SECOND DIVISION

[G.R. No. 152134. June 4, 2004]

ENDREO MAGBANUA, VALLACAR TRANSIT, INC., and its Present Corporate Official RICARDO
YANSON, petitioners, vs. JOSE TABUSARES, JR., EVA T. LAFIGUERA, NONA C.
TABUSARES, JUN C. TABUSARES, FE C. TABUSARES and JAX C.
TABUSARES, respondents.

DECISION
PUNO, J.:

The case at bar arose from the complaint for damages filed by spouses Jose Tabusares, Sr. and
Rebecca Tabusares against petitioners, Endreo A. Magbanua, Vallacar Transit, Inc., and/or its
corporate officials for the tragic death of their son, Jury Tabusares, in a vehicular mishap involving a
Ceres Liner Bus owned and operated by petitioners. The case was docketed as Civil Case No. 4654
before the Regional Trial Court of Negros Occidental, Branch 48, Bacolod City.
The facts, as found by the trial court, are as follows:

At about 4:30 oclock in the afternoon of October 25, 1986, a Ceres Liner Bus No. 154 with Plate No.
GVG 469, driven by Endreo Magbanua and owned and operated by Vallacar Transit, Inc., and an
Amante Type Jeepney bearing Plate No. FBN 996, driven by Felipe Palacios and owned by Salvador
Algara, Sr. figured in a vehicular accident along the national road at Hda. Mabuhay, Gil Montilla,
Sipalay, Negros Occidental. The Ceres Liner Bus bumped the rear portion of the Amante Type
Jeepney while both vehicles were running downhill on the same direction towards the town
of Sipalay from the North. Due to the impact, several passengers of the Amante Type Jeepney were
thrown out and ran over by the Ceres Liner Bus and died as a result of the injuries they sustained.
(O)ne of those killed was Jury Tabusares, 27 years of age, single, an employee of the Maricalum
Copper Mines as Oiler 2B and was then receiving P1,256.00 monthly salary plus P510.00 cost of
living allowance (COLA) or a total monthly income of P1,766.00. Jury Tabusares was the son of the
plantiffs Jose Tabusares, Sr. and Rebecca Tabusares. Immediately before the bumping accident, the
Ceres Liner Buss driver, Endreo Magbanua, was trying to overtake the Amante Type Jeepney ahead
of him and he said that he did not apply his brakes because he cannot overtake if he will slow
down. The Amante Type Jeepney was overloaded with 35 passengers and some of them clinging on
its sides and some were riding on the roof. While the Ceres Liner (B)us was about one and a half (1)
meters from the Amante Type Jeepney, the bus driver saw that the jeepney went zigzagging on the
middle of the road and since he could not control the bus anymore it bumped the rear portion of the
jeep.

After a careful perusal of the circumstances of the case, the (c)ourt finds that the Amante Type
Jeepney, as testified to by its own driver, Felipe Palacios, was not a passenger jeepney but a private
vehicle which is used by its owner Salvador Algara, Sr., who is an ambulant peddler in his peddling
business. But, although not for passengers, it was carrying 35 passengers at the time of the bumping
accident on October 25, 1986 as testified to by Traffic Investigator Pfc. Praxedes Campillanos of the
Sipalay Police Command, Sipalay, Negros Occidental. This jeep had a seating capacity of only 16
passengers but it was made to accommodate passengers on its roof and some were clinging on its
side. This act is not only gross negligence but it was violative of the traffic rules and regulations. On
the other hand, the (c)ourt also finds that the driver of the Ceres Liner Bus was driving his vehicle
negligently and recklessly because Endreo Magbanua testified and admitted that while driving the
bus downhill and following the Amante type Jeepney ahead of him, he did not apply his brakes
because he was trying to overtake when he bumped the jeep on its rear portion. This act was
negligent and reckless because Endreo Magbanua could have avoided the bumping of the jeepney
had he applied his brakes considering that he has the last clear chance to prevent a collision by
slowing down and reducing speed.[1]

The trial court found that the negligent acts of the drivers of both the jeepney and the Ceres
Liner Bus combined in directly causing the death of Jury Tabusares. It therefore held both drivers
solidarily liable for damages. The court ruled:
WHEREFORE, in view of the foregoing considerations, judgment is hereby rendered ordering and
condemning the defendants Endreo A. Magbanua, Vallacar Transit, Inc., thru and represented by its
corporate official Ricardo Yanson, Felipe T. Palacios and Salvador Algara, Sr. to pay jointly and
severally to the plantiffs, as follows:

1. The sum of P50,000.00 as indemnity for the death of Jury Tabusares;

2. The amount of P699,336.00 as indemnity for the loss of the earning capacity of the late Jury
Tabusares;

3. The amount of P27,600.00 as reimbursement for actual expenses in connection with the death and
burial of the said deceased;

4. The amount of P10,000.00 as moral damages; and

5. The sum of P10,000.00 as reasonable attorneys fees.

The cross-claim of defendant Salvador Algara, Sr. against the defendants Endreo A. Magbanua and
Vallacar Transit, Inc., represented by its corporate official Ricardo Yanson, is hereby allowed and
defendants Endreo A. Magbanua and Vallacar Transit, Inc., represented by it (sic) corporate official
Ricardo Yanson are hereby ordered to indemnify Salvador Algara, Sr. in such amount as he may be
required to pay as damages to the herein plaintiffs.

The counterclaims of the defendants against the plaintiffs are hereby dismissed for lack or merit.

SO ORDERED.[2]

Petitioners appealed to the Court of Appeals. They prayed that the decision of the trial court be
reversed insofar as their liabilities are concerned.[3]
During the pendency of the appeal, Jose Tabusares, Sr. and his wife, Rebecca, passed away.
On May 18, 1999, the Court of Appeals approved the substitution of the late spouses by their heirs,
namely: Jose Tabusares, Jr., Eva T. Lafiguera, Nona C. Tabusares, Jun C. Tabusares, Fe C.
Tabusares and Jax C. Tabusares.[4]
On March 13, 2001, the Court of Appeals rendered its decision. It affirmed the factual findings
of the trial court, but modified the award of damages, reducing the amount of lost earning
to P374,392.00. It made the following computation:

In the case at bar, the victim Jury Tabusares was twenty- seven (27) years old at the time of
death. With 65 years as the given life expectancy in the Philippines, the victim was expected to live
for another thirty-eight (38) years. In respect of income, the victim was receiving the amount
of P1,766.00 as total monthly income or a gross yearly income of P21,192.00. Multiplied by 38, the
number of years the victim is expected to continue living, the amount arrived at is P748,784.00 using
the formula 2/3 x [80-27] x 21,192.00. From the said figure must be deducted the reasonable amount
of P374,392.00 or 50% thereof representing the living and other necessary expenses of the deceased
had he continued to live. Hence, the lost earnings of the deceased should be P374,392.00.[5]

Petitioners filed a partial motion for reconsideration of the decision of the Court of Appeals,
praying for a reduction of the amount of damages for loss of earning capacity. The Court of Appeals
denied the motion.[6] Hence, this petition.
Petitioners, while accepting the factual findings of the trial court and the appellate court, now
assail the latters computation of the award of damages for loss of earning capacity. They contend
that there are varying computations used in the decisions of this Court. In People vs. Lopez,[7] the
Court applied the following formula:

2/3 x (80-27) x P21,192.00 50%

However, the following formula was employed in People vs. Muyco, et al.:[8]

2/3 x (80 27) x P21,192.00 80%

 The difference lies in the computation of the net income of the victim. In the Lopez case, net
income was derived by deducting 50% of the gross annual income, while in the Muyco case, the
amount deducted was 80% of the gross annual income. The Court of Appeals followed the
computation in People vs. Lopez as it was the prevailing case law at the time of the decision
appealed from was promulgated and unmistakably more favorable to the heirs of the deceased
xxx.[9] Petitioners argue that the instant case was decided by the Court of Appeals one year and six
months after the promulgation of People vs. Muyco,therefore, the Court should apply the
computation in the latter case.[10]
On the other hand, the respondents, in their comment, cite other cases decided after
the Muyco case where the Court applied the formula in the Lopez case. They submit that the
computation in People vs. Lopez should be applied in this case.[11]
The petition is devoid of merit.
Article 2205 of the New Civil Code allows the recovery of damages for loss or impairment of
earning capacity in cases of temporary or permanent personal injury. Such damages covers the loss
sustained by the dependents or heirs of the deceased, consisting of the support they would have
received from him had he not died because of the negligent act of another. The loss is not equivalent
to the entire earnings of the deceased, but only that portion that he would have used to support his
dependents or heirs. Hence, we deduct from his gross earnings the necessary expenses supposed to
be used by the deceased for his own needs. The Court explained in Villa Rey Transit, Inc. vs. Court of
Appeals[12] that:

(the award of damages for loss of earning capacity is) concerned with the determination of the losses
or damages sustained by the private respondents, as dependents and intestate heirs of the deceased,
and that said damages consist, not of the full amount of his earnings, but of the support they
received or would have received from him had he not died in consequence of the negligence of
petitioners agent. In fixing the amount of that support, we must reckon with the necessary expenses
of his own living, which should be deducted from his earnings. Thus, it has been consistently held
that earning capacity, as an element of damages to ones estate for his death by wrongful act is
necessarily his net earning capacity or his capacity to acquire money, less the necessary expense for
his own living. Stated otherwise, the amount recoverable is not loss of the entire earning, but rather
the loss of that portion of the earnings which the beneficiary would have received. In other words,
only net earnings, not gross earning are to be considered that is, the total of the
earnings less expenses necessary in the creation of such earnings or income and less living and other
incidental expenses.

Aside from the loss sustained by the heirs of the deceased, another factor considered in
determining the award of loss of earning capacity is the life expectancy of the deceased which takes
into account his work, lifestyle, age and state of health prior to the accident. [13]
Thus, the formula for the computation of unearned income is:
Net life gross living
Earning = expectancy x annual less expenses
Capacity income
Life expectancy is determined in accordance with the formula:

2/3 x [80 age of deceased]

The bone of contention in this case is the amount of living expenses that should be deducted
from the deceaseds gross annual income - whether 50% or 80%.
A survey of more recent jurisprudence shows that the Court consistently pegged the amount at
50% of the gross annual income.[14] We held in Smith Bell Dodwell Shipping Agency Corp. vs.
Borja[15] that when there is no showing that the living expenses constituted a smaller percentage of
the gross income, we fix the living expenses at half of the gross income, thus:

In other words, only net earnings, not gross earnings, are to be considered; that is, the total of the
earnings less expenses necessary in the creation of such earnings or income, less living and other
incidental expenses. When there is no showing that the living expenses constituted a smaller
percentage of the gross income, we fix the living expenses at half of the gross income. To hold that
one would have used only a small part of the income, with the larger part going to the support of
ones children, would be conjectural and unreasonable. (emphasis supplied)
 There is no evidence in the case at bar whether the living expenses of the victim, Jury
Tabusares, constituted a bigger or smaller percentage of his gross income. In such case, it is fair to
assume that it is 50% of his gross annual income. Hence, we find that the Court of Appeals did not
err in its computation of the award of loss of unearned income to petitioner.
IN VIEW WHEREOF, the petition is DENIED. The assailed decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.
Quisumbing, Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-12163 March 4, 1959

PAZ FORES, petitioner,

vs.
IRENEO MIRANDA, respondent.

Alberto O. Villaraza for petitioner.

Almazan and Ereneta for respondent.

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

Defendant-petitioner Paz Fores brings this petition for review of the decision of the Court of Appeals
(C.A. Case No. 1437-R) awarding to the plaintiff-respondent Ireneo Miranda the sums of P5,000 by
way of actual damages and counsel fees, and P10,000 as moral damages, with costs.

Respondent was one of the passengers on a jeepney driven by Eugenio Luga. While the vehicle was
descending the Sta. Mesa bridge at an excessive rate of speed, the driver lost control thereof, causing
it to swerve and to his the bridge wall. The accident occurred on the morning of March 22, 1953. Five
of the passengers were injured, including the respondent who suffered a fracture of the upper right
humerus. He was taken to the National Orthopedic Hospital for treatment, and later was subjected
to a series of operations; the first on May 23, 1953, when wire loops were wound around the broken
bones and screwed into place; a second, effected to insert a metal splint, and a third one to remove
such splint. At the time of the trial, it appears that respondent had not yet recovered the use of his
right arm.

The driver was charged with serious physical injuries through reckless imprudence, and upon
interposing a plea of guilty was sentenced accordingly.

The contention that the evidence did not sufficiently establish the identity of the vehicle as the
belonging to the petitioner was rejected by the appellate court which found, among other things, that
is carried plate No. TPU-1163, SERIES OF 1952, Quezon City, registered in the name of Paz Fores,
(appellant herein) and that the vehicle even had the name of "Doa Paz" painted below its wind
shield. No evidence to the contrary was introduced by the petitioner, who relied on an attack upon
the credibility of the two policemen who went to the scene of the incident.

A point to be further remarked is petitioner's contention that on March 21, 1953, or one day before
the accident happened, she allegedly sold the passenger jeep that was involved therein to a certain
Carmen Sackerman.

The initial problem raised by the petitioner in this appeal may be formulated thus "Is the
approval of the Public Service Commission necessary for the sale of a public service vehicle even
without conveying therewith the authority to operate the same?" Assuming the dubious sale to be a
fact, the court of Appeals answered the query in the affirmative. The ruling should be upheld.

Section 20 of the Public Service Act (Commonwealth Act No. 146) provides:

Sec. 20. Subject to established limitations and exceptions and saving provisions to the
contrary, it shall be unlawful for any public service or for the owner, lessee or operator
thereof, without the previous approval and authority of the Commission previously had

xxx xxx xxx

(g) To sell, alienate, mortgage, encumber or lease its property, franchises, certificates,
privileges, or rights, or any part thereof; or merge or consolidate its property, franchises,
privileges or rights, or any part thereof, with those of any other public service. The approval
herein required shall be given, after notice to the public and after hearing the persons
interested at a public hearing, if it be shown that there are just and reasonable grounds for
 making the mortgage or encumbrance, for liabilities of more than one year maturity, or the
sale, alienation, lease, merger, or consolidation to be approved and that the same are not
detrimental to the public interest, and in case of a sale, the date on which the same is to be
consummated shall be fixed in the order of approval: Provided, however, That nothing herein
contained shall be construed to prevent the transaction from being negotiated or completed
before its approval or to prevent the sale, alienation, or lease by any public service of any of
its property in the ordinary course of its business.

Interpreting the effects of this particular provision of law, we have held in the recent cases
of Montoya vs. Ignacio, * 50 Off. Gaz. No. 1, p. 108; Timbol vs. Osias, et al., G. R. No. L-7547, April
30, 1955, and Medina vs. Cresencia, 99 Phil., 506; 52 Off. Gaz. No. 10, p. 4606, that a transfer
contemplated by the law, if made without the requisite approval of the Public Service Commission, is
not effective and binding in so far as the responsibility of the grantee under the franchise in relation
to the public is concerned. Petitioner assails, however, the applicability of these rulings to the
instant case, contending that in those cases, the operator did not convey, by lease or by sale, the
vehicle independently of his rights under the franchise. This line of reasoning does not find support
in the law. The provisions of the statute are clear and prohibit the sale, alienation, lease, or
encumbrance of the property, franchise, certificate, privileges or rights, or any part thereof of the
owner or operator of the public service Commission. The law was designed primarily for the
protection of the public interest; and until the approval of the public Service Commission is obtained
the vehicle is, in contemplation of law, still under the service of the owner or operator standing in the
records of the Commission which the public has a right to rely upon.

The proviso contained in the aforequoted law, to the effect that nothing therein shall be construed "to
prevent the transaction from being negotiated or complete before its approval", means only that the
sale without the required approval is still valid and binding between the parties (Montoya vs.
Ignacio, supra). The phrase "in the ordinary course of its business" found in the other proviso" or to
prevent the sale, alienation, or lease by any public service of any of its property". As correctly
observed by the lower court, could not have been intended to include the sale of the vehicle itself, but
at most may refer only to such property that may be conceivably disposed or by the carrier in the
ordinary course of its business, like junked equipment or spare parts.

The case of Indalecio de Torres vs. Vicente Ona (63 Phil., 594, 597) is enlightening; and there, it was
held:

Under the law, the Public Service Commission has not only general supervision and
regulation of, but also full jurisdiction and control over all public utilities including the
property, equipment and facilities used, and the property rights and franchise enjoyed by
every individual and company engaged i the performance of a public service in the sense this
phrase is used in the Public Service Act or Act No. 3108). By virtue of the provisions of said
Act, motor vehicles used in the performance of a service, as the transportation of freight from
one point to another, have to this date been considered and they cannot but be so
considered-public service property; and, by reason of its own nature, a TH truck, which
means that the operator thereof places it at the disposal of anybody who is willing to pay a
rental of its use, when he desires to transfer or carry his effects, merchandise or any other
cargo from one place to another, is necessarily a public service property. (Emphasis supplied)

Of course, this court has held in the case of Bachrach Motor co. vs. Zamboanga Transportation Co.,
52 Phil., 244, that there may be a nunc pro tunc authorization which has the effect of having the
approval retroact to the date of the transfer; but such outcome cannot prejudice rights intervening in
the meantime. It appears that no such approval was given by the Commission before the accident
occurred.

The P10,000 actual damages awarded by the Court of First Instance of Manila were reduced by the
Court of Appeals to only P2,000, on the ground that a review of the records failed to disclose a
sufficient basis for the trial court's appraisal, since the only evidence presented on this point
consisted of respondent's bare statement that his expenses and loss of income amounted to P20,000.
On the other hand, "it cannot be denied," the lower court said, "that appellee (respondent) did incur
expenses"' It is well to note further that respondent was a painter by profession and a professor of
Fine Arts, so that the amount of P2,000 awarded cannot be said to be excessive (see Arts. 2224 and
2225, Civil Code of the Philippines). The attorney's fees in the sum of P3,000 also awarded to the
respondent are assailed on the ground that the Court of First Instance did not provided for the same,
and since no appeal was interposed by said respondent, it was allegedly error for the Court of
Appeals to award them motu proprio. Petitioner fails to note that attorney's fees are included in the
concept of actual damages under the Civil Code and may be awarded whenever the court deems it is
just and equitable (Art. 2208, Civil Code of the Philippines). We see no reason to alter these awards.

Anent the moral damages ordered to be paid to the respondent, the same must be discarded. We
have repeatedly ruled (Cachero vs. Manila Yellow Taxicab Co. Inc., 101 Phil., 523; 54 Off. Gaz., [26],
6599; Necesito, et al vs. Paras, 104 Phil., 75; 56 Off. Gaz., [23] 4023, that moral damages are not
recoverable in damage actions predicted on a breach of the contract of transportation, in view of
Articles 2219 and 2220 of the new Civil Code, which provide as follows:

Art. 2219. Moral damages may be recovered in the following and analogous cases:

(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;

xxx xxx xxx

Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if
the court should find that, under circumstances, such damages are justify due. The same rule
applies to breaches of contract where the defendant acted fraudulently or in bad faith.

By contrasting the provisions of these two article it immediately becomes apparent that:

(a) In case of breach of contract (including one of transportation) proof of bad faith or fraud ( dolus),
i.e., wanton or deliberately injurious conduct, is essential to justify an award of moral damages; and

(b) That a breach of contract can not be considered included in the descriptive term "analogous cases"
used in Art. 2219; not only because Art. 2220 specifically provides for the damages that are caused
by contractual breach, but because the definition of quasi-delict in Art. 2176 of the Code
expressly excludes the cases where there is a "preexisting contractual relation between the parties."

Art. 2176. Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage dome. Such fault or negligence, if there is no pre-
existing contractual relation between the parties, is called a quasi-delict and is governed by
the provisions of this Chapter.

The exception to the basic rule of damages now under consideration is a mishap resulting in the
death of a passenger, in which case Article 1764 makes the common carrier expressly subject to the
rule of Art. 2206, that entitles the deceased passenger to "demand moral damages for mental
anguish by reason of the death of the deceased" (Necesito vs. Paras, 104 Phil., 84, Resolution on
motion to reconsider, September 11, 1958). But the exceptional rule of Art. 1764 makes it all the
more evident that where the injured passenger does not die, moral damages are not recoverable
unless it is proved that the carrier was guilty of malice or bad faith. We think it is clear that the
mere carelessness of the carrier's driver does not per se constitute of justify an inference of malice or
bad faith on the part of the carrier; and in the case at bar there is no other evidence of such malice to
support the award of moral damages by the Court of Appeals. To award moral damages for breach of
contract, therefore, without proof of bad faith or malice on the part of the defendant, as required by
Art. 220, would be to violate the clear provisions of the law, and constitute unwarranted judicial
legislation.

The Court of Appeals has invoked our rulings in Castro vs. Acro Taxicab Co., G.R. No. 49155,
December 14, 1948 and Layda vs. Court of Appeals, 90 Phil., 724; but these doctrines were
predicated upon our former law of damages, before judicial discretion in fixing them became limited
by the express provisions of the new Civil Code (previously quoted). Hence, the aforesaid rulings are
now inapplicable.

Upon the other hand, the advantageous position of a party suing a carrier for breach of the contract
of transportations explains, to some extent, the limitations imposed by the new Code on the amount
of the recovery. The action for breach of contract imposes on the defendant carrier a presumption of
liability upon mere proof of injury to the passenger; that latter is relieved from the duty to
established the fault of the carrier, or of his employees, and the burden is placed on the carrier to
prove that it was due to an unforseen event or to force majeure (Cangco vs. Manila Railroad Co., 38
Phil., 768, 777). Moreover, the carrier, unlike in suits for quasi-delict, may not escape liability by
proving that it has exercised due diligence in the selection and supervision of its employees (Art.
1759, new civil code; Cangco vs. Manila Railroad Co., supra; Prado vs. Manila Electric Co., 51 Phil.,
900).

The difference in conditions, defenses and proof, as well as the codal concept of quasi-delict as
essentially extracontractual negligence, compel us to differentiate between action ex contractu, and
actions quasi ex delicto, and prevent us from viewing the action for breach of contract as
simultaneously embodying an action on tort. Neither can this action be taken as one to enforce on
employee's liability under Art. 103 of the Revised Penal Code, since the responsibility is not alleged
to be subsidiary, nor is there on record any averment or proof that the driver of appellant was
insolvent. In fact, he is not even made a party to the suit.

It is also suggested that a carrier's violation of its engagement to safety transport the passenger
involves a breach of the passenger's confidence, and therefore should be regarded as a breach of
contract in bad faith, justifying recovery of moral damages under Art. 2220. This theory is untenable,
for under it the carrier would always be deemed in bad faith, in every case its obligation to the
passenger is infringed, and it would be never accountable for simple negligence; while under the law
(Art. 1756). the presumption is that common carriers acted negligently (and not maliciously), and
Art. 1762 speaks of negligence of the common carrier.

ART. 1756. In case of death of or injuries to passengers, common carriers are presumed to
have been at fault or to have acted negligently, unless they prove that they observed
extraordinary diligence as prescribed in article 1733 and 1755.

ART. 1762. The contributory negligence of the passenger does not bar recovery of damages
for his death or injuries, if the proximate cause thereof is the negligence of the common
carrier, but the amount of damages shall be equitably reduced.

The distinction between fraud, bad faith or malice in the sense of deliberate or wanton wrong doing
and negligence (as mere carelessness) is too fundamental in our law to be ignored (Arts. 1170-1172);
their consequences being clearly differentiated by the Code.

ART. 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in
good faith is liable shall be those that are the natural and probable consequences of the
breach of the obligation, and which the parties have foreseen or could have reasonably
foreseen at the time the obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all
damages which may be reasonably attributed to the non-performance of the obligation.

It is to be presumed, in the absence of statutory provision to the contrary, that this difference was in
the mind of the lawmakers when in Art. 2220 they limited recovery of moral damages to breaches of
contract in bad faith. It is true that negligence may be occasionally so gross as to amount to malice;
but that fact must be shown in evidence, and a carrier's bad faith is not to be lightly inferred from a
mere finding that the contract was breached through negligence of the carrier's employees.

In view of the foregoing considerations, the decision of the Court of Appeals is modified by
eliminating the award of P5,000.00 by way of moral damages. (Court of Appeals Resolution of May 5,
1957). In all other respects, the judgment is affirmed. No costs in this instance. So ordered.

Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion and
Endencia, JJ., concur.
 THIRD DIVISION

[G.R. No. 118664. August 7, 1998]

JAPAN AIRLINES, petitioner, vs. THE COURT OF APPEALS ENRIQUE AGANA, MARIA
ANGELA NINA AGANA, ADALIA B. FRANCISCO and JOSE MIRANDA, respondents.

DECISION
ROMERO, J.:

Before us is an appeal by certiorari filed by petitioner Japan Airlines, Inc. (JAL) seeking the
reversal of the decision of the Court of Appeals, [1] which affirmed with modification the award of
damages made by the trial court in favor of herein private respondents Enrique Agana, Maria
Angela Nina Agana, Adelia Francisco and Jose Miranda.
On June 13, 1991, private respondent Jose Miranda boarded JAL flight No. JL 001 in San
Francisco, California bound for Manila. Likewise, on the same day private respondents Enrique
Agana, Maria Angela Nina Agana and Adelia Francisco left Los Angeles, California for Manila via
JAL flight No. JL 061. As an incentive for travelling on the said airline, both flights were to make an
overnight stopover at Narita, Japan, at the airlines expense, thereafter proceeding to Manila the
following day.
Upon arrival at Narita, Japan on June 14, 1991, private respondents were billeted at Hotel
Nikko Narita for the night. The next day, private respondents, on the final leg of their journey, went
to the airport to take their flight to Manila. However, due to the Mt. Pinatubo eruption, unrelenting
ashfall blanketed Ninoy Aquino International Airport (NAIA), rendering it inaccessible to airline
traffic. Hence, private respondents trip to Manila was cancelled indefinitely.
To accommodate the needs of its stranded passengers, JAL rebooked all the Manila-bound
passengers on flight No. 741 due to depart on June 16, 1991 and also paid for the hotel expenses for
their unexpected overnight stay. On June 16, 1991, much to the dismay of the private respondents,
their long anticipated flight to Manila was again cancelled due to NAIAs indefinite closure. At this
point, JAL informed the private respondents that it would no longer defray their hotel and
accommodation expense during their stay in Narita.
Since NAIA was only reopened to airline traffic on June 22, 1991, private respondents were
forced to pay for their accommodations and meal expenses from their personal funds from June 16 to
June 21, 1991. Their unexpected stay in Narita ended on June 22, 1991 when they arrived in Manila
on board JL flight No. 741.
Obviously, still reeling from the experience, private respondents, on July 25, 1991, commenced
an action for damages against JAL before the Regional Trial Court of Quezon City, Branch 104. [2] To
support their claim, private respondents asserted that JAL failed to live up to its duty to provide
care and comfort to its stranded passengers when it refused to pay for their hotel and
accommodation expenses from June 16 to 21, 1991 at Narita, Japan. In other words, they insisted
that JAL was obligated to shoulder their expenses as long as they were still stranded in Narita. On
the other hand, JAL denied this allegation and averred that airline passengers have no vested right
to these amenities in case a flight is cancelled due to force majeure.
On June 18, 1992, the trial court rendered its judgment in favor of private respondents holding
JAL liable for damages, viz.:

WHEREFORE, judgment is rendered in favor of plaintiffs ordering the defendant Japan Airlines to
pay the plaintiffs Enrique Agana, Adalia B. Francisco and Maria Angela Nina Agana the sum of One
million Two Hundred forty-six Thousand Nine Hundred Thirty-Six Pesos (P1,246,936.00) and Jose
Miranda the sum of Three Hundred Twenty Thousand Six Hundred sixteen and 31/100
(P320,616.31) as actual, moral and exemplary damages and pay attorneys fees in the amount of Two
Hundred Thousand Pesos (P200,000.00), and to pay the costs of suit.

Undaunted, JAL appealed the decision before the Court of Appeals, which, however, with the
exception of lowering the damages awarded affirmed the trial courts finding, [3] thus:
Thus, the award of moral damages should be as it is hereby reduced to P200,000.00 for each of the
plaintiffs, the exemplary damages to P300,000.00 and the attorneys fees to P100,000.00 plus the
costs.

WHEREFORE, with the foregoing Modification, the judgment appealed from is hereby AFFIRMED
in all other respects.

JAL filed a motion for reconsideration which proved futile and unavailing. [4]
Failing in its bid to reconsider the decision, JAL has now filed this instant petition.
The issue to be resolved is whether JAL, as a common carrier has the obligation to shoulder the
hotel and meal expenses of its stranded passengers until they have reached their final destination,
even if the delay were caused by force majeure.
To begin with, there is no dispute that the Mt. Pinatubo eruption prevented JAL from
proceeding to Manila on schedule. Likewise, private respondents concede that such event can be
considered as force majeure since their delayed arrival in Manila was not imputable to JAL.[5]
However, private respondents contend that while JAL cannot be held responsible for the
delayed arrival in Manila, it was nevertheless liable for their living expenses during their
unexpected stay in Narita since airlines have the obligation to ensure the comfort and convenience of
its passengers. While we sympathize with the private respondents plight, we are unable to accept
this contention.
We are not unmindful of the fact that in a plethora of cases we have consistently ruled that a
contract to transport passengers is quite different in kind and degree from any other contractual
relation. It is safe to conclude that it is a relationship imbued with public interest. Failure on the
part of the common carrier to live up to the exacting standards of care and diligence renders it liable
for any damages that may be sustained by its passengers. However, this is not to say that common
carriers are absolutely responsible for all injuries or damages even if the same were caused by a
fortuitous event. To rule otherwise would render the defense of force majeure, as an exception from
any liability, illusory and ineffective.
Accordingly, there is no question that when a party is unable to fulfill his obligation because of
force majeure, the general rule is that he cannot be held liable for damages for non-
performance.[6] Corollarily, when JAL was prevented from resuming its flight to Manila due to the
effects of Mt. Pinatubo eruption, whatever losses or damages in the form of hotel and meal expenses
the stranded passengers incurred, cannot be charged to JAL. Yet it is undeniable that JAL assumed
the hotel expenses of respondents for their unexpected overnight stay on June 15, 1991.
Admittedly, to be stranded for almost a week in a foreign land was an exasperating experience
for the private respondents. To be sure, they underwent distress and anxiety during their
unanticipated stay in Narita, but their predicament was not due to the fault or negligence of JAL but
the closure of NAIA to international flights. Indeed, to hold JAL, in the absence of bad faith or
negligence, liable for the amenities of its stranded passengers by reason of a fortuitous event is too
much of a burden to assume.
Furthermore, it has been held that airline passengers must take such risks incident to the mode
of travel.[7] In this regard, adverse weather conditions or extreme climatic changes are some of the
perils involved in air travel, the consequences of which the passenger must assume or expect. After
all, common carriers are not the insurer of all risks.[8]
Paradoxically, the Court of Appeals, despite the presence of force majeure, still ruled against
JAL relying in our decision in PAL v. Court of Appeals,[9] thus:

The position taken by PAL in this case clearly illustrates its failure to grasp the exacting standard
required by law. Undisputably, PALs diversion of its flight due to inclement weather was a
fortuitous event.Nonetheless, such occurrence did not terminate PALs contract with its
passengers. Being in the business of air carriage and the sole one to operate in the country, PAL is
deemed equipped to deal with situations as in the case at bar. What we said in one case once again
must be stressed, i.e., the relation of carrier and passenger continues until the latter has been landed
at the port of destination and has left the carriers premises. Hence, PAL necessarily would still have
to exercise extraordinary diligence in safeguarding the comfort, convenience and safety of its
stranded passengers until they have reached their final destination.On this score, PAL grossly failed
considering the then ongoing battle between government forces and Muslim rebels in Cotabato City
and the fact that the private respondent was a stranger to the place.
 The reliance is misplaced. The factual background of the PAL case is different from the instant
petition. In that case there was indeed a fortuitous event resulting in the diversion of the PAL
flight. However, the unforeseen diversion was worsened when private respondents (passenger) was
left at the airport and could not even hitch a ride in a Ford Fiera loaded with PAL personnel, [10] not
to mention the apparent apathy of the PAL station manager as to the predicament of the stranded
passengers.[11] In light of these circumstances, we held that if the fortuitous event was accompanied
by neglect and malfeasance by the carriers employees, an action for damages against the carrier is
permissible. Unfortunately, for private respondents, none of these conditions are present in the
instant petition.
We are not prepared, however, to completely absolve petitioner JAL from any liability. It must
be noted that private respondents bought tickets from the United States with Manila as their final
destination. While JAL was no longer required to defray private respondents living expenses during
their stay in Narita on account of the fortuitous event, JAL had the duty to make the
necessary arrangements to transport private respondents on the first available connecting flight to
Manila. Petitioner JAL reneged on its obligation to look after the comfort and convenience of its
passengers when it declassified private respondents from transit passengers to new passengers as a
result of which private respondents were obliged to make the necessary arrangements themselves
for the next flight to Manila. Private respondents were placed on the waiting list from June 20 to
June 24. To assure themselves of a seat on an available flight, they were compelled to stay in the
airport the whole day of June 22, 1991 and it was only at 8:00 p.m. of the aforesaid date that they
were advised that they could be accommodated in said flight which flew at about 9:00 a.m. the next
day.
We are not oblivious to the fact that the cancellation of JAL flights to Manila from June 15 to
June 21, 1991 caused considerable disruption in passenger booking and reservation. In fact, it would
be unreasonable to expect, considering NAIAs closure, that JAL flight operations would be normal on
the days affected. Nevertheless, this does not excuse JAL from its obligation to make the necessary
arrangements to transport private respondents on its first available flight to Manila. After all, it had
a contract to transport private respondents from the United States to Manila as their final
destination.
Consequently, the award of nominal damages is in order. Nominal damages are adjudicated in
order that a right of a plaintiff, which has been violated or invaded by the defendant, may be
vindicated or recognized and not for the purpose of indemnifying any loss suffered by him. [12] The
court may award nominal damages in every obligation arising from any source enumerated in Article
1157, or in every case where any property right has been invaded. [13]
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals dated December 22,
1993 is hereby MODIFIED. The award of actual, moral and exemplary damages is hereby
DELETED.Petitioner JAL is ordered to pay each of the private respondents nominal damages in the
sum of P100,000.00 each including attorneys fees of P50,000.00 plus costs.
SO ORDERED.
Narvasa, C.J. (Chairman), Kapunan and Purisima, JJ. concur.
Japan Airlines vs Court of Appeals (G.R. No. 118664)
Facts: Private respondents boarded a JAL flight in San Francisco, California bound for Manila. It
included an overnight stopover at Narita, Japan at JALs expense. Due to the Mt. Pinatubo eruption,
private respondents trip to Manila was cancelled. JAL rebooked all the Manila-bound passengers
and paid for the hotel expenses of their unexpected overnight stay. The flight of private respondents
was again cancelled due to NAIAs indefinite closure. JAL informed the respondents that it would no
longer defray their hotel and accommodation expense during their stay in Narita. The respondents
were forced to pay for their accommodations and meal expenses for 5 days.

Issues:

1. Whether or not JAL has the obligation to shoulder the hotel and meal expenses even if the
delay was caused by force majeure
2. Whether or not the award of damages was proper
Held:

1. When a party is unable to fulfill his obligation because of force majeure, the general rule is
that he cannot be held liable for damages for non-performance. When JAL was prevented
from resuming its flight to Manila due to the effects of the eruption, whatever losses or
damages in the form of hotel and meal expenses the stranded passengers incurred cannot be
 charged to JAL. The predicament of the private respondents was not due to the fault or
negligence of JAL. JAL had the duty to arrange the respondents flight back to Manila.
However, it failed to look after the comfort and convenience of its passengers when it made
the passengers arrange their flight back to Manila on their own and after waiting in the
airport for a whole day.
2. Yes, the award of nominal damages is proper. Nominal damages are adjudicated in order
that a right of a plaintiff, which has been violated or invaded by the defendant, may be
vindicated or recognized and not for the purpose of indemnifying any loss suffered by him.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 108997 April 21, 1995

LUFTHANSA GERMAN AIRLINE, petitioner,

vs.
COURT OF APPEALS and DON M. FERRY, respondents.

MENDOZA, J.:

Lufthansa German Airlines, petitioner herein, seeks a review of the Decision of the Court of Appeals
promulgated on January 29,1992 in CA-G.R. No. 22494. 1 That decision affirmed in toto the
judgment of the Regional Trial Court of Makati (Branch 145) rendered on July 25, 1988 in Civil Case
No. 13306, 2 condemning Lufthansa to pay Don M. Ferry, herein private respondent, the following
amounts:

(a) US$75,000.00 or its peso equivalent at the time of payment as actual damages;

(b) USS75,000.00, or its peso equivalent at the time of payment, as moral damages;

(c) US$25,000.00 or its peso equivalent at the time of payment, as exemplary

damages;

(d) US$25,000,00 peso equivalent at the time of payment, as attorney's fees and
litigation expenses;

(e) All the foregoing amounts to bear interest at the legal rate from the date of filing
of the complaint until fully paid; and

(f) Costs of suit.

The relevant facts recited in the appealed judgment, we, and adopted by the Court of Appeals from
the summary setforth by Lufthansa in its brief: 3 "Stripped of non-essentials," said the Appellate
Court, "and as disclosed from defendant-appellant's brief, the antecedent facts of the case are as
follows:

5. On 16 May 1985, plaintiff-appellee (Don Ferry) purchased from the defendant-

appellant a San Francisco/ New York/ Paris/ Frankfurt/Manila first class open dated
ticket (Exh. "B" and Exh. "1").

(a) There was no carrier indicated for the San Francisco/New

York/Paris portions of the journey.

(b) The carrier box for the Paris/ Frankfurt/Manila portion of the
ticket shows the letter "LH" which indicates that plaintiff- appellee
agreed to fly those portions or legs of his journey on defendant-
appellant Lufthansa.

6. On June 3, 1985, plaintiff-appellee went to Lufthansa's San Francisco office

allegedly to get Lufthansa to endorse the San Francisco/New York portion of his
journey to Trans World Airlines ("TWA" for brevity).
 (a) But, there was no need to secure said endorsement since no
carrier was indicated in the ticket for the San Francisco/New York leg
of the journey (Exh. "B" or "1").

(b) Thus, plaintiff-appellee was told by Mrs. Ingrid Egger Lufthansa's

ticket agent in its San Francisco office, that no endorsement was
required or necessary and that he should go back to TWA and request
them to accept the ticket without any endorsement (t.s.n. of Aug. 26,
1987, pp. 20-23 in relation to Exh. "B" and Exh. "1").

7 Instead of going to TWA as advised, plaintiff requested Mrs. Egger for a different
routing which omitted the New York/Paris leg of his original itinerary.

(a) Said new routing would require the endorsement of the ticket.

(b) Hence, Mrs. Egger advised the plaintiff-appellee that she would
need to get an authorization from Lufthansa's Manila office in order
to endorse plaintiff-appellee's ticket, She also explained to plaintiff-
appellee the procedure for obtaining the authorization and the reason
why it was required.

(c) Upon being advised that securing the necessary authorization

could possibly take a day or more, plaintiff-appellee advised Mrs.
Egger that he could not wait (t.s.n. of Aug. 26, 1987, pp. 27, 40, 46,
73, 74 and 76).

8. Thereafter. plaintiff-appellee settled on a new routing of San

Francisco/Frankfurt/Cologne/Frankfurt/Manila thereby omitting the New York/Paris
legs of his original itinerary.

(a) Instead of writing "LH" on the carrier's boxes opposite each

portion of plaintiffs new ticket (Exh; "C" and Exh. "2") starting with
the San Francisco portion up to Manila, Mrs. Egger simplified
matters by indicating on the restriction box the phrase "LH only"
(Ibid., pp. 29-34).

9 On. 10 June 1985, plaintiff-appellee went to Baden-Baden GmbH, a travel agency,

to make arrangements for his. return to Manila on June 12,1985.

(a) Since no Lufthansa flights were scheduled to leave for Manila on

June 12, 1985; plaintiff made a booking on a Cathay Pacific Airlines
flight ("CPA") which was supposed to leave the Frankfurt Airport for
Hong Kong at noon at 12 June 1985.

10 On June 12, 1985, plaintiff-appeIlee went to the Frankfurt Airport.

(a) The CPA ticket agent informed the plaintiff that an endorsement
from the defendant-appellant Lufthansa was required for him to
travel on CPA.

(b) Plaintiff-appellee then proceeded to the Lufthansa's ticket counter

at the Frankfurt Airport.

11. Plaintiff-appellee met with Miss Petra Wilhelm, Lufthansa's ticket agent therein.

(a) Miss Wilhelm reiterated Ms. Egger's previous advise that due to
currency restrictions, authorization from Lufthansa's Manila office
was required before she could endorse plaintiffs ticket to CPA (t.s.n.
of Oct. 10, 1987, pp. 21-26).

(b) The reason for the need to get an endorsement from Lufthansa's
Manila office and the procedure for obtaining such endorsement was
 fully explained to the plaintiff-appellee for the second time by Miss
Wilhelm (ibid, in relation to Exhs. "10" and "10-A").

(c) Since it would take Miss Wilhelm sometime to communicate and

obtain the endorsement from the defendant's Manila office, it was
obvious at that time that plaintiff-appellee would be unable to board
the CPA flight which he booked.

12. Consequently, upon plaintiff-appellee's request Miss Wilhelm booked him on a

Lufthansa flight leaving Frankfurt Airport in the afternoon of the same day, 12 June
1985 for Bangkok and for the Bangkok/Manila portion of his journey, Miss Wilhelm
booked plaintiff on a Thai Airways flight (Ibid., pp. 36-37).

13. Plaintiff-appellee was able to depart Frankfurt Airport in the afternoon of 12

June 1985 on the Lufthansa flight and was able to board the Thai Airways flight
from Bangkok to Manila, arriving thereat in the afternoon of the following day.
(Appellant's Brief, pp. 4-8).

Evidently in the belief that the facts created a right of action in his favor, Don Ferry filed a
complaint against Lufthansa on April 1,1986 in the Regional Trial Court of Makati, for recovery of
damages arising from breach of contract. 4 Lufthansa filed its Answer on May 28, 1986, setting up a
compulsory counterclaim for compensatory and exemplary damages, attorney's fees, expenses of
litigation and costs of suit.

On July 25, 1988, the trial court rendered its decision earlier adverted to, awarding to private
respondent the amount of damages prayed for in his complaint. The decision was affirmed in toto by
the Court of Appeals. Hence, this petition, in which it is contended that respondent Court of Appeals
committed errors of law in:

(a) applying the rule that "findings of the lower court are generally final" and that
the "testimonies of petitioner's witnesses are open to criticism as interested
witnesses" since respondent Court of Appeals accepted the testimonies of petitioner's
witnesses in its statement of facts;

(b) ruling that petitioner "is duty-bound to provide plaintiff-appellee air transport"
for the San Francisco/New York/Paris route when it made the Francisco/New
York/Paris portions of the journey and private respondent had omitted the New
York/Paris leg of his original itinerary;

(c) ruling that petitioner is guilty of bad faith when it "changed plaintiff-appellee's
unrestricted ticket to a partly restricted ticket without informing the plaintiff-
appellee.

(d) ruling that petitioner "violated its contract of air carriage with plaintiff-appellee
by refusing to endorse plaintiff-appellee's first class full fare Lufthansa ticket to
Cathay Pacific Airways," since it also made the factual findings that "Miss Wilhelm
reiterated Ms. Egger's previous advice that due to currency restrictions,
authorization from Lufthansa's Manila office was required" and that "since it would
take Miss Wilhelm sometime to communicate and obtain the endorsement from the
defendant's Manila office, it was obvious that plaintiff-appellee would be unable to
board the CPA flight which he booked;

(e) awarding actual damages of US$75,000.00 or its peso equivalent in favor of

private respondent when there is no proof that would justify the exorbitant award;

(f) awarding moral damages of US$75,000.00 or its peso equivalent in favor of

prlvate, respondent when there is no proof of bad faith or malice Moreover,
granting arguendo that there is basis for the award of moral damages, the award is
"outrageously exorbitant";

(g) awarding exemplary damages of, US$25,000.00 or its peso equivalent in favor of
private respondent when there is no proof that petitioner or its employees acted in a
wanton, fraudulent, reckless, oppressive or malevolent manner, Moreover,
 granting arguendo that there is basis for the award of exemplary damages, the award
is outrageously exorbitant;

(h) awarding attorney's fees and litigation expenses of US$25.000.00 or its peso
equivalent in favor of private respondent when there is no proof that petitioner acted
in gross and evident bad faith. Furthermore, there is also no proof presented as to the
attorney's fees and expenses of litigation claimed by private respondent; and,

(i) awarding interests.

The established rule is that the findings of the trial court as to the credibility of witnesses are
accorded much respect, if not indeed conclusive effect, save only in those exceptional instances where
they are clearly shown to be arbitrary. 5 In the case at bench, the Trial Court refused to accord any
credit to petitioner Airline's "three (3) foreign witnesses" because they are "all long-time employees of
defendant which also shouldered all their expenses" (in coming to this country to give evidence) and
hence, their testimonies "are tained polluted and should be seen with disfavor. 6

While it may be true, as the trial court opines, "that testimony of employees of a party is 'of course
open to the criticism that they would naturally testify, as far as they possibly could in favor of their
employers; and in weighing testimony such a relation between a witness and a party is frequently
noticed by the court, 7 it is equally true that the fact that the witness is an employee or an overseer of
a party is not of itself sufficient to discredit his testimony. 8

This Court has intensively analyzed the testimonies of petitioner's saidthree (3) witnesses and
found them to be clear, straightforward and convincing. They spoke authoritatively of their
respective lines of work, and candidly of their dealings with private respondent, without betraying
any trace of falsehood or partiality, or any attempt to exculpate petitioner from the alleged breach of
contract; in fact, it may even be said that some of their statements were somewhat damaging to their
employer's cause.

That petitioner paid for its witnesses expenses in coming to the Philippines to testify, is not a valid
cause for disbelieving their testimonies; it seems but natural and reasonable under the peculiar
circumstances of the case that petitioner should do so. For the record, however, only the expenses of
Mrs. Ingrid Egger and Mrs. Petra Wilhelm were shouldered by petitioner, the third witness, Mr.
Berndt Loewe, then being based in Manila as petitioner's passenger sales manager. Considering the
known disinclination of persons to be involved in court litigations, even if it be only as witnesses. it is
hardly reasonable to expect petitioner's witnesses to agree to bear the cost of flying to and staying in
Manila to testify in the case. At any rate, there is no showing whatever that petitioner's witnesses
were otherwise so materially benefited by their travel to the Philippines, or were so fanatically loyal
to Lufthansa, as to be motivated to distort the thruth and testify falsely in the latter's favor.

The trial court as well as the appellate court gravely erred therefore, in totally disregarding the
testimonies of petitioner's witnesses on the basis alone of the employment relationship between
them. Their factual findings cannot consequently be accorded binding effect, 9 and this Court is thus
constrained to itself weigh and evaluate the evidence presented by the parties.

To begin with, private respondent was bound by the conditions of the contract of carriage purchased
by him from Lufthansa. 10 The ticket 11 did not indicate any carrier for the San Francisco/New York
leg of respondent Ferry's journey. He was therefore free to choose his airline for that leg. With
respect, however, to the Paris/Frankfurt /manila portion of his journey, private respondent was
deemed to have agreed to fly Lufthansa as shown by the letters "LH" written on the carrier box.

Thus, in San Francisco, when private respondent chose to take a TWA flight to New York, no
endorsement from petitioner Airline was required because, as just mentioned, his ticket did not
indicate any carrier for the San Francisco/New York leg. It was only in the Paris/Frankfurt/Manila
leg that an endorsement was needed if private respondent desired to fly with an airline other than
Lufthansa. These conditions were communicated to private respondent by Ingrid Egger, petitioner's
ticket agent:

Q Now, during his testimony in Court on February 17, 1987, the

plaintiff, Mr. Don Ferry testified in Court that he went to the
Lufthansa office in San Francisco, was able to talk to you, presented a
ticket which was originally issued in Manila requested you to give
him an endorsement as required by TWA so that he could use the
ticket for his flight from San Francisco to new York, what can you say
about that allegation of the plaintiff?

A I told the passenger that an endorsement is not necessary on that

ticket when he presented to me for the portion he wanted to use it for.

Q Now, you said that you told Mr. Ferry that there was no need for a
Lufthansa endorsement for him to use the ticket for the San
Francisco/New York portion of his journey, why did you say that?

A There was no carrier entered into the carrier block. It was open,
therefore, any carrier should have accepted that portion of the ticket
between San Francisco and New York.

Q What did he tell you, that this was a requirement being imposed by
the TWA?

A I told him that he should go back to TWA and tell them what I told
him that it does not need any endorsement for the portion of the
ticket. 12

xxx xxx xxx

Q Did the plaintiff, Mr. Ferry tell you that he-went to the TWA offices
in the same building to have a domestic flight from San Francisco to
New York and that the TWA offices said that it was necessary to get
a Lufthansa endorsement?

A Yes.

Q And what was your reply?

A I told him that it was not necessary for that endorsement.

Q Yes, but could you have given him an endorsement?

A Yes, if he wanted to go to San Francisco/New York and New York to

Paris, I could give him an endorsement.

Q Yes, but the point is, he asked for an endorsement but you did not
give him an endorsement, is that not correct?

A I told him he could go back to TWA because he does not need any
endorsement.

Q But the fact is despite his request for endorsement, you did not give
him such endorsement, is that not correct?

A His request for endorsement was for a different routing. 13

xxx xxx xxx

Q Now, when Mr. Don Ferry went to see you on June 3, 1985 and
informed you that the TWA downstairs needed an endorsement of
Lufthansa, you could have given him an endorsement s you said but
instead, you told him there was no need, is that correct?

A That is right.

Q Why did you not give him an endorsement?

 A Because after we have a conversation, he told me that he wanted to
have a different routing.

Q Yes, but when he requested you for an endorsement. It was very

easy for you to give him an endorsement, was it not?

A That is not what he wanted. He wanted a different routing.

Q That was after when you did not want to give him an endorsement?

A That is not right. He came out and he said he wanted an

endorsement and I said, if you want to fly to New York. you don't
need an endorsement, and then he said, that is not what I want. I
want to have a different routing.

Q You mean to say in the same conversation. he told you he did not
like to fly from San Francisco to New York?

A He told me he needed a different routing. 14

From the testimony of Mrs. Egger, it is clear that the there was no refusal on the part of petitioner
airline to give the endorsement required by TWA. The reason no endorsement was given was that
there was no requirement for such endorsement. At this point, petitioner Airline did not refuse to
give him an endorsement being required by TWA. It is one thing to say that petitioner airline
refused to give a required endorsement, and another to say that since no endorsement was needed,
none was given.

The same cannot, however, be said with respect to the Frankfurt/Manila portion of respondent
Ferry's journey. Petitioner's witness, Mr. Berndt Loewe, admitted that the Baden-Baden GMBH was
a Lufthansa-appointed travel agent, authorized to make reservations and confirmations, 15 and that
despite the fact that Exhibit "E" was a page of a notebook produced by German Railway Company
referring to train connections. 16 the same should be deemed a confirmation of the flight arrangement
contained thereon:

Q Now, if you look at Exhibit "E" as an expert, would you believe that
there was confirmed reservation of Cathay Pacific Airways for the
flight Frankfurt-Hongkong, Hongkong-Manila?

A Yes, it say here okay, Frankfurt Hongkong, there is a word "okay"

so, it seems that Cathay Pacific gave okay to the travel agent.

Q Frankfurt/Hongkong okay for June 12?

A Yes.

Q Hongkong - Manila okay for June 13?

A Yes.

Q For first class?

A Yes.

Q With seat?

A yes, with seat number 7-K to Hongkong and I-a to Manila.

Q So, you would say that this Exhibit "E" is a confirmed flight for
Cathay Pacific from Frankfurt Hongkong, Hongkong, Manila?

A Yes, according to what is written here.

 Q And this travel is authorized to make confirmation?

Private respondent having previously obtained a flight confirmation from a Lufthansa-appointed

travel agent, there was no reason why the Frankfurt Lufthansa office should not give the
endorsement needed by private respondent fly Cathay Pacific Airways. That confirmation
necessarily carried with it the prior approval of Lufthansa for private respondent to employ another
airline so that all that was needed was the actual, physical signification of said approval through an
endorsement which should have been given as a matter of course. Petitioner's failure in this regard
constituted breach of its contract of carriage with private respondent.

The breach was not attended by fraud or bad faith, however. When Petra Wilhelm; petitioner
airline's ticket agent at its Frankfurt Airport office, informed private respondent that an
authorization from Manila was needed before she could give an endorsement, what was foremost in
her mind was the policy regarding currency restrictions in effect at that time, which was made
known and explained to private respondent in San Francisco. Apparently, the significance of the
previously confirmed reservation completely escaped Mrs. Wilhelm on that occasion. The omission or
failure of petitioner airline then to give private respondent the required endorsement was thus
evidently due to a misappreciation of the significance of private respondent's previously confirmed
reservation, and not to any willful desire to deny private respondent the night to utilize another
airline.

We cannot give credence to private respondent's claim that he was treated rudely by petitioner
airline's personnel. His testimony on the matter is equivocal, to say the least reservation and:

Q Now, what did you do when you went to Lufthansa counter at the
airport for the endorsement?

A The woman in the counter was most interesting in one way.

Q Why?

A She gave me the impression of totally impolite. When I presented

the ticket to her, I said I need an endorsement for Cathay Pacific. She
said, I cannot give an endorsement. I wonder why she immediately
showed that impolite attitude.

Q What did you do next?

A I said, what seems to be the problem? She said well, you have a
restricted ticket. What that does mean, I said. It means that you
cannot get endorsement and even if I give you endorsement I still
have to communicate in Manila, and then you have to wait.

xxx xxx xxx

Q What did you do next?

A Then I said I have a problem about Frankfurt because I don't have

to go anywhere. If she could help me to get a hotel and she said that
is not our business. So, I said, what can I do. I don't really know. And
finally, I asked her if there was any Lufthansa flight to anywhere
near Manila to region.

xxx xxx xxx

Q What happened next?

A Then she looked at my ticket and she said that I will have to pay
extra for the flight. I said this is impossible. I have a first class ticket
and fully paid. If I have gone direct from Frankfurt to Manila, I don't
have to be charged anything. How come that I will be charged now for
the Thai connection and she said well, that is a special rate.
 Q What was your reply?

A I disagree. I denied. I said I paid the full amount of this ticket and I
did not get any special rate.

Q What was the tenor of your conversation between you and the
German Lufthansa stewardess?

A We were both getting every excited. I was getting very excited

because I had fever and she was totally unfriendly to my mind.

Q What happened next?

A Finally, she looked at my ticket. I said why don't you compute?

What additional amount I have to pay so that I can see if I can afford
it. So she did. And finally, she said, you can be accommodated. 18

This allegation was directly rebutted by Mrs. Wilhelm, to whose

testimony 19 we lend credence as it conforms to normal human behavior:

Q . . . My question to you Mrs. witness is: Were you very impolite to

the plaintiff?

A No; sir. There is no reason to be impolite to a person or to

passenger I never has (sic) seen before and if there was no discussion
between us, there is no reason to be impolite.

Q Would you be impolite to a passenger who merely asks for an

endorsement?.

A No, sir.

Q Have you received request for endorsement of tickets before?

A Often, sir.

Q What do you do upon receipt of such request for endorsement?

A I looked at the ticket and checked whether we can get the

endorsement and if I can I would give the endorsement and if I
cannot, I will explain why I cannot and I would not be impolite to
him.

Where the defendant is not shown to have acted fraudulently or in bad faith in breaching the
contract, liability for damages is limited to the natural and probable consequences of the breach of
the obligation, and which the parties had foreseen or could reasonably have foreseen. In such a case,
liability would not include the payment of moral and exemplary damages. Under Article 2232 of the
Civil Code, in a contractual or quasi-contractual relationship, moral or exemplary damages may be
awarded only if the defendant had acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner. 20

The trial Court's award of actual damages for unrealized profits in the amount of US$75,000.00,
must also be disallowed, private respondent's claim thereto being highly speculative. The realization
of profits by respondent Ferry from a real estate development project in Foster City was not a
certainty, but depended on a number of factors, foremost of which was his ability to invite investors
and to win the bid. Even private respondent himself could only speculate on the amount of profit he
might have earned from said transaction: 21

Q From this estimated profit of $687.000.00 if the land were

developed. how much would have been your share?
 A Well, I can only speculate on that depending on the fact on how
much money I would get in the form of commission. I can only
surmise that I could get for at least $200.000.00 dollars.

Q If the land would have been developed, how much would be the
profit?

A Based on what was reported to me by Mr. Navarete when the

original buyer turned around, maybe million dollar, 550 thousand
dollars or 800 thousand, the profit was 200 thousand on the land
alone. And I again speculate my share would be 100 thousand dollars.

"Actual or compensatory damages cannot be presumed, but must be duly proved, and proved with
reasonable degree of certainty. A court cannot rely on speculations, conjecture or guesswork as to the
fact and amount of damages, but must depend upon competent proof that they have (been) suffered
and on evidence of the actual amount thereof." 22

There is no room to doubt that some species of injury was caused to private respondent because of
petitioner airline's failure to endorse his ticket to Cathay Pacific Airways. In the absence of
competent proof on the actual damage suffered, private respondent is "entitled to nominal damages
which, as the law says, is adjudicated in order that a right of the plaintiff, which has been violated
or invaded by the defendant, may be vindicated and recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered." 23 We consider the amount of P50,000.00 just and
reasonable under the circumstances.

An award of P20,000.00 for and as attorney's fees is likewise just and equitable, private respondent
having been compelled to incur expenses to protect his interests.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 22494 dated January 29,
1993 is hereby MODIFIED by the deletion of the awards of actual, moral and exemplary damages, as
well as the interest thereon. Petitioner Lufthansa German Airlines is hereby ORDERED to pay
private respondent Don Ferry the amount of P50,000.00 as nominal damages and the amount of
P20,000.00 as and for attorney's fees. No pronouncement as to costs.

SO ORDERED.

Regalado, Puno and Mendoza, JJ., concur.

 FIRST DIVISION

[G.R. No. 159352. April 14, 2004]

PREMIERE DEVELOPMENT BANK, petitioner, vs. COURT OF APPEALS, PANACOR

MARKETING CORPORATION and ARIZONA TRANSPORT CORPORATION, respondents.

DECISION
YNARES-SANTIAGO, J.:

This is a petition for review under Rule 45 of the 1997 Rules on Civil Procedure seeking the
annulment of the Decision dated June 18, 2003 of the Court of Appeals[1] which affirmed the Decision
of the Regional Trial Court[2] in Civil Case No. 65577.
The undisputed facts show that on or about October 1994, Panacor Marketing Corporation
(Panacor for brevity), a newly formed corporation, acquired an exclusive distributorship of products
manufactured by Colgate Palmolive Philippines, Inc. (Colgate for short). To meet the capital
requirements of the exclusive distributorship, which required an initial inventory level of P7.5
million, Panacor applied for a loan of P4.1 million with Premiere Development Bank. After an
extensive study of Panacors creditworthiness, Premiere Bank rejected the loan application and
suggested that its affiliate company, Arizona Transport Corporation (Arizona for short),[3] should
instead apply for the loan on condition that the proceeds thereof shall be made available to Panacor.
Eventually, Panacor was granted a P4.1 million credit line as evidenced by a Credit Line
Agreement.[4] As suggested, Arizona, which was an existing loan client, applied for and was granted
a loan of P6.1 million, P3.4 million of which would be used to pay-off its existing loan accounts and
the remaining P2.7 million as credit line of Panacor. As security for the P6.1 million loan, Arizona,
represented by its Chief Executive Officer Pedro Panaligan and spouses Pedro and Marietta
Panaligan in their personal capacities, executed a Real Estate Mortgage against a parcel of land
covered by TCT No. T-3475 as per Entry No. 49507 dated October 2, 1995.[5]
Since the P2.7 million released by Premiere Bank fell short of the P4.1 million credit line which
was previously approved, Panacor negotiated for a take-out loan with Iba Finance Corporation
(hereinafter referred to as Iba-Finance) in the sum of P10 million, P7.5 million of which will be
released outright in order to take-out the loan from Premiere Bank and the balance of P2.5 million
(to complete the needed capital of P4.1 million with Colgate) to be released after the cancellation by
Premiere of the collateral mortgage on the property covered by TCT No. T-3475. Pursuant to the said
take-out agreement, Iba-Finance was authorized to pay Premiere Bank the prior existing loan
obligations of Arizona in an amount not to exceed P6 million.
On October 5, 1995, Iba-Finance sent a letter to Ms. Arlene R. Martillano, officer-in-charge of
Premiere Banks San Juan Branch, informing her of the approved loan in favor of Panacor
and Arizona, and requesting for the release of TCT No. T-3475. Martillano, after reading the letter,
affixed her signature of conformity thereto and sent the original copy to Premiere Banks legal
office. The full text of the letter reads:[6]

Please be informed that we have approved the loan application of ARIZONA TRANSPORT CORP.
and PANACOR MARKETING CORPORATION. Both represented by MR. PEDRO P. PANALIGAN
(hereinafter the BORROWERS) in the principal amount of PESOS: SEVEN MILLION FIVE
HUNDRED THOUSAND ONLY (P7,500,000.00) Philippine Currency. The loan shall be secured by a
Real Estate Mortgage over a parcel of land located at #777 Nueve de Pebrero St. Bo. Mauway,
Mandaluyong City, Metro Manila covered by TCT No. 3475 and registered under the name of
Arizona Haulers, Inc. which is presently mortgaged with your bank.

The borrowers have authorized IBA FINANCE CORP. to pay Premiere Bank from the proceeds of
their loan. The disbursement of the loan, however is subject to the annotation of our mortgage lien
on the said property and final verification that said title is free from any other lien or encumbrance
other than that of your company and IBA Finance Corporation.

In order to register the mortgage, please entrust to us the owners duplicate copy of TCT No. 3475,
current tax declaration, realty tax receipts for the current year and other documents necessary to
affect annotation thereof.
Upon registration of our mortgage, we undertake to remit directly to you or your authorized
representative the amount equivalent to the Borrowers outstanding indebtedness to Premiere Bank
as duly certified by your goodselves provided such an amount shall not exceed PESOS: SIX
MILLION ONLY (P6,000,000.00) and any amount in excess of the aforestated shall be for the
account of the borrowers. It is understood that upon receipt of payment, you will release to us the
corresponding cancellation of your mortgage within five (5) banking days therefrom.

If the foregoing terms and conditions are acceptable to you, please affix your signature provided
below and furnish us a copy of the Statement of Account of said borrowers.

On October 12, 1995, Premiere Bank sent a letter-reply[7] to Iba-Finance, informing the latter of
its refusal to turn over the requested documents on the ground that Arizona had existing unpaid
loan obligations and that it was the banks policy to require full payment of all outstanding loan
obligations prior to the release of mortgage documents. Thereafter, Premiere Bank issued to Iba-
Finance a Final Statement of Account[8] showing Arizonas total loan indebtedness. On October 19,
1995, Panacor and Arizona executed in favor of Iba-Finance a promissory note in the amount of 7.5
million. Thereafter, Iba-Finance paid to Premiere Bank the amount of P6,235,754.79 representing
the full outstanding loan account of Arizona. Despite such payment, Premiere Bank still refused to
release the requested mortgage documents specifically, the owners duplicate copy of TCT No. T-
3475.[9]
On November 2, 1995, Panacor requested Iba-Finance for the immediate approval and release of
the remaining P2.5 million loan to meet the required monthly purchases from Colgate. Iba-Finance
explained however, that the processing of the P2.5 million loan application was conditioned, among
others, on the submission of the owners duplicate copy of TCT No. 3475 and the cancellation by
Premiere Bank ofArizonas mortgage. Occasioned by Premiere Banks adamant refusal to release the
mortgage cancellation document, Panacor failed to generate the required capital to meet its
distribution and sales targets. OnDecember 7, 1995, Colgate informed Panacor of its decision to
terminate their distribution agreement.
On March 13, 1996, Panacor and Arizona filed a complaint for specific performance and
damages against Premiere Bank before the Regional Trial Court of Pasig City, docketed as Civil
Case No. 65577.
On June 11, 1996, Iba-Finance filed a complaint-in-intervention praying that judgment be
rendered ordering Premiere Bank to pay damages in its favor.
On May 26, 1998, the trial court rendered a decision in favor of Panacor and Iba-Finance, the
decretal portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff Panacor Marketing Corporation
and against the defendant Premiere Bank, ordering the latter to pay the former the following sums,
namely:

1) P4,520,000.00 in addition to legal interest from the time of filing of the complaint until
full payment;

2) P1,000,000.00 as and for exemplary damages;

3) P100,000.00 as and for reasonable attorneys fees; and

4) Costs of suit.

Similarly, judgment is hereby rendered in favor of plaintiff-in-intervention IBA-Finance Corporation

as against defendant Premiere bank, as follows, namely:

1) Ordering defendant Premiere Bank to release to plaintiff-intervenor IBA-Finance

Corporation the owners duplicate copy of Transfer Certificate of Title No. 3475
registered in the name of Arizona Haulers, Inc. including the deed of cancellation of
the mortgage constituted thereon;

2) Ordering the defendant Premiere Bank to pay to Intervenor IBA-Finance, the following
sums, to wit:

3) P1,000,000.00 as and by way of exemplary damages; and

 4) P100,000.00 as and for reasonable attorneys fees; and

5) Costs of suit.

For lack of sufficient legal and factual basis, the counterclaim of defendant Premiere Bank is
DISMISSED.

SO ORDERED.

Premiere Bank appealed to the Court of Appeals contending that the trial court erred in
finding, inter alia, that it had maliciously downgraded the credit-line of Panacor from P4.1 million to
P2.7 million.
In the meantime, a compromise agreement was entered into between Iba-Finance and Premiere
Bank whereby the latter agreed to return without interest the amount of P6,235,754.79 which Iba-
Finance earlier remitted to Premiere Bank to pay off the unpaid loans of Arizona. On March 11,
1999, the compromise agreement was approved.
On June 18, 2003, a decision was rendered by the Court of Appeals which affirmed with
modification the decision of the trial court, the dispositive portion of which reads:

WHEREFORE, premises considered, the present appeal is hereby DISMISSED, and the decision
appealed from in Civil Case No. 65577 is hereby AFFIRMED with MODIFICATION in that the
award of exemplary damages in favor of the appellees is hereby reduced to P500,000.00. Needless to
add, in view of the Compromise Agreement plaintiff-intervenor IBA-Finance and defendant-
appellant PREMIERE between plaintiff-intervenor IBA-Finance and defendant-appellant
PREMIERE as approved by this Court per Resolution dated March 11, 1999, Our dispositive of the
present appeal is only with respect to the liability of appellant PREMIERE to the plaintiff-appellees.

With costs against the defendant-appellant.

SO ORDERED.[10]

Hence the present petition for review, which raises the following issues: [11]
I

WHETHER OR NOT THE DECISION OF HONORABLE COURT OF APPEALS EXCEEDED AND

WENT BEYOND THE FACTS, THE ISSUES AND EVIDENCE PRESENTED IN THE APPEAL
TAKING INTO CONSIDERATION THE ARGUMENT OF PETITIONER BANK AND ADVENT OF
THE DULY APPROVED COMPROMISE AGREEMENT BETWEEN THE PETITIONER BANK
AND IBA FINANCE CORPORATION.

II

WHETHER OR NOT THE ISSUES THAT SHOULD HAVE BEEN RESOLVED BY THE
HONORABLE COURT OF APPEALS, BY REASON OF THE EXISTENCE OF THE COMPROMISE
AGREEMENT, IS LIMITED TO THE ISSUE OF ALLEGED BAD FAITH OF PETITIONER BANK
IN THE DOWNGRADING OF THE LOAN AND SHOULD NOT INCLUDE THE RENDITION OF
AN ADVERSE PRONOUNCEMENT TO AN ALREADY FAIT ACCOMPLI- ISSUE ON THE
REFUSAL OF THE BANK TO RECOGNIZE THE TAKE-OUT OF THE LOAN AND THE RELEASE
OF TCT NO. 3475.

III

WHETHER OR NOT PETITIONER ACTED IN BAD FAITH IN THE DOWNGRADING OF THE

LOAN OF RESPONDENTS TO SUPPORT AN AWARD OF ACTUAL AND EXEMPLARY
DAMAGES NOW REDUCED TO P500,000.00.

IV

WHETHER OR NOT THERE IS BASIS OR COMPETENT PIECE OF EVIDENCE PRESENTED

DURING THE TRIAL TO SUPPORT AN AWARD OF ACTUAL DAMAGES OF P4,520,000.00.
 Firstly, Premiere Bank argues that considering the compromise agreement it entered with Iba-
Finance, the Court of Appeals should have ruled only on the issue of its alleged bad faith in
downgrading Panacors credit line. It further contends that the Court of Appeals should have
refrained from making any adverse pronouncement on the refusal of Premiere Bank to recognize the
take-out and its subsequent failure to release the cancellation of the mortgage because they were
rendered fait accompli by the compromise agreement.
We are not persuaded.
In a letter-agreement[12] dated October 5, 1995, Iba-Finance informed Premiere Bank of its
approval of Panacors loan application in the amount of P10 million to be secured by a real estate
mortgage over a parcel of land covered by TCT No. T-3475. It was agreed that Premiere Bank shall
entrust to Iba-Finance the owners duplicate copy of TCT No. T-3475 in order to register its mortgage,
after which Iba-Finance shall pay off Arizonas outstanding indebtedness. Accordingly, Iba-Finance
remitted P6,235,754.79 to Premiere Bank on the understanding that said amount represented the
full payment of Arizonas loan obligations. Despite performance by Iba-Finance of its end of the
bargain, Premiere Bank refused to deliver the mortgage document. As a consequence, Iba-Finance
failed to release the remaining P2.5 million loan it earlier pledged to Panacor, which finally led to
the revocation of its distributorship agreement with Colgate.
Undeniably, the not-so-forthright conduct of Premiere Bank in its dealings with respondent
corporations caused damage to Panacor and Iba-Finance. It is error for Premiere Bank to assume
that the compromise agreement it entered with Iba-Finance extinguished all direct and collateral
incidents to the aborted take-out such that it also cancelled its obligations to Panacor. The
unjustified refusal by Premiere Bank to release the mortgage document prompted Iba-Finance to
withhold the release of the P2.5 million earmarked for Panacor which eventually terminated the
distributorship agreement. Both Iba-Finance and Panacor, which are two separate and distinct
juridical entities, suffered damages due to the fault of Premiere Bank. Hence, it should be held liable
to each of them.
While the compromise agreement may have resulted in the satisfaction of Iba-Finances legal
claims, Premiere Banks liability to Panacor remains. We agree with the Court of Appeals that the
present appeal is only with respect to the liability of appellant Premiere Bank to the plaintiffs-
appellees (Panacor and Arizona)[13] taking into account the compromise agreement.
For the foregoing reasons, we find that the Court of Appeals did not err in discussing in the
assailed decision the abortive take-out and the refusal by Premiere Bank to release the cancellation
of the mortgage document.
Secondly, Premiere Bank asserts that it acted in good faith when it downgraded the credit line
of Panacor from P4.1 million to P2.7 million. It cites the decision of the trial court which, albeit
inconsistent with its final disposition, expressly recognized that the downgrading of the loan was not
the proximate cause of the damages suffered by respondents.
Under the Credit Line Agreement[14] dated September 1995, Premiere Bank agreed to extend a
loan of P4.1 million to Arizona to be used by its affiliate, Panacor, in its operations. Eventually,
Premiere approved in favor of Arizona a loan equivalent to P6.1 million, P3.4 million of which was
allotted for the payment of Arizonas existing loan obligations and P2.7 million as credit line of
Panacor. Since only P2.7 million was made available to Panacor, instead of P4.1 million as
previously approved, Panacor applied for a P2.5 loan from Iba-Finance, which, as earlier mentioned,
was not released because of Premiere Banks refusal to issue the mortgage cancellation.
It is clear that Premiere Bank deviated from the terms of the credit line agreement when it
unilaterally and arbitrarily downgraded the credit line of Panacor from P4.1 million to P2.7 million.
Having entered into a well-defined contractual relationship, it is imperative that the parties should
honor and adhere to their respective rights and obligations thereunder. Law and jurisprudence
dictate that obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith. [15] The appellate court correctly observed, and we agree,
that:

Appellants actuations, considering the actual knowledge of its officers of the tight financial situation
of appellee PANACOR brought about primarily by the appellant banks considerable reduction of the
credit line portion of the loan, in relation to the bail-out efforts of IBA Finance, whose payment of the
outstanding loan account of appellee ARIZONA with appellant was readily accepted by the
appellant, were truly marked by bad faith and lack of due regard to the urgency of its compliance by
immediately releasing the mortgage cancellation document and delivery of the title to IBA Finance.
That time is of the essence in the requested release of the mortgage cancellation and delivery of the
subject title was only too well-known to appellant, having only belatedly invoked the cross-default
provision in the Real Estate Mortgage executed in its favor by appellee ARIZONA to resist the plain
valid and just demand of IBA Finance for such compliance by appellant bank. [16]

Premiere Bank cannot justify its arbitrary act of downgrading the credit line on the alleged
finding by its project analyst that the distributorship was not financially feasible. Notwithstanding
the alleged forewarning, Premiere Bank still extended Arizona the loan of P6.1 million, albeit in
contravention of the credit line agreement. This indubitably indicates that Premiere Bank had
deliberately and voluntarily granted the said loan despite its claim that the distributorship contract
was not viable.
Neither can Premiere Bank rely on the puerile excuse that it was the banks policy not to release
the mortgage cancellation prior to the settlement of outstanding loan obligations. Needless to say,
the Final Statement of Account dated October 17, 1995 showing in no uncertain terms Arizonas
outstanding indebtedness, which was subsequently paid by Iba-Finance, was the full payment
of Arizonas loan obligations. Equity demands that a party cannot disown it previous declaration to
the prejudice of the other party who relied reasonably and justifiably on such declaration.
Thirdly, Premiere Bank avers that the appellate courts reliance on the credit line agreement as
the basis of bad faith on its part was inadmissible or self-serving for not being duly notarized, being
unsigned in all of its left margins, and undated. According to Premiere Bank, the irregularities in
the execution of the credit line agreement bolsters the theory that the same was the product of
manipulation orchestrated by respondent corporations through undue influence and pressure
exerted by its officers on Martillano.
Premiere Banks posture deserves scant consideration. As found by the lower court, there are
sufficient indicia that demonstrate that the alleged unjust pressure exerted on Martillano was more
imagined than real. In her testimony, Martillano claims that she was persuaded and coaxed by
Caday of Iba-Finance and Panaligan of Panacor to sign the letter. It was she who provided Iba-
Finance with the Final Statement of Account and accepted its payment without objection or
qualification. These acts show that she was vested by Premiere Bank with sufficient authority to
enter into the said transactions.
If a private corporation intentionally or negligently clothes its officers or agents with apparent
power to perform acts for it, the corporation will be estopped to deny that the apparent authority is
real as to innocent third persons dealing in good faith with such officers or agents. [17] As testified to
by Martillano, after she received a copy of the credit line agreement and affixed her signature in
conformity thereto, she forwarded the same to the legal department of the Bank at its Head
Office. Despite its knowledge, Premiere Bank failed to disaffirm the contract. When the officers or
agents of a corporation exceed their powers in entering into contracts or doing other acts, the
corporation, when it has knowledge thereof, must promptly disaffirm the contract or act and allow
the other party or third persons to act in the belief that it was authorized or has been ratified. If it
acquiesces, with knowledge of the facts, or fails to disaffirm, ratification will be implied or else it will
be estopped to deny ratification.[18]
Finally, Premiere Bank argues that the finding by the appellate court that it was liable for
actual damages in the amount of P4,520,000.00 is without basis. It contends that the evidence
presented by Panacor in support of its claim for actual damages are not official receipts but self-
serving declarations.
To justify an award for actual damages, there must be competent proof of the actual amount of
loss. Credence can be given only to claims, which are duly supported by receipts.[19] The burden of
proof is on the party who will be defeated if no evidence is presented on either side. He must
establish his case by a preponderance of evidence which means that the evidence, as a whole,
adduced by one side is superior to that of the other. In other words, damages cannot be presumed
and courts, in making an award, must point out specific facts that can afford a basis for measuring
whatever compensatory or actual damages are borne.
Under Article 2199 of the Civil Code, actual or compensatory damages are those awarded in
satisfaction of, or in recompense for, loss or injury sustained. They proceed from a sense of natural
justice and are designed to repair the wrong that has been done, to compensate for the injury
inflicted and not to impose a penalty.
In the instant case, the actual damages were proven through the sole testimony of Themistocles
Ruguero, the vice president for administration of Panacor. In his testimony, the witness affirmed
that Panacor incurred losses, specifically, in terms of training and seminars, leasehold acquisition,
procurement of vehicles and office equipment without, however, adducing receipts to substantiate
the same. The documentary evidence marked as exhibit W, which was an ordinary private writing
allegedly itemizing the capital expenditures and losses from the failed operation of Panacor, was not
testified to by any witness to ascertain the veracity of its contents. Although the lower court fixed the
sum of P4,520,000.00 as the total expenditures incurred by Panacor, it failed to show how and in
what manner the same were substantiated by the claimant with reasonable certainty. Hence, the
claim for actual damages should be admitted with extreme caution since it is only based on bare
assertion without support from independent evidence. Premieres failure to prove actual expenditure
consequently conduces to a failure of its claim. In determining actual damages, the court cannot rely
on mere assertions, speculations, conjectures or guesswork but must depend on competent proof and
on the best evidence obtainable regarding the actual amount of loss. [20]
Even if not recoverable as compensatory damages, Panacor may still be awarded damages in the
concept of temperate or moderate damages. When the court finds that some pecuniary loss has been
suffered but the amount cannot, from the nature of the case, be proved with certainty, temperate
damages may be recovered. Temperate damages may be allowed in cases where from the nature of
the case, definite proof of pecuniary loss cannot be adduced, although the court is convinced that the
aggrieved party suffered some pecuniary loss.
The Code Commission, in explaining the concept of temperate damages under Article 2224,
makes the following comment:[21]

In some States of the American Union, temperate damages are allowed. There are cases where from
the nature of the case, definite proof of pecuniary loss cannot be offered, although the court is
convinced that there has been such loss. For instance, injury to ones commercial credit or to the
goodwill of a business firm is often hard to show with certainty in terms of money. Should damages
be denied for that reason? The judge should be empowered to calculate moderate damages in such
cases, rather than that the plaintiff should suffer, without redress from the defendant's wrongful act.

It is obvious that the wrongful acts of Premiere Bank adversely affected, in one way or another,
the commercial credit[22] of Panacor, greatly contributed to, if not, decisively caused the premature
stoppage of its business operations and the consequent loss of business opportunity. Since these
losses are not susceptible to pecuniary estimation, temperate damages may be awarded. Article 2216
of the Civil Code:

No proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or
exemplary damages may be adjudicated. The assessment of such damages, except liquidated ones, is
left to the discretion of the Court, according to the circumstances of each case.

Under the circumstances, the sum of P200,000.00 as temperate damages is reasonable.

WHEREFORE, the petition is DENIED. The Decision dated June 18, 2003 of the Court of
Appeals in CA-G.R. CV No. 60750, ordering Premiere Bank to pay Panacor Marketing Corporation
P500,000.00 as exemplary damages, P100,000.00 as attorneys fees, and costs, is AFFIRMED, with
the MODIFICATION that the award of P4,520,000.00 as actual damages is DELETED for lack of
factual basis. In lieu thereof, Premiere Bank is ordered to pay Panacor P200,000.00 as temperate
damages.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, Carpio, and Azcuna, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 84281 May 27, 1994

CITYTRUST BANKING CORPORATION, petitioner,

vs.
THE INTERMEDIATE APPELLATE COURT and EMME HERRERO, respondents.

Agcaoili and Associates for petitioner.

David B. Agoncillo for private respondent.

Humberto B. Basco, collaborating counsel for private respondent.

VITUG, J.:

This case emanated from a complaint filed by private respondent Emme Herrero for damages
against petitioner Citytrust Banking Corporation. In her complaint, private respondent averred that
she, a businesswoman, made regular deposits, starting September of 1979, with petitioner Citytrust
Banking Corporation at its Burgos branch in Calamba, Laguna. On 15 May 1980, she deposited with
petitioner the amount of Thirty One Thousand Five Hundred Pesos (P31,500.00), in cash, in order to
amply cover six (6) postdated checks she issued, viz:

Check No. Amount

007383 P1,507.00
007384 1,262.00
007387 4,299.00
007387 2,204.00
007492 6,281.00
007400 4,716.00

When presented for encashment upon maturity, all the checks were dishonored due to
"insufficient funds." The last check No. 007400, however, was personally redeemed by private
respondent in cash before it could be redeposited.

Petitioner, in its answer, asserted that it was due to private respondent's fault that her checks were
dishonored. It averred that instead of stating her correct account number, i.e., 29000823, in her
deposit slip, she inaccurately wrote 2900823.

The Regional Trial Court (Branch XXXIV) of Calamba, Laguna, on

27 February 1984, dismissed the complaint for lack of merit; thus:

WHEREFORE, judgment is hereby rendered in favor of the defendant and against

the plaintiff, DISMISSING the complaint for lack of merit, plaintiff is hereby
adjudged to pay the defendant reasonable attorney's fee in the amount of FIVE
THOUSAND PESOS (P5,000.00) plus cost of suit.

Private respondent went to the Court of Appeals, which found the appeal meritorious. Hence, it
rendered judgment, on 15 July 1988, reversing the trial court's decision. The appellate court ruled:

WHEREFORE, the judgment appealed from is REVERSED and a new one entered
thereby ordering defendant to pay plaintiff nominal damages of P2,000.00, temperate
and moderate damages of P5,000.00, and attorney's fees of P4,000.00.
 The counterclaim of defendant is dismissed for lack of merit, with costs against him.

Petitioner Citytrust Banking Corporation is now before us in this petition for review on certiorari.

Petitioner bank concedes that it is its obligation to honor checks issued by private respondent which
are sufficiently funded, but, it contends, private respondent has also the duty to use her account in
accordance with the rules of petitioner bank to which she has contractually acceded. Among such
rules, contained in its "brochures" governing current account deposits, is the following printed
provision:

In making a deposit . . . kindly insure accuracy in filing said deposit slip forms as we
hold ourselves free of any liability for loss due to an incorrect account number
indicated in the deposit slip although the name of the depositor is correctly written.

Exactly the same issue was addressed by the appellate court, which, after its deliberations, made the
following findings and conclusions: 1

We cannot uphold the position of defendant. For, even if it be true that there was
error on the part of the plaintiff in omitting a "zero" in her account number, yet, it is
a fact that her name, "Emme E. Herrero", is clearly written on said deposit slip (Exh.
"B"). This is controlling in determining in whose account the deposit is made or
should be posted. This is so because it is not likely to commit an error in one's name
than merely relying on numbers which are difficult to remember, especially a number
with eight (8) digits as the account numbers of defendant's depositors. We view the
use of numbers as simply for the convenience of the bank but was never intended to
disregard the real name of its depositors. The bank is engaged in business impressed
with public interest, and it is its duty to protect in return its many clients and
depositors who transact business with it. It should not be a matter of the bank alone
receiving deposits, lending out money and collecting interests. It is also its obligation
to see to it that all funds invested with it are properly accounted for and duly posted
in its ledgers.

In the case before Us, We are not persuaded that defendant bank was not free from
blame for the fiasco. In the first place, the teller should not have accepted plaintiff's
deposit without correcting the account number on the deposit slip which, obviously,
was erroneous because, as pointed out by defendant, it contained only seven (7) digits
instead of eight (8). Second, the complete name of plaintiff depositor appears in bold
letters on the deposit slip (Exh. "B"). There could be no mistaking in her name, and
that the deposit was made in her name, "Emma E. Herrero." In fact, defendant's
teller should not have fed her deposit slip to the computer knowing that her account
number written thereon was wrong as it contained only seven (7) digits. As it
happened, according to defendant, plaintiff's deposit had to be consigned to the
suspense accounts pending verification. This, indeed, could have been avoided at the
first instance had the teller of defendant bank performed her duties efficiently and
well. For then she could have readily detected that the account number in the name
of "Emma E. Herrero" was erroneous and would be rejected by the computer. That is,
or should be, part of the training and standard operating procedure of the bank's
employees. On the other hand, the depositors are not concerned with banking
procedure. That is the responsibility of the bank and its employees. Depositors are
only concerned with the facility of depositing their money, earning interest thereon, if
any, and withdrawing therefrom, particularly businessmen, like plaintiff, who are
supposed to be always "on-the-go". Plaintiff's account is a "current account" which
should immediately be posted. After all, it does not earn interest. At least, the
forbearance should be commensurated with prompt, efficient and satisfactory service.

Bank clients are supposed to rely on the services extended by the bank, including the
assurance that their deposits will be duly credited them as soon as they are made.
For, any delay in crediting their account can be embarrassing to them as in the case
of plaintiff.

We agree with plaintiff that

. . . even in computerized systems of accounts, ways and means are

available whereby deposits with erroneous account numbers are
 properly credited depositor's correct account numbers. They add that
failure on the part of the defendant to do so is negligence for which
they are liable. As proof thereof plaintiff alludes to five particular
incidents where plaintiff admittedly wrongly indicated her account
number in her deposit slips
(Exhs. "J", "L", "N", "O" and "P"), but were nevertheless properly
credited her deposit (pp. 4-5, Decision).

We have already ruled in Mundin v. Far East Bank & Trust Co., AC-G.R. CV No.
03639, prom. Nov. 2, 1985, quoting the court a quo in an almost identical set of facts,
that

Having accepted a deposit in the course of its business transactions, it

behooved upon defendant bank to see to it and without recklessness
that the depositor was accurately credited therefor. To post a
deposit in somebody else's name despite the name of the depositor
clearly written on the deposit slip is indeed sheer negligence which
could have easily been avoided if defendant bank exercised due
diligence and circumspection in the acceptance and posting of
plaintiff's deposit.

We subscribe to the above disquisitions of the appellate court. In Simex International (Manila),
Inc. vs. Court of Appeals, 183 SCRA 360, reiterated in Bank of Philippine Islands vs. Intermediate
Appellate Court, 206 SCRA 408, we similarly said, in cautioning depository banks on their fiduciary
responsibility, that

In every case, the depositor expects the bank to treat his account with utmost
fidelity, whether such account consists only of a few hundred pesos or of millions. The
bank must record every single transaction accurately, down to the last centavo, and
as promptly as possible. This has to be done if the account is to reflect at any given
time the amount of money the depositor can dispose of as he sees fit, confident that
the bank will deliver it as and to whomever he directs. A blunder on the part of the
bank, such as the dishonor of a check without good reason, can cause the depositor
not a little embarrassment if not also financial loss and perhaps even civil and
criminal litigation.

The point is that as a business affected with public interest and because of the nature
of its functions, the bank is under obligation to treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature of their
relationship.

We agree with petitioner, however, that it is wrong to award, along with nominal damages,
temperate or moderate damages. The two awards are incompatible and cannot be granted
concurrently. Nominal damages are given in order that a right of the plaintiff, which has been
violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered by him (Art. 2221, New Civil Code; Manila Banking
Corp. vs. Intermediate Appellate Court, 131 SCRA 271). Temperate or moderate damages, which are
more than nominal but less than compensatory damages, on the other hand, may be recovered when
the court finds that some pecuniary loss has been suffered but its amount cannot, from the nature of
the case, be proved with reasonable certainty (Art. 2224, New Civil Code).

In the instant case, we also find need for vindicating the wrong done on private respondent, and we
accordingly agree with the Court of Appeals in granting to her nominal damages but not in similarly
awarding temperate or moderate damages.

WHEREFORE, the appealed decision is MODIFIED by deleting the award of temperate or moderate
damages. In all other respects, the appellate court's decision is AFFIRMED. No costs in this
instance.

SO ORDERED.

Feliciano, Bidin, Romero and Melo, JJ., concur.

Citytrust banking Corp., vs. Intermediate Appellate Court

GR No. 84281 May 27, 1994
Vitug, J:

Facts:
Emme Herrero, businesswoman, made regular deposits with Citytrust Banking Corp. at its
Burgoa branch in Calamba, Laguna. She deposited the amount of P31, 500 in order to amply cover 6
postdated checks she issued. All checks were dishonored due to insufficiency of funds upon the
presentment for encashment. Citytrust banking Corp. asserted that it was due to Herreros fault
that her checks were dishonored, for he inaccurately wrote his account number in the deposit slip.
RTC dismissed the complaint for lack of merit. CA reversed the decision of RTC.

Issue:
Whether or not Citytrust banking Corp. has the duty to honor checks issued by Emme
Herrero despite the failure to accurately stating the account number resulting to insufficiency of
funds for the check.

Held:
Yes, even it is true that there was error on the account number stated in the deposit slip, its
is, however, indicated the name of Emme Herrero. This is controlling in determining in whose
account the deposit is made or should be posted. This is so because it is not likely to commit an error
in ones name than merely relying on numbers which are difficult to remember. Numbers are for the
convenience of the bank but was never intended to disregard the real name of its depositors. The
bank is engaged in business impressed with public trust, and it is its duty to protect in return its
clients and depositors who transact business with it. It should not be a matter of the bank alone
receiving deposits, lending out money and collecting interests. It is also its obligation to see to it that
all funds invested with it are properly accounted for and duly posted in its ledgers.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-21151 June 26, 1968

LOURDES MUNSAYAC, petitioner,

vs.
BENEDICTA DE LARA and THE COURT OF APPEALS, respondents.

Celso P. Mariano for petitioner.

Ruben L. Roxas for respondents.

MAKALINTAL, J.:

As a result of injuries suffered by the plaintiff-appellee while riding as a passenger on a jeepney

owned and operated by the defendant-appellant, this action for recovery of damages was filed in the
Court of First Instance of Rizal (Pasig Branch). The trial Judge found the driver recklessly negligent:
he drove at an excessive speed, unmindful of the fact that the road was under repair and heedless of
the passengers' pleas that he go more slowly. Besides the award of compensatory damages for actual
expenses incurred and loss of income, the defendant was ordered to pay P1,000.00 as exemplary
damages and P500.00 as attorney's fees. On these last two items the defendant appealed to the
Court of Appeals, which rendered a judgment of affirmance, quoting the trial Court's justification for
the award as follows:

The defendant's admission that the accident happened and the plaintiff's extensive injuries
as a result thereof, despite which the defendant failed, or even refused, to placate the
sufferings of plaintiff, necessitating the filing of this action, entitled plaintiff to exemplary
damages to set an example to others and attorney's fees.

The case is new before us on review by certiorari.

The Civil Code provides that "exemplary or corrective damages are imposed, by way of example or
correction for the public good" (Act 2229); and that in contracts "the Court may award exemplary
damages if the defendant acted in wanton, fraudulent, reckless, oppressive or malevolent manner"
(Art. 2232).

Appellant points out that the act referred to in Article 2232 must be one which is coetaneous with
and characterizes the breach of the contract on which the suit is based, and not one which is
subsequent to such breach and therefore has no causal relation thereto, such as the herein
defendant's failure to placate the sufferings of the plaintiff.

Appellant relies on the case of Rotea vs. Halili, G.R. No. L-12030, September 30, 1960, where this
Court held:

According to the rule adopted by many courts, a principal or master can be held liable for
exemplary or punitive damages based upon the wrongful act of his agent or servant only
where he participated in the doing of such wrongful act or has previously authorized or
subsequently ratified it with full knowledge of the facts. Reasons given for this rule are that
since damages are penal in character, the motive authorizing their infliction will not be
imputed by presumption to the principal when the act is committed by an agent or servant,
and that since they are awarded not by way of compensation, but as a warning to others,
they can only be awarded against one who has participated in the offense, and the principal
therefore cannot be held liable for them merely by reason of wanton, oppressive or malicious
intent on the part of the agent (15 Art. Jur. 730).

We believe the point of the appellant is well-taken. It is difficult to conceive how the defendant in a
breach of contract case could be held to have acted in a wanton, fraudulent, reckless, oppressive or
violent manner within the meaning of Article 2232 for something he did or did not do after the
breach, which had no causal connection therewith. The law does not contemplate a vicarious liability
on his part: the breach is his as party to the contract, and so if he is to be held liable at all for
exemplary damages by reason of the wrongful act of his agent, it must be shown that he had
previously authorized or knowingly ratified it thereafter, in effect making him a co-participant. From
the decision under review, however, there is nothing to show previous authority or subsequent
ratification by appellant insofar as the recklessness of the driver was concerned. The mere statement
that the defendant failed, even refused, to placate the suffering of the plaintiff, necessitating the
filing of the action, is too tenuous a basis to warrant the conclusion that the defendant approved of
the wrongful act of his servant with full knowledge of the facts.

It is not enough to say that an example should be made, or corrective measures employed, for the
public good, especially in accident cases where public carriers are involved. For the causative
negligence in such cases is personal to the employees actually in charge of the vehicles, and it is they
who should be made to pay this kind of damages by way of example or correction, unless by the
demonstrated tolerance or approval of the owners they themselves can be held at fault and their
fault is of the character described in Article 2232 of the Civil Code. Otherwise there would be
practically no difference between their liability for exemplary damages and their liability for
compensatory damages, which needs no proof of their negligence since the suit is predicated on
breach of contract and due diligence on their part does not constitute a defense.

IN VIEW OF THE FOREGOING, the judgment appealed from is modified by eliminating the award
for exemplary damages, and affirmed with respect to the attorney's fees. No pronouncement as to
costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.
 Republic of the Philippines

Supreme Court

Manila

SECOND DIVISION

SPOUSES FERNANDO G.R. No. 188288

and LOURDES VILORIA,

Petitioners, Present:

CARPIO, J.,

Chairperson,

PEREZ,

- versus - SERENO,

REYES, and

BERNABE, JJ.

Promulgated:

CONTINENTAL AIRLINES, INC.,

Respondent. January 16, 2012

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

DECISION

REYES, J.:
 This is a petition for review under Rule 45 of the Rules of Court from the January 30, 2009
Decision1 of the Special Thirteenth Division of the Court of Appeals (CA) in CA-G.R. CV No. 88586
entitled Spouses Fernando and Lourdes Viloria v. Continental Airlines, Inc., the dispositive portion
of which states:

WHEREFORE, the Decision of the Regional Trial Court, Branch 74, dated 03
April 2006, awarding US$800.00 or its peso equivalent at the time of payment, plus
legal rate of interest from 21 July 1997 until fully paid, [P]100,000.00 as moral
damages, [P]50,000.00 as exemplary damages, [P]40,000.00 as attorneys fees and
costs of suit to plaintiffs-appellees is hereby REVERSED and SET ASIDE.

Defendant-appellants counterclaim is DENIED.

Costs against plaintiffs-appellees.

SO ORDERED.2

On April 3, 2006, the Regional Trial Court of Antipolo City, Branch 74 (RTC) rendered a
Decision, giving due course to the complaint for sum of money and damages filed by petitioners
Fernando Viloria (Fernando) and Lourdes Viloria (Lourdes), collectively called Spouses Viloria,
against respondent Continental Airlines, Inc. (CAI). As culled from the records, below are the facts
giving rise to such complaint.

On or about July 21, 1997 and while in the United States, Fernando purchased for himself
and his wife, Lourdes, two (2) round trip airline tickets from San Diego, California to Newark, New
Jersey on board Continental Airlines. Fernando purchased the tickets at US$400.00 each from a
travel agency called Holiday Travel and was attended to by a certain Margaret Mager (Mager).
According to Spouses Viloria, Fernando agreed to buy the said tickets after Mager informed them
that there were no available seats at Amtrak, an intercity passenger train service provider in the
United States. Per the tickets, Spouses Viloria were scheduled to leave for Newark on August 13,
1997 and return to San Diego on August 21, 1997.

Subsequently, Fernando requested Mager to reschedule their flight to Newark to an earlier

date or August 6, 1997. Mager informed him that flights to Newark via Continental Airlines were
already fully booked and offered the alternative of a round trip flight via Frontier Air. Since flying
with Frontier Air called for a higher fare of US$526.00 per passenger and would mean traveling by
night, Fernando opted to request for a refund. Mager, however, denied his request as the subject
tickets are non-refundable and the only option that Continental Airlines can offer is the re-issuance
of new tickets within one (1) year from the date the subject tickets were issued. Fernando decided to
reserve two (2) seats with Frontier Air.

As he was having second thoughts on traveling via Frontier Air, Fernando went to the
Greyhound Station where he saw an Amtrak station nearby. Fernando made inquiries and was told
that there are seats available and he can travel on Amtrak anytime and any day he pleased.
Fernando then purchased two (2) tickets for Washington, D.C.

From Amtrak, Fernando went to Holiday Travel and confronted Mager with the Amtrak
tickets, telling her that she had misled them into buying the Continental Airlines tickets by
misrepresenting that Amtrak was already fully booked. Fernando reiterated his demand for a refund
but Mager was firm in her position that the subject tickets are non-refundable.

Upon returning to the Philippines, Fernando sent a letter to CAI on February 11, 1998,
demanding a refund and alleging that Mager had deluded them into purchasing the subject tickets. 3

In a letter dated February 24, 1998, Continental Micronesia informed Fernando that his
complaint had been referred to the Customer Refund Services of Continental Airlines at Houston,
Texas.4

In a letter dated March 24, 1998, Continental Micronesia denied Fernandos request for a
refund and advised him that he may take the subject tickets to any Continental ticketing location for
the re-issuance of new tickets within two (2) years from the date they were issued. Continental
Micronesia informed Fernando that the subject tickets may be used as a form of payment for the
purchase of another Continental ticket, albeit with a re-issuance fee.5

On June 17, 1999, Fernando went to Continentals ticketing office at Ayala Avenue, Makati
City to have the subject tickets replaced by a single round trip ticket to Los Angeles, California
under his name. Therein, Fernando was informed that Lourdes ticket was non-transferable, thus,
cannot be used for the purchase of a ticket in his favor. He was also informed that a round trip ticket
to Los Angeles was US$1,867.40 so he would have to pay what will not be covered by the value of his
San Diego to Newark round trip ticket.

In a letter dated June 21, 1999, Fernando demanded for the refund of the subject tickets as
he no longer wished to have them replaced. In addition to the dubious circumstances under which
the subject tickets were issued, Fernando claimed that CAIs act of charging him with US$1,867.40
for a round trip ticket to Los Angeles, which other airlines priced at US$856.00, and refusal to allow
him to use Lourdes ticket, breached its undertaking under its March 24, 1998 letter. 6

On September 8, 2000, Spouses Viloria filed a complaint against CAI, praying that CAI be
ordered to refund the money they used in the purchase of the subject tickets with legal interest from
July 21, 1997 and to pay P1,000,000.00 as moral damages, P500,000.00 as exemplary damages
and P250,000.00 as attorneys fees.7

CAI interposed the following defenses: (a) Spouses Viloria have no right to ask for a refund
as the subject tickets are non-refundable; (b) Fernando cannot insist on using the ticket in Lourdes
name for the purchase of a round trip ticket to Los Angeles since the same is non-transferable; (c) as
Mager is not a CAI employee, CAI is not liable for any of her acts; (d) CAI, its employees and agents
did not act in bad faith as to entitle Spouses Viloria to moral and exemplary damages and attorneys
fees. CAI also invoked the following clause printed on the subject tickets:

3. To the extent not in conflict with the foregoing carriage and other services
performed by each carrier are subject to: (i) provisions contained in this ticket, (ii)
applicable tariffs, (iii) carriers conditions of carriage and related regulations which
are made part hereof (and are available on application at the offices of carrier),
except in transportation between a place in the United States or Canada and any
place outside thereof to which tariffs in force in those countries apply. 8

According to CAI, one of the conditions attached to their contract of carriage is the non-
transferability and non-refundability of the subject tickets.

The RTCs Ruling

 Following a full-blown trial, the RTC rendered its April 3, 2006 Decision, holding that
Spouses Viloria are entitled to a refund in view of Magers misrepresentation in obtaining their
consent in the purchase of the subject tickets.9 The relevant portion of the April 3, 2006 Decision
states:

Continental Airlines agent Ms. Mager was in bad faith when she was less
candid and diligent in presenting to plaintiffs spouses their booking options. Plaintiff
Fernando clearly wanted to travel via AMTRAK, but defendants agent misled him
into purchasing Continental Airlines tickets instead on the fraudulent
misrepresentation that Amtrak was fully booked. In fact, defendant Airline did not
specifically denied (sic) this allegation.

Plainly, plaintiffs spouses, particularly plaintiff Fernando, were tricked into

buying Continental Airline tickets on Ms. Magers misleading misrepresentations.
Continental Airlines agent Ms. Mager further relied on and exploited plaintiff
Fernandos need and told him that they must book a flight immediately or risk not
being able to travel at all on the couples preferred date. Unfortunately, plaintiffs
spouses fell prey to the airlines and its agents unethical tactics for baiting trusting
customers.10

Citing Articles 1868 and 1869 of the Civil Code, the RTC ruled that Mager is CAIs agent,
hence, bound by her bad faith and misrepresentation. As far as the RTC is concerned, there is no
issue as to whether Mager was CAIs agent in view of CAIs implied recognition of her status as such
in its March 24, 1998 letter.

The act of a travel agent or agency being involved here, the following are the
pertinent New Civil Code provisions on agency:

Art. 1868. By the contract of agency a person binds himself to

render some service or to do something in representation or on behalf
of another, with the consent or authority of the latter.

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.

Agency may be oral, unless the law requires a specific form.

 As its very name implies, a travel agency binds itself to render some service
or to do something in representation or on behalf of another, with the consent or
authority of the latter. This court takes judicial notice of the common services
rendered by travel agencies that represent themselves as such, specifically the
reservation and booking of local and foreign tours as well as the issuance of airline
tickets for a commission or fee.

The services rendered by Ms. Mager of Holiday Travel agency to the plaintiff
spouses on July 21, 1997 were no different from those offered in any other travel
agency. Defendant airline impliedly if not expressly acknowledged its principal-agent
relationship with Ms. Mager by its offer in the letter dated March 24, 1998 an
obvious attempt to assuage plaintiffs spouses hurt feelings. 11

Furthermore, the RTC ruled that CAI acted in bad faith in reneging on its undertaking to
replace the subject tickets within two (2) years from their date of issue when it charged Fernando
with the amount of US$1,867.40 for a round trip ticket to Los Angeles and when it refused to allow
Fernando to use Lourdes ticket. Specifically:

Tickets may be reissued for up to two years from the original date of issue. When
defendant airline still charged plaintiffs spouses US$1,867.40 or more than double
the then going rate of US$856.00 for the unused tickets when the same were
presented within two (2) years from date of issue, defendant airline exhibited callous
treatment of passengers.12

The Appellate Courts Ruling

On appeal, the CA reversed the RTCs April 3, 2006 Decision, holding that CAI cannot be
held liable for Magers act in the absence of any proof that a principal-agent relationship existed
between CAI and Holiday Travel. According to the CA, Spouses Viloria, who have the burden of proof
to establish the fact of agency, failed to present evidence demonstrating that Holiday Travel is CAIs
agent. Furthermore, contrary to Spouses Vilorias claim, the contractual relationship between
Holiday Travel and CAI is not an agency but that of a sale.

Plaintiffs-appellees assert that Mager was a sub-agent of Holiday Travel who

was in turn a ticketing agent of Holiday Travel who was in turn a ticketing agent of
Continental Airlines. Proceeding from this premise, they contend that Continental
Airlines should be held liable for the acts of Mager. The trial court held the same
view.
 We do not agree. By the contract of agency, a person binds him/herself to
render some service or to do something in representation or on behalf of another,
with the consent or authority of the latter. The elements of agency are: (1) consent,
express or implied, of the parties to establish the relationship; (2) the object is the
execution of a juridical act in relation to a third person; (3) the agent acts as a
representative and not for him/herself; and (4) the agent acts within the scope of
his/her authority. As the basis of agency is representation, there must be, on the part
of the principal, an actual intention to appoint, an intention naturally inferable from
the principals words or actions. In the same manner, there must be an intention on
the part of the agent to accept the appointment and act upon it. Absent such mutual
intent, there is generally no agency. It is likewise a settled rule that persons dealing
with an assumed agent are bound at their peril, if they would hold the principal
liable, to ascertain not only the fact of agency but also the nature and extent of
authority, and in case either is controverted, the burden of proof is upon them to
establish it. Agency is never presumed, neither is it created by the mere use of the
word in a trade or business name. We have perused the evidence and documents so
far presented. We find nothing except bare allegations of plaintiffs-appellees that
Mager/Holiday Travel was acting in behalf of Continental Airlines. From all sides of
legal prism, the transaction in issue was simply a contract of sale, wherein Holiday
Travel buys airline tickets from Continental Airlines and then, through its
employees, Mager included, sells it at a premium to clients.13

The CA also ruled that refund is not available to Spouses Viloria as the word non-
refundable was clearly printed on the face of the subject tickets, which constitute their contract with
CAI. Therefore, the grant of their prayer for a refund would violate the proscription against
impairment of contracts.

Finally, the CA held that CAI did not act in bad faith when they charged Spouses Viloria
with the higher amount of US$1,867.40 for a round trip ticket to Los Angeles. According to the CA,
there is no compulsion for CAI to charge the lower amount of US$856.00, which Spouses Viloria
claim to be the fee charged by other airlines. The matter of fixing the prices for its services is CAIs
prerogative, which Spouses Viloria cannot intervene. In particular:

It is within the respective rights of persons owning and/or operating business entities
to peg the premium of the services and items which they provide at a price which
they deem fit, no matter how expensive or exhorbitant said price may seem vis--
vis those of the competing companies. The Spouses Viloria may not intervene with
the business judgment of Continental Airlines.14

The Petitioners Case

 In this Petition, this Court is being asked to review the findings and conclusions of the CA,
as the latters reversal of the RTCs April 3, 2006 Decision allegedly lacks factual and legal bases.
Spouses Viloria claim that CAI acted in bad faith when it required them to pay a higher amount for
a round trip ticket to Los Angeles considering CAIs undertaking to re-issue new tickets to them
within the period stated in their March 24, 1998 letter. CAI likewise acted in bad faith when it
disallowed Fernando to use Lourdes ticket to purchase a round trip to Los Angeles given that there
is nothing in Lourdes ticket indicating that it is non-transferable. As a common carrier, it is CAIs
duty to inform its passengers of the terms and conditions of their contract and passengers cannot be
bound by such terms and conditions which they are not made aware of. Also, the subject contract of
carriage is a contract of adhesion; therefore, any ambiguities should be construed against CAI.
Notably, the petitioners are no longer questioning the validity of the subject contracts and limited its
claim for a refund on CAIs alleged breach of its undertaking in its March 24, 1998 letter.

The Respondents Case

In its Comment, CAI claimed that Spouses Vilorias allegation of bad faith is negated by its
willingness to issue new tickets to them and to credit the value of the subject tickets against the
value of the new ticket Fernando requested. CAI argued that Spouses Vilorias sole basis to claim
that the price at which CAI was willing to issue the new tickets is unconscionable is a piece of
hearsay evidence an advertisement appearing on a newspaper stating that airfares from Manila to
Los Angeles or San Francisco cost US$818.00.15 Also, the advertisement pertains to airfares in
September 2000 and not to airfares prevailing in June 1999, the time when Fernando asked CAI to
apply the value of the subject tickets for the purchase of a new one.16 CAI likewise argued that it did
not undertake to protect Spouses Viloria from any changes or fluctuations in the prices of airline
tickets and its only obligation was to apply the value of the subject tickets to the purchase of the
newly issued tickets.

With respect to Spouses Vilorias claim that they are not aware of CAIs restrictions on the
subject tickets and that the terms and conditions that are printed on them are ambiguous, CAI
denies any ambiguity and alleged that its representative informed Fernando that the subject tickets
are non-transferable when he applied for the issuance of a new ticket. On the other hand, the word
non-refundable clearly appears on the face of the subject tickets.

CAI also denies that it is bound by the acts of Holiday Travel and Mager and that no
principal-agency relationship exists between them. As an independent contractor, Holiday Travel
was without capacity to bind CAI.
 Issues

To determine the propriety of disturbing the CAs January 30, 2009 Decision and whether
Spouses Viloria have the right to the reliefs they prayed for, this Court deems it necessary to resolve
the following issues:

a. Does a principal-agent relationship exist between CAI and Holiday Travel?

b. Assuming that an agency relationship exists between CAI and Holiday Travel, is
CAI bound by the acts of Holiday Travels agents and employees such as
Mager?

c. Assuming that CAI is bound by the acts of Holiday Travels agents and employees,
can the representation of Mager as to unavailability of seats at Amtrak be
considered fraudulent as to vitiate the consent of Spouse Viloria in the
purchase of the subject tickets?

d. Is CAI justified in insisting that the subject tickets are non-transferable and non-
refundable?

e. Is CAI justified in pegging a different price for the round trip ticket to Los Angeles
requested by Fernando?

f. Alternatively, did CAI act in bad faith or renege its obligation to Spouses Viloria to
apply the value of the subject tickets in the purchase of new ones when it
refused to allow Fernando to use Lourdes ticket and in charging a higher
price for a round trip ticket to Los Angeles?

This Courts Ruling

I. A principal-agent relationship exists between CAI

and Holiday Travel.

With respect to the first issue, which is a question of fact that would require this Court to
review and re-examine the evidence presented by the parties below, this Court takes exception to the
general rule that the CAs findings of fact are conclusive upon Us and our jurisdiction is limited to
the review of questions of law. It is well-settled to the point of being axiomatic that this Court is
authorized to resolve questions of fact if confronted with contrasting factual findings of the trial
court and appellate court and if the findings of the CA are contradicted by the evidence on record. 17

According to the CA, agency is never presumed and that he who alleges that it exists has the
burden of proof. Spouses Viloria, on whose shoulders such burden rests, presented evidence that fell
short of indubitably demonstrating the existence of such agency.

We disagree. The CA failed to consider undisputed facts, discrediting CAIs denial that
Holiday Travel is one of its agents. Furthermore, in erroneously characterizing the contractual
relationship between CAI and Holiday Travel as a contract of sale, the CA failed to apply the
fundamental civil law principles governing agency and differentiating it from sale.

In Rallos v. Felix Go Chan & Sons Realty Corporation,18 this Court explained the nature of
an agency and spelled out the essential elements thereof:

Out of the above given principles, sprung the creation and acceptance of
the relationship of agency whereby one party, called the principal (mandante),
authorizes another, called the agent (mandatario), to act for and in his behalf in
transactions with third persons. The essential elements of agency are: (1) there is
consent, express or implied of the parties to establish the relationship; (2) the object
is the execution of a juridical act in relation to a third person; (3) the agent acts as a
representative and not for himself, and (4) the agent acts within the scope of his
authority.

Agency is basically personal, representative, and derivative in nature. The

authority of the agent to act emanates from the powers granted to him by his
principal; his act is the act of the principal if done within the scope of the
authority. Qui facit per alium facit se. "He who acts through another acts himself."19

Contrary to the findings of the CA, all the elements of an agency exist in this case. The first
and second elements are present as CAI does not deny that it concluded an agreement with Holiday
Travel, whereby Holiday Travel would enter into contracts of carriage with third persons on CAIs
behalf. The third element is also present as it is undisputed that Holiday Travel merely acted in a
representative capacity and it is CAI and not Holiday Travel who is bound by the contracts of
carriage entered into by Holiday Travel on its behalf. The fourth element is also present considering
that CAI has not made any allegation that Holiday Travel exceeded the authority that was granted
to it. In fact, CAI consistently maintains the validity of the contracts of carriage that Holiday Travel
executed with Spouses Viloria and that Mager was not guilty of any fraudulent misrepresentation.
That CAI admits the authority of Holiday Travel to enter into contracts of carriage on its behalf is
easily discernible from its February 24, 1998 and March 24, 1998 letters, where it impliedly
recognized the validity of the contracts entered into by Holiday Travel with Spouses Viloria. When
Fernando informed CAI that it was Holiday Travel who issued to them the subject tickets, CAI did
not deny that Holiday Travel is its authorized agent.

Prior to Spouses Vilorias filing of a complaint against it, CAI never refuted that it gave
Holiday Travel the power and authority to conclude contracts of carriage on its behalf. As clearly
extant from the records, CAI recognized the validity of the contracts of carriage that Holiday Travel
entered into with Spouses Viloria and considered itself bound with Spouses Viloria by the terms and
conditions thereof; and this constitutes an unequivocal testament to Holiday Travels authority to act
as its agent. This Court cannot therefore allow CAI to take an altogether different position and deny
that Holiday Travel is its agent without condoning or giving imprimatur to whatever damage or
prejudice that may result from such denial or retraction to Spouses Viloria, who relied on good faith
on CAIs acts in recognition of Holiday Travels authority. Estoppel is primarily based on the doctrine
of good faith and the avoidance of harm that will befall an innocent party due to its injurious
reliance, the failure to apply it in this case would result in gross travesty of justice. 20 Estoppel bars
CAI from making such denial.

As categorically provided under Article 1869 of the Civil Code, [a]gency 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.

Considering that the fundamental hallmarks of an agency are present, this Court finds it
rather peculiar that the CA had branded the contractual relationship between CAI and Holiday
Travel as one of sale. The distinctions between a sale and an agency are not difficult to discern and
this Court, as early as 1970, had already formulated the guidelines that would aid in differentiating
the two (2) contracts. In Commissioner of Internal Revenue v. Constantino, 21 this Court extrapolated
that the primordial differentiating consideration between the two (2) contracts is the transfer of
ownership or title over the property subject of the contract. In an agency, the principal retains
ownership and control over the property and the agent merely acts on the principals behalf and
under his instructions in furtherance of the objectives for which the agency was established. On the
other hand, the contract is clearly a sale if the parties intended that the delivery of the property will
effect a relinquishment of title, control and ownership in such a way that the recipient may do with
the property as he pleases.
 Since the company retained ownership of the goods, even as it delivered
possession unto the dealer for resale to customers, the price and terms of which were
subject to the company's control, the relationship between the company and the
dealer is one of agency, tested under the following criterion:

The difficulty in distinguishing between contracts of sale and the

creation of an agency to sell has led to the establishment of rules by the
application of which this difficulty may be solved. The decisions say the
transfer of title or agreement to transfer it for a price paid or promised is the
essence of sale. If such transfer puts the transferee in the attitude or position
of an owner and makes him liable to the transferor as a debtor for the agreed
price, and not merely as an agent who must account for the proceeds of a
resale, the transaction is a sale; while the essence of an agency to sell is the
delivery to an agent, not as his property, but as the property of the principal,
who remains the owner and has the right to control sales, fix the price, and
terms, demand and receive the proceeds less the agent's commission upon
sales made. 1 Mechem on Sales, Sec. 43; 1 Mechem on Agency, Sec. 48;
Williston on Sales, 1; Tiedeman on Sales, 1. (Salisbury v. Brooks, 94 SE 117,
118-119)22

As to how the CA have arrived at the conclusion that the contract between CAI and Holiday
Travel is a sale is certainly confounding, considering that CAI is the one bound by the contracts of
carriage embodied by the tickets being sold by Holiday Travel on its behalf. It is undisputed that CAI
and not Holiday Travel who is the party to the contracts of carriage executed by Holiday Travel with
third persons who desire to travel via Continental Airlines, and this conclusively indicates the
existence of a principal-agent relationship. That the principal is bound by all the obligations
contracted by the agent within the scope of the authority granted to him is clearly provided under
Article 1910 of the Civil Code and this constitutes the very notion of agency.

II. In actions based on quasi-delict, a principal can

only be held liable for the tort committed by its
agents employees if it has been established by
preponderance of evidence that the principal was also
at fault or negligent or that the principal exercise
control and supervision over them.

Considering that Holiday Travel is CAIs agent, does it necessarily follow that CAI is liable
for the fault or negligence of Holiday Travels employees? Citing China Air Lines, Ltd. v. Court of
Appeals, et al.,23 CAI argues that it cannot be held liable for the actions of the employee of its
ticketing agent in the absence of an employer-employee relationship.
 An examination of this Courts pronouncements in China Air Lines will reveal that an airline
company is not completely exonerated from any liability for the tort committed by its agents
employees. A prior determination of the nature of the passengers cause of action is necessary. If the
passengers cause of action against the airline company is premised on culpa aquiliana or quasi-
delict for a tort committed by the employee of the airline companys agent, there must be an
independent showing that the airline company was at fault or negligent or has contributed to the
negligence or tortuous conduct committed by the employee of its agent. The mere fact that the
employee of the airline companys agent has committed a tort is not sufficient to hold the airline
company liable. There is no vinculum jurisbetween the airline company and its agents employees
and the contractual relationship between the airline company and its agent does not operate to
create a juridical tie between the airline company and its agents employees. Article 2180 of the
Civil Code does not make the principal vicariously liable for the tort committed by its agents
employees and the principal-agency relationship per se does not make the principal a party to such
tort; hence, the need to prove the principals own fault or negligence.

On the other hand, if the passengers cause of action for damages against the airline
company is based on contractual breach or culpa contractual, it is not necessary that there be
evidence of the airline companys fault or negligence. As this Court previously stated in China Air
Lines and reiterated in Air France vs. Gillego,24 in an action based on a breach of contract of
carriage, the aggrieved party does not have to prove that the common carrier was at fault or was
negligent. All that he has to prove is the existence of the contract and the fact of its non-performance
by the carrier.

Spouses Vilorias cause of action on the basis of Magers alleged fraudulent

misrepresentation is clearly one of tort or quasi-delict, there being no pre-existing contractual
relationship between them. Therefore, it was incumbent upon Spouses Viloria to prove that CAI was
equally at fault.

However, the records are devoid of any evidence by which CAIs alleged liability can be
substantiated. Apart from their claim that CAI must be held liable for Magers supposed fraud
because Holiday Travel is CAIs agent, Spouses Viloria did not present evidence that CAI was a
party or had contributed to Magers complained act either by instructing or authorizing Holiday
Travel and Mager to issue the said misrepresentation.

It may seem unjust at first glance that CAI would consider Spouses Viloria bound by the
terms and conditions of the subject contracts, which Mager entered into with them on CAIs behalf,
in order to deny Spouses Vilorias request for a refund or Fernandos use of Lourdes ticket for the re-
issuance of a new one, and simultaneously claim that they are not bound by Magers supposed
misrepresentation for purposes of avoiding Spouses Vilorias claim for damages and maintaining the
validity of the subject contracts. It may likewise be argued that CAI cannot deny liability as it
benefited from Magers acts, which were performed in compliance with Holiday Travels obligations
as CAIs agent.

However, a persons vicarious liability is anchored on his possession of control, whether

absolute or limited, on the tortfeasor. Without such control, there is nothing which could justify
extending the liability to a person other than the one who committed the tort. As this Court
explained in Cangco v. Manila Railroad Co.:25

With respect to extra-contractual obligation arising from negligence, whether of act

or omission, it is competent for the legislature to elect and our Legislature has so
elected to limit such liability to cases in which the person upon whom such an
obligation is imposed is morally culpable or, on the contrary, for reasons of public
policy, to extend that liability, without regard to the lack of moral culpability, so as to
include responsibility for the negligence of those persons whose acts or omissions are
imputable, by a legal fiction, to others who are in a position to exercise an absolute or
limited control over them. The legislature which adopted our Civil Code has elected
to limit extra-contractual liability with certain well-defined exceptions to cases
in which moral culpability can be directly imputed to the persons to be charged. This
moral responsibility may consist in having failed to exercise due care in one's own
acts, or in having failed to exercise due care in the selection and control of one's agent
or servants, or in the control of persons who, by reasons of their status, occupy a
position of dependency with respect to the person made liable for their
conduct.26 (emphasis supplied)

It is incumbent upon Spouses Viloria to prove that CAI exercised control or supervision over
Mager by preponderant evidence. The existence of control or supervision cannot be presumed and
CAI is under no obligation to prove its denial or nugatory assertion. Citing Belen v. Belen,27 this
Court ruled in Jayme v. Apostol,28 that:

In Belen v. Belen, this Court ruled that it was enough for defendant to deny an
alleged employment relationship. The defendant is under no obligation to prove the
negative averment. This Court said:

It is an old and well-settled rule of the courts that the burden

of proving the action is upon the plaintiff, and that if he fails
satisfactorily to show the facts upon which he bases his claim, the
defendant is under no obligation to prove his exceptions. This [rule] is
in harmony with the provisions of Section 297 of the Code of Civil
Procedure holding that each party must prove his own affirmative
allegations, etc.29 (citations omitted)
Therefore, without a modicum of evidence that CAI exercised control over Holiday Travels
employees or that CAI was equally at fault, no liability can be imposed on CAI for Magers supposed
misrepresentation.

III. Even on the assumption that CAI may be held

liable for the acts of Mager, still, Spouses
Viloria are not entitled to a refund. Magers
statement cannot be considered a causal fraud
that would justify the annulment of the
subject contracts that would oblige CAI to
indemnify Spouses Viloria and return the
money they paid for the subject tickets.

Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent of the
contracting parties was obtained through fraud, the contract is considered voidable and may be
annulled within four (4) years from the time of the discovery of the fraud. Once a contract is
annulled, the parties are obliged under Article 1398 of the same Code to restore to each other the
things subject matter of the contract, including their fruits and interest.

On the basis of the foregoing and given the allegation of Spouses Viloria that Fernandos
consent to the subject contracts was supposedly secured by Mager through fraudulent means, it is
plainly apparent that their demand for a refund is tantamount to seeking for an annulment of the
subject contracts on the ground of vitiated consent.

Whether the subject contracts are annullable, this Court is required to determine whether
Magers alleged misrepresentation constitutes causal fraud. Similar to the dispute on the existence
of an agency, whether fraud attended the execution of a contract is factual in nature and this Court,
as discussed above, may scrutinize the records if the findings of the CA are contrary to those of the
RTC.

Under Article 1338 of the Civil Code, there is fraud when, through insidious words or
machinations of one of the contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to. In order that fraud may vitiate consent, it must be the
causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of the
contract.30 In Samson v. Court of Appeals,31 causal fraud was defined as a deception employed by
one party prior to or simultaneous to the contract in order to secure the consent of the other. 32

Also, fraud must be serious and its existence must be established by clear and convincing
evidence. As ruled by this Court in Sierra v. Hon. Court of Appeals, et al.,33 mere preponderance of
evidence is not adequate:

Fraud must also be discounted, for according to the Civil Code:

Art. 1338. There is fraud when, through insidious words or

machinations of one of the contracting parties, the other is induced to
enter into a contract which without them, he would not have agreed
to.

Art. 1344. In order that fraud may make a contract voidable,

it should be serious and should not have been employed by both
contracting parties.

To quote Tolentino again, the misrepresentation constituting the fraud must

be established by full, clear, and convincing evidence, and not merely by a
preponderance thereof. The deceit must be serious. The fraud is serious when it is
sufficient to impress, or to lead an ordinarily prudent person into error; that which
cannot deceive a prudent person cannot be a ground for nullity. The circumstances of
each case should be considered, taking into account the personal conditions of the
victim.34

After meticulously poring over the records, this Court finds that the fraud alleged by Spouses
Viloria has not been satisfactorily established as causal in nature to warrant the annulment of the
subject contracts. In fact, Spouses Viloria failed to prove by clear and convincing evidence that
Magers statement was fraudulent. Specifically, Spouses Viloria failed to prove that (a) there were
indeed available seats at Amtrak for a trip to New Jersey on August 13, 1997 at the time they spoke
with Mager on July 21, 1997; (b) Mager knew about this; and (c) that she purposely informed them
otherwise.

This Court finds the only proof of Magers alleged fraud, which is Fernandos testimony that
an Amtrak had assured him of the perennial availability of seats at Amtrak, to be wanting. As CAI
correctly pointed out and as Fernando admitted, it was possible that during the intervening period of
three (3) weeks from the time Fernando purchased the subject tickets to the time he talked to said
Amtrak employee, other passengers may have cancelled their bookings and reservations with
Amtrak, making it possible for Amtrak to accommodate them. Indeed, the existence of fraud cannot
be proved by mere speculations and conjectures. Fraud is never lightly inferred; it is good faith that
is. Under the Rules of Court, it is presumed that "a person is innocent of crime or wrong" and that
"private transactions have been fair and regular."35 Spouses Viloria failed to overcome this
presumption.

IV. Assuming the contrary, Spouses Viloria are

nevertheless deemed to have ratified the subject
contracts.

Even assuming that Magers representation is causal fraud, the subject contracts have been
impliedly ratified when Spouses Viloria decided to exercise their right to use the subject tickets for
the purchase of new ones. Under Article 1392 of the Civil Code, ratification extinguishes the action
to annul a voidable contract.

Ratification of a voidable contract is defined under Article 1393 of the Civil Code as follows:

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that

there is a tacit ratification if, with knowledge of the reason which renders the
contract voidable and such reason having ceased, the person who has a right to
invoke it should execute an act which necessarily implies an intention to waive his
right.

Implied ratification may take diverse forms, such as by silence or acquiescence; by acts
showing approval or adoption of the contract; or by acceptance and retention of benefits flowing
therefrom.36

Simultaneous with their demand for a refund on the ground of Fernandos vitiated consent,
Spouses Viloria likewise asked for a refund based on CAIs supposed bad faith in reneging on its
undertaking to replace the subject tickets with a round trip ticket from Manila to Los Angeles.
 In doing so, Spouses Viloria are actually asking for a rescission of the subject contracts based
on contractual breach. Resolution, the action referred to in Article 1191, is based on the defendants
breach of faith, a violation of the reciprocity between the parties 37 and in Solar Harvest, Inc. v.
Davao Corrugated Carton Corporation,38 this Court ruled that a claim for a reimbursement in view
of the other partys failure to comply with his obligations under the contract is one for rescission or
resolution.

However, annulment under Article 1390 of the Civil Code and rescission under Article 1191
are two (2) inconsistent remedies. In resolution, all the elements to make the contract valid are
present; in annulment, one of the essential elements to a formation of a contract, which is consent, is
absent. In resolution, the defect is in the consummation stage of the contract when the parties are in
the process of performing their respective obligations; in annulment, the defect is already present at
the time of the negotiation and perfection stages of the contract. Accordingly, by pursuing the
remedy of rescission under Article 1191, the Vilorias had impliedly admitted the validity of the
subject contracts, forfeiting their right to demand their annulment. A party cannot rely on the
contract and claim rights or obligations under it and at the same time impugn its existence or
validity. Indeed, litigants are enjoined from taking inconsistent positions.39

V. Contracts cannot be rescinded for a slight or casual

breach.

CAI cannot insist on the non-transferability of the

subject tickets.

Considering that the subject contracts are not annullable on the ground of vitiated consent,
the next question is: Do Spouses Viloria have the right to rescind the contract on the ground of
CAIs supposed breach of its undertaking to issue new tickets upon surrender of the subject tickets?

Article 1191, as presently worded, states:

The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
 The injured party may choose between the fulfilment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

According to Spouses Viloria, CAI acted in bad faith and breached the subject contracts when
it refused to apply the value of Lourdes ticket for Fernandos purchase of a round trip ticket to Los
Angeles and in requiring him to pay an amount higher than the price fixed by other airline
companies.

In its March 24, 1998 letter, CAI stated that non-refundable tickets may be used as a form
of payment toward the purchase of another Continental ticket for $75.00, per ticket, reissue fee
($50.00, per ticket, for tickets purchased prior to October 30, 1997).

Clearly, there is nothing in the above-quoted section of CAIs letter from which the
restriction on the non-transferability of the subject tickets can be inferred. In fact, the words used by
CAI in its letter supports the position of Spouses Viloria, that each of them can use the ticket under
their name for the purchase of new tickets whether for themselves or for some other person.

Moreover, as CAI admitted, it was only when Fernando had expressed his interest to use the
subject tickets for the purchase of a round trip ticket between Manila and Los Angeles that he was
informed that he cannot use the ticket in Lourdes name as payment.

Contrary to CAIs claim, that the subject tickets are non-transferable cannot be implied from
a plain reading of the provision printed on the subject tickets stating that [t]o the extent not in
conflict with the foregoing carriage and other services performed by each carrier are subject to: (a)
provisions contained in this ticket, x x x (iii) carriers conditions of carriage and related regulations
which are made part hereof (and are available on application at the offices of carrier) x x x. As a
common carrier whose business is imbued with public interest, the exercise of extraordinary
diligence requires CAI to inform Spouses Viloria, or all of its passengers for that matter, of all the
terms and conditions governing their contract of carriage. CAI is proscribed from taking advantage
of any ambiguity in the contract of carriage to impute knowledge on its passengers of and demand
compliance with a certain condition or undertaking that is not clearly stipulated. Since the
prohibition on transferability is not written on the face of the subject tickets and CAI failed to inform
Spouses Viloria thereof, CAI cannot refuse to apply the value of Lourdes ticket as payment for
Fernandos purchase of a new ticket.

CAIs refusal to accept Lourdes ticket for the

purchase of a new ticket for Fernando is only a casual
breach.

Nonetheless, the right to rescind a contract for non-performance of its stipulations is not
absolute. The general rule is that rescission of a contract will not be permitted for a slight or casual
breach, but only for such substantial and fundamental violations as would defeat the very object of
the parties in making the agreement.40 Whether a breach is substantial is largely determined by the
attendant circumstances.41

While CAIs refusal to allow Fernando to use the value of Lourdes ticket as payment for the
purchase of a new ticket is unjustified as the non-transferability of the subject tickets was not clearly
stipulated, it cannot, however be considered substantial. The endorsability of the subject tickets is
not an essential part of the underlying contracts and CAIs failure to comply is not essential to its
fulfillment of its undertaking to issue new tickets upon Spouses Vilorias surrender of the subject
tickets. This Court takes note of CAIs willingness to perform its principal obligation and this is to
apply the price of the ticket in Fernandos name to the price of the round trip ticket between Manila
and Los Angeles. CAI was likewise willing to accept the ticket in Lourdes name as full or partial
payment as the case may be for the purchase of any ticket, albeit under her name and for her
exclusive use. In other words, CAIs willingness to comply with its undertaking under its March 24,
1998 cannot be doubted, albeit tainted with its erroneous insistence that Lourdes ticket is non-
transferable.

Moreover, Spouses Vilorias demand for rescission cannot prosper as CAI cannot be solely
faulted for the fact that their agreement failed to consummate and no new ticket was issued to
Fernando. Spouses Viloria have no right to insist that a single round trip ticket between Manila and
Los Angeles should be priced at around $856.00 and refuse to pay the difference between the price of
the subject tickets and the amount fixed by CAI. The petitioners failed to allege, much less prove,
that CAI had obliged itself to issue to them tickets for any flight anywhere in the world upon their
surrender of the subject tickets. In its March 24, 1998 letter, it was clearly stated that [n]on-
refundable tickets may be used as a form of payment toward the purchase of another Continental
ticket42 and there is nothing in it suggesting that CAI had obliged itself to protect Spouses Viloria
from any fluctuation in the prices of tickets or that the surrender of the subject tickets will be
considered as full payment for any ticket that the petitioners intend to buy regardless of actual price
and destination. The CA was correct in holding that it is CAIs right and exclusive prerogative to fix
the prices for its services and it may not be compelled to observe and maintain the prices of other
airline companies.43

The conflict as to the endorsability of the subject tickets is an altogether different matter,
which does not preclude CAI from fixing the price of a round trip ticket between Manila and Los
Angeles in an amount it deems proper and which does not provide Spouses Viloria an excuse not to
pay such price, albeit subject to a reduction coming from the value of the subject tickets. It cannot be
denied that Spouses Viloria had the concomitant obligation to pay whatever is not covered by the
value of the subject tickets whether or not the subject tickets are transferable or not.

There is also no showing that Spouses Viloria were discriminated against in bad faith by
being charged with a higher rate. The only evidence the petitioners presented to prove that the price
of a round trip ticket between Manila and Los Angeles at that time was only $856.00 is a newspaper
advertisement for another airline company, which is inadmissible for being hearsay evidence, twice
removed. Newspaper clippings are hearsay if they were offered for the purpose of proving the truth
of the matter alleged. As ruled in Feria v. Court of Appeals,:44

[N]ewspaper articles amount to hearsay evidence, twice removed and are therefore
not only inadmissible but without any probative value at all whether objected to or
not, unless offered for a purpose other than proving the truth of the matter asserted.
In this case, the news article is admissible only as evidence that such publication
does exist with the tenor of the news therein stated.45 (citations omitted)

The records of this case demonstrate that both parties were equally in default; hence, none of
them can seek judicial redress for the cancellation or resolution of the subject contracts and they are
therefore bound to their respective obligations thereunder. As the 1 st sentence of Article 1192
provides:

Art. 1192. In case both parties have committed a breach of the obligation, the
liability of the first infractor shall be equitably tempered by the courts. If it cannot be
determined which of the parties first violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages. (emphasis supplied)
 Therefore, CAIs liability for damages for its refusal to accept Lourdes ticket for the purchase
of Fernandos round trip ticket is offset by Spouses Vilorias liability for their refusal to pay the
amount, which is not covered by the subject tickets. Moreover, the contract between them remains,
hence, CAI is duty bound to issue new tickets for a destination chosen by Spouses Viloria upon their
surrender of the subject tickets and Spouses Viloria are obliged to pay whatever amount is not
covered by the value of the subject tickets.

This Court made a similar ruling in Central Bank of the Philippines v. Court of
Appeals.46 Thus:

Since both parties were in default in the performance of their respective

reciprocal obligations, that is, Island Savings Bank failed to comply with its
obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with
his obligation to pay his P17,000.00 debt within 3 years as stipulated, they are both
liable for damages.

Article 1192 of the Civil Code provides that in case both parties have
committed a breach of their reciprocal obligations, the liability of the first infractor
shall be equitably tempered by the courts. WE rule that the liability of Island
Savings Bank for damages in not furnishing the entire loan is offset by the liability of
Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not
paying his overdue P17,000.00 debt. x x x.47

Another consideration that militates against the propriety of holding CAI liable for moral
damages is the absence of a showing that the latter acted fraudulently and in bad faith. Article 2220
of the Civil Code requires evidence of bad faith and fraud and moral damages are generally not
recoverable in culpa contractual except when bad faith had been proven.48 The award of exemplary
damages is likewise not warranted. Apart from the requirement that the defendant acted in a
wanton, oppressive and malevolent manner, the claimant must prove his entitlement to moral
damages.49

WHEREFORE, premises considered, the instant Petition is DENIED.

SO ORDERED.
In 1997, while the spouses Viloria were in the United States, they approached Holiday Travel, a
travel agency working for Continental Airlines, to purchase tickets from Newark to San Diego. The
travel agent, Margaret Mager, advised the couple that they cannot travel by train because it was
already fully booked; that they must purchase plane tickets for Continental Airlines; that if they
wont purchase plane tickets; theyll never reach their destination in time. The couple believed
Magers representations and so they purchased two plane tickets worth $800.00.
 Later however, the spouses found out that the train trip wasnt really fully booked and so they
purchased train tickets and went to their destination by train instead. Then they called up Mager to
request for a refund for the plane tickets. Mager referred the couple to Continental Airlines. As the
couple were now in the Philippines, they filed their request with Continental Airlines office in Ayala.
The spouses Viloria alleged that Mager misled them into believing that the only way to travel was by
plane and so they were fooled into buying expensive plane tickets.
Continental Airlines refused to refund the amount of the tickets and so the spouses sued the airline
company. In its defense, Continental Airlines claimed that the tickets sold to them by Mager were
non-refundable; that, if any, they were not bound by the misrepresentations of Mager because theres
no contract of agency existing between Continental Airlines and Mager.
The trial court ruled in favor of spouses Viloria but the Court of Appeals reversed the ruling of the
RTC.
ISSUE: Whether or not a contract of agency exists between Continental Airlines and Mager.
HELD: Yes. All the elements of agency are present, to wit:

1. there is consent, express or implied of the parties to establish the relationship;

2. the object is the execution of a juridical act in relation to a third person;
3. the agent acts as a representative and not for himself, and
4. the agent acts within the scope of his authority.

The first and second elements are present as Continental Airlines does not deny that it concluded an
agreement with Holiday Travel to which Mager is part of, whereby Holiday Travel would enter into
contracts of carriage with third persons on the airlines behalf. The third element is also present as it
is undisputed that Holiday Travel merely acted in a representative capacity and it is Continental
Airlines and not Holiday Travel who is bound by the contracts of carriage entered into by Holiday
Travel on its behalf. The fourth element is also present considering that Continental Airlines has not
made any allegation that Holiday Travel exceeded the authority that was granted to it.
Continental Airlines also never questioned the validity of the transaction between Mager and the
spouses. Continental Airlines is therefore in estoppel. Continental Airlines cannot be allowed to take
an altogether different position and deny that Holiday Travel is its agent without condoning or
giving imprimatur to whatever damage or prejudice that may result from such denial or retraction to
Spouses Viloria, who relied on good faith on Continental Airlines acts in recognition of Holiday
Travels authority. Estoppel is primarily based on the doctrine of good faith and the avoidance of
harm that will befall an innocent party due to its injurious reliance, the failure to apply it in this
case would result in gross travesty of justice.