G.R. No.

L-19118

January 30, 1965

MARIANO A. ALBERT, plaintiff-appellant,

vs.
UNIVERSITY PUBLISHING CO., INC., defendant-appellee.
Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.
Aruego, Mamaril & Associates for defendant-appellees.
BENGZON, J.P., J.:
No less than three times have the parties here appealed to this Court.
In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958, we found plaintiff
entitled to damages (for breach of contract) but reduced the amount from
P23,000.00 to P15,000.00.
Then in Albert vs. University Publishing Co., Inc., L-15275, October 24, 1960, we
held that the judgment for P15,000.00 which had become final and executory,
should be executed to its full amount, since in fixing it, payment already made had
been considered.
Now we are asked whether the judgment may be executed against Jose M. Aruego,
supposed President of University Publishing Co., Inc., as the real defendant.
Fifteen years ago, on September 24, 1949, Mariano A. Albert sued University
Publishing Co., Inc. Plaintiff allegedinter alia that defendant was a corporation duly
organized and existing under the laws of the Philippines; that on July 19, 1948,
defendant, through Jose M. Aruego, its President, entered into a contract with
plaintifif; that defendant had thereby agreed to pay plaintiff P30,000.00 for the
exclusive right to publish his revised Commentaries on the Revised Penal Code and
for his share in previous sales of the book's first edition; that defendant had
undertaken to pay in eight quarterly installments of P3,750.00 starting July 15, 1948;
that per contract failure to pay one installment would render the rest due; and that
defendant had failed to pay the second installment.
Defendant admitted plaintiff's allegation of defendant's corporate existence;
admitted the execution and terms of the contract dated July 19, 1948; but alleged
that it was plaintiff who breached their contract by failing to deliver his manuscript.
Furthermore, defendant counterclaimed for damages.1wph1.t
Plaintiff died before trial and Justo R. Albert, his estate's administrator, was
substituted for him.
The Court of First Instance of Manila, after trial, rendered decision on April 26, 1954,
stating in the dispositive portion

IN VIEW OF ALL THE FOREGOING, the Court renders judgment in favor of the
plaintiff and against the defendant the University Publishing Co., Inc., ordering
the defendant to pay the administrator Justo R. Albert, the sum of P23,000.00
with legal [rate] of interest from the date of the filing of this complaint until the
whole amount shall have been fully paid. The defendant shall also pay the
costs. The counterclaim of the defendant is hereby dismissed for lack of
evidence.
As aforesaid, we reduced the amount of damages to P15,000.00, to be executed in
full. Thereafter, on July 22, 1961, the court a quo ordered issuance of an execution
writ against University Publishing Co., Inc. Plaintiff, however, on August 10, 1961,
petitioned for a writ of execution against Jose M. Aruego, as the real defendant,
stating, "plaintiff's counsel and the Sheriff of Manila discovered that there is no such
entity as University Publishing Co., Inc." Plaintiff annexed to his petition a
certification from the securities and Exchange Commission dated July 31, 1961,
attesting: "The records of this Commission do not show the registration of
UNIVERSITY PUBLISHING CO., INC., either as a corporation or partnership."
"University Publishing Co., Inc." countered by filing, through counsel (Jose M.
Aruego's own law firm), a "manifestation" stating that "Jose M. Aruego is not a party
to this case," and that, therefore, plaintiff's petition should be denied.
Parenthetically, it is not hard to decipher why "University Publishing Co., Inc.,"
through counsel, would not want Jose M. Aruego to be considered a party to the
present case: should a separate action be now instituted against Jose M. Aruego,
the plaintiff will have to reckon with the statute of limitations.
The court a quo denied the petition by order of September 9, 1961, and from this,
plaintiff has appealed.
The fact of non-registration of University Publishing Co., Inc. in the Securities and
Exchange Commission has not been disputed. Defendant would only raise the point
that "University Publishing Co., Inc.," and not Jose M. Aruego, is the party defendant;
thereby assuming that "University Publishing Co., Inc." is an existing corporation
with an independent juridical personality. Precisely, however, on account of the
non-registration it cannot be considered a corporation, not even a corporation de
facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no personality separate from
Jose M. Aruego; it cannot be sued independently.
The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is
inapplicable here. Aruego represented a non-existent entity and induced not only
the plaintiff but even the court to believe in such representation. He signed the
contract as "President" of "University Publishing Co., Inc.," stating that this was "a
corporation duly organized and existing under the laws of the Philippines," and
obviously misled plaintiff (Mariano A. Albert) into believing the same. One who has
induced another to act upon his wilful misrepresentation that a corporation was duly
organized and existing under the law, cannot thereafter set up against his victim the
principle of corporation by estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069).
"University Publishing Co., Inc." purported to come to court, answering the

complaint and litigating upon the merits. But as stated, "University Publishing Co.,
Inc." has no independent personality; it is just a name. Jose M. Aruego was, in
reality, the one who answered and litigated, through his own law firm as counsel. He
was in fact, if not, in name, the defendant.

We need hardly state that should there be persons who under the law are liable to
Aruego for reimbursement or contribution with respect to the payment he makes
under the judgment in question, he may, of course, proceed against them through
proper remedial measures.

Even with regard to corporations duly organized and existing under the law, we have
in many a case pierced the veil of corporate fiction to administer the ends of justice. *
And in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting or
purporting to act on behalf of a corporation which has no valid existence assumes
such privileges and obligations and becomes personally liable for contracts entered
into or for other acts performed as such agent." Had Jose M. Aruego been named
as party defendant instead of, or together with, "University Publishing Co., Inc.,"
there would be no room for debate as to his personal liability. Since he was not so
named, the matters of "day in court" and "due process" have arisen.

PREMISES CONSIDERED, the order appealed from is hereby set aside and the
case remanded ordering the lower court to hold supplementary proceedings for the
purpose of carrying the judgment into effect against University Publishing Co., Inc.
and/or Jose M. Aruego. So ordered.

In this connection, it must be realized that parties to a suit are "persons who have a
right to control the proceedings, to make defense, to adduce and cross-examine
witnesses, and to appeal from a decision" (67 C.J.S. 887) and Aruego was, in
reality, the person who had and exercised these rights. Clearly, then, Aruego had his
day in court as the real defendant; and due process of law has been substantially
observed.

HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA

PRODUCTION, INC., and VICENTE DEL ROSARIO, respondents.

By "due process of law" we mean " "a law which hears before it condemns; which
proceeds upon inquiry, and renders judgment only after trial. ... ." (4 Wheaton, U.S.
518, 581.)"; or, as this Court has said, " "Due process of law" contemplates notice
and opportunity to be heard before judgment is rendered, affecting one's person or
property" (Lopez vs. Director of Lands, 47 Phil. 23, 32)." (Sicat vs. Reyes, L-11023,
Dec. 14, 1956.) And it may not be amiss to mention here also that the "due process"
clause of the Constitution is designed to secure justice as a living reality; not to
sacrifice it by paying undue homage to formality. For substance must prevail over
form. It may now be trite, but none the less apt, to quote what long ago we said in
Alonso vs. Villamor, 16 Phil. 315, 321-322:
A litigation is not a game of technicalities in which one, more deeply schooled
and skilled in the subtle art of movement and position, entraps and destroys the
other. It is, rather, a contest in which each contending party fully and fairly lays
before the court the facts in issue and then, brushing side as wholly trivial and
indecisive all imperfections of form and technicalities of procedure, asks that
Justice be done upon the merits. Lawsuits, unlike duels, are not to be won by a
rapier's thrust. Technicality, when it deserts its proper office as an aid to justice
and becomes its great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights in technicalities.
The evidence is patently clear that Jose M. Aruego, acting as representative of a
non-existent principal, was the real party to the contract sued upon; that he was the
one who reaped the benefits resulting from it, so much so that partial payments of
the consideration were made by him; that he violated its terms, thereby precipitating
the suit in question; and that in the litigation he was the real defendant. Perforce, in
line with the ends of justice, responsibility under the judgment falls on him.

G.R. No. 128690

January 21, 1999

ABS-CBN BROADCASTING CORPORATION, petitioner,

vs.

DECISION
DAVIDE, JR., CJ.:
In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp.
(hereafter ABS-CBN) seeks to reverse and set aside the decision 1 of 31 October
1996 and the resolution 2 of 10 March 1997 of the Court of Appeals in CA-G.R. CV
No. 44125. The former affirmed with modification the decision 3 of 28 April 1993 of
the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case No.
Q-92-12309. The latter denied the motion to reconsider the decision of 31 October
1996.
The antecedents, as found by the RTC and adopted by the Court of Appeals, are as
follows:
In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh. A)
whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva films.
Sometime in December 1991, in accordance with paragraph 2.4 [sic] of said
agreement stating that .
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva
films for TV telecast under such terms as may be agreed upon by the parties hereto,
provided, however, that such right shall be exercised by ABS-CBN from the actual
offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president
Charo Santos-Concio, a list of three(3) film packages (36 title) from which ABS-CBN
may exercise its right of first refusal under the afore-said agreement (Exhs. 1 par,
2, 2, 2-A and 2-B-Viva). ABS-CBN, however through Mrs. Concio, can tick off
only ten (10) titles (from the list) we can purchase (Exh. 3 Viva) and therefore
did not accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs.
Concio are not the subject of the case at bar except the film Maging Sino Ka Man.
For further enlightenment, this rejection letter dated January 06, 1992 (Exh 3

Viva) is hereby quoted:

6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I would like to express
my difficulty in recommending the purchase of the three film packages you are
offering ABS-CBN.
From among the three packages I can only tick off 10 titles we can purchase. Please
see attached. I hope you will understand my position. Most of the action pictures in
the list do not have big action stars in the cast. They are not for primetime. In line
with this I wish to mention that I have not scheduled for telecast several action
pictures in out very first contract because of the cheap production value of these
movies as well as the lack of big action stars. As a film producer, I am sure you
understand what I am trying to say as Viva produces only big action pictures.
In fact, I would like to request two (2) additional runs for these movies as I can only
schedule them in our non-primetime slots. We have to cover the amount that was
paid for these movies because as you very well know that non-primetime
advertising rates are very low. These are the unaired titles in the first contract.
I hope you will consider this request of mine.
The other dramatic films have been offered to us before and have been rejected
because of the ruling of MTRCB to have them aired at 9:00 p.m. due to their very
adult themes.
As for the 10 titles I have chosen [sic] from the 3 packages please consider
including all the other Viva movies produced last year. I have quite an attractive offer
to make.
Thanking you and with my warmest regards.
(Signed) Charo Santos-Concio
On February 27, 1992, defendant Del Rosario approached ABS-CBNs Ms. Concio,
with a list consisting of 52 original movie titles (i.e. not yet aired on television)
including the 14 titles subject of the present case, as well as 104 re-runs (previously
aired on television) from which ABS-CBN may choose another 52 titles, as a total of
156 titles, proposing to sell to ABS-CBN airing rights over this package of 52
originals and 52 re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash
and P30,000,000.00 worth of television spots (Exh. 4 to 4-C Viva; 9 -Viva).
On April 2, 1992, defendant Del Rosario and ABS-CBN general manager, Eugenio
Lopez III, met at the Tamarind Grill Restaurant in Quezon City to discuss the
package proposal of Viva. What transpired in that lunch meeting is the subject of
conflicting versions. Mr. Lopez testified that he and Mr. Del Rosario allegedly agreed
that ABS-CBN was granted exclusive film rights to fourteen (14) films for a total
consideration of P36 million; that he allegedly put this agreement as to the price and
number of films in a napkin and signed it and gave it to Mr. Del Rosario (Exh. D;
TSN, pp. 24-26, 77-78, June 8, 1992). On the other hand, Del Rosario denied
having made any agreement with Lopez regarding the 14 Viva films; denied the
existence of a napkin in which Lopez wrote something; and insisted that what he
and Lopez discussed at the lunch meeting was Vivas film package offer of 104 films

(52 originals and 52 re-runs) for a total price of P60 million. Mr. Lopez promising
[sic]to make a counter proposal which came in the form of a proposal contract
Annex C of the complaint (Exh. 1- Viva; Exh. C ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior
vice-president for Finance discussed the terms and conditions of Vivas offer to sell
the 104 films, after the rejection of the same package by ABS-CBN.
On April 07, 1992, defendant Del Rosario received through his secretary, a
handwritten note from Ms. Concio, (Exh. 5 Viva), which reads: Heres the draft
of the contract. I hope you find everything in order, to which was attached a draft
exhibition agreement (Exh. C- ABS-CBN; Exh. 9 Viva, p. 3) a counter-proposal
covering 53 films, 52 of which came from the list sent by defendant Del Rosario and
one film was added by Ms. Concio, for a consideration of P35 million. Exhibit C
provides that ABS-CBN is granted films right to 53 films and contains a right of first
refusal to 1992 Viva Films. The said counter proposal was however rejected by
Vivas Board of Directors [in the] evening of the same day, April 7, 1992, as Viva
would not sell anything less than the package of 104 films for P60 million pesos
(Exh. 9 Viva), and such rejection was relayed to Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN and following several negotiations
and meetings defendant Del Rosario and Vivas President Teresita Cruz, in
consideration of P60 million, signed a letter of agreement dated April 24, 1992.
granting RBS the exclusive right to air 104 Viva-produced and/or acquired films (Exh.
7-A RBS; Exh. 4 RBS) including the fourteen (14) films subject of the present
case. 4
On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific
performance with a prayer for a writ of preliminary injunction and/or temporary
restraining order against private respondents Republic Broadcasting Corporation 5
(hereafter RBS ), Viva Production (hereafter VIVA), and Vicente Del Rosario. The
complaint was docketed as Civil Case No. Q-92-12309.
On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private
respondents from proceeding with the airing, broadcasting, and televising of the
fourteen VIVA films subject of the controversy, starting with the film Maging Sino Ka
Man, which was scheduled to be shown on private respondents RBS channel 7 at
seven oclock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued an order 7
directing the issuance of a writ of preliminary injunction upon ABS-CBNs posting of
P35 million bond. ABS-CBN moved for the reduction of the bond, 8 while private
respondents moved for reconsideration of the order and offered to put up a
counterbond. 9
In the meantime, private respondents filed separate answers with counterclaim. 10
RBS also set up a cross-claim against VIVA.
On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary
injunction upon the posting by RBS of a P30 million counterbond to answer for
whatever damages ABS-CBN might suffer by virtue of such dissolution. However, it
reduced petitioners injunction bond to P15 million as a condition precedent for the
reinstatement of the writ of preliminary injunction should private respondents be
unable to post a counterbond.

At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court,
agreed to explore the possibility of an amicable settlement. In the meantime, RBS
prayed for and was granted reasonable time within which to put up a P30 million
counterbond in the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement RBS posted on 1 October
1992 a counterbond, which the RTC approved in its Order of 15 October 1992. 13
On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August
and 15 October 1992 Orders, which RBS opposed. 15
On 29 October 1992, the RTC conducted a pre-trial. 16
Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of
Appeals a petition 17challenging the RTCs Orders of 3 August and 15 October
1992 and praying for the issuance of a writ of preliminary injunction to enjoin the
RTC from enforcing said orders. The case was docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary restraining order 18
to enjoin the airing, broadcasting, and televising of any or all of the films involved in
the controversy.
On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing
the petition in CA -G.R. No. 29300 for being premature. ABS-CBN challenged the
dismissal in a petition for review filed with this Court on 19 January 1993, which was
docketed as G.R. No. 108363.
In the meantime the RTC received the evidence for the parties in Civil Case No.
Q-192-1209. Thereafter, on 28 April 1993, it rendered a decision 20 in favor of
RBS and VIVA and against ABS-CBN disposing as follows:
WHEREFORE, under cool reflection and prescinding from the foregoing, judgments
is rendered in favor of defendants and against the plaintiff.
(1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:
a) P107,727.00, the amount of premium paid by RBS to the surety which issued
defendant RBSs bond to lift the injunction;
b) P191,843.00 for the amount of print advertisement for Maging Sino Ka Man in
various newspapers;
c) Attorneys fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay P212,000.00 by way of
reasonable attorneys fees.
(4) The cross-claim of defendant RBS against defendant VIVA is dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price and terms of the
offer. The alleged agreement between Lopez III and Del Rosario was subject to the

approval of the VIVA Board of Directors, and said agreement was disapproved
during the meeting of the Board on 7 April 1992. Hence, there was no basis for
ABS-CBNs demand that VIVA signed the 1992 Film Exhibition Agreement.
Furthermore, the right of first refusal under the 1990 Film Exhibition Agreement had
previously been exercised per Ms. Concios letter to Del Rosario ticking off ten titles
acceptable to them, which would have made the 1992 agreement an entirely new
contract.
On 21 June 1993, this Court denied 21 ABS-CBNs petition for review in G.R. No.
108363, as no reversible error was committed by the Court of Appeals in its
challenged decision and the case had become moot and academic in view of the
dismissal of the main action by the court a quo in its decision of 28 April 1993.
Aggrieved by the RTCs decision, ABS-CBN appealed to the Court of Appeals
claiming that there was a perfected contract between ABS-CBN and VIVA granting
ABS-CBN the exclusive right to exhibit the subject films. Private respondents VIVA
and Del Rosario also appealed seeking moral and exemplary damages and
additional attorneys fees.
In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that
the contract between ABS-CBN and VIVA had not been perfected, absent the
approval by the VIVA Board of Directors of whatever Del Rosario, its agent, might
have agreed with Lopez III. The appellate court did not even believe ABS-CBNs
evidence that Lopez III actually wrote down such an agreement on a napkin, as
the same was never produced in court. It likewise rejected ABS-CBNs insistence on
its right of first refusal and ratiocinated as follows:
As regards the matter of right of first refusal, it may be true that a Film Exhibition
Agreement was entered into between Appellant ABS-CBN and appellant VIVA under
Exhibit A in 1990, and that parag. 1.4 thereof provides:
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) VIVA
films for TV telecast under such terms as may be agreed upon by the parties hereto,
provided, however, that such right shall be exercised by ABS-CBN within a period of
fifteen (15) days from the actual offer in writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still
be subject to such terms as may be agreed upon by the parties thereto, and that the
said right shall be exercised by ABS-CBN within fifteen (15) days from the actual
offer in writing.
Said parag. 1.4 of the agreement Exhibit A on the right of first refusal did not fix the
price of the film right to the twenty-four (24) films, nor did it specify the terms thereof.
The same are still left to be agreed upon by the parties.
In the instant case, ABS-CBNs letter of rejection Exhibit 3 (Records, p. 89) stated
that it can only tick off ten (10) films, and the draft contract Exhibit C accepted only
fourteen (14) films, while parag. 1.4 of Exhibit A speaks of the next twenty-four (24)
films.
The offer of VIVA was sometime in December 1991 (Exhibits 2, 2-A. 2-B; Records,
pp. 86-88; Decision, p. 11, Records, p. 1150), when the first list of VIVA films was
sent by Mr. Del Rosario to ABS-CBN. The Vice President of ABS-CBN, Ms. Charo
Santos-Concio, sent a letter dated January 6, 1992 (Exhibit 3, Records, p. 89)

where ABS-CBN exercised its right of refusal by rejecting the offer of VIVA.. As aptly
observed by the trial court, with the said letter of Mrs. Concio of January 6, 1992,
ABS-CBN had lost its right of first refusal. And even if We reckon the fifteen (15) day
period from February 27, 1992 (Exhibit 4 to 4-C) when another list was sent to
ABS-CBN after the letter of Mrs. Concio, still the fifteen (15) day period within which
ABS-CBN shall exercise its right of first refusal has already expired. 22

contract has already been effective, as the elements thereof, namely, consent,
object, and consideration were established. It then concludes that the Court of
Appeals pronouncements were not supported by law and jurisprudence, as per our
decision of 1 December 1995 in Limketkai Sons Milling, Inc. v. Court of Appeals, 23
which cited Toyota Shaw, Inc. v. Court of Appeals, 24 Ang Yu Asuncion v. Court of
Appeals, 25 and Villonco Realty Company v. Bormaheco. Inc. 26

Accordingly, respondent court sustained the award of actual damages consisting in

the cost of print advertisements and the premium payments for the counterbond,
there being adequate proof of the pecuniary loss which RBS had suffered as a result
of the filing of the complaint by ABS-CBN. As to the award of moral damages, the
Court of Appeals found reasonable basis therefor, holding that RBSs reputation was
debased by the filing of the complaint in Civil Case No. Q-92-12309 and by the
non-showing of the film Maging Sino Ka Man. Respondent court also held that
exemplary damages were correctly imposed by way of example or correction for the
public good in view of the filing of the complaint despite petitioners knowledge that
the contract with VIVA had not been perfected, It also upheld the award of attorneys
fees, reasoning that with ABS-CBNs act of instituting Civil Case No, Q-92-1209,
RBS was unnecessarily forced to litigate. The appellate court, however, reduced
the awards of moral damages to P2 million, exemplary damages to P2 million, and
attorneys fees to P500, 000.00.

Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor.
RBS spent for the premium on the counterbond of its own volition in order to negate
the injunction issued by the trial court after the parties had ventilated their respective
positions during the hearings for the purpose. The filing of the counterbond was an
option available to RBS, but it can hardly be argued that ABS-CBN compelled RBS
to incur such expense. Besides, RBS had another available option, i.e., move for the
dissolution or the injunction; or if it was determined to put up a counterbond, it could
have presented a cash bond. Furthermore under Article 2203 of the Civil Code, the
party suffering loss or injury is also required to exercise the diligence of a good
father of a family to minimize the damages resulting from the act or omission. As
regards the cost of print advertisements, RBS had not convincingly established that
this was a loss attributable to the non showing Maging Sino Ka Man; on the
contrary, it was brought out during trial that with or without the case or the injunction,
RBS would have spent such an amount to generate interest in the film.

On the other hand, respondent Court of Appeals denied VIVA and Del Rosarios
appeal because it was RBS and not VIVA which was actually prejudiced when the
complaint was filed by ABS-CBN.

ABS-CBN further contends that there was no clear basis for the awards of moral
and exemplary damages. The controversy involving ABS-CBN and RBS did not in
any way originate from business transaction between them. The claims for such
damages did not arise from any contractual dealings or from specific acts committed
by ABS-CBN against RBS that may be characterized as wanton, fraudulent, or
reckless; they arose by virtue only of the filing of the complaint, An award of moral
and exemplary damages is not warranted where the record is bereft of any proof
that a party acted maliciously or in bad faith in filing an action. 27 In any case, free
resort to courts for redress of wrongs is a matter of public policy. The law recognizes
the right of every one to sue for that which he honestly believes to be his right
without fear of standing trial for damages where by lack of sufficient evidence, legal
technicalities, or a different interpretation of the laws on the matter, the case would
lose ground. 28 One who makes use of his own legal right does no injury. 29 If
damage results front the filing of the complaint, it is damnum absque injuria. 30
Besides, moral damages are generally not awarded in favor of a juridical person,
unless it enjoys a good reputation that was debased by the offending party resulting
in social humiliation. 31

Its motion for reconsideration having been denied, ABS-CBN filed the petition in this
case, contending that the Court of Appeals gravely erred in
I
. . . RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN
PETITIONER AND PRIVATE RESPONDENT VIVA NOTWITHSTANDING
PREPONDERANCE OF EVIDENCE ADDUCED BY PETITIONER TO THE
CONTRARY.
II
. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF
PRIVATE RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE
RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEYS FEES IN FAVOR OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first refusal over
twenty-four titles under the 1990 Film Exhibition Agreement, as it had chosen only
ten titles from the first list. It insists that we give credence to Lopezs testimony that
he and Del Rosario met at the Tamarind Grill Restaurant, discussed the terms and
conditions of the second list (the 1992 Film Exhibition Agreement) and upon
agreement thereon, wrote the same on a paper napkin. It also asserts that the

As regards the award of attorneys fees, ABS-CBN maintains that the same had no
factual, legal, or equitable justification. In sustaining the trial courts award, the Court
of Appeals acted in clear disregard of the doctrines laid down in Buan v.
Camaganacan 32 that the text of the decision should state the reason why
attorneys fees are being awarded; otherwise, the award should be disallowed.
Besides, no bad faith has been imputed on, much less proved as having been
committed by, ABS-CBN. It has been held that where no sufficient showing of bad
faith would be reflected in a party s persistence in a case other than an erroneous
conviction of the righteousness of his cause, attorneys fees shall not be recovered
as cost. 33
On the other hand, RBS asserts that there was no perfected contract between

ABS-CBN and VIVA absent any meeting of minds between them regarding the
object and consideration of the alleged contract. It affirms that the ABS-CBNs claim
of a right of first refusal was correctly rejected by the trial court. RBS insist the
premium it had paid for the counterbond constituted a pecuniary loss upon which it
may recover. It was obliged to put up the counterbond due to the injunction procured
by ABS-CBN. Since the trial court found that ABS-CBN had no cause of action or
valid claim against RBS and, therefore not entitled to the writ of injunction, RBS
could recover from ABS-CBN the premium paid on the counterbond. Contrary to the
claim of ABS-CBN, the cash bond would prove to be more expensive, as the loss
would be equivalent to the cost of money RBS would forego in case the P30 million
came from its funds or was borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements for the
cancelled showing of the film Maging Sino Ka Man because the print
advertisements were put out to announce the showing on a particular day and hour
on Channel 7, i.e., in its entirety at one time, not a series to be shown on a periodic
basis. Hence, the print advertisement were good and relevant for the particular date
showing, and since the film could not be shown on that particular date and hour
because of the injunction, the expenses for the advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the
case and secured injunctions purely for the purpose of harassing and prejudicing
RBS. Pursuant then to Article 19 and 21 of the Civil Code, ABS-CBN must be held
liable for such damages. Citing Tolentino, 34 damages may be awarded in
cases of abuse of rights even if the act done is not illicit and there is abuse of rights
were plaintiff institutes and action purely for the purpose of harassing or prejudicing
the defendant.
In support of its stand that a juridical entity can recover moral and exemplary
damages, private respondents RBScited People v. Manero, 35
where it was
stated that such entity may recover moral and exemplary damages if it has a good
reputation that is debased resulting in social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS reputation has been debased by ABS-CBNs acts
in this case. When RBS was not able to fulfill its commitment to the viewing public to
show the film Maging Sino Ka Man on the scheduled dates and times (and on two
occasions that RBS advertised), it suffered serious embarrassment and social
humiliation. When the showing was canceled, late viewers called up RBS offices
and subjected RBS to verbal abuse (Announce kayo nang announce, hindi ninyo
naman ilalabas, nanloloko yata kayo) (Exh. 3-RBS, par. 3). This alone was not
something RBS brought upon itself. it was exactly what ABS-CBN had planned to
happen.
The amount of moral and exemplary damages cannot be said to be excessive. Two
reasons justify the amount of the award.
The first is that the humiliation suffered by RBS is national extent. RBS operations
as a broadcasting company is [sic] nationwide. Its clientele, like that of ABS-CBN,
consists of those who own and watch television. It is not an exaggeration to state,
and it is a matter of judicial notice that almost every other person in the country
watches television. The humiliation suffered by RBS is multiplied by the number of
televiewers who had anticipated the showing of the film Maging Sino Ka Man on
May 28 and November 3, 1992 but did not see it owing to the cancellation. Added to

this are the advertisers who had placed commercial spots for the telecast and to
whom RBS had a commitment in consideration of the placement to show the film in
the dates and times specified.
The second is that it is a competitor that caused RBS to suffer the humiliation. The
humiliation and injury are far greater in degree when caused by an entity whose
ultimate business objective is to lure customers (viewers in this case) away from the
competition. 36
For their part, VIVA and Vicente del Rosario contend that the findings of fact of the
trial court and the Court of Appeals do not support ABS-CBNs claim that there was
a perfected contract. Such factual findings can no longer be disturbed in this petition
for review under Rule 45, as only questions of law can be raised, not questions of
fact. On the issue of damages and attorneys fees, they adopted the arguments of
RBS.
The key issues for our consideration are (1) whether there was a perfected contract
between VIVA and ABS-CBN, and (2) whether RBS is entitled to damages and
attorneys fees. It may be noted that the award of attorneys fees of P212,000 in
favor of VIVA is not assigned as another error.
I.
The first issue should be resolved against ABS-CBN. A contract is a meeting of
minds between two persons whereby one binds himself to give something or to
render some service to another 37 for a consideration. There is no contract unless
the following requisites concur: (1) consent of the contracting parties; (2) object
certain which is the subject of the contract; and (3) cause of the obligation, which is
established. 38 A contract undergoes three stages:
(a) preparation, conception, or generation, which is the period of negotiation and
bargaining, ending at the moment of agreement of the parties;
(b) perfection or birth of the contract, which is the moment when the parties come to
agree on the terms of the contract; and
(c) consummation or death, which is the fulfillment or performance of the terms
agreed upon in the contract. 39
Contracts that are consensual in nature are perfected upon mere meeting of the
minds, Once there is concurrence between the offer and the acceptance upon the
subject matter, consideration, and terms of payment a contract is produced. The
offer must be certain. To convert the offer into a contract, the acceptance must be
absolute and must not qualify the terms of the offer; it must be plain, unequivocal,
unconditional, and without variance of any sort from the proposal. A qualified
acceptance, or one that involves a new proposal, constitutes a counter-offer and is a
rejection of the original offer. Consequently, when something is desired which is not
exactly what is proposed in the offer, such acceptance is not sufficient to generate
consent because any modification or variation from the terms of the offer annuls the
offer. 40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill
on 2 April 1992 to discuss the package of films, said package of 104 VIVA films was
VIVAs offer to ABS-CBN to enter into a new Film Exhibition Agreement. But
ABS-CBN, sent, through Ms. Concio, a counter-proposal in the form of a draft

contract proposing exhibition of 53 films for a consideration of P35 million. This

counter-proposal could be nothing less than the counter-offer of Mr. Lopez during
his conference with Del Rosario at Tamarind Grill Restaurant. Clearly, there was no
acceptance of VIVAs offer, for it was met by a counter-offer which substantially
varied the terms of the offer.
ABS-CBNs reliance in Limketkai Sons Milling, Inc. v. Court of Appeals 41 and
Villonco Realty Company v. Bormaheco, Inc., 42 is misplaced. In these cases, it
was held that an acceptance may contain a request for certain changes in the terms
of the offer and yet be a binding acceptance as long as it is clear that the meaning
of the acceptance is positively and unequivocally to accept the offer, whether such
request is granted or not. This ruling was, however, reversed in the resolution of 29
March 1996, 43 which ruled that the acceptance of all offer must be unqualified and
absolute, i.e., it must be identical in all respects with that of the offer so as to
produce consent or meeting of the minds.
On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised
counter-offer were not material but merely clarificatory of what had previously been
agreed upon. It cited the statement in Stuart v.Franklin Life Insurance Co. 44 that a
vendors change in a phrase of the offer to purchase, which change does not
essentially change the terms of the offer, does not amount to a rejection of the offer
and the tender of a counter-offer. 45 However, when any of the elements of the
contract is modified upon acceptance, such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of VIVAs offer. Hence,
they underwent a period of bargaining. ABS-CBN then formalized its
counter-proposals or counter-offer in a draft contract, VIVA through its Board of
Directors, rejected such counter-offer. Even if it be conceded arguendo that Del
Rosario had accepted the counter-offer, the acceptance did not bind VIVA, as there
was no proof whatsoever that Del Rosario had the specific authority to do so.
Under Corporation Code, 46 unless otherwise provided by said Code, corporate
powers, such as the power; to enter into contracts; are exercised by the Board of
Directors. However, the Board may delegate such powers to either an executive
committee or officials or contracted managers. The delegation, except for the
executive committee, must be for specific purposes, 47 Delegation to officers makes
the latter agents of the corporation; accordingly, the general rules of agency as to
the bindings effects of their acts would apply. 48 For such officers to be deemed
fully clothed by the corporation to exercise a power of the Board, the latter must
specially authorize them to do so. That Del Rosario did not have the authority to
accept ABS-CBNs counter-offer was best evidenced by his submission of the draft
contract to VIVAs Board of Directors for the latters approval. In any event, there
was between Del Rosario and Lopez III no meeting of minds. The following findings
of the trial court are instructive:
A number of considerations militate against ABS-CBNs claim that a contract was
perfected at that lunch meeting on April 02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred
to the price and the number of films, which he wrote on a napkin. However, Exhibit
C contains numerous provisions which, were not discussed at the Tamarind Grill, if
Lopez testimony was to be believed nor could they have been physically written on
a napkin. There was even doubt as to whether it was a paper napkin or a cloth

napkin. In short what were written in Exhibit C were not discussed, and therefore
could not have been agreed upon, by the parties. How then could this court compel
the parties to sign Exhibit C when the provisions thereof were not previously
agreed upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of
the contract was 14 films. The complaint in fact prays for delivery of 14 films. But
Exhibit C mentions 53 films as its subject matter. Which is which If Exhibits C
reflected the true intent of the parties, then ABS-CBNs claim for 14 films in its
complaint is false or if what it alleged in the complaint is true, then Exhibit C did not
reflect what was agreed upon by the parties. This underscores the fact that there
was no meeting of the minds as to the subject matter of the contracts, so as to
preclude perfection thereof. For settled is the rule that there can be no contract
where there is no object which is its subject matter (Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. D)
states:
We were able to reach an agreement. VIVA gave us the exclusive license to show
these fourteen (14) films, and we agreed to pay Viva the amount of P16,050,000.00
as well as grant Viva commercial slots worth P19,950,000.00. We had already
earmarked this P16,050,000.00.
which gives a total consideration of
P16,050,000.00. equals P36,000,000.00).

P36

million

(P19,950,000.00

plus

On cross-examination Mr. Lopez testified:

Q. What was written in this napkin?
A. The total price, the breakdown the known Viva movies, the 7 blockbuster movies
and the other 7 Viva movies because the price was broken down accordingly. The
none [sic] Viva and the seven other Viva movies and the sharing between the cash
portion and the concerned spot portion in the total amount of P35 million pesos.
Now, which is which? P36 million or P35 million? This weakens ABS-CBNs claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit
C to Mr. Del Rosario with a handwritten note, describing said Exhibit C as a
draft. (Exh. 5 Viva; tsn pp. 23-24 June 08, 1992). The said draft has a well
defined meaning.
Since Exhibit C is only a draft, or a tentative, provisional or preparatory writing
prepared for discussion, the terms and conditions thereof could not have been
previously agreed upon by ABS-CBN and Viva Exhibit C could not therefore legally
bind Viva, not having agreed thereto. In fact, Ms. Concio admitted that the terms and
conditions embodied in Exhibit C were prepared by ABS-CBNs lawyers and there
was no discussion on said terms and conditions. . . .
As the parties had not yet discussed the proposed terms and conditions in Exhibit
C, and there was no evidence whatsoever that Viva agreed to the terms and
conditions thereof, said document cannot be a binding contract. The fact that Viva
refused to sign Exhibit C reveals only two [sic] well that it did not agree on its terms
and conditions, and this court has no authority to compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at

the Tamarind Grill was only provisional, in the sense that it was subject to approval
by the Board of Directors of Viva. He testified:
The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del
Rosario had no authority to bind Viva to a contract with ABS-CBN until and unless
its Board of Directors approved it. The complaint, in fact, alleges that Mr. Del
Rosario is the Executive Producer of defendant Viva which is a corporation. (par.
2, complaint). As a mere agent of Viva, Del Rosario could not bind Viva unless what
he did is ratified by its Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210;
Arnold vs. Willets and Paterson, 44 Phil. 634). As a mere agent, recognized as such
by plaintiff, Del Rosario could not be held liable jointly and severally with Viva and
his inclusion as party defendant has no legal basis. (Salonga vs. Warner Barner
[sic] , COLTA , 88 Phil. 125; Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations in the complaint are clear
admissions that what was supposed to have been agreed upon at the Tamarind Grill
between Mr. Lopez and Del Rosario was not a binding agreement. It is as it should
be because corporate power to enter into a contract is lodged in the Board of
Directors. (Sec. 23, Corporation Code). Without such board approval by the Viva
board, whatever agreement Lopez and Del Rosario arrived at could not ripen into a
valid contract binding upon Viva (Yao Ka Sin Trading vs. Court of Appeals, 209
SCRA 763). The evidence adduced shows that the Board of Directors of Viva
rejected Exhibit C and insisted that the film package for 140 films be maintained
(Exh. 7-1 Viva ). 49
The contention that ABS-CBN had yet to fully exercise its right of first refusal over
twenty-four films under the 1990 Film Exhibition Agreement and that the meeting
between Lopez and Del Rosario was a continuation of said previous contract is
untenable. As observed by the trial court, ABS-CBN right of first refusal had already
been exercised when Ms. Concio wrote to VIVA ticking off ten films, Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was
sent, was for an entirely different package. Ms. Concio herself admitted on
cross-examination to having used or exercised the right of first refusal. She stated
that the list was not acceptable and was indeed not accepted by ABS-CBN, (TSN,
June 8, 1992, pp. 8-10). Even Mr. Lopez himself admitted that the right of the first
refusal may have been already exercised by Ms. Concio (as she had). (TSN, June 8,
1992, pp. 71-75). Del Rosario himself knew and understand [sic] that ABS-CBN has
lost its rights of the first refusal when his list of 36 titles were rejected (Tsn, June 9,
1992, pp. 10-11) 50
II
However, we find for ABS-CBN on the issue of damages. We shall first take up
actual damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law
on actual or compensatory damages. Except as provided by law or by stipulation,
one is entitled to compensation for actual damages only for such pecuniary loss
suffered by him as he has duly proved. 51 The indemnification shall comprehend
not only the value of the loss suffered, but also that of the profits that the obligee
failed to obtain. 52 In contracts and quasi-contracts the damages which may be
awarded are dependent on whether the obligor acted with good faith or otherwise, It
case of good faith, the damages recoverable are those which are the natural and
probable consequences of the breach of the obligation and which the parties have

foreseen or could have reasonably foreseen at the time of the constitution of the
obligation. If the obligor acted with fraud, bad faith, malice, or wanton attitude, he
shall be responsible for all damages which may be reasonably attributed to the
non-performance of the obligation. 53 In crimes and quasi-delicts, the defendant
shall be liable for all damages which are the natural and probable consequences of
the act or omission complained of, whether or not such damages has been foreseen
or could have reasonably been foreseen by the defendant. 54
Actual damages may likewise be recovered for loss or impairment of earning
capacity in cases of temporary or permanent personal injury, or for injury to the
plaintiffs business standing or commercial credit. 55
The claim of RBS for actual damages did not arise from contract, quasi-contract,
delict, or quasi-delict. It arose from the fact of filing of the complaint despite
ABS-CBNs alleged knowledge of lack of cause of action. Thus paragraph 12 of
RBSs Answer with Counterclaim and Cross-claim under the heading
COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has no cause of action
RBS. As a result thereof, RBS suffered actual damages in the amount of
P6,621,195.32. 56
Needless to state the award of actual damages cannot be comprehended under the
above law on actual damages. RBS could only probably take refuge under Articles
19, 20, and 21 of the Civil Code, which read as follows:
Art. 19. Every person must, in the exercise of his rights and in the performance of
his duties, act with justice, give everyone his due, and observe honesty and good
faith.
Art. 20. Every person who, contrary to law, wilfully or negligently causes damage to
another, shall indemnify the latter for tile same.
Art. 21. Any person who willfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the
damage.
It may further be observed that in cases where a writ of preliminary injunction is
issued, the damages which the defendant may suffer by reason of the writ are
recoverable from the injunctive bond. 57 In this case, ABS-CBN had not yet filed the
required bond; as a matter of fact, it asked for reduction of the bond and even went
to the Court of Appeals to challenge the order on the matter, Clearly then, it was not
necessary for RBS to file a counterbond. Hence, ABS-CBN cannot be held
responsible for the premium RBS paid for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for Maging Sino Ka
Man for lack of sufficient legal basis. The RTC issued a temporary restraining order
and later, a writ of preliminary injunction on the basis of its determination that there
existed sufficient ground for the issuance thereof. Notably, the RTC did not dissolve
the injunction on the ground of lack of legal and factual basis, but because of the
plea of RBS that it be allowed to put up a counterbond.
As regards attorneys fees, the law is clear that in the absence of stipulation,
attorneys fees may be recovered as actual or compensatory damages under any of
the circumstances provided for in Article 2208 of the Civil Code. 58

The general rule is that attorneys fees cannot be recovered as part of damages
because of the policy that no premium should be placed on the right to litigate. 59
They are not to be awarded every time a party wins a suit. The power of the court to
award attorneys fees under Article 2208 demands factual, legal, and equitable
justification. 60 Even when claimant is compelled to litigate with third persons or to
incur expenses to protect his rights, still attorneys fees may not be awarded where
no sufficient showing of bad faith could be reflected in a partys persistence in a
case other than erroneous conviction of the righteousness of his cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil
Code. Article 2217 thereof defines what are included in moral damages, while Article
2219 enumerates the cases where they may be recovered, Article 2220 provides
that moral damages may be recovered in breaches of contract where the defendant
acted fraudulently or in bad faith. RBSs claim for moral damages could possibly fall
only under item (10) of Article 2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Moral damages are in the category of an award designed to compensate the
claimant for actual injury suffered. and not to impose a penalty on the wrongdoer. 62
The award is not meant to enrich the complainant at the expense of the defendant,
but to enable the injured party to obtain means, diversion, or amusements that will
serve to obviate then moral suffering he has undergone. It is aimed at the
restoration, within the limits of the possible, of the spiritual status quo ante, and
should be proportionate to the suffering inflicted. 63 Trial courts must then guard
against the award of exorbitant damages; they should exercise balanced restrained
and measured objectivity to avoid suspicion that it was due to passion, prejudice, or
corruption on the part of the trial court. 64
The award of moral damages cannot be granted in favor of a corporation because,
being an artificial person and having existence only in legal contemplation, it has no
feelings, no emotions, no senses, It cannot, therefore, experience physical suffering
and mental anguish, which call be experienced only by one having a nervous
system. 65 The statement in People v. Manero 66 and Mambulao Lumber Co. v.
PNB 67 that a corporation may recover moral damages if it has a good reputation
that is debased, resulting in social humiliation is an obiter dictum. On this score
alone the award for damages must be set aside, since RBS is a corporation.

prejudicing or injuring another. Article 20 speaks of the general sanction for all other
provisions of law which do not especially provide for their own sanction; while Article
21 deals with acts contra bonus mores, and has the following elements; (1) there is
an act which is legal, (2) but which is contrary to morals, good custom, public order,
or public policy, and (3) and it is done with intent to injure.72
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad
faith implies a conscious and intentional design to do a wrongful act for a dishonest
purpose or moral obliquity. 73 Such must be substantiated by evidence. 74
There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It
was honestly convinced of the merits of its cause after it had undergone serious
negotiations culminating in its formal submission of a draft contract. Settled is the
rule that the adverse result of an action does not per se make the action wrongful
and subject the actor to damages, for the law could not have meant to impose a
penalty on the right to litigate. If damages result from a persons exercise of a right, it
is damnum absque injuria. 75
WHEREFORE, the instant petition is GRANTED. The challenged decision of the
Court of Appeals in CA-G.R. CV No, 44125 is hereby REVERSED except as to
unappealed award of attorneys fees in favor of VIVA Productions, Inc.

G.R. No. 118692

July 28, 2006

COASTAL PACIFIC TRADING, INC., petitioner,

vs.
SOUTHERN ROLLING MILLS, CO., INC. (now known as Visayan Integrated
Steel Corporation),
Directors owe loyalty and fidelity to the corporation they serve and to its creditors.
When these directors sit on the board as representatives of shareholders who are
also major creditors, they cannot be allowed to use their offices to secure undue
advantage for those shareholders, in fraud of other creditors who do not have a
similar representation in the board of directors.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of
the Civil Code. These are imposed by way of example or correction for the public
good, in addition to moral, temperate, liquidated or compensatory damages. 68
They are recoverable in criminal cases as part of the civil liability when the crime
was committed with one or more aggravating circumstances; 69 in quasi-contracts,
if the defendant acted with gross negligence; 70 and in contracts and
quasi-contracts, if the defendant acted in a wanton, fraudulent, reckless, oppressive,
or malevolent manner. 71

The Case: Before us is a Petition for Review3 under Rule 45 of the Rules of Court,
assailing the September 27, 1994 Decision4 and the January 5, 1995 Resolution5 of
the Court of Appeals (CA) in CA-GR CV No. 39385. The challenged Decision
disposed as follows:

It may be reiterated that the claim of RBS against ABS-CBN is not based on contract,
quasi-contract, delict, or quasi-delict, Hence, the claims for moral and exemplary
damages can only be based on Articles 19, 20, and 21 of the Civil Code.

The challenged Resolution denied reconsideration.

The elements of abuse of right under Article 19 are the following: (1) the existence of
a legal right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of

"WHEREFORE, the decision of the Regional Trial Court is hereby AFFIRMED

in toto."6

The Facts
Respondent Southern Rolling Mills Co., Inc. was organized in 1959 for the purpose

of engaging in a steel processing business. It was later renamed Visayan Integrated

Steel Corporation (VISCO).7
On December 11, 1961, VISCO obtained a loan from the Development Bank of the
Philippines (DBP) in the amount of P836,000. This loan was secured by a duly
recorded Real Estate Mortgage over VISCO's three (3) parcels of land, including all
the machineries and equipment found there.8
On August 15, 1963, VISCO entered into a Loan Agreement9 with respondent banks
(later referred to as "Consortium"10) for the amount of US$5,776,186.71 or
P21,745,707.36 (at the then prevailing exchange rate) to finance its importation of
various raw materials. To secure the full and faithful performance of its obligation,
VISCO executed on August 3, 1965, a second mortgage11 over the same land,
machineries and equipment in favor of respondent banks. This second mortgage
remained unrecorded.12
VISCO eventually defaulted in the performance of its obligation to respondent banks.
This prompted the Consortium to file on January 26, 1966, Civil Case No. 1841,
which was a Petition for Foreclosure of Mortgage with Petition for Receivership.13
This case was eventually dismissed for failure to prosecute.14
Afterwards, negotiations were conducted between VISCO and respondent banks for
the conversion of the unpaid loan into equity in the corporation.15 Vicente Garcia,
vice-president of VISCO and of Far East Bank and Trust Company (FEBTC),16
testified that sometime in 1966, the creditor banks were given management of and
control over VISCO.17 In time,18 in order to reorganize it, its principal creditors
agreed to group themselves into a creditors' consortium.19 As a result of the
reorganized corporate structure of VISCO, respondent banks acquired more than
90 percent of its equity. Notwithstanding this conversion, it remained indebted to the
Consortium in the amount of P16,123,918.02.20
Meanwhile from 1964 to 1965, VISCO also entered into a processing agreement
with Petitioner Coastal Pacific Trading, Inc. ("Coastal"). Pursuant to that agreement,
petitioner delivered 3,000 metric tons of hot rolled steel coils to VISCO for
processing into block iron sheets. Contrary to their agreement, the latter was able to
process and deliver to petitioner only 1,600 metric tons of those sheets. Hence, a
total of 1,400 metric tons of hot rolled steel coils remained unaccounted for.21 The
fact that petitioner was among the major creditors of VISCO was recognized by the
latter's vice-president, Vicente Garcia.22 Indeed, on October 9, 1970, it forwarded to
petitioner a proposal for a Compromise Agreement.23 Subsequent developments
indicate, however, that the parties did not arrive at a compromise.
Two years later, on October 20, 1972, Garcia wrote Arturo P. Samonte,
representative of FEBTC24 and director of VISCO,25 a letter that reads as follows:

insure the safety of the unexpended funds of VISCO from any contingencies in
the future. As of now VISCO's account with the Far East Bank is in the name of
BOARD OF TRUSTEES VISCO CONSORTIUM OF BANKS. It may be better
to eliminate the term VISCO and just call the account BOARD OF TRUSTEES
CONSORTIUM OF BANKS."26
According to a notation on this letter, an FEBTC assistant cashier named Silverio
duly complied with the above request.27 Indeed, events would later reveal that the
bank held a deposit account in the name of the "Board of Trustees-Consortium of
Banks."28
On September 20, 1974, respondent banks held a luncheon meeting29 in the
FEBTC Boardroom to discuss how they would address the insistent demands of the
DBP for VISCO to settle its obligations. Jose B. Fernandez, Jr., VISCO's then
chairman and concurrent FEBTC President,30 expressed his apprehension that
either the DBP or the government would soon pursue extra-judicial foreclosure
against VISCO.
In this regard, Fernandez informed the members of the Consortium that he had
received letter-offers from two corporations that were interested in purchasing
VISCO's generator sets.31 After deliberating on the matter, the members decided to
approve the sale of these two generator sets to Filmag (Phil.), Inc. It was also
agreed that the proceeds of the sale would be used to pay VISCO's indebtedness to
DBP and to secure the release of the first mortgage.32 The Consortium agreed with
Filmag on the following payment procedure:
"The payment procedure will be as follows: Filmag pays to VISCO; VISCO
pays the Consortium; and then the Consortium pays the DBP with the
arrangement that the Consortium subrogates to the rights of the DBP as first
mortgagee to the VISCO plant. The Consortium further agreed to call a meeting
of the VISCO board of directors for the purpose of considering and formally
approving the proposed sale of the 2 generators to Filmag."33
Accordingly, on October 4, 1974, the VISCO board of directors had a meeting in the
FEBTC Boardroom.34 The board was asked to decide how VISCO would settle its
debt to DBP: whether by asking the Consortium to put up the necessary amount or
by accepting Filmag's offer to purchase VISCO's generator sets.35 The latter option
was unanimously chosen36 in a Resolution worded as follows:
"RESOLVED, That the offer of Filmag (Philippines) Inc. in their letters of
December 14, 1973 and March 19, 1974 to purchase two (2) units of generator
sets, including standard accessories, of VISCO is hereby accepted under the
following terms and conditions:
xxx

"In the light of recent development on IISMI and Elirol which were taken over by
the government, I suggest that we take certain precautionary measures to
protect the interests of the Consortium of Banks. One such step may be to

xxx

xxx

"2. The price for the two (2) generator sets is PESOS: ONE MILLION FIVE
HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY TWO ONLY

(P1,550,572) x x x and shall be payable upon signing of a letter-agreement and

which shall be later formalized into a Deed of Sale. The amount, however, shall
be held by the depositary bank of VISCO, Far East Bank and Trust Company,
in escrow and shall be at VISCO's disposal upon the signing of Filmag of the
receipt/s of delivery of the said two (2) generator sets.
xxx

xxx

xxx

"FURTHER RESOLVED, That the sales proceeds of PESOS: ONE MILLION

FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY TWO ONLY
(P1,550,572) shall be utilized to pay the liability of VISCO with the
Development Bank of the Philippines."37
The sale of the generator sets to Filmag took place and, according to the testimony
of Garcia, the proceeds were deposited with FEBTC in a special account held in
trust for the Consortium.38
A year after, on May 22, 1975, petitioner filed with the Pasig Regional Trial Court
(RTC) a Complaint39 for Recovery of Property and Damages with Preliminary
Injunction and Attachment.40 Petitioner's allegation was that VISCO had fraudulently
misapplied or converted the finished steel sheets entrusted to it.41 On June 3, 1975,
Judge Pedro A. Revilla issued a Writ of Preliminary Attachment over its properties
that were not exempt from execution.42
In compliance with the Writ, Sheriff Andres R. Bonifacio attempted to garnish the
account of VISCO in FEBTC,43which denied holding that account. Instead, the bank
admitted that what it had was a deposit account in the name of the Board of
Trustees-Consortium of Banks, particularly Account No. 2479-1.44 FEBTC reported
to Sheriff Bonifacio that it had instructed its accounting department to hold the
account, "subject to the prior liens or rights in favor of [FEBTC] and other entities."45

On November 3, 1980, Southern Industrial Projects, Inc. (SIP), which was a

judgment creditor52 of VISCO, filed Civil Case No. 3383. It was a Complaint53 for
Declaration of Nullity of the Mortgage and Injunction to Restrain the Consortium
from Proceeding with the Auction Sale. SIP argued that DBP had actually been paid
by VISCO with the proceeds from the sale of the generator sets. Hence, the
mortgage in favor of that bank had been extinguished by the payment and could not
have been assigned to the Consortium.54 A temporary restraining order against the
latter was thus successfully obtained; the provincial sheriff could not proceed with
the auction sale of the mortgaged assets.55 But SIP's victory was short-lived. On
March 2, 1984, Civil Case No. 3383 was decided in favor of the Consortium.56
Judge Andrew S. Namocatcat ruled thus:
"The evidence of the plaintiff is only anchored on the fact that the deed of
assignment executed by the DBP in favor of the defendant banks is an act
which would defraud creditors. It is the thinking of the court that the payment of
defendant banks to DBP of VISCO's loan and the execution of the DBP of the
deed of assignment of credit and rights to the defendant banks is in accordance
with Article 1302 and 1303 of the New Civil Code, and said transaction is not to
defraud creditors because the defendant banks are also creditors of VISCO."57
On June 14, 1985, this Decision was affirmed by the Intermediate Appellate Court in
CA-GR No. 03719. 58
The auction sale of VISCO's mortgaged properties took place on March 19, 1985
and the Consortium emerged as the highest bidder.59 The Certificate of Sale60 in its
favor was registered on May 22, 1985.61
On June 27, 1985, VISCO executed through Vicente Garcia, a Deed of Assignment
of Right of Redemption62 in favor of the National Steel Corporation (NSC), in
consideration of P100,000. 63 On the same day, the Consortium sold the foreclosed
real and personal properties of VISCO to the NSC.64

While petitioner's case was pending, VISCO's vice-president (Garcia) and director
(Arturo Samonte) requested from FEBTC a cash advance of P1,342,656.88 for the
full settlement of VISCO's account with DBP.46 On June 29, 1976, FEBTC complied
by issuing Check No. FE239249 for P1,342,656.88, payable to "[DBP] for [the]
account of VISCO."47 On even date, DBP executed a Deed of Assignment of
Mortgage Rights Interest and Participation48 in favor of Respondent Consortium of
Banks. The deed stated that, in consideration of the payment made, all of DBP's
rights under the mortgage agreement with VISCO were being transferred and
conveyed to the Consortium.49 Thus did the latter obtain DBP's recorded primary
lien over the real and chattel properties of VISCO.

On August 16, 1985, petitioner filed against respondents Civil Case No. 3929, which
was a Complaint for Annulment or Rescission of Sale, Damages with Preliminary
Injunction.65 Coastal alleged that, despite the Writ of Attachment issued in its favor
in the still pending Civil Case No. 21272, the Consortium had sold the properties to
NSC. Further, despite the attachment of the properties, the Consortium was
allegedly able to sell and place them beyond the reach of VISCO's other creditors.66
Thus imputing bad faith to respondent banks' actions, petitioner said that the sale
was intended to defraud VISCO's other creditors.

On September 23, 1980, the Consortium filed a Petition for Extra-Judicial

Foreclosure with the Office of the Provincial Sheriff of Bohol.50 The Notice of
Extrajudicial Foreclosure of Mortgage, published in the Bohol Newsweek on
October 10, 1980, announced that the auction sale was scheduled for November 11,
1980.51

Petitioner further contended that the assignment in favor of the Consortium was
fraudulent, because DBP had been paid with the proceeds from the sale of the
generator sets owned by VISCO, and not with the Consortium's own funds.67
Petitioner offered as proof the minutes of the meeting68 in which the transaction was
decided. Respondent Consortium countered that the minutes would in fact readily
disclose that the intention of its members was to apply the proceeds to a partial
payment to DBP.69 Respondent insisted that it used its own funds to pay the bank.70

On August 20, 1985, a temporary restraining order (TRO)71 was issued by Judge
Mercedes Gozo-Dadole against VISCO, enjoining it from proceeding with the
removal or disposal of its properties; the execution and/or consummation of the
foreclosure sale; and the sale of the foreclosed properties to NSC. On September 6,
1985, the trial court issued an Order requiring the Consortium to post a bond of P25
million in favor of Coastal for damages that petitioner may suffer from the lifting of
the TRO. The bond filed was then approved by the RTC in its Order of September
13, 1985.72
On December 15, 1986, Civil Case No. 21272 was finally decided by Judge Nicolas
P. Lapena, Jr., in favor of Coastal.73 VISCO was ordered to pay petitioner the sum of
P851,316.19 with interest at the legal rate, plus attorney's fees of P50,000.00 and
costs.74 Coastal filed a Motion for Execution,75 but the judgment has remained
unsatisfied to date.
On January 5, 1992, a Decision76 on Civil Case No. 3929 was rendered as follows:
"WHEREFORE, this Court hereby renders judgment in favor of the defendants
and against the plaintiff Coastal Pacific Trading, Inc. BY WAY OF THE MAIN
COMPLAINT, to wit:
"1. Declaring the extrajudicial foreclosure sale conducted by the sheriff
and the corresponding certificate of sale executed by the defendant
sheriffs on March 15, 1985 relative to the real properties of the defendant
SRM/VISCO of Cortes, Bohol, Philippines, which were registered in the
Register of Deeds of Bohol, on May 22, 1985 and the Transfer of
Assignment to the defendant National Steel Corporation of any or part of
the foreclosed properties arising from the extrajudicial foreclosure sale as
valid and legal;
"2. Ordering the plaintiff Coastal Pacific Trading Inc. to pay the defendant
Consortium of Banks[,] Southern Rolling Mills, Co., Inc., Far East Bank &
Trust Company, Philippine Commercial Industrial Bank, Equitable Banking
Corporation, Prudential Bank, Board of Trustees-Consortium of Banks[VISCO], United Coconut Planters Bank, City Trust Banking Corporation,
Associated Bank, Insular Bank of Asia and America, International
Corporate Bank, Commercial Bank of Manila, Bank of the Philippine
Islands and the National Steel Corporation in the instant case the amount
of FIVE HUNDRED THOUSAND PESOS (P500,000.00) representing
damages;
"3. Ordering the plaintiff The (sic) Coastal Pacific Trading Inc. to pay the
defendants the amount of FIFTEEN THOUSAND PESOS (P15,000.00)
representing attorney's fees;
"4. Dismissing the Amended Complaint of the plaintiff;
"5. Ordering the plaintiff to pay the cost; AND

"BY WAY OF CROSS CLAIM INTERPOSED

"BY THE DEFENDANT National Steel Corporation against the Consortium of
Banks and SRM/VISCO, the same is dismissed for lack of merit, without
pronouncement as to cost."77
Insisting that the trial court erred in holding that it had failed to prove its case by
preponderance of evidence, Coastal filed an appeal with the CA. Allegedly, the
purported insufficiency of proof was based on the sole ground that petitioner did not
file an objection when the properties were sold on execution. It contended that the
court a quo had arrived at this erroneous conclusion by relying on inapplicable
jurisprudence.78
Additionally, Coastal argued that the trial court had erred in not annulling the
foreclosure proceedings and sale for being fictitious and done to defraud petitioner
as VISCO's creditor. Supposedly, the DBP mortgage had already been extinguished
by payment; thus, the bank could not have assigned the contract to the
Consortium.79
Petitioner also prayed for the annulment of the sale in favor of NSC on the ground
that the latter was a party to the fraudulent foreclosure and, hence, not a buyer in
good faith.80
Ruling of the Court of Appeals
At the outset, the CA stressed that the validity of the Consortium's mortgage,
foreclosure, and assignments had already been upheld in CA-GR CV No. 03719,
entitled Southern Industrial Projects v. United Coconut Planters Bank81 Citing
Valencia v. RTC of Quezon City, Br. 9082 and Vda. de Cruzo v. Carriaga,83 the CA
explained that the absolute identity of parties was not necessary for the application
of res judicata. All that was required was a shared identity of interests, as shown by
the identity of reliefs sought by one person in a prior case and by another in a
subsequent case.
While Coastal was not a party to Southern Industrial Projects, it should nevertheless
be bound by that Decision, because it had raised substantially the same claim and
cause of action as SIP, according to the appellate court. The CA held that the basic
reliefs sought by Coastal and SIP were substantially the same: the nullification of
the Deed of Assignment in favor of the Consortium, the foreclosure sale, and the
subsequent sale to NSC. Because this identity of reliefs sought showed an identity
of interests, the CA concluded that it need not rule on those issues.84
As to the issue that the DBP mortgage had been extinguished by payment, the CA
quoted its earlier Decision inSouthern Industrial Projects:
"The evidence shows that the proceeds of the sale of the two generating sets
were applied by defendants-appellees in the payment of the outstanding
obligation of VISCO. It appears that said proceeds were deposited in the bank

account of the consortium of creditors to avoid it being garnished by the

creditors notwithstanding the set-off, VISCO was still indebted to the
defendants-appellees.

issues, x x x:"91

"The evidence x x x shows that upon VISCO's request for [cash] advance, the
Far East Banks (sic) and Trust Co., the manager of the consortium of creditors,
issued FEBTC check No. 239249 on June 29, 1976 in the amount of
P1,342,656.68 payable to the DBP to pay off its loan to the latter.

"Respondent Court of Appeals further erred in not annulling the Deed of

Assignment of the DBP mortgage x x x, the extrajudicial foreclosure
proceedings of the two mortgages x x x, and the separate sale of the land and
machineries as real and personal properties by the foreclosing banks to NSC,
as well as the assignment or waiver of SRM/Visco's legal right of redemption
over the foreclosed properties, for being fraudulently executed through
collusion among the [respondents] and in fraud of SRM/Visco's creditor,
[Petitioner] Coastal, x x x;"92

xxx

xxx

xxx

"x x x. A public document celebrated with all the legal formalities under the
safeguard of notarial certificate is evidence against a party, and a high degree
[of] proof is necessary to overcome the legal presumption that the recital is true.
The biased and interested testimony of one of the parties to such instrument
who attempts to vary or repudiate what it purports to be, cannot overcome the
evidentiary force of what is recited in the document."85
The appellate court also rejected petitioner's contention that the Consortium's
Petition for Extrajudicial Foreclosure was already barred by the earlier resort to a
judicial foreclosure. The CA clarified that in filing a Petition for Judicial Foreclosure,
the Consortium had pursued its right as junior encumbrancer. On the other hand,
the Consortium filed a Petition for Extrajudicial Foreclosure as a first encumbrancer
by virtue of DBP's assignment in its favor.86
The CA also rejected petitioner's theory of extinguishment of obligation by merger. It
observed that the merger could not have possibly taken place, because respondent
banks and VISCO were not creditors and debtors in their own right.87
Petitioner's Motion for Reconsideration,88 which was received by the CA on
November 15, 1994,89 was denied for lack of merit.
Hence, this Petition.90
Issues
Petitioner raises the following issues for our consideration:

"II

Stripped of nonessentials, the two issues may be restated as follows:

1. Whether the present action is barred by res judicata
2. Whether respondents disposed of VISCO's assets in fraud of the creditors
The Court's Ruling
The Petition is meritorious.
First Issue:
Res judicata
The CA cited Valencia v. RTC of Quezon City93 to support the finding that SIP and
Coastal were substantially the same parties. We distinguish.
In Valencia, the plaintiff-intervenor in the first case, Cario, claimed Lot 4 based on
an alleged purchase of Valencia's "squatter's rights" over the property. The trial court
dismissed the claim and held that no such purchase ever took place.94 It also held
that, on the assumption that a sale had taken place, the sale was null and void for
being contrary to the pertinent housing law. It also found that all current occupants
of Lot 4 were illegal squatters; thus, it ordered their ejectment.

"I

When this first case attained finality, Carino's daughter, Catbagan, filed another suit
against Valencia. Catbagan challenged the applicability of the ejectment Order
issued to her; as an occupant of the lot, she was allegedly not a party to the first
case. Her Petition was denied for lack of merit.95

"Respondent Court of Appeals, seemingly to avoid the irrefutable evidence of

fraud and collusion practised by [respondents] against [Petitioner] Coastal,
erroneously sustained the trial court's holding that the present case is barred by
res judicata because of the previous decision in the case of Southern Industrial
Projects, Inc., vs. United Coconut Planters Bank, CA-G.R. No. 03719,
considering that the elements that call for the application of this rule are not
present in the case at bar, and the exceptions allowed by this Honorable
Supreme Court are not applicable here for variance or distinction in facts and

The execution of the Decision in the first case was again forestalled when Llanes,
Cario's sister-in-law who was another occupant of Lot 4, filed another suit against
the same respondent. Like Cario, Llanes insisted on having purchased the subject
lot from Valencia.96 This Court ruled that the suit was barred by res judicata. There
was a substantial identity of parties, because the right claimed by both Cario and
Llanes were based on each one's alleged purchase of Valencia's "squatter's

rights."97
In the first case, sales of "squatter's rights" were already categorically declared null
and void for being contrary to law. Thus, Llanes' admission that she had purchased
Valencia's "squatter's rights" placed her in the same category as Cario. The
purchase could not be treated differently, because the final and executory Decision
held that all purchases of "squatter's rights" (regardless of who the purchasers were)
were null and void.98
Further, the earlier ruling held that "the present occupants are illegal squatters."
That ruling included Llanes, who was admittedly one of the occupants.99 Simply put,
she and Valencia were considered identical parties for purposes of res judicata,
because they were obviously litigating under the same void title and capacity as
vendees of "squatter's rights" and as occupants of Lot 4.
Moreover, we held in Valencia that Llanes' suit was merely a clear attempt to
prevent or delay the execution of the judgment in the first case, which had become
final by reason of the three affirmances by this Court. The pattern to obstruct the
execution of the first judgment was obvious: after Cario lost the first case, her
daughter filed a second one. When the daughter lost the second, the
daughter-in-law filed a third case. It may be observed that the three successive
plaintiffs were all occupants of the same property and belonged to the same family;
this fact was also indicative of their privity.
Given this background, it becomes clear that the finding of a substantial identity of
parties in Valencia was based on its peculiar factual circumstances, which are
different from those in the present case.
Unlike Llanes, Coastal is not asserting a right that has been categorically declared
null and void in a prior case. In fact, its right based on the processing agreement
was upheld in Civil Case No. 21272. Clearly, Coastal cannot be treated in the same
manner as Llanes.
The CA erred in applying Southern Industrial Projects v. United Coconut Planters
Bank100 as a bar by res judicatawith respect to the present case. For this principle to
apply, the following elements must concur: a) the former judgment was final; b) the
court that rendered it had jurisdiction over the subject matter and the parties; c) the
judgment was based on the merits; and, d) between the first and the second actions,
there is an identity of parties, subject matters, and causes of action.101
It is axiomatic that res judicata does not require an absolute, but only a substantial,
identity of parties. There is a substantial identity when there is privity between the
two parties or they are successors-in-interest by title subsequent to the
commencement of the action, litigating for the same thing, under the same title, and
in the same capacity.102 Petitioner was not acting in the same capacity as SIP when
it filed Civil Case No. 3383, which eventually became AC-GR CV No. 03719. It
brought this latter action as a creditor under a processing agreement with VISCO;
on the other hand, the latter was sued by SIP, based on an alleged breach of their

management contract. Very clearly, their rights were entirely distinct and separate
from each other. In no manner were these two creditors privies of each other.
The causes of action in the two Complaints were also different. Causes of action
arise from violations of rights. A single right may be violated by several acts or
omissions, in which case the plaintiff has only one cause of action. Likewise, a
single act or omission may violate several rights at the same time, as when the act
constitutes a violation of separate and distinct legal obligations.103 The violation of
each of these separate rights is a separate cause of action in itself.104 Hence,
although these causes of action arise from the same state of facts, they are distinct
and independent and may be litigated separately; recovery on one is not a bar to
subsequent actions on the others.105
In the present case, the right of SIP (arising from its management contract with
VISCO) is totally distinct and separate from the right of Coastal (arising from its
processing contract with VISCO). SIP and Coastal are asserting distinct rights
arising from different legal obligations of the debtor corporation. Thus, VISCO's
violation of those separate rights has given rise to separate causes of action.
The confusion in the resolution of the issue of identity of parties occurred, because
the two creditors were assailing the same transactions of VISCO on the same
grounds. Since the two cases they filed presented similar legal issues, the appellate
court held that its ruling in AC-GR CV No. 03719 was also applicable to the instant
case.
Common but palpable is this misconception of the doctrine of res judicata. Persons
do not become privies by the mere fact that they are interested in the same question
or in proving the same set of facts, or that one person is interested in the result of a
litigation involving the other. Hence, several creditors of one debtor cannot be
considered as identical parties for the purpose of assailing the acts of the debtor.
They have distinct credits, rights, and interests, such that the failure of one to
recover should not preclude the other creditors from also pursuing their legal
remedies.
Further, petitioner, which was not a party to Southern Industrial Projects (their
causes of action being separate and distinct), did not have the opportunity to be
heard in that case, much less to present its own evidence. Thus, to bind petitioner to
the Decision in that case would clearly violate its rights to due process. As a
separate party, it has the right to have its arguments and evidence evaluated on
their own merits.
Second Issue:
Fraud of Creditors
We now come to the heart of the Petition. Coastal alleges that the assignment of
mortgage, the extrajudicial foreclosure proceedings, and the sale of the properties
of VISCO should all be rescinded on the ground that they were done to defraud the
latter's creditors.

The CA found no merit in petitioner's arguments. It ruled that the assignment

conformed to the requirements of law; that the consideration for the assignment had
allegedly been given by FEBTC; and that, hence, the Consortium had a right to
foreclose on the mortgaged properties.
By focusing on the innate validity of these Contracts, the CA totally overlooked the
issue of fraud as a ground for rescission. Elementary is the principle that the validity
of a contract does not preclude its rescission. Under Articles 1380 and 1381 (3) of
the Civil Code, contracts that are otherwise valid between the contracting parties
may nonetheless be subsequently rescinded by reason of injury to third persons,
like creditors.106 In fact, rescission implies that there is a contract that, while initially
valid, produces a lesion or pecuniary damage to someone.107Thus, when the CA
confined itself to the issue of the validity of these contracts, it did not at all address
the heart of petitioner's cause of action: whether these transactions had been
undertaken by the Consortium to defraud VISCO's other creditors.
There is more than a preponderance of evidence showing the Consortium's
deliberate plan to defraud VISCO's other creditors.

Quite the opposite, they even took steps to hide VISCO's unexpended funds.
Garcia's 1972 letter to Samonte unmistakably reveals that they kept those funds in
an account named "Board of Trustees VISCO Consortium of Banks." This fact alone
shows an effort to hide, with the evident intent to keep, those funds for themselves.
The letter even says that, for the protection of the Consortium, the name "VISCO"
should be eliminated entirely, so that the account name would read "Board of
Trustees Consortium of Banks." Clearly, this particular move was found to be
necessary to avoid a takeover by the government, which was also a creditor of
VISCO.113 This express intent of the latter, under the direction and for the benefit of
the Consortium, corroborated petitioner's contention that respondent banks had
defrauded VISCO's creditors.
Assignment of Mortgage
in Favor of the Consortium Banks
The assignment of mortgage in favor of the Consortium also bears the earmarks of
fraud. Initially, respondent banks had agreed that VISCO should sell two of its
generator sets, so that the proceeds could be utilized to pay DBP. This plan was
direct, simple, and would extinguish the encumbrance in favor of the bank.

Consortium Banks as Directors

It will be recalled that Respondent Consortium took over management and control of
VISCO by acquiring 90 percent of the latter's equity. Thus, 9 out of the 10 directors
of the corporation were all officials of the Consortium,108 which may thus be said to
have effectively occupied and/or controlled the board. Significantly, nowhere in the
records can we find any denial by respondent of this allegation by petitioner.109
As directors of VISCO, the officials of the Consortium were in a position of trust; thus,
they owed it a duty of loyalty. This trust relationship sprang from the fact that they
had control and guidance over its corporate affairs and property.110 Their duty was
more stringent when it became insolvent or without sufficient assets to meet its
outstanding obligations that arose. Because they were deemed trustees of the
creditors in those instances, they should have managed the corporation's assets
with strict regard for the creditors' interests. When these directors became corporate
creditors in their own right, they should not have permitted themselves to secure any
undue advantage over other creditors.111 In the instant case, the Consortium
miserably failed to observe its duty of fidelity towards VISCO and its creditors.
Duty of the Consortium Banks
to VISCO's Creditors
Recall that as early as 1966, the Consortium, through its directors on the board of
VISCO, had already assumed management and control over the latter. Hence,
when VISCO recognized its outstanding liability to petitioner in 1970 and offered a
Compromise Agreement,112 respondent banks were already at the helm of the
debtor corporation. The members of the Consortium, therefore, cannot deny that
they were aware of those claims against the corporation. Nonetheless, they did not
adopt any measure to protect petitioner's credit.

Then, quite surprisingly, the Consortium set down the following payment procedure:
Filmag would pay VISCO; the latter would pay the Consortium, which would pay
DBP; and the Consortium would then subrogate DBP to the latter's rights as first
mortgagee. One is then led to ask: if the intention was to pay DBP; from the sales
proceeds of the generator sets, why did the money have to pass through the
Consortium?
The answer lies in the nature of respondent's mortgage. It will be recalled that this
mortgage remained unrecorded and not legally binding on the other creditors.114
Thus, if DBP had been directly paid by VISCO, the latter could have freed up its
properties to the satisfaction of all its other creditors. This procedure would have
been fair to all, but it was not followed by the Consortium.
Instead, the proceeds from the sale of the generator sets were first paid to
respondent banks, which used the money to pay DBP. The last step in the payment
procedure explains the reason for this preferred though roundabout manner of
payment. This final step entitled the Consortium to obtain DBP's primary lien
through an assignment by allowing it to pay VISCO's loan to the bank, without
incurring additional expenses.
In the end, by collecting the money from VISCO, respondent banks recovered what
they had ostensibly remitted to DBP. Moreover, the primary lien that respondent
banks acquired allowed them, as unsecured creditors of VISCO, to foreclose on the
assets of the corporation without regard to its inferior claims. It was a clever ruse
that would have worked, were it not done by creditors who were duty-bound, as
directors, not to take clever advantage of other creditors.
To be sure, there was undue advantage. The payment scheme devised by the

Consortium continued the efficacy of the primary lien, this time in its favor, to the
detriment of the other creditors. When one considers its knowledge that VISCO's
assets might not be enough to meet its obligations to several creditors,115 the
intention to defraud the other creditors is even more striking. Fraud is present when
the debtor knows that its actions would cause injury.116

if its vendors obtained their title through fraud.120 Pursuant to this principle, the
remedy of the defrauded creditor is to sue for damages against those who caused
or employed the fraud. Hence, petitioner is entitled to damages from the
Consortium.
Award of Damages

The assignment in favor of the Consortium was a rescissible contract for having
been undertaken in fraud of creditors.117 Article 1385 of the Civil Code provides for
the effect of rescission, as follows:
"Rescission creates the obligation to return the things which were the object of
the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can
return whatever he may be obliged to restore.
"Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad
faith.
"In this case, indemnity for damages may be demanded from the person
causing the loss."
Indeed, mutual restitution is required in all cases involving rescission. But when it is
no longer possible to return the object of the contract, an indemnity for damages
operates as restitution. The important consideration is that the indemnity for
damages should restore to the injured party what was lost.
In the case at bar, it is no longer possible to order the return of VISCO's properties.
They have already been sold to the NSC, which has not been shown to have acted
in bad faith. The party alleging bad faith must establish it by competent proof. Sans
that proof, purchasers are deemed to be in good faith, and their interest in the
subject property must not be disturbed. Purchasers in good faith are those who buy
the property of another without notice that some other person has a right to or
interest in the property; and who pay the full and fair price for it at the time of the
purchase, or before they get notice of some other persons' claim of interest in the
property.118
In the present case, petitioner failed to discharge its burden of proving bad faith on
the part of NSC. There is insufficient evidence on record that the latter participated
in the design to defraud VISCO's creditors. To NSC, petitioner imputes fraud from
the sole fact that the former was allegedly aware that its vendor, the Consortium,
had taken control over VISCO including the corporation's assets.119 We cannot
appreciate how knowledge of the takeover would necessarily implicate anyone in
the Consortium's fraudulent designs. Besides, NSC was not shown to be privy to the
information that VISCO had no other assets to satisfy other creditors' respective
claims.
The right of an innocent purchaser for value must be respected and protected, even

It is essential that for damages to be awarded, a claimant must satisfactorily prove

during the trial that they have a factual basis, and that the defendant's acts have a
causal connection to them.121 Thus, the question of damages should normally call
for a remand of the case to the lower court for further proceedings. Considering,
however, the length of time that petitioner's just claim has been thwarted, we find it
in the best interest of substantial justice to decide the issue of damages now on the
basis of the available records. A remand for further proceedings would only result in
a needless delay.
Going over the records of the case, we find that petitioner has a final and executory
judgment in its favor in Civil Case No. 21272. The judgment in that case reads as
follows:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs ordering
defendant VISCO/SRM to pay the plaintiffs the sum of P851,316.19 with
interest thereon at the legal rate from the filing of this complaint, plus attorney's
fees of P50,000.00 and to pay the costs."122
The foregoing is the judgment credit that petitioner cannot enforce against VISCO
because of Respondent Consortium's fraudulent disposition of the corporation's
assets. In other words, the above amounts define the extent of the actual damage
suffered by Coastal and the amount that respondent has to restore pursuant to
Article 1385.
On the basis of the finding of fraud, the award of exemplary damages is in order, to
serve as a warning to other creditors not to abuse their rights. Under Article 2229 of
the Civil Code, exemplary or corrective damages are imposed by way of example or
correction for the public good. By their nature, exemplary damages should be
imposed in an amount sufficient and effective to deter possible future similar acts by
respondent banks. The court finds the amount of P250,000 sufficient in the instant
case.
As a rule, a corporation is not entitled to moral damages because, not being a
natural person, it cannot experience physical suffering or sentiments like wounded
feelings, serious anxiety, mental anguish and moral shock.123 The only exception to
this rule is when the corporation has a good reputation that is debased, resulting in
its humiliation in the business realm.124 In the present case, the records do not show
any evidence that the name or reputation of petitioner has been sullied as a result of
the Consortium's fraudulent acts. Accordingly, moral damages are not warranted.
WHEREFORE, the Petition is GRANTED. The assailed Decision of the Court of

Appeals dated September 27, 1994, and its Resolution dated January 5, 1995, are
hereby REVERSED and SET ASIDE. Respondent Consortium of Banks is ordered
to PAY Petitioner Coastal Pacific Trading, Inc., the sum adjudged by the Regional
Trial Court of Pasig, Branch 167, in Civil Case No. 21272 entitled Coastal Pacific
Trading, Felix de la Costa, and Aurora del Banco v. Visayan Integrated Corporation,
to wit: "x x x the sum of P851,316.19 with interest thereon at the legal rate from the
filing of [the] [C]omplaint, plus attorney's fees of P50,000 and x x x the costs."
Respondent Consortium of Banks is further ordered to pay petitioner exemplary
damages in the amount of P250,000.

Let us begin with the less burdensome: if you have children taking medical
course at AMEC-BCCM, advise them to pass all subjects because if they fail in
any subject they will repeat their year level, taking up all subjects including
those they have passed already. Several students had approached me stating
that they had consulted with the DECS which told them that there is no such
regulation. If [there] is no such regulation why is AMEC doing the same?
xxx

SO ORDERED.
G.R. No. 141994

JUN ALEGRE:

January 17, 2005

FILIPINAS BROADCASTING NETWORK, INC., petitioner,

vs.
AGO MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE
OF MEDICINE, (AMEC-BCCM) and ANGELITA F. AGO, respondents.
DECISION
CARPIO, J.:

Second: Earlier AMEC students in Physical Therapy had complained that the
course is not recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if the subject
does not have an instructor - such greed for money on the part of AMECs
administration. Take the subject Anatomy: students would pay for the subject upon
enrolment because it is offered by the school. However there would be no instructor
for such subject. Students would be informed that course would be moved to a later
date because the school is still searching for the appropriate instructor.
xxx

The Case
This petition for review1 assails the 4 January 1999 Decision2 and 26 January 2000
Resolution of the Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals
affirmed with modification the 14 December 1992 Decision3 of the Regional Trial
Court of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of Appeals held
Filipinas Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre and
Carmelo Rima liable for libel and ordered them to solidarily pay Ago Medical and
Educational Center-Bicol Christian College of Medicine moral damages, attorneys
fees and costs of suit.
The Antecedents
"Expos" is a radio documentary4 program hosted by Carmelo Mel Rima ("Rima")
and Hermogenes Jun Alegre ("Alegre").5 Expos is aired every morning over
DZRC-AM which is owned by Filipinas Broadcasting Network, Inc. ("FBNI").
"Expos" is heard over Legazpi City, the Albay municipalities and other Bicol areas.6
In the morning of 14 and 15 December 1989, Rima and Alegre exposed various
alleged complaints from students, teachers and parents against Ago Medical and
Educational Center-Bicol Christian College of Medicine ("AMEC") and its
administrators. Claiming that the broadcasts were defamatory, AMEC and Angelita
Ago ("Ago"), as Dean of AMECs College of Medicine, filed a complaint for
damages7 against FBNI, Rima and Alegre on 27 February 1990. Quoted are
portions of the allegedly libelous broadcasts:

It is a public knowledge that the Ago Medical and Educational Center has survived
and has been surviving for the past few years since its inception because of funds
support from foreign foundations. If you will take a look at the AMEC premises youll
find out that the names of the buildings there are foreign soundings. There is a
McDonald Hall. Why not Jose Rizal or Bonifacio Hall? That is a very concrete and
undeniable evidence that the support of foreign foundations for AMEC is substantial,
isnt it? With the report which is the basis of the expose in DZRC today, it would be
very easy for detractors and enemies of the Ago family to stop the flow of support of
foreign foundations who assist the medical school on the basis of the latters
purpose. But if the purpose of the institution (AMEC) is to deceive students at cross
purpose with its reason for being it is possible for these foreign foundations to lift or
suspend their donations temporarily.8
xxx
On the other hand, the administrators of AMEC-BCCM, AMEC Science High
School and the AMEC-Institute of Mass Communication in their effort to
minimize expenses in terms of salary are absorbing or continues to accept
"rejects". For example how many teachers in AMEC are former teachers of
Aquinas University but were removed because of immorality? Does it mean that the
present administration of AMEC have the total definite moral foundation from
catholic administrator of Aquinas University. I will prove to you my friends, that
AMEC is a dumping ground, garbage, not merely of moral and physical misfits.
Probably they only qualify in terms of intellect. The Dean of Student Affairs of AMEC
is Justita Lola, as the family name implies. She is too old to work, being an old

woman. Is the AMEC administration exploiting the very [e]nterprising or

compromising and undemanding Lola? Could it be that AMEC is just patiently
making use of Dean Justita Lola were if she is very old. As in atmospheric situation
zero visibility the plane cannot land, meaning she is very old, low pay follows. By
the way, Dean Justita Lola is also the chairman of the committee on scholarship in
AMEC. She had retired from Bicol University a long time ago but AMEC has
patiently made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral and
physically misfit people. What does this mean? Immoral and physically misfits as
teachers.
May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that
your are no longer fit to teach. You are too old. As an aviation, your case is zero
visibility. Dont insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the
scholarship committee at that. The reason is practical cost saving in salaries,
because an old person is not fastidious, so long as she has money to buy the
ingredient of beetle juice. The elderly can get by thats why she (Lola) was taken in
as Dean.
xxx
xxx On our end our task is to attend to the interests of students. It is likely that the
students would be influenced by evil. When they become members of society
outside of campus will be liabilities rather than assets.What do you expect from
a doctor who while studying at AMEC is so much burdened with unreasonable
imposition? What do you expect from a student who aside from peculiar problems
because not all students are rich in their struggle to improve their social status are
even more burdened with false regulations. xxx9(Emphasis supplied)
The complaint further alleged that AMEC is a reputable learning institution. With the
supposed exposs, FBNI, Rima and Alegre "transmitted malicious imputations, and
as such, destroyed plaintiffs (AMEC and Ago) reputation." AMEC and Ago included
FBNI as defendant for allegedly failing to exercise due diligence in the selection and
supervision of its employees, particularly Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an
Answer10 alleging that the broadcasts against AMEC were fair and true. FBNI, Rima
and Alegre claimed that they were plainly impelled by a sense of public duty to
report the "goings-on in AMEC, [which is] an institution imbued with public interest."
Thereafter, trial ensued. During the presentation of the evidence for the defense,

Atty. Edmundo Cea, collaborating counsel of Atty. Lozares, filed a Motion to

Dismiss11 on FBNIs behalf. The trial court denied the motion to dismiss.
Consequently, FBNI filed a separate Answer claiming that it exercised due diligence
in the selection and supervision of Rima and Alegre. FBNI claimed that before hiring
a broadcaster, the broadcaster should (1) file an application; (2) be interviewed; and
(3) undergo an apprenticeship and training program after passing the interview.
FBNI likewise claimed that it always reminds its broadcasters to "observe truth,
fairness and objectivity in their broadcasts and to refrain from using libelous and
indecent language." Moreover, FBNI requires all broadcasters to pass the
Kapisanan ng mga Brodkaster sa Pilipinas ("KBP") accreditation test and to secure
a KBP permit.
On 14 December 1992, the trial court rendered a Decision12 finding FBNI and Alegre
liable for libel except Rima. The trial court held that the broadcasts are libelous per
se. The trial court rejected the broadcasters claim that their utterances were the
result of straight reporting because it had no factual basis. The broadcasters did not
even verify their reports before airing them to show good faith. In holding FBNI liable
for libel, the trial court found that FBNI failed to exercise diligence in the selection
and supervision of its employees.
In absolving Rima from the charge, the trial court ruled that Rimas only participation
was when he agreed with Alegres expos. The trial court found Rimas statement
within the "bounds of freedom of speech, expression, and of the press." The
dispositive portion of the decision reads:
WHEREFORE, premises considered, this court finds for the plaintiff. Considering
the degree of damages caused by the controversial utterances, which are not
found by this court to be really very serious and damaging, and there being no
showing that indeed the enrollment of plaintiff school dropped,defendants
Hermogenes "Jun" Alegre, Jr. and Filipinas Broadcasting Network (owner of the
radio station DZRC), are hereby jointly and severally ordered to pay plaintiff Ago
Medical and Educational Center-Bicol Christian College of Medicine (AMEC-BCCM)
the amount of P300,000.00 moral damages, plus P30,000.00 reimbursement of
attorneys fees, and to pay the costs of suit.
SO ORDERED. 13 (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on
the other, appealed the decision to the Court of Appeals. The Court of Appeals
affirmed the trial courts judgment with modification. The appellate court made Rima
solidarily liable with FBNI and Alegre. The appellate court denied Agos claim for
damages and attorneys fees because the broadcasts were directed against AMEC,
and not against her. The dispositive portion of the Court of Appeals decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the
modification that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with
FBN[I] and Hermo[g]enes Alegre.

SO ORDERED.14
FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals
denied in its 26 January 2000 Resolution.

IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR
PAYMENT OF MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF
SUIT.
The Courts Ruling

Hence, FBNI filed this petition.

15

We deny the petition.

The Ruling of the Court of Appeals
The Court of Appeals upheld the trial courts ruling that the questioned broadcasts
are libelous per se and that FBNI, Rima and Alegre failed to overcome the legal
presumption of malice. The Court of Appeals found Rima and Alegres claim that
they were actuated by their moral and social duty to inform the public of the
students gripes as insufficient to justify the utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMECs administrators, the
Court of Appeals ruled that the broadcasts were made "with reckless disregard as to
whether they were true or false." The appellate court pointed out that FBNI, Rima
and Alegre failed to present in court any of the students who allegedly complained
against AMEC. Rima and Alegre merely gave a single name when asked to identify
the students. According to the Court of Appeals, these circumstances cast doubt on
the veracity of the broadcasters claim that they were "impelled by their moral and
social duty to inform the public about the students gripes."
The Court of Appeals found Rima also liable for libel since he remarked that "(1)
AMEC-BCCM is a dumping ground for morally and physically misfit teachers; (2)
AMEC obtained the services of Dean Justita Lola to minimize expenses on its
employees salaries; and (3) AMEC burdened the students with unreasonable
imposition and false regulations."16
The Court of Appeals held that FBNI failed to exercise due diligence in the selection
and supervision of its employees for allowing Rima and Alegre to make the radio
broadcasts without the proper KBP accreditation. The Court of Appeals denied
Agos claim for damages and attorneys fees because the libelous remarks were
directed against AMEC, and not against her. The Court of Appeals adjudged FBNI,
Rima and Alegre solidarily liable to pay AMEC moral damages, attorneys fees and
costs of suit.1awphi1.nt
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and

This is a civil action for damages as a result of the allegedly defamatory remarks of
Rima and Alegre against AMEC.17 While AMEC did not point out clearly the legal
basis for its complaint, a reading of the complaint reveals that AMECs cause of
action is based on Articles 30 and 33 of the Civil Code. Article 3018 authorizes a
separate civil action to recover civil liability arising from a criminal offense. On the
other hand, Article 3319 particularly provides that the injured party may bring a
separate civil action for damages in cases of defamation, fraud, and physical
injuries. AMEC also invokes Article 1920 of the Civil Code to justify its claim for
damages. AMEC cites Articles 217621 and 218022 of the Civil Code to hold FBNI
solidarily liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel23 is a public and malicious imputation of a crime, or of a vice or defect, real or
imaginary, or any act or omission, condition, status, or circumstance tending to
cause the dishonor, discredit, or contempt of a natural or juridical person, or to
blacken the memory of one who is dead.24
There is no question that the broadcasts were made public and imputed to AMEC
defects or circumstances tending to cause it dishonor, discredit and contempt. Rima
and Alegres remarks such as "greed for money on the part of AMECs
administrators"; "AMEC is a dumping ground, garbage of xxx moral and physical
misfits"; and AMEC students who graduate "will be liabilities rather than assets" of
the society are libelous per se. Taken as a whole, the broadcasts suggest that
AMEC is a money-making institution where physically and morally unfit teachers
abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that
Rima and Alegre were plainly impelled by their civic duty to air the students gripes.
FBNI alleges that there is no evidence that ill will or spite motivated Rima and Alegre
in making the broadcasts. FBNI further points out that Rima and Alegre exerted
efforts to obtain AMECs side and gave Ago the opportunity to defend AMEC and its
administrators. FBNI concludes that since there is no malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious.25 Rima and Alegre failed to
show adequately their good intention and justifiable motive in airing the supposed

gripes of the students. As hosts of a documentary or public affairs program, Rima

and Alegre should have presented the public issues "free from inaccurate and
misleading information."26 Hearing the students alleged complaints a month before
the expos,27 they had sufficient time to verify their sources and information.
However, Rima and Alegre hardly made a thorough investigation of the students
alleged gripes. Neither did they inquire about nor confirm the purported irregularities
in AMEC from the Department of Education, Culture and Sports. Alegre testified that
he merely went to AMEC to verify his report from an alleged AMEC official who
refused to disclose any information. Alegre simply relied on the words of the
students "because they were many and not because there is proof that what they
are saying is true."28 This plainly shows Rima and Alegres reckless disregard of
whether their report was true or not.
Contrary to FBNIs claim, the broadcasts were not "the result of straight reporting."
Significantly, some courts in the United States apply the privilege of "neutral
reportage" in libel cases involving matters of public interest or public figures. Under
this privilege, a republisher who accurately and disinterestedly reports certain
defamatory statements made against public figures is shielded from liability,
regardless of the republishers subjective awareness of the truth or falsity of the
accusation.29 Rima and Alegre cannot invoke the privilege of neutral reportage
because unfounded comments abound in the broadcasts. Moreover, there is no
existing controversy involving AMEC when the broadcasts were made. The privilege
of neutral reportage applies where the defamed person is a public figure who is
involved in an existing controversy, and a party to that controversy makes the
defamatory statement.30
However, FBNI argues vigorously that malice in law does not apply to this case.
Citing Borjal v. Court of Appeals,31 FBNI contends that the broadcasts "fall within
the coverage of qualifiedly privileged communications" for being commentaries on
matters of public interest. Such being the case, AMEC should prove malice in fact or
actual malice. Since AMEC allegedly failed to prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the
"doctrine of fair comment," thus:
[F]air commentaries on matters of public interest are privileged and constitute a
valid defense in an action for libel or slander. The doctrine of fair comment means
that while in general every discreditable imputation publicly made is deemed false,
because every man is presumed innocent until his guilt is judicially proved, and
every false imputation is deemed malicious, nevertheless, when the discreditable
imputation is directed against a public person in his public capacity, it is not
necessarily actionable. In order that such discreditable imputation to a public
official may be actionable, it must either be a false allegation of fact or a
comment based on a false supposition. If the comment is an expression of
opinion, based on established facts, then it is immaterial that the opinion
happens to be mistaken, as long as it might reasonably be inferred from the
facts.32(Emphasis supplied)
True, AMEC is a private learning institution whose business of educating students is

"genuinely imbued with public interest." The welfare of the youth in general and
AMECs students in particular is a matter which the public has the right to know.
Thus, similar to the newspaper articles in Borjal, the subject broadcasts dealt with
matters of public interest. However, unlike in Borjal, the questioned broadcasts are
not based on established facts. The record supports the following findings of the
trial court:
xxx Although defendants claim that they were motivated by consistent reports of
students and parents against plaintiff, yet, defendants have not presented in court,
nor even gave name of a single student who made the complaint to them, much less
present written complaint or petition to that effect. To accept this defense of
defendants is too dangerous because it could easily give license to the media to
malign people and establishments based on flimsy excuses that there were reports
to them although they could not satisfactorily establish it. Such laxity would
encourage careless and irresponsible broadcasting which is inimical to public
interests.
Secondly, there is reason to believe that defendant radio broadcasters, contrary to
the mandates of their duties, did not verify and analyze the truth of the reports
before they aired it, in order to prove that they are in good faith.
Alegre contended that plaintiff school had no permit and is not accredited to offer
Physical Therapy courses. Yet, plaintiff produced a certificate coming from DECS
that as of Sept. 22, 1987 or more than 2 years before the controversial broadcast,
accreditation to offer Physical Therapy course had already been given the plaintiff,
which certificate is signed by no less than the Secretary of Education and Culture
herself, Lourdes R. Quisumbing (Exh. C-rebuttal). Defendants could have easily
known this were they careful enough to verify. And yet, defendants were very
categorical and sounded too positive when they made the erroneous report that
plaintiff had no permit to offer Physical Therapy courses which they were offering.
The allegation that plaintiff was getting tremendous aids from foreign foundations
like Mcdonald Foundation prove not to be true also. The truth is there is no
Mcdonald Foundation existing. Although a big building of plaintiff school was given
the name Mcdonald building, that was only in order to honor the first missionary in
Bicol of plaintiffs religion, as explained by Dr. Lita Ago. Contrary to the claim of
defendants over the air, not a single centavo appears to be received by plaintiff
school from the aforementioned McDonald Foundation which does not exist.
Defendants did not even also bother to prove their claim, though denied by Dra. Ago,
that when medical students fail in one subject, they are made to repeat all the other
subject[s], even those they have already passed, nor their claim that the school
charges laboratory fees even if there are no laboratories in the school. No evidence
was presented to prove the bases for these claims, at least in order to give
semblance of good faith.
As for the allegation that plaintiff is the dumping ground for misfits, and immoral
teachers, defendant[s] singled out Dean Justita Lola who is said to be so old, with
zero visibility already. Dean Lola testified in court last Jan. 21, 1991, and was found

to be 75 years old. xxx Even older people prove to be effective teachers like
Supreme Court Justices who are still very much in demand as law professors in
their late years. Counsel for defendants is past 75 but is found by this court to be still
very sharp and effective.l^vvphi1.net So is plaintiffs counsel.
Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally
infirmed, but is still alert and docile.
The contention that plaintiffs graduates become liabilities rather than assets of our
society is a mere conclusion. Being from the place himself, this court is aware that
majority of the medical graduates of plaintiffs pass the board examination easily and
become prosperous and responsible professionals.33
Had the comments been an expression of opinion based on established facts, it is
immaterial that the opinion happens to be mistaken, as long as it might reasonably
be inferred from the facts.34 However, the comments of Rima and Alegre were not
backed up by facts. Therefore, the broadcasts are not privileged and remain
libelousper se.
The broadcasts also violate the Radio Code35 of the Kapisanan ng mga Brodkaster
sa Pilipinas, Ink. ("Radio Code"). Item I(B) of the Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues free from personal
bias, prejudice and inaccurate and misleading information. x x x
Furthermore, the station shall strive to present balanced discussion of issues. x
x x.
xxx
7. The station shall be responsible at all times in the supervision of public
affairs, public issues and commentary programs so that they conform to the
provisions and standards of this code.
8. It shall be the responsibility of the newscaster, commentator, host and
announcer to protect public interest, general welfare and good order in the
presentation of public affairs and public issues.36 (Emphasis supplied)
The broadcasts fail to meet the standards prescribed in the Radio Code, which lays
down the code of ethical conduct governing practitioners in the radio broadcast
industry. The Radio Code is a voluntary code of conduct imposed by the radio
broadcast industry on its own members. The Radio Code is a public warranty by the
radio broadcast industry that radio broadcast practitioners are subject to a code by
which their conduct are measured for lapses, liability and sanctions.

The public has a right to expect and demand that radio broadcast practitioners live
up to the code of conduct of their profession, just like other professionals. A
professional code of conduct provides the standards for determining whether a
person has acted justly, honestly and with good faith in the exercise of his rights and
performance of his duties as required by Article 1937 of the Civil Code. A
professional code of conduct also provides the standards for determining whether a
person who willfully causes loss or injury to another has acted in a manner contrary
to morals or good customs under Article 2138 of the Civil Code.
II.
Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral damages because it is a
corporation.39
A juridical person is generally not entitled to moral damages because, unlike a
natural person, it cannot experience physical suffering or such sentiments as
wounded feelings, serious anxiety, mental anguish or moral shock.40 The Court of
Appeals cites Mambulao Lumber Co. v. PNB, et al.41 to justify the award of moral
damages. However, the Courts statement in Mambulao that "a corporation may
have a good reputation which, if besmirched, may also be a ground for the award of
moral damages" is an obiter dictum.42
Nevertheless, AMECs claim for moral damages falls under item 7 of Article 221943
of the Civil Code. This provision expressly authorizes the recovery of moral
damages in cases of libel, slander or any other form of defamation. Article 2219(7)
does not qualify whether the plaintiff is a natural or juridical person. Therefore, a
juridical person such as a corporation can validly complain for libel or any other form
of defamation and claim for moral damages.44
Moreover, where the broadcast is libelous per se, the law implies damages.45 In
such a case, evidence of an honest mistake or the want of character or reputation of
the party libeled goes only in mitigation of damages.46Neither in such a case is the
plaintiff required to introduce evidence of actual damages as a condition precedent
to the recovery of some damages.47 In this case, the broadcasts are libelous per se.
Thus, AMEC is entitled to moral damages.
However, we find the award of P300,000 moral damages unreasonable. The record
shows that even though the broadcasts were libelous per se, AMEC has not
suffered any substantial or material damage to its reputation. Therefore, we reduce
the award of moral damages from P300,000 to P150,000.
III.
Whether the award of attorneys fees is proper
FBNI contends that since AMEC is not entitled to moral damages, there is no basis

for the award of attorneys fees. FBNI adds that the instant case does not fall under
the enumeration in Article 220848 of the Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify
satisfactorily its claim for attorneys fees. AMEC did not adduce evidence to warrant
the award of attorneys fees. Moreover, both the trial and appellate courts failed to
explicitly state in their respective decisions the rationale for the award of attorneys
fees.49 InInter-Asia Investment Industries, Inc. v. Court of Appeals ,50 we held
that:
[I]t is an accepted doctrine that the award thereof as an item of damages is the
exception rather than the rule, and counsels fees are not to be awarded every time
a party wins a suit. The power of the court to award attorneys fees under
Article 2208 of the Civil Code demands factual, legal and equitable
justification, without which the award is a conclusion without a premise, its
basis being improperly left to speculation and conjecture. In all events, the
court must explicitly state in the text of the decision, and not only in the decretal
portion thereof, the legal reason for the award of attorneys fees.51 (Emphasis
supplied)
While it mentioned about the award of attorneys fees by stating that it "lies within
the discretion of the court and depends upon the circumstances of each case," the
Court of Appeals failed to point out any circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre for moral damages,
attorneys fees and costs of suit
FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of
damages and attorneys fees because it exercised due diligence in the selection and
supervision of its employees, particularly Rima and Alegre. FBNI maintains that its
broadcasters, including Rima and Alegre, undergo a "very regimented process"
before they are allowed to go on air. "Those who apply for broadcaster are
subjected to interviews, examinations and an apprenticeship program."
FBNI further argues that Alegres age and lack of training are irrelevant to his
competence as a broadcaster. FBNI points out that the "minor deficiencies in the
KBP accreditation of Rima and Alegre do not in any way prove that FBNI did not
exercise the diligence of a good father of a family in selecting and supervising
them." Rimas accreditation lapsed due to his non-payment of the KBP annual fees
while Alegres accreditation card was delayed allegedly for reasons attributable to
the KBP Manila Office. FBNI claims that membership in the KBP is merely voluntary
and not required by any law or government regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and severally

liable for the tort which they commit.52 Joint tort feasors are all the persons who
command, instigate, promote, encourage, advise, countenance, cooperate in, aid or
abet the commission of a tort, or who approve of it after it is done, if done for their
benefit.53 Thus, AMEC correctly anchored its cause of action against FBNI on
Articles 2176 and 2180 of the Civil Code.1a\^/phi1.net
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable
to pay for damages arising from the libelous broadcasts. As stated by the Court of
Appeals, "recovery for defamatory statements published by radio or television may
be had from the owner of the station, a licensee, the operator of the station, or a
person who procures, or participates in, the making of the defamatory statements."54
An employer and employee are solidarily liable for a defamatory statement by the
employee within the course and scope of his or her employment, at least when the
employer authorizes or ratifies the defamation.55 In this case, Rima and Alegre were
clearly performing their official duties as hosts of FBNIs radio program Expos
when they aired the broadcasts. FBNI neither alleged nor proved that Rima and
Alegre went beyond the scope of their work at that time. There was likewise no
showing that FBNI did not authorize and ratify the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence
in the selection andsupervision of its employees, particularly Rima and Alegre.
FBNI merely showed that it exercised diligence in theselection of its broadcasters
without introducing any evidence to prove that it observed the same diligence in
thesupervision of Rima and Alegre. FBNI did not show how it exercised diligence in
supervising its broadcasters. FBNIs alleged constant reminder to its broadcasters
to "observe truth, fairness and objectivity and to refrain from using libelous and
indecent language" is not enough to prove due diligence in the supervision of its
broadcasters. Adequate training of the broadcasters on the industrys code of
conduct, sufficient information on libel laws, and continuous evaluation of the
broadcasters performance are but a few of the many ways of showing diligence in
the supervision of broadcasters.
FBNI claims that it "has taken all the precaution in the selection of Rima and Alegre
as broadcasters, bearing in mind their qualifications." However, no clear and
convincing evidence shows that Rima and Alegre underwent FBNIs "regimented
process" of application. Furthermore, FBNI admits that Rima and Alegre had
deficiencies in their KBP accreditation,56 which is one of FBNIs requirements before
it hires a broadcaster. Significantly, membership in the KBP, while voluntary,
indicates the broadcasters strong commitment to observe the broadcast industrys
rules and regulations. Clearly, these circumstances show FBNIs lack of diligence in
selecting andsupervising Rima and Alegre. Hence, FBNI is solidarily liable to pay
damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4
January 1999 and Resolution of 26 January 2000 of the Court of Appeals in CA-G.R.
CV No. 40151 with the MODIFICATION that the award of moral damages is reduced
from P300,000 to P150,000 and the award of attorneys fees is deleted. Costs
against petitioner.

SO ORDERED.

The original amount of the bond was for P4,000.00; but the amount was
later reduced to P2,000.00.

G.R. No. L-27155 May 18, 1978

PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO GUECO and THE
PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., respondents.
Medina, Locsin, Corua, & Sumbillo for petitioner.
Manuel Lim & Associates for private respondents.

ANTONIO, J.:
Certiorari to review the decision of the Court of Appeals which affirmed the judgment
of the Court of First Instance of Manila in Civil Case No. 34185, ordering petitioner,
as third-party defendant, to pay respondent Rita Gueco Tapnio, as third-party
plaintiff, the sum of P2,379.71, plus 12% interest per annum from September 19,
1957 until the same is fully paid, P200.00 attorney's fees and costs, the same
amounts which Rita Gueco Tapnio was ordered to pay the Philippine American
General Insurance Co., Inc., to be paid directly to the Philippine American General
Insurance Co., Inc. in full satisfaction of the judgment rendered against Rita Gueco
Tapnio in favor of the former; plus P500.00 attorney's fees for Rita Gueco Tapnio
and costs. The basic action is the complaint filed by Philamgen (Philippine American
General Insurance Co., Inc.) as surety against Rita Gueco Tapnio and Cecilio
Gueco, for the recovery of the sum of P2,379.71 paid by Philamgen to the Philippine
National Bank on behalf of respondents Tapnio and Gueco, pursuant to an
indemnity agreement. Petitioner Bank was made third-party defendant by Tapnio
and Gueco on the theory that their failure to pay the debt was due to the fault or
negligence of petitioner.
The facts as found by the respondent Court of Appeals, in affirming the decision of
the Court of First Instance of Manila, are quoted hereunder:
Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco Tapnio as
principal, in favor of the Philippine National Bank Branch at San Fernando,
Pampanga, to guarantee the payment of defendant Rita Gueco Tapnio's
account with said Bank. In turn, to guarantee the payment of whatever
amount the bonding company would pay to the Philippine National Bank,
both defendants executed the indemnity agreement, Exh. B. Under the
terms and conditions of this indemnity agreement, whatever amount the
plaintiff would pay would earn interest at the rate of 12% per annum, plus
attorney's fees in the amount of 15 % of the whole amount due in case of
court litigation.

It is not disputed that defendant Rita Gueco Tapnio was indebted to the
bank in the sum of P2,000.00, plus accumulated interests unpaid, which
she failed to pay despite demands. The Bank wrote a letter of demand to
plaintiff, as per Exh. C; whereupon, plaintiff paid the bank on September
18, 1957, the full amount due and owing in the sum of P2,379.91, for and
on account of defendant Rita Gueco's obligation (Exhs. D and D-1).
Plaintiff, in turn, made several demands, both verbal and written, upon
defendants (Exhs. E and F), but to no avail.
Defendant Rita Gueco Tapnio admitted all the foregoing facts. She claims,
however, when demand was made upon her by plaintiff for her to pay her
debt to the Bank, that she told the Plaintiff that she did not consider herself
to be indebted to the Bank at all because she had an agreement with one
Jacobo-Nazon whereby she had leased to the latter her unused export
sugar quota for the 1956-1957 agricultural year, consisting of 1,000 piculs
at the rate of P2.80 per picul, or for a total of P2,800.00, which was already
in excess of her obligation guaranteed by plaintiff's bond, Exh. A. This
lease agreement, according to her, was with the knowledge of the bank.
But the Bank has placed obstacles to the consummation of the lease, and
the delay caused by said obstacles forced 'Nazon to rescind the lease
contract. Thus, Rita Gueco Tapnio filed her third-party complaint against
the Bank to recover from the latter any and all sums of money which may
be adjudged against her and in favor of the plaitiff plus moral damages,
attorney's fees and costs.
Insofar as the contentions of the parties herein are concerned, we quote
with approval the following findings of the lower court based on the
evidence presented at the trial of the case:
It has been established during the trial that Mrs. Tapnio had an
export sugar quota of 1,000 piculs for the agricultural year
1956-1957 which she did not need. She agreed to allow Mr.
Jacobo C. Tuazon to use said quota for the consideration of
P2,500.00 (Exh. "4"-Gueco). This agreement was called a
contract of lease of sugar allotment.
At the time of the agreement, Mrs. Tapnio was indebted to the
Philippine National Bank at San Fernando, Pampanga. Her
indebtedness was known as a crop loan and was secured by a
mortgage on her standing crop including her sugar quota
allocation for the agricultural year corresponding to said standing
crop. This arrangement was necessary in order that when Mrs.
Tapnio harvests, the P.N.B., having a lien on the crop, may
effectively enforce collection against her. Her sugar cannot be
exported without sugar quota allotment Sometimes, however, a

planter harvest less sugar than her quota, so her excess quota is
utilized by another who pays her for its use. This is the
arrangement entered into between Mrs. Tapnio and Mr. Tuazon
regarding the former's excess quota for 1956-1957 (Exh.
"4"-Gueco).
Since the quota was mortgaged to the P.N.B., the contract of
lease had to be approved by said Bank, The same was
submitted to the branch manager at San Fernando, Pampanga.
The latter required the parties to raise the consideration of P2.80
per picul or a total of P2,800.00 (Exh. "2-Gueco") informing them
that "the minimum lease rental acceptable to the Bank, is P2.80
per picul." In a letter addressed to the branch manager on
August 10, 1956, Mr. Tuazon informed the manager that he was
agreeable to raising the consideration to P2.80 per picul. He
further informed the manager that he was ready to pay said
amount as the funds were in his folder which was kept in the
bank.
Explaining the meaning of Tuazon's statement as to the funds, it
was stated by him that he had an approved loan from the bank
but he had not yet utilized it as he was intending to use it to pay
for the quota. Hence, when he said the amount needed to pay
Mrs. Tapnio was in his folder which was in the bank, he meant
and the manager understood and knew he had an approved loan
available to be used in payment of the quota. In said Exh.
"6-Gueco", Tuazon also informed the manager that he would
want for a notice from the manager as to the time when the bank
needed the money so that Tuazon could sign the corresponding
promissory note.
Further Consideration of the evidence discloses that when the branch
manager of the Philippine National Bank at San Fernando recommended
the approval of the contract of lease at the price of P2.80 per picul (Exh. 1
1-Bank), whose recommendation was concurred in by the Vice-president
of said Bank, J. V. Buenaventura, the board of directors required that the
amount be raised to 13.00 per picul. This act of the board of directors was
communicated to Tuazon, who in turn asked for a reconsideration thereof.
On November 19, 1956, the branch manager submitted Tuazon's request
for reconsideration to the board of directors with another recommendation
for the approval of the lease at P2.80 per picul, but the board returned the
recommendation unacted upon, considering that the current price
prevailing at the time was P3.00 per picul (Exh. 9-Bank).
The parties were notified of the refusal on the part of the board of directors
of the Bank to grant the motion for reconsideration. The matter stood as it
was until February 22, 1957, when Tuazon wrote a letter (Exh. 10-Bank
informing the Bank that he was no longer interested to continue the deal,
referring to the lease of sugar quota allotment in favor of defendant Rita

Gueco Tapnio. The result is that the latter lost the sum of P2,800.00 which
she should have received from Tuazon and which she could have paid the
Bank to cancel off her indebtedness,
The court below held, and in this holding we concur that failure of the
negotiation for the lease of the sugar quota allocation of Rita Gueco
Tapnio to Tuazon was due to the fault of the directors of the Philippine
National Bank, The refusal on the part of the bank to approve the lease at
the rate of P2.80 per picul which, as stated above, would have enabled
Rita Gueco Tapnio to realize the amount of P2,800.00 which was more
than sufficient to pay off her indebtedness to the Bank, and its insistence
on the rental price of P3.00 per picul thus unnecessarily increasing the
value by only a difference of P200.00. inevitably brought about the
rescission of the lease contract to the damage and prejudice of Rita Gueco
Tapnio in the aforesaid sum of P2,800.00. The unreasonableness of the
position adopted by the board of directors of the Philippine National Bank
in refusing to approve the lease at the rate of P2.80 per picul and insisting
on the rate of P3.00 per picul, if only to increase the retail value by only
P200.00 is shown by the fact that all the accounts of Rita Gueco Tapnio
with the Bank were secured by chattel mortgage on standing crops,
assignment of leasehold rights and interests on her properties, and surety
bonds, aside from the fact that from Exh. 8-Bank, it appears that she was
offering to execute a real estate mortgage in favor of the Bank to replace
the surety bond This statement is further bolstered by the fact that Rita
Gueco Tapnio apparently had the means to pay her obligation fact that she
has been granted several value of almost P80,000.00 for the agricultural
years from 1952 to 56. 1

Its motion for the reconsideration of the decision of the Court of Appeals having
been denied, petitioner filed the present petition.
The petitioner contends that the Court of Appeals erred:
(1) In finding that the rescission of the lease contract of the 1,000 piculs of sugar
quota allocation of respondent Rita Gueco Tapnio by Jacobo C. Tuazon was due to
the unjustified refusal of petitioner to approve said lease contract, and its
unreasonable insistence on the rental price of P3.00 instead of P2.80 per picul; and
(2) In not holding that based on the statistics of sugar price and prices of sugar
quota in the possession of the petitioner, the latter's Board of Directors correctly
fixed the rental of price per picul of 1,000 piculs of sugar quota leased by
respondent Rita Gueco Tapnio to Jacobo C. Tuazon at P3.00 per picul.
Petitioner argued that as an assignee of the sugar quota of Tapnio, it has the right,
both under its own Charter and under the Corporation Law, to safeguard and protect
its rights and interests under the deed of assignment, which include the right to

approve or disapprove the said lease of sugar quota and in the exercise of that
authority, its
Board of Directors necessarily had authority to determine and fix the rental price per
picul of the sugar quota subject of the lease between private respondents and
Jacobo C. Tuazon. It argued further that both under its Charter and the Corporation
Law, petitioner, acting thru its Board of Directors, has the perfect right to adopt a
policy with respect to fixing of rental prices of export sugar quota allocations, and in
fixing the rentals at P3.00 per picul, it did not act arbitrarily since the said Board was
guided by statistics of sugar price and prices of sugar quotas prevailing at the time.
Since the fixing of the rental of the sugar quota is a function lodged with petitioner's
Board of Directors and is a matter of policy, the respondent Court of Appeals could
not substitute its own judgment for that of said Board of Directors, which acted in
good faith, making as its basis therefore the prevailing market price as shown by
statistics which were then in their possession.
Finally, petitioner emphasized that under the appealed judgment, it shall suffer a
great injustice because as a creditor, it shall be deprived of a just claim against its
debtor (respondent Rita Gueco Tapnio) as it would be required to return to
respondent Philamgen the sum of P2,379.71, plus interest, which amount had been
previously paid to petitioner by said insurance company in behalf of the principal
debtor, herein respondent Rita Gueco Tapnio, and without recourse against
respondent Rita Gueco Tapnio.
We must advert to the rule that this Court's appellate jurisdiction in proceedings of
this nature is limited to reviewing only errors of law, accepting as conclusive the
factual fin dings of the Court of Appeals upon its own assessment of the evidence. 2

The contract of lease of sugar quota allotment at P2.50 per picul between Rita
Gueco Tapnio and Jacobo C. Tuazon was executed on April 17, 1956. This contract
was submitted to the Branch Manager of the Philippine National Bank at San
Fernando, Pampanga. This arrangement was necessary because Tapnio's
indebtedness to petitioner was secured by a mortgage on her standing crop
including her sugar quota allocation for the agricultural year corresponding to said
standing crop. The latter required the parties to raise the consideration to P2.80 per
picul, the minimum lease rental acceptable to the Bank, or a total of P2,800.00.
Tuazon informed the Branch Manager, thru a letter dated August 10, 1956, that he
was agreeable to raising the consideration to P2.80 per picul. He further informed
the manager that he was ready to pay the said sum of P2,800.00 as the funds were
in his folder which was kept in the said Bank. This referred to the approved loan of
Tuazon from the Bank which he intended to use in paying for the use of the sugar
quota. The Branch Manager submitted the contract of lease of sugar quota
allocation to the Head Office on September 7, 1956, with a recommendation for
approval, which recommendation was concurred in by the Vice-President of the
Bank, Mr. J. V. Buenaventura. This notwithstanding, the Board of Directors of
petitioner required that the consideration be raised to P3.00 per picul.
Tuazon, after being informed of the action of the Board of Directors, asked for a

reconsideration thereof. On November 19, 1956, the Branch Manager submitted the
request for reconsideration and again recommended the approval of the lease at
P2.80 per picul, but the Board returned the recommendation unacted, stating that
the current price prevailing at that time was P3.00 per picul.
On February 22, 1957, Tuazon wrote a letter, informing the Bank that he was no
longer interested in continuing the lease of sugar quota allotment. The crop year
1956-1957 ended and Mrs. Tapnio failed to utilize her sugar quota, resulting in her
loss in the sum of P2,800.00 which she should have received had the lease in favor
of Tuazon been implemented.
It has been clearly shown that when the Branch Manager of petitioner required the
parties to raise the consideration of the lease from P2.50 to P2.80 per picul, or a
total of P2,800-00, they readily agreed. Hence, in his letter to the Branch Manager
of the Bank on August 10, 1956, Tuazon informed him that the minimum lease rental
of P2.80 per picul was acceptable to him and that he even offered to use the loan
secured by him from petitioner to pay in full the sum of P2,800.00 which was the
total consideration of the lease. This arrangement was not only satisfactory to the
Branch Manager but it was also approves by Vice-President J. V. Buenaventura of
the PNB. Under that arrangement, Rita Gueco Tapnio could have realized the
amount of P2,800.00, which was more than enough to pay the balance of her
indebtedness to the Bank which was secured by the bond of Philamgen.
There is no question that Tapnio's failure to utilize her sugar quota for the crop year
1956-1957 was due to the disapproval of the lease by the Board of Directors of
petitioner. The issue, therefore, is whether or not petitioner is liable for the damage
caused.
As observed by the trial court, time is of the essence in the approval of the lease of
sugar quota allotments, since the same must be utilized during the milling season,
because any allotment which is not filled during such milling season may be
reallocated by the Sugar Quota Administration to other holders of allotments. 3
There was no proof that there was any other person at that time willing to lease the
sugar quota allotment of private respondents for a price higher than P2.80 per picul.
"The fact that there were isolated transactions wherein the consideration for the
lease was P3.00 a picul", according to the trial court, "does not necessarily mean
that there are always ready takers of said price. " The unreasonableness of the
position adopted by the petitioner's Board of Directors is shown by the fact that the
difference between the amount of P2.80 per picul offered by Tuazon and the P3.00
per picul demanded by the Board amounted only to a total sum of P200.00.
Considering that all the accounts of Rita Gueco Tapnio with the Bank were secured
by chattel mortgage on standing crops, assignment of leasehold rights and interests
on her properties, and surety bonds and that she had apparently "the means to pay
her obligation to the Bank, as shown by the fact that she has been granted several
sugar crop loans of the total value of almost P80,000.00 for the agricultural years
from 1952 to 1956", there was no reasonable basis for the Board of Directors of
petitioner to have rejected the lease agreement because of a measly sum of
P200.00.

While petitioner had the ultimate authority of approving or disapproving the

proposed lease since the quota was mortgaged to the Bank, the latter certainly
cannot escape its responsibility of observing, for the protection of the interest of
private respondents, that degree of care, precaution and vigilance which the
circumstances justly demand in approving or disapproving the lease of said sugar
quota. The law makes it imperative that every person "must in the exercise of his
rights and in the performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith, 4 This petitioner failed to do. Certainly, it knew
that the agricultural year was about to expire, that by its disapproval of the lease
private respondents would be unable to utilize the sugar quota in question. In failing
to observe the reasonable degree of care and vigilance which the surrounding
circumstances reasonably impose, petitioner is consequently liable for the damages
caused on private respondents. Under Article 21 of the New Civil Code, "any person
who wilfully causes loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the damage." The
afore-cited provisions on human relations were intended to expand the concept of
torts in this jurisdiction by granting adequate legal remedy for the untold number of
moral wrongs which is impossible for human foresight to specifically provide in the
statutes. 5

A corporation is civilly liable in the same manner as natural persons for torts,
because "generally speaking, the rules governing the liability of a principal or master
for a tort committed by an agent or servant are the same whether the principal or
master be a natural person or a corporation, and whether the servant or agent be a
natural or artificial person. All of the authorities agree that a principal or master is
liable for every tort which he expressly directs or authorizes, and this is just as true
of a corporation as of a natural person, A corporation is liable, therefore, whenever a
tortious act is committed by an officer or agent under express direction or authority
from the stockholders or members acting as a body, or, generally, from the directors
as the governing body." 6

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is

hereby AFFIRMED.
G.R. No. 126297

January 31, 2007

PROFESSIONAL SERVICES, INC., Petitioner,

vs.
NATIVIDAD and ENRIQUE AGANA, Respondents.
x-----------------------x
G.R. No. 126467

January 31, 2007

NATIVIDAD (Substituted by her children MARCELINO AGANA III, ENRIQUE

AGANA, JR., EMMA AGANA ANDAYA, JESUS AGANA, and RAYMUND AGANA)

and ENRIQUE AGANA, Petitioners,

vs.
JUAN FUENTES, Respondent.
x- - - - - - - - - - - - - - - - - - - -- - - - x
G.R. No. 127590

January 31, 2007

MIGUEL AMPIL, Petitioner,

vs.
NATIVIDAD AGANA and ENRIQUE AGANA, Respondents.
DECISION
SANDOVAL-GUTIERREZ, J.:
Hospitals, having undertaken one of mankinds most important and delicate
endeavors, must assume the grave responsibility of pursuing it with appropriate
care. The care and service dispensed through this high trust, however technical,
complex and esoteric its character may be, must meet standards of responsibility
commensurate with the undertaking to preserve and protect the health, and indeed,
the very lives of those placed in the hospitals keeping.1
Assailed in these three consolidated petitions for review on certiorari is the Court of
Appeals Decision2 dated September 6, 1996 in CA-G.R. CV No. 42062 and CA-G.R.
SP No. 32198 affirming with modification the Decision3 dated March 17, 1993 of the
Regional Trial Court (RTC), Branch 96, Quezon City in Civil Case No. Q-43322 and
nullifying its Order dated September 21, 1993.
The facts, as culled from the records, are:
On April 4, 1984, Natividad Agana was rushed to the Medical City General Hospital
(Medical City Hospital) because of difficulty of bowel movement and bloody anal
discharge. After a series of medical examinations, Dr. Miguel Ampil, petitioner in
G.R. No. 127590, diagnosed her to be suffering from "cancer of the sigmoid."
On April 11, 1984, Dr. Ampil, assisted by the medical staff4 of the Medical City
Hospital, performed an anterior resection surgery on Natividad. He found that the
malignancy in her sigmoid area had spread on her left ovary, necessitating the
removal of certain portions of it. Thus, Dr. Ampil obtained the consent of Natividads
husband, Enrique Agana, to permit Dr. Juan Fuentes, respondent in G.R. No.
126467, to perform hysterectomy on her.
After Dr. Fuentes had completed the hysterectomy, Dr. Ampil took over, completed
the operation and closed the incision.
However, the operation appeared to be flawed. In the corresponding Record of

Operation dated April 11, 1984, the attending nurses entered these remarks:

On February 16, 1986, pending the outcome of the above cases, Natividad died and
was duly substituted by her above-named children (the Aganas).

"sponge count lacking 2

"announced to surgeon searched (sic) done but to no avail continue for closure."
On April 24, 1984, Natividad was released from the hospital. Her hospital and
medical bills, including the doctors fees, amounted to P60,000.00.
After a couple of days, Natividad complained of excruciating pain in her anal region.
She consulted both Dr. Ampil and Dr. Fuentes about it. They told her that the pain
was the natural consequence of the surgery. Dr. Ampil then recommended that she
consult an oncologist to examine the cancerous nodes which were not removed
during the operation.
On May 9, 1984, Natividad, accompanied by her husband, went to the United States
to seek further treatment. After four months of consultations and laboratory
examinations, Natividad was told she was free of cancer. Hence, she was advised
to return to the Philippines.
On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains.
Two weeks thereafter, her daughter found a piece of gauze protruding from her
vagina. Upon being informed about it, Dr. Ampil proceeded to her house where he
managed to extract by hand a piece of gauze measuring 1.5 inches in width. He
then assured her that the pains would soon vanish.

On March 17, 1993, the RTC rendered its Decision in favor of the Aganas, finding
PSI, Dr. Ampil and Dr. Fuentes liable for negligence and malpractice, the decretal
part of which reads:
WHEREFORE, judgment is hereby rendered for the plaintiffs ordering the
defendants PROFESSIONAL SERVICES, INC., DR. MIGUEL AMPIL and DR.
JUAN FUENTES to pay to the plaintiffs, jointly and severally, except in respect of
the award for exemplary damages and the interest thereon which are the liabilities
of defendants Dr. Ampil and Dr. Fuentes only, as follows:
1. As actual damages, the following amounts:
a. The equivalent in Philippine Currency of the total of US$19,900.00 at
the rate of P21.60-US$1.00, as reimbursement of actual expenses
incurred in the United States of America;
b. The sum of P4,800.00 as travel taxes of plaintiffs and their physician
daughter;
c. The total sum of P45,802.50, representing the cost of hospitalization at
Polymedic Hospital, medical fees, and cost of the saline solution;
2. As moral damages, the sum of P2,000,000.00;

Dr. Ampils assurance did not come true. Instead, the pains intensified, prompting
Natividad to seek treatment at the Polymedic General Hospital. While confined there,
Dr. Ramon Gutierrez detected the presence of another foreign object in her vagina
-- a foul-smelling gauze measuring 1.5 inches in width which badly infected her
vaginal vault. A recto-vaginal fistula had formed in her reproductive organs which
forced stool to excrete through the vagina. Another surgical operation was needed
to remedy the damage. Thus, in October 1984, Natividad underwent another
surgery.
On November 12, 1984, Natividad and her husband filed with the RTC, Branch 96,
Quezon City a complaint for damages against the Professional Services, Inc. (PSI),
owner of the Medical City Hospital, Dr. Ampil, and Dr. Fuentes, docketed as Civil
Case No. Q-43322. They alleged that the latter are liable for negligence for leaving
two pieces of gauze inside Natividads body and malpractice for concealing their
acts of negligence.
Meanwhile, Enrique Agana also filed with the Professional Regulation Commission
(PRC) an administrative complaint for gross negligence and malpractice against Dr.
Ampil and Dr. Fuentes, docketed as Administrative Case No. 1690. The PRC Board
of Medicine heard the case only with respect to Dr. Fuentes because it failed to
acquire jurisdiction over Dr. Ampil who was then in the United States.

3. As exemplary damages, the sum of P300,000.00;

4. As attorneys fees, the sum of P250,000.00;
5. Legal interest on items 1 (a), (b), and (c); 2; and 3 hereinabove, from date of
filing of the complaint until full payment; and
6. Costs of suit.
SO ORDERED.
Aggrieved, PSI, Dr. Fuentes and Dr. Ampil interposed an appeal to the Court of
Appeals, docketed as CA-G.R. CV No. 42062.
Incidentally, on April 3, 1993, the Aganas filed with the RTC a motion for a partial
execution of its Decision, which was granted in an Order dated May 11, 1993.
Thereafter, the sheriff levied upon certain properties of Dr. Ampil and sold them for
P451,275.00 and delivered the amount to the Aganas.
Following their receipt of the money, the Aganas entered into an agreement with PSI

and Dr. Fuentes to indefinitely suspend any further execution of the RTC Decision.
However, not long thereafter, the Aganas again filed a motion for an alias writ of
execution against the properties of PSI and Dr. Fuentes. On September 21, 1993,
the RTC granted the motion and issued the corresponding writ, prompting Dr.
Fuentes to file with the Court of Appeals a petition for certiorari and prohibition, with
prayer for preliminary injunction, docketed as CA-G.R. SP No. 32198. During its
pendency, the Court of Appeals issued a Resolution5 dated October 29, 1993
granting Dr. Fuentes prayer for injunctive relief.
On January 24, 1994, CA-G.R. SP No. 32198 was consolidated with CA-G.R. CV
No. 42062.
Meanwhile, on January 23, 1995, the PRC Board of Medicine rendered its Decision6
in Administrative Case No. 1690 dismissing the case against Dr. Fuentes. The
Board held that the prosecution failed to show that Dr. Fuentes was the one who left
the two pieces of gauze inside Natividads body; and that he concealed such fact
from Natividad.
On September 6, 1996, the Court of Appeals rendered its Decision jointly disposing
of CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198, thus:
WHEREFORE, except for the modification that the case against
defendant-appellant Dr. Juan Fuentes is hereby DISMISSED, and with the
pronouncement that defendant-appellant Dr. Miguel Ampil is liable to reimburse
defendant-appellant Professional Services, Inc., whatever amount the latter will pay
or had paid to the plaintiffs-appellees, the decision appealed from is hereby
AFFIRMED and the instant appeal DISMISSED.
Concomitant with the above, the petition for certiorari and prohibition filed by herein
defendant-appellant Dr. Juan Fuentes in CA-G.R. SP No. 32198 is hereby
GRANTED and the challenged order of the respondent judge dated September 21,
1993, as well as the alias writ of execution issued pursuant thereto are hereby
NULLIFIED and SET ASIDE. The bond posted by the petitioner in connection with
the writ of preliminary injunction issued by this Court on November 29, 1993 is
hereby cancelled.
Costs against defendants-appellants Dr. Miguel Ampil and Professional Services,
Inc.
SO ORDERED.
Only Dr. Ampil filed a motion for reconsideration, but it was denied in a Resolution7
dated December 19, 1996.
Hence, the instant consolidated petitions.
In G.R. No. 126297, PSI alleged in its petition that the Court of Appeals erred in
holding that: (1) it is estopped from raising the defense that Dr. Ampil is not its

employee; (2) it is solidarily liable with Dr. Ampil; and (3) it is not entitled to its
counterclaim against the Aganas. PSI contends that Dr. Ampil is not its employee,
but a mere consultant or independent contractor. As such, he alone should answer
for his negligence.
In G.R. No. 126467, the Aganas maintain that the Court of Appeals erred in finding
that Dr. Fuentes is not guilty of negligence or medical malpractice, invoking the
doctrine of res ipsa loquitur. They contend that the pieces of gauze are prima facie
proofs that the operating surgeons have been negligent.
Finally, in G.R. No. 127590, Dr. Ampil asserts that the Court of Appeals erred in
finding him liable for negligence and malpractice sans evidence that he left the two
pieces of gauze in Natividads vagina. He pointed to other probable causes, such as:
(1) it was Dr. Fuentes who used gauzes in performing the hysterectomy; (2) the
attending nurses failure to properly count the gauzes used during surgery; and (3)
the medical intervention of the American doctors who examined Natividad in the
United States of America.
For our resolution are these three vital issues: first, whether the Court of Appeals
erred in holding Dr. Ampil liable for negligence and malpractice; second, whether the
Court of Appeals erred in absolving Dr. Fuentes of any liability; and third, whether
PSI may be held solidarily liable for the negligence of Dr. Ampil.
I - G.R. No. 127590
Whether the Court of Appeals Erred in Holding Dr. Ampil
Liable for Negligence and Malpractice.
Dr. Ampil, in an attempt to absolve himself, gears the Courts attention to other
possible causes of Natividads detriment. He argues that the Court should not
discount either of the following possibilities: first, Dr. Fuentes left the gauzes in
Natividads body after performing hysterectomy; second, the attending nurses erred
in counting the gauzes; and third, the American doctors were the ones who placed
the gauzes in Natividads body.
Dr. Ampils arguments are purely conjectural and without basis. Records show that
he did not present any evidence to prove that the American doctors were the ones
who put or left the gauzes in Natividads body. Neither did he submit evidence to
rebut the correctness of the record of operation, particularly the number of gauzes
used. As to the alleged negligence of Dr. Fuentes, we are mindful that Dr. Ampil
examined his (Dr. Fuentes) work and found it in order.
The glaring truth is that all the major circumstances, taken together, as specified by
the Court of Appeals, directly point to Dr. Ampil as the negligent party, thus:
First, it is not disputed that the surgeons used gauzes as sponges to control the
bleeding of the patient during the surgical operation.

Second, immediately after the operation, the nurses who assisted in the
surgery noted in their report that the sponge count (was) lacking 2; that such
anomaly was announced to surgeon and that a search was done but to no
avail prompting Dr. Ampil to continue for closure x x x.
Third, after the operation, two (2) gauzes were extracted from the same spot of
the body of Mrs. Agana where the surgery was performed.
An operation requiring the placing of sponges in the incision is not complete until the
sponges are properly removed, and it is settled that the leaving of sponges or other
foreign substances in the wound after the incision has been closed is at least prima
facie negligence by the operating surgeon.8 To put it simply, such act is considered
so inconsistent with due care as to raise an inference of negligence. There are even
legions of authorities to the effect that such act is negligence per se.9
Of course, the Court is not blind to the reality that there are times when danger to a
patients life precludes a surgeon from further searching missing sponges or foreign
objects left in the body. But this does not leave him free from any obligation. Even if
it has been shown that a surgeon was required by the urgent necessities of the case
to leave a sponge in his patients abdomen, because of the dangers attendant upon
delay, still, it is his legal duty to so inform his patient within a reasonable time
thereafter by advising her of what he had been compelled to do. This is in order that
she might seek relief from the effects of the foreign object left in her body as her
condition might permit. The ruling in Smith v. Zeagler10 is explicit, thus:
The removal of all sponges used is part of a surgical operation, and when a
physician or surgeon fails to remove a sponge he has placed in his patients body
that should be removed as part of the operation, he thereby leaves his operation
uncompleted and creates a new condition which imposes upon him the legal duty of
calling the new condition to his patients attention, and endeavoring with the means
he has at hand to minimize and avoid untoward results likely to ensue therefrom.
Here, Dr. Ampil did not inform Natividad about the missing two pieces of gauze.
Worse, he even misled her that the pain she was experiencing was the ordinary
consequence of her operation. Had he been more candid, Natividad could have
taken the immediate and appropriate medical remedy to remove the gauzes from
her body. To our mind, what was initially an act of negligence by Dr. Ampil has
ripened into a deliberate wrongful act of deceiving his patient.
This is a clear case of medical malpractice or more appropriately, medical
negligence. To successfully pursue this kind of case, a patient must only prove that
a health care provider either failed to do something which a reasonably prudent
health care provider would have done, or that he did something that a reasonably
prudent provider would not have done; and that failure or action caused injury to the
patient.11 Simply put, the elements are duty, breach, injury and proximate causation.
Dr, Ampil, as the lead surgeon, had the duty to remove all foreign objects, such as
gauzes, from Natividads body before closure of the incision. When he failed to do
so, it was his duty to inform Natividad about it. Dr. Ampil breached both duties. Such
breach caused injury to Natividad, necessitating her further examination by

American doctors and another surgery. That Dr. Ampils negligence is the proximate
cause12 of Natividads injury could be traced from his act of closing the incision
despite the information given by the attending nurses that two pieces of gauze were
still missing. That they were later on extracted from Natividads vagina established
the causal link between Dr. Ampils negligence and the injury. And what further
aggravated such injury was his deliberate concealment of the missing gauzes from
the knowledge of Natividad and her family.
II - G.R. No. 126467
Whether the Court of Appeals Erred in Absolving
Dr. Fuentes of any Liability
The Aganas assailed the dismissal by the trial court of the case against Dr. Fuentes
on the ground that it is contrary to the doctrine of res ipsa loquitur. According to them,
the fact that the two pieces of gauze were left inside Natividads body is a prima
facie evidence of Dr. Fuentes negligence.
We are not convinced.
Literally, res ipsa loquitur means "the thing speaks for itself." It is the rule that the
fact of the occurrence of an injury, taken with the surrounding circumstances, may
permit an inference or raise a presumption of negligence, or make out a plaintiffs
prima facie case, and present a question of fact for defendant to meet with an
explanation.13 Stated differently, where the thing which caused the injury, without the
fault of the injured, is under the exclusive control of the defendant and the injury is
such that it should not have occurred if he, having such control used proper care, it
affords reasonable evidence, in the absence of explanation that the injury arose
from the defendants want of care, and the burden of proof is shifted to him to
establish that he has observed due care and diligence.14
From the foregoing statements of the rule, the requisites for the applicability of the
doctrine of res ipsa loquitur are: (1) the occurrence of an injury; (2) the thing which
caused the injury was under the control and management of the defendant; (3) the
occurrence was such that in the ordinary course of things, would not have happened
if those who had control or management used proper care; and (4) the absence of
explanation by the defendant. Of the foregoing requisites, the most instrumental is
the "control and management of the thing which caused the injury."15
We find the element of "control and management of the thing which caused the
injury" to be wanting. Hence, the doctrine of res ipsa loquitur will not lie.
It was duly established that Dr. Ampil was the lead surgeon during the operation of
Natividad. He requested the assistance of Dr. Fuentes only to perform hysterectomy
when he (Dr. Ampil) found that the malignancy in her sigmoid area had spread to her
left ovary. Dr. Fuentes performed the surgery and thereafter reported and showed
his work to Dr. Ampil. The latter examined it and finding everything to be in order,

allowed Dr. Fuentes to leave the operating room. Dr. Ampil then resumed operating
on Natividad. He was about to finish the procedure when the attending nurses
informed him that two pieces of gauze were missing. A "diligent search" was
conducted, but the misplaced gauzes were not found. Dr. Ampil then directed that
the incision be closed. During this entire period, Dr. Fuentes was no longer in the
operating room and had, in fact, left the hospital.
Under the "Captain of the Ship" rule, the operating surgeon is the person in
complete charge of the surgery room and all personnel connected with the
operation. Their duty is to obey his orders.16 As stated before, Dr. Ampil was the lead
surgeon. In other words, he was the "Captain of the Ship." That he discharged such
role is evident from his following conduct: (1) calling Dr. Fuentes to perform a
hysterectomy; (2) examining the work of Dr. Fuentes and finding it in order; (3)
granting Dr. Fuentes permission to leave; and (4) ordering the closure of the
incision. To our mind, it was this act of ordering the closure of the incision
notwithstanding that two pieces of gauze remained unaccounted for, that caused
injury to Natividads body. Clearly, the control and management of the thing which
caused the injury was in the hands of Dr. Ampil, not Dr. Fuentes.

Art. 2176. Whoever by act or omission causes damage to another, there being fault
or negligence, is obliged to pay for the damage done. Such fault or negligence, if
there is no pre-existing contractual relation between the parties, is called a
quasi-delict and is governed by the provisions of this Chapter.
A derivative of this provision is Article 2180, the rule governing vicarious liability
under the doctrine of respondeat superior, thus:
ART. 2180. The obligation imposed by Article 2176 is demandable not only for ones
own acts or omissions, but also for those of persons for whom one is responsible.
x
x

x
x

x
x

The owners and managers of an establishment or enterprise are likewise

responsible for damages caused by their employees in the service of the branches
in which the latter are employed or on the occasion of their functions.

In this jurisdiction, res ipsa loquitur is not a rule of substantive law, hence, does not
per se create or constitute an independent or separate ground of liability, being a
mere evidentiary rule.17 In other words, mere invocation and application of the
doctrine does not dispense with the requirement of proof of negligence. Here, the
negligence was proven to have been committed by Dr. Ampil and not by Dr.
Fuentes.

Employers shall be liable for the damages caused by their employees and
household helpers acting within the scope of their assigned tasks even though the
former are not engaged in any business or industry.

III - G.R. No. 126297

The responsibility treated of in this article shall cease when the persons herein
mentioned prove that they observed all the diligence of a good father of a family to
prevent damage.

Whether PSI Is Liable for the Negligence of Dr. Ampil

The third issue necessitates a glimpse at the historical development of hospitals and
the resulting theories concerning their liability for the negligence of physicians.
Until the mid-nineteenth century, hospitals were generally charitable institutions,
providing medical services to the lowest classes of society, without regard for a
patients ability to pay.18 Those who could afford medical treatment were usually
treated at home by their doctors.19 However, the days of house calls and
philanthropic health care are over. The modern health care industry continues to
distance itself from its charitable past and has experienced a significant conversion
from a not-for-profit health care to for-profit hospital businesses. Consequently,
significant changes in health law have accompanied the business-related changes
in the hospital industry. One important legal change is an increase in hospital liability
for medical malpractice. Many courts now allow claims for hospital vicarious liability
under the theories of respondeat superior, apparent authority, ostensible authority,
or agency by estoppel. 20
In this jurisdiction, the statute governing liability for negligent acts is Article 2176 of
the Civil Code, which reads:

x
x

x
x

x
x

A prominent civilist commented that professionals engaged by an employer, such as

physicians, dentists, and pharmacists, are not "employees" under this article
because the manner in which they perform their work is not within the control of the
latter (employer). In other words, professionals are considered personally liable for
the fault or negligence they commit in the discharge of their duties, and their
employer cannot be held liable for such fault or negligence. In the context of the
present case, "a hospital cannot be held liable for the fault or negligence of a
physician or surgeon in the treatment or operation of patients."21
The foregoing view is grounded on the traditional notion that the professional status
and the very nature of the physicians calling preclude him from being classed as an
agent or employee of a hospital, whenever he acts in a professional capacity.22 It
has been said that medical practice strictly involves highly developed and
specialized knowledge,23 such that physicians are generally free to exercise their
own skill and judgment in rendering medical services sans interference.24 Hence,
when a doctor practices medicine in a hospital setting, the hospital and its
employees are deemed to subserve him in his ministrations to the patient and his
actions are of his own responsibility.25

The case of Schloendorff v. Society of New York Hospital26 was then considered an
authority for this view. The "Schloendorff doctrine" regards a physician, even if
employed by a hospital, as an independent contractor because of the skill he
exercises and the lack of control exerted over his work. Under this doctrine,
hospitals are exempt from the application of the respondeat superior principle for
fault or negligence committed by physicians in the discharge of their profession.
However, the efficacy of the foregoing doctrine has weakened with the significant
developments in medical care. Courts came to realize that modern hospitals are
increasingly taking active role in supplying and regulating medical care to patients.
No longer were a hospitals functions limited to furnishing room, food, facilities for
treatment and operation, and attendants for its patients. Thus, in Bing v. Thunig,27
the New York Court of Appeals deviated from the Schloendorff doctrine, noting that
modern hospitals actually do far more than provide facilities for treatment. Rather,
they regularly employ, on a salaried basis, a large staff of physicians, interns, nurses,
administrative and manual workers. They charge patients for medical care and
treatment, even collecting for such services through legal action, if necessary. The
court then concluded that there is no reason to exempt hospitals from the universal
rule of respondeat superior.
In our shores, the nature of the relationship between the hospital and the physicians
is rendered inconsequential in view of our categorical pronouncement in Ramos v.
Court of Appeals28 that for purposes of apportioning responsibility in medical
negligence cases, an employer-employee relationship in effect exists between
hospitals and their attending and visiting physicians. This Court held:
"We now discuss the responsibility of the hospital in this particular incident. The
unique practice (among private hospitals) of filling up specialist staff with attending
and visiting "consultants," who are allegedly not hospital employees, presents
problems in apportioning responsibility for negligence in medical malpractice cases.
However, the difficulty is more apparent than real.
In the first place, hospitals exercise significant control in the hiring and firing of
consultants and in the conduct of their work within the hospital premises. Doctors
who apply for consultant slots, visiting or attending, are required to submit proof of
completion of residency, their educational qualifications, generally, evidence of
accreditation by the appropriate board (diplomate), evidence of fellowship in most
cases, and references. These requirements are carefully scrutinized by members of
the hospital administration or by a review committee set up by the hospital who
either accept or reject the application. x x x.
After a physician is accepted, either as a visiting or attending consultant, he is
normally required to attend clinico-pathological conferences, conduct bedside
rounds for clerks, interns and residents, moderate grand rounds and patient audits
and perform other tasks and responsibilities, for the privilege of being able to
maintain a clinic in the hospital, and/or for the privilege of admitting patients into the
hospital. In addition to these, the physicians performance as a specialist is
generally evaluated by a peer review committee on the basis of mortality and
morbidity statistics, and feedback from patients, nurses, interns and residents. A

consultant remiss in his duties, or a consultant who regularly falls short of the
minimum standards acceptable to the hospital or its peer review committee, is
normally politely terminated.
In other words, private hospitals, hire, fire and exercise real control over their
attending and visiting consultant staff. While consultants are not, technically
employees, x x x, the control exercised, the hiring, and the right to terminate
consultants all fulfill the important hallmarks of an employer-employee relationship,
with the exception of the payment of wages. In assessing whether such a
relationship in fact exists, the control test is determining. Accordingly, on the basis of
the foregoing, we rule that for the purpose of allocating responsibility in medical
negligence cases, an employer-employee relationship in effect exists between
hospitals and their attending and visiting physicians. "
But the Ramos pronouncement is not our only basis in sustaining PSIs liability. Its
liability is also anchored upon the agency principle of apparent authority or agency
by estoppel and the doctrine of corporate negligence which have gained acceptance
in the determination of a hospitals liability for negligent acts of health professionals.
The present case serves as a perfect platform to test the applicability of these
doctrines, thus, enriching our jurisprudence.
Apparent authority, or what is sometimes referred to as the "holding
out" theory, or doctrine of ostensible agency or agency by estoppel,29 has its origin
from the law of agency. It imposes liability, not as the result of the reality of a
contractual relationship, but rather because of the actions of a principal or an
employer in somehow misleading the public into believing that the relationship or
the authority exists.30 The concept is essentially one of estoppel and has been
explained in this manner:
"The principal is bound by the acts of his agent with the apparent authority which he
knowingly permits the agent to assume, or which he holds the agent out to the
public as possessing. The question in every case is whether the principal has by his
voluntary act placed the agent in such a situation that a person of ordinary prudence,
conversant with business usages and the nature of the particular business, is
justified in presuming that such agent has authority to perform the particular act in
question.31
The applicability of apparent authority in the field of hospital liability was upheld long
time ago in Irving v. Doctor Hospital of Lake Worth, Inc.32 There, it was explicitly
stated that "there does not appear to be any rational basis for excluding the concept
of apparent authority from the field of hospital liability." Thus, in cases where it can
be shown that a hospital, by its actions, has held out a particular physician as its
agent and/or employee and that a patient has accepted treatment from that
physician in the reasonable belief that it is being rendered in behalf of the hospital,
then the hospital will be liable for the physicians negligence.
Our jurisdiction recognizes the concept of an agency by implication or estoppel.

Article 1869 of the Civil Code reads:

ART. 1869. Agency may be express, or implied from the acts of the principal, from
his silence or lack of action, or his failure to repudiate the agency, knowing that
another person is acting on his behalf without authority.
In this case, PSI publicly displays in the lobby of the Medical City Hospital the
names and specializations of the physicians associated or accredited by it, including
those of Dr. Ampil and Dr. Fuentes. We concur with the Court of Appeals conclusion
that it "is now estopped from passing all the blame to the physicians whose names it
proudly paraded in the public directory leading the public to believe that it vouched
for their skill and competence." Indeed, PSIs act is tantamount to holding out to the
public that Medical City Hospital, through its accredited physicians, offers quality
health care services. By accrediting Dr. Ampil and Dr. Fuentes and publicly
advertising their qualifications, the hospital created the impression that they were its
agents, authorized to perform medical or surgical services for its patients. As
expected, these patients, Natividad being one of them, accepted the services on the
reasonable belief that such were being rendered by the hospital or its employees,
agents, or servants. The trial court correctly pointed out:
x x x regardless of the education and status in life of the patient, he ought not be
burdened with the defense of absence of employer-employee relationship between
the hospital and the independent physician whose name and competence are
certainly certified to the general public by the hospitals act of listing him and his
specialty in its lobby directory, as in the case herein. The high costs of todays
medical and health care should at least exact on the hospital greater, if not broader,
legal responsibility for the conduct of treatment and surgery within its facility by its
accredited physician or surgeon, regardless of whether he is independent or
employed."33
The wisdom of the foregoing ratiocination is easy to discern. Corporate entities, like
PSI, are capable of acting only through other individuals, such as physicians. If
these accredited physicians do their job well, the hospital succeeds in its mission of
offering quality medical services and thus profits financially. Logically, where
negligence mars the quality of its services, the hospital should not be allowed to
escape liability for the acts of its ostensible agents.
We now proceed to the doctrine of corporate negligence or corporate responsibility.
One allegation in the complaint in Civil Case No. Q-43332 for negligence and
malpractice is that PSI as owner, operator and manager of Medical City Hospital,
"did not perform the necessary supervision nor exercise diligent efforts in the
supervision of Drs. Ampil and Fuentes and its nursing staff, resident doctors, and
medical interns who assisted Drs. Ampil and Fuentes in the performance of their
duties as surgeons."34 Premised on the doctrine of corporate negligence, the trial
court held that PSI is directly liable for such breach of duty.
We agree with the trial court.

Recent years have seen the doctrine of corporate negligence as the judicial answer
to the problem of allocating hospitals liability for the negligent acts of health
practitioners, absent facts to support the application of respondeat superior or
apparent authority. Its formulation proceeds from the judiciarys acknowledgment
that in these modern times, the duty of providing quality medical service is no longer
the sole prerogative and responsibility of the physician. The modern hospitals have
changed structure. Hospitals now tend to organize a highly professional medical
staff whose competence and performance need to be monitored by the hospitals
commensurate with their inherent responsibility to provide quality medical care.35
The doctrine has its genesis in Darling v. Charleston Community Hospital.36 There,
the Supreme Court of Illinois held that "the jury could have found a hospital
negligent, inter alia, in failing to have a sufficient number of trained nurses attending
the patient; failing to require a consultation with or examination by members of the
hospital staff; and failing to review the treatment rendered to the patient." On the
basis of Darling, other jurisdictions held that a hospitals corporate negligence
extends to permitting a physician known to be incompetent to practice at the
hospital.37 With the passage of time, more duties were expected from hospitals,
among them: (1) the use of reasonable care in the maintenance of safe and
adequate facilities and equipment; (2) the selection and retention of competent
physicians; (3) the overseeing or supervision of all persons who practice medicine
within its walls; and (4) the formulation, adoption and enforcement of adequate rules
and policies that ensure quality care for its patients.38 Thus, in Tucson Medical
Center, Inc. v. Misevich,39 it was held that a hospital, following the doctrine of
corporate responsibility, has the duty to see that it meets the standards of
responsibilities for the care of patients. Such duty includes the proper supervision of
the members of its medical staff. And in Bost v. Riley,40 the court concluded that a
patient who enters a hospital does so with the reasonable expectation that it will
attempt to cure him. The hospital accordingly has the duty to make a reasonable
effort to monitor and oversee the treatment prescribed and administered by the
physicians practicing in its premises.
In the present case, it was duly established that PSI operates the Medical City
Hospital for the purpose and under the concept of providing comprehensive medical
services to the public. Accordingly, it has the duty to exercise reasonable care to
protect from harm all patients admitted into its facility for medical treatment.
Unfortunately, PSI failed to perform such duty. The findings of the trial court are
convincing, thus:
x x x PSIs liability is traceable to its failure to conduct an investigation of the matter
reported in the nota bene of the count nurse. Such failure established PSIs part in
the dark conspiracy of silence and concealment about the gauzes. Ethical
considerations, if not also legal, dictated the holding of an immediate inquiry into the
events, if not for the benefit of the patient to whom the duty is primarily owed, then in
the interest of arriving at the truth. The Court cannot accept that the medical and the
healing professions, through their members like defendant surgeons, and their
institutions like PSIs hospital facility, can callously turn their backs on and disregard
even a mere probability of mistake or negligence by refusing or failing to investigate
a report of such seriousness as the one in Natividads case.

It is worthy to note that Dr. Ampil and Dr. Fuentes operated on Natividad with the
assistance of the Medical City Hospitals staff, composed of resident doctors, nurses,
and interns. As such, it is reasonable to conclude that PSI, as the operator of the
hospital, has actual or constructive knowledge of the procedures carried out,
particularly the report of the attending nurses that the two pieces of gauze were
missing. In Fridena v. Evans,41 it was held that a corporation is bound by the
knowledge acquired by or notice given to its agents or officers within the scope of
their authority and in reference to a matter to which their authority extends. This
means that the knowledge of any of the staff of Medical City Hospital constitutes
knowledge of PSI. Now, the failure of PSI, despite the attending nurses report, to
investigate and inform Natividad regarding the missing gauzes amounts to callous
negligence. Not only did PSI breach its duties to oversee or supervise all persons
who practice medicine within its walls, it also failed to take an active step in fixing
the negligence committed. This renders PSI, not only vicariously liable for the
negligence of Dr. Ampil under Article 2180 of the Civil Code, but also directly liable
for its own negligence under Article 2176. In Fridena, the Supreme Court of Arizona
held:
x x x In recent years, however, the duty of care owed to the patient by the hospital
has expanded. The emerging trend is to hold the hospital responsible where the
hospital has failed to monitor and review medical services being provided within its
walls. See Kahn Hospital Malpractice Prevention, 27 De Paul . Rev. 23 (1977).
Among the cases indicative of the emerging trend is Purcell v. Zimbelman, 18 Ariz.
App. 75,500 P. 2d 335 (1972). In Purcell, the hospital argued that it could not be held
liable for the malpractice of a medical practitioner because he was an independent
contractor within the hospital. The Court of Appeals pointed out that the hospital had
created a professional staff whose competence and performance was to be
monitored and reviewed by the governing body of the hospital, and the court held
that a hospital would be negligent where it had knowledge or reason to believe that
a doctor using the facilities was employing a method of treatment or care which fell
below the recognized standard of care.
Subsequent to the Purcell decision, the Arizona Court of Appeals held that a hospital
has certain inherent responsibilities regarding the quality of medical care furnished
to patients within its walls and it must meet the standards of responsibility
commensurate with this undertaking. Beeck v. Tucson General Hospital, 18 Ariz.
App. 165, 500 P. 2d 1153 (1972). This court has confirmed the rulings of the Court of
Appeals that a hospital has the duty of supervising the competence of the doctors
on its staff. x x x.
x
x

In the amended complaint, the plaintiffs did plead that the operation was performed
at the hospital with its knowledge, aid, and assistance, and that the negligence of
the defendants was the proximate cause of the patients injuries. We find that such
general allegations of negligence, along with the evidence produced at the trial of
this case, are sufficient to support the hospitals liability based on the theory of

negligent supervision."
Anent the corollary issue of whether PSI is solidarily liable with Dr. Ampil for
damages, let it be emphasized that PSI, apart from a general denial of its
responsibility, failed to adduce evidence showing that it exercised the diligence of a
good father of a family in the accreditation and supervision of the latter. In neglecting
to offer such proof, PSI failed to discharge its burden under the last paragraph of
Article 2180 cited earlier, and, therefore, must be adjudged solidarily liable with Dr.
Ampil. Moreover, as we have discussed, PSI is also directly liable to the Aganas.
One final word. Once a physician undertakes the treatment and care of a patient,
the law imposes on him certain obligations. In order to escape liability, he must
possess that reasonable degree of learning, skill and experience required by his
profession. At the same time, he must apply reasonable care and diligence in the
exercise of his skill and the application of his knowledge, and exert his best
judgment.
WHEREFORE, we DENY all the petitions and AFFIRM the challenged Decision of
the Court of Appeals in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198.
Costs against petitioners PSI and Dr. Miguel Ampil.
SO ORDERED.