and Development (EBRD), the Inter-American Development Bank (IADB), the European
Investment Bank (EIB); the Nordic Investment Bank (NIB); the Caribbean Development Bank (CDB), the
Council of Europe Development Bank (CEDB) and such others as may be recognized by the BSP.

x x x

This Circular shall take effect fifteen (15) days after its publication either in the Official Gazette or in a
newspaper of general circulation.

FOR THE MONETARY BOARD:

RAFAEL B. BUENAVENTURA
Governor

December 10, 1982
CBP CIRCULAR NO. 905-82

The Monetary Board, in its Resolution No. 2224 dated December 3, 1982, approved the following
regulations governing interest rates on loans or forbearance of money, goods or credit and the
amendment of Books I to IV of the Manual of Regulations for Banks and Other Financial Intermediaries:
General Provisions

SECTION 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or
forbearance of any money, goods, or credits, regardless of maturity and whether secured or unsecured,
that may be charged or collected by any person, whether natural or juridical, shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as amended.

SECTION 2. The rate of interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of express contract as to such rate of interest, shall continue to be
twelve per cent (12%) per annum.

SECTION 3. Loans denominated or payable in a foreign currency shall continue to be subject to Central
Bank regulations on foreign borrowings.

BOOK I
Commercial Banks

SECTION 4. Subsection 1254.3 of the Manual of Regulations is hereby deleted.

SECTION 5. Section 1303 of the Manual of Regulations is hereby amended to read as follows:

"SECTION 1303. Interest and Other Charges. The rate of interest, including commissions, premiums,
fees and other charges, on any loan, or forbearance of any money, goods or credits, regardless of
maturity and whether secured or unsecured, shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law, as amended."

SECTION 6. Subsection 1303.3 of the Manual of Regulations is hereby deleted.

SECTION 7. The first paragraph of Subsection 1303.4 of the Manual of Regulations is hereby amended to
read as follows:

"The rate of interest on a floating rate loan during each interest period shall be stated on the basis of a
reference rate plus a margin as may be agreed upon by the parties."

SECTION 8. Subsection 1303.6 of the Manual of Regulations is hereby amended to read as follows:

"Subsection 1303.6. Short-term rate. Expanded commercial banks, commercial banks and specialized
government banks shall post their respective short-term prime rates in a conspicuous place in their
principal offices, branches and other banking offices. Expanded commercial banks and the Land Bank of
the Philippines shall publish every other Monday their respective prevailing short-term prime rates in at
least one daily newspaper of general circulation throughout the Philippines and on the effective date of
any change of at least one-half per cent (%) per annum from the last published rate, in at least one
daily newspaper of general circulation throughout the Philippines. For purposes of this subsection, the
short-term prime rate shall be the lowest effective rate which a bank will charge on availments of
P500,000.00 and above with a maturity of 90 days, more or less , against credit lines of the bank's more
established clients, provided that such availments are not eligible for rediscounting with the Central
Bank at preferential rates and that the borrowers are not directors, officers and stockholders, including
their related interest, of the lending bank.

Likewise, for purposes of this subsection, "more established clients" is defined as client who has been
availing himself of the facilities of the bank for number of years, by maintaining substantial deposit
balances, utilizing foreign exchange facilities such as exports, imports and remittances on a regular basis,
or availing himself of other fee-based services.

"For statistical and monitoring purposes, banks shall report these rates monthly to the Department of
Economic Research, Domestic, Central Bank of the Philippines. Changes in these rates shall also be
reported to said Department on the day the changes are to be effective.

"Banks shall report monthly to the Department of Economic Research-Domestic the volume and interest
of availments of P500,000.00 and above with a maturity of 90 days, more or less, against credit lines of
their clients."

SECTION 9. Item "d" of Section 1349 of the Manual of Regulations is hereby amended to read as follows:

"d. Terms, interest and charges. The maximum term of loans money shops may grant shall in no case
exceed 180 days and the rate of interest on such loans, inclusive of commissions, premiums, fees and
other charges, shall not be subject to any ceilings prescribed under or pursuant to the Usury Laws, as
amended."

SECTION 10. Subsection 1388.1 of the Manual of Regulations is hereby amended to read as follows:

"The rate of yield, including commissions, premiums, fees, and other charges, from the purchase of
receivables and other obligations, regardless of maturity, that may be charged or received by banks
authorized to engage in quasi- banking functions or by non-bank financial intermediaries authorized to
engage in quasi-banking functions, shall not be subject to any regulatory ceiling.

"Data on the volume and interest rates of domestic loans and discounts with original maturities of more
than 365 days shall be reported by expanded commercial banks and commercial banks to the
Department of Economic Research, Domestic, Central Bank of the Philippines, not later than the 15
th

banking day after end of reference month."

BOOK II
Thrift Banks

SECTION 11. Subsection 2254.3 of the Manual of Regulations is hereby deleted.

SECTION 12. Section 2303 of the Manual of Regulations is hereby amended to read as follows:

"SECTION 2303.
Interest and other Charges. The rate of interest, including commissions, premiums, fees and other
charges, on a loan or forbearance of any money, goods or credits, regardless of maturity, and whether
secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law,
as amended."

SECTION 13. Subsection 2303.3 of the Manual of Regulations is hereby deleted.

SECTION 14. The first paragraph of Subsection 2303.4 of the Manual of Regulations is hereby amended
to read as follows:

"The rate of interest on a floating rate loan during each interest period shall be stated on the basis of a
reference rate plus a margin as may be agreed upon by the parties.

SECTION 15. The last paragraph of Subsection 2303.4 of the Manual of Regulations is hereby amended
to read as follows:

"Where the loan agreement provides for a floating interest rate, the interest period, which shall be such
period of time for which the rate of interest is fixed, shall be such period as may be agreed upon by the
parties."

SECTION 16. The first paragraph of Subsection 2303.6 of the Manual of Regulations is hereby deleted.
SECTION 17. Item "c" of Section 2349 of the Manual of Regulations is hereby amended to read as
follows:

"C.
Terms, interest and charges. The maximum term of loans money shops may grant shall in no case
exceed 180 days and the rate of interest on such loans, inclusive of commission, premiums, fees and
other charges, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as
amended."

SECTION 18. Subsection 2388.1 of the Manual of Regulations is hereby amended to read as follows:

"Subsection 2388.1.
Yields on purchases of receivables. The rate of yield, including commissions, premiums, fees and
other charges, from the purchase of receivables and other obligations, regardless of maturity, that may
be charged or received by banks authorized to engage in quasi-banking functions or by non-bank
financial intermediaries authorized to engage in quasi- banking functions, shall not be subject to any
regulatory ceiling."

BOOK III
Rural Banks

SECTION 19. Item "c" of Subsection 3152.3 of the Manual of Regulations is hereby amended to read as
follows:

"c. Terms, interest and charges. The maximum term of loans money shops may grant shall in no case
exceed 180 days and the rate of interest on such loans, inclusive of commissions, premiums, fees and
other charges, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as
amended."

SECTION 20. Subsection 3254.2 of the Manual of Regulations is hereby
deleted.

SECTION 21. Paragraph "a" of Subsection 3303.1 of the Manual of Regulations is hereby amended to
read as follows:

"a. Interest rate. The rate of interest, including commissions, premiums, fees and other charges, on a
loan or forbearance of any money, goods, or credits, regardless of maturity and whether secured or
unsecured, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as
amended."

SECTION 22. Item "b" of Subsection 3303.1 of the Manual of Regulations is hereby deleted and items
"c", "d", "f" and "g" of the same Subsection are hereby relettered as items "b", "c", "d" and "e",
respectively.

SECTION 23. The first paragraph of Subsection 3303.2 of the Manual of Regulations is hereby deleted.

SECTION 24. Subsection 3303.5 of the Manual of Regulations is hereby amended to read as follows:

"Subsection 3303.5. Floating rates of interest. The rate of interest on a floating rate loan during each
interest period shall be stated on the basis of a reference rate plus a margin as may be agreed upon by
the parties.

"Reference rates for various interest periods shall be determined and announced by the Central Bank
every week and shall be based on the weighted average of the interest rates paid during the
immediately preceding week by the ten (10) commercial banks with the highest levels of outstanding
deposit substitutes on promissory notes issued by such banks, with maturities corresponding to the
interest periods for which such reference rates are being determined. The commercial banks to be
included for purposes of computing the reference rates shall be reviewed and determined at the
beginning of every calendar semester on the basis of the levels of their outstanding deposit substitutes
as of May 31 or November 30, as the case may be.

"The rate of interest on floating rate loans, existing and outstanding as of April 2, 1982 shall continue to
be determined on the basis of the reference rate obtained from the weighted average of the interest
rates paid by the five banks with the largest volume of business transacted during the immediately
preceding thirty (30) days, on time deposits with maturities of more than seven hundred thirty (730)
days, which shall be announced by the Central Bank every month for as long as such loans are existing
and outstanding: Provided, however, That the parties to such existing floating rate loans agreements are
not precluded from amending or modifying their loan agreements by adopting a floating rate of interest
determined on the basis of the reference rate mentioned in the preceding paragraph.

"Where the loan agreement provides for a floating interest rate, the interest period, which shall be such
period of time for which the rate of interest is fixed, shall be such period as may be agreed upon by the
parties."

BOOK IV
Non-Bank Financial Intermediaries
SECTION 25. The last paragraph of Subsection 4283Q.1 of the Manual of Regulations is hereby amended
to read as follows:

"Procedures for demand deposits of NBQBs with the Central Bank as provided in Appendix 14 shall be
followed."

SECTION 26. Subsection 4303Q.1 to 4303Q.9 of the Manual of Regulations are hereby amended to read
as follows:

"Subsection 4303Q.1. Purchase of Receivables. The rate of yield, including commissions, premiums,
fees and other charges, from the purchase of receivables and other obligations, regardless of maturity,
that may be charged or received by NBQBs shall not be subject to any regulatory ceiling.

"Receivables and other obligations shall include claims collectible in money of any amount and maturity
from domestic and foreign sources. The Monetary Board shall determine in doubtful cases whether a
particular claim is included within said phrase."

"Subsection 4303Q.2. Loans. The rate of interest, including commissions, premiums, fees and other
charges, on loan transactions, regardless of maturity and whether secured or unsecured, shall not be
subject to any ceiling prescribed under or pursuant to the Usury Law, as amended."

"Subsection 4303Q.3. Floating rate of interest. The rate of interest on a floating rate loan during each
interest period shall be stated on the basis of a reference rate plus a margin as may be agreed upon by
the parties.

"Reference rates for various interest periods shall be determined and announced by the Central Bank
every week and shall be based on the weighted average of the interest rates paid during the
immediately preceding week by the ten (10) commercial banks with the highest levels of outstanding
deposit substitutes on promissory notes issued by such banks, with maturities corresponding to the
interest periods for which such references rates are being determined. The commercial banks to be
included for purposes of computing the reference rates shall be reviewed and determined at the
beginning of every calendar semester on the basis of the levels of their outstanding deposit substitutes
as of May 31 or November 30, as the case may be."

"The rate of interest on floating rate loans, existing and outstanding as of April 2, 1982 shall continue to
be determined on the basis of the reference rate obtained from the weighted average of the interest
rates paid by the five banks with the largest volume of business transacted during the immediately
preceding thirty (30) days, on time deposits with maturities of more than seven hundred thirty (730)
days, which shall be announced by the Central Bank every month for as long as such loans are existing
and outstanding: Provided, however, That the parties to such existing floating rate loan agreements are
not precluded from amending or modifying their loan agreements by adopting a floating rate of interest
determined on the basis of the reference rate mentioned in the next preceding paragraph.

"Where the loan agreement provides for a floating interest rate, the interest period, which shall be such
period of time for which the rate of interest is fixed, shall be such period as may be agreed upon by the
parties."

"Subsection 4303Q.4. Effect of prepayment. If there is no agreement on the rebate of interest in the
event of prepayment of the loan, the creditor is not under any legal obligation to return the interest
corresponding to the period from date of prepayment to the stipulated maturity date of the loan. Any
prepayment made by the debtor should not, therefore, affect the computation of the effective rate
stipulated in the loan contract."

SECTION 27. Subsections 4303Q.10 and 4303Q.11 of the Manual of Regulations are hereby renumbered
as Subsections 4303Q.5. and 4303Q.6, respectively.

SECTION 28. Subsection 4303N.1 of the Manual of Regulations is hereby amended to read as follows:

"Subsection 4303N.1. Interest Rates. The rate of interest including commissions, premiums, fees and
other charges on loans and forbearance of money, regardless of maturity and whether secured or
unsecured, shall not be subject to any ceilings prescribed under or pursuant to the Usury Law, as
amended."

SECTION 29. Subsections 4303N.2, 4303N.4 and 4303N.5 of the Manual of Regulations are hereby
deleted, and Subsections 4303N.3, 4303N.6, and 4303N.7 thereof are hereby renumbered as
Subsections 4303N.2, 4303N.3 and 4303N.4, respectively.

SECTION 30. Section 4303P of the Manual of Regulations is hereby amended to read as follows:

"SECTION 4303P. Interest, Fees and Other Charges. The rate of interest including commissions,
premiums, fees and other charges on any loan or forbearance of money extended by a pawnshop,
pawnbroker or pawnbroker's agent, regardless of maturity, shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended.

"No pawnshop shall collect interest on loans in advance for a period of more than a year."

SECTION 31. Subsection 4303P.1 of the Manual of Regulations is hereby deleted.

SECTION 32. Whenever any person or entity violated any of the provisions of this Circular, the person or
entity responsible for such violation shall be subject to the penalties prescribed in the first paragraph of
Section 34 of Republic Act No. 265, as amended, and/or the penalties prescribed in Section 10 of Act No.
2655, without prejudice to the imposition of administrative sanctions under Sections 34-A and 34-B of
Republic Act No. 265, as amended.

SECTION 33. This Circular shall take effect on January 1, 1983.

FOR THE MONETARY BOARD:
(SGD.) JAIME C. LAYA
Governor
Monetary Board Circular 905






























Republic of the Philippines
SUPREME COURT
Manila

EN BANC



G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.

Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.

Zapa Law Office for private respondent.



VITUG, J.:

The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre
operator and the customs broker; (b) whether the payment of legal interest on an award for loss or
damage is to be computed from the time the complaint is filed or from the date the decision appealed
from is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent
(12%) or six percent (6%).

The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed
facts that have led to the controversy are hereunder reproduced:

This is an action against defendants shipping company, arrastre operator and broker-forwarder for
damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who paid
the consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery
vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No. 81/01177
for P36,382,466.38.

Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of
defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which
damage was unknown to plaintiff.

On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant
Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey." Exh.
D).

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to
the consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of
the contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).

Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered losses
totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented against
defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).

As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95
under the aforestated marine insurance policy, so that it became subrogated to all the rights of action of
said consignee against defendants (per "Form of Subrogation", "Release" and Philbanking check, Exhs.
M, N, and O). (pp. 85-86, Rollo.)

There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:

Defendants filed their respective answers, traversing the material allegations of the complaint
contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged in good
order from the vessel unto the custody of Metro Port Service so that any damage/losses incurred after
the shipment was incurred after the shipment was turned over to the latter, is no longer its liability (p.
17, Record); Metroport averred that although subject shipment was discharged unto its custody, portion
of the same was already in bad order (p. 11, Record); Allied Brokerage alleged that plaintiff has no cause
of action against it, not having negligent or at fault for the shipment was already in damage and bad
order condition when received by it, but nonetheless, it still exercised extra ordinary care and diligence
in the handling/delivery of the cargo to consignee in the same condition shipment was received by it.

From the evidence the court found the following:

The issues are:

1. Whether or not the shipment sustained losses/damages;

2. Whether or not these losses/damages were sustained while in the custody of defendants (in whose
respective custody, if determinable);

3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's pre-Trial
Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).

As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two drums
were shipped in good order and condition, as clearly shown by the Bill of Lading and Commercial Invoice
which do not indicate any damages drum that was shipped (Exhs. B and C). But when on December 12,
1981 the shipment was delivered to defendant Metro Port Service, Inc., it excepted to one drum in bad
order.

Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in the
respective and/or successive custody and possession of defendants carrier (Eastern), arrastre operator
(Metro Port) and broker (Allied Brokerage). This becomes evident when the Marine Cargo Survey Report
(Exh. G), with its "Additional Survey Notes", are considered. In the latter notes, it is stated that when the
shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila on December 12, 1981, it
was observed that "one (1) fiber drum (was) in damaged condition, covered by the vessel's Agent's Bad
Order Tally Sheet No. 86427." The report further states that when defendant Allied Brokerage withdrew
the shipment from defendant arrastre operator's custody on January 7, 1982, one drum was found
opened without seal, cello bag partly torn but contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the consignee, one drum was found
with adulterated/faked contents. It is obvious, therefore, that these losses/damages occurred before
the shipment reached the consignee while under the successive custodies of defendants. Under Art.
1737 of the New Civil Code, the common carrier's duty to observe extraordinary diligence in the
vigilance of goods remains in full force and effect even if the goods are temporarily unloaded and stored
in transit in the warehouse of the carrier at the place of destination, until the consignee has been
advised and has had reasonable opportunity to remove or dispose of the goods (Art. 1738, NCC).
Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad Order Cargoes" (Exhs. 3-
Eastern) states that on December 12, 1981 one drum was found "open".

and thus held:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

A. Ordering defendants to pay plaintiff, jointly and severally:

1. The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982,
the date of filing of this complaints, until fully paid (the liability of defendant Eastern Shipping, Inc. shall
not exceed US$500 per case or the CIF value of the loss, whichever is lesser, while the liability of
defendant Metro Port Service, Inc. shall be to the extent of the actual invoice value of each package,
crate box or container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the
Management Contract);

2. P3,000.00 as attorney's fees, and

3. Costs.

B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage
Corporation.

SO ORDERED. (p. 207, Record).

Dissatisfied, defendant's recourse to US.

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is
correct. As there is sufficient evidence that the shipment sustained damage while in the successive
possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount it
paid to the consignee. (pp. 87-89, Rollo.)

The Court of Appeals thus affirmed in toto the judgment of the court
a quo.

In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of
discretion on the part of the appellate court when

I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE OPERATOR AND
CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED
DECISION;

II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD
COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE PERCENT PER
ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE RATE
OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.

The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that
novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack to.

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the
time the articles are surrendered to or unconditionally placed in the possession of, and received by, the
carrier for transportation until delivered to, or until the lapse of a reasonable time for their acceptance
by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161
SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or
arrive in damaged condition, a presumption arises against the carrier of its failure to observe that
diligence, and there need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code;
Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals,
131 SCRA 365). There are, of course, exceptional cases when such presumption of fault is not observed
but these cases, enumerated in Article 1734 1 of the Civil Code, are exclusive, not one of which can be
applied to this case.

The question of charging both the carrier and the arrastre operator with the obligation of properly
delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund
Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and the
arrastre operator liable in solidum, thus:

The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and
warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between the
consignee and the common carrier is similar to that of the consignee and the arrastre operator
(Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to
take good care of the goods that are in its custody and to deliver them in good condition to the
consignee, such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are
therefore charged with the obligation to deliver the goods in good condition to the consignee.

We do not, of course, imply by the above pronouncement that the arrastre operator and the customs
broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that
attendant facts in a given case may not vary the rule. The instant petition has been brought solely by
Eastern Shipping Lines, which, being the carrier and not having been able to rebut the presumption of
fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a quo
and the appellate court, we take note, is that "there is sufficient evidence that the shipment sustained
damage while in the successive possession of appellants" (the herein petitioner among them).
Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is
inevitable regardless of whether there are others solidarily liable with it.

It is over the issue of legal interest adjudged by the appellate court that deserves more than just a
passing remark.

Let us first see a chronological recitation of the major rulings of this Court:

The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries
and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred
in its complaint that the total amount of its claim for the value of the undelivered goods amounted to
P3,947.20. This demand, however, was neither established in its totality nor definitely ascertained. In
the stipulation of facts later entered into by the parties, in lieu of proof, the amount of P1,447.51 was
agreed upon. The trial court rendered judgment ordering the appellants (defendants) Manila Port
Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with
legal interest thereon from the date the complaint was filed on 28 December 1962 until full payment
thereof. The appellants then assailed, inter alia, the award of legal interest. In sustaining the appellants,
this Court ruled:

Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal rate.
Such interest normally is allowable from the date of demand, judicial or extrajudicial. The trial court
opted for judicial demand as the starting point.

But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon
unliquidated claims or damages, except when the demand can be established with reasonable
certainty." And as was held by this Court in Rivera vs. Perez, 4 L-6998, February 29, 1956, if the suit were
for damages, "unliquidated and not known until definitely ascertained, assessed and determined by the
courts after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)

The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of Damages for
Injury to Person and Loss of Property." After trial, the lower court decreed:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants and
against the defendants and third party plaintiffs as follows:

Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and
severally the following persons:

xxx xxx xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the value of
the boat F B Pacita III together with its accessories, fishing gear and equipment minus P80,000.00 which
is the value of the insurance recovered and the amount of P10,000.00 a month as the estimated
monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time they are actually paid
or already the total sum of P370,000.00 as of June 4, 1972 with legal interest from the filing of the
complaint until paid and to pay attorney's fees of P5,000.00 with costs against defendants and third
party plaintiffs. (Emphasis supplied.)

On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained
the trial court in adjudging legal interest from the filing of the complaint until fully paid. When the
appellate court's decision became final, the case was remanded to the lower court for execution, and
this was when the trial court issued its assailed resolution which applied the 6% interest per annum
prescribed in Article 2209 of the Civil Code. In their petition for review on certiorari, the petitioners
contended that Central Bank Circular
No. 416, providing thus

By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary Board in its
Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or
forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of
express contract as to such rate of interest, shall be twelve (12%) percent per annum. This Circular shall
take effect immediately. (Emphasis found in the text)

should have, instead, been applied. This Court 6 ruled:

The judgments spoken of and referred to are judgments in litigations involving loans or forbearance of
any money, goods or credits. Any other kind of monetary judgment which has nothing to do with, nor
involving loans or forbearance of any money, goods or credits does not fall within the coverage of the
said law for it is not within the ambit of the authority granted to the Central Bank.

xxx xxx xxx

Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for
Damages for injury to persons and loss of property and does not involve any loan, much less
forbearances of any money, goods or credits. As correctly argued by the private respondents, the law
applicable to the said case is Article 2209 of the New Civil Code which reads

Art. 2209. If 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 interest
agreed upon, and in the absence of stipulation, the legal interest which is six percent per annum.

The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July
1986. The case was for damages occasioned by an injury to person and loss of property. The trial court
awarded private respondent Pedro Manabat actual and compensatory damages in the amount of
P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on the
Reformina v. Tomol case, this Court 8 modified the interest award from 12% to 6% interest per annum
but sustained the time computation thereof, i.e., from the filing of the complaint until fully paid.

In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages arising
from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29,
1968, the date of the filing of the complaint until full payment . . . ." Save from the modification of the
amount granted by the lower court, the Court of Appeals sustained the trial court's decision. When
taken to this Court for review, the case, on 03 October 1986, was decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and
environmental circumstances of this case, we deem it reasonable to render a decision imposing, as We
do hereby impose, upon the defendant and the third-party defendants (with the exception of Roman
Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to
cover all damages (with the exception to attorney's fees) occasioned by the loss of the building
(including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00)
Pesos as and for attorney's fees, the total sum being payable upon the finality of this decision. Upon
failure to pay on such finality, twelve (12%) per cent interest per annum shall be imposed upon
aforementioned amounts from finality until paid. Solidary costs against the defendant and third-party
defendants (Except Roman Ozaeta). (Emphasis supplied)

A motion for reconsideration was filed by United Construction, contending that "the interest of twelve
(12%) per cent per annum imposed on the total amount of the monetary award was in contravention of
law." The Court 10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases
and, in its resolution of 15 April 1988, it explained:

There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No.
416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or forbearance of
any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986];
Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is neither a loan or
a forbearance, but then no interest is actually imposed provided the sums referred to in the judgment
are paid upon the finality of the judgment. It is delay in the payment of such final judgment, that will
cause the imposition of the interest.

It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum,
from the filing of the complaint until paid; in other words, as part of the judgment for damages. Clearly,
they are not applicable to the instant case. (Emphasis supplied.)

The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court 11 was a
petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate
Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to
P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the
amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00
as exemplary damages with interest thereon at 12% per annum from notice of judgment, plus costs of
suit. In a decision of 09 November 1988, this Court, while recognizing the right of the private respondent
to recover damages, held the award, however, for moral damages by the trial court, later sustained by
the IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court and
rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred
Thousand (P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis
supplied)

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from a
breach of employment contract. For having been illegally dismissed, the petitioner was awarded by the
trial court moral and exemplary damages without, however, providing any legal interest thereon. When
the decision was appealed to the Court of Appeals, the latter held:

WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated October
31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except defendant-
appellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in the dispositive
portion of the decision, including the sum of P1,400.00 in concept of compensatory damages, with
interest at the legal rate from the date of the filing of the complaint until fully paid (Emphasis supplied.)

The petition for review to this Court was denied. The records were thereupon transmitted to the trial
court, and an entry of judgment was made. The writ of execution issued by the trial court directed that
only compensatory damages should earn interest at 6% per annum from the date of the filing of the
complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition for certiorari
assailed the said order. This Court said:

. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate" from
the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416] does not apply to
actions based on a breach of employment contract like the case at bar. (Emphasis supplied)

The Court reiterated that the 6% interest per annum on the damages should be computed from the time
the complaint was filed until the amount is fully paid.

Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs.
Angas, 14 decided on 08 May 1992, involved the expropriation of certain parcels of land. After
conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to
pay the private respondents certain sums of money as just compensation for their lands so expropriated
"with legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest per annum
under the Civil Code, the Court 15 declared:

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but
expropriation of certain parcels of land for a public purpose, the payment of which is without stipulation
regarding interest, and the interest adjudged by the trial court is in the nature of indemnity for
damages. The legal interest required to be paid on the amount of just compensation for the properties
expropriated is manifestly in the form of indemnity for damages for the delay in the payment thereof.
Therefore, since the kind of interest involved in the joint judgment of the lower court sought to be
enforced in this case is interest by way of damages, and not by way of earnings from loans, etc. Art.
2209 of the Civil Code shall apply.

Concededly, there have been seeming variances in the above holdings. The cases can perhaps be
classified into two groups according to the similarity of the issues involved and the corresponding rulings
rendered by the court. The "first group" would consist of the cases of Reformina v. Tomol (1985),
Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan Insurance
Company v. Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American
Express International v. Intermediate Appellate Court (1988).

In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or
12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases that
there has been a consistent holding that the Central Bank Circular imposing the 12% interest per annum
applies only to loans or forbearance 16 of money, goods or credits, as well as to judgments involving
such loan or forbearance of money, goods or credits, and that the 6% interest under the Civil Code
governs when the transaction involves the payment of indemnities in the concept of damage arising
from the breach or a delay in the performance of obligations in general. Observe, too, that in these
cases, a common time frame in the computation of the 6% interest per annum has been applied, i.e.,
from the time the complaint is filed until the adjudged amount is fully paid.

The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per
annum, 17 depending on whether or not the amount involved is a loan or forbearance, on the one hand,
or one of indemnity for damage, on the other hand. Unlike, however, the "first group" which remained
consistent in holding that the running of the legal interest should be from the time of the filing of the
complaint until fully paid, the "second group" varied on the commencement of the running of the legal
interest.

Malayan held that the amount awarded should bear legal interest from the date of the decision of the
court a quo, explaining that "if the suit were for damages, 'unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the date
of the decision.'" American Express International v. IAC, introduced a different time frame for reckoning
the 6% interest by ordering it to be "computed from the finality of (the) decision until paid." The Nakpil
and Sons case ruled that 12% interest per annum should be imposed from the finality of the decision
until the judgment amount is paid.

The ostensible discord is not difficult to explain. The factual circumstances may have called for different
applications, guided by the rule that the courts are vested with discretion, depending on the equities of
each case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and
reconciliation, to suggest the following rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions under Title
XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 20

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 should be that which may have been stipulated in writing. 21
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. 22 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.

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 24 at the rate of 6% per
annum. 25 No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. 26 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.

WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from
the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%),
shall be imposed on such amount upon finality of this decision until the payment thereof.

SO ORDERED.

Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason,
Puno and Kapunan, JJ., concur.

Mendoza, J., took no part.






THIRD DIVISION

[G.R. No. 128721. March 9, 1999]

CRISMINA GARMENTS, INC., petitioner, vs. COURT OF APPEAL AND NORMA SIAPNO, respondents.

DECISION

PANGANIBAN, J.:

Interest shall be computed in accordance with the stipulation of the parties. In the absence of such
agreement, the rate shall be twelve percent (12%) per annum when the obligation arises out of a loan or
a forbearance of money, goods or credits. In other cases, it shall be six percent (6%).

The Case

On May 5, 1997, Crismina Garments, Inc. filed a Petition for Review on Certiorari[1] assailing the
December 28, 1995 Decision[2] and March 17, 1997 Resolution[3] of the Court of Appeals in CA-GR CV
No. 28973. On September 24, 1997, this Court issued a minute Resolution*4+ denying the petition for
its failure to show any reversible error on the part of the Court of Appeals.

Petitioner then filed a Motion for Reconsideration,[5] arguing that the interest rate should be computed
at 6 percent per annum as provided under Article 2209 of the Civil Code, not 12 percent per annum as
prescribed under Circular No. 416 of the Central Bank of the Philippines. Acting on the Motion, the
Court reinstated[6] the Petition, but only with respect to the issue of which interest rate should be
applied.[7]

The Facts

As the facts of the case are no longer disputed, we are reproducing hereunder the findings of the
appellate court:

During the period from February 1979 to April 1979, the [herein petitioner], which was engaged in the
export of girls denim pants, contracted the services of the *respondent+, the sole proprietress of the
DWilmar Garments, for the sewing of 20,762 pieces of assorted girls*+ denims supplied by the
[petitioner] under Purchase Orders Nos. 1404, dated February 15, 1979, 0430 dated February 1, 1979,
1453 dated April 30, 1979. The [petitioner] was obliged to pay the [respondent], for her services, in the
total amount of P76,410.00. The [respondent] sew[ed] the materials and delivered the same to the
[petitioner] which acknowledged the same per Delivery Receipt Nos. 0030, dated February 9, 1979;
0032, dated February 15, 1979; 0033 dated February 21, 1979; 0034, dated February 24, 1979; 0036,
dated February 20, 1979; 0038, dated March 11, 1979[;] 0039, dated March 24, 1979; 0040 dated March
27, 1979; 0041, dated March 29, 1979; 0044, dated Marc[h] 25, 1979; 0101 dated May 18, 1979[;] 0037,
dated March 10, 1979 and 0042 dated March 10, 1979, in good order condition. At first, the
[respondent] was told that the sewing of some of the pants w[as] defective. She offered to take delivery
of the defective pants. However, she was later told by *petitioner+s representative that the goods were
already good. She was told to just return for her check of P76,410.00. However, the [petitioner] failed
to pay her the aforesaid amount. This prompted her to hire the services of counsel who, on November
12, 1979, wrote a letter to the [petitioner] demanding payment of the aforesaid amount within ten (10)
days from receipt thereof. On February 7, 1990, the *petitioner+s *v+ice-[p]resident-[c]omptroller,
wrote a letter to *respondent+s counsel, averring, inter alia, that the pairs of jeans sewn by her,
numbering 6,164 pairs, were defective and that she was liable to the [petitioner] for the amount of
P49,925.51 which was the value of the damaged pairs of denim pants and demanded refund of the
aforesaid amount.

On January 8, 1981, the *respondent+ filed her complaint against the [petitioner] with the [trial court]
for the collection of the principal amount of P76,410.00. x x x

x x x x x x x x x

After due proceedings, the *trial court+ rendered judgment, on February 28, 1989, in favor of the
[respondent] against the [petitioner], the dispositive portion of which reads as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering
the latter to pay the former:

(1) The sum of P76,140.00 with interest thereon at 12% per annum, to be counted from the filing of this
complaint on January 8, 1981, until fully paid;

(2) The sum of P5,000 as attorney*+s fees; and

(3) The costs of this suit;

(4) Defendants counterclaim is hereby dismissed.*8]

The Court of Appeals (CA) affirmed the trial courts ruling, except for the award of attorneys fees which
was deleted.[9] Subsequently, the CA denied the Motion for Reconsideration.[10]

Hence, this recourse to this Court.[11]

Sole Issue

In light of the Courts Resolution dated April 27, 1998, petitioner submits for our consideration this sole
issue:

Whether or not it is proper to impose interest at the rate of twelve percent (12%) per annum for an
obligation that does not involve a loan or forbearance of money in the absence of stipulation of the
parties.*12+

This Courts Ruling

We sustain petitioners contention that the interest rate should be computed at six percent (6%) per
annum.

Sole Issue: Interest Rate

The controversy revolves around petitioners payment of the price beyond the period prescribed in a
contract for a piece of work. Article 1589 of the Civil Code provides that *t+he vendee *herein
petitioner] shall owe interest for the period between the delivery of the thing and the payment of the
price x x x should he be in default, from the time of judicial or extrajudicial demand for the payment of
the price. The only issue now is the applicable rate of interest for the late payment.

Because the case before us is an action for the enforcement of an obligation for payment of money
arising from a contract for a piece of work,*13+ petitioner submits that the interest rate should be six
percent (6%), pursuant to Article 2209 of the Civil Code, which states:

If the obligation consists in the payment 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. (Emphasis
supplied.)

On the other hand, private respondent maintains that the interest rate should be twelve percent (12%)
per annum, in accordance with Central Bank (CB) Circular No. 416, which reads:

By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise known
as the Usury Law, the Monetary Board, in its Resolution No. 1622 dated July 29, 1974, has prescribed
that the rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed
in judgments, in the absence of express contract as to such rate of interest, shall be twelve per cent
(12%) per annum. (Emphasis supplied.)

She argues that the circular applies, since the money sought to be recovered by her is in the form of
forbearance.*14+

We agree with the petitioner. In Reformina v. Tomol Jr.,[15] this Court stressed that the interest rate
under CB Circular No. 416 applies to (1) loans; (2) forbearance of money, goods or credits; or (3) a
judgment involving a loan or forbearance of money, goods or credits. Cases beyond the scope of the
said circular are governed by Article 2209 of the Civil Code,[16] which considers interest a form of
indemnity for the delay in the performance of an obligation.[17]

In Eastern Shipping Lines, Inc. v. Court of Appeals,[18] the Court gave the following guidelines for the
application of the proper interest rates:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on
Damages of the Civil Code govern in determining the measure of recoverable damages.

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 should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be xxx 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.*19+

In Keng Hua Paper Products Co., Inc. v. CA,[20] we also ruled that the monetary award shall earn interest
at twelve percent (12%) per annum from the date of the finality of the judgment until its satisfaction,
regardless of whether or not the case involves a loan or forbearance of money. The interim period is
deemed to be equivalent to a forbearance of credit.[21]

Because the amount due in this case arose from a contract for a piece of work, not from a loan or
forbearance of money, the legal interest of six percent (6%) per annum should be applied. Furthermore,
since the amount of the demand could be established with certainty when the Complaint was filed, the
six percent (6%) interest should be computed from the filing of the said Complaint. But after the
judgment becomes final and executory until the obligation is satisfied, the interest should be reckoned
at twelve percent (12%) per year.

Private respondent maintains that the twelve percent (12%) interest should be imposed, because the
obligation arose from a forbearance of money.[22] This is erroneous. In Eastern Shipping,[23] the Court
observed that a forbearance in the context of the usury law is a contractual obligation of lender or
creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay a loan
or debt then due and payable. Using this standard, the obligation in this case was obviously not a
forbearance of money, goods or credit.

WHEREFORE, the appealed Decision is MODIFIED. The rate of interest shall be six percent (6%) per
annum, computed from the time of the filing of the Complaint in the trial court until the finality of the
judgment. If the adjudged principal and the interest (or any part thereof) remain unpaid thereafter, the
interest rate shall be twelve percent (12%) per annum computed from the time the judgment becomes
final and executory until it is fully satisfied. No pronouncement as to costs.

SO ORDERED.

Romero, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.



















Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION



G.R. No. 116863 February 12, 1998

KENG HUA PAPER PRODUCTS CO. INC., petitioner,
vs.
COURT OF APPEALS; REGIONAL TRIAL COURT OF MANILA, BR. 21; and SEA-LAND SERVICE, INC.,
respondents.



PANGANIBAN, J.:

What is the nature of a bill of lading? When does a bill of lading become binding on a consignee? Will an
alleged overshipment justify the consignee's refusal to receive the goods described in the bill of lading?
When may interest be computed on unpaid demurrage charges?

Statement of the Case

These are the main questions raised in this petition assailing the Decision 1 of the Court of Appeals 2
promulgated on May 20, 1994 in C.A.-G.R. CV No. 29953 affirming in toto the decision 3 dated
September 28, 1990 in Civil Case No. 85-33269 of the Regional Trial Court of Manila, Branch 21. The
dispositive portion of the said RTC decision reads:

WHEREFORE, the Court finds by preponderance of evidence that Plaintiff has proved its cause of action
and right to relief. Accordingly, judgment is hereby rendered in favor of the Plaintiff and against
Defendant, ordering the Defendant to pay plaintiff:

1. The sum of P67,340.00 as demurrage charges, with interest at the legal rate from the date of the
extrajudicial demand until fully paid;

2. A sum equivalent to ten (10%) percent of the total amount due as Attorney's fees and litigation
expenses.

Send copy to respective counsel of the parties.

SO ORDERED. 4

The Facts

The factual antecedents of this case as found by the Court of Appeals are as follows:

Plaintiff (herein private respondent), a shipping company, is a foreign corporation licensed to do
business in the Philippines. On June 29, 1982, plaintiff received at its Hong Kong terminal a sealed
container, Container No. SEAU 67523, containing seventy-six bales of "unsorted waste paper" for
shipment to defendant (herein petitioner), Keng Hua Paper Products, Co. in Manila. A bill of lading (Exh.
A) to cover the shipment was issued by the plaintiff.

On July 9, 1982, the shipment was discharged at the Manila International Container Port. Notices of
arrival were transmitted to the defendant but the latter failed to discharge the shipment from the
container during the "free time" period or grace period. The said shipment remained inside the
plaintiff's container from the moment the free time period expired on July 29, 1982 until the time when
the shipment was unloaded from the container on November 22, 1983, or a total of four hundred
eighty-one (481) days. During the 481-day period, demurrage charges accrued. Within the same period,
letters demanding payment were sent by the plaintiff to the defendant who, however, refused to settle
its obligation which eventually amounted to P67,340.00. Numerous demands were made on the
defendant but the obligation remained unpaid. Plaintiff thereafter commenced this civil action for
collection and damages.

In its answer, defendant, by way of special and affirmative defense, alleged that it purchased fifty (50)
tons of waste paper from the shipper in Hong Kong, Ho Kee Waste Paper, as manifested in Letter of
Credit No. 824858 (Exh. 7. p. 110. Original Record) issued by Equitable Banking Corporation, with partial
shipment permitted; that under the letter of credit, the remaining balance of the shipment was only ten
(10) metric tons as shown in Invoice No. H-15/82 (Exh. 8, p. 111, Original Record); that the shipment
plaintiff was asking defendant to accept was twenty (20) metric tons which is ten (10) metric tons more
than the remaining balance; that if defendant were to accept the shipment, it would be violating Central
Bank rules and regulations and custom and tariff laws; that plaintiff had no cause of action against the
defendant because the latter did not hire the former to carry the merchandise; that the cause of action
should be against the shipper which contracted the plaintiff's services and not against defendant; and
that the defendant duly notified the plaintiff about the wrong shipment through a letter dated January
24, 1983 (Exh. D for plaintiff, Exh. 4 for defendant, p. 5. Folder of Exhibits).

As previously mentioned, the RTC found petitioner liable for demurrage; attorney's fees and expenses of
litigation. The petitioner appealed to the Court of Appeals, arguing that the lower court erred in (1)
awarding the sum of P67,340 in favor of the private respondent, (2) rejecting petitioner's contention
that there was overshipment, (3) ruling that petitioner's recourse was against the shipper, and (4)
computing legal interest from date of extrajudicial demand. 5

Respondent Court of Appeals denied the appeal and affirmed the lower court's decision in toto. In a
subsequent resolution, 6 it also denied the petitioner's motion for reconsideration.

Hence, this petition for review. 7

The Issues

In its memorandum, petitioner submits the following issues:

I. Whether or not petitioner had accepted the bill of lading;

II. Whether or not the award of the sum of P67,340.00 to private respondent was proper;

III. Whether or not petitioner was correct in not accepting the overshipment;

IV. Whether or not the award of legal interest from the date of private respondent's extrajudicial
demand was proper; 8

In the main, the case revolves around the question of whether petitioner bound by the bill of lading. We
shall, thus, discuss the above four issues as they intertwine with this main question.

The Court's Ruling

The petition is partly meritorious. We affirm petitioner's liability for demurrage, but modify the interest
rate thereon.

Main Issue: Liability Under the Bill of Lading

A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a contract by
which three parties, namely, the shipper, the carrier, and the consignee undertake specific
responsibilities and assume stipulated obligations. 9 A "bill of lading delivered and accepted constitutes
the contract of carriage even though not signed," 10 because the "(a)cceptance of a paper containing
the terms of a proposed contract generally constitutes an acceptance of the contract and of all of its
terms and conditions of which the acceptor has actual or constructive notice." 11 In a nutshell, the
acceptance of a bill of lading by the shipper and the consignee, with full knowledge of its contents, gives
rise to the presumption that the same was a perfected and binding contract. 12

In the case at bar, both lower courts held that the bill of lading was a valid and perfected contract
between the shipper (Ho Kee), the consignee (Petitioner Keng Hua), and the carrier (Private Respondent
Sea-Land). Section 17 of the bill of lading provided that the shipper and the consignee were liable for the
payment of demurrage charges for the failure to discharge the containerized shipment beyond the grace
period allowed by tariff rules. Applying said stipulation, both lower courts found petitioner liable. The
aforementioned section of the bill of lading reads:

17. COOPERAGE FINES. The shipper and consignee shall be liable for, indemnify the carrier and ship and
hold them harmless against, and the carrier shall have a lien on the goods for, all expenses and charges
for mending cooperage, baling, repairing or reconditioning the goods, or the van, trailers or containers,
and all expenses incurred in protecting, caring for or otherwise made for the benefit of the goods,
whether the goods be damaged or not, and for any payment, expense, penalty fine, dues, duty, tax or
impost, loss, damage, detention, demurrage, or liability of whatsoever nature, sustained or incurred by
or levied upon the carrier or the ship in connection with the goods or by reason of the goods being or
having been on board, or because of shipper's failure to procure consular or other proper permits,
certificates or any papers that may be required at any port or place or shipper's failure to supply
information or otherwise to comply with all laws, regulations and requirements of law in connection
with the goods of from any other act or omission of the shipper or consignee: (Emphasis supplied.)

Petitioner contends, however, that it should not be bound by the bill of lading because it never gave its
consent thereto. Although petitioner admits "physical acceptance" of the bill of lading, it argues that its
subsequent actions belie the finding that it accepted the terms and conditions printed therein. 13
Petitioner cites as support the "Notice of Refused or On Hand Freight" it received on November 2, 1982
from private respondent, which acknowledged that petitioner declined to accept the shipment.
Petitioner adds that it sent a copy of the said notice to the shipper on December 23, 1982. Petitioner
points to its January 24, 1983 letter to the private respondent, stressing "that its acceptance of the bill
of lading would be tantamount to an act of smuggling as the amount it had imported (with full
documentary support) was only (at that time) for 10,000 kilograms and not for 20,313 kilograms as
stated in the bill of lading" and "could lay them vulnerable to legal sanctions for violation of customs and
tariff as well as Central Bank laws." 14 Petitioner further argues that the demurrage "was a consequence
of the shipper's mistake" of shipping more than what was bought. The discrepancy in the amount of
waste paper it actually purchased, as reflected in the invoice vis-a-vis the excess amount in the bill of
lading, allegedly justifies its refusal to accept the shipment. 15

Petitioner Bound by
the Bill of Lading

We are not persuaded. Petitioner admits that it "received the bill of lading immediately after the arrival
of the shipment" 16 on July 8, 1982. 17 Having been afforded an opportunity to examine the said
document, petitioner did not immediately object to or dissent from any term or stipulation therein. It
was only six months later, on January 24, 1983, that petitioner sent a letter to private respondent saying
that it could not accept the shipment. Petitioner's inaction for such a long period conveys the clear
inference that it accepted the terms and conditions of the bill of lading. Moreover, said letter spoke only
of petitioner's inability to use the delivery permit, i.e. to pick up the cargo, due to the shipper's failure to
comply with the terms and conditions of the letter of credit, for which reason the bill of lading and other
shipping documents were returned by the "banks" to the shipper. 18 The letter merely proved
petitioner's refusal to pick up the cargo, not its rejection of the bill of lading.

Petitioner's reliance on the Notice of Refused or On Hand Freight, as proof of its nonacceptance of the
bill of lading, is of no consequence. Said notice was not written by petitioner; it was sent by private
respondent to petitioner in November 1982, or four months after petitioner received the bill of lading. If
the notice has any legal significance at all, it is to highlight petitioner's prolonged failure to object to the
bill of lading. Contrary to petitioner's contention, the notice and the letter support not belie the
findings of the two lower courts that the bill of lading was impliedly accepted by petitioner.

As aptly stated by Respondent Court of Appeals:

In the instant case, (herein petitioner) cannot and did not allege non-receipt of its copy of the bill of
lading from the shipper. Hence, the terms and conditions as well as the various entries contained
therein were brought to its knowledge. (Herein petitioner) accepted the bill of lading without
interposing any objection as to its contents. This raises the presumption that (herein petitioner) agreed
to the entries and stipulations imposed therein.

Moreover, it is puzzling that (herein petitioner) allowed months to pass, six (6) months to be exact,
before notifying (herein private respondent) of the "wrong shipment". It was only on January 24, 1983
that (herein petitioner) sent (herein private respondent) such a letter of notification (Exh D for plaintiff,
Exh. 4 for defendant; p. 5, Folder of Exhibits). Thus, for the duration of those six months (herein private
respondent never knew the reason for (herein petitioner's) refusal to discharge the shipment.

After accepting the bill of lading, receiving notices of arrival of the shipment, failing to object thereto,
(herein petitioner) cannot now deny that it is bound by the terms in the bill of lading. If it did not intend
to be bound, (herein petitioner) would not have waited for six months to lapse before finally bringing
the matter to (herein private respondent's attention. The most logical reaction in such a case would be
to immediately verify the matter with the other parties involved. In this case, however, (herein
petitioner) unreasonably detained (herein private respondent's) vessel to the latter's prejudice. 19

Petitioner's attempt to evade its obligation to receive the shipment on the pretext that this may cause it
to violate customs, tariff and central bank laws must likewise fail. Mere apprehension of violating said
laws, without a clear demonstration that taking delivery of the shipment has become legally impossible,
20 cannot defeat the petitioner's contractual obligation and liability under the bill of lading.

In any event, the issue of whether petitioner accepted the bill of lading was raised for the first time only
in petitioner's memorandum before this Court. Clearly, we cannot now entertain an issue raised for the
very first time on appeal, in deference to the well-settled doctrine that "(a)n issue raised for the first
time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel.
Questions raised on appeal must be within the issues framed by the parties and, consequently, issues
not raised in the trial court cannot be raised for the first time on appeal." 21

In the case at bar, the prolonged failure of petitioner to receive and discharge the cargo from the private
respondent's vessel constitutes a violation of the terms of the bill of lading. It should thus be liable for
demurrage to the former.

In The Apollon, 22 Justice Story made the following relevant comment on the nature of demurrage:

In truth, demurrage is merely an allowance or compensation for the delay or detention of a vessel. It is
often a matter of contract, but not necessarily so. The very circumstance that in ordinary commercial
voyages, a particular sum is deemed by the parties a fair compensation for delays, is the very reason
why it is, and ought to be, adopted as a measure of compensation, in cases ex delicto. What fairer rule
can be adopted than that which founds itself upon mercantile usage as to indemnity, and fixes a
recompense upon the deliberate consideration of all the circumstances attending the usual earnings and
expenditures in common voyages? It appears to us that an allowance, by way of demurrage, is the true
measure of damages in all cases of mere detention, for that allowance has reference to the ship's
expenses, wear and tear, and common employment. 23

Amount of Demurrage Charges

Petitioner argues that it is not obligated to pay any demurrage charges because, prior to the filing of the
complaint, private respondent made no demand for the sum of P67,340. Moreover, private
respondent's loss and prevention manager, Loi Gillera, demanded P50,260; but its counsel, Sofronio
Larcia, subsequently asked for a different amount of P37,800.

Petitioner's position is puerile. The amount of demurrage charges in the sum of P67,340 is a factual
conclusion of the trial court that was affirmed by the Court of Appeals and, thus, binding on this Court.
24 Besides, such factual finding is supported by the extant evidence. 25 The apparent discrepancy was a
result of the variance of the dates when the two demands were made. Necessarily, the longer the cargo
remained unclaimed, the higher the demurrage. Thus, while in his letter dated April 24, 1983, 26 private
respondent's counsel demanded payment of only P37,800, the additional demurrage incurred petitioner
due to its continued refusal to receive delivery of the cargo ballooned to P67,340 by November 22,
1983. The testimony of Counsel Sofronio Larcia as regards said letter of April 24, 1983 elucidates, viz:

Q Now, after you sent this letter, do you know what happened?

A Defendant continued to refuse to take delivery of the shipment and the shipment stayed at the port
for a longer period.

Q So, what happened to the shipment?

A The shipment incurred additional demurrage charges which amounted to P67,340.00 as of November
22, 1983 or more than a year after almost a year after the shipment arrived at the port.

Q So, what did you do?

A We requested our collection agency to pursue the collection of this amount. 27

Bill of Lading Separate from
Other Letter of Credit Arrangements

In a letter of credit, there are three distinct and independent contracts:

(1) the contract of sale between the buyer and the seller, (2) the contract of the buyer with the issuing
bank, and (3) the letter of credit proper in which the bank promises to pay the seller pursuant to the
terms and conditions stated therein. "Few things are more clearly settled in law than that the three
contracts which make up the letter of credit arrangement are to be maintained in a state of perpetual
separation." 28 A transaction involving the purchase of goods may also require, apart from a letter of
credit, a contract of transportation specially when the seller and the buyer are not in the same locale or
country, and the goods purchased have to be transported to the latter.

Hence, the contract of carriage, as stipulated in the bill of lading in the present case, must be treated
independently of the contract of sale between the seller and the buyer, and the contract for the
issuance of a letter of credit between the buyer and the issuing bank. Any discrepancy between the
amount of the goods described in the commercial invoice in the contract of sale and the amount
allowed in the letter of credit will not affect the validity and enforceability of the contract of carriage as
embodied in the bill of lading. As the bank cannot be expected to look beyond the documents presented
to it by the seller pursuant to the letter of credit, 29 neither can the carrier be expected to go beyond
the representations of the shipper in the bill of lading and to verify their accuracy vis-a-viz the
commercial invoice and the letter of a credit. Thus, the discrepancy between the amount of goods
indicated in the invoice and the amount in the bill of lading cannot negate petitioner's obligation to
private respondent arising from the contract of transportation. Furthermore, private respondent, as
carrier, had no knowledge of the contents of the container. The contract of carriage was under the
arrangement known as "Shipper's Load And Count," and shipper was solely responsible for the loading
of the container while carrier was oblivious to the contents of the shipment. Petitioner's remedy in case
of overshipment lies against the seller/shipper, not against the carrier.

Payment of Interest

Petitioner posits that it "first knew" of the demurrage claim of P67,340 only when it received, by
summons, private respondent's complaint. Hence, interest may not be allowed to run from the date of
private respondent's extrajudicial demands on March 8, 1983 for P50,260 or on April 24, 1983 for
P37,800, considering that, in both cases, "there was no demand for interest." 30 We agree.

Jurisprudence teaches us:

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. 31

The case before us involves an obligation not arising from a loan or forbearance of money; thus,
pursuant to Article 2209 of the Civil Code, the applicable interest rate is six percent per annum. Since
the bill of lading did not specify the amount of demurrage, and the sum claimed by private respondent
increased as the days went by, the total amount demanded cannot be deemed to have been established
with reasonable certainty until the trial court rendered its judgment. Indeed, "(u)nliquidated damages or
claims, it is said, are those which are not or cannot be known until definitely ascertained, assessed and
determined by the courts after presentation of proof. " 32 Consequently, the legal interest rate is six
percent, to be computed from September 28, 1990, the date of the trial court's decision. And in
accordance with Philippine National Bank 33 and Eastern Shipping, 34 the rate of twelve percent per
annum shall be charged on the total then outstanding, from the time the judgment becomes final and
executory until its satisfaction.

Finally, the Court notes that the matter of attorney's fees was taken up only in the dispositive portion of
the trial court's decision. This falls short of the settled requirement that the text of the decision should
state the reason for the award of attorney's fees, for without such justification, its award would be a
"conclusion without a premise, its basis being improperly left to speculation and conjecture." 35

WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that the legal interest
of six percent per annum shall be computed from September 28, 1990 until its full payment before
finality of judgment. The rate of interest shall be adjusted to twelve percent per annum, computed from
the time said judgment became final and executory until full satisfaction. The award of attorney's fees is
DELETED.

SO ORDERED.
Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 113926 October 23, 1996

SECURITY BANK AND TRUST COMPANY, petitioner,
vs.
REGIONAL TRIAL COURT OF MAKATI, BRANCH 61, MAGTANGGOL EUSEBIO and LEILA VENTURA,
respondents.



HERMOSISIMA, JR. J.:p

Questions of law which are of first impression are sought to be resolved in this case: Should the rate of
interest on a loan or forbearance of money, goods or credits, as stipulated in a contract, far in excess of
the ceiling prescribed under or pursuant to the Usury Law, prevail over Section 2 of Central Bank Circular
No. 905 which prescribes that the rate of interest thereof shall continue to be 12% per annum? Do the
Courts have the discretion to arbitrarily override stipulated interest rates of promissory notes and
stipulated interest rates of promissory notes and thereby impose a 12% interest on the loans, in the
absence of evidence justifying the imposition of a higher rate?

This is a petition for review on certiorari for the purpose of assailing the decision of Honorable Judge
Fernando V. Gorospe of the Regional Trial Court of Makati, Branch 61, dated March 30, 1993, which
found private respondent Eusebio liable to petitioner for a sum of money. Interest was lowered by the
court a quo from 23% per annum as agreed upon the parties to 12% per annum.

The undisputed facts are as follows:

On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory Note No. TL/74/178/83
in favor of petitioner Security Bank and Trust Co. (SBTC) in the total amount of One Hundred Thousand
Pesos (P100,000.00) payable in six monthly installments with a stipulated interest of 23% per annum up
to the fifth installment. 1

On July 28, 1983, respondent Eusebio again executed Promissory Note No. TL/74/1296/83 in favor of
petitioner SBTC. Respondent bound himself to pay the sum of One Hundred Thousand Pesos
(P100,000.00) in six (6) monthly installments plus 23% interest per annum. 2

Finally, another Promissory Note No. TL74/1491/83 was executed on August 31, 1983 in the amount of
Sixty Five Thousand Pesos (P65,000.00). Respondent agreed to pay this note in six (6) monthly
installments plus interest at the rate of 23% per annum. 3

On all the abovementioned promissory notes, private respondent Leila Ventura had signed as co-maker.
4

Upon maturity which fell on the different dates below, the principal balance remaining on the notes
stood at:

1) PN No. TL/74/748/83 P16,665.00 as of September 1983.
2) PN No. TL/74/1296/83 P83,333.00 as of August 1983.
3) PN No. TL/74/1991/83 P65,000.00 as of August 1983.

Upon the failure and refusal of respondent Eusebio to pay the aforestated balance payable, a collection
case was filed in court by petitioner SBTC. 5 On March 30, 1993, the court a quo rendered a judgment in
favor of petitioner SBTC, the dispositive portion which reads:

WHEREFORE, premises above-considered, and plaintiff's claim having been duly proven, judgment is
hereby rendered in favor of plaintiff and as against defendant Eusebio who is hereby ordered to:

1. Pay the sum of P16,655.00, plus interest of 12% per annum starting 27 September 1983, until fully
paid;

2. Pay the sum of P83,333.00, plus interest of 12% per annum starting 28 August 1983, until fully paid;

3. Pay the sum of P65,000.00, plus interest of 12% per annum starting 31 August 1983, until fully paid;

4. Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as and by way of
attorney's fees; and to

5. Pay the costs of this suit.

SO ORDERED. 6

On August 6, 1993, a motion for partial reconsideration was filed by petitioner SBTC contending that:

(1) the interest rate agreed upon by the parties during the signing of the promissory notes was 23% per
annum;

(2) the interests awarded should be compounded quarterly from due date as provided in the three (3)
promissory notes;

(3) defendants Leila Ventura should likewise be held liable to pay the balance on the promissory notes
since she has signed as co-maker and as such, is liable jointly and severally with defendant Eusebio
without a need for demand upon her. 7

Consequently, an Order was issued by the court a quo denying the motion to grant the rates of interest
beyond 12% per annum; and holding defendant Leila Ventura jointly and severally liable with co-
defendants Eusebio.

Hence, this petition.

The sole issue to be settled in this petition is whether or not the 23% rate of interest per annum agreed
upon by petitioner bank and respondents is allowable and not against the Usury Law.

We find merit in this petition.

From the examination of the records, it appears that indeed the agreed rate of interest as stipulated on
the three (3) promissory notes is 23% per annum. 8 The applicable provision of law is the Central Bank
Circular No. 905 which took effect on December 22, 1982, particularly Sections 1 and 2 which state: 9

Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or
forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured,
that may be charged or collected by any person, whether natural or judicial, shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as amended.

Sec. 2. The rate of interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of express contract as to such rate of interest, shall continue to be
twelve per cent (12%) per annum.

CB Circular 905 was issued by the Central Bank's Monetary Board pursuant to P.D. 1684 empowering
them to prescribe the maximum rates of interest for loans and certain forbearances, to wit:

Sec. 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as follows:

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate of interest for the
loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or
rates whenever warranted by prevailing economic and social conditions: Provided, That changes in such
rate or rates may be effected gradually on scheduled dates announced in advance.

In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum
rates for loans of low priority, such as consumer loans or renewals thereof as well as such loans made by
pawnshops, finance companies and other similar credit institutions although the rates prescribed for
these institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribed
different maximum rate or rates for different types of borrowings, including deposits and deposit
substitutes, or loans of financial intermediaries. 10

The court has ruled in the case of Philippine National Bank v. Court of Appeals 11 that:

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely
regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of
money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously
stipulated.

All the promissory notes were signed in 1983 and, therefore, were already covered by CB Circular No.
905. Contrary to the claim of respondent court, this circular did not repeal nor in anyway amend the
Usury Law but simply suspended the latter's effectivity.

Basic is the rule of statutory construction that when the law is clear and unambiguous, the court is left
with no alternative but to apply the same according to its clear language. As we have held in the case of
Quijano v. Development Bank of the Philippines: 12

. . . We cannot see any room for interpretation or construction in the clear and unambiguous language
of the above-quoted provision of law. This Court had steadfastly adhered to the doctrine that its first
and fundamental duty is the application of the law according to its express terms, interpretation being
called for only when such literal application is impossible. No process of interpretation or construction
need be resorted to where a provision of law peremptorily calls for application. Where a requirement or
condition is made in explicit and unambiguous terms, no discretion is left to the judiciary. It must see to
it that is mandate is obeyed.

The rate of interest was agreed upon by the parties freely. Significantly, respondent did not question
that rate. It is not for respondent court a quo to change the stipulations in the contract where it is not
illegal. Furthermore, Article 1306 of the New Civil Code provides that 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. We find no valid reason for the
respondent court a quo to impose a 12% rate of interest on the principal balance owing to petitioner by
respondent in the presence of a valid stipulation. In a loan or forbearance of money, the interest due
should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum. 13
Hence, only in the absence of a stipulation can the court impose the 12% rate of interest.

The promissory notes were signed by both parties voluntarily. Therefore, stipulations therein are
binding between them. Respondent Eusebio, likewise, did not question any of the stipulations therein.
In fact, in the Comment filed by respondent Eusebio to this court, he chose not to question the decision
and instead expressed his desire to negotiate with the petitioner bank for "terms within which to settle
his obligation." 14

IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is hereby AFFIRMED with the
MODIFICATION that the rate of interest that should be imposed be 23% per annum.

SO ORDERED.

Padilla, Bellosillo, Vitug and Kapunan, JJ., concur.



































Republic of the Philippines
SUPREME COURT
Baguio City

FIRST DIVISION



G.R. No. 113412 April 17, 1996

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.



KAPUNAN, J.:p

On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses
Ponciano L. Almeda and Eufemia P. Almeda several loan/credit accommodations totaling P18.0 Million
pesos payable in a period of six years at an interest rate of 21% per annum. To secure the loan, the
spouses Almeda executed a Real Estate Mortgage Contract covering a 3,500 square meter parcel of
land, together with the building erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati,
Metro Manila. A credit agreement embodying the terms and conditions of the loan was executed
between the parties. Pertinent portions of the said agreement are quoted below:

SPECIAL CONDITIONS

xxx xxx xxx

The loan shall be subject to interest at the rate of twenty one per cent (21%) per annum, payable semi-
annually in arrears, the first interest payment to become due and payable six (6) months from date of
initial release of the loan. The loan shall likewise be subject to the appropriate service charge and a
penalty charge of three per cent (30%) per annum to be imposed on any amount remaining unpaid or
not rendered when due.

xxx xxx xxx

III. OTHER CONDITIONS

(c) Interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these
accommodations shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate
agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum
interest rate. 1

Between 1981 and 1984, petitioners made several partial payments on the loan totaling. P7,735,004.66,
2 a substantial portion of which was applied to accrued interest. 3 On March 31, 1984, respondent bank,
over petitioners' protestations, raised the interest rate to 28%, allegedly pursuant to Section III-c (1) of
its credit agreement. Said interest rate thereupon increased from an initial 21% to a high of 68%
between March of 1984 to September, 1986. 4

Petitioner protested the increase in interest rates, to no avail. Before the loan was to mature in March,
1988, the spouses filed on February 6, 1988 a petition for declaratory relief with prayer for a writ of
preliminary injunction and temporary restraining order with the Regional Trial Court of Makati,
docketed as Civil Case No. 18872. In said petition, which was raffled to Branch 134 presided by Judge
Ignacio Capulong, the spouses sought clarification as to whether or not the PNB could unilaterally raise
interest rates on the loan, pursuant to the credit agreement's escalation clause, and in relation to
Central Bank Circular No. 905. As a preliminary measure, the lower court, on March 3, 1988, issued a
writ of preliminary injunction enjoining the Philippine National Bank from enforcing an interest rate
above the 21% stipulated in the credit agreement. By this time the spouses were already in default of
their loan obligations.

Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB countered by
ordering the extrajudicial foreclosure of petitioner's mortgaged properties and scheduled an auction
sale for March 14, 1989. Upon motion by petitioners, however, the lower court, on April 5, 1989,
granted a supplemental writ of preliminary injunction, staying the public auction of the mortgaged
property.

On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court dissolved the
supplemental writ of preliminary injunction. Petitioners filed a motion for reconsideration. In the
interim, respondent bank once more set a new date for the foreclosure sale of Marvin Plaza which was
March 12, 1990. Prior to the scheduled date, however, petitioners tendered to respondent bank the
amount of P40,142,518.00, consisting of the principal (P18,000,000.00) and accrued interest calculated
at the originally stipulated rate of 21%. The PNB refused to accept the payment. 5

As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990, formally consigned
the amount of P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-663. They prayed
therein for a writ of preliminary injunction with a temporary restraining order. The case was raffled to
Branch 147, presided by Judge Teofilo Guadiz. On March 15, 1990, respondent bank sought the dismissal
of the case.

On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the writ of
preliminary injunction enjoining the foreclosure sale of "Marvin Plaza" scheduled on March 12, 1990. On
April 17, 1990 respondent bank filed a motion for reconsideration of the said order.

On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by Judge Eriberto
Rosario who issued an order consolidating said case with Civil Case 18871 presided by Judge Ignacio
Capulong.

For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30, 1990, respondent
bank filed a petition for Certiorari, Prohibition and Mandamus with respondent Court of Appeals,
assailing the following orders of the Regional Trial Court:

1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary injunction restraining
the foreclosure sale of Mavin Plaza set on March 12, 1990;

2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent bank's motion to lift the
writ of injunction issued by Judge Guadiz as well as its motion to dismiss Civil Case No. 90-663;

3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's subsequent motion to lift the
writ of preliminary injunction; and

4. Order of Judge Capulong dated October 20, 1992 denying respondent bank's motion for
reconsideration.

On August 27, 1993, respondent court rendered its decision setting aside the assailed orders and
upholding respondent bank's right to foreclose the mortgaged property pursuant to Act 3135, as
amended and P.D. 385. Petitioners' Motion for Reconsideration and Supplemental Motion for
Reconsideration, dated September 15, 1993 and October 28, 1993, respectively, were denied by
respondent court in its resolution dated January 10, 1994.

Hence the instant petition.

This appeal by certiorari from the respondent court's decision dated August 27, 1993 raises two
principal issues namely: 1) Whether or not respondent bank was authorized to raise its interest rates
from 21% to as high as 68% under the credit agreement; and 2) Whether or not respondent bank is
granted the authority to foreclose the Marvin Plaza under the mandatory foreclosure provisions of P.D.
385.

In its comment dated April 19, 1994, respondent bank vigorously denied that the increases in the
interest rates were illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of
interest it imposed was based on the agreement of the parties. Respondent bank further contends that
it had a right to foreclose the mortgaged property pursuant to P.D. 385, after petitioners were unable to
pay their loan obligations to the bank based on the increased rates upon maturity in 1984.

The instant petition is impressed with merit.

The binding effect of any agreement between parties to a contract is premised on two settled principles:
(1) that any obligation arising from contract has the force of law between the parties; and (2) that there
must be mutuality between the parties based on their essential equality. 6 Any contract which appears
to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any
stipulation regarding the validity or compliance of the contract which is left solely to the will of one of
the parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally
altered the terms of its contract with petitioners by increasing the interest rates on the loan without the
prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by the Civil Code
when it provides, in Article 1956 that "No interest shall be due unless it has been expressly stipulated in
writing." What has been "stipulated in writing" from a perusal of interest rate provision of the credit
agreement signed between the parties is that petitioners were bound merely to pay 21% interest,
subject to a possible escalation or de-escalation, when 1) the circumstances warrant such escalation or
de-escalation; 2) within the limits allowed by law; and 3) upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this
case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily
resolved by a careful reading of the credit agreement because the same plainly uses the phrase "interest
rate agreed upon," in reference to the original 21% interest rate. The interest provision states:

(c) interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these
accommodations shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate
agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum
interest rate.

In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent bank from
unilaterally raising the interest rate in the borrower's loan from 18% to 32%, 41% and 48% partly
because the aforestated increases violated the principle of mutuality of contracts expressed in Article
1308 of the Civil Code. The Court held:

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates

. . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law.

but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase
the agreed interest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116
which limits such changes to once every twelve months.

Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private
respondent's loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

Art. 308. The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them.

In order that obligations arising from contracts may have the force of law between the parties, there
must be mutuality between the parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the
P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during the term of the loan, that
license would have been null and void for being violative of the principle of mutuality essential in
contracts. It would have invested the loan agreement with the character of a contract of adhesion,
where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being
reduced to the alternative "to take it or lease it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85).
Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against
abuse and imposition.

PNB's successive increases of the interest rate on the private respondent's loan, over the latter's
protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section
9.01 that its terms "may be amended only by an instrument in writing signed by the party to be bound
as burdened by such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil
Code which provides that "no interest shall be due unless it has been expressly stipulated in writing."

The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24% per
annum, hence, he is not bound to pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as
found by the Court of Appeals, is indisputable.

Clearly, the galloping increases in interest rate imposed by respondent bank on petitioners' loan, over
the latter's vehement protests, were arbitrary.

Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not authorize the
bank, or any lending institution for that matter, to progressively increase interest rates on borrowings to
an extent which would have made it virtually impossible for debtors to comply with their own
obligations. True, escalation clauses in credit agreements are perfectly valid and do not contravene
public policy. Such clauses, however, (as are stipulations in other contracts) are nonetheless still subject
to laws and provisions governing agreements between parties, which agreements while they may be
the law between the contracting parties implicitly incorporate provisions of existing law.
Consequently, while the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the
said circular could possibly be read as granting respondent bank carte blanche authority to raise interest
rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets.
Borrowing represents a transfusion of capital from lending institutions to industries and businesses in
order to stimulate growth. This would not, obviously, be the effect of PNB's unilateral and lopsided
policy regarding the interest rates of petitioners' borrowings in the instant case.

Apart from violating the principle of mutuality of contracts, there is authority for disallowing the interest
rates imposed by respondent bank, for the credit agreement specifically requires that the increase be
"within the limits allowed by law". In the case of PNB v. Court of Appeals, cited above, this Court clearly
emphasized that C.B. Circular No. 905 could not be properly invoked to justify the escalation clauses of
such contracts, not being a grant of specific authority.

Furthermore, the escalation clause of the credit agreement requires that the same be made "within the
limits allowed by law," obviously referring specifically to legislative enactments not administrative
circulars. Note that the phrase "limits imposed by law," refers only to the escalation clause. However,
the same agreement allows reduction on the basis of law or the Monetary Board. Had the parties
intended the word "law" to refer to both legislative enactments and administrative circulars and
issuances, the agreement would not have gone as far as making a distinction between "law or the
Monetary Board Circulars" in referring to mutually agreed upon reductions in interest rates. This
distinction was the subject of the Court's disquisition in the case of Banco Filipino Savings and Mortgage
Bank v. Navarro 8 where the Court held that:

What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from
12% to 17% per annum under the Escalation Clause. It is our considered opinion that it may not.

The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase.

the interest rate stipulated in this contract without advance notice to me/us in the event.

a law

increasing

the lawful rates of interest that may be charged

on this particular

kind of loan. (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate may be increased "in the event
a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind
of loan." The Escalation Clause was dependent on an increase of rate made by "law" alone.

CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not
strictly a statute or a law, it has, however, the force and effect of law." (Emphasis supplied). "An
administrative regulation adopted pursuant to law has the force and effect of law." "That administrative
rules and regulations have the force of law can no longer be questioned."

The distinction between a law and an administrative regulation is recognized in the Monetary Board
guidelines quoted in the latter to the BORROWER of Ms. Paderes of September 24, 1976 (supra).
According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No.
494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank
regulation is promulgated increasing the maximum rate for loans." The guidelines thus presuppose that
a Central Bank regulation is not within the term "any law."

The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a
to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the
rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest
is increased "by law or by the Monetary Board." To quote:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may
stipulate that the rate of interest agreed upon may be increased in the event that the applicable
maximum rate of interest

is increased by law or by the Monetary Board:

Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the
rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest
is reduced by law or by the Monetary Board;

Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after
the effectivity of the increase or decrease in the maximum rate of interest.' (Paragraphing and emphasis
supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1)
that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order
for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the
event that the applicable maximum rate of interest is reduced by law or by the Monetary Board."

Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in
contravention to the tenor of their credit agreement. That an increase in interest rates from 18% to as
much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984, petitioners had
paid an amount equivalent to virtually half of the entire principal (P7,735,004.66) which was applied to
interest alone. By the time the spouses tendered the amount of P40,142,518.00 in settlement of their
obligations; respondent bank was demanding P58,377,487.00 over and above those amounts already
previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely
potestative but based on reasonable and valid grounds. 9 Here, as clearly demonstrated above, not only
the increases of the interest rates on the basis of the escalation clause patently unreasonable and
unconscionable, but also there are no valid and reasonable standards upon which the increases are
anchored.

We go now to respondent bank's claim that the principal issue in the case at bench involves its right to
foreclose petitioners' properties under P.D. 385. We find respondent's pretense untenable.

Presidential Decree No. 385 was issued principally to guarantee that government financial institutions
would not be denied substantial cash inflows necessary to finance the government's development
projects all over the country by large borrowers who resort to litigation to prevent or delay the
government's collection of their debts or loans. 10 In facilitating collection of debts through its
automatic foreclosure provisions, the government is however, not exempted from observing basic
principles of law, and ordinary fairness and decency under the due process clause of the Constitution. 11

In the first place, because of the dispute regarding the interest rate increases, an issue which was never
settled on merit in the courts below, the exact amount of petitioner's obligations could not be
determined. Thus, the foreclosure provisions of P.D. 385 could be validly invoked by respondent only
after settlement of the question involving the interest rate on the loan, and only after the spouses
refused to meet their obligations following such determination. In Filipinas Marble Corporation v.
Intermediate Appellate Court, 12 involving P.D. 385's provisions on mandatory foreclosure, we held
that:

We cannot, at this point, conclude that respondent DBP together with the Bancom people actually
misappropriated and misspent the $5 million loan in whole or in part although the trial court found that
there is "persuasive" evidence that such acts were committed by the respondent. This matter should
rightfully be litigated below in the main action. Pending the outcome of such litigation, P.D. 385 cannot
automatically be applied for if it is really proven that respondent DBP is responsible for the
misappropriation of the loan, even if only in part, then the foreclosure of the petitioner's properties
under the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It
would unduly prejudice the petitioner, its employees and their families.

Only after trial on the merits of the main case can the true amount of the loan which was applied wisely
or not, for the benefit of the petitioner be determined. Consequently, the extent of the loan where
there was no failure of consideration and which may be properly satisfied by foreclosure proceedings
under P.D. 385 will have to await the presentation of evidence in a trial on the merits.

In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in Filipinas Marble
Corporation, held:

The enforcement of P.D. 385 will sweep under the rug' this iceberg of a scandal in the sugar industry
during the Marcos Martial Law years. This we can not allow to happen. For the benefit of future
generations, all the dirty linen in the PHILSUCUCOM/NASUTRA/RPB closets have to be exposed in public
so that the same may NEVER be repeated.

It is of paramount national interest, that we allow the trial court to proceed with dispatch to allow the
parties below to present their evidence.

Furthermore, petitioners made a valid consignation of what they, in good faith and in compliance with
the letter of the Credit Agreement, honestly believed to be the real amount of their remaining
obligations with the respondent bank. The latter could not therefore claim that there was no honest-to-
goodness attempt on the part of the spouse to settle their obligations. Respondent's rush to inequitably
invoke the foreclosure provisions of P.D. 385 through its legal machinations in the courts below, in spite
of the unsettled differences in interpretation of the credit agreement was obviously made in bad faith,
to gain the upper hand over petitioners.

In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring
the parties to agree to changes in the interest rate in writing, we hold that the unilateral and progressive
increases imposed by respondent PNB were null and void. Their effect was to increase the total
obligation on an eighteen million peso loan to an amount way over three times that which was originally
granted to the borrowers. That these increases, occasioned by crafty manipulations in the interest rates
is unconscionable and neutralizes the salutary policies of extending loans to spur business cannot be
disputed.

WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August 27, 1993, as
well as the resolution dated February 10, 1994 is hereby REVERSED AND SET ASIDE. The case is
remanded to the Regional Trial Court of Makati for further proceedings.

SO ORDERED.
Bellosillo and Hermosisima, Jr., JJ., concur.
Padilla and Vitug, JJ., took no part.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-25704 April 24, 1968
ANGEL JOSE WAREHOUSING CO., INC., plaintiff-appellee,
vs.
CHELDA ENTERPRISES and DAVID SYJUECO, defendants-appellants.
Luis A. Guerrero for plaintiff-appellee.
Burgos and Sarte for defendants-appellants.
BENGZON, J.P., J.:
Plaintiff corporation filed suit in the Court of First Instance of Manila on May 29, 1964 against the
partnership Chelda Enterprises and David Syjueco, its capitalist partner, for recovery of alleged unpaid
loans in the total amount of P20,880.00, with legal interest from the filing of the complaint, plus
attorney's fees of P5,000.00. Alleging that post dated checks issued by defendants to pay said account
were dishonored, that defendants' industrial partner, Chellaram I. Mohinani, had left the country, and
that defendants have removed or disposed of their property, or are about to do so, with intent to
defraud their creditors, preliminary attachment was also sought.
Answering, defendants averred that they obtained four loans from plaintiff in the total amount of
P26,500.00, of which P5,620.00 had been paid, leaving a balance of P20,880.00; that plaintiff charged
and deducted from the loan usurious interests thereon, at rates of 2% and 2.5% per month, and,
consequently, plaintiff has no cause of action against defendants and should not be permitted to
recover under the law. A counterclaim for P2,000.00 attorney's fees was interposed.
Plaintiff filed on June 25, 1964 an answer to the counterclaim, specifically denying under oath the
allegations of usury.
After trial, decision was rendered, on November 10, 1965. The court found that there remained due
from defendants an unpaid principal amount of P20,287.50; that plaintiff charged usurious interests, of
which P1,048.15 had actually been deducted in advance by plaintiff from the loan; that said amount of
P1,048.15 should therefore be deducted from the unpaid principal of P20,287.50, leaving a balance of
P19,247.351 still payable to the plaintiff. Said court held that notwithstanding the usurious interests
charged, plaintiff is not barred from collecting the principal of the loan or its balance of P19,247.35.
Accordingly, it stated, in the dispositive portion of the decision, thus:
WHEREFORE, judgment is hereby rendered, ordering the defendant partnership to pay to the plaintiff
the amount of P19,247.35, with legal interest thereon from May 29, 1964 until paid, plus an additional
sum of P2,000.00 as damages for attorney's fee; and, in case the assets of defendant partnership be
insufficient to satisfy this judgment in full, ordering the defendant David Syjueco to pay to the plaintiff
one-half (1/2) of the unsatisfied portion of this judgment.
With costs against the defendants.1wph1.t
Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious interest, may
the creditor recover the principal of the loan? (2) Should attorney's fees be awarded in plaintiff's favor?
To refute the lower court's decision which is based on the doctrine laid down by this Court in Lopez v. El
Hogar Filipino, 47 Phil. 249, holding that a contract of loan with usurious interest is valid as to the loan
but void as to the usurious interest, appellants argue that in light of the New Civil Code provisions said
doctrine no longer applies. In support thereof, they cite the case decided by the Court of Appeals in
Sebastian v. Bautista, 58 O.G. No. 15, p. 3146.
The Sebastian case was an action for recovery of a parcel of land. The Court of First Instance therein
decided in plaintiff's favor, on the ground that the so-called sale with pacto de retro of said land was in
fact only an equitable mortgage. In affirming the trial court, the writer of the opinion of the Court of
Appeals went further to state the view that the loan secured by said mortgage was usurious in nature,
and, thus, totally void. Such reasoning of the writer, however, was not concurred in by the other
members of the Court, who concurred in the result and voted for affirmance on the grounds stated by
the trial court. Furthermore, the affirmance of the existence of equitable mortgage necessarily implies
the existence of a valid contract of loan, because the former is an accessory contract to the latter.
Great reliance is made by appellants on Art. 1411 of the New Civil Code which states:
Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the
act constitutes criminal offense, both parties being in pari delicto, they shall have no action against each
other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal
of effects or instruments of a crime shall be applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what
he has given, and shall not be bound to comply with his promise.
Since, according to the appellants, a usurious loan is void due to illegality of cause or object, the rule of
pari delicto expressed in Article 1411, supra, applies, so that neither party can bring action against each
other. Said rule, however, appellants add, is modified as to the borrower, by express provision of the
law (Art. 1413, New Civil Code), allowing the borrower to recover interest paid in excess of the interest
allowed by the Usury Law. As to the lender, no exception is made to the rule; hence, he cannot recover
on the contract. So they continue the New Civil Code provisions must be upheld as against the
Usury Law, under which a loan with usurious interest is not totally void, because of Article 1961 of the
New Civil Code, that: "Usurious contracts shall be governed by the Usury Law and other special laws, so
far as they are not inconsistent with this Code." (Emphasis ours.)
We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is the same as
Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for departing from previous
interpretation that, as provided in the Usury Law (Act No. 2655, as amended), a loan with usurious
interest is not totally void only as to the interest.
True, as stated in Article 1411 of the New Civil Code, the rule of pari delicto applies where a contract's
nullity proceeds from illegality of the cause or object of said contract.
However, appellants fail to consider that a contract of loan with usurious interest consists of principal
and accessory stipulations; the principal one is to pay the debt; the accessory stipulation is to pay
interest thereon.2
And said two stipulations are divisible in the sense that the former can still stand without the latter.
Article 1273, Civil Code, attests to this: "The renunciation of the principal debt shall extinguish the
accessory obligations; but the waiver of the latter shall leave the former in force."
The question therefore to resolve is whether the illegal terms as to payment of interest likewise renders
a nullity the legal terms as to payments of the principal debt. Article 1420 of the New Civil Code provides
in this regard: "In case of a divisible contract, if the illegal terms can be separated from the legal ones,
the latter may be enforced."
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal
debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as
to the prestation to pay the stipulated interest; hence, being separable, the latter only should be
deemed void, since it is the only one that is illegal.
Neither is there a conflict between the New Civil Code and the Usury Law. Under the latter, in Sec. 6,
any person who for a loan shall have paid a higher rate or greater sum or value than is allowed in said
law, may recover the whole interest paid. The New Civil Code, in Article 1413 states: "Interest paid in
excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon
from the date of payment." Article 1413, in speaking of "interest paid in excess of the interest allowed
by the usury laws" means the whole usurious interest; that is, in a loan of P1,000, with interest of P20%
per annum P200 for one year, if the borrower pays said P200, the whole P200 is the usurious interest,
not just that part thereof in excess of the interest allowed by law. It is in this case that the law does not
allow division. The whole stipulation as to interest is void, since payment of said interest is the cause or
object and said interest is illegal. The only change effected, therefore, by Article 1413, New Civil Code, is
not to provide for the recovery of the interest paid in excess of that allowed by law, which the Usury
Law already provided for, but to add that the same can be recovered "with interest thereon from the
date of payment."
The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage
stipulations on usurious interest, said stipulations are treated as wholly void, so that the loan becomes
one without stipulation as to payment of interest. It should not, however, be interpreted to mean
forfeiture even of the principal, for this would unjustly enrich the borrower at the expense of the lender.
Furthermore, penal sanctions are available against a usurious lender, as a further deterrence to usury.
The principal debt remaining without stipulation for payment of interest can thus be recovered by
judicial action. And in case of such demand, and the debtor incurs in delay, the debt earns interest from
the date of the demand (in this case from the filing of the complaint). Such interest is not due to
stipulation, for there was none, the same being void. Rather, it is due to the general provision of law
that in obligations to pay money, where the debtor incurs in delay, he has to pay interest by way of
damages (Art. 2209, Civil Code). The court a quo therefore, did not err in ordering defendants to pay the
principal debt with interest thereon at the legal rate, from the date of filing of the complaint.
As regards, however, the attorney's fees, the court a quo stated no basis for its award, beyond saying
that as a result of defendants' refusal to pay the amount of P19,247.35 notwithstanding repeated
demands, plaintiff was obliged to retain the services of counsel. The rule as to attorney's fees is that the
same are not recoverable, in the absence of stipulation. Several exceptions to this rule are provided (Art.
2208, Civil Code). Unless shown to fall under an exception, the act of plaintiff in engaging counsel's
services due to refusal of defendants to pay his demand, does not justify award of attorney's fees
(Estate of Buan v. Camaganacan, L-21569, Feb. 28, 1966). Defendants, moreover, had reason to resist
the claim, since there was yet no definite ruling of this Court on the point of law involved herein in light
of the New Civil Code. Said award should therefore be deleted.
WHEREFORE, with the modification that the award of attorney's fees in plaintiff's favor is deleted
therefrom, and the correction of the clerical error as to the principal still recoverable, from P19,247.35
to P19,239.35, the appealed judgment is hereby affirmed. No costs. So ordered.
Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and Fernando, JJ., concur.
Zaldivar, J., took no part.
Concepcion, C.J., is on leave.






SECOND DIVISION

[G.R. No. 141811. November 15, 2001]

FIRST METRO INVESTMENT CORPORATION, petitioner, vs. ESTE DEL SOL MOUNTAIN RESERVE, INC.,
VALENTIN S. DAEZ, JR., MANUEL Q. SALIENTES, MA. ROCIO A. DE VEGA, ALEXANDER G. ASUNCION,
ALBERTO* M. LADORES, VICENTE M. DE VERA, JR., and FELIPE B. SESE, respondents.

D E C I S I O N

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision[1] of the Court of Appeals[2] dated
November 8, 1999 in CA-G.R. CV No. 53328 reversing the Decision[3] of the Regional Trial Court of Pasig
City, Branch 159 dated June 2, 1994 in Civil Case No. 39224. Essentially, the Court of Appeals found and
declared that the fees provided for in the Underwriting and Consultancy Agreements executed by and
between petitioner First Metro Investment Corp. (FMIC) and respondent Este del Sol Mountain Reserve,
Inc. (Este del Sol) simultaneously with the Loan Agreement dated January 31, 1978 were mere
subterfuges to camouflage the usurious interest charged by petitioner FMIC.

The facts of the case are as follows:

It appears that on January 31, 1978, petitioner FMIC granted respondent Este del Sol a loan of Seven
Million Three Hundred Eighty-Five Thousand Five Hundred Pesos (P7,385,500.00) to finance the
construction and development of the Este del Sol Mountain Reserve, a sports/resort complex project
located at Barrio Puray, Montalban, Rizal.[4]

Under the terms of the Loan Agreement, the proceeds of the loan were to be released on staggered
basis. Interest on the loan was pegged at sixteen (16%) percent per annum based on the diminishing
balance. The loan was payable in thirty-six (36) equal and consecutive monthly amortizations to
commence at the beginning of the thirteenth month from the date of the first release in accordance
with the Schedule of Amortization.[5] In case of default, an acceleration clause was, among others,
provided and the amount due was made subject to a twenty (20%) percent one-time penalty on the
amount due and such amount shall bear interest at the highest rate permitted by law from the date of
default until full payment thereof plus liquidated damages at the rate of two (2%) percent per month
compounded quarterly on the unpaid balance and accrued interests together with all the penalties, fees,
expenses or charges thereon until the unpaid balance is fully paid, plus attorneys fees equivalent to
twenty-five (25%) percent of the sum sought to be recovered, which in no case shall be less than Twenty
Thousand Pesos (P20,000.00) if the services of a lawyer were hired.[6]

In accordance with the terms of the Loan Agreement, respondent Este del Sol executed several
documents[7] as security for payment, among them, (a) a Real Estate Mortgage dated January 31, 1978
over two (2) parcels of land being utilized as the site of its development project with an area of
approximately One Million Twenty-Eight Thousand and Twenty-Nine (1,028,029) square meters and
particularly described in TCT Nos. N-24332 and N-24356 of the Register of Deeds of Rizal, inclusive of all
improvements, as well as all the machineries, equipment, furnishings and furnitures existing thereon;
and (b) individual Continuing Suretyship agreements by co-respondents Valentin S. Daez, Jr., Manuel Q.
Salientes, Ma. Rocio A. De Vega, Alexander G. Asuncion, Alberto M. Ladores, Vicente M. De Vera, Jr. and
Felipe B. Sese, all dated February 2, 1978, to guarantee the payment of all the obligations of respondent
Este del Sol up to the aggregate sum of Seven Million Five Hundred Thousand Pesos (P7,500,000 00)
each.[8]

Respondent Este del Sol also executed, as provided for by the Loan Agreement, an Underwriting
Agreement on January 31, 1978 whereby petitioner FMIC shall underwrite on a best-efforts basis the
public offering of One Hundred Twenty Thousand (120,000) common shares of respondent Este del Sols
capital stock for a one-time underwriting fee of Two Hundred Thousand Pesos (P200,000.00). In
addition to the underwriting fee, the Underwriting Agreement provided that for supervising the public
offering of the shares, respondent Este del Sol shall pay petitioner FMIC an annual supervision fee of
Two Hundred Thousand Pesos (P200,000.00) per annum for a period of four (4) consecutive years. The
Underwriting Agreement also stipulated for the payment by respondent Este del Sol to petitioner FMIC a
consultancy fee of Three Hundred Thirty-Two Thousand Five Hundred Pesos (P332,500.00) per annum
for a period of four (4) consecutive years. Simultaneous with the execution of and in accordance with
the terms of the Underwriting Agreement, a Consultancy Agreement was also executed on January 31,
1978 whereby respondent Este del Sol engaged the services of petitioner FMIC for a fee as consultant to
render general consultancy services.[9]

In three (3) letters all dated February 22, 1978 petitioner billed respondent Este del Sol for the amounts
of [a] Two Hundred Thousand Pesos (P200,000.00) as the underwriting fee of petitioner FMIC in
connection with the public offering of the common shares of stock of respondent Este del Sol; [b] One
Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) as consultancy fee for a period of four (4)
years; and [c] Two Hundred Thousand Pesos (P200,000.00) as supervision fee for the year beginning
February, 1978, in accordance to the Underwriting Agreement.[10] The said amounts of fees were
deemed paid by respondent Este del Sol to petitioner FMIC which deducted the same from the first
release of the loan.

Since respondent Este del Sol failed to meet the schedule of repayment in accordance with a revised
Schedule of Amortization, it appeared to have incurred a total obligation of Twelve Million Six Hundred
Seventy-Nine Thousand Six Hundred Thirty Pesos and Ninety-Eight Centavos (P12,679,630.98) per the
petitioners Statement of Account dated June 23, 1980,*11+ to wit:

STATEMENT OF ACCOUNT OF

ESTE DEL SOL MOUNTAIN RESERVE, INC.

AS OF JUNE 23, 1980

PARTICULARS AMOUNT

Total amount due as of 11-22-78 per

revised amortization schedule dated

1-3-78 P7,999,631.42

Interest on P7,999,631.42 @ 16% p.a. from

11-22-78 to 2-22-79 (92 days) 327,096.04

Balance 8,326,727.46

One time penalty of 20% of the entire unpaid

obligations under Section 6.02 (ii) of

Loan Agreement 1,665,345.49

Past due interest under Section 6.02 (iii)

of loan Agreement:

@ 19% p.a. from 2-22-79 to 11-30-79

(281 days) 1,481,879.93

@ 21% p.a. from 11-30-79 to 6-23-80

(206 days) 1,200,714.10

Other charges publication of extra judicial

foreclosure of REM made on

5-23-80 & 6-6-80 4,964.00

Total Amount Due and Collectible as of

June 23, 1980 P12,679,630.98

Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage on June 23,
1980.[12] At the public auction, petitioner FMIC was the highest bidder of the mortgaged properties for
Nine Million Pesos (P9,000,000.00). The total amount of Three Million One Hundred Eighty-Eight
Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos (P3,188,630.75) was deducted
therefrom, that is, for the publication fee for the publication of the Sheriffs Notice of Sale, Four
Thousand Nine Hundred Sixty-Four Pesos (P4,964.00); for Sheriffs fees for conducting the foreclosure
proceedings, Fifteen Thousand Pesos (P15,000.00); and for Attorneys fees, Three Million One Hundred
Sixty-Eight Thousand Six Hundred Sixty-Six Pesos and Seventy-Five Centavos (P3,168,666.75). The
remaining balance of Five Million Eight Hundred Eleven Thousand Three Hundred Sixty-Nine Pesos and
Twenty-Five Centavos (P5,811,369.25) was applied to interests and penalty charges and partly against
the principal, due as of June 23, 1980, thereby leaving a balance of Six Million Eight Hundred Sixty-Three
Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) on the
principal amount of the loan as of June 23, 1980.[13]

Failing to secure from the individual respondents, as sureties of the loan of respondent Este del Sol by
virtue of their continuing surety agreements, the payment of the alleged deficiency balance, despite
individual demands sent to each of them,[14] petitioner instituted on November 11, 1980 the instant
collection suit[15]against the respondents to collect the alleged deficiency balance of Six Million Eight
Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos
(P6,863,297.73) plus interest thereon at twenty-one (21%) percent per annum from June 24, 1980 until
fully paid, and twenty-five (25%) percent thereof as and for attorneys fees and costs.

In their Answer, the respondents sought the dismissal of the case and set up several special and
affirmative defenses, foremost of which is that the Underwriting and Consultancy Agreements executed
simultaneously with and as integral parts of the Loan Agreement and which provided for the payment of
Underwriting, Consultancy and Supervision fees were in reality subterfuges resorted to by petitioner
FMIC and imposed upon respondent Este del Sol to camouflage the usurious interest being charged by
petitioner FMIC.[16]

The petitioner FMIC presented as its witnesses during the trial: Cesar Valenzuela, its former Senior Vice-
President, Felipe Neri, its Vice-President for Marketing, and Dennis Aragon, an Account Manager of its
Account Management Group, as well as documentary evidence. On the other hand, co-respondents
Vicente M. De Vera, Jr. and Valentin S. Daez, Jr., and Perfecto Doroja, former Senior Manager and
Assistant Vice-President of FMIC, testified for the respondents.

After the trial, the trial court rendered its decision in favor of petitioner FMIC, the dispositive portion of
which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants, ordering
defendants jointly and severally to pay to plaintiff the amount of P6,863,297.73 plus 21% interest per
annum, from June 24, 1980, until the entire amount is fully paid, plus the amount equivalent to 25% of
the total amount due, as attorneys fees, plus costs of suit.

Defendants counterclaims are dismissed, for lack of merit.

Finding the decision of the trial court unacceptable, respondents interposed an appeal to the Court of
Appeals. On November 8, 1999, the appellate court reversed the challenged decision of the trial court.
The appellate court found and declared that the fees provided for in the Underwriting and Consultancy
Agreements were mere subterfuges to camouflage the excessively usurious interest charged by the
petitioner FMIC on the loan of respondent Este del Sol; and that the stipulated penalties, liquidated
damages and attorneys fees were excessive, iniquitous, unconscionable and revolting to the
conscience, and declared that in lieu thereof, the stipulated one time twenty (20%) percent penalty on
the amount due and ten (10%) percent of the amount due as attorneys fees would be reasonable and
suffice to compensate petitioner FMIC for those items. Thus, the appellate court dismissed the
complaint as against the individual respondents sureties and ordered petitioner FMIC to pay or
reimburse respondent Este del Sol the amount of Nine Hundred Seventy-One Thousand Pesos
(P971,000.00) representing the difference between what is due to the petitioner and what is due to
respondent Este del Sol, based on the following computation:[17]

A: DUE TO THE *PETITIONER+

Principal of Loan P7,382,500.00

Add: 20% one-time

Penalty 1,476,500.00

Attorneys fees 900,000.00 P9,759,000.00

Less: Proceeds of foreclosure

Sale 9,000,000.00

Deficiency P 759,000.00

B. DUE TO [RESPONDENT ESTE DEL SOL]

Return of usurious interest in the form of:

Underwriting fee P 200,000.00

Supervision fee 200,000.00

Consultancy fee 1,330,000.00

Total amount due Este P 1,730,000.00

The appellee is, therefore, obliged to return to the appellant Este del Sol the difference of P971,000.00
or (P1,730,000.00 less P759,000.00).

Petitioner moved for reconsideration of the appellate courts adverse decision. However, this was
denied in a Resolution[18]dated February 9, 2000 of the appellate court.

Hence, the instant petition anchored on the following assigned errors:[19]

THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW
AND WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT:

a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY AGREEMENTS SHOULD NOT BE
CONSIDERED SEPARATE AND DISTINCT FROM THE LOAN AGREEMENT, AND INSTEAD, THEY SHOULD BE
CONSIDERED AS A SINGLE CONTRACT.

b] HELD THAT THE UNDERWRITING AND CONSULTANCY AGREEMENTS ARE MERE SUBTERFUGES TO
CAMOUFLAGE THE USURIOUS INTEREST CHARGED BY THE PETITIONER.

c+ REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONERS WITNESSES ON THE SERVICES
PERFORMED BY PETITIONER.

d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD WAIVED THEIR RIGHT TO SEEK
RECOVERY OF THE AMOUNTS THEY PAID TO PETITIONER, AND [ii] THAT RESPONDENTS HAD ADMITTED
THE VALIDITY OF THE UNDERWRITING AND CONSULTANCY AGREEMENTS.

e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY WHAT IS DUE TO EACH PARTY AFTER
THE FORECLOSURE SALE, AS SHOWN IN PP. 34-35 OF THE ASSAILED DECISION, EVEN GRANTING JUST
FOR THE SAKE OF ARGUMENT THAT THE APPELLATE COURT WAS CORRECT IN STIGMATIZING [i] THE
PROVISIONS OF THE LOAN AGREEMENT THAT REFER TO STIPULATED PENALTIES, LIQUIDATED DAMAGES
AND ATTORNEYS FEES AS SUPPOSEDLY EXCESSIVE, INIQUITOUS AND UNCONSCIONABLE AND
REVOLTING TO THE CONSCIENCE AND *ii+ THE UNDERWRITING, SUPERVISION AND CONSULTANCY
SERVICES AGREEMENT AS SUPPOSEDLY MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS
INTEREST CHARGED UPON THE RESPONDENT ESTE BY PETITIONER.

f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND THUS THE INDIVIDUAL
RESPONDENTS, ARE STILL OBLIGATED TO THE PETITIONER.

Petitioner essentially assails the factual findings and conclusion of the appellate court that the
Underwriting and Consultancy Agreements were executed to conceal a usurious loan. Inquiry upon the
veracity of the appellate courts factual findings and conclusion is not the function of this Court for the
Supreme Court is not a trier of facts. Only when the factual findings of the trial court and the appellate
court are opposed to each other does this Court exercise its discretion to re-examine the factual findings
of both courts and weigh which, after considering the record of the case, is more in accord with law and
justice.

After a careful and thorough review of the record including the evidence adduced, we find no reason to
depart from the findings of the appellate court.

First, there is no merit to petitioner FMICs contention that Central Bank Circular No. 905 which took
effect on January 1, 1983 and removed the ceiling on interest rates for secured and unsecured loans,
regardless of maturity, should be applied retroactively to a contract executed on January 31, 1978, as in
the case at bar, that is, while the Usury Law was in full force and effect. It is an elementary rule of
contracts that the laws, in force at the time the contract was made and entered into, govern it.[20]
More significantly, Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but
simply suspended the latters effectivity.*21+ The illegality of usury is wholly the creature of legislation.
A Central Bank Circular cannot repeal a law. Only a law can repeal another law.[22] Thus, retroactive
application of a Central Bank Circular cannot, and should not, be presumed.[23]

Second, when a contract between two (2) parties is evidenced by a written instrument, such document
is ordinarily the best evidence of the terms of the contract. Courts only need to rely on the face of
written contracts to determine the intention of the parties. However, this rule is not without
exception.[24] The form of the contract is not conclusive for the law will not permit a usurious loan to
hide itself behind a legal form. Parol evidence is admissible to show that a written document though
legal in form was in fact a device to cover usury. If from a construction of the whole transaction it
becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should and
will permit no scheme, however ingenious, to becloud the crime of usury.[25]

In the instant case, several facts and circumstances taken altogether show that the Underwriting and
Consultancy Agreements were simply cloaks or devices to cover an illegal scheme employed by
petitioner FMIC to conceal and collect excessively usurious interest, and these are:

a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is the same
date of the Loan Agreement.[26] Furthermore, under the Underwriting Agreement payment of the
supervision and consultancy fees was set for a period of four (4) years[27] to coincide ultimately with
the term of the Loan Agreement.[28] This fact means that all the said agreements which were executed
simultaneously were set to mature or shall remain effective during the same period of time.

b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of an
underwriting agreement[29]and specifically mentioned that such underwriting agreement is a condition
precedent[30]for petitioner FMIC to extend the loan to respondent Este del Sol, indicating and as
admitted by petitioner FMICs employees,*31+ that such Underwriting Agreement is part and parcel of
the Loan Agreement.*32+

c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three Hundred
Thirty Thousand Pesos (P1,330,000.00)[33] as consultancy fee despite the clear provision in the
Consultancy Agreement that the said agreement is for Three Hundred Thirty-Two Thousand Five
Hundred Pesos (P332,500.00) per annum for four (4) years and that only the first year consultancy fee
shall be due upon signing of the said consultancy agreement.[34]

d) The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred Thousand Pesos
(P200,000.00), Two Hundred Thousand Pesos (P200,000.00) and One Million Three Hundred Thirty
Thousand Pesos (P1,330,000.00), respectively, were billed by petitioner to respondent Este del Sol on
February 22, 1978,[35] that is, on the same occasion of the first partial release of the loan in the amount
of Two Million Three Hundred Eighty-Two Thousand Five Hundred Pesos (P2,382,500.00).[36] It is from
this first partial release of the loan that the said corresponding bills for Underwriting, Supervision and
Consultancy fees were deducted and apparently paid, thus, reverting back to petitioner FMIC the total
amount of One Million Seven Hundred Thirty Thousand Pesos (P1,730,000.00) as part of the amount
loaned to respondent Este del Sol.[37]

e) Petitioner FMIC was in fact unable to organize an underwriting/selling syndicate to sell any share of
stock of respondent Este del Sol and much less to supervise such a syndicate, thus failing to comply with
its obligation under the Underwriting Agreement.[38] Besides, there was really no need for an
Underwriting Agreement since respondent Este del Sol had its own licensed marketing arm to sell its
shares and all its shares have been sold through its marketing arm.[39]

f) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement,[40] aside
from the fact that there was no need for a Consultancy Agreement, since respondent Este del Sols
officers appeared to be more competent to be consultants in the development of the projected
sports/resort complex.[41]

All the foregoing established facts and circumstances clearly belie the contention of petitioner FMIC that
the Loan, Underwriting and Consultancy Agreements are separate and independent transactions. The
Underwriting and Consultancy Agreements which were executed and delivered contemporaneously
with the Loan Agreement on January 31, 1978 were exacted by petitioner FMIC as essential conditions
for the grant of the loan. An apparently lawful loan is usurious when it is intended that additional
compensation for the loan be disguised by an ostensibly unrelated contract providing for payment by
the borrower for the lenders services which are of little value or which are not in fact to be rendered,
such as in the instant case.[42] In this connection, Article 1957 of the New Civil Code clearly provides
that:

Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the
laws against usury shall be void. The borrower may recover in accordance with the laws on usury.

In usurious loans, the entire obligation does not become void because of an agreement for usurious
interest; the unpaid principal debt still stands and remains valid but the stipulation as to the usurious
interest is void, consequently, the debt is to be considered without stipulation as to the interest.[43] The
reason for this rule was adequately explained in the case of Angel Jose Warehousing Co., Inc. v. Child
Enterprises[44]where this Court held:

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal
debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as
to the prestation to pay the stipulated interest; hence, being separable, the latter only should be
deemed void, since it is the only one that is illegal.

Thus, the nullity of the stipulation on the usurious interest does not affect the lenders right to receive
back the principal amount of the loan. With respect to the debtor, the amount paid as interest under a
usurious agreement is recoverable by him, since the payment is deemed to have been made under
restraint, rather than voluntarily.[45]

This Court agrees with the factual findings and conclusion of the appellate court, to wit:

We find the stipulated penalties, liquidated damages and attorneys fees, excessive, iniquitous and
unconscionable and revolting to the conscience as they hardly allow the borrower any chance of survival
in case of default. And true enough, ESTE folded up when the appellee extrajudicially foreclosed on its
(ESTEs) development project and literally closed its offices as both the appellee and ESTE were at the
time holding office in the same building. Accordingly, we hold that 20% penalty on the amount due and
10% of the proceeds of the foreclosure sale as attorneys fees would suffice to compensate the appellee,
especially so because there is no clear showing that the appellee hired the services of counsel to effect
the foreclosure; it engaged counsel only when it was seeking the recovery of the alleged deficiency.

Attorneys fees as provided in penal clauses are in the nature of liquidated damages. So long as such
stipulation does not contravene any law, morals, or public order, it is binding upon the parties.
Nonetheless, courts are empowered to reduce the amount of attorneys fees if the same is iniquitous
or unconscionable.*46+ Articles 1229 and 2227 of the New Civil Code provide that:

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

Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable.

In the case at bar, the amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred Thirty
Pesos and Seventy-Five Centavos (P3,188,630.75) for the stipulated attorneys fees equivalent to
twenty-five (25%) percent of the alleged amount due, as of the date of the auction sale on June 23,
1980, is manifestly exorbitant and unconscionable. Accordingly, we agree with the appellate court that
a reduction of the attorneys fees to ten (10%) percent is appropriate and reasonable under the facts
and circumstances of this case.

Lastly, there is no merit to petitioner FMICs contention that the appellate court erred in awarding an
amount allegedly not asked nor prayed for by respondents. Whether the exact amount of the relief was
not expressly prayed for is of no moment for the reason that the relief was plainly warranted by the
allegations of the respondents as well as by the facts as found by the appellate court. A party is entitled
to as much relief as the facts may warrant.[47]

In view of all the foregoing, the Court is convinced that the appellate court committed no reversible
error in its challenged Decision.

WHEREFORE, the instant petition is hereby DENIED, and the assailed Decision of the Court of Appeals is
AFFIRMED. Costs against petitioner.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.




















Republic of the Philippines
SUPREME COURT
Manila

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.

Ernesto P. Pangalangan for petitioners.

Luis General, Jr. for private respondent.



NOCON, J.:

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.

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 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.

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 telephone 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);

(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 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.

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 posts 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.

(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 petitioner's 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:

(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.

(b) In most cases, only drop wires and not telephone cables have been strung to the posts, which posts
have remained erect up to the present;

(c) Petitioner's 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 respondent's 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 respondent's 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 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.

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.

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, Magarao 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.

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.

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 of 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.

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 inequitous 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 inequitous 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.

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:

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 mater 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 plaintiffs 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).

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 re-negotiate 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 unforseen 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 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 grant 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
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:

. . . 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 . . . . 14

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 inequitous 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 plaintiffs 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 so highly inequitous 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.

It is settled that when the trial court decides a case in favor of a party on a certain ground, the appellant
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 effect 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). . . .

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 inequitous, 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:

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 is 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 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.

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 plaintiff 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:

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 inequitous 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) . . ..

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.
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION



G.R. No. 119379 September 25, 1998

RODELO G. POLOTAN, SR., petitioner,
vs.
HON. COURT OF APPEALS (Eleventh Division), REGIONAL TRIAL COURT IN MAKATI CITY (Branch 132),
and SECURITY DINERS INTERNATIONAL CORPORATION, respondents.



ROMERO, J.:

Assailed before this Court in a Petition for Review on Certiorari is the decision 1 of the Court of Appeals
in CA-G.R. CV No. 33270 affirming the decision of Branch 132 of the Regional Trial Court of Makati City.

Private respondent Security Diners International Corporation (Diners Club), a credit card company,
extends credit accommodations to its cardholders for the purchase of goods and other services from
member establishments. Said goods and services are reimbursed later on by cardholders upon proper
billing.

Petitioner Rodelo G. Polotan, Sr. applied for membership and credit accommodations with Diners Club
in October 1985. The application form contained terms and conditions governing the use and availment
of the Diners Club card, among which is for the cardholder to pay all charges made through the use of
said card within the period indicated in the statement of account and any remaining unpaid balance to
earn 3% interest per annum plus prime rate of Security Bank & Trust Company. Notably, in the
application form submitted by petitioner, Ofricano Canlas obligated himself to pay jointly and severally
with petitioner the latter's obligation to private respondent.

Upon acceptance of his application, petitioner was issued Diners Club card No. 3651-212766-3005. As of
May 8, 1987, petitioner incurred credit charges plus appropriate interest and service charges in the
aggregate amount of P33,819.84 which had become due and demandable.

Demands for payment made against petitioner proved futile. Hence, private respondent filed a
Complaint for Collection of Sum of Money against petitioner before the lower court.

The lower court rued, thus:

WHEREFORE, judgment is hereby rendered ordering defendants to pay jointly and severally plaintiff:

a) The amount of P33,819.84 and interest of 3% per annum plus prime rate of SBTC and service charges
of 2% per month starting May 9, 1987 until the entire obligation is fully paid;

b) An amount equivalent to 25% of any and all amounts due and payable as attorney's fees, plus costs of
suit.

With respect to the cross-claim of defendant Ofricano Canlas, defendant Rodelo G. Polotan, Sr. is
ordered to indemnify and/or reimburse the former for whatever he may be ordered to pay plaintiff.

The Court of Appeals affirmed the ruling of the lower court. Hence, this petition. Petitioner assigns the
following errors:

I

RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF LAW IN RULING AS VALID AND LEGAL THE
FOLLOWING PROVISION ON INTEREST IN THE DINERS CARD CONTRACT, TO WIT:

PAYMENT OF CHARGES . . . The Cardholder agrees to pay interest per annum at 3% plus the prime
rate of Security Bank and Trust Company. . . . Provided that if there occurs any change in the prevailing
market rates the new interest rate shall be the guiding rate of computing the interest due on the
outstanding obligation without need of serving notice to the Cardholder other than the required posting
on the monthly statement served to the Cardholder.

The Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such interest
in the event of changes in prevailing market rates and to charge additional service fees as may be
deemed necessary in order to maintain its service to the Cardholder.

II

RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF LAW IN RULING IN EFFECT THAT PRIVATE
RESPONDENT'S STATEMENT OF ACCOUNT (Exh. "2"). AS A JUDICIAL ADMISSION THAT MRS. POLOTAN
HAD ALREADY PAID COULD BE CONTRADICTED WITHOUT THE PRIVATE RESPONDENT LAYING THE
PROPER BASIS FOR THE INTRODUCTION OF CONTRARY EVIDENCE;

III

RESPONDENT COURT OF APPEALS COMMITTED A GRIEVOUS ERROR OF FACT IN FINDING AS CREDIBLE
THE ILLOGICAL AND ABSURD EXPLANATION OF PRIVATE RESPONDENT'S MR. VICENTE;

IV

RESPONDENT COURT OF APPEALS ERRED IN NOT AWARDING DAMAGES TO PETITIONER.

In the first assignment of error, petitioner argues that the provision on interest rate is "obscure and
ambiguous and not susceptible of reasonable interpretation" particularly the terms "prime rate",
"prevailing market rate" and "guiding rate". In effect, there was no meeting of minds. As such, this being
a contract of adhesion, any ambiguity should be resolved against the one who caused it.

Petitioner added that the said provision was also illegal as it violated the laws and Central Bank
Circulars. While said proviso allowed for the escalation of interest, it did not allow for a downward
adjustment of the same.

In his second and third assignment of error, petitioner claimed that Diners Club admitted, through its
statement of account, that petitioner's wife, Mrs. Polotan, had no more account with it. But then, he
claimed that the lower court and the Court of Appeals allowed the testimony of one Mr. Vicente
explaining that the reason why Mrs. Polotan had no more account with it was that being a
supplementary cardholder, her account was consolidated with that of petitioner in accordance with its
new policy. He argued that since Diners Club admitted that Mrs. Polotan had no more account with it,
the only way it could contradict such admission was by declaring that the same was a result of a
palpable mistake in accordance with Section 4 of Rule 129 of the Revised Rules on Evidence. In admitting
said explanation, the lower court and the Court of Appeals violated the rule on the weight to be
accorded conflicting evidence. In effect, petitioner insists that both courts favored the uncorroborated
testimonial evidence of Mr. Vicente over the documentary evidence presented by petitioner and
admitted by Diners Club.

In its fourth assignment of error, petitioner claimed that he should have been awarded damages
because of Diners Club's bad faith.

This Court finds Petitioner's contentions without merit.

The issues presented by petitioner are clearly questions of law. Notwithstanding petitioner's submission
of the above errors, however, the core issue is basically one of fact. This case stemmed from a simple
complaint for collection of sum of money. The lower court and the Court of Appeals found that
petitioner indeed owed Diners Club the amount being demanded.

In the case of Reyes v. CA, 2 this Court held that factual findings of the trial court, adopted and
confirmed by the Court of Appeals, are final and conclusive and may not be reviewed on appeal. The
exceptions to this rule are as follows: (1) when the inference made is manifestly mistaken, absurd or
impossible; (2) when there is a grave abuse of discretion; (3) when the finding is grounded entirely on
speculations, surmises or conjectures; (4) when the judgment of the Court of Appeals is based on
misapprehension of facts; (5) when the findings of fact are conflicting; (6) when the Court of Appeals, in
making its findings, went beyond the issues of the case and the same is contrary to the admissions of
both appellant and appellee; (7) when the findings of the Court of Appeals are contrary to those of the
trial court; (8) when the findings of fact are conclusions without citation of specific evidence on which
they are based; (9) when the Court of Appeals manifestly overlooked certain relevant facts not disputed
by the parties and which, if properly considered, would justify a different conclusion and (10) when the
findings of fact of the Court of Appeals are premised on the absence of evidence and are contradicted by
the evidence on record.

Only a clear showing that any of the above-cited exceptions exists would justify a review of the findings
of fact made by the lower court and upheld by the Court of Appeals. In the instant case, a review of the
decisions of the lower court, as well as the Court of Appeals, shows that the conclusions have been
logically arrived at and substantially supported by the evidence presented by the parties.

Be that as it may, this Court sees it fit and proper to discuss the merits of this petition based on
petitioner's claim that since the contract he signed with Diners Club was a contract of adhesion, the
obscure provision on interest should be resolved in his favor.

A contract of adhesion is one in which one of the contracting parties imposes a ready-made form of
contract which the other party may accept or reject, but cannot modify. One party prepares the
stipulation in the contract, while the other party merely affixes his signature or his "adhesion" thereto,
giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing. 3

Admittedly, the contract containing standard stipulations imposed upon those who seek to avail of its
credit services was prepared by Diners Club. There is no way a prospective credit card holder can object
to any onerous provision as it is offered on a take-it-or-leave-it basis. Being a contract of adhesion, any
ambiguity in its provisions trust be construed against private respondent.

Indeed, the terms "prime rate", "prevailing market rate", "2% penalty charge", "service fee", and
"guiding rate" are technical terms which are beyond the ken of an ordinary layman. To be sure,
petitioner hardly falls into the category of an "ordinary layman." As aptly observed by the Court of
Appeals:

. . . [A]ppellant by his own admission is a "lawyer by profession, a reputable businessman and a note
leader of a number of socio-civic organizations." With such impressive credentials, this Court is hard-put
to fathom someone of his calibre entering into a contract with eyes "blindfolded". 4

Nevertheless, these types of contracts have been declared as binding ordinary contracts, the reason
being that the party who adheres to the contract is free to reject it entirely. 5

The binding effect of any agreement between parties to a contract is premised on two settled principles:
(1) that any obligation arising from a contract has the force of law between the parties; and (2) that
there must be mutuality between the parties based on their essential equality. Any contract which
appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is
void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of
one of the parties, is likewise, invalid. 6 It is important to stress that the Court is not precluded from
ruling out blind adherence to their terms if the attendant facts and circumstances show that they should
be ignored for being obviously too one-sided. 7

In this case, petitioner, in effect, claims that the subject contract is one-sided in that the contract allows
for the escalation of interests, but does not provide for a downward adjustment of the same in violation
of Central Bank Circular 905.

The claim is without basis. First, by signing the contract, petitioner and private respondent agreed upon
the rate as stipulated in the subject contract. Such is now allowed by C.B. Circular 905. 8 Second,
petitioner failed to cite any particular provision of said Circular which was allegedly violated by the
subject contract.

Be that as it may, there is nothing inherently wrong with escalation clauses. Escalation clauses are valid
stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long
term contracts. 9

Petitioner further argues that the interest rate was unilaterally imposed and based on the standards and
rate formulated solely by Diners Club.

In Florendo v. CA, 10 this Court has held that:

. . . the unilateral determination and imposition of increased interest rates by the herein respondent
bank is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil
Code. As this Court held in PNB v. CA (196 SCRA 536 [1991]):

In order that obligations arising from contracts may have the force of law between the parties, there
must be mutuality between the parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void. . . .

The contractual provision in question states that "if there occurs any change in the prevailing market
rates, the new interest rate shall be the guiding rate in computing the interest due on the outstanding
obligation without need of serving notice to the Cardholder other than the required posting on the
monthly statement served to the Cardholder." This could not be considered an escalation clause for the
reason that it neither states all increase nor a decrease in interest rate. Said clause simply states that the
interest rate should be based on the prevailing market rate.

Interpreting it differently, while said clause does not expressly stipulate a reduction in interest rate, it
nevertheless provides a leeway for the interest rate to be reduced in case the prevailing market rates
dictate its reduction.

Admittedly, the second paragraph of the questioned proviso which provides that "the Cardholder
hereby authorizes Security Diners to correspondingly increase the rate of such interest in the event of
changes in prevailing market rates . . ." is an escalation clause. However, it cannot be said to be
dependent solely on the will of private respondent as it is also dependent on the prevailing market
rates.

Escalation clauses are not basically wrong or legally objectionable as long as they are not solely
potestative but based on reasonable and valid grounds. 11 Obviously, the fluctuation in the markets
rates is beyond the control of private respondent.

As to the second and third assignments of error, it is misleading for petitioner to say that private
respondent had judicially admitted that its statement of account is proof that Mrs. Polotan has already
paid her account with private respondent. Proceeding from said premise, it is further misleading for
petitioner to conclude that private respondent's testimonial evidence about a new policy contradicted
its judicially admitted documentary evidence without laying the proper basis for the introduction of
contrary evidence and in violation of Section 2, Rule 129 of the Revised Rules on Evidence, which
provides that:

Admissions made by the parties in the pleadings, or in the course of the trial or other proceedings do
not require proof and can be contradicted unless previously shown to have been made through palpable
mistake.

Certainly, Diners Club could not deny the existence of Exhibit "2" which is the Statement of Account
issued to Mrs. Polotan since, precisely, it was the one which issued said statement. But to conclude that
said Statement of Account was likewise an admission that Mrs. Polotan has no more account with Diners
Club would be equivocatory, or non-sequitur.

While private respondent admitted the existence of Exhibit "2", it could not have agreed to the purpose
for which the exhibit was presented. As satisfactorily found by the Court of Appeals and to which this
Court agrees:

Appellant's allegation is misleading. On the contrary, appellee's rebuttal witness, Alfredo Vicente,
categorically stated that the reason the Statement of Account in the name of Alicia Polotan showed a
zero balance (Exh. "2") was due to the fact that effective February 1989, under a new system, separate
monthly statements were produced on supplementary card members. Prior to February 1989, the
availment of Mr. and Mrs. Polotan were incorporated under one statement.

Moreover, it is to be observed that while the Complaint was filed on 15 May 1987, the Diners Club
Monthly Statement in the name of Alicia B. Polotan is dated almost two (2) years later or "02/08/89"
(Exh. "2"). This bolsters the testimony of Alfredo Vicente regarding the entry of zero balance in Mrs.
Polotan's name.

Although said exhibit would, by itself, show that Mrs. Polotan had no more account with Diners Club, it
would not have been conclusive to prove that said account was already paid. The proper evidence
would have been a receipt of payment.

Significantly, petitioner did not contest the purchases as indicated in the statements of account but
merely alleged that some of the purchases being claimed to have been made by petitioner were not
supported by invoices. The lower court found otherwise. 12

In light of the above, this Court sees no reason to award damages to petitioner.

WHEREFORE, in view of the foregoing, the petition for certiorari is hereby DENIED and the Decision of
the Court of Appeals AFFIRMED with the MODIFICATION that the attorney's fees are reduced to 15%.

SO ORDERED.

Narvasa, C.J. Kapunan and Purisima, JJ., concur.





















Republic of the Philippines
SUPREME COURT
Manila

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,
FRNACISCO DANTE, PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.

Alejo Mabanag for plaintiff-appellee.
Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-appellants.

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

This appeal comes to us directly from the Court of First Instance because the claims involved aggregate
more than P200,000.00.

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 into 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 claim 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 P20,000.00, 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 P75,000.00, P10,000.00 of which was paid upon the signing of the
agreement, and

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from and out of the first letter
of credit covering the first shipment of iron ores and of 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 under written by a bonding company was put up by
defendants to secure the payment of the P65,000.00 balance of their 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-1", 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
then P65,000.00, 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 good will, 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 & 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 P65,000.00 balance of the price of said ore been paid to Gaite by
Fonacier and his sureties payment of said amount, on the theory that they had lost 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 P65,000.00 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 P65,000.00 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 P200,000.00 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 P65,000.00 become 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 the defendants to pay plaintiff the
P65,000.00 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 Gait'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 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, P65,000.00 with interest at 6% per annum from December 9, 1955 until 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 results 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 P65,000.00 (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
(P75,000.00) which the latter binds to pay as follows:

a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of this agreement.

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be paid from and out of the first letter
of credit covering the first shipment 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 P65,000.00, 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 (P65,000.00) will be paid out of the first letter of credit covering the first
shipment of iron ores . . ." 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 right 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 a to guarantee payment of the P65,000.00, an 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 P65,000.00.

3) To subordinate the obligation to pay the remaining P65,000.00 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 desireability 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 indented a
suspensive condition or a suspensive period (dies ad quem) for the payment of the P65,000.00, the rules
of interpretation would incline the scales in favor of "the greater 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' obligation is deemed to be
actually existing, with only its maturity (due date) postponed or deferred, that 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 appellant have forfeited the right 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 P65,000.00, 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 P65,000.00, 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:

"ART. 1198. The debtor shall lose every right to make use of the period:

(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 barely; 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.".

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 P65,000.00 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 of 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 or 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 P75,000,00 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 Louisiana 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 questions; 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 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 Cirpriano
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 appellant's
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. (ch. Pine River Logging & Improvement Co. vs 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, Concepcion, Barrera, Paredes, Dizon, De Leon and Natividad, JJ., concur.



















Republic of the Philipppines
SUPREME COURT
Manila

THIRD DIVISION

[G.R. No. 131784. September 16, 1999]

FELIX L. GONZALES, Petitioner, vs. THE HEIRS OF THOMAS and PAULA CRUZ, herein represented by
ELENA C. TALENS, Respondents.

D E C I S I O N

PANGANIBAN, J.:

If a stipulation in a contract admits of several meanings, it shall be understood as bearing that import
most adequate to render it effectual. An obligation cannot be enforced unless the plaintiff has fulfilled
the condition upon which it is premised. Hence, an obligation to purchase cannot be implemented
unless and until the sellers have shown their title to the specific portion of the property being sold.

The Case

Before us is a Petition for Review on Certiorari assailing the August 13, 1997 Decision[1] of the Court of
Appeals[2] in CA-GR CV No. 303754, which disposed as follows:

WHEREFORE, the decision of the trial court dated November 16, 1990 is hereby REVERSED. The appellee
FELIX GONZALES is hereby ordered to surrender possession of the property covered by the Contract of
Lease/Purchase to the appellants, Heirs of Thomas and Paula Cruz, and to pay to the appellants the
following amounts:

1. P15,000.00 per annum as rentals counted from December 1, 1984 until the appellants shall have
recovered possession of the property subject of the Contract of Lease/Purchase;

2. P15,000.00 as attorneys fees; and

3. Costs of suit.[3]

On the other hand, the trial court[4] Decision,[5] which was reversed by the CA, ruled as follows:

WHEREFORE, premises considered, this Court hereby renders judgment in favor of the defendant, Felix
Gonzales, and against the plaintiffs, as follows:

(1) Ordering the dismissal of the case;

(2) Sentencing the plaintiffs, jointly and severally, the sum of P20,000.00 as moral damages and the
other sum of P10,000.00 as and for attorneys fees; and

(3) To pay the costs.[6]

The Facts

We hereby reproduce, unedited, the Court of Appeals summary of the facts of this case as follows:

On December 1, 1983, Paula Ao Cruz together with the plaintiffs heirs of Thomas and Paula Cruz, namely
Ricardo A. Cruz, Carmelita M. Cruz, Salome A. Cruz, Irenea C. Victoria, Leticia C. Salvador and Elena C.
Talens, entered into a Contract of Lease/Purchase with the defendant, Felix L. Gonzales, the sole
proprietor and manager of Felgon Farms, of a half-portion of a parcel of land containing an area of 12
hectares, more or less, and an accretion of 2 hectares, more or less, situated in Rodriguez Town,
Province of Rizal and covered by Transfer Certificate of Title No. 12111 (Exhibit A, p. 157, Records). The
contract of Lease/Purchase contains the following provisions:

1. The terms of this Contract is for a period of one year upon the signing thereof. After the period of this
Contract, the LESSEE shall purchase the property on the agreeable price of One Million Pesos
(P1,000,000.00) payable within Two (2) Years period with an interest of 12% per annum subject to the
devalued amount of the Philippine Peso, according to the following schedule of payment:

Upon the execution of the Deed of Sale 50% - and thereafter 25% every six (6) months thereafter,
payable within the first ten (10) days of the beginning of each period of six (6) months.

2. The LESSEE shall pay by way of annual rental an amount equivalent to Two Thousand Five Hundred
(P2,500.00) Pesos per hectare, upon the signing of this contract on Dec. 1, 1983.

x x x x x x x x x

9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and distinct T.C.T.
over the herein leased portion to the LESSEE within a reasonable period of time which shall not in any
case exceed four (4) years, after which a new Contract shall be executed by the herein parties which
shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms and conditions
are concerned.

x x x x x x x x x

(Exhibits A, A-1; pp. 157-158. Records)

The defendant Gonzales paid the P2,500.00 per hectare or P15,000.00 annual rental on the half-portion
of the property covered by Transfer Certificate of Title No. 12111 in accordance with the second
provision of the Contract of Lease/Purchase (p. 12, TSN, September 14, 1989) and thereafter took
possession of the property, installing thereon the defendant Jesus Sambrano as his caretaker (pp. 16-17,
27, TSN, December 12, 1989). The defendant Gonzales did not, however, exercise his option to purchase
the property immediately after the expiration of the one-year lease on November 30, 1984 (pp. 19-20,
TSN, September 14, 1989). He remained in possession of the property without paying the purchase price
provided for in the Contract of Lease/Purchase (Ibid.) and without paying any further rentals thereon (p.
36, TSN, November 7, 1989).

A letter was sent by one of the plaintiffs-heirs Ricardo Cruz to the defendant Gonzales informing him of
the lessors decision to rescind the Contract of Lease/Purchase due to a breach thereof committed by the
defendant (Exhibit C; p. 162, Records). The letter also served as a demand on the defendant to vacate
the premises within 10 days from receipt of said letter (Ibid.).

The defendant Gonzales refused to vacate the property and continued possession thereof (p. 2, Record).
The matter was therefore brought before the barangay captain of San Isidro, but owing to the
defendants refusal to appear before the barangay, a certification allowing the case to be brought to
Court was issued on March 18, 1987 (Exhibit E; p. 165, Records).

The lessor, Paula Ao Cruz died the following day, March 19, 1987 (p. 9, TSN, September 14, 1989).

A final demand letter to vacate the premises was sent by the remaining lessors who are also the heirs of
the deceased lessor Paula Ao Cruz, through their counsel on August 24, 1987 which the defendant
Gonzales received but did not heed (Exhibits D and D-1; pp. 163-164, Records).

The property subject of the Contract of Lease/Purchase is currently the subject of an Extra-Judicial
Partition (Exhibits G and G-1; pp. 168-169, Records). Title to the property remains in the name of the
plaintiffs predecessors-in-interest, Bernardina Calixto and Severo Cruz (Exhibit B; p. 160, Records).

Alleging breach of the provisions of the Contract of Lease/Purchase, the plaintiffs filed a complaint for
recovery of possession of the property - subject of the contract with damages, both moral and
compensatory and attorneys fees and litigation expenses (p. 3, Records).

Alleging breach of paragraph nine of the Contract of Lease/Purchase, and payment of only P50,000.00 of
the P500,000.00 agreed down payment on the purchase price of P1,000,000.00, the defendant Gonzales
filed his answer on November 23, 1987 praying for a dismissal of the complaint filed against him and an
award of moral, exemplary and actual damages, as well as litigation expenses (pp. 19-22, Records).

The defendant Sambrano was, upon motion, declared in default for failure to file an answer despite
valid service of summons (p. 30, Records).

The parties limited the issues to be resolved to:

(1) Whether or not paragraph 9 of the contract is a condition precedent before the defendant is to pay
the down payment;

(2) Whether or not plaintiffs can rescind the Contract of Lease/Purchase; and

(3) Whether or not plaintiffs can terminate the Contract of Lease. (p. 4, Decision; p. 262, Records)

After the termination of the pre-trial conference, the trial court proceeded to hear the case on the
merits and arrived at its appealed decision based on the following findings and conclusions:

Paragraph 9 of the contract clearly indicates that the lessors-plaintiffs shall obtain a Transfer Certificate
of Title in the name of the lessee within 4 years before a new contract is to be entered into under the
same terms and conditions as the original Contract of Lease/Purchase. Thus, before a deed of Sale can
be entered into between the plaintiffs and the defendant, the plaintiffs have to obtain the Transfer
Certificate of Title in favor of the defendant. Article 1181 of the New Civil Code states that: 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. When the
obligation assumed by a party to a contract is expressly subjected to a condition, the obligation cannot
be enforced against him unless the condition is complied with (Wise & Co. vs. Kelly, 37 Phil. 695; PNB vs.
Philippine Trust Co., 68 Phil. 48).

The failure of the plaintiffs to secure the Transfer Certificate of Title, as provided for in the contract,
does not entitle them to rescind the contract[.] Article 1191 of the New Civil Code states 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 of the
obligation, with the payment of damages in either case. He may seek rescission, even after he has
chosen fulfillment, if the latter should become impossible x x x. The power to rescind is given to the
injured party. Where the plaintiff is the party who did not perform, he is not entitled to insist upon the
performance of the contract by the defendant or recover damages by reason of his own breach (Mateos
vs. Lopez, 6 Phil. 206; Borque vs. Yu Chipco, 14 Phil. 95). An action for specific performance of a contract
is an equitable proceeding, and he who seeks to enforce it must himself be fair and reasonable, and do
equity (Seva vs. Berwin, 48 Phil. 581). In this case, plaintiffs failed to comply with the conditions
precedent after 2-1/2 years from the execution of the contract so as to entitle them to rescind the
contract. Although the contract stated that the same be done within 4 years from execution, still, the
defendant has to be assured that the land subject of the case will be transferred in his name without any
encumbrances, as the Extra-Judicial Partition dated July 17, 1989 was being processed, and continues to
be in process to this date. The failure to secure the Transfer Certificate of Title in favor of the defendant
entitles not the plaintiffs but, rather, the defendant to either rescind or to ask for specific performances.

Are the plaintiffs entitled to terminate the Contract of Lease? Article 1670 of the New Civil Code states
that:

If at the end of the contract the lessee should continue enjoying the thing leased for fifteen days with
the acquies[c]ence of the lessor and unless a notice to the contrary by either party has previously been
given, it is understood that there is an implied new lease, not for the period of the original contract, but
for the time established in Articles 1682 and 1687. The other terms of the original contract shall be
revived.

Article 1682 of the New Civil Code states that:

The lease of a piece of rural land, when its duration has not been fixed, is understood to have been
made for all the time necessary for the gathering of the fruits which the whole estate leased may yield in
one year, or which it may yield once, although two or more years may have to elapse for the purpose.

The plaintiffs filed the complaint on October 12, 1987 after making an extra-judicial demand on July 2,
1986. The contract was entered into on December 1, 1983. The demand was thus made more than a
year and a half from the expiry date of the original lease considering that there was no payment made
for the second year of the lease. If one has to consider the fact that the defendant was given the option
to purchase the property after two years, then, the lease would presumably run for at least two years. If
that is so, then, the demand was made seven months after the expiration of the two-year lease. Still,
this demand by the plaintiffs will come under the implied new lease of Articles 1682 and 1670 so that
the plaintiffs are not entitled to terminate the Contract of Lease.

In sum, the plaintiffs cannot terminate the Contract of Lease due to their failure to notify the defendant
in due time of their intention to that effect. Nor can they rescind the Contract of Purchase in view of the
fact that there is a condition precedent which the plaintiffs have not fulfilled. It is the defendant now
who has the option to either rescind or demand the performance of the contract. Moreover, according
to Article 1654 of the New Civil Code, the lessor is obliged to deliver the thing which is the object of the
contract in such condition as to render it fit for the use intended. Considering that the lessors-plaintiffs
have not delivered the property in whole over the protest of the defendant, the latter suffered damages
therefor. (p. 4-6, Decision; pp. 262-264, Records)

Their complaint thus dismissed, the plaintiffs, now appellants, assign the trial court of having committed
the following errors:

I

THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT PLAINTIFFS-APPELLANTS COULD NOT VALIDLY
RESCIND AND TERMINATE THE LEASE/PURCHASE CONTRACT (EXHIBIT A) AND THEREAFTER TO TAKE
POSSESSION OF THE LAND IN QUESTION AND EJECT THEREFROM DEFENDANTS-APPELLEES.

II

THE TRIAL COURT EQUALLY ERRED IN NOT GRANTING THE RELIEFS PLEADED AND PRAYED FOR BY
PLAINTIFFS-APPELLANTS IN THEIR COMPLAINT. (p. 42, Rollo)

The case was submitted for decision without the appellees brief as per the Courts resolution dated July
8, 1992 (p. 71, Rollo).

Ruling of the Court of Appeals

The Court of Appeals reversed the trial court in this wise:

The trial court, in its decision interpreted the ninth provision of the Contract of Lease/Purchase to mean
that before the appellee exercises his option to purchase the property by paying the 50% plus interest
on the P1,000,000.00 purchase price, the appellants must first transfer the title to the property in the
appellees name. The Court finds this interpretation of the provision strained if not altogether absurd.
The transfer of title to the property in the appellees name cannot be interpreted as a condition
precedent to the payment of the agreed purchase price because such interpretation not only runs
counter [to] the explicit provisions of the contract but also is contrary to the normal course of things
anent the sale of real properties. The terms of the contract [are] explicit and require no interpretation.
Upon the expiration of the lease, the lessee shall purchase the property. Besides, the normal course of
things anent the sale of real properties dictates that there must first be payment of the agreed purchase
price before transfer of title to the vendees name can be made.

This was precisely what the appellants and Paula Ao Cruz had in mind when they had the ninth provision
incorporated in the Contract of Lease/Purchase. They had asked for a period of 4 years from the time
they receive the downpayment of 50% within which to have [the] title to the property transferred in the
name of the appellee. The reason for this four (4) year period is [that] title to the property still remains
in the name of the original owners, the predecessors-in-interest of the herein appellants and
[transferring] the title to their names and eventually to the lessee-purchaser, appellee herein, would
take quite some time.

The appellee wanted to have the title to the property transferred in his name first before he exercises
his option to purchase allegedly in accordance with the ninth provision of the contract. But the ninth
provision does not give him this right. A reading of the contract in its entirety shows that the 4 year
period asked for by the appellants within which to have title to the property transferred in the appellees
name will only start to run when the appellee exercises his option to purchase. Since the appellee never
exercised his option to purchase, then appellee is not entitled to have the title to the property
transferred in his name.

Attributing reversible errors to the appellate court, petitioner elevated the case to this Court.[7]

The Issues

In his Memorandum,[8] petitioner submits the following main issues:

I. Whether or not the Court of Appeals has gravely erred and committed grave abuse of discretion in the
interpretation of [the] law between the parties.

II. Whether or not the Court of Appeals committed serious mistakes in the finding of facts which
resulted [in] departing from the usual course of judicial proceedings.

For these issues to be resolved, petitioner asks this Court to answer the following questions:

1. Is there a conflict between the statement in paragraph 1 of the Lease/Purchase Contract and that [in]
paragraph No. 9 thereof?

2. Is paragraph 9 of the Lease/Purchase Contract a condition precedent before petitioner could exercise
his option to buy the property?

3. Can plaintiff rescind or terminate the Contract of Lease after the one-year period?

In fine, the resolution of this case depends upon the proper interpretation of paragraph nine of the
Contract.

The Courts Ruling

The Petition is meritorious.

Main Issue: Interpretation of Paragraph Nine

In its first paragraph, the disputed agreement provides that petitioner shall lease the property for one
year, after which he shall purchase it. Paragraph nine, on the other hand, requires herein respondents to
obtain a separate and distinct Transfer Certificate of Title (TCT) over the property, viz.:

9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and distinct T.C.T.
over the lease portion to the LESSEE within a reasonable period of time which shall not in any case
exceed four (4) years, after which a new Contract shall be executed by the herein parties which shall be
the same in all respects with this Contract of Lease/Purchase insofar as the terms and conditions are
concerned.

Alleging that petitioner has not purchased the property after the lapse of one year, respondents seek to
rescind the Contract and to recover the property. Petitioner, on the other hand, argues that he could
not be compelled to purchase the property, because respondents have not complied with paragraph
nine, which obligates them to obtain a separate and distinct title in their names. He contends that
paragraph nine was a condition precedent to the purchase of the property.

To be sure, this paragraph and the entire agreement, for that matter -- is not a model of how a contract
should be worded. It is an invitation to a litigation, as in fact the parties had to go all to way up to this
Court to plead for a resolution of their conflict which is rooted in their failure to express themselves
clearly. Small wonder, even the two lower courts gave contradictory understanding of this provision,
thereby necessitating the intervention of the highest court of the land.

Both the trial court and the Court of Appeals (CA) interpreted this provision to mean that the
respondents had obliged themselves to obtain a TCT in the name of petitioner-lessee. The trial court
held that this obligation was a condition precedent to petitioners purchase of the property. Since
respondents had not performed their obligation, they could not compel petitioner to buy the parcel of
land. The CA took the opposite view, holding that the property should be purchased first before
respondents may be obliged to obtain a TCT in the name of petitioner-lessee-buyer.

As earlier noted, petitioner disagrees with the interpretation of the two courts and maintains that
respondents were obligated to procure a TCT in their names before he could be obliged to purchase the
property in question.

Basic is the rule in the interpretation of contracts that if some stipulation therein should admit of several
meanings, it shall be understood as bearing that import most adequate to render it effectual.[9]
Considering the antecedents of the ownership of the disputed lot, it appears that petitioners
interpretation renders clause nine most effectual.

The record shows that at the time the contract was executed, the land in question was still registered in
the name of Bernardina Calixto and Severo Cruz, respondents predecessors-in-interest. There is no
showing whether respondents were the only heirs of Severo Cruz or whether the other half of the land
in the name of Bernardina Calixto was adjudicated to them by any means. In fact, they admit that
extrajudicial proceedings were still ongoing. Hence, when the Contract of Lease/Purchase was executed,
there was no assurance that the respondents were indeed the owners of the specific portion of the lot
that petitioner wanted to buy, and if so, in what concept and to what extent.

Thus, the clear intent of the ninth paragraph was for respondents to obtain a separate and distinct TCT
in their names. This was necessary to enable them to show their ownership of the stipulated portion of
the land and their concomitant right to dispose of it. Absent any title in their names, they could not have
sold the disputed parcel of land.

It is a well-settled principle in law that no one can give what one does not have -- nemo dat quod non
habet. Accordingly, one can sell only what one owns or is authorized to sell, and the buyer can acquire
no more than what the seller can transfer legally.[10]

Because the property remained registered in the names of their predecessors-in-interest, private
respondents could validly sell only their undivided interest in the estate of Severo Cruz, the extent of
which was however not shown in the records. There being no partition of the estate thus far, there was
no guarantee as to how much and which portion would be adjudicated to Respondents.

In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing
sold.[11] In this case, the respondent could not deliver ownership or title to a specific portion of the yet
undivided property. True, they could have intended to sell their hereditary interest, but in the context of
the Contract of Lease/Purchase, the parties under paragraph nine wanted the specific portion of the
land to be segregated, identified and specifically titled. Hence, by the said Contract, the respondents as
sellers were given a maximum of four years within which to acquire a separate TCT in their names,
preparatory to the execution of the deed of sale and the payment of the agreed price in the manner
described in paragraph nine.

This interpretation is bolstered by the P50,000 petitioner advanced to respondents in order to help
them expedite the transfer of the TCT to their names. Ineluctably, the intention of the parties was to
have the title transferred first to respondents names as a condition for the completion of the purchase.

In holding that clause nine was not a condition precedent to the purchase of the property, the CA relied
on a literal interpretation to the effect that the TCT should be obtained in the name of the petitioner-
vendee. It reasoned that the title could be transferred to the name of the buyer only after the
completion of the purchase. Thus, petitioner should first purchase the property before respondents
could be obliged to transfer the TCT to his name.

We disagree. The literal interpretation not only ignores the factual backdrop of the case; it also utilizes a
faulty parsing of paragraph nine, which should purportedly read as follows: The lessors x x x shall
undertake to obtain a separate and distinct TCT xxx to the LESSEE within a reasonable period of time
which shall not in any case exceed four (4) years x x x. Read in its entirety, however, paragraph nine does
not say that the TCT should be obtained in the name of the lessee. In fact, paragraph nine requires
respondents to obtain a TCT over the herein leased portion to the LESSEE, thereby showing that the
crucial phrase to the LESSEE adverts to the leased portion and not to the name which should appear in
the new TCT.

Furthermore, the CA interpretation ignores the other part of paragraph nine, stating that after a
separate TCT had been obtained, a new contract shall be executed by the herein parties which shall be
the same in all respects with this Contract of Lease/Purchase insofar as the terms and conditions are
concerned.

If, as the CA held, petitioner should purchase the property first before the title can be transferred to his
name, why should there be a waiting period of four years before the parties can execute the new
contract evidencing the sale? Why should the petitioner still be required to pay rentals after it purchases
and pays for the property? The Contract could not have envisioned this absurd scenario.

Clearly, the appellate courts literal interpretation of the first portion of paragraph nine renders the latter
portion thereof ineffectual. In other words, that portion can only mean that the respondents should first
obtain a TCT in their names, after which petitioner is given time to purchase and pay for the property.

Respondents insist that the obligation of petitioner to buy the disputed land immediately after the
termination of the one year lease period is explicit.[12] However, it is more reasonable to state that the
first paragraph was effectively modified by the ninth. To repeat, petitioner can be compelled to perform
his obligation under the first paragraph, only after respondents have complied with the ninth. Unless
and until respondents have done so, the first paragraph cannot be enforced against petitioner.

In sum, we hold that the ninth provision was intended to ensure that respondents would have a valid
title over the specific portion they were selling to petitioner. Only after the title is assured may the
obligation to buy the land and to pay the sums stated in the Contract be enforced within the period
stipulated. Verily, the petitioners obligation to purchase has not yet ripened and cannot be enforced
until and unless respondents can prove their title to the property subject of the Contract.

Secondary Issues

Ninth Clause Was a Condition Precedent

Because the ninth clause required respondents to obtain a separate and distinct TCT in their names and
not in the name of petitioner, it logically follows that such undertaking was a condition precedent to the
latters obligation to purchase and pay for the land. Put differently, petitioners obligation to purchase the
land is a conditional one and is governed by Article 1181 of the Civil Code.[13]

Condition has been defined as every future and uncertain event upon which an obligation or provision is
made to depend. It is a future and uncertain event upon which the acquisition or resolution of rights is
made to depend by those who execute the juridical act.[14] Without it, the sale of the property under
the Contract cannot be perfected, and petitioner cannot be obliged to purchase the property. When the
consent of a party to a contract is given subject to the fulfillment of a suspensive condition, the contract
is not perfected unless that condition is first complied with.[15]

The Court has held that [w]hen the obligation assumed by a party to a contract is expressly subjected to
a condition, the obligation cannot be enforced against him unless the condition is complied with.[16]
Furthermore, [t]he obligatory force of a conditional obligation is subordinated to the happening of a
future and uncertain event, so that if that event does not take place, the parties would stand as if the
conditional obligation had never existed.[17]

In this case, the obligation of the petitioner to buy the land cannot be enforced unless respondents
comply with the suspensive condition that they acquire first a separate and distinct TCT in their names.
The suspensive condition not having been fulfilled, then the obligation of the petitioner to purchase the
land has not arisen.

Respondents Cannot Rescind the Contract

In the same vein, respondents cannot rescind the contract, because they have not caused the transfer of
the TCT to their names, which is a condition precedent to petitioners obligation. This Court has held that
there can be no rescission (or more properly, resolution) of an obligation as yet non-existent, because
the suspensive condition has not happened.[18]

Since the reversal of the CA Decision is inevitable, the trial courts judgment should be reinstated.
However, we find no sufficient factual or legal justifications for the award of moral damages and
attorneys fees.

WHEREFORE, the petition is GRANTED and the appealed Decision is REVERSED and SET ASIDE. The
Decision of the trial court is REINSTATED, but the award of moral damages and attorneys fees is
DELETED for lack of basis. No costs.

SO ORDERED.

Melo, (Chairman), Purisima, and Gonzaga-Reyes, JJ., concur.

Vitug, J., no part; did not participate in deliberations (in PHILJA on official business).



















Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-24190 July 13, 1926

GEORGE L. PARKS, plaintiff-appellant,
vs.
PROVINCE OF TARLAC, MUNICIPALITY OF TARLAC, CONCEPCION CIRER, and JAMES HILL, her husband,
defendants-appellees.

Jos. N. Wolfson for appellant.
Provincial Fiscal Lopez de Jesus for the Province and Municipality of Tarlac.
No appearance for the other appellees.

AVANCEA, C. J.:

On October 18, 1910, Concepcion Cirer and James Hill, the owners of parcel of land No. 2 referred to in
the complaint, donated it perpetually to the municipality of Tarlac, Province of Tarlac, under certain
conditions specified in the public document in which they made this donation. The donation was
accepted by Mr. Santiago de Jesus in the same document on behalf of the municipal council of Tarlac of
which he was the municipal president. The parcel thus donated was later registered in the name of the
donee, the municipality of Tarlac. On January 15, 1921, Concepcion Cirer and James Hill sold this parcel
to the herein plaintiff George L. Parks. On August 24, 1923, the municipality of Tarlac transferred the
parcel to the Province of Tarlac which, by reason of this transfer, applied for and obtained the
registration thereof in its name, the corresponding certificate of title having been issued to it.

The plaintiff, George L. Parks, alleging that the conditions of the donation had not been complied with
and invoking the sale of this parcel of land made by Concepcion Cirer and James Hill in his favor, brought
this action against the Province of Tarlac, the municipality of Tarlac, Concepcion Cirer and James Hill and
prayed that he be declared the absolute owner entitled to the possession of this parcel, that the transfer
of the same by the municipality of Tarlac to the Province of Tarlac be annulled, and the transfer
certificate issued to the Province of Tarlac cancelled.

The lower court dismissed the complaint.

The plaintiff has no right of action. If he has any, it is only by virtue of the sale of this parcel made by
Concepcion Cirer and James Hill in his favor on January 15, 1921, but that sale cannot have any effect.
This parcel having been donated by Concepcion Cirer and James Hill to the municipality of Tarlac, which
donation was accepted by the latter, the title to the property was transferred to the municipality of
Tarlac. It is true that the donation might have been revoked for the causes, if any, provided by the law,
but the fact is that it was not revoked when Concepcion Cirer and James Hill made the sale of this parcel
to the plaintiff. Even supposing that causes existed for the revocation of this donation, still, it was
necessary, in order to consider it revoked, either that the revocation had been consented to by the
donee, the municipality of Tarlac, or that it had been judicially decreed. None of these circumstances
existed when Concepcion Cirer and James Hill sold this parcel to the plaintiff. Consequently, when the
sale was made Concepcion Cirer and James Hill were no longer the owners of this parcel and could not
have sold it to the plaintiff, nor could the latter have acquired it from them.

But the appellant contends that a condition precedent having been imposed in the donation and the
same not having been complied with, the donation never became effective. We find no merit in this
contention. The appellant refers to the condition imposed that one of the parcels donated was to be
used absolutely and exclusively for the erection of a central school and the other for a public park, the
work to commence in both cases within the period of six months from the date of the ratification by the
partes of the document evidencing the donation. It is true that this condition has not been complied
with. The allegation, however, that it is a condition precedent is erroneous. The characteristic of a
condition precedent is that the acquisition of the right is not effected while said condition is not
complied with or is not deemed complied with. Meanwhile nothing is acquired and there is only an
expectancy of right. Consequently, when a condition is imposed, the compliance of which cannot be
effected except when the right is deemed acquired, such condition cannot be a condition precedent. In
the present case the condition that a public school be erected and a public park made of the donated
land, work on the same to commence within six months from the date of the ratification of the donation
by the parties, could not be complied with except after giving effect to the donation. The donee could
not do any work on the donated land if the donation had not really been effected, because it would be
an invasion of another's title, for the land would have continued to belong to the donor so long as the
condition imposed was not complied with.

The appellant also contends that, in any event, the condition not having been complied with, even
supposing that it was not a condition precedent but subsequent, the non-compliance thereof is
sufficient cause for the revocation of the donation. This is correct. But the period for bringing an action
for the revocation of the donation has prescribed. That this action 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 five years for the revocation by the subsequent birth of children (art. 646,
Civil Code), and one year for the revocation 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, Civil Code), 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. Under the law in force (sec. 43, Code of Civ. Proc.)
the period of prescription of this class of action is ten years. The action for the revocation of the
donation for this cause arose on April 19, 1911, that is six months after the ratification of the instrument
of donation of October 18, 1910. The complaint in this action was presented July 5, 1924, more than ten
years after this cause accrued.

By virtue of the foregoing, the judgment appealed from is affirmed, with the costs against the appellant.
So ordered.

Street, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.





































Republic of the Philippines
SUPREME COURT
Manila
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.

BELLOSILLO, J.:
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]), executed a deed of donation in
favor of the latter of a parcel of land identified as Lot No. 3174-B-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 cornerstone 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, private 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 prescribed;
that it did not violate any of the conditions in the deed of donation because it never used the donated
property 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 1991, 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 the
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 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 alleges 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 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. 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 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. 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 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. 8
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. 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 interests. 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:
I agree with the view in the majority opinion that the donation in question is onerous considering the
conditions imposed by the donor on the donee which created reciprocal obligations upon both parties.
Beyond that, I beg to disagree.
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:
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 . . . .
(emphasis 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 a gratuitous contract should be resolved in favor of the least transmission of
rights and interest . . . (emphasis 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 word 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 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 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 (emphasis 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 and applied this to
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 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.
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 of 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 of Osmea, 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 1926 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 Luna 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 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.
For the reasons expressed above, I register my dissent. Accordingly, the decision of the Court of Appeals
must be upheld, except its ruling that the conditions of the donation are resolutory.
Padilla, J., dissents










Republic of the Philipppines
SUPREME COURT
Manila

SECOND DIVISION

[G.R. No. 126444. December 4, 1998]

ALFONSO QUIJADA, CRESENTE QUIJADA, REYNELDA QUIJADA, DEMETRIO QUIJADA, ELIUTERIA QUIJADA,
EULALIO QUIJADA, and WARLITO QUIJADA, petitioners, vs. COURT OF APPEALS, REGALADO MONDEJAR,
RODULFO GOLORAN, ALBERTO ASIS, SEGUNDINO RAS, ERNESTO GOLORAN, CELSO ABISO, FERNANDO
BAUTISTA, ANTONIO MACASERO, and NESTOR MAGUINSAY, Respondents.

D E C I S I O N

MARTINEZ, J.:

Petitioners, as heirs of the late Trinidad Quijada, filed a complaint against private respondents for
quieting of title, recovery of possession and ownership of parcels of land with claim for attorney's fees
and damages. The suit was premised on the following facts found by the Court of Appeals, which is
materially the same as that found by the trial court:

"Plaintiffs-appellees (Petitioners) are the children of the late Trinidad Corvera Vda. de Quijada. Trinidad
was one of the heirs of the late Pedro Corvera and inherited from the latter the two-hectare parcel of
land subject of the case, situated in the barrio of San Agustin, Talacogon, Agusan del Sur. On April 5,
1956, Trinidad Quijada together with her sisters Leonila Corvera Vda. de Sequea and Paz Corvera
Cabiltes and brother Epapiadito Corvera executed a conditional deed of donation (Exh. C) of the two-
hectare parcel of land subject of the case in favor of the Municipality of Talacogon, the condition being
that the parcel of land shall be used solely and exclusively as part of the campus of the proposed
provincial high school in Talacogon. Apparently, Trinidad remained in possession of the parcel of land
despite the donation. On July 29, 1962, Trinidad sold one (1) hectare of the subject parcel of land to
defendant-appellant Regalado Mondejar (Exh. 1). Subsequently, Trinidad verbally sold the remaining
one (1) hectare to defendant-appellant (respondent) Regalado Mondejar without the benefit of a
written deed of sale and evidenced solely by receipts of payment. In 1980, the heirs of Trinidad, who at
that time was already dead, filed a complaint for forcible entry (Exh. E) against defendant-appellant
(respondent) Regalado Mondejar, which complaint was, however, dismissed for failure to prosecute
(Exh. F). In 1987, the proposed provincial high school having failed to materialize, the Sangguniang
Bayan of the municipality of Talacogon enacted a resolution reverting the two (2) hectares of land
donated back to the donors (Exh. D). In the meantime, defendant-appellant (respondent) Regalado
Mondejar sold portions of the land to defendants-appellants (Respondents) Fernando Bautista (Exh. 5),
Rodolfo Goloran (Exh. 6), Efren Guden (Exh. 7) and Ernesto Goloran (Exh. 8).

"On July 5, 1988, plaintiffs-appellees (Petitioners) filed this action against defendants-appellants
(Respondents). In the complaint, plaintiffs-appellees (Petitioners) alleged that their deceased mother
never sold, conveyed, transferred or disposed of the property in question to any person or entity much
less to Regalado Mondejar save the donation made to the Municipality of Talacogon in 1956; that at the
time of the alleged sale to Regalado Mondejar by Trinidad Quijada, the land still belongs to the
Municipality of Talacogon, hence, the supposed sale is null and void.

"Defendants-appellants (Respondents), on the other hand, in their answer claimed that the land in
dispute was sold to Regalado Mondejar, the one (1) hectare on July 29, 1962, and the remaining one (1)
hectare on installment basis until fully paid. As affirmative and/or special defense, defendants-
appellants (Respondents) alleged that plaintiffs' action is barred by laches or has prescribed.

"The court a quo rendered judgment in favor of plaintiffs-appellees (Petitioners): firstly because
'Trinidad Quijada had no legal title or right to sell the land to defendant Mondejar in 1962, 1966, 1967
and 1968, the same not being hers to dispose of because ownership belongs to the Municipality of
Talacogon' (Decision, p. 4; Rollo, p. 39) and, secondly, that the deed of sale executed by Trinidad Quijada
in favor of Mondejar did not carry with it the conformity and acquiescence of her children, more so that
she was already 63 years old at the time, and a widow (Decision, p. 6; Rollo, p. 41)."[1]

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

"WHEREFORE, viewed from the above perceptions, the scale of justice having tilted in favor of the
plaintiffs, judgment is, as it is hereby rendered:

1) ordering the Defendants to return and vacate the two (2) hectares of land to Plaintiffs as described in
Tax Declaration No. 1209 in the name of Trinidad Quijada;

2) ordering any person acting in Defendants' behalf to vacate and restore the peaceful possession of the
land in question to Plaintiffs;

3) ordering the cancellation of the Deed of Sale executed by the late Trinidad Quijada in favor of
Defendant Regalado Mondejar as well as the Deeds of Sale/Relinquishments executed by Mondejar in
favor of the other Defendants;

4) ordering Defendants to remove their improvements constructed on the questioned lot;

5) ordering the Defendants to pay Plaintiffs, jointly and severally, the amount of P10,000.00
representing attorney's fees;

6) ordering Defendants to pays the amount of P8,000.00 as expenses of litigation; and

7) ordering Defendants to pay the sum of P30,000.00 representing moral damages.

SO ORDERED."[2]

On appeal, the Court of Appeals reversed and set aside the judgment a quo[3] ruling that the sale made
by Trinidad Quijada to respondent Mondejar was valid as the4 former retained an inchoate interest on
the lots by virtue of the automatic reversion clause in the deed of donation.[4] Thereafter, petitioners
filed a motion for reconsideration. When the CA denied their motion,[5] petitioners instituted a petition
for review to this Court arguing principally that the sale of the subject property made by Trinidad
Quijada to respondent Mondejar is void, considering that at that time, ownership was already
transferred to the Municipality of Talacogon. On the contrary, private respondents contend that the sale
was valid, that they are buyers in good faith, and that petitioners' case is barred by laches.[6]

We affirm the decision of the respondent court.

The donation made on April 5, 1956 by Trinidad Quijada and her brother and sisters[7] was subject to
the condition that the donated property shall be "used solely and exclusively as a part of the campus of
the proposed Provincial High School in Talacogon."[8] The donation further provides that should "the
proposed Provincial High School be discontinued or if the same shall be opened but for some reason or
another, the same may in the future be closed" the donated property shall automatically revert to the
donor.[9] Such condition, not being contrary to law, morals, good customs, public order or public policy
was validly imposed in the donation.[10]

When the Municipality's acceptance of the donation was made known to the donor, the former became
the new owner of the donated property -- donation being a mode of acquiring and transmitting
ownership[11] - notwithstanding the condition imposed by the donee. The donation is perfected once
the acceptance by the donee is made known to the donor.[12] Accordingly, ownership is immediately
transferred to the latter and that ownership will only revert to the donor if the resolutory condition is
not fulfilled.

In this case, that resolutory condition is the construction of the school. It has been ruled that when a
person donates land to another on the condition that the latter would build upon the land a school, the
condition imposed is not a condition precedent or a suspensive condition but a resolutory one.[13] Thus,
at the time of the sales made in 1962 towards 1968, the alleged seller (Trinidad) could not have sold the
lots since she had earlier transferred ownership thereof by virtue of the deed of donation. So long as the
resolutory condition subsists and is capable of fulfillment, the donation remains effective and the donee
continues to be the owner subject only to the rights of the donor or his successors-in-interest under the
deed of donation. Since no period was imposed by the donor on when must the donee comply with the
condition, the latter remains the owner so long as he has tried to comply with the condition within a
reasonable period. Such period, however, became irrelevant herein when the donee-Municipality
manifested through a resolution that it cannot comply with the condition of building a school and the
same was made known to the donor. Only then - when the non-fulfillment of the resolutory condition
was brought to the donor's knowledge - that ownership of the donated property reverted to the donor
as provided in the automatic reversion clause of the deed of donation.

The donor may have an inchoate interest in the donated property during the time that ownership of the
land has not reverted to her. Such inchoate interest may be the subject of contracts including a contract
of sale. In this case, however, what the donor sold was the land itself which she no longer owns. It
would have been different if the donor-seller sold her interests over the property under the deed of
donation which is subject to the possibility of reversion of ownership arising from the non-fulfillment of
the resolutory condition.

As to laches, petitioners' action is not yet barred thereby. Laches presupposes 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;[14] "it is negligence or omission to assert a right within a reasonable
time, thus, giving rise to a presumption that the party entitled to assert it either has abandoned or
declined to assert it."[15] Its essential elements of:

a) Conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation
complained of;

b) Delay in asserting complainant's right after he had knowledge of the defendant's conduct and after he
has an opportunity to sue;

c) Lack of knowledge or notice on the part of the defendant that the complainant would assert the right
on which he bases his suit; and,

d) Injury or prejudice to the defendant in the event relief is accorded to the complainant."[16]

are absent in this case. Petitioners' cause of action to quiet title commenced only when the property
reverted to the donor and/or his successors-in-interest in 1987. Certainly, when the suit was initiated
the following year, it cannot be said that petitioners had slept on their rights for a long time. The 1960's
sales made by Trinidad Quijada cannot be the reckoning point as to when petitioners' cause of action
arose. They had no interest over the property at that time except under the deed of donation to which
private respondents were not privy. Moreover, petitioners had previously filed an ejectment suit against
private respondents only that it did not prosper on a technicality.

Be that at it may, there is one thing which militates against the claim of petitioners. Sale, being a
consensual contract, is perfected by mere consent, which is manifested the moment there is a meeting
of the minds[17] as to the offer and acceptance thereof on three (3) elements: subject matter, price and
terms of payment of the price.[18] ownership by the seller on the thing sold at the time of the
perfection of the contract of sale is not an element for its perfection. What the law requires is that the
seller has the right to transfer ownership at the time the thing sold is delivered.[19] Perfection per se
does not transfer ownership which occurs upon the actual or constructive delivery of the thing sold.[20]
A perfected contract of sale cannot be challenged on the ground of non-ownership on the part of the
seller at the time of its perfection; hence, the sale is still valid.

The consummation, however, of the perfected contract is another matter. It occurs upon the
constructive or actual delivery of the subject matter to the buyer when the seller or her successors-in-
interest subsequently acquires ownership thereof. Such circumstance happened in this case when
petitioners -- who are Trinidad Quijada's heirs and successors-in-interest -- became the owners of the
subject property upon the reversion of the ownership of the land to them. Consequently, ownership is
transferred to respondent Mondejar ands those who claim their right from him. Article 1434 of the New
Civil Code supports the ruling that the seller's "title passes by operation of law to the buyer."[21] This
rule applies not only when the subject matter of the contract of sale is goods,[22] but also to other kinds
of property, including real property.[23]

There is also no merit in petitioners' contention that since the lots were owned by the municipality at
the time of the sale, they were outside the commerce of men under Article 1409 (4) of the NCC;[24]
thus, the contract involving the same is inexistent and void from the beginning. However, nowhere in
Article 1409 (4) is it provided that the properties of a municipality, whether it be those for public use or
its patrimonial property[25] are outside the commerce of men. Besides, the lots in this case were
conditionally owned by the municipality. To rule that the donated properties are outside the commerce
of men would render nugatory the unchallenged reasonableness and justness of the condition which the
donor has the right to impose as owner thereof. Moreover, the objects referred to as outsides the
commerce of man are those which cannot be appropriated, such as the open seas and the heavenly
bodies.

With respect to the trial courts award of attorneys fees, litigation expenses and moral damages, there is
neither factual nor legal basis thereof. Attorneys fees and expenses of litigation cannot, following the
general rule in Article 2208 of the New Civil Code, be recovered in this case, there being no stipulation to
that effect and the case does not fall under any of the exceptions.[26] It cannot be said that private
respondents had compelled petitioners to litigate with third persons. Neither can it be ruled that the
former acted in gross and evident bad faith in refusing to satisfy the latters claims considering that
private respondents were under an honest belief that they have a legal right over the property by virtue
of the deed of sale. Moral damages cannot likewise be justified as none of the circumstances
enumerated under Articles 2219[27] and 2220[28] of the New Civil Code concur in this case.

WHEREFORE, by virtue of the foregoing, the assailed decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

Melo (Acting Chairman), Puno, and Mendoza, JJ., concur.