CATHAY PACIFIC AIRWAYS, LTD., petitioner, vs.
SPOUSES In their complaint, the Vazquezes alleged that when they
DANIEL VAZQUEZ and MARIA LUISA MADRIGAL
VAZQUEZ, respondents.
DECISION
DAVIDE, JR., C.J.:
Is an involuntary upgrading of an airline passengers
accommodation from one class to a more superior class at no extra
cost a breach of contract of carriage that would entitle the passenger
to an award of damages? This is a novel question that has to be
resolved in this case.
The facts in this case, as found by the Court of Appeals and
adopted by petitioner Cathay Pacific Airways, Ltd., (hereinafter
Cathay) are as follows:
Cathay is a common carrier engaged in the business of
transporting passengers and goods by air. Among the many routes it
services is the Manila-Hongkong-Manila course. As part of its
marketing strategy, Cathay accords its frequent flyers membership in
its Marco Polo Club. The members enjoy several privileges, such as
priority for upgrading of booking without any extra charge whenever
an opportunity arises. Thus, a frequent flyer booked in the Business
Class has priority for upgrading to First Class if the Business Class
Section is fully booked.
Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria
Luisa Madrigal Vazquez are frequent flyers of Cathay and are Gold
Card members of its Marco Polo Club. On 24 September 1996, the
Vazquezes, together with their maid and two friends Pacita Cruz and
Josefina Vergel de Dios, went to Hongkong for pleasure and
business.
For their return flight to Manila on 28 September 1996, they
were booked on Cathays Flight CX-905, with departure time at 9:20
p.m. Two hours before their time of departure, the Vazquezes and
their companions checked in their luggage at Cathays check-in
counter at Kai Tak Airport and were given their respective boarding
passes, to wit, Business Class boarding passes for the Vazquezes and
their two friends, and Economy Class for their maid. They then
proceeded to the Business Class passenger lounge.
When boarding time was announced, the Vazquezes and their
two friends went to Departure Gate No. 28, which was designated for
Business Class passengers. Dr. Vazquez presented his boarding pass
to the ground stewardess, who in turn inserted it into an electronic
machine reader or computer at the gate. The ground stewardess was
assisted by a ground attendant by the name of Clara Lai Han
Chiu. When Ms. Chiu glanced at the computer monitor, she saw a
message that there was a seat change from Business Class to First
Class for the Vazquezes.
Ms. Chiu approached Dr. Vazquez and told him that the
Vazquezes accommodations were upgraded to First Class. Dr.
Vazquez refused the upgrade, reasoning that it would not look nice
for them as hosts to travel in First Class and their guests, in the
Business Class; and moreover, they were going to discuss business
matters during the flight. He also told Ms. Chiu that she could have
other passengers instead transferred to the First Class Section. Taken
aback by the refusal for upgrading, Ms. Chiu consulted her
supervisor, who told her to handle the situation and convince the
Vazquezes to accept the upgrading. Ms. Chiu informed the latter that
the Business Class was fully booked, and that since they were Marco
Polo Club members they had the priority to be upgraded to the First
Class. Dr. Vazquez continued to refuse, so Ms. Chiu told them that if
they would not avail themselves of the privilege, they would not be
allowed to take the flight. Eventually, after talking to his two friends,
Dr. Vazquez gave in. He and Mrs. Vazquez then proceeded to the
First Class Cabin.
Upon their return to Manila, the Vazquezes, in a letter of 2
October 1996 addressed to Cathays Country Manager, demanded
that they be indemnified in the amount of P1million for the
humiliation and embarrassment caused by its employees. They also
demanded a written apology from the management of Cathay,
preferably a responsible person with a rank of no less than the
Country Manager, as well as the apology from Ms. Chiu within fifteen
days from receipt of the letter.
In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to
Cathays Country Manager Argus Guy Robson, informed the
Vazquezes that Cathay would investigate the incident and get back
to them within a weeks time.
On 8 November 1996, after Cathays failure to give them any
feedback within its self-imposed deadline, the Vazquezes instituted
before the Regional Trial Court of Makati City an action for damages
against Cathay, praying for the payment to each of them the
amounts of P250,000 as temperate damages; P500,000 as moral
damages; P500,000 as exemplary or corrective damages;
and P250,000 as attorneys fees.
informed Ms. Chiu that they preferred to stay in Business Class, Ms.
Chiu obstinately, uncompromisingly and in a loud, discourteous and
harsh voice threatened that they could not board and leave with the
flight unless they go to First Class, since the Business Class was
overbooked. Ms. Chius loud and stringent shouting annoyed,
embarrassed, and humiliated them because the incident was
witnessed by all the other passengers waiting for boarding. They also
claimed that they were unjustifiably delayed to board the plane, and
when they were finally permitted to get into the aircraft, the forward
storage compartment was already full. A flight stewardess instructed
Dr. Vazquez to put his roll-on luggage in the overhead storage
compartment. Because he was not assisted by any of the crew in
putting up his luggage, his bilateral carpal tunnel syndrome was
aggravated, causing him extreme pain on his arm and wrist. The
Vazquezes also averred that they belong to the uppermost and
absolutely top elite of both Philippine Society and the Philippine
financial community, [and that] they were among the wealthiest
persons in the Philippine[s].
In its answer, Cathay alleged that it is a practice among
commercial airlines to upgrade passengers to the next better class of
accommodation, whenever an opportunity arises, such as when a
certain section is fully booked. Priority in upgrading is given to its
frequent flyers, who are considered favored passengers like the
Vazquezes. Thus, when the Business Class Section of Flight CX-905
was fully booked, Cathays computer sorted out the names of favored
passengers for involuntary upgrading to First Class. When Ms. Chiu
informed the Vazquezes that they were upgraded to First Class, Dr.
Vazquez refused. He then stood at the entrance of the boarding
apron, blocking the queue of passengers from boarding the plane,
which inconvenienced other passengers. He shouted that it was
impossible for him and his wife to be upgraded without his two
friends who were traveling with them. Because of Dr. Vazquezs
outburst, Ms. Chiu thought of upgrading the traveling companions of
the Vazquezes. But when she checked the computer, she learned
that the Vazquezes companions did not have priority for
upgrading. She then tried to book the Vazquezes again to their
original seats. However, since the Business Class Section was already
fully booked, she politely informed Dr. Vazquez of such fact and
explained that the upgrading was in recognition of their status as
Cathays valued passengers. Finally, after talking to their guests, the
Vazquezes eventually decided to take the First Class
accommodation.
Cathay also asserted that its employees at the Hong Kong
airport acted in good faith in dealing with the Vazquezes; none of
them shouted, humiliated, embarrassed, or committed any act of
disrespect against them (the Vazquezes). Assuming that there was
indeed a breach of contractual obligation, Cathay acted in good faith,
which negates any basis for their claim for temperate, moral, and
exemplary damages and attorneys fees. Hence, it prayed for the
dismissal of the complaint and for payment of P100,000 for
exemplary damages and P300,000 as attorneys fees and litigation
expenses.
During the trial, Dr. Vazquez testified to support the allegations
in the complaint. His testimony was corroborated by his two friends
who were with him at the time of the incident, namely, Pacita G. Cruz
and Josefina Vergel de Dios.
For its part, Cathay presented documentary evidence and the
testimonies of Mr. Yuen; Ms. Chiu; Norma Barrientos, Comptroller of
its retained counsel; and Mr. Robson. Yuen and Robson testified on
Cathays policy of upgrading the seat accommodation of its Marco
Polo Club members when an opportunity arises. The upgrading of
the Vazquezes to First Class was done in good faith; in fact, the First
Class Section is definitely much better than the Business Class in
terms of comfort, quality of food, and service from the cabin
crew. They also testified that overbooking is a widely accepted
practice in the airline industry and is in accordance with the
International Air Transport Association (IATA) regulations. Airlines
overbook because a lot of passengers do not show up for their
flight. With respect to Flight CX-905, there was no overall
overbooking to a degree that a passenger was bumped off or
downgraded. Yuen and Robson also stated that the demand letter of
the Vazquezes was immediately acted upon. Reports were gathered
from their office in Hong Kong and immediately forwarded to their
counsel Atty. Remollo for legal advice. However, Atty. Remollo
begged off because his services were likewise retained by the
Vazquezes; nonetheless, he undertook to solve the problem in behalf
of Cathay. But nothing happened until Cathay received a copy of the
complaint in this case. For her part, Ms. Chiu denied that she shouted
or used foul or impolite language against the Vazquezes. Ms.
Barrientos testified on the amount of attorneys fees and other
litigation expenses, such as those for the taking of the depositions of
Yuen and Chiu.
In its decision[1] of 19 October 1998, the trial court found for the
Vazquezes and decreed as follows:
WHEREFORE, finding preponderance of evidence to sustain the
instant complaint, judgment is hereby rendered in favor of plaintiffs
Vazquez spouses and against defendant Cathay Pacific Airways, Ltd.,
ordering the latter to pay each plaintiff the following:
a) Nominal damages in the amount of P100,000.00
for each plaintiff;
b) Moral damages in the amount of P2,000,000.00
for each plaintiff;
c) Exemplary damages in the amount
of P5,000,000.00 for each plaintiff;
d) Attorneys fees and expenses of litigation in the
amount of P1,000,000.00 for each
plaintiff; and
e) Costs of suit.
SO ORDERED.
According to the trial court, Cathay offers various classes of
seats from which passengers are allowed to choose regardless of
their reasons or motives, whether it be due to budgetary constraints
or whim. The choice imposes a clear obligation on Cathay to
transport the passengers in the class chosen by them. The carrier
cannot, without exposing itself to liability, force a passenger to
involuntarily change his choice. The upgrading of the Vazquezes
accommodation over and above their vehement objections was due
to the overbooking of the Business Class. It was a pretext to pack as
many passengers as possible into the plane to maximize Cathays
revenues. Cathays actuations in this case displayed deceit, gross
negligence, and bad faith, which entitled the Vazquezes to awards
for damages.
On appeal by the petitioners, the Court of Appeals, in its
decision of 24 July 2001,[2] deleted the award for exemplary
damages; and it reduced the awards for moral and nominal damages
for each of the Vazquezes to P250,000 and P50,000, respectively,
and the attorneys fees and litigation expenses to P50,000 for both
of them.
The Court of Appeals ratiocinated that by upgrading the
Vazquezes to First Class, Cathay novated the contract of carriage
without the formers consent. There was a breach of contract not
because Cathay overbooked the Business Class Section of Flight CX-
905 but because the latter pushed through with the upgrading
despite the objections of the Vazquezes.
However, the Court of Appeals was not convinced that Ms.
Chiu shouted at, or meant to be discourteous to, Dr. Vazquez,
although it might seemed that way to the latter, who was a member
of the elite in Philippine society and was not therefore used to being
harangued by anybody. Ms. Chiu was a Hong Kong Chinese whose
fractured Chinese was difficult to understand and whose manner of
speaking might sound harsh or shrill to Filipinos because of cultural
differences. But the Court of Appeals did not find her to have acted
with deliberate malice, deceit, gross negligence, or bad faith. If at all,
she was negligent in not offering the First Class accommodations to
other passengers. Neither can the flight stewardess in the First Class
Cabin be said to have been in bad faith when she failed to assist Dr.
Vazquez in lifting his baggage into the overhead storage bin. There is
no proof that he asked for help and was refused even after saying
that he was suffering from bilateral carpal tunnel syndrome. Anent
the delay of Yuen in responding to the demand letter of the
Vazquezes, the Court of Appeals found it to have been sufficiently
explained.
The Vazquezes and Cathay separately filed motions for a
reconsideration of the decision, both of which were denied by the
Court of Appeals.
Cathay seasonably filed with us this petition in this
case. Cathay maintains that the award for moral damages has no
basis, since the Court of Appeals found that there was no wanton,
fraudulent, reckless and oppressive display of manners on the part of
its personnel; and that the breach of contract was not attended by
fraud, malice, or bad faith. If any damage had been suffered by the
Vazquezes, it was damnum absque injuria, which is damage without
injury, damage or injury inflicted without injustice, loss or damage
without violation of a legal right, or a wrong done to a man for which
the law provides no remedy. Cathay also invokes our decision
in United Airlines, Inc. v. Court of Appeals[3] where we recognized that,
in accordance with the Civil Aeronautics Boards Economic Regulation
No. 7, as amended, an overbooking that does not exceed ten percent
cannot be considered deliberate and done in bad faith. We thus
deleted in that case the awards for moral and exemplary damages, as
well as attorneys fees, for lack of proof of overbooking exceeding ten
percent or of bad faith on the part of the airline carrier.
On the other hand, the Vazquezes assert that the Court of
Appeals was correct in granting awards for moral and nominal
damages and attorneys fees in view of the breach of contract
committed by Cathay for transferring them from the Business Class
to First Class Section without prior notice or consent and over their
vigorous objection. They likewise argue that the issuance of
passenger tickets more than the seating capacity of each section of
the plane is in itself fraudulent, malicious and tainted with bad faith.
The key issues for our consideration are whether (1) by
upgrading the seat accommodation of the Vazquezes from Business
Class to First Class Cathay breached its contract of carriage with the
Vazquezes; (2) the upgrading was tainted with fraud or bad faith; and
(3) the Vazquezes are entitled to damages.
We resolve the first issue in the affirmative.
A contract is a meeting of minds between two persons whereby
one agrees to give something or render some service to another for a
consideration. There is no contract unless the following requisites
concur: (1) consent of the contracting parties; (2) an object certain
which is the subject of the contract; and (3) the cause of the
obligation which is established.[4] Undoubtedly, a contract of carriage
existed between Cathay and the Vazquezes. They voluntarily and
freely gave their consent to an agreement whose object was the
transportation of the Vazquezes from Manila to Hong Kong and back
to Manila, with seats in the Business Class Section of the aircraft, and
whose cause or consideration was the fare paid by the Vazquezes to
Cathay.
The only problem is the legal effect of the upgrading of the seat
accommodation of the Vazquezes. Did it constitute a breach of
contract?
Breach of contract is defined as the failure without legal reason
to comply with the terms of a contract.[5] It is also defined as the
[f]ailure, without legal excuse, to perform any promise which forms
the whole or part of the contract.[6]
In previous cases, the breach of contract of carriage consisted
in either the bumping off of a passenger with confirmed reservation
or the downgrading of a passengers seat accommodation from one
class to a lower class. In this case, what happened was the
reverse. The contract between the parties was for Cathay to
transport the Vazquezes to Manila on a Business Class
accommodation in Flight CX-905. After checking-in their luggage at
the Kai Tak Airport in Hong Kong, the Vazquezes were given
boarding cards indicating their seat assignments in the Business
Class Section. However, during the boarding time, when the
Vazquezes presented their boarding passes, they were informed that
they had a seat change from Business Class to First Class. It turned
out that the Business Class was overbooked in that there were more
passengers than the number of seats. Thus, the seat assignments of
the Vazquezes were given to waitlisted passengers, and the
Vazquezes, being members of the Marco Polo Club, were upgraded
from Business Class to First Class.
We note that in all their pleadings, the Vazquezes never denied
that they were members of Cathays Marco Polo Club. They knew
that as members of the Club, they had priority for upgrading of their
seat accommodation at no extra cost when an opportunity arises.
But, just like other privileges, such priority could be waived. The
Vazquezes should have been consulted first whether they wanted to
avail themselves of the privilege or would consent to a change of seat
accommodation before their seat assignments were given to other
passengers. Normally, one would appreciate and accept an
upgrading, for it would mean a better accommodation. But,
whatever their reason was and however odd it might be, the
Vazquezes had every right to decline the upgrade and insist on the
Business Class accommodation they had booked for and which was
designated in their boarding passes. They clearly waived their priority
or preference when they asked that other passengers be given the
upgrade. It should not have been imposed on them over their
vehement objection. By insisting on the upgrade, Cathay breached
its contract of carriage with the Vazquezes.
We are not, however, convinced that the upgrading or the
breach of contract was attended by fraud or bad faith. Thus, we
resolve the second issue in the negative.
Bad faith and fraud are allegations of fact that demand clear
and convincing proof. They are serious accusations that can be so
conveniently and casually invoked, and that is why they are never
presumed. They amount to mere slogans or mudslinging unless
convincingly substantiated by whoever is alleging them.
Fraud has been defined to include an inducement through
insidious machination. Insidious machination refers to a deceitful
scheme or plot with an evil or devious purpose. Deceit exists where
the party, with intent to deceive, conceals or omits to state material
facts and, by reason of such omission or concealment, the other
party was induced to give consent that would not otherwise have
been given.[7]
Bad faith does not simply connote bad judgment or negligence;
it imports a dishonest purpose or some moral obliquity and conscious
doing of a wrong, a breach of a known duty through some motive or
interest or ill will that partakes of the nature of fraud.[8]
We find no persuasive proof of fraud or bad faith in this
case. The Vazquezes were not induced to agree to the upgrading
through insidious words or deceitful machination or through willful
concealment of material facts. Upon boarding, Ms. Chiu told the
Vazquezes that their accommodations were upgraded to First Class
in view of their being Gold Card members of Cathays Marco Polo
Club. She was honest in telling them that their seats were already
given to other passengers and the Business Class Section was fully
booked. Ms. Chiu might have failed to consider the remedy of
offering the First Class seats to other passengers. But, we find no bad
faith in her failure to do so, even if that amounted to an exercise of
poor judgment.
Neither was the transfer of the Vazquezes effected for some
evil or devious purpose. As testified to by Mr. Robson, the First Class
Section is better than the Business Class Section in terms of comfort,
quality of food, and service from the cabin crew; thus, the difference
in fare between the First Class and Business Class at that time was
$250.[9] Needless to state, an upgrading is for the better condition
and, definitely, for the benefit of the passenger.
We are not persuaded by the Vazquezes argument that the
overbooking of the Business Class Section constituted bad faith on
the part of Cathay. Section 3 of the Economic Regulation No. 7 of the
Civil Aeronautics Board, as amended, provides:
Sec 3. Scope. This regulation shall apply to every Philippine and
foreign air carrier with respect to its operation of flights or portions of
flights originating from or terminating at, or serving a point within
the territory of the Republic of the Philippines insofar as it denies
boarding to a passenger on a flight, or portion of a flight inside or
outside the Philippines, for which he holds confirmed reserved
space. Furthermore, this Regulation is designed to cover only honest
mistakes on the part of the carriers and excludes deliberate and
willful acts of non-accommodation. Provided, however, that
overbooking not exceeding 10% of the seating capacity of the
aircraft shall not be considered as a deliberate and willful act of non-
accommodation.
It is clear from this section that an overbooking that does not
exceed ten percent is not considered deliberate and therefore does
not amount to bad faith.[10] Here, while there was admittedly an
overbooking of the Business Class, there was no evidence of
overbooking of the plane beyond ten percent, and no passenger was
ever bumped off or was refused to board the aircraft.
Now we come to the third issue on damages.
The Court of Appeals awarded each of the Vazquezes moral
damages in the amount of P250,000. Article 2220 of the Civil Code
provides:
Article 2220. Willful injury to property may be a legal ground for
awarding moral damages if the court should find that, under the
circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in
bad faith.
Moral damages include physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. Although
incapable of pecuniary computation, moral damages may be
recovered if they are the proximate result of the defendants wrongful
act or omission.[11] Thus, case law establishes the following requisites
for the award of moral damages: (1) there must be an injury clearly
sustained by the claimant, whether physical, mental or
psychological; (2) there must be a culpable act or omission factually
established; (3) the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) the
award for damages is predicated on any of the cases stated in Article
2219 of the Civil Code.[12]
Moral damages predicated upon a breach of contract of
carriage may only be recoverable in instances where the carrier is
guilty of fraud or bad faith or where the mishap resulted in the death
of a passenger.[13] Where in breaching the contract of carriage the
airline is not shown to have acted fraudulently or in bad faith, liability
for damages is limited to the natural and probable consequences of
the breach of the obligation which the parties had foreseen or could
have reasonably foreseen. In such a case the liability does not include
moral and exemplary damages.[14]
In this case, we have ruled that the breach of contract of
carriage, which consisted in the involuntary upgrading of the
Vazquezes seat accommodation, was not attended by fraud or bad
faith. The Court of Appeals award of moral damages has, therefore,
no leg to stand on.
The deletion of the award for exemplary damages by the Court
of Appeals is correct. It is a requisite in the grant of exemplary
damages that the act of the offender must be accompanied by bad
faith or done in wanton, fraudulent or malevolent manner.[15] Such
requisite is absent in this case. Moreover, to be entitled thereto the
claimant must first establish his right to moral, temperate, or
compensatory damages.[16] Since the Vazquezes are not entitled to
any of these damages, the award for exemplary damages has no
legal basis. And where the awards for moral and exemplary damages
are eliminated, so must the award for attorneys fees.[17]
The most that can be adjudged in favor of the Vazquezes for
Cathays breach of contract is an award for nominal damages under
Article 2221 of the Civil Code, which reads as follows:
Article 2221 of the Civil Code provides:
Article 2221. Nominal damages are adjudicated in order that a right
of the plaintiff, which has been violated or invaded by the defendant,
may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered by him.
Worth noting is the fact that in Cathays Memorandum filed
with this Court, it prayed only for the deletion of the award for moral
damages. It deferred to the Court of Appeals discretion in awarding
nominal damages; thus:
As far as the award of nominal damages is concerned, petitioner
respectfully defers to the Honorable Court of Appeals
discretion. Aware as it is that somehow, due to the resistance of
respondents-spouses to the normally-appreciated gesture of
petitioner to upgrade their accommodations, petitioner may have
disturbed the respondents-spouses wish to be with their companions
(who traveled to Hong Kong with them) at the Business Class on their
flight to Manila. Petitioner regrets that in its desire to provide the
respondents-spouses with additional amenities for the one and one-
half (1 1/2) hour flight to Manila, unintended tension ensued.[18]
Nonetheless, considering that the breach was intended to give more
benefit and advantage to the Vazquezes by upgrading their Business
Class accommodation to First Class because of their valued status as
Marco Polo members, we reduce the award for nominal damages
to P5,000.
Before writing finis to this decision, we find it well-worth to
quote the apt observation of the Court of Appeals regarding the
awards adjudged by the trial court:
We are not amused but alarmed at the lower courts unbelievable
alacrity, bordering on the scandalous, to award excessive amounts as
damages. In their complaint, appellees asked for P1 million as moral
damages but the lower court awarded P4 million; they asked
for P500,000.00 as exemplary damages but the lower court cavalierly
awarded a whooping P10 million; they asked for P250,000.00 as
attorneys fees but were awarded P2 million; they did not ask for
nominal damages but were awarded P200,000.00. It is as if the lower
court went on a rampage, and why it acted that way is beyond all
tests of reason. In fact the excessiveness of the total award invites
the suspicion that it was the result of prejudice or corruption on the
part of the trial court.
The presiding judge of the lower court is enjoined to hearken to the
Supreme Courts admonition in Singson vs. CA (282 SCRA 149
[1997]), where it said:
The well-entrenched principle is that the grant of moral damages
depends upon the discretion of the court based on the circumstances
of each case. This discretion is limited by the principle that the
amount awarded should not be palpably and scandalously excessive
as to indicate that it was the result of prejudice or corruption on the
part of the trial court.
and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was
held:
Nonetheless, we agree with the injunction expressed by the Court of
Appeals that passengers must not prey on international airlines for
damage awards, like trophies in a safari. After all neither the social
standing nor prestige of the passenger should determine the extent
to which he would suffer because of a wrong done, since the dignity
affronted in the individual is a quality inherent in him and not
conferred by these social indicators. [19]
We adopt as our own this observation of the Court of Appeals.
WHEREFORE, the instant petition is hereby
partly GRANTED. The Decision of the Court of Appeals of 24 July
2001 in CA-G.R. CV No. 63339 is hereby MODIFIED, and as modified,
the awards for moral damages and attorneys fees are set aside and
deleted, and the award for nominal damages is reduced to P5,000.
 No pronouncement on costs.
SO ORDERED.
Vitug, Carpio, and Azcuna, JJ., concur.
Ynares-Santiago, J., on leave.
SINGAPORE AIRLINES LIMITED, petitioner, vs. ANDION
FERNANDEZ, respondent.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari assailing the
Decision[1] of the Court of Appeals which affirmed in toto the
decision[2] of the Regional Trial Courtof Pasig City, Branch 164 in Civil
Case No. 60985 filed by the respondent for damages.
The Case for the Respondent
Respondent Andion Fernandez is an acclaimed soprano here in
the Philippines and abroad. At the time of the incident, she was
availing an educational grant from the Federal Republic of Germany,
pursuing a Masters Degree in Music majoring in Voice.[3]
She was invited to sing before the King and Queen
of Malaysia on February 3 and 4, 1991. For this singing engagement,
an airline passage ticket was purchased from petitioner Singapore
Airlines which would transport her
to Manila from Frankfurt, Germany on January 28,
1991. From Manila, she would proceed to Malaysia on the next
day.[4] It was necessary for the respondent to pass by Manila in order
to gather her wardrobe; and to rehearse and coordinate with her
pianist her repertoire for the aforesaid performance.
The petitioner issued the respondent a Singapore Airlines
ticket for Flight No. SQ 27, leaving Frankfurt, Germany on January 27,
1991 bound for Singapore with onward connections
from Singapore to Manila. Flight No. SQ 27 was scheduled to
leave Frankfurt at 1:45 in the afternoon of January 27, 1991, arriving
at Singapore at 8:50 in the morning of January 28, 1991. The
connecting flight from Singapore to Manila, Flight No. SQ 72, was
leaving Singapore at 11:00 in the morning of January 28, 1991,
arriving in Manila at 2:20 in the afternoon of the same day.[5]
On January 27, 1991, Flight No. SQ 27 left Frankfurt but arrived
in Singapore two hours late or at about 11:00 in the morning
of January 28, 1991. By then, the aircraft bound for Manila had left as
scheduled, leaving the respondent and about 25 other passengers
stranded in the Changi Airport in Singapore.[6]
Upon disembarkation at Singapore, the respondent
approached the transit counter who referred her to the nightstop
counter and told the lady employee thereat that it was important for
her to reach Manila on that day, January 28, 1991. The lady employee
told her that there were no more flights to Manila for that day and
that respondent had no choice but to stay in Singapore. Upon
respondents persistence, she was told that she can actually fly
to Hong Konggoing to Manila but since her ticket was non-
transferable, she would have to pay for the ticket. The respondent
could not accept the offer because she had no money to pay for
it.[7] Her pleas for the respondent to make arrangements to transport
her to Manila were unheeded.[8]
The respondent then requested the lady employee to use their
phone to make a call to Manila. Over the employees reluctance, the
respondent telephoned her mother to inform the latter that she
missed the connecting flight. The respondent was able to contact a
family friend who picked her up from the airport for her overnight
stay in Singapore.[9]
The next day, after being brought back to the airport, the
respondent proceeded to petitioners counter which says: Immediate
Attention To Passengers with Immediate Booking. There were four
or five passengers in line. The respondent approached petitioners
male employee at the counter to make arrangements for immediate
booking only to be told: Cant you see I am doing something. She
explained her predicament but the male employee uncaringly
retorted: Its your problem, not ours.[10]
The respondent never made it to Manila and was forced to take
a direct flight from Singapore to Malaysia on January 29, 1991,
through the efforts of her mother and travel agency in Manila. Her
mother also had to travel to Malaysia bringing with her respondents
wardrobe and personal things needed for the performance that
caused them to incur an expense of about P50,000.[11]
As a result of this incident, the respondents performance
before the Royal Family of Malaysia was below par. Because of the
rude and unkind treatment she received from the petitioners
personnel in Singapore, the respondent was engulfed with fear,
anxiety, humiliation and embarrassment causing her to suffer mental
fatigue and skin rashes. She was thereby compelled to seek
immediate medical attention upon her return to Manila for acute
urticaria.[12]
On June 15, 1993, the RTC rendered a decision with the
following dispositive portion:
ACCORDINGLY and as prayed for, defendant Singapore Airlines is
ordered to pay herein plaintiff Andion H. Fernandez the sum of:
1. FIFTY THOUSAND (P50,000.00) PESOS as
compensatory or actual damages;
2. TWO HUNDRED and FIFTY THOUSAND
(P250,000.00) PESOS as moral
damages considering plaintiffs
professional standing in the field of
culture at home and abroad;
3. ONE HUNDRED THOUSAND (P100,000.00)
PESOS as exemplary damages;
4. SEVENTY-FIVE THOUSAND (P75,000.00) PESOS
as attorneys fees; and
5. To pay the costs of suit.
SO ORDERED.[13]
The petitioner appealed the decision to the Court of Appeals.
On June 10, 1998, the CA promulgated the assailed decision
finding no reversible error in the appealed decision of the trial
court.[14]
Forthwith, the petitioner filed the instant petition for review,
raising the following errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING IN
TOTO THE DECISION OF THE TRIAL COURT THAT AWARDED
DAMAGES TO RESPONDENT FOR THE ALLEGED FAILURE OF THE
PETITIONER TO EXERCISE EXTRAORDINARY DILIGENCE.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
THE PETITIONER ACTED IN BAD FAITH.
III
THE HONORABLE COURT OF APPEALS ERRED IN DISMISSING THE
PETITIONERS COUNTERCLAIMS.[15]
The petitioner assails the award of damages contending that it
exercised the extraordinary diligence required by law under the given
circumstances. The delay of Flight No. SQ 27
from Frankfurt to Singapore on January 28, 1991 for more than two
hours was due to a fortuitous event and beyond petitioners
control. Inclement weather prevented the petitioners plane coming
from Copenhagen, Denmark to arrive in Frankfurt on time on January
27, 1991. The plane could not take off from the airport as the place
was shrouded with fog. This delay caused a snowball effect whereby
the other flights were consequently delayed. The plane carrying the
respondent arrived in Singapore two (2) hours behind
schedule.[16] The delay was even compounded when the plane could
not travel the normal route which was through the Middle East due
to the raging Gulf War at that time. It had to pass through the
restricted Russian airspace which was more congested.[17]
Under these circumstances, petitioner therefore alleged that it
cannot be faulted for the delay in arriving in Singapore on January 28,
1991 and causing the respondent to miss her connecting flight
to Manila.
The petitioner further contends that it could not also be held in
bad faith because its personnel did their best to look after the needs
and interests of the passengers including the respondent. Because
the respondent and the other 25 passengers missed their connecting
flight to Manila, the petitioner automatically booked them to the
flight the next day and gave them free hotel accommodations for the
night. It was respondent who did not take petitioners offer and opted
to stay with a family friend in Singapore.
The petitioner also alleges that the action of the respondent
was baseless and it tarnished its good name and image earned
through the years for which, it was entitled to damages in the
amount of P1,000,000; exemplary damages of P500,000; and
attorneys fees also in the amount of P500,000.[18]
The petition is barren of merit.
When an airline issues a ticket to a passenger, confirmed for a
particular flight on a certain date, a contract of carriage arises. The
passenger then has every right to expect that he be transported on
that flight and on that date. If he does not, then the carrier opens
itself to a suit for a breach of contract of carriage.[19]
The contract of air carriage is a peculiar one. Imbued with
public interest, the law requires common carriers to carry the
passengers safely as far as human care and foresight can provide,
using the utmost diligence of very cautious persons with due regard
for all the circumstances.[20] In an action for 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 is necessary to
prove is the existence of the contract and the fact of its non-
performance by the carrier.[21]
In the case at bar, it is undisputed that the respondent carried a
confirmed ticket for the two-legged trip from Frankfurt to Manila: 1)
Frankfurt-Singapore; and 2) Singapore-Manila. In her contract of
carriage with the petitioner, the respondent certainly expected that
she would fly to Manila on Flight No. SQ 72 on January 28,
1991. Since the petitioner did not transport the respondent as
covenanted by it on said terms, the petitioner clearly breached its
contract of carriage with the respondent. The respondent had every
right to sue the petitioner for this breach. The defense that the delay
was due to fortuitous events and beyond petitioners control is
unavailing. In PAL vs. CA,[22] we held that:
.... 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 to be 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...
...
...If the cause of non-fulfillment of the contract is due to a fortuitous
event, it has to be the sole and only cause (Art. 1755 C.C., Art. 1733
C.C.).Since part of the failure to comply with the obligation of
common carrier to deliver its passengers safely to their destination
lay in the defendants failure to provide comfort and convenience to
its stranded passengers using extraordinary diligence, the cause of
non-fulfillment is not solely and exclusively due to fortuitous event,
but due to something which defendant airline could have prevented,
defendant becomes liable to plaintiff.
Indeed, in the instant case, petitioner was not without recourse
to enable it to fulfill its obligation to transport the respondent safely
as scheduled as far as human care and foresight can provide to her
destination. Tagged as a premiere airline as it claims to be and with
the complexities of air travel, it was certainly well-equipped to be
able to foresee and deal with such situation. The petitioners
indifference and negligence by its absence and insensitivity was
exposed by the trial court, thus:
(a) Under Section 9.1 of its Traffic Manual (Exhibit 4)
flights can be delayed to await the uplift of
connecting cargo and passengers arriving on a
late in-bound flight As adverted to by the trial
court,Flight SQ-27/28 maybe delayed for about
half an hour to transfer plaintiff to her connecting
flight. As pointed out above, delay is normal in
commercial air transportation (RTC Decision, p.
22); or
(b) Petitioner airlines could have carried her on one of its
flights bound for Hongkong and arranged for a
connecting flight from Hongkong to Manila all on
the same date. But then the airline personnel who
informed her of such possibility told her that she
has to pay for that flight. Regrettably, respondent
did not have sufficient funds to pay for it. (TSN, 30
March 1992, pp.8-9; RTC Decision, pp. 22-
23) Knowing the predicament of the respondent,
petitioner did not offer to shoulder the cost of the
ticket for that flight; or
(c) As noted by the trial court from the account of
petitioners witness, Bob Khkimyong, that a
passenger such as the plaintiff could have been
accommodated in another international airline
such as Lufthansa to bring the plaintiff to
Singapore early enough from Frankfurt provided
that there was prior communication from that
station to enable her to catch the connecting
flight to Manila because of the urgency of her
business in Manila(RTC Decision, p. 23)
The petitioners diligence in communicating to its passengers
the consequences of the delay in their flights was wanting. As
elucidated by the trial court:
It maybe that delay in the take off and arrival of commercial aircraft
could not be avoided and may be caused by diverse factors such as
those testified to by defendants pilot. However, knowing fully well
that even before the plaintiff boarded defendants Jumbo aircraft
in Frankfurt bound for Singapore, it has already incurred a delay of
two hours. Nevertheless, defendant did not take the trouble of
informing plaintiff, among its other passengers of such a delay and
that in such a case, the usual practice of defendant airline will be that
they have to stay overnight at their connecting airport; and much less
did it inquire from the plaintiff and the other 25 passengers bound for
Manila whether they are amenable to stay overnight in Singapore
and to take the connecting flight to Manila the next day. Such
information should have been given and inquiries made in Frankfurt
because even the defendant airlines manual provides that in case of
urgency to reach his or her destination on the same date, the head
office of defendant in Singapore must be informed by telephone or
telefax so as the latter may make certain arrangements with other
airlines in Frankfurt to bring such a passenger with urgent business to
Singapore in such a manner that the latter can catch up with her
connecting flight such as S-27/28 without spending the night in
Singapore[23]
The respondent was not remiss in conveying her apprehension
about the delay of the flight when she was still in Frankfurt. Upon the
assurance of petitioners personnel in Frankfurt that she will be
transported to Manila on the same date, she had every right to
expect that obligation fulfilled. She testified, to wit:
Q: Now, since you were late, when the plane that arrived
from Frankfurt was late, did you not make
arrangements so that your flight
from Singapore to Manilawould be adjusted?
A: I asked the lady at the ticket counter, the one who
gave the boarding pass in Frankfurt and I asked her,
Since my flight going to Singapore would be late,
what would happen to my Singapore-Manila flight?
and then she said, Dont worry, Singapore Airlines
would be responsible to bring you to Manila on the
same date. And then they have informed the name
of the officer, or whatever, that our flight is going
to be late.[24]
When a passenger contracts for a specific flight, he has a
purpose in making that choice which must be respected. This choice,
once exercised, must not be impaired by a breach on the part of the
airline without the latter incurring any liability.[25] For petitioners
failure to bring the respondent to her destination, as scheduled, we
find the petitioner clearly liable for the breach of its contract of
carriage with the respondent.
We are convinced that the petitioner acted in bad faith. Bad
faith means a breach of known duty through some motive of interest
or ill will. Self-enrichment or fraternal interest, and not personal ill
will, may well have been the motive; but it is malice
nevertheless.[26] Bad faith was imputed by the trial court when it
found that the petitioners employees at the Singapore airport did not
accord the respondent the attention and treatment allegedly
warranted under the circumstances. The lady employee at the
counter was unkind and of no help to her. The respondent further
alleged that without her threats of suing the company, she was not
allowed to use the companys phone to make long distance calls to
her mother in Manila. The male employee at the counter where it
says: Immediate Attention to Passengers with Immediate Booking
was rude to her when he curtly retorted that he was busy attending
to other passengers in line. The trial court concluded that this
inattentiveness and rudeness of petitioners personnel to respondents
plight was gross enough amounting to bad faith. This is a finding that
is generally binding upon the Court which we find no reason to
disturb.
Article 2232 of the Civil Code provides that in a contractual or
quasi-contractual relationship, exemplary damages may be awarded
only if the defendant had acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. In this case, petitioners employees
acted in a wanton, oppressive or malevolent manner. The award of
exemplary damages is, therefore, warranted in this case.
WHEREFORE, the Petition is DENIED. The Decision of the
Court of Appeals is AFFIRMED.
SO ORDERED.
Puno, (Chairman), Quisumbing, Austria-Martinez, and Tinga,
JJ., concur.
EQUITABLE PCI BANK,* G.R. No. 171545
AIMEE YU and BEJAN
LIONEL APAS,
Petitioners, Present:
PUNO, C.J., Chairperson,
- v e r s u s - SANDOVAL-GUTIERREZ, E) Ordering [Equitable, Aimee Yu and
CORONA, Bejan Lionel Apas], jointly and
A severally, to pay [respondents']
ZCUNA attorney's fees in the sum of P300,000;
and litigation expenses in the sum
LEONA of P50,000 and the cost of suit;
RDO-DE
CASTRO, JJ. F) Directing plaintiffs Ng Sheung Ngor and
NG SHEUNG NGOR** doing Ken Marketing to pay [Equitable] the
business under the name unpaid principal obligation for the peso
and style KEN MARKETING, Promulgated: loan as well as the unpaid obligation for
KEN APPLIANCE DIVISION, the dollar denominated loan;
INC. and BENJAMIN E. GO, G) Directing plaintiff Ng Sheung Ngor and
Respondents. December 19, 2007 Ken Marketing to pay [Equitable]
interest as follows:

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - 1) 12% per annum for the peso loans;

x
2) 8% per annum for the dollar loans.
DECISION The basis for the payment of the
dollar obligation is the conversion
CORONA, J.: rate of P26.50 per dollar availed of
at the time of incurring of the
This petition for review on certiorari[1] seeks to set aside the obligation in accordance with
decision[2] of the Court of Appeals (CA) in CA-G.R. SP No. 83112 and Article 1250 of the Civil Code of the
its resolution[3] denying reconsideration. Philippines;
On October 7, 2001, respondents Ng Sheung Ngor,[4] Ken
Appliance Division, Inc. and Benjamin E. Go filed an action for H) Dismissing [Equitable's] counterclaim
annulment and/or reformation of documents and contracts[5] against except the payment of the aforestated
petitioner Equitable PCI Bank (Equitable) and its employees, Aimee unpaid principal loan obligations and
Yu and Bejan Lionel Apas, in the Regional Trial Court (RTC), Branch interest.
16 of Cebu City.[6] They claimed that Equitable induced them to avail
of its peso and dollar credit facilities by offering low interest SO ORDERED.[19]
rates[7] so they accepted Equitable's proposal and signed the bank's
pre-printed promissory notes on various dates beginning 1996. They,
however, were unaware that the documents contained identical Equitable and respondents filed their respective notices of appeal.[20]
escalation clauses granting Equitable authority to increase interest
rates without their consent.[8] In the March 1, 2004 order of the RTC, both notices were denied due
course because Equitable and respondents failed to submit proof
Equitable, in its answer, asserted that respondents knowingly that they paid their respective appeal fees.[21]
accepted all the terms and conditions contained in the promissory
notes.[9] In fact, they continuously availed of and benefited from WHEREFORE, premises considered,
Equitable's credit facilities for five years.[10] the appeal interposed by defendants from the
Decision in the above-entitled case
After trial, the RTC upheld the validity of the promissory notes. It is DENIED due course. As of February 27, 2004,
found that, in 2001 alone, Equitable restructured respondents' loans the Decision dated February 5, 2004, is
amounting to US$228,200 and P1,000,000.[11] The trial court, considered final and executory in so far
however, invalidated the escalation clause contained therein because as [Equitable, Aimee Yu and Bejan Lionel
it violated the principle of mutuality of contracts.[12] Nevertheless, it Apas] are concerned.[22] (emphasis supplied)
took judicial notice of the steep depreciation of the peso during the
intervening period[13] and declared the existence of extraordinary
deflation.[14] Consequently, the RTC ordered the use of the 1996 Equitable moved for the reconsideration of the March 1, 2004 order
dollar exchange rate in computing respondents' dollar-denominated of the RTC[23] on the ground that it did in fact pay the appeal
loans.[15] Lastly, because the business reputation of respondents was fees. Respondents, on the other hand, prayed for the issuance of a
(allegedly) severely damaged when Equitable froze their writ of execution.[24]
accounts,[16] the trial court awarded moral and exemplary damages
to them.[17] On March 24, 2004, the RTC issued an omnibus order denying
Equitable's motion for reconsideration for lack of merit[25] and
The dispositive portion of the February 5, 2004 RTC ordered the issuance of a writ of execution in favor of
decision[18] provided: respondents.[26] According to the RTC, because respondents did not
WHEREFORE, premises considered, judgment is move for the reconsideration of the previous order (denying due
hereby rendered: course to the parties notices of appeal),[27] the February 5, 2004
decision became final and executory as to both parties and a writ of
A) Ordering [Equitable] to reinstate and execution against Equitable was in order.[28]
return the amount of [respondents']
deposit placed on hold status; A writ of execution was thereafter issued[29] and three real properties
of Equitable were levied upon.[30]
B) Ordering [Equitable] to pay
[respondents] the sum of P12 [m]illion On March 26, 2004, Equitable filed a petition for relief in the RTC
[p]esos as moral damages; from the March 1, 2004 order.[31] It, however, withdrew that petition
on March 30, 2004[32] and instead filed a petition for certiorari with an
C) Ordering [Equitable] to pay application for an injunction in the CA to enjoin the implementation
[respondents] the sum of P10 [m]illion and execution of the March 24, 2004 omnibus order.[33]
[p]esos as exemplary damages;
On June 16, 2004, the CA granted Equitable's application for
D) Ordering defendants Aimee Yu and injunction. A writ of preliminary injunction was correspondingly
Bejan [Lionel] Apas to pay issued.[34]
[respondents], jointly and severally, the
sum of [t]wo [m]illion [p]esos as moral Notwithstanding the writ of injunction, the properties of Equitable
and exemplary damages; previously levied upon were sold in a public auction on July 1, 2004.
Respondents were the highest bidders and certificates of sale were
issued to them.[35]
On August 10, 2004, Equitable moved to annul the July 1, 2004
auction sale and to cite the sheriffs who conducted the sale in
contempt for proceeding with the auction despite the injunction
order of the CA.[36]
On October 28, 2005, the CA dismissed the petition for
certiorari.[37] It found Equitable guilty of forum shopping because the
bank filed its petition for certiorari in the CA several hours before
withdrawing its petition for relief in the RTC.[38] Moreover, Equitable
failed to disclose, both in the statement of material dates and
certificate of non-forum shopping (attached to its petition for
certiorari in the CA), that it had a pending petition for relief in the
RTC.[39]
Equitable moved for reconsideration[40] but it was denied.[41] Thus,
this petition.
Equitable asserts that it was not guilty of forum shopping because
the petition for relief was withdrawn on the same day the petition for
certiorari was filed.[42] It likewise avers that its petition for certiorari
was meritorious because the RTC committed grave abuse of
discretion in issuing the March 24, 2004 omnibus order which was
based on an erroneous assumption. The March 1, 2004 order denying
its notice of appeal for non payment of appeal fees was erroneous
because it had in fact paid the required fees.[43] Thus, the RTC, by
issuing its March 24, 2004 omnibus order, effectively prevented
Equitable from appealing the patently wrong February 5, 2004
decision.[44]
This petition is meritorious.
Forum shopping exists when two or more actions involving the same
transactions, essential facts and circumstances are filed and those
actions raise identical issues, subject matter and causes of
action.[45] The test is whether, in two or more pending cases, there is
identity of parties, rights or causes of actions and reliefs.[46]
Equitable's petition for relief in the RTC and its petition for certiorari
in the CA did not have identical causes of action. The petition for
relief from the denial of its notice of appeal was based on the RTCs
judgment or final order preventing it from taking an appeal by fraud,
accident, mistake or excusable negligence.[47] On the other hand, its
petition for certiorari in the CA, a special civil action, sought to
correct the grave abuse of discretion amounting to lack of jurisdiction
committed by the RTC.[48]
In a petition for relief, the judgment or final order is
rendered by a court with competent jurisdiction. In a petition for
certiorari, the order is rendered by a court without or in excess of its
jurisdiction.
Moreover, Equitable substantially complied with the rule on non-
forum shopping when it moved to withdraw its petition for relief in
the RTC on the same day (in fact just four hours and forty minutes
after) it filed the petition for certiorari in the CA. Even if Equitable
failed to disclose that it had a pending petition for relief in the RTC, it
rectified what was doubtlessly a careless oversight by withdrawing
the petition for relief just a few hours after it filed its petition for
certiorari in the CA ― a clear indication that it had no intention of
maintaining the two actions at the same time.
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any
tribunal, board or officer exercising judicial or
quasi-judicial function has acted without or in
excess of its or his jurisdiction, or with grave
abuse of discretion amounting to lack or excess
of jurisdiction, and there is no appeal, nor any
plain, speedy or adequate remedy in the
ordinary course of law, a person aggrieved
thereby may file a verified petition in the proper
court, alleging the facts with certainty and
praying that judgment be rendered annulling or
modifying the proceedings of such tribunal,
board or officer, and granting such incidental
reliefs as law and justice may require.
The petition shall be accompanied by a certified
true copy of the judgment, order or resolution
subject thereof, copies of all pleadings and
documents relevant and pertinent thereto, and a
sworn certificate of non-forum shopping as
provided in the third paragraph of Section 3, Rule
46.
There are two substantial requirements in a petition for certiorari.
These are:
1. that the tribunal, board or officer
exercising judicial or quasi-judicial
functions acted without or in excess of
his or its jurisdiction or with grave
abuse of discretion amounting to lack
or excess of jurisdiction; and
2. that there is no appeal or any plain,
speedy and adequate remedy in the
ordinary course of law.
For a petition for certiorari premised on grave abuse of discretion to
prosper, petitioner must show that the public respondent patently
and grossly abused his discretion and that abuse amounted to an
evasion of positive duty or a virtual refusal to perform a duty enjoined
by law or to act at all in contemplation of law, as where the power
was exercised in an arbitrary and despotic manner by reason of
passion or hostility.[49]
The March 1, 2004 order denied due course to the notices of appeal
of both Equitable and respondents. However, it declared that the
February 5, 2004 decision was final and executory only with respect
to Equitable.[50] As expected, the March 24, 2004 omnibus order
denied Equitable's motion for reconsideration and granted
respondents' motion for the issuance of a writ of execution.[51]
The March 1, 2004 and March 24, 2004 orders of the RTC
were obviously intended to prevent Equitable, et al. from appealing
the February 5, 2004 decision. Not only that. The execution of the
decision was undertaken with indecent haste, effectively obviating or
defeating Equitable's right to avail of possible legal remedies. No
matter how we look at it, the RTC committed grave abuse of
discretion in rendering those orders.
With regard to whether Equitable had a plain, speedy and adequate
remedy in the ordinary course of law, we hold that there was none.
The RTC denied due course to its notice of appeal in the March 1,
2004 order. It affirmed that denial in the March 24, 2004 omnibus
order. Hence, there was no way Equitable could have possibly
appealed the February 5, 2004 decision.[52]
Although Equitable filed a petition for relief from the March 24, 2004
order, that petition was not a plain, speedy and adequate remedy in
the ordinary course of law.[53] A petition for relief under Rule 38 is an
equitable remedy allowed only in exceptional circumstances or
where there is no other available or adequate remedy.[54]
Thus, we grant Equitable's petition for certiorari and consequently
give due course to its appeal.
The jurisdiction of this Court in Rule 45 petitions is limited to
questions of law.[55] There is a question of law when the doubt or
controversy concerns the correct application of law or jurisprudence
to a certain set of facts; or when the issue does not call for the
probative value of the evidence presented, the truth or falsehood of
facts being admitted.[56]
Equitable does not assail the factual findings of the trial court. Its
arguments essentially focus on the nullity of the RTCs February 5,
2004 decision. Equitable points out that that decision was patently
erroneous, specially the exorbitant award of damages, as it was
inconsistent with existing law and jurisprudence.[57]
The RTC upheld the validity of the promissory notes
despite respondents assertion that those documents were contracts
of adhesion.
A contract of adhesion is a contract whereby almost all of its
provisions are drafted by one party.[58] The participation of the other
party is limited to affixing his signature or his adhesion to the
contract.[59] For this reason, contracts of adhesion are strictly
construed against the party who drafted it.[60]
It is erroneous, however, to conclude that contracts of adhesion are
invalid per se. They are, on the contrary, as binding as ordinary
contracts. A party is in reality free to accept or reject it. A contract of
adhesion becomes void only when the dominant party takes
advantage of the weakness of the other party, completely depriving
the latter of the opportunity to bargain on equal footing.[61]
That was not the case here. As the trial court noted, if the terms and
conditions offered by Equitable had been truly prejudicial to
respondents, they would have walked out and negotiated with
another bank at the first available instance. But they did not. Instead,
they continuously availed of Equitable's credit facilities for five long
years.
While the RTC categorically found that respondents had outstanding
dollar- and peso-denominated loans with Equitable, it, however,
failed to ascertain the total amount due (principal, interest and
penalties, if any) as of July 9, 2001. The trial court did not explain how
it arrived at the amounts of US$228,200 and P1,000,000.[62] In Metro
Manila Transit Corporation v. D.M. Consunji,[63] we reiterated that this
Court is not a trier of facts and it shall pass upon them only for
compelling reasons which unfortunately are not present in this
case.[64] Hence, we ordered the partial remand of the case for the
sole purpose of determining the amount of actual damages.[65]
Escalation clauses are not void per se. However, one which grants the
creditor an unbridled right to adjust the interest independently and
upwardly, completely depriving the debtor of the right to assent to
an important modification in the agreement is void. Clauses of that
nature violate the principle of mutuality of contracts.[66] Article
1308[67] of the Civil Code holds that a contract must bind both
contracting parties; its validity or compliance cannot be left to the
will of one of them.[68]
For this reason, we have consistently held that a valid escalation
clause provides:
1. that the rate of interest will only be
increased if the applicable maximum
rate of interest is increased by law or by
the Monetary Board; and
2. that the stipulated rate of interest will
be reduced if the applicable maximum
rate of interest is reduced by law or by
the Monetary Board (de-escalation
clause).[69]
The RTC found that Equitable's promissory notes uniformly stated:
If subject promissory note is extended, the
interest for subsequent extensions shall be at
such rate as shall be determined by the bank.[70]
Equitable dictated the interest rates if the term (or period
for repayment) of the loan was extended. Respondents had no choice
but to accept them. This was a violation of Article 1308 of the Civil
Code. Furthermore, the assailed escalation clause did not contain the
necessary provisions for validity, that is, it neither provided that the
rate of interest would be increased only if allowed by law or the
Monetary Board, nor allowed de-escalation. For these reasons, the
escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita
Builders v. Philippine National Bank[71] we held that, because the
escalation clause was annulled, the principal amount of the loan was
subject to the original or stipulated rate of interest. Upon maturity,
the amount due was subject to legal interest at the rate of 12% per
annum.[72]
Consequently, respondents should pay Equitable the interest rates of
12.66% p.a. for their dollar-denominated loans and 20% p.a. for their
peso-denominated loans from January 10, 2001 to July 9, 2001.
Thereafter, Equitable was entitled to legal interest of 12% p.a. on all
amounts due.
Extraordinary inflation exists when there is an unusual decrease in
the purchasing power of currency (that is, beyond the common
fluctuation in the value of currency) and such decrease could not be
reasonably foreseen or was manifestly beyond the contemplation of
the parties at the time of the obligation. Extraordinary deflation, on
the other hand, involves an inverse situation.[73]
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation
or deflation of the currency stipulated should
intervene, the value of the currency at the time
of the establishment of the obligation shall be
the basis of payment, unless there is an
agreement to the contrary.
For extraordinary inflation (or deflation) to affect an
obligation, the following requisites must be proven:
1. that there was an official declaration
of extraordinary inflation or deflation
from the Bangko Sentral ng Pilipinas
(BSP);[74]
2. that the obligation was contractual in
nature;[75] and
3. that the parties expressly agreed to
consider the effects of the
extraordinary inflation or deflation.[76]
Despite the devaluation of the peso, the BSP never declared a
situation of extraordinary inflation. Moreover, although the
obligation in this instance arose out of a contract, the parties did not
agree to recognize the effects of extraordinary inflation (or
deflation).[77] The RTC never mentioned that there was a such
stipulation either in the promissory note or loan agreement.
Therefore, respondents should pay their dollar-denominated loans at
the exchange rate fixed by the BSP on the date of maturity.[78]
Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered, not to impose a
penalty to the wrongdoer.[79] To be entitled to moral damages, a
claimant must prove:
1. That he or she suffered besmirched
reputation, or physical, mental or
psychological suffering sustained by
the claimant;
2. That the defendant committed a
wrongful act or omission;
3. That the wrongful act or omission was
the proximate cause of the damages
the claimant sustained;
4. The case is predicated on any of the
instances expressed or envisioned by
Article 2219[80] and 2220[81]. [82]
In culpa contractual or breach of contract, moral damages
are recoverable only if the defendant acted fraudulently or in bad
faith or in wanton disregard of his contractual obligations.[83] The
breach must be wanton, reckless, malicious or in bad faith, and
oppressive or abusive.[84]
The RTC found that respondents did not pay Equitable the interest
due on February 9, 2001 (or any month thereafter prior to the
maturity of the loan)[85] or the amount due (principal plus interest)
due on July 9, 2001.[86] Consequently, Equitable applied respondents'
deposits to their loans upon maturity.
The relationship between a bank and its depositor is that of creditor
and debtor.[87] For this reason, a bank has the right to set-off the
deposits in its hands for the payment of a depositor's Present:
indebtedness.[88] - versus -
YNARES-SA
Respondents indeed defaulted on their obligation. For this reason, Chairperson
Equitable had the option to exercise its legal right to set-off or BANK OF THE PHILIPPINE ISLANDS, CHICO-NAZ
compensation. However, the RTC mistakenly (or, as it now appears, Respondent. VELASCO,
deliberately) concluded that Equitable acted fraudulently or in bad NACHURA,
faith or in wanton disregard of its contractual obligations despite the . PERALTA, J
absence of proof. The undeniable fact was that, whatever damage
respondents sustained was purely the consequence of their failure Promulgate
to pay their loans. There was therefore absolutely no basis for the September
award of moral damages to them. x------------------------------------------------------------------------------------
-----x
Neither was there reason to award exemplary damages. Since
respondents were not entitled to moral damages, neither should
they be awarded exemplary damages.[89] And if respondents were DECISION
not entitled to moral and exemplary damages, neither could they be
awarded attorney's fees and litigation expenses.[90]
VELASCO, JR., J.:
ACCORDINGLY, the petition is hereby GRANTED.

The October 28, 2005 decision and February 3, 2006 resolution of the The Case
Court of Appeals in CA-G.R. SP No. 83112 are Before us is a Petition for Review on Certiorari under Rule
hereby REVERSED and SET ASIDE. 45 of the Rules of Court seeking to reverse and set aside the June 30,
2006 Decision[1] of the Court of Appeals (CA) and its November 21,
The March 24, 2004 omnibus order of the Regional Trial Court, 2006 Resolution[2] denying petitioners motion for reconsideration.
Branch 16, Cebu City in Civil Case No. CEB-26983 is The Facts
hereby ANNULLED for being rendered with grave abuse of Petitioner Ileana Macalinao was an approved cardholder of
discretion amounting to lack or excess of jurisdiction. All proceedings BPI Mastercard, one of the credit card facilities of respondent Bank of
undertaken pursuant thereto are likewise declared null and void. the Philippine Islands (BPI).[3] Petitioner Macalinao made some
purchases through the use of the said credit card and defaulted in
The March 1, 2004 order of the Regional Trial Court, Branch 16 of paying for said purchases. She subsequently received a letter dated
Cebu City in Civil Case No. CEB-26983 is hereby SET ASIDE. The January 5, 2004 from respondent BPI, demanding payment of the
appeal of petitioners Equitable PCI Bank, Aimee Yu and Bejan Lionel amount of one hundred forty-one thousand five hundred eighteen
Apas is therefore given due course. pesos and thirty-four centavos (PhP 141,518.34), as follows:
Stateme Previous Purchase Penalt Financ Balance
The February 5, 2004 decision of the Regional Trial Court, Branch 16 nt Date Balance s y e Due
of Cebu City in Civil Case No. CEB-26983 is accordingly SET (Paymen Interes Charge
ASIDE. New judgment is hereby entered: ts) t s
10/27/20 94,843.7 559.72 3,061.9 98,456.41
1. ordering respondents Ng Sheung Ngor, doing 02 0 9
business under the name and style of Ken 11/27/20 98,465.4 (15,000) 0 2,885. 86,351.02
Marketing, Ken Appliance Division, Inc. and 02 1 61
Benjamin E. Go to pay petitioner Equitable PCI 12/31/20 86,351.0 30,308.80 259.05 2,806. 119,752.2
Bank the principal amount of their dollar- and 02 2 41 8
peso-denominated loans;
1/27/200 119,752.2 618.23 3,891.0 124,234.5
2. ordering respondents Ng Sheung Ngor, doing
3 8 7 8
business under the name and style of Ken
2/27/200 124,234.5 990.93 4,037.6 129,263.1
Marketing, Ken Appliance Division, Inc. and
3 8 2 3
Benjamin E. Go to pay petitioner Equitable PCI
Bank interest at: 3/27/200 129,263.1 (18,000.0 298.72 3,616.0 115,177.9
a) 12.66% p.a. with respect to their dollar- 3 3 0) 5 0
denominated loans from January 10, 4/27/200 115,177.9 644.26 3,743.2 119,565.4
2001 to July 9, 2001; 3 0 8 4
b) 20% p.a. with respect to their peso- 5/27/200 119,565.4 (10,000.0 402.95 3,571.7 113,540.1
denominated loans from January 10, 3 4 0) 1 0
2001 to July 9, 2001;[91] 6/29/200 113,540.1 8,362.50 323.57 3,607.3 118,833.4
c) pursuant to our ruling in Eastern 3 0 (7,000.00 2 9
Shipping Lines v. Court of )
Appeals,[92] the total amount due on 7/27/200 118,833.4 608.07 3,862. 123,375.6
July 9, 2001 shall earn legal interest at 3 9 09 5
12% p.a. from the time petitioner 8/27/200 123,375.6 1,050. 4,009.7 128,435.5
Equitable PCI Bank demanded 3 5 20 1 6
payment, whether judicially or extra- 9/28/200 128,435.5 1,435.5 4,174.1 134,045.2
judicially; and 3 6 1 6 3
d) after this Decision becomes final and 10/28/20
executory, the applicable rate shall be 03
12% p.a. until full satisfaction; 11/28/20
3. all other claims and counterclaims are dismissed. 03
As a starting point, the Regional Trial Court, Branch 16 of Cebu City
12/28/20
shall compute the exact amounts due on the respective dollar-
03
denominated and peso-denominated loans, as of July 9, 2001, of
1/27/200 141,518. 8,491. 4,599.3 154,608.
respondents Ng Sheung Ngor, doing business under the name and
4 34 10 4 78
style of Ken Marketing, Ken Appliance Division and Benjamin E. Go.

SO ORDERED. Under the Terms and Conditions Governing the Issuance

and Use of the BPI Credit and BPI Mastercard, the charges or balance
thereof remaining unpaid after the payment due date indicated on
the monthly Statement of Accounts shall bear interest at the rate of
ILEANA DR. MACALINAO, 3% per month and an additional penalty fee equivalent to another 3%
G.R. No. 175490
Petitioner, per month. Particularly:
 8. PAYMENT OF CHARGES BCC shall
furnish the Cardholder a monthly Statement of
Account (SOA) and the Cardholder agrees that all
charges made through the use of the CARD shall
be paid by the Cardholder as stated in the SOA on
or before the last day for payment, which is
twenty (20) days from the date of the said SOA,
and such payment due date may be changed to
an earlier date if the Cardholders account is
considered overdue and/or with balances in
excess of the approved credit limit, or to such
other date as may be deemed proper by the
CARD issuer with notice to the Cardholder on the
same monthly SOA. If the last day fall on a
Saturday, Sunday or a holiday, the last day for the
payment automatically becomes the last working
day prior to said payment date. However,
notwithstanding the absence or lack of proof of
service of the SOA of the Cardholder, the latter
shall pay any and all charges made through the
use of the CARD within thirty (30) days from date
or dates thereof. Failure of the Cardholder to pay
the charges made through the CARD within the
payment period as stated in the SOA or within
thirty (30) days from actual date or dates of
purchase whichever occur earlier, shall render
him in default without the necessity of demand
from BCC, which the Cardholder expressly
waives. The charges or balance thereof
remaining unpaid after the payment due date
indicated on the monthly Statement of
Accounts shall bear interest at the rate of 3%
per month for BPI Express Credit, BPI Gold
Mastercard and an additional penalty fee
equivalent to another 3% of the amount due for
every month or a fraction of a months
delay. PROVIDED that if there occurs any change
on the prevailing market rates, BCC shall have the
option to adjust the rate of interest and/or
penalty fee due on the outstanding obligation
with prior notice to the cardholder. The
Cardholder hereby authorizes BCC to
correspondingly increase the rate of such interest
[in] the event of changes in the prevailing market
rates, and to charge additional service fees as
may be deemed necessary in order to maintain its
service to the Cardholder. A CARD with
outstanding balance unpaid after thirty (30) days
from original billing statement date shall
automatically be suspended, and those with
accounts unpaid after ninety (90) days from said
original billing/statement date shall automatically
be cancel (sic), without prejudice to BCCs right to
suspend or cancel any card anytime and for
whatever reason. In case of default in his
obligation as provided herein, Cardholder shall
surrender his/her card to BCC and in addition to
the interest and penalty charges aforementioned
, pay the following liquidated damages and/or
fees (a) a collection fee of 25% of the amount due
if the account is referred to a collection agency or
attorney; (b) service fee for every dishonored
check issued by the cardholder in payment of his
account without prejudice, however, to BCCs
right of considering Cardholders account, and (c)
a final fee equivalent to 25% of the unpaid
balance, exclusive of litigation expenses and
judicial cost, if the payment of the account is
enforced though court action. Venue of all civil
suits to enforce this Agreement or any other suit
directly or indirectly arising from the relationship
between the parties as established herein,
whether arising from crimes, negligence or
breach thereof, shall be in the process of courts of
the City of Makati or in other courts at the option
of BCC.[4] (Emphasis supplied.)
For failure of petitioner Macalinao to settle her obligations,
respondent BPI filed with the Metropolitan Trial Court (MeTC) of
Makati City a complaint for a sum of money against her and her
husband, Danilo SJ. Macalinao. This was raffled to Branch 66 of the
MeTC and was docketed as Civil Case No. 84462 entitled Bank of the
Philippine Islands vs. Spouses Ileana Dr. Macalinao and Danilo SJ.
Macalinao.[5]
In said complaint, respondent BPI prayed for the payment
of the amount of one hundred fifty-four thousand six hundred eight
pesos and seventy-eight centavos (PhP 154,608.78) plus 3.25%
finance charges and late payment charges equivalent to 6% of the
amount due from February 29, 2004 and an amount equivalent to
25% of the total amount due as attorneys fees, and of the cost of
suit.[6]
After the summons and a copy of the complaint were
served upon petitioner Macalinao and her husband, they failed to file
their Answer.[7]Thus, respondent BPI moved that judgment be
rendered in accordance with Section 6 of the Rule on Summary
Procedure.[8] This was granted in an Order dated June 16,
2004.[9] Thereafter, respondent BPI submitted its documentary
evidence.[10]
In its Decision dated August 2, 2004, the MeTC ruled in
favor of respondent BPI and ordered petitioner Macalinao and her
husband to pay the amount of PhP 141,518.34 plus interest and
penalty charges of 2% per month, to wit:
WHEREFORE, finding merit in the
allegations of the complaint supported by
documentary evidence, judgment is hereby
rendered in favor of the plaintiff, Bank of the
Philippine Islands and against defendant-
spouses Ileana DR Macalinao and Danilo SJ
Macalinao by ordering the latter to pay the
former jointly and severally the following:
1. The amount of PESOS: ONE
HUNDRED FORTY ONE THOUSAND
FIVE HUNDRED EIGHTEEN AND
34/100 (P141,518.34) plus interest and
penalty charges of 2% per month from
January 05, 2004 until fully paid;
2. P10,000.00 as and by way of
attorneys fees; and
3. Cost of suit.
SO ORDERED.[11]
Only petitioner Macalinao and her husband appealed to the
Regional Trial Court (RTC) of Makati City, their recourse docketed as
Civil Case No. 04-1153. In its Decision dated October 14, 2004, the
RTC affirmed in toto the decision of the MeTC and held:
In any event, the sum of P141,518.34
adjudged by the trial court appeared to be the
result of a recomputation at the reduced rate of
2% per month. Note that the total amount
sought by the plaintiff-appellee was P154,608.75
exclusive of finance charge of 3.25% per month
and late payment charge of 6% per month.
WHEREFORE, the appealed decision is
hereby affirmed in toto.
No pronouncement as to costs.
SO ORDERED.[12]
Unconvinced, petitioner Macalinao filed a petition for
review with the CA, which was docketed as CA-G.R. SP No. 92031.
The CA affirmed with modification the Decision of the RTC:
WHEREFORE, the appealed decision
is AFFIRMED but MODIFIED with respect to the
total amount due and interest rate. Accordingly,
petitioners are jointly and severally ordered to
pay respondent Bank of the Philippine Islands
the following:
1. The amount of One
Hundred Twenty Six
Thousand Seven
Hundred Six Pesos and
Seventy Centavos plus
interest and penalty
charges of 3% per month
from January 5, 2004
until fully paid;
 2. P10,000.00 as and by
way of attorneys fees;
and
3. Cost of Suit.
SO ORDERED.[13]
Although sued jointly with her husband, petitioner
Macalinao was the only one who filed the petition before the CA
since her husband already passed away on October 18, 2005.[14]
In its assailed decision, the CA held that the amount of PhP
141,518.34 (the amount sought to be satisfied in the demand letter of
respondent BPI) is clearly not the result of the re-computation at the
reduced interest rate as previous higher interest rates were already
incorporated in the said amount. Thus, the said amount should not
be made as basis in computing the total obligation of petitioner
Macalinao. Further, the CA also emphasized that respondent BPI
should not compound the interest in the instant case absent a
stipulation to that effect. The CA also held, however, that the MeTC
erred in modifying the amount of interest rate from 3% monthly to
only 2% considering that petitioner Macalinao freely availed herself
of the credit card facility offered by respondent BPI to the general
public. It explained that contracts of adhesion are not invalid per se
and are not entirely prohibited.
Petitioner Macalinaos motion for reconsideration was
denied by the CA in its Resolution dated November 21, 2006. Hence,
petitioner Macalinao is now before this Court with the following
assigned errors:
I.
THE REDUCTION OF INTEREST RATE, FROM
9.25% TO 2%, SHOULD BE UPHELD SINCE THE
STIPULATED RATE OF INTEREST WAS
UNCONSCIONABLE AND INIQUITOUS, AND
THUS ILLEGAL.
II.
THE COURT OF APPEALS ARBITRARILY
MODIFIED THE REDUCED RATE OF INTEREST
FROM 2% TO 3%, CONTRARY TO THE TENOR
OF ITS OWN DECISION.
III.
THE COURT A QUO, INSTEAD OF PROCEEDING
WITH A RECOMPUTATION, SHOULD HAVE
DISMISSED THE CASE FOR FAILURE OF
RESPONDENT BPI TO PROVE THE CORRECT
AMOUNT OF PETITIONERS OBLIGATION, OR IN
THE ALTERNATIVE, REMANDED THE CASE TO
THE LOWER COURT FOR RESPONDENT BPI TO
PRESENT PROOF OF THE CORRECT AMOUNT
THEREOF.
Our Ruling
The petition is partly meritorious.
The Interest Rate and Penalty Charge of 3% Per Month or 36% Per
Annum Should Be Reduced to 2% Per Month or 24% Per Annum
In its Complaint, respondent BPI originally imposed the
interest and penalty charges at the rate of 9.25% per month or 111%
per annum. This was declared as unconscionable by the lower courts
for being clearly excessive, and was thus reduced to 2% per month or
24% per annum. On appeal, the CA modified the rate of interest and
penalty charge and increased them to 3% per month or 36% per
annum based on the Terms and Conditions Governing the Issuance
and Use of the BPI Credit Card, which governs the transaction
between petitioner Macalinao and respondent BPI.
In the instant petition, Macalinao claims that the interest
rate and penalty charge of 3% per month imposed by the CA is
iniquitous as the same translates to 36% per annum or thrice the
legal rate of interest.[15] On the other hand, respondent BPI asserts
that said interest rate and penalty charge are reasonable as the same
are based on the Terms and Conditions Governing the Issuance and
Use of the BPI Credit Card.[16]
We find for petitioner. We are of the opinion that the
interest rate and penalty charge of 3% per month should be equitably
reduced to 2% per month or 24% per annum.
Indeed, in the Terms and Conditions Governing the
Issuance and Use of the BPI Credit Card, there was a stipulation on
the 3% interest rate. Nevertheless, it should be noted that this is not
the first time that this Court has considered the interest rate of 36%
per annum as excessive and unconscionable. We held in Chua vs.
Timan:[17]
The stipulated interest rates of 7% and
5% per month imposed on respondents loans
must be equitably reduced to 1% per month or
12% per annum. We need not unsettle the
principle we had affirmed in a plethora of cases
that stipulated interest rates of 3% per month
and higher are excessive, iniquitous,
unconscionable and exorbitant. Such
stipulations are void for being contrary to
morals, if not against the law. While C.B.
Circular No. 905-82, which took effect on January
1, 1983, effectively removed the ceiling on
interest rates for both secured and unsecured
loans, regardless of maturity, nothing in the said
circular could possibly be read as granting carte
blanche authority to lenders to raise interest rates
to levels which would either enslave their
borrowers or lead to a hemorrhaging of their
assets. (Emphasis supplied.)
Since the stipulation on the interest rate is void, it is as if
there was no express contract thereon. Hence, courts may reduce the
interest rate as reason and equity demand.[18]
The same is true with respect to the penalty charge.
Notably, under the Terms and Conditions Governing the Issuance
and Use of the BPI Credit Card, it was also stated therein that
respondent BPI shall impose an additional penalty charge of 3% per
month. Pertinently, Article 1229 of the Civil Code states:
Art. 1229. The judge shall equitably
reduce the penalty when the principal obligation
has been partly or irregularly complied with by
the debtor. Even if there has been no
performance, the penalty may also be reduced by
the courts if it is iniquitous or unconscionable.
In exercising this power to determine what is iniquitous and
unconscionable, courts must consider the circumstances of each case
since what may be iniquitous and unconscionable in one may be
totally just and equitable in another.[19]
In the instant case, the records would reveal that petitioner
Macalinao made partial payments to respondent BPI, as indicated in
her Billing Statements.[20] Further, the stipulated penalty charge of
3% per month or 36% per annum, in addition to regular interests, is
indeed iniquitous and unconscionable.
Thus, under the circumstances, the Court finds it equitable
to reduce the interest rate pegged by the CA at 1.5% monthly to 1%
monthly and penalty charge fixed by the CA at 1.5% monthly to 1%
monthly or a total of 2% per month or 24% per annum in line with the
prevailing jurisprudence and in accordance with Art. 1229 of the Civil
Code.
There Is No Basis for the Dismissal of the Case,
Much Less a Remand of the Same for Further Reception of
Evidence
Petitioner Macalinao claims that the basis of the re-
computation of the CA, that is, the amount of PhP 94,843.70 stated
on the October 27, 2002 Statement of Account, was not the amount
of the principal obligation. Thus, this allegedly necessitates a re-
examination of the evidence presented by the parties. For this
reason, petitioner Macalinao further contends that the dismissal of
the case or its remand to the lower court would be a more
appropriate disposition of the case.
Such contention is untenable. Based on the records, the
summons and a copy of the complaint were served upon petitioner
Macalinao and her husband on May 4, 2004. Nevertheless, they failed
to file their Answer despite such service. Thus, respondent BPI
moved that judgment be rendered accordingly.[21] Consequently, a
decision was rendered by the MeTC on the basis of the evidence
submitted by respondent BPI. This is in consonance with Sec. 6 of the
Revised Rule on Summary Procedure, which states:
Sec. 6. Effect of failure to
answer. Should the defendant fail to answer the
complaint within the period above provided,
the court, motu proprio, or on motion of the
plaintiff, shall render judgment as may be
warranted by the facts alleged in the complaint
and limited to what is prayed for
therein: Provided, however, that the court may in
its discretion reduce the amount of damages and
attorneys fees claimed for being excessive or
otherwise unconscionable. This is without
 prejudice to the applicability of Section 3(c), Rule - versus - BERSAMIN,
10 of the Rules of Court, if there are two or more DEL CASTILLO,
defendants. (As amended by the 1997 Rules of VILLARAMA, JR, and
Civil Procedure; emphasis supplied.) PERLAS-BERNABE, JJ.
Promulgated:
SPOUSES VERONICA AND
Considering the foregoing rule, respondent BPI should not DANILO GONZALES, June 27, 2012
be made to suffer for petitioner Macalinaos failure to file an answer Respondents.
and concomitantly, to allow the latter to submit additional evidence
x--------------------------------------------------------------------------------------
by dismissing or remanding the case for further reception of
---x
evidence. Significantly, petitioner Macalinao herself admitted the
existence of her obligation to respondent BPI, albeit with reservation
DECISION
as to the principal amount. Thus, a dismissal of the case would cause
great injustice to respondent BPI. Similarly, a remand of the case for
BERSAMIN, J.:
further reception of evidence would unduly prolong the proceedings
There is novation when there is an irreconcilable incompatibility
of the instant case and render inutile the proceedings conducted
between the old and the new obligations. There is no novation in
before the lower courts.
case of only slight modifications; hence, the old obligation prevails.
Significantly, the CA correctly used the beginning balance
of PhP 94,843.70 as basis for the re-computation of the interest
The petitioners challenge the decision promulgated on March 19,
considering that this was the first amount which appeared on the
2003,[1] whereby the Court of Appeals (CA) upheld the issuance of a
Statement of Account of petitioner Macalinao. There is no other
writ of execution by the Regional Trial Court (RTC), Branch 16, in
amount on which the re-computation could be based, as can be
Malolos, Bulacan.
gathered from the evidence on record. Furthermore, barring a
showing that the factual findings complained of are totally devoid of
support in the record or that they are so glaringly erroneous as to
constitute serious abuse of discretion, such findings must stand, for
this Court is not expected or required to examine or contrast the
evidence submitted by the parties.[22]
Antecedents
In view of the ruling that only 1% monthly interest and 1%
The Court adopts the following summary of the
penalty charge can be applied to the beginning balance of PhP
antecedents rendered by the Court in Medel v. Court of Appeals,[2] the
94,843.70, this Court finds the following computation more
case from which this case originated, to wit:
appropriate:
On November 7, 1985, Servando Franco
Statement Previous Purchases Balance Interest (1%) Penalty Total Amount
and Leticia Medel (hereafter Servando and
Date Balance (Payments) Leticia) obtained aDue
Charge for the
loan from Veronica R.
(1%) Month
Gonzales (hereafter Veronica), who was engaged
10/27/2002 94,843.70 94,843.70 948.44 948.44
in the money lending 96,740.58
business under the name
11/27/2002 94,843.70 (15,000) 79,843.70 798.44 798.44 Credit Enterprises,
Gonzales 81,440.58 in the amount
12/31/2002 79,843.70 30,308.80 110,152.50 1,101.53 1,101.53
of P50,000.00, 112,355.56
payable in two months. Veronica
1/27/2003 110,152.50 110,152.50 1,101.53 gave1,101.53
only the amount112,355.56
of P47,000.00, to the
2/27/2003 110,152.50 110,152.50 1,101.53 borrowers,
1,101.53 as she retained P3,000.00, as advance
112,355.56
3/27/2003 110,152.50 (18,000.00) 92,152.50 921.53 interest for one month
921.53 at 6% per month. Servado
93,995.56
4/27/2003 92,152.50 92,152.50 921.53 and921.53
Leticia executed a promissory note
93,995.56
5/27/2003 92,152.50 (10,000.00) 82,152.50 821.53 for 821.53
P50,000.00, to evidence
83,795.56the loan, payable on
6/29/2003 82,152.50 8,362.50 83,515.00 835.15 January
835.157, 1986. 85,185.30
(7,000.00)
On November 19, 1985, Servando and
7/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
Leticia obtained from Veronica another loan in
8/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30 payable in two
the amount of P90,000.00,
9/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30per month. They
months, at 6% interest
10/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
executed a promissory note to evidence the loan,
11/28/2003 83,515.00 83,515.00 835.15 835.15
maturing on January 85,185.30
19, 1986. They received
12/28/2003 83,515.00 83,515.00 835.15 835.15
only P84,000.00, out85,185.30
of the proceeds of the loan.
1/27/2004 83,515.00 83,515.00 835.15 835.15 85,185.30
TOTAL 83,515.00 14,397.26 On maturity 112,309.52
14,397.26 of the two promissory notes,
the borrowers failed to pay the indebtedness.

WHEREFORE, the petition is PARTLY GRANTED. The CA Decision
dated June 30, 2006 in CA-G.R. SP No. 92031 is
hereby MODIFIED with respect to the total amount due, interest
rate, and penalty charge. Accordingly, petitioner Macalinao is
ordered to pay respondent BPI the following:
(1) The amount of one hundred twelve thousand three
hundred nine pesos and fifty-two centavos (PhP 112,309.52) plus
interest and penalty charges of 2% per month from January 5, 2004
until fully paid;
(2) PhP 10,000 as and by way of attorneys fees; and
(3) Cost of suit.
On June 11, 1986, Servando and Leticia
secured from Veronica still another loan in the
amount of P300,000.00, maturing in one month,
secured by a real estate mortgage over a property
belonging to Leticia Makalintal Yaptinchay, who
issued a special power of attorney in favor of
Leticia Medel, authorizing her to execute the
mortgage. Servando and Leticia executed a
promissory note in favor of Veronica to pay the
sum of P300,000.00, after a month, or on July 11,
1986. However, only the sum of P275,000.00,
was given to them out of the proceeds of the
loan.

SO ORDERED. Like the previous loans, Servando and

Medel failed to pay the third loan on maturity.

On July 23, 1986, Servando and

HEIRS OF SERVANDO G.R. No. 159709
Leticia with the latter's husband, Dr. Rafael
FRANCO,
Medel, consolidated all their previous unpaid
Petitioners, Present:
loans totaling P440,000.00, and sought from
Veronica another loan in the amount
LEONARDO-DE CASTRO,
of P60,000.00, bringing their indebtedness to a
Acting Chairperson,
 total of P500,000.00, payable on August 23,
1986. They executed a promissory note, reading
as follows:
Baliwag, Bulacan July 23, 1986
Maturity Date August 23, 1986
P500,000.00
FOR VALUE RECEIVED, I/WE jointly and severally promise to
pay to the order of VERONICA R. GONZALES doing business in
the business style of GONZALES CREDIT ENTERPRISES,
Filipino, of legal age, married to Danilo G. Gonzales, Jr., of
Baliwag Bulacan, the sum of PESOS ........ FIVE HUNDRED
THOUSAND ..... (P500,000.00) Philippine
Currency with interestthereon at the rate of 5.5 PER CENT per m
onth plus 2% service charge per annum from date hereof until
fully paid according to the amortization schedule contained
herein. (Underscoring supplied)
Payment will be made in full at the maturity date.
Should I/WE fail to pay any amortization or portion hereof when
due, all the other installments together with all interest accrued
shall immediately be due and payable and I/WE hereby agree to
pay
an additional amount equivalent to one percent (1%) per month
of the amount due and demandable as penalty charges in the for
m of liquidated damages until fully paid; and the
further sum of TWENTY FIVE PER CENT (25%) thereof in full,
without deductions as Attorney's Fee whether actually incurred
or not, of the total amount due and demandable, exclusive of
costs and judicial or extra judicial expenses. (Underscoring
supplied)
I, WE further agree that in the event the present rate of interest
on loan is increased by law or the Central Bank of the
Philippines, the holder shall have the option to apply and collect
the increased interest charges without notice although the
original interest have already been collected wholly or partially
unless the contrary is required by law.
It is also a special condition of this contract that the parties
herein agree that the amount of peso-obligation under this
agreement is based on the present value of peso, and if there be
any change in the value thereof, due to extraordinary inflation or
deflation, or any other cause or reason, then the peso-obligation
herein contracted shall be adjusted in accordance with the value
of the peso then prevailing at the time of the complete
fulfillment of obligation.
Demand and notice of dishonor
waived. Holder may accept partial
payments and grant renewals of this
note or extension of payments,
reserving rights against each and all
indorsers and all parties to this note.
IN CASE OF JUDICIAL Execution
of this obligation, or any part of it,
the debtors waive all his/their rights
under the provisions of Section 12,
Rule 39, of the Revised Rules of
Court.
On maturity of the loan, the borrowers
failed to pay the indebtedness of P500,000.00,
plus interests and penalties, evidenced by the
above-quoted promissory note.
On February 20, 1990, Veronica R.
Gonzales, joined by her husband Danilo G.
Gonzales, filed with the Regional Trial Court of
Bulacan, Branch 16, at Malolos, Bulacan, a
complaint for collection of the full amount of the
loan including interests and other charges.
In his answer to the complaint filed with the trial court on
April 5, 1990, defendant Servando alleged that he did not obtain
any loan from the plaintiffs; that it was defendants Leticia and Dr.
Rafael Medel who borrowed from the plaintiffs the sum
of P500,000.00, and actually received the amount and benefited
therefrom; that the loan was secured by a real estate mortgage
executed in favor of the plaintiffs, and that he (Servando Franco)
signed the promissory note only as a witness.
In their separate answer filed on April 10,1990, defendants
Leticia and Rafael Medel alleged that the loan was the transaction
of Leticia Yaptinchay, who executed a mortgage in favor of the
plaintiffs over a parcel of real estate situated in San Juan,
Batangas; that the interest rate is excessive at 5.5% per month
with additional service charge of 2% per annum, and penalty
charge of 1% per month; that the stipulation for attorney's fees of
25% of the amount due is unconscionable, illegal and excessive,
and that substantial payments made were applied to interest,
penalties and other charges.
After due trial, the lower court declared that the due
execution and genuineness of the four promissory notes had been
duly proved, and ruled that although the Usury Law had been
repealed, the interest charged by the plaintiffs on the loans was
unconscionable and "revolting to the conscience". Hence, the trial
court applied "the provision of the New [Civil] Code" that the "legal
rate of interest for loan or forbearance of money, goods or credit is
12% per annum."
Accordingly, on December 9, 1991, the trial court rendered
judgment, the dispositive portion of which reads as follows:
WHEREFORE, premises considered, judgment is hereby
rendered, as follows:
1. Ordering the defendants Servando Franco and Leticia
Medel, jointly and severally, to pay plaintiffs the amount
of P47,000.00 plus 12% interest per annum from November 7,
1985 and 1% per month as penalty, until the entire amount is
paid in full.
2. Ordering the defendants Servando Franco and Leticia Y.
Medel to plaintiffs, jointly and severally the amount
of P84,000.00 with 12% interest per annum and 1% per cent per
month as penalty from November 19,1985 until the whole
amount is fully paid;
3. Ordering the defendants to
pay the plaintiffs, jointly and
severally, the amount of P285,000.00
plus 12% interest per annum and 1%
per month as penalty from July 11,
1986, until the whole amount is fully
paid;
4. Ordering the defendants to
pay plaintiffs, jointly and severally,
the amount of P50,000.00 as
attorney's fees;
5. All counterclaims are hereby
dismissed.
With costs against the
defendants.
In due time, both plaintiffs and
defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants
argued that the promissory note, which
consolidated all the unpaid loans of the
defendants, is the law that governs the
parties. They further argued that Circular No. 416
of the Central Bank prescribing the rate of
interest for loans or forbearance of money, goods
or credit at 12% per annum, applies only in the
absence of a stipulation on interest rate, but not
when the parties agreed thereon.
The Court of Appeals sustained the
plaintiffs-appellants' contention. It ruled that the
Usury Law having become legally inexistent with
the promulgation by the Central Bank in 1982 of
 Circular No. 905, the lender and borrower could
agree on any interest that may be charged on the
loan. The Court of Appeals further held that "the
imposition of an additional amount equivalent to
1% per month of the amount due and
demandable as penalty charges in the form of
liquidated damages until fully paid was allowed
by law.
Accordingly, on March 21, 1997, the Court
of Appeals promulgated it decision reversing that
of the Regional Trial Court, disposing as follows:
WHEREFORE, the appealed
judgment is hereby MODIFIED such
that defendants are hereby ordered
to pay the plaintiffs the sum
of P500,000.00, plus 5.5% per month
interest and 2% service charge per
annum effective July 23, 1986, plus
1% per month of the total amount
due and demandable as penalty
charges effective August 24, 1986,
until the entire amount is fully paid.
The award to the plaintiffs
of P50,000.00 as attorney's fees is
affirmed. And so is the imposition of
costs against the defendants.
SO ORDERED.
On April 15, 1997, defendants-appellants
filed a motion for reconsideration of the said
decision. By resolution dated November 25,
1997, the Court of Appeals denied the motion.[3]
On review, the Court in Medel v. Court of Appeals struck
down as void the stipulation on the interest for being iniquitous or
unconscionable, and revived the judgment of the RTC rendered on
December 9, 1991, viz:
WHEREFORE, the Court hereby
REVERSES and SETS ASIDE the decision of the
Court of Appeals promulgated on March 21, 1997,
and its resolution dated November 25, 1997.
Instead, we render judgment REVIVING and
AFFIRMING the decision dated December 9,
1991, of the Regional Trial Court of Bulacan,
Branch 16, Malolos, Bulacan, in Civil Case No.
134-M-90, involving the same parties.
No pronouncement as to costs in this
instance.
SO ORDERED.[4]
Upon the finality of the decision in Medel v. Court of
Appeals, the respondents moved for execution.[5] Servando Franco
opposed,[6]claiming that he and the respondents had agreed to fix
the entire obligation at P775,000.00.[7] According to Servando, their
agreement, which was allegedly embodied in a receipt dated
February 5, 1992,[8] whereby he made an initial payment
of P400,000.00 and promised to pay the balance of P375,000.00 on
February 29, 1992, superseded the July 23, 1986 promissory note.
The RTC granted the motion for execution over Servandos
opposition, thus:
There is no doubt that the decision dated
December 9, 1991 had already been affirmed and
had already become final and executory. Thus, in
accordance with Sec. 1 of Rule 39 of the 1997
Rules of Civil Procedure, execution shall issue as a
matter of right. It has likewise been ruled that a
judgment which has acquired finality becomes
immutable and unalterable and hence may no
longer be modified at any respect except only to
correct clerical errors or mistakes (Korean Airlines
Co. Ltd. vs. C.A., 247 SCRA 599). In this respect,
the decision deserves to be respected.
The argument about the modification of
the contract or non-participation of defendant
Servando Franco in the proceedings on appeal on
the alleged belief that the payment he made had
already absolved him from liability is of no
moment. Primarily, the decision was for him and
Leticia Medel to pay the plaintiffs jointly and
severally the amounts stated in the Decision. In
other words, the liability of the defendants
thereunder is solidary. Based on this aspect
alone, the new defense raised by defendant
Franco is unavailing.
WHEREFORE, in the light of all the
foregoing, the Court hereby grants the Motion for
Execution of Judgment.
Accordingly, let a writ of execution be
issued for implementation by the Deputy Sheriff
of this Court.
SO ORDERED.[9]
On March 8, 2001, the RTC issued the writ of execution.[10]
Servando moved for reconsideration,[11] but the RTC denied
his motion.[12]
On March 19, 2003, the CA affirmed the RTC through its assailed
decision, ruling that the execution was proper because of Servandos
failure to comply with the terms of the compromise agreement,
stating:[13]
Petitioner cannot deny the fact that there
was no full compliance with the tenor of the
compromise agreement. Private respondents on
their part did not disregard the payments made
by the petitioner. They even offered that
whatever payments made by petitioner, it can be
deducted from the principal obligation including
interest. However, private respondents posit that
the payments made cannot alter, modify or
revoke the decision of the Supreme Court in the
instant case.
In the case of Prudence Realty and
Development Corporation vs. Court of Appeals, the
Supreme Court ruled that:
When the terms of the
compromise judgment is violated,
the aggrieved party must move for its
execution, not its invalidation.
It is clear from the aforementioned
jurisprudence that even if there is a compromise
agreement and the terms have been violated, the
aggrieved party, such as the private respondents,
has the right to move for the issuance of a writ of
execution of the final judgment subject of the
compromise agreement.
Moreover, under the circumstances of this
case, petitioner does not stand to suffer any harm
or prejudice for the simple reason that what has
been asked by private respondents to be the
subject of a writ of execution is only the balance
of petitioners obligation after deducting the
payments made on the basis of the compromise
agreement.
WHEREFORE, premises considered, the
instant petition is hereby DENIED DUE COURSE
and consequently DISMISSED for lack of merit.
SO ORDERED.
His motion for reconsideration having been denied,[14] Servando
appealed. He was eventually substituted by his heirs, now the
petitioners herein, on account of his intervening death. The
substitution was pursuant to the resolution dated June 15, 2005.[15]
Issue
The petitioners submit that the CA erred in ruling that:
I Sgd)
THE 9 DECEMBER 1991 DECISION OF BRANCH
16 OF THE REGIONAL TRIAL COURT OF
MALOLOS, BULACAN WAS NOT NOVATED BY
THE COMPROMISE AGREEMENT BETWEEN
THE PARTIES ON 5 FEBRUARY 1992.
II
THE LIABILITY OF THE PETITIONER TO
RESPONDENTS SHOULD BE BASED ON THE
DECEMBER 1991 DECISION OF BRANCH 16 OF
THE REGIONAL TRIAL COURT OF MALOLOS,
BULACAN AND NOT ON THE COMPROMISE
AGREEMENT EXECUTED IN 1992.
The petitioners insist that the RTC could not validly enforce a
judgment based on a promissory note that had been already
novated; that the promissory note had been impliedly novated when
the principal obligation of P500,000.00 had been fixed
at P750,000.00, and the maturity date had been extended from
August 23, 1986 to February 29, 1992.
In contrast, the respondents aver that the petitioners seek to alter,
modify or revoke the final and executory decision of the Court; that
novation did not take place because there was no complete
incompatibility between the promissory note and the memorandum
receipt; that Servandos previous payment would be deducted from
the total liability of the debtors based on the RTCs decision.
Issue
Was there a novation of the August 23, 1986 promissory
note when respondent Veronica Gonzales issued the February 5,
1992 receipt?
Ruling
The petition lacks merits.
I obligation. Instead, the respondents only thereby recognized the
Novation did not transpire because no
irreconcilable incompatibility existed
between the promissory note and the receipt
To buttress their claim of novation, the petitioners rely on the receipt
issued on February 5, 1992 by respondent Veronica whereby
Servandos obligation was fixed at P750,000.00. They insist that even
the maturity date was extended until February 29, 1992. Such
changes, they assert, were incompatible with those of the original
agreement under the promissory note.
The petitioners assertion is wrong.
A novation arises when there is a substitution of an obligation by a
subsequent one that extinguishes the first, either by changing the
object or the principal conditions, or by substituting the person of the
debtor, or by subrogating a third person in the rights of the
creditor.[16] For a valid novation to take place, there must be,
therefore: (a) a previous valid obligation; (b) an agreement of the
parties to make a new contract; (c) an extinguishment of the old
contract; and (d) a valid new contract.[17] In short, the new obligation
extinguishes the prior agreement only when the substitution is
unequivocally declared, or the old and the new obligations are
incompatible on every point. A compromise of a final judgment
operates as a novation of the judgment obligation upon compliance
with either of these two conditions.[18]
The receipt dated February 5, 1992, excerpted below, did not create a
new obligation incompatible with the old one under the promissory
note, viz:
February 5, 1992
Received from SERVANDO FRANCO BPI
Managers Check No. 001700 in the amount
of P400,00.00 as partial payment of loan. Balance
of P375,000.00 to be paid on or before
FEBRUARY 29, 1992. In case of default an interest
will be charged as stipulated in the promissory
note subject of this case.
(
V
. Gonzalez[19]
To be clear, novation is not presumed. This means that the parties to
a contract should expressly agree to abrogate the old contract in
favor of a new one. In the absence of the express agreement, the old
and the new obligations must be incompatible on every
point.[20] According to California Bus Lines, Inc. v. State Investment
House, Inc.:[21]
The extinguishment of the old obligation by the
new one is a necessary element of novation which
may be effected either expressly or impliedly. The
term expressly means that the contracting parties
incontrovertibly disclose that their object in
executing the new contract is to extinguish the
old one. Upon the other hand, no specific form is
required for an implied novation, and all that is
prescribed by law would be an incompatibility
between the two contracts. While there is really
no hard and fast rule to determine what might
constitute to be a sufficient change that can bring
about novation, the touchstone for contrariety,
however, would be an irreconcilable
incompatibility between the old and the new
obligations.
There is incompatibility when the two obligations cannot stand
together, each one having its independent existence. If the two
obligations cannot stand together, the latter obligation novates the
first.[22] Changes that breed incompatibility must be essential in
nature and not merely accidental. The incompatibility must affect
any of the essential elements of the obligation, such as its object,
cause or principal conditions thereof; otherwise, the change is merely
modificatory in nature and insufficient to extinguish the original
obligation.[23]
In light of the foregoing, the issuance of the receipt created no new
original obligation by stating in the receipt that the P400,000.00 was
partial payment of loan and by referring to the promissory note
subject of the case in imposing the interest. The loan mentioned in
the receipt was still the same loan involving the P500,000.00
extended to Servando. Advertence to the interest stipulated in the
promissory note indicated that the contract still subsisted, not
replaced and extinguished, as the petitioners claim.
The receipt dated February 5, 1992 was only the proof of Servandos
payment of his obligation as confirmed by the decision of the RTC. It
did not establish the novation of his agreement with the
respondents. Indeed, the Court has ruled that an obligation to pay a
sum of money is not novated by an instrument that expressly
recognizes the old, or changes only the terms of payment, or adds
other obligations not incompatible with the old ones, or the new
contract merely supplements the old one.[24] A new contract that is a
mere reiteration, acknowledgment or ratification of the old contract
with slight modifications or alterations as to the cause or object or
principal conditions can stand together with the former one, and
there can be no incompatibility between them.[25] Moreover, a
creditors acceptance of payment after demand does not operate as a
modification of the original contract.[26]
Worth noting is that Servandos liability was joint and solidary with his
co-debtors. In a solidary obligation, the creditor may proceed against
any one of the solidary debtors or some or all of them
simultaneously.[27] The choice to determine against whom the
collection is enforced belongs to the creditor until the obligation is
fully satisfied.[28] Thus, the obligation was being enforced against
Servando, who, in order to escape liability, should have presented
evidence to prove that his obligation had already been cancelled by
the new obligation or that another debtor had assumed his place. In
case of change in the person of the debtor, the substitution must be
clear and express,[29] and made with the consent of the
creditor.[30]Yet, these circumstances did not obtain herein, proving
precisely that Servando remained a solidary debtor against whom
the entire or part of the obligation might be enforced.
Lastly, the extension of the maturity date did not constitute a
novation of the previous agreement. It is settled that an extension of
the term or period of the maturity date does not result in novation.[31]
II
Total liability to be reduced by P400,000.00
The petitioners argue that Servandos remaining liability amounted to
only P375,000.00, the balance indicated in the February 5, 1992
receipt. Accordingly, the balance was not yet due because the
respondents did not yet make a demand for payment.
The petitioners cannot be upheld.
The balance of P375,000.00 was premised on the taking place of a
novation. However, as found now, novation did not take place.
Accordingly, Servandos obligation, being solidary, remained to be
that decreed in the December 9, 1991 decision of the RTC, inclusive
of interests, less the amount of P400,000.00 that was meanwhile
paid by him.
WHEREFORE, the Court AFFIRMS the decision of the
Court of Appeals promulgated on March 19, 2003; ORDERS the
Regional Trial Court, Branch 16, in Malolos, Bulacan to proceed with
the execution based on its decision rendered on December 9, 1991,
deducting the amount of P400,000.00 already paid by the late
Servando Franco; and DIRECTS the petitioners to pay the costs of
suit.
SO ORDERED.
G.R. No. 128690 January 21, 1999
ABS-CBN BROADCASTING CORPORATION, petitioner,
vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING
CORP, VIVA PRODUCTION, INC., and VICENTE DEL
ROSARIO, respondents.
DAVIDE, JR., CJ.:
In this petition for review on certiorari, petitioner ABS-CBN
Broadcasting Corp. (hereafter ABS-CBN) seeks to reverse and set
aside the decision 1 of 31 October 1996 and the resolution 2 of 10
March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The
former affirmed with modification the decision 3 of 28 April 1993 of
the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil
Case No. Q-92-12309. The latter denied the motion to reconsider the
decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court of
Appeals, are as follows:
In 1990, ABS-CBN and Viva executed a Film
Exhibition Agreement (Exh. "A") whereby Viva
gave ABS-CBN an exclusive right to exhibit some
Viva films. Sometime in December 1991, in
accordance with paragraph 2.4 [sic] of said
agreement stating that —.
1.4 ABS-CBN shall have the right of first refusal to
the next twenty-four (24) Viva films for TV
telecast under such terms as may be agreed upon
by the parties hereto, provided, however, that
such right shall be exercised by ABS-CBN from
the actual offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through
its vice-president Charo Santos-Concio, a list of three(3) film
packages (36 title) from which ABS-CBN may exercise its right of
first refusal under the afore-said agreement (Exhs. "1" par, 2, "2,"
"2-A'' and "2-B"-Viva). ABS-CBN, however through Mrs. Concio,
"can tick off only ten (10) titles" (from the list) "we can purchase"
(Exh. "3" - Viva) and therefore did not accept said list (TSN, June
8, 1992, pp. 9-10). The titles ticked off by Mrs. Concio are not the
subject of the case at bar except the film ''Maging Sino Ka Man."
For further enlightenment, this rejection letter dated January 06,
1992 (Exh "3" - Viva) is hereby quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I
would like to express my difficulty in recommending the
purchase of the three film packages you are offering ABS-CBN.
From among the three packages I can only tick off 10 titles we
can purchase. Please see attached. I hope you will understand my
position. Most of the action pictures in the list do not have big
action stars in the cast. They are not for primetime. In line with
this I wish to mention that I have not scheduled for telecast
several action pictures in out very first contract because of the
cheap production value of these movies as well as the lack of big
action stars. As a film producer, I am sure you understand what I
am trying to say as Viva produces only big action pictures.
In fact, I would like to request two (2) additional runs for these
movies as I can only schedule them in our non-primetime slots.
We have to cover the amount that was paid for these movies
because as you very well know that non-primetime advertising
rates are very low. These are the unaired titles in the first
contract.
1. Kontra Persa [sic].
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us before and have
been rejected because of the ruling of MTRCB to have them aired
at 9:00 p.m. due to their very adult themes.
As for the 10 titles I have choosen [sic] from the 3 packages
please consider including all the other Viva movies produced last
year. I have quite an attractive offer to make.
Thanking you and with my warmest regards.
On February 27, 1992, defendant Del Rosario approached ABS-CBN's
Ms. Concio, with a list consisting of 52 original movie titles (i.e. not
yet aired on television) including the 14 titles subject of the present
case, as well as 104 re-runs (previously aired on television) from
which ABS-CBN may choose another 52 titles, as a total of 156 titles,
proposing to sell to ABS-CBN airing rights over this package of 52
originals and 52 re-runs for P60,000,000.00 of which P30,000,000.00
will be in cash and P30,000,000.00 worth of television spots (Exh. "4"
to "4-C" Viva; "9" -Viva).
On April 2, 1992, defendant Del Rosario and ABS-
CBN general manager, Eugenio Lopez III, met at
the Tamarind Grill Restaurant in Quezon City to
discuss the package proposal of Viva. What
transpired in that lunch meeting is the subject of
conflicting versions. Mr. Lopez testified that he
and Mr. Del Rosario allegedly agreed that ABS-
CRN was granted exclusive film rights to fourteen
(14) films for a total consideration of P36 million;
that he allegedly put this agreement as to the
price and number of films in a "napkin'' and
 signed it and gave it to Mr. Del Rosario (Exh. D;
TSN, pp. 24-26, 77-78, June 8, 1992). On the other
hand, Del Rosario denied having made any
agreement with Lopez regarding the 14 Viva
films; denied the existence of a napkin in which
Lopez wrote something; and insisted that what
he and Lopez discussed at the lunch meeting was
Viva's film package offer of 104 films (52 originals
and 52 re-runs) for a total price of P60 million. Mr.
Lopez promising [sic]to make a counter proposal
which came in the form of a proposal contract
Annex "C" of the complaint (Exh. "1"·- Viva; Exh.
"C" - ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano
Gozon of RBS Senior vice-president for Finance
discussed the terms and conditions of Viva's offer
to sell the 104 films, after the rejection of the
same package by ABS-CBN.
On April 07, 1992, defendant Del Rosario received
through his secretary, a handwritten note from
Ms. Concio, (Exh. "5" - Viva), which reads: "Here's
the draft of the contract. I hope you find
everything in order," to which was attached a
draft exhibition agreement (Exh. "C''- ABS-CBN;
Exh. "9" - Viva, p. 3) a counter-proposal covering
53 films, 52 of which came from the list sent by
defendant Del Rosario and one film was added by
Ms. Concio, for a consideration of P35 million.
Exhibit "C" provides that ABS-CBN is granted
films right to 53 films and contains a right of first
refusal to "1992 Viva Films." The said counter
proposal was however rejected by Viva's Board of
Directors [in the] evening of the same day, April
7, 1992, as Viva would not sell anything less than
the package of 104 films for P60 million pesos
(Exh. "9" - Viva), and such rejection was relayed to
Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN
and following several negotiations and meetings
defendant Del Rosario and Viva's President
Teresita Cruz, in consideration of P60 million,
signed a letter of agreement dated April 24, 1992.
granting RBS the exclusive right to air 104 Viva-
produced and/or acquired films (Exh. "7-A" - RBS;
Exh. "4" - RBS) including the fourteen (14) films
subject of the present case. 4
On 27 May 1992, ABS-CBN filed before the RTC a complaint for
specific performance with a prayer for a writ of preliminary injunction
and/or temporary restraining order against private respondents
Republic Broadcasting Corporation 5 (hereafter RBS ), Viva
Production (hereafter VIVA), and Vicente Del Rosario. The complaint
was docketed as Civil Case No. Q-92-12309.
On 27 May 1992, RTC issued a temporary restraining
order 6 enjoining private respondents from proceeding with the
airing, broadcasting, and televising of the fourteen VIVA films subject
of the controversy, starting with the film Maging Sino Ka Man, which
was scheduled to be shown on private respondents RBS' channel 7 at
seven o'clock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued an
order 7 directing the issuance of a writ of preliminary injunction upon
ABS-CBN's posting of P35 million bond. ABS-CBN moved for the
reduction of the bond, 8 while private respondents moved for
reconsideration of the order and offered to put up a counterbound. 9
In the meantime, private respondents filed separate answers with
counterclaim. 10 RBS also set up a cross-claim against VIVA..
On 3 August 1992, the RTC issued an order 11 dissolving the writ of
preliminary injunction upon the posting by RBS of a P30 million
counterbond to answer for whatever damages ABS-CBN might suffer
by virtue of such dissolution. However, it reduced petitioner's
injunction bond to P15 million as a condition precedent for the
reinstatement of the writ of preliminary injunction should private
respondents be unable to post a counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of
the court, agreed to explore the possibility of an amicable
settlement. In the meantime, RBS prayed for and was granted
reasonable time within which to put up a P30 million counterbond in
the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement RBS posted
on 1 October 1992 a counterbond, which the RTC approved in its
Order of 15 October 1992.13
On 19 October 1992, ABS-CBN filed a motion for
reconsideration 14 of the 3 August and 15 October 1992 Orders, which
RBS opposed. 15
On 29 October 1992, the RTC conducted a pre-trial. 16
Pending resolution of its motion for reconsideration, ABS-CBN filed
with the Court of Appeals a petition17challenging the RTC's Orders of
3 August and 15 October 1992 and praying for the issuance of a writ
of preliminary injunction to enjoin the RTC from enforcing said
orders. The case was docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary
restraining order18 to enjoin the airing, broadcasting, and televising
of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a
decision 19 dismissing the petition in CA -G.R. No. 29300 for being
premature. ABS-CBN challenged the dismissal in a petition for
review filed with this Court on 19 January 1993, which was docketed
as G.R. No. 108363.
In the meantime the RTC received the evidence for the parties in Civil
Case No. Q-192-1209. Thereafter, on 28 April 1993, it rendered a
decision 20 in favor of RBS and VIVA and against ABS-CBN disposing
as follows:
WHEREFORE, under cool reflection and
prescinding from the foregoing, judgments is
rendered in favor of defendants and against the
plaintiff.
(1) The complaint is hereby
dismissed;
(2) Plaintiff ABS-CBN is
ordered to pay defendant RBS
the following:
According to the RTC, there was no meeting of minds on the price
and terms of the offer. The alleged agreement between Lopez III and
Del Rosario was subject to the approval of the VIVA Board of
Directors, and said agreement was disapproved during the meeting
of the Board on 7 April 1992. Hence, there was no basis for ABS-
CBN's demand that VIVA signed the 1992 Film Exhibition
Agreement. Furthermore, the right of first refusal under the 1990
Film Exhibition Agreement had previously been exercised per Ms.
Concio's letter to Del Rosario ticking off ten titles acceptable to
them, which would have made the 1992 agreement an entirely new
contract.
On 21 June 1993, this Court denied21 ABS-CBN's petition for review in
G.R. No. 108363, as no reversible error was committed by the Court
of Appeals in its challenged decision and the case had "become moot
and academic in view of the dismissal of the main action by the
court a quo in its decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of
Appeals claiming that there was a perfected contract between ABS-
CBN and VIVA granting ABS-CBN the exclusive right to exhibit the
subject films. Private respondents VIVA and Del Rosario also
appealed seeking moral and exemplary damages and additional
attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed with
the RTC that the contract between ABS-CBN and VIVA had not been
perfected, absent the approval by the VIVA Board of Directors of
whatever Del Rosario, it's agent, might have agreed with Lopez III.
The appellate court did not even believe ABS-CBN's evidence that
Lopez III actually wrote down such an agreement on a "napkin," as
the same was never produced in court. It likewise rejected ABS-
CBN's insistence on its right of first refusal and ratiocinated as
follows:
As regards the matter of right of first refusal, it
may be true that a Film Exhibition Agreement
was entered into between Appellant ABS-CBN
and appellant VIVA under Exhibit "A" in 1990, and
that parag. 1.4 thereof provides:
1.4 ABS-CBN shall have the right of first refusal to the next twenty-
four (24) VIVA films for TV telecast under such terms as may be
agreed upon by the parties hereto, provided, however, that such
right shall be exercised by ABS-CBN within a period of fifteen (15)
days from the actual offer in writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of
ABS-CBN shall still be subject to such terms as may be agreed upon
by the parties thereto, and that the said right shall be exercised by
ABS-CBN within fifteen (15) days from the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit "A" on the right of first
refusal did not fix the price of the film right to the twenty-four (24)
films, nor did it specify the terms thereof. The same are still left to be
agreed upon by the parties.
In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records,
p. 89) stated that it can only tick off ten (10) films, and the draft
contract Exhibit "C" accepted only fourteen (14) films, while parag.
1.4 of Exhibit "A'' speaks of the next twenty-four (24) films.
The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A.
2-B; Records, pp. 86-88; Decision, p. 11, Records, p. 1150), when the
first list of VIVA films was sent by Mr. Del Rosario to ABS-CBN. The
Vice President of ABS-CBN, Ms. Charo Santos-Concio, sent a letter
dated January 6, 1992 (Exhibit 3, Records, p. 89) where ABS-CBN
exercised its right of refusal by rejecting the offer of VIVA.. As aptly
observed by the trial court, with the said letter of Mrs. Concio of
January 6, 1992, ABS-CBN had lost its right of first refusal. And even
if We reckon the fifteen (15) day period from February 27, 1992
(Exhibit 4 to 4-C) when another list was sent to ABS-CBN after the
letter of Mrs. Concio, still the fifteen (15) day period within which
ABS-CBN shall exercise its right of first refusal has already expired.22
Accordingly, respondent court sustained the award of actual
damages consisting in the cost of print advertisements and the
premium payments for the counterbond, there being adequate proof
of the pecuniary loss which RBS had suffered as a result of the filing
of the complaint by ABS-CBN. As to the award of moral damages,
the Court of Appeals found reasonable basis therefor, holding that
RBS's reputation was debased by the filing of the complaint in Civil
Case No. Q-92-12309 and by the non-showing of the film "Maging
Sino Ka Man." Respondent court also held that exemplary damages
were correctly imposed by way of example or correction for the
public good in view of the filing of the complaint despite petitioner's
knowledge that the contract with VIVA had not been perfected, It
also upheld the award of attorney's fees, reasoning that with ABS-
CBN's act of instituting Civil Case No, Q-92-1209, RBS was
"unnecessarily forced to litigate." The appellate court, however,
reduced the awards of moral damages to P2 million, exemplary
damages to P2 million, and attorney's fees to P500, 000.00.
On the other hand, respondent Court of Appeals denied VIVA and
Del Rosario's appeal because it was "RBS and not VIVA which was
actually prejudiced when the complaint was filed by ABS-CBN."
Its motion for reconsideration having been denied, ABS-CBN filed
the petition in this case, contending that the Court of Appeals gravely
erred in
I case other than an erroneous conviction of the righteousness of his
. . . RULING THAT THERE WAS NO PERFECTED
CONTRACT BETWEEN PETITIONER AND
PRIVATE RESPONDENT VIVA
NOTWITHSTANDING PREPONDERANCE OF
EVIDENCE ADDUCED BY PETITIONER TO THE
CONTRARY.
II
. . . IN AWARDING ACTUAL AND
COMPENSATORY DAMAGES IN FAVOR OF
PRIVATE RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY
DAMAGES IN FAVOR OF PRIVATE
RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN FAVOR
OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first
refusal over twenty-four titles under the 1990 Film Exhibition
Agreement, as it had chosen only ten titles from the first list. It insists
that we give credence to Lopez's testimony that he and Del Rosario
met at the Tamarind Grill Restaurant, discussed the terms and
conditions of the second list (the 1992 Film Exhibition Agreement)
and upon agreement thereon, wrote the same on a paper napkin. It
also asserts that the contract has already been effective, as the
elements thereof, namely, consent, object, and consideration were
established. It then concludes that the Court of Appeals'
pronouncements were not supported by law and jurisprudence, as
per our decision of 1 December 1995 in Limketkai Sons Milling, Inc. v.
Court of Appeals, 23 which cited Toyota Shaw, Inc. v. Court of
Appeals, 24 Ang Yu Asuncion v. Court of Appeals, 25 and Villonco Realty
Company v. Bormaheco. Inc.26
Anent the actual damages awarded to RBS, ABS-CBN disavows
liability therefor. RBS spent for the premium on the counterbond of
its own volition in order to negate the injunction issued by the trial
court after the parties had ventilated their respective positions
during the hearings for the purpose. The filing of the counterbond
was an option available to RBS, but it can hardly be argued that ABS-
CBN compelled RBS to incur such expense. Besides, RBS had another
available option, i.e., move for the dissolution or the injunction; or if
it was determined to put up a counterbond, it could have presented a
cash bond. Furthermore under Article 2203 of the Civil Code, the
party suffering loss or injury is also required to exercise the diligence
of a good father of a family to minimize the damages resulting from
the act or omission. As regards the cost of print advertisements, RBS
had not convincingly established that this was a loss attributable to
the non showing "Maging Sino Ka Man"; on the contrary, it was
brought out during trial that with or without the case or the
injunction, RBS would have spent such an amount to generate
interest in the film.
ABS-CBN further contends that there was no clear basis for the
awards of moral and exemplary damages. The controversy involving
ABS-CBN and RBS did not in any way originate from business
transaction between them. The claims for such damages did not arise
from any contractual dealings or from specific acts committed by
ABS-CBN against RBS that may be characterized as wanton,
fraudulent, or reckless; they arose by virtue only of the filing of the
complaint, An award of moral and exemplary damages is not
warranted where the record is bereft of any proof that a party acted
maliciously or in bad faith in filing an action. 27 In any case, free resort
to courts for redress of wrongs is a matter of public policy. The law
recognizes the right of every one to sue for that which he honestly
believes to be his right without fear of standing trial for damages
where by lack of sufficient evidence, legal technicalities, or a
different interpretation of the laws on the matter, the case would
lose ground. 28 One who makes use of his own legal right does no
injury. 29 If damage results front the filing of the complaint, it
is damnum absque injuria. 30 Besides, moral damages are generally
not awarded in favor of a juridical person, unless it enjoys a good
reputation that was debased by the offending party resulting in social
humiliation.31
As regards the award of attorney's fees, ABS-CBN maintains that the
same had no factual, legal, or equitable justification. In sustaining the
trial court's award, the Court of Appeals acted in clear disregard of
the doctrines laid down in Buan v. Camaganacan 32 that the text of
the decision should state the reason why attorney's fees are being
awarded; otherwise, the award should be disallowed. Besides, no bad
faith has been imputed on, much less proved as having been
committed by, ABS-CBN. It has been held that "where no sufficient
showing of bad faith would be reflected in a party' s persistence in a
cause, attorney's fees shall not be recovered as cost." 33
On the other hand, RBS asserts that there was no perfected contract
between ABS-CBN and VIVA absent any meeting of minds between
them regarding the object and consideration of the alleged contract.
It affirms that the ABS-CBN's claim of a right of first refusal was
correctly rejected by the trial court. RBS insist the premium it had
paid for the counterbond constituted a pecuniary loss upon which it
may recover. It was obliged to put up the counterbound due to the
injunction procured by ABS-CBN. Since the trial court found that
ABS-CBN had no cause of action or valid claim against RBS and,
therefore not entitled to the writ of injunction, RBS could recover
from ABS-CBN the premium paid on the counterbond. Contrary to
the claim of ABS-CBN, the cash bond would prove to be more
expensive, as the loss would be equivalent to the cost of money RBS
would forego in case the P30 million came from its funds or was
borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements
for the cancelled showing of the film "Maging Sino Ka Man" because
the print advertisements were put out to announce the showing on a
particular day and hour on Channel 7, i.e., in its entirety at one time,
not a series to be shown on a periodic basis. Hence, the print
advertisement were good and relevant for the particular date
showing, and since the film could not be shown on that particular
date and hour because of the injunction, the expenses for the
advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-
CBN filed the case and secured injunctions purely for the purpose of
harassing and prejudicing RBS. Pursuant then to Article 19 and 21 of
the Civil Code, ABS-CBN must be held liable for such
damages. Citing Tolentino,34 damages may be awarded in cases of
abuse of rights even if the act done is not illicit and there is abuse of
rights were plaintiff institutes and action purely for the purpose of
harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and
exemplary damages, private respondents RBS cited People
v. Manero,35 where it was stated that such entity may recover moral
and exemplary damages if it has a good reputation that is debased
resulting in social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation has
been debased by ABS-CBN's acts in this case.
When RBS was not able to fulfill its commitment
to the viewing public to show the film "Maging
Sino Ka Man" on the scheduled dates and times
(and on two occasions that RBS advertised), it
suffered serious embarrassment and social
humiliation. When the showing was canceled,
late viewers called up RBS' offices and subjected
RBS to verbal abuse ("Announce kayo nang
announce, hindi ninyo naman ilalabas,"
"nanloloko yata kayo") (Exh. 3-RBS, par. 3). This
alone was not something RBS brought upon
itself. it was exactly what ABS-CBN had planned
to happen.
The amount of moral and exemplary damages
cannot be said to be excessive. Two reasons
justify the amount of the award.
The first is that the humiliation suffered by RBS is
national extent. RBS operations as a broadcasting
company is [sic] nationwide. Its clientele, like that
of ABS-CBN, consists of those who own and
watch television. It is not an exaggeration to
state, and it is a matter of judicial notice that
almost every other person in the country watches
television. The humiliation suffered by RBS is
multiplied by the number of televiewers who had
anticipated the showing of the film "Maging Sino
Ka Man" on May 28 and November 3, 1992 but
did not see it owing to the cancellation. Added to
this are the advertisers who had placed
commercial spots for the telecast and to whom
RBS had a commitment in consideration of the
placement to show the film in the dates and
times specified.
The second is that it is a competitor that caused
RBS to suffer the humiliation. The humiliation
and injury are far greater in degree when caused
by an entity whose ultimate business objective is
to lure customers (viewers in this case) away from
the competition. 36
For their part, VIVA and Vicente del Rosario contend that the findings
of fact of the trial court and the Court of Appeals do not support ABS-
CBN's claim that there was a perfected contract. Such factual
findings can no longer be disturbed in this petition for review under
Rule 45, as only questions of law can be raised, not questions of fact.
On the issue of damages and attorneys fees, they adopted the
arguments of RBS.
The key issues for our consideration are (1) whether there was a
perfected contract between VIVA and ABS-CBN, and (2) whether
RBS is entitled to damages and attorney's fees. It may be noted that
the award of attorney's fees of P212,000 in favor of VIVA is not
assigned as another error.
I.
The first issue should be resolved against ABS-CBN. A contract is a
meeting of minds between two persons whereby one binds himself
to give something or to render some service to another 37 for a
consideration. there is no contract unless the following requisites
concur: (1) consent of the contracting parties; (2) object certain which
is the subject of the contract; and (3) cause of the obligation, which is
established.38 A contract undergoes three stages:
(a) preparation, conception, or generation, which
is the period of negotiation and bargaining,
ending at the moment of agreement of the
parties;
(b) perfection or birth of the contract, which is the
moment when the parties come to agree on the
terms of the contract; and
(c) consummation or death, which is the
fulfillment or performance of the terms agreed
upon in the contract. 39
Contracts that are consensual in nature are perfected upon mere
meeting of the minds, Once there is concurrence between the offer
and the acceptance upon the subject matter, consideration, and
terms of payment a contract is produced. The offer must be certain.
To convert the offer into a contract, the acceptance must be absolute
and must not qualify the terms of the offer; it must be plain,
unequivocal, unconditional, and without variance of any sort from
the proposal. A qualified acceptance, or one that involves a new
proposal, constitutes a counter-offer and is a rejection of the original
offer. Consequently, when something is desired which is not exactly
what is proposed in the offer, such acceptance is not sufficient to
generate consent because any modification or variation from the
terms of the offer annuls the offer.40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the
Tamarind Grill on 2 April 1992 to discuss the package of films, said
package of 104 VIVA films was VIVA's offer to ABS-CBN to enter into
a new Film Exhibition Agreement. But ABS-CBN, sent, through Ms.
Concio, a counter-proposal in the form of a draft contract proposing
exhibition of 53 films for a consideration of P35 million. This counter-
proposal could be nothing less than the counter-offer of Mr. Lopez
during his conference with Del Rosario at Tamarind Grill Restaurant.
Clearly, there was no acceptance of VIVA's offer, for it was met by a
counter-offer which substantially varied the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is
misplaced. In these cases, it was held that an acceptance may
contain a request for certain changes in the terms of the offer and yet
be a binding acceptance as long as "it is clear that the meaning of the
acceptance is positively and unequivocally to accept the offer,
whether such request is granted or not." This ruling was, however,
reversed in the resolution of 29 March 1996, 43 which ruled that the
acceptance of all offer must be unqualified and absolute, i.e., it "must
be identical in all respects with that of the offer so as to produce
consent or meeting of the minds."
On the other hand, in Villonco, cited in Limketkai, the alleged
changes in the revised counter-offer were not material but merely
clarificatory of what had previously been agreed upon. It cited the
statement in Stuart v. Franklin Life Insurance Co.44 that "a vendor's
change in a phrase of the offer to purchase, which change does not
essentially change the terms of the offer, does not amount to a
rejection of the offer and the tender of a counter-offer." 45However,
when any of the elements of the contract is modified upon
acceptance, such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of
VIVA's offer. Hence, they underwent a period of bargaining. ABS-
CBN then formalized its counter-proposals or counter-offer in a draft
contract, VIVA through its Board of Directors, rejected such counter-
offer, Even if it be conceded arguendo that Del Rosario had accepted
the counter-offer, the acceptance did not bind VIVA, as there was no
proof whatsoever that Del Rosario had the specific authority to do so.
Under Corporation Code,46 unless otherwise provided by said Code,
corporate powers, such as the power; to enter into contracts; are
exercised by the Board of Directors. However, the Board may
delegate such powers to either an executive committee or officials or
contracted managers. The delegation, except for the executive
committee, must be for specific purposes, 47 Delegation to officers
makes the latter agents of the corporation; accordingly, the general
rules of agency as to the bindings effects of their acts would
apply. 48 For such officers to be deemed fully clothed by the
corporation to exercise a power of the Board, the latter must
specially authorize them to do so. That Del Rosario did not have the
authority to accept ABS-CBN's counter-offer was best evidenced by
his submission of the draft contract to VIVA's Board of Directors for
the latter's approval. In any event, there was between Del Rosario
and Lopez III no meeting of minds. The following findings of the trial
court are instructive:
A number of considerations militate against ABS-
CBN's claim that a contract was perfected at that
lunch meeting on April 02, 1992 at the Tamarind
Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the
Tamarind Grill referred to the price and the number of films, which
he wrote on a napkin. However, Exhibit "C" contains numerous
provisions which, were not discussed at the Tamarind Grill, if Lopez
testimony was to be believed nor could they have been physically
written on a napkin. There was even doubt as to whether it was a
paper napkin or a cloth napkin. In short what were written in
Exhibit "C'' were not discussed, and therefore could not have been
agreed upon, by the parties. How then could this court compel the
parties to sign Exhibit "C" when the provisions thereof were not
previously agreed upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the
subject matter of the contract was 14 films. The complaint in fact
prays for delivery of 14 films. But Exhibit "C" mentions 53 films as
its subject matter. Which is which If Exhibits "C" reflected the true
intent of the parties, then ABS-CBN's claim for 14 films in its
complaint is false or if what it alleged in the complaint is true, then
Exhibit "C" did not reflect what was agreed upon by the parties.
This underscores the fact that there was no meeting of the minds
as to the subject matter of the contracts, so as to preclude
perfection thereof. For settled is the rule that there can be no
contract where there is no object which is its subject matter (Art.
1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit
testimony (Exh. "D") states:
We were able to reach an agreement. VIVA gave us the exclusive
license to show these fourteen (14) films, and we agreed to pay
Viva the amount of P16,050,000.00 as well as grant Viva
commercial slots worth P19,950,000.00. We had already
earmarked this P16, 050,000.00.
which gives a total consideration of P36 million (P19,950,000.00
plus P16,050,000.00. equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q. What was written in this napkin?
A. The total price, the breakdown the known Viva movies, the 7
blockbuster movies and the other 7 Viva movies because the price
was broken down accordingly. The none [sic] Viva and the seven
other Viva movies and the sharing between the cash portion and
the concerned spot portion in the total amount of P35 million
pesos.
Now, which is which? P36 million or P35 million? This weakens ABS-
CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she
transmitted Exhibit "C" to Mr. Del Rosario with a handwritten note,
describing said Exhibit "C" as a "draft." (Exh. "5" - Viva; tsn pp. 23-
24 June 08, 1992). The said draft has a well defined meaning.
Since Exhibit "C" is only a draft, or a tentative, provisional or
preparatory writing prepared for discussion, the terms and
conditions thereof could not have been previously agreed upon by
ABS-CBN and Viva Exhibit "C'' could not therefore legally bind Viva,
not having agreed thereto. In fact, Ms. Concio admitted that the
terms and conditions embodied in Exhibit "C" were prepared by
ABS-CBN's lawyers and there was no discussion on said terms and
conditions. . . .
As the parties had not yet discussed the proposed
terms and conditions in Exhibit "C," and there was
no evidence whatsoever that Viva agreed to the
terms and conditions thereof, said document
cannot be a binding contract. The fact that Viva
refused to sign Exhibit "C" reveals only two [sic]
well that it did not agree on its terms and
conditions, and this court has no authority to
compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he
and Mr. Del Rosario agreed upon at the Tamarind
Grill was only provisional, in the sense that it was
subject to approval by the Board of Directors of
Viva. He testified:
Q. Now, Mr. Witness, and
after that Tamarind meeting
... the second meeting
wherein you claimed that you
have the meeting of the
minds between you and Mr.
Vic del Rosario, what
happened?
A. Vic Del Rosario was
supposed to call us up and tell
us specifically the result of the
discussion with the Board of
Directors.
Q. And you are referring to
the so-called agreement
which you wrote in [sic] a
piece of paper?
A. Yes, sir.
Q. So, he was going to
forward that to the board of
Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43,
June 8, 1992)
Q. Did Mr. Del Rosario tell you
that he will submit it to his
Board for approval?
A. Yes, sir. (Tsn, p. 69, June 8,
1992).
The above testimony of Mr. Lopez shows beyond
doubt that he knew Mr. Del Rosario had no
authority to bind Viva to a contract with ABS-
CBN until and unless its Board of Directors
approved it. The complaint, in fact, alleges that
Mr. Del Rosario "is the Executive Producer of
defendant Viva" which "is a corporation." (par. 2,
complaint). As a mere agent of Viva, Del Rosario
could not bind Viva unless what he did is ratified
by its Board of Directors. (Vicente vs. Geraldez, 52
SCRA 210; Arnold vs. Willetsand Paterson, 44 Phil.
634). As a mere agent, recognized as such by
plaintiff, Del Rosario could not be held liable
jointly and severally with Viva and his inclusion as
party defendant has no legal basis. (Salonga
vs. Warner Barner [sic] , COLTA , 88 Phil. 125;
Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations in
the complaint are clear admissions that what was
supposed to have been agreed upon at the
Tamarind Grill between Mr. Lopez and Del
Rosario was not a binding agreement. It is as it
should be because corporate power to enter into
a contract is lodged in the Board of Directors.
(Sec. 23, Corporation Code). Without such board
approval by the Viva board, whatever agreement
Lopez and Del Rosario arrived at could not ripen
into a valid contract binding upon Viva (Yao Ka
Sin Trading vs. Court of Appeals, 209 SCRA 763).
The evidence adduced shows that the Board of
Directors of Viva rejected Exhibit "C" and insisted
that the film package for 140 films be maintained
(Exh. "7-1" - Viva ). 49
The contention that ABS-CBN had yet to fully exercise its right of
first refusal over twenty-four films under the 1990 Film Exhibition
Agreement and that the meeting between Lopez and Del Rosario
was a continuation of said previous contract is untenable. As
observed by the trial court, ABS-CBN right of first refusal had already
been exercised when Ms. Concio wrote to VIVA ticking off ten films,
Thus:
[T]he subsequent negotiation with ABS-CBN two
(2) months after this letter was sent, was for an
entirely different package. Ms. Concio herself
admitted on cross-examination to having used or
exercised the right of first refusal. She stated that
the list was not acceptable and was indeed not
accepted by ABS-CBN, (TSN, June 8, 1992, pp. 8-
10). Even Mr. Lopez himself admitted that the
right of the first refusal may have been already
exercised by Ms. Concio (as she had). (TSN, June
8, 1992, pp. 71-75). Del Rosario himself knew and
understand [sic] that ABS-CBN has lost its rights
of the first refusal when his list of 36 titles were
rejected (Tsn, June 9, 1992, pp. 10-11) 50
II
However, we find for ABS-CBN on the issue of damages. We shall
first take up actual damages. Chapter 2, Title XVIII, Book IV of the
Civil Code is the specific law on actual or compensatory damages.
Except as provided by law or by stipulation, one is entitled to
compensation for actual damages only for such pecuniary loss
suffered by him as he has duly proved. 51 The indemnification shall
comprehend not only the value of the loss suffered, but also that of
the profits that the obligee failed to obtain. 52 In contracts and quasi-
contracts the damages which may be awarded are dependent on
whether the obligor acted with good faith or otherwise, It case of
good faith, the damages recoverable are those which are the natural
and probable consequences of the breach of the obligation and
which the parties have foreseen or could have reasonably foreseen at
the time of the constitution of the obligation. If the obligor acted
with fraud, bad faith, malice, or wanton attitude, he shall be
responsible for all damages which may be reasonably attributed to
the non-performance of the obligation. 53 In crimes and quasi-delicts,
the defendant shall be liable for all damages which are the natural
and probable consequences of the act or omission complained of,
whether or not such damages has been foreseen or could have
reasonably been foreseen by the defendant.54
Actual damages may likewise be recovered for loss or impairment of
earning capacity in cases of temporary or permanent personal injury,
or for injury to the plaintiff's business standing or commercial
credit.55
The claim of RBS for actual damages did not arise from contract,
quasi-contract, delict, or quasi-delict. It arose from the fact of filing of
the complaint despite ABS-CBN's alleged knowledge of lack of cause
of action. Thus paragraph 12 of RBS's Answer with Counterclaim and
Cross-claim under the heading COUNTERCLAIM specifically alleges:
 12. ABS-CBN filed the complaint knowing fully
well that it has no cause of action RBS. As a result
thereof, RBS suffered actual damages in the
amount of P6,621,195.32. 56
Needless to state the award of actual damages cannot be
comprehended under the above law on actual damages. RBS could
only probably take refuge under Articles 19, 20, and 21 of the Civil
Code, which read as follows:
Art. 19. Every person must, in the exercise of his
rights and in the performance of his duties, act
with justice, give everyone his due, and observe
honesty and good faith.
Art. 20. Every person who, contrary to law,
wilfully or negligently causes damage to another,
shall indemnify the latter for tile same.
Art. 21. Any person who wilfully causes loss or
injury to another in a manner that is contrary to
morals, good customs or public policy shall
compensate the latter for the damage.
It may further be observed that in cases where a writ of preliminary
injunction is issued, the damages which the defendant may suffer by
reason of the writ are recoverable from the injunctive bond. 57 In this
case, ABS-CBN had not yet filed the required bond; as a matter of
fact, it asked for reduction of the bond and even went to the Court of
Appeals to challenge the order on the matter, Clearly then, it was not
necessary for RBS to file a counterbond. Hence, ABS-CBN cannot be
held responsible for the premium RBS paid for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for
"Maging Sino Ka Man" for lack of sufficient legal basis. The RTC
issued a temporary restraining order and later, a writ of preliminary
injunction on the basis of its determination that there existed
sufficient ground for the issuance thereof. Notably, the RTC did not
dissolve the injunction on the ground of lack of legal and factual
basis, but because of the plea of RBS that it be allowed to put up a
counterbond.
As regards attorney's fees, the law is clear that in the absence of
stipulation, attorney's fees may be recovered as actual or
compensatory damages under any of the circumstances provided for
in Article 2208 of the Civil Code. 58
The general rule is that attorney's fees cannot be recovered as part of
damages because of the policy that no premium should be placed on
the right to litigate.59 They are not to be awarded every time a party
wins a suit. The power of the court to award attorney's fees under
Article 2208 demands factual, legal, and equitable
justification.60Even when claimant is compelled to litigate with third
persons or to incur expenses to protect his rights, still attorney's fees
may not be awarded where no sufficient showing of bad faith could
be reflected in a party's persistence in a case other than erroneous
conviction of the righteousness of his cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book
IV of the Civil Code. Article 2217 thereof defines what are included in
moral damages, while Article 2219 enumerates the cases where they
may be recovered, Article 2220 provides that moral damages may be
recovered in breaches of contract where the defendant acted
fraudulently or in bad faith. RBS's claim for moral damages could
possibly fall only under item (10) of Article 2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26,
27, 28, 29, 30, 32, 34, and 35.
Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered. and not to
impose a penalty on the wrongdoer.62 The award is not meant to
enrich the complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or amusements
that will serve to obviate then moral suffering he has undergone. It is
aimed at the restoration, within the limits of the possible, of the
spiritual status quo ante, and should be proportionate to the suffering
inflicted.63 Trial courts must then guard against the award of
exorbitant damages; they should exercise balanced restrained and
measured objectivity to avoid suspicion that it was due to passion,
prejudice, or corruption on the part of the trial court. 64
The award of moral damages cannot be granted in favor of a
corporation because, being an artificial person and having existence
only in legal contemplation, it has no feelings, no emotions, no
senses, It cannot, therefore, experience physical suffering and mental
anguish, which call be experienced only by one having a nervous
system. 65 The statement in People v. Manero 66 and Mambulao
Lumber Co. v. PNB 67 that a corporation may recover moral damages
if it "has a good reputation that is debased, resulting in social
humiliation" is an obiter dictum. On this score alone the award for
damages must be set aside, since RBS is a corporation.
The basic law on exemplary damages is Section 5, Chapter 3, Title
XVIII, Book IV of the Civil Code. These are imposed by way of
example or correction for the public good, in addition to moral,
temperate, liquidated or compensatory damages. 68 They are
recoverable in criminal cases as part of the civil liability when the
crime was committed with one or more aggravating
circumstances; 69 in quasi-contracts, if the defendant acted with
gross negligence; 70 and in contracts and quasi-contracts, if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner.71
It may be reiterated that the claim of RBS against ABS-CBN is not
based on contract, quasi-contract, delict, or quasi-delict, Hence, the
claims for moral and exemplary damages can only be based on
Articles 19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the following: (1)
the existence of a legal right or duty, (2) which is exercised in bad
faith, and (3) for the sole intent of prejudicing or injuring another.
Article 20 speaks of the general sanction for all other provisions of
law which do not especially provide for their own sanction; while
Article 21 deals with acts contra bonus mores, and has the following
elements; (1) there is an act which is legal, (2) but which is contrary to
morals, good custom, public order, or public policy, and (3) and it is
done with intent to injure. 72
Verily then, malice or bad faith is at the core of Articles 19, 20, and
21. Malice or bad faith implies a conscious and intentional design to
do a wrongful act for a dishonest purpose or moral obliquity. 73 Such
must be substantiated by evidence. 74
There is no adequate proof that ABS-CBN was inspired by malice or
bad faith. It was honestly convinced of the merits of its cause after it
had undergone serious negotiations culminating in its formal
submission of a draft contract. Settled is the rule that the adverse
result of an action does not per se make the action wrongful and
subject the actor to damages, for the law could not have meant to
impose a penalty on the right to litigate. If damages result from a
person's exercise of a right, it is damnum absque injuria.75
WHEREFORE, the instant petition is GRANTED. The challenged
decision of the Court of Appeals in CA-G.R. CV No, 44125 is hereby
REVERSED except as to unappealed award of attorney's fees in favor
of VIVA Productions, Inc.1âwphi1.nêt
No pronouncement as to costs.
SO ORDERED.
G.R. No. 128690 January 21, 1999
ABS-CBN BROADCASTING CORPORATION, petitioner,
vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING
CORP, VIVA PRODUCTION, INC., and VICENTE DEL
ROSARIO, respondents.
DAVIDE, JR., CJ.:
In this petition for review on certiorari, petitioner ABS-CBN
Broadcasting Corp. (hereafter ABS-CBN) seeks to reverse and set
aside the decision 1 of 31 October 1996 and the resolution 2 of 10
March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The
former affirmed with modification the decision 3 of 28 April 1993 of
the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil
Case No. Q-92-12309. The latter denied the motion to reconsider the
decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court of
Appeals, are as follows:
In 1990, ABS-CBN and Viva executed a Film
Exhibition Agreement (Exh. "A") whereby Viva
gave ABS-CBN an exclusive right to exhibit some
Viva films. Sometime in December 1991, in
accordance with paragraph 2.4 [sic] of said
agreement stating that —.
1.4 ABS-CBN shall have the right of first refusal to
the next twenty-four (24) Viva films for TV
telecast under such terms as may be agreed upon
by the parties hereto, provided, however, that
such right shall be exercised by ABS-CBN from
the actual offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through its
vice-president Charo Santos-Concio, a list of three(3) film packages
(36 title) from which ABS-CBN may exercise its right of first refusal
under the afore-said agreement (Exhs. "1" par, 2, "2," "2-A'' and "2-
B"-Viva). ABS-CBN, however through Mrs. Concio, "can tick off only
ten (10) titles" (from the list) "we can purchase" (Exh. "3" - Viva) and
therefore did not accept said list (TSN, June 8, 1992, pp. 9-10). The
titles ticked off by Mrs. Concio are not the subject of the case at bar
except the film ''Maging Sino Ka Man."
For further enlightenment, this rejection letter dated January 06,
1992 (Exh "3" - Viva) is hereby quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I would
like to express my difficulty in recommending the purchase of the
three film packages you are offering ABS-CBN.
From among the three packages I can only tick off 10 titles we can
purchase. Please see attached. I hope you will understand my
position. Most of the action pictures in the list do not have big action
stars in the cast. They are not for primetime. In line with this I wish to
mention that I have not scheduled for telecast several action pictures
in out very first contract because of the cheap production value of
these movies as well as the lack of big action stars. As a film
producer, I am sure you understand what I am trying to say as Viva
produces only big action pictures.
In fact, I would like to request two (2) additional runs for these
movies as I can only schedule them in our non-primetime slots. We
have to cover the amount that was paid for these movies because as
you very well know that non-primetime advertising rates are very
low. These are the unaired titles in the first contract.
1. Kontra Persa [sic].
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us before and have
been rejected because of the ruling of MTRCB to have them aired at
9:00 p.m. due to their very adult themes.
As for the 10 titles I have choosen [sic] from the 3 packages please
consider including all the other Viva movies produced last year. I have
quite an attractive offer to make.
On February 27, 1992, defendant Del Rosario approached ABS-CBN's
Ms. Concio, with a list consisting of 52 original movie titles (i.e. not
yet aired on television) including the 14 titles subject of the present
case, as well as 104 re-runs (previously aired on television) from
which ABS-CBN may choose another 52 titles, as a total of 156 titles,
proposing to sell to ABS-CBN airing rights over this package of 52
originals and 52 re-runs for P60,000,000.00 of which P30,000,000.00
will be in cash and P30,000,000.00 worth of television spots (Exh. "4"
to "4-C" Viva; "9" -Viva).
On April 2, 1992, defendant Del Rosario and ABS-
CBN general manager, Eugenio Lopez III, met at
the Tamarind Grill Restaurant in Quezon City to
discuss the package proposal of Viva. What
transpired in that lunch meeting is the subject of
conflicting versions. Mr. Lopez testified that he
and Mr. Del Rosario allegedly agreed that ABS-
CRN was granted exclusive film rights to fourteen
(14) films for a total consideration of P36 million;
that he allegedly put this agreement as to the
price and number of films in a "napkin'' and
signed it and gave it to Mr. Del Rosario (Exh. D;
TSN, pp. 24-26, 77-78, June 8, 1992). On the other
hand, Del Rosario denied having made any
agreement with Lopez regarding the 14 Viva
films; denied the existence of a napkin in which
Lopez wrote something; and insisted that what
he and Lopez discussed at the lunch meeting was
Viva's film package offer of 104 films (52 originals
and 52 re-runs) for a total price of P60 million. Mr.
Lopez promising [sic]to make a counter proposal
which came in the form of a proposal contract
Annex "C" of the complaint (Exh. "1"·- Viva; Exh.
"C" - ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano
Gozon of RBS Senior vice-president for Finance
discussed the terms and conditions of Viva's offer
to sell the 104 films, after the rejection of the
same package by ABS-CBN.
On April 07, 1992, defendant Del Rosario received
through his secretary, a handwritten note from
Ms. Concio, (Exh. "5" - Viva), which reads: "Here's
the draft of the contract. I hope you find
everything in order," to which was attached a
draft exhibition agreement (Exh. "C''- ABS-CBN;
Exh. "9" - Viva, p. 3) a counter-proposal covering
53 films, 52 of which came from the list sent by
defendant Del Rosario and one film was added by
Ms. Concio, for a consideration of P35 million.
Exhibit "C" provides that ABS-CBN is granted
films right to 53 films and contains a right of first
refusal to "1992 Viva Films." The said counter
proposal was however rejected by Viva's Board of
Directors [in the] evening of the same day, April
7, 1992, as Viva would not sell anything less than
the package of 104 films for P60 million pesos
(Exh. "9" - Viva), and such rejection was relayed to
Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN
and following several negotiations and meetings
defendant Del Rosario and Viva's President
Teresita Cruz, in consideration of P60 million,
signed a letter of agreement dated April 24, 1992.
granting RBS the exclusive right to air 104 Viva-
produced and/or acquired films (Exh. "7-A" - RBS;
Exh. "4" - RBS) including the fourteen (14) films
subject of the present case. 4
On 27 May 1992, ABS-CBN filed before the RTC a complaint for
specific performance with a prayer for a writ of preliminary injunction
and/or temporary restraining order against private respondents
Republic Broadcasting Corporation 5 (hereafter RBS ), Viva
Production (hereafter VIVA), and Vicente Del Rosario. The complaint
was docketed as Civil Case No. Q-92-12309.
On 27 May 1992, RTC issued a temporary restraining
order 6 enjoining private respondents from proceeding with the
airing, broadcasting, and televising of the fourteen VIVA films subject
of the controversy, starting with the film Maging Sino Ka Man, which
was scheduled to be shown on private respondents RBS' channel 7 at
seven o'clock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued an
order 7 directing the issuance of a writ of preliminary injunction upon
ABS-CBN's posting of P35 million bond. ABS-CBN moved for the
reduction of the bond, 8 while private respondents moved for
reconsideration of the order and offered to put up a counterbound. 9
In the meantime, private respondents filed separate answers with
counterclaim. 10 RBS also set up a cross-claim against VIVA..
On 3 August 1992, the RTC issued an order 11 dissolving the writ of
preliminary injunction upon the posting by RBS of a P30 million
counterbond to answer for whatever damages ABS-CBN might suffer
by virtue of such dissolution. However, it reduced petitioner's
injunction bond to P15 million as a condition precedent for the
reinstatement of the writ of preliminary injunction should private
respondents be unable to post a counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of
the court, agreed to explore the possibility of an amicable
settlement. In the meantime, RBS prayed for and was granted
reasonable time within which to put up a P30 million counterbond in
the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement RBS posted
on 1 October 1992 a counterbond, which the RTC approved in its
Order of 15 October 1992.13
On 19 October 1992, ABS-CBN filed a motion for
reconsideration 14 of the 3 August and 15 October 1992 Orders, which
RBS opposed. 15
On 29 October 1992, the RTC conducted a pre-trial. 16
Pending resolution of its motion for reconsideration, ABS-CBN filed
with the Court of Appeals a petition17challenging the RTC's Orders of
3 August and 15 October 1992 and praying for the issuance of a writ
of preliminary injunction to enjoin the RTC from enforcing said
orders. The case was docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary
restraining order18 to enjoin the airing, broadcasting, and televising
of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a
decision 19 dismissing the petition in CA -G.R. No. 29300 for being
premature. ABS-CBN challenged the dismissal in a petition for
review filed with this Court on 19 January 1993, which was docketed
as G.R. No. 108363.
In the meantime the RTC received the evidence for the parties in Civil
Case No. Q-192-1209. Thereafter, on 28 April 1993, it rendered a
decision 20 in favor of RBS and VIVA and against ABS-CBN disposing
as follows:
WHEREFORE, under cool reflection and
prescinding from the foregoing, judgments is
 rendered in favor of defendants and against the
plaintiff.
(1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:
a) P107,727.00, the amount of premium paid by RBS to the surety
which issued defendant RBS's bond to lift the injunction;
b) P191,843.00 for the amount of print advertisement for "Maging
Sino Ka Man" in various newspapers;
c) Attorney's fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay
P212,000.00 by way of reasonable attorney's fees.
(4) The cross-claim of defendant RBS against defendant VIVA is
dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price
and terms of the offer. The alleged agreement between Lopez III and
Del Rosario was subject to the approval of the VIVA Board of
Directors, and said agreement was disapproved during the meeting
of the Board on 7 April 1992. Hence, there was no basis for ABS-
CBN's demand that VIVA signed the 1992 Film Exhibition
Agreement. Furthermore, the right of first refusal under the 1990
Film Exhibition Agreement had previously been exercised per Ms.
Concio's letter to Del Rosario ticking off ten titles acceptable to
them, which would have made the 1992 agreement an entirely new
contract.
On 21 June 1993, this Court denied21 ABS-CBN's petition for review in
G.R. No. 108363, as no reversible error was committed by the Court
of Appeals in its challenged decision and the case had "become moot
and academic in view of the dismissal of the main action by the
court a quo in its decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of
Appeals claiming that there was a perfected contract between ABS-
CBN and VIVA granting ABS-CBN the exclusive right to exhibit the
subject films. Private respondents VIVA and Del Rosario also
appealed seeking moral and exemplary damages and additional
attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed with
the RTC that the contract between ABS-CBN and VIVA had not been
perfected, absent the approval by the VIVA Board of Directors of
whatever Del Rosario, it's agent, might have agreed with Lopez III.
The appellate court did not even believe ABS-CBN's evidence that
Lopez III actually wrote down such an agreement on a "napkin," as
the same was never produced in court. It likewise rejected ABS-
CBN's insistence on its right of first refusal and ratiocinated as
follows:
As regards the matter of right of first refusal, it may be true that a
Film Exhibition Agreement was entered into between Appellant
ABS-CBN and appellant VIVA under Exhibit "A" in 1990, and that
parag. 1.4 thereof provides:
1.4 ABS-CBN shall have the right of first refusal to the next twenty-
four (24) VIVA films for TV telecast under such terms as may be
agreed upon by the parties hereto, provided, however, that such
right shall be exercised by ABS-CBN within a period of fifteen (15)
days from the actual offer in writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of
ABS-CBN shall still be subject to such terms as may be agreed upon
by the parties thereto, and that the said right shall be exercised by
ABS-CBN within fifteen (15) days from the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit "A" on
the right of first refusal did not fix the price of the
film right to the twenty-four (24) films, nor did it
specify the terms thereof. The same are still left
to be agreed upon by the parties.
In the instant case, ABS-CBN's letter of rejection
Exhibit 3 (Records, p. 89) stated that it can only
tick off ten (10) films, and the draft contract
Exhibit "C" accepted only fourteen (14) films,
while parag. 1.4 of Exhibit "A'' speaks of the next
twenty-four (24) films.
The offer of V1VA was sometime in December
1991 (Exhibits 2, 2-A. 2-B; Records, pp. 86-88;
Decision, p. 11, Records, p. 1150), when the first
list of VIVA films was sent by Mr. Del Rosario to
ABS-CBN. The Vice President of ABS-CBN, Ms.
Charo Santos-Concio, sent a letter dated January
6, 1992 (Exhibit 3, Records, p. 89) where ABS-
CBN exercised its right of refusal by rejecting the
offer of VIVA.. As aptly observed by the trial
court, with the said letter of Mrs. Concio of
January 6, 1992, ABS-CBN had lost its right of
first refusal. And even if We reckon the fifteen
(15) day period from February 27, 1992 (Exhibit 4
to 4-C) when another list was sent to ABS-CBN
after the letter of Mrs. Concio, still the fifteen (15)
day period within which ABS-CBN shall exercise
its right of first refusal has already expired.22
Accordingly, respondent court sustained the award of actual
damages consisting in the cost of print advertisements and the
premium payments for the counterbond, there being adequate proof
of the pecuniary loss which RBS had suffered as a result of the filing
of the complaint by ABS-CBN. As to the award of moral damages,
the Court of Appeals found reasonable basis therefor, holding that
RBS's reputation was debased by the filing of the complaint in Civil
Case No. Q-92-12309 and by the non-showing of the film "Maging
Sino Ka Man." Respondent court also held that exemplary damages
were correctly imposed by way of example or correction for the
public good in view of the filing of the complaint despite petitioner's
knowledge that the contract with VIVA had not been perfected, It
also upheld the award of attorney's fees, reasoning that with ABS-
CBN's act of instituting Civil Case No, Q-92-1209, RBS was
"unnecessarily forced to litigate." The appellate court, however,
reduced the awards of moral damages to P2 million, exemplary
damages to P2 million, and attorney's fees to P500, 000.00.
On the other hand, respondent Court of Appeals denied VIVA and
Del Rosario's appeal because it was "RBS and not VIVA which was
actually prejudiced when the complaint was filed by ABS-CBN."
Its motion for reconsideration having been denied, ABS-CBN filed
the petition in this case, contending that the Court of Appeals gravely
erred in
I
. . . RULING THAT THERE WAS NO PERFECTED
CONTRACT BETWEEN PETITIONER AND
PRIVATE RESPONDENT VIVA
NOTWITHSTANDING PREPONDERANCE OF
EVIDENCE ADDUCED BY PETITIONER TO THE
CONTRARY.
II
. . . IN AWARDING ACTUAL AND
COMPENSATORY DAMAGES IN FAVOR OF
PRIVATE RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY
DAMAGES IN FAVOR OF PRIVATE
RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN FAVOR
OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first
refusal over twenty-four titles under the 1990 Film Exhibition
Agreement, as it had chosen only ten titles from the first list. It insists
that we give credence to Lopez's testimony that he and Del Rosario
met at the Tamarind Grill Restaurant, discussed the terms and
conditions of the second list (the 1992 Film Exhibition Agreement)
and upon agreement thereon, wrote the same on a paper napkin. It
also asserts that the contract has already been effective, as the
elements thereof, namely, consent, object, and consideration were
established. It then concludes that the Court of Appeals'
pronouncements were not supported by law and jurisprudence, as
per our decision of 1 December 1995 in Limketkai Sons Milling, Inc. v.
Court of Appeals, 23 which cited Toyota Shaw, Inc. v. Court of
Appeals, 24 Ang Yu Asuncion v. Court of Appeals, 25 and Villonco Realty
Company v. Bormaheco. Inc.26
Anent the actual damages awarded to RBS, ABS-CBN disavows
liability therefor. RBS spent for the premium on the counterbond of
its own volition in order to negate the injunction issued by the trial
court after the parties had ventilated their respective positions
during the hearings for the purpose. The filing of the counterbond
was an option available to RBS, but it can hardly be argued that ABS-
CBN compelled RBS to incur such expense. Besides, RBS had another
available option, i.e., move for the dissolution or the injunction; or if
it was determined to put up a counterbond, it could have presented a
cash bond. Furthermore under Article 2203 of the Civil Code, the
party suffering loss or injury is also required to exercise the diligence
of a good father of a family to minimize the damages resulting from
the act or omission. As regards the cost of print advertisements, RBS
had not convincingly established that this was a loss attributable to
the non showing "Maging Sino Ka Man"; on the contrary, it was
brought out during trial that with or without the case or the
injunction, RBS would have spent such an amount to generate
interest in the film.
ABS-CBN further contends that there was no clear basis for the
awards of moral and exemplary damages. The controversy involving
ABS-CBN and RBS did not in any way originate from business
transaction between them. The claims for such damages did not arise
from any contractual dealings or from specific acts committed by
ABS-CBN against RBS that may be characterized as wanton,
fraudulent, or reckless; they arose by virtue only of the filing of the
complaint, An award of moral and exemplary damages is not
warranted where the record is bereft of any proof that a party acted
maliciously or in bad faith in filing an action. 27 In any case, free resort
to courts for redress of wrongs is a matter of public policy. The law
recognizes the right of every one to sue for that which he honestly
believes to be his right without fear of standing trial for damages
where by lack of sufficient evidence, legal technicalities, or a
different interpretation of the laws on the matter, the case would
lose ground. 28 One who makes use of his own legal right does no
injury. 29 If damage results front the filing of the complaint, it
is damnum absque injuria. 30 Besides, moral damages are generally
not awarded in favor of a juridical person, unless it enjoys a good
reputation that was debased by the offending party resulting in social
humiliation.31
As regards the award of attorney's fees, ABS-CBN maintains that the
same had no factual, legal, or equitable justification. In sustaining the
trial court's award, the Court of Appeals acted in clear disregard of
the doctrines laid down in Buan v. Camaganacan 32 that the text of
the decision should state the reason why attorney's fees are being
awarded; otherwise, the award should be disallowed. Besides, no bad
faith has been imputed on, much less proved as having been
committed by, ABS-CBN. It has been held that "where no sufficient
showing of bad faith would be reflected in a party' s persistence in a
case other than an erroneous conviction of the righteousness of his
cause, attorney's fees shall not be recovered as cost." 33
On the other hand, RBS asserts that there was no perfected contract
between ABS-CBN and VIVA absent any meeting of minds between
them regarding the object and consideration of the alleged contract.
It affirms that the ABS-CBN's claim of a right of first refusal was
correctly rejected by the trial court. RBS insist the premium it had
paid for the counterbond constituted a pecuniary loss upon which it
may recover. It was obliged to put up the counterbound due to the
injunction procured by ABS-CBN. Since the trial court found that
ABS-CBN had no cause of action or valid claim against RBS and,
therefore not entitled to the writ of injunction, RBS could recover
from ABS-CBN the premium paid on the counterbond. Contrary to
the claim of ABS-CBN, the cash bond would prove to be more
expensive, as the loss would be equivalent to the cost of money RBS
would forego in case the P30 million came from its funds or was
borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements
for the cancelled showing of the film "Maging Sino Ka Man" because
the print advertisements were put out to announce the showing on a
particular day and hour on Channel 7, i.e., in its entirety at one time,
not a series to be shown on a periodic basis. Hence, the print
advertisement were good and relevant for the particular date
showing, and since the film could not be shown on that particular
date and hour because of the injunction, the expenses for the
advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-
CBN filed the case and secured injunctions purely for the purpose of
harassing and prejudicing RBS. Pursuant then to Article 19 and 21 of
the Civil Code, ABS-CBN must be held liable for such
damages. Citing Tolentino,34 damages may be awarded in cases of
abuse of rights even if the act done is not illicit and there is abuse of
rights were plaintiff institutes and action purely for the purpose of
harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and
exemplary damages, private respondents RBS cited People
v. Manero,35 where it was stated that such entity may recover moral
and exemplary damages if it has a good reputation that is debased
resulting in social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation has
been debased by ABS-CBN's acts in this case.
When RBS was not able to fulfill its commitment
to the viewing public to show the film "Maging
Sino Ka Man" on the scheduled dates and times
(and on two occasions that RBS advertised), it
suffered serious embarrassment and social
humiliation. When the showing was canceled,
late viewers called up RBS' offices and subjected
RBS to verbal abuse ("Announce kayo nang
announce, hindi ninyo naman ilalabas,"
"nanloloko yata kayo") (Exh. 3-RBS, par. 3). This
alone was not something RBS brought upon
itself. it was exactly what ABS-CBN had planned
to happen.
The amount of moral and exemplary damages
cannot be said to be excessive. Two reasons
justify the amount of the award.
The first is that the humiliation suffered by RBS is
national extent. RBS operations as a broadcasting
company is [sic] nationwide. Its clientele, like that
of ABS-CBN, consists of those who own and
watch television. It is not an exaggeration to
state, and it is a matter of judicial notice that
almost every other person in the country watches
television. The humiliation suffered by RBS is
multiplied by the number of televiewers who had
anticipated the showing of the film "Maging Sino
Ka Man" on May 28 and November 3, 1992 but
did not see it owing to the cancellation. Added to
this are the advertisers who had placed
commercial spots for the telecast and to whom
RBS had a commitment in consideration of the
placement to show the film in the dates and
times specified.
The second is that it is a competitor that caused
RBS to suffer the humiliation. The humiliation
and injury are far greater in degree when caused
by an entity whose ultimate business objective is
to lure customers (viewers in this case) away from
the competition. 36
For their part, VIVA and Vicente del Rosario contend that the findings
of fact of the trial court and the Court of Appeals do not support ABS-
CBN's claim that there was a perfected contract. Such factual
findings can no longer be disturbed in this petition for review under
Rule 45, as only questions of law can be raised, not questions of fact.
On the issue of damages and attorneys fees, they adopted the
arguments of RBS.
The key issues for our consideration are (1) whether there was a
perfected contract between VIVA and ABS-CBN, and (2) whether
RBS is entitled to damages and attorney's fees. It may be noted that
the award of attorney's fees of P212,000 in favor of VIVA is not
assigned as another error.
I.
The first issue should be resolved against ABS-CBN. A contract is a
meeting of minds between two persons whereby one binds himself
to give something or to render some service to another 37 for a
consideration. there is no contract unless the following requisites
concur: (1) consent of the contracting parties; (2) object certain which
is the subject of the contract; and (3) cause of the obligation, which is
established.38 A contract undergoes three stages:
(a) preparation, conception, or generation, which
is the period of negotiation and bargaining,
ending at the moment of agreement of the
parties;
(b) perfection or birth of the contract, which is the
moment when the parties come to agree on the
terms of the contract; and
(c) consummation or death, which is the
fulfillment or performance of the terms agreed
upon in the contract. 39
Contracts that are consensual in nature are perfected upon mere
meeting of the minds, Once there is concurrence between the offer
and the acceptance upon the subject matter, consideration, and
terms of payment a contract is produced. The offer must be certain.
To convert the offer into a contract, the acceptance must be absolute
and must not qualify the terms of the offer; it must be plain,
unequivocal, unconditional, and without variance of any sort from
the proposal. A qualified acceptance, or one that involves a new
proposal, constitutes a counter-offer and is a rejection of the original
offer. Consequently, when something is desired which is not exactly
what is proposed in the offer, such acceptance is not sufficient to
generate consent because any modification or variation from the
terms of the offer annuls the offer.40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the
Tamarind Grill on 2 April 1992 to discuss the package of films, said
package of 104 VIVA films was VIVA's offer to ABS-CBN to enter into
a new Film Exhibition Agreement. But ABS-CBN, sent, through Ms.
Concio, a counter-proposal in the form of a draft contract proposing
exhibition of 53 films for a consideration of P35 million. This counter-
proposal could be nothing less than the counter-offer of Mr. Lopez contract where there is no object which is its
during his conference with Del Rosario at Tamarind Grill Restaurant. subject matter (Art. 1318, NCC).
Clearly, there was no acceptance of VIVA's offer, for it was met by a THIRD, Mr. Lopez [sic] answer to question 29 of
counter-offer which substantially varied the terms of the offer. his affidavit testimony (Exh. "D") states:
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of We were able to reach an
Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is agreement. VIVA gave us the
misplaced. In these cases, it was held that an acceptance may exclusive license to show
contain a request for certain changes in the terms of the offer and yet these fourteen (14) films, and
be a binding acceptance as long as "it is clear that the meaning of the we agreed to pay Viva the
acceptance is positively and unequivocally to accept the offer, amount of P16,050,000.00 as
whether such request is granted or not." This ruling was, however, well as grant Viva commercial
reversed in the resolution of 29 March 1996, 43 which ruled that the slots worth P19,950,000.00.
acceptance of all offer must be unqualified and absolute, i.e., it "must We had already earmarked
be identical in all respects with that of the offer so as to produce this P16, 050,000.00.
consent or meeting of the minds." which gives a total consideration of P36 million
On the other hand, in Villonco, cited in Limketkai, the alleged (P19,950,000.00 plus P16,050,000.00. equals
changes in the revised counter-offer were not material but merely P36,000,000.00).
clarificatory of what had previously been agreed upon. It cited the On cross-examination Mr. Lopez testified:
statement in Stuart v. Franklin Life Insurance Co.44 that "a vendor's Q. What was written in this
change in a phrase of the offer to purchase, which change does not napkin?
essentially change the terms of the offer, does not amount to a A. The total price, the
rejection of the offer and the tender of a counter-offer." 45However, breakdown the known Viva
when any of the elements of the contract is modified upon movies, the 7 blockbuster
acceptance, such alteration amounts to a counter-offer. movies and the other 7 Viva
In the case at bar, ABS-CBN made no unqualified acceptance of movies because the price was
VIVA's offer. Hence, they underwent a period of bargaining. ABS- broken down accordingly. The
CBN then formalized its counter-proposals or counter-offer in a draft none [sic] Viva and the seven
contract, VIVA through its Board of Directors, rejected such counter- other Viva movies and the
offer, Even if it be conceded arguendo that Del Rosario had accepted sharing between the cash
the counter-offer, the acceptance did not bind VIVA, as there was no portion and the concerned
proof whatsoever that Del Rosario had the specific authority to do so. spot portion in the total
Under Corporation Code,46 unless otherwise provided by said Code, amount of P35 million pesos.
corporate powers, such as the power; to enter into contracts; are Now, which is which? P36 million or P35 million?
exercised by the Board of Directors. However, the Board may This weakens ABS-CBN's claim.
delegate such powers to either an executive committee or officials or FOURTH. Mrs. Concio, testifying for ABS-CBN
contracted managers. The delegation, except for the executive stated that she transmitted Exhibit "C" to Mr. Del
committee, must be for specific purposes, 47 Delegation to officers Rosario with a handwritten note, describing said
makes the latter agents of the corporation; accordingly, the general Exhibit "C" as a "draft." (Exh. "5" - Viva; tsn pp. 23-
rules of agency as to the bindings effects of their acts would 24 June 08, 1992). The said draft has a well
apply. 48 For such officers to be deemed fully clothed by the defined meaning.
corporation to exercise a power of the Board, the latter must Since Exhibit "C" is only a draft, or a tentative,
specially authorize them to do so. That Del Rosario did not have the provisional or preparatory writing prepared for
authority to accept ABS-CBN's counter-offer was best evidenced by discussion, the terms and conditions thereof
his submission of the draft contract to VIVA's Board of Directors for could not have been previously agreed upon by
the latter's approval. In any event, there was between Del Rosario ABS-CBN and Viva Exhibit "C'' could not
and Lopez III no meeting of minds. The following findings of the trial therefore legally bind Viva, not having agreed
court are instructive: thereto. In fact, Ms. Concio admitted that the
A number of considerations militate against ABS- terms and conditions embodied in Exhibit "C"
CBN's claim that a contract was perfected at that were prepared by ABS-CBN's lawyers and there
lunch meeting on April 02, 1992 at the Tamarind was no discussion on said terms and conditions. . .
Grill. .
FIRST, Mr. Lopez claimed that what was agreed As the parties had not yet discussed the proposed
upon at the Tamarind Grill referred to the price terms and conditions in Exhibit "C," and there was
and the number of films, which he wrote on a no evidence whatsoever that Viva agreed to the
napkin. However, Exhibit "C" contains numerous terms and conditions thereof, said document
provisions which, were not discussed at the cannot be a binding contract. The fact that Viva
Tamarind Grill, if Lopez testimony was to be refused to sign Exhibit "C" reveals only two [sic]
believed nor could they have been physically well that it did not agree on its terms and
written on a napkin. There was even doubt as to conditions, and this court has no authority to
whether it was a paper napkin or a cloth napkin. compel Viva to agree thereto.
In short what were written in Exhibit "C'' were not FIFTH. Mr. Lopez understand [sic] that what he
discussed, and therefore could not have been and Mr. Del Rosario agreed upon at the Tamarind
agreed upon, by the parties. How then could this Grill was only provisional, in the sense that it was
court compel the parties to sign Exhibit "C" when subject to approval by the Board of Directors of
the provisions thereof were not previously agreed Viva. He testified:
upon? Q. Now, Mr. Witness, and
SECOND, Mr. Lopez claimed that what was after that Tamarind meeting
agreed upon as the subject matter of the contract ... the second meeting
was 14 films. The complaint in fact prays for wherein you claimed that you
delivery of 14 films. But Exhibit "C" mentions 53 have the meeting of the
films as its subject matter. Which is which If minds between you and Mr.
Exhibits "C" reflected the true intent of the Vic del Rosario, what
parties, then ABS-CBN's claim for 14 films in its happened?
complaint is false or if what it alleged in the A. Vic Del Rosario was
complaint is true, then Exhibit "C" did not reflect supposed to call us up and tell
what was agreed upon by the parties. This us specifically the result of the
underscores the fact that there was no meeting of discussion with the Board of
the minds as to the subject matter of the Directors.
contracts, so as to preclude perfection thereof. Q. And you are referring to
For settled is the rule that there can be no the so-called agreement
 which you wrote in [sic] a
piece of paper?
A. Yes, sir.
Q. So, he was going to
forward that to the board of
Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43,
June 8, 1992)
Q. Did Mr. Del Rosario tell you
that he will submit it to his
Board for approval?
A. Yes, sir. (Tsn, p. 69, June 8,
1992).
The above testimony of Mr. Lopez shows beyond
doubt that he knew Mr. Del Rosario had no
authority to bind Viva to a contract with ABS-
CBN until and unless its Board of Directors
approved it. The complaint, in fact, alleges that
Mr. Del Rosario "is the Executive Producer of
defendant Viva" which "is a corporation." (par. 2,
complaint). As a mere agent of Viva, Del Rosario
could not bind Viva unless what he did is ratified
by its Board of Directors. (Vicente vs. Geraldez, 52
SCRA 210; Arnold vs. Willetsand Paterson, 44 Phil.
634). As a mere agent, recognized as such by
plaintiff, Del Rosario could not be held liable
jointly and severally with Viva and his inclusion as
party defendant has no legal basis. (Salonga
vs. Warner Barner [sic] , COLTA , 88 Phil. 125;
Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations in
the complaint are clear admissions that what was
supposed to have been agreed upon at the
Tamarind Grill between Mr. Lopez and Del
Rosario was not a binding agreement. It is as it
should be because corporate power to enter into
a contract is lodged in the Board of Directors.
(Sec. 23, Corporation Code). Without such board
approval by the Viva board, whatever agreement
Lopez and Del Rosario arrived at could not ripen
into a valid contract binding upon Viva (Yao Ka
Sin Trading vs. Court of Appeals, 209 SCRA 763).
The evidence adduced shows that the Board of
Directors of Viva rejected Exhibit "C" and insisted
that the film package for 140 films be maintained
(Exh. "7-1" - Viva ). 49
The contention that ABS-CBN had yet to fully exercise its right of
first refusal over twenty-four films under the 1990 Film Exhibition
Agreement and that the meeting between Lopez and Del Rosario
was a continuation of said previous contract is untenable. As
observed by the trial court, ABS-CBN right of first refusal had already
been exercised when Ms. Concio wrote to VIVA ticking off ten films,
Thus:
[T]he subsequent negotiation with ABS-CBN two
(2) months after this letter was sent, was for an
entirely different package. Ms. Concio herself
admitted on cross-examination to having used or
exercised the right of first refusal. She stated that
the list was not acceptable and was indeed not
accepted by ABS-CBN, (TSN, June 8, 1992, pp. 8-
10). Even Mr. Lopez himself admitted that the
right of the first refusal may have been already
exercised by Ms. Concio (as she had). (TSN, June
8, 1992, pp. 71-75). Del Rosario himself knew and
understand [sic] that ABS-CBN has lost its rights
of the first refusal when his list of 36 titles were
rejected (Tsn, June 9, 1992, pp. 10-11) 50
II
However, we find for ABS-CBN on the issue of damages. We shall
first take up actual damages. Chapter 2, Title XVIII, Book IV of the
Civil Code is the specific law on actual or compensatory damages.
Except as provided by law or by stipulation, one is entitled to
compensation for actual damages only for such pecuniary loss
suffered by him as he has duly proved. 51 The indemnification shall
comprehend not only the value of the loss suffered, but also that of
the profits that the obligee failed to obtain. 52 In contracts and quasi-
contracts the damages which may be awarded are dependent on
whether the obligor acted with good faith or otherwise, It case of
good faith, the damages recoverable are those which are the natural
and probable consequences of the breach of the obligation and
which the parties have foreseen or could have reasonably foreseen at
the time of the constitution of the obligation. If the obligor acted
with fraud, bad faith, malice, or wanton attitude, he shall be
responsible for all damages which may be reasonably attributed to
the non-performance of the obligation. 53 In crimes and quasi-delicts,
the defendant shall be liable for all damages which are the natural
and probable consequences of the act or omission complained of,
whether or not such damages has been foreseen or could have
reasonably been foreseen by the defendant.54
Actual damages may likewise be recovered for loss or impairment of
earning capacity in cases of temporary or permanent personal injury,
or for injury to the plaintiff's business standing or commercial
credit.55
The claim of RBS for actual damages did not arise from contract,
quasi-contract, delict, or quasi-delict. It arose from the fact of filing of
the complaint despite ABS-CBN's alleged knowledge of lack of cause
of action. Thus paragraph 12 of RBS's Answer with Counterclaim and
Cross-claim under the heading COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully
well that it has no cause of action RBS. As a result
thereof, RBS suffered actual damages in the
amount of P6,621,195.32. 56
Needless to state the award of actual damages cannot be
comprehended under the above law on actual damages. RBS could
only probably take refuge under Articles 19, 20, and 21 of the Civil
Code, which read as follows:
Art. 19. Every person must, in the exercise of his
rights and in the performance of his duties, act
with justice, give everyone his due, and observe
honesty and good faith.
Art. 20. Every person who, contrary to law,
wilfully or negligently causes damage to another,
shall indemnify the latter for tile same.
Art. 21. Any person who wilfully causes loss or
injury to another in a manner that is contrary to
morals, good customs or public policy shall
compensate the latter for the damage.
It may further be observed that in cases where a writ of preliminary
injunction is issued, the damages which the defendant may suffer by
reason of the writ are recoverable from the injunctive bond. 57 In this
case, ABS-CBN had not yet filed the required bond; as a matter of
fact, it asked for reduction of the bond and even went to the Court of
Appeals to challenge the order on the matter, Clearly then, it was not
necessary for RBS to file a counterbond. Hence, ABS-CBN cannot be
held responsible for the premium RBS paid for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for
"Maging Sino Ka Man" for lack of sufficient legal basis. The RTC
issued a temporary restraining order and later, a writ of preliminary
injunction on the basis of its determination that there existed
sufficient ground for the issuance thereof. Notably, the RTC did not
dissolve the injunction on the ground of lack of legal and factual
basis, but because of the plea of RBS that it be allowed to put up a
counterbond.
As regards attorney's fees, the law is clear that in the absence of
stipulation, attorney's fees may be recovered as actual or
compensatory damages under any of the circumstances provided for
in Article 2208 of the Civil Code. 58
The general rule is that attorney's fees cannot be recovered as part of
damages because of the policy that no premium should be placed on
the right to litigate.59 They are not to be awarded every time a party
wins a suit. The power of the court to award attorney's fees under
Article 2208 demands factual, legal, and equitable
justification.60Even when claimant is compelled to litigate with third
persons or to incur expenses to protect his rights, still attorney's fees
may not be awarded where no sufficient showing of bad faith could
be reflected in a party's persistence in a case other than erroneous
conviction of the righteousness of his cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book
IV of the Civil Code. Article 2217 thereof defines what are included in
moral damages, while Article 2219 enumerates the cases where they
may be recovered, Article 2220 provides that moral damages may be
recovered in breaches of contract where the defendant acted
fraudulently or in bad faith. RBS's claim for moral damages could
possibly fall only under item (10) of Article 2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26,
27, 28, 29, 30, 32, 34, and 35.
Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered. and not to
impose a penalty on the wrongdoer.62 The award is not meant to
enrich the complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or amusements
that will serve to obviate then moral suffering he has undergone. It is
aimed at the restoration, within the limits of the possible, of the
spiritual status quo ante, and should be proportionate to the suffering
inflicted.63 Trial courts must then guard against the award of
exorbitant damages; they should exercise balanced restrained and
measured objectivity to avoid suspicion that it was due to passion,
prejudice, or corruption on the part of the trial court. 64
The award of moral damages cannot be granted in favor of a
corporation because, being an artificial person and having existence
only in legal contemplation, it has no feelings, no emotions, no
senses, It cannot, therefore, experience physical suffering and mental
anguish, which call be experienced only by one having a nervous
system. 65 The statement in People v. Manero 66 and Mambulao
Lumber Co. v. PNB 67 that a corporation may recover moral damages
if it "has a good reputation that is debased, resulting in social
humiliation" is an obiter dictum. On this score alone the award for
damages must be set aside, since RBS is a corporation.
The basic law on exemplary damages is Section 5, Chapter 3, Title
XVIII, Book IV of the Civil Code. These are imposed by way of
example or correction for the public good, in addition to moral,
temperate, liquidated or compensatory damages. 68 They are
recoverable in criminal cases as part of the civil liability when the
crime was committed with one or more aggravating
circumstances; 69 in quasi-contracts, if the defendant acted with
gross negligence; 70 and in contracts and quasi-contracts, if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner.71
It may be reiterated that the claim of RBS against ABS-CBN is not
based on contract, quasi-contract, delict, or quasi-delict, Hence, the
claims for moral and exemplary damages can only be based on
Articles 19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the following: (1)
the existence of a legal right or duty, (2) which is exercised in bad
faith, and (3) for the sole intent of prejudicing or injuring another.
Article 20 speaks of the general sanction for all other provisions of
law which do not especially provide for their own sanction; while
Article 21 deals with acts contra bonus mores, and has the following
elements; (1) there is an act which is legal, (2) but which is contrary to
morals, good custom, public order, or public policy, and (3) and it is
done with intent to injure. 72
Verily then, malice or bad faith is at the core of Articles 19, 20, and
21. Malice or bad faith implies a conscious and intentional design to
do a wrongful act for a dishonest purpose or moral obliquity. 73 Such
must be substantiated by evidence. 74
There is no adequate proof that ABS-CBN was inspired by malice or
bad faith. It was honestly convinced of the merits of its cause after it
had undergone serious negotiations culminating in its formal
submission of a draft contract. Settled is the rule that the adverse
result of an action does not per se make the action wrongful and
subject the actor to damages, for the law could not have meant to
impose a penalty on the right to litigate. If damages result from a
person's exercise of a right, it is damnum absque injuria.75
WHEREFORE, the instant petition is GRANTED. The challenged
decision of the Court of Appeals in CA-G.R. CV No, 44125 is hereby
REVERSED except as to unappealed award of attorney's fees in favor
of VIVA Productions, Inc.1âwphi1.nêt
No pronouncement as to costs.
SO ORDERED.
[G.R. No. 155001. May 5, 2003]
DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI
B. REUNILLA, MANUEL ANTONIO B. BOE, MAMERTO
S. CLARA, REUEL E. DIMALANTA, MORY V.
DOMALAON, CONRADO G. DIMAANO, LOLITA R.
HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C.
HILARIO, MIASCOR WORKERS UNION - NATIONAL
LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES
EMPLOYEES ASSOCIATION (PALEA), petitioners,
vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO.,
INC., MANILA INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT OF TRANSPORTATION AND
COMMUNICATIONS and SECRETARY LEANDRO M.
MENDOZA, in his capacity as Head of the Department of
Transportation and Communications, respondents,
MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS
AVIATION SYSTEMS CORPORATION, MACROASIA-
EUREST SERVICES, INC., MACROASIA-MENZIES
AIRPORT SERVICES CORPORATION, MIASCOR
CATERING SERVICES CORPORATION, MIASCOR
AIRCRAFT MAINTENANCE CORPORATION, and
MIASCOR LOGISTICS CORPORATION, petitioners-in-
intervention,
[G.R. No. 155547. May 5, 2003]
SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and
CONSTANTINO G. JARAULA, petitioners,
vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO.,
INC., MANILA INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT OF TRANSPORTATION AND
COMMUNICATIONS, DEPARTMENT OF PUBLIC WORKS
AND HIGHWAYS, SECRETARY LEANDRO M.
MENDOZA, in his capacity as Head of the Department of
Transportation and Communications, and SECRETARY
SIMEON A. DATUMANONG, in his capacity as Head of
the Department of Public Works and
Highways, respondents,
JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C.
ZIALCITA, WILLY BUYSON VILLARAMA, PROSPERO C.
NOGRALES, PROSPERO A. PICHAY, JR., HARLIN CAST
ABAYON, and BENASING O.
MACARANBON, respondents-intervenors,
[G.R. No. 155661. May 5, 2003]
CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B.
VALENCIA, MA. TERESA V. GAERLAN, LEONARDO DE
LA ROSA, DINA C. DE LEON, VIRGIE CATAMIN RONALD
SCHLOBOM, ANGELITO SANTOS, MA. LUISA M.
PALCON and SAMAHANG MANGGAGAWA SA
PALIPARAN NG PILIPINAS (SMPP), petitioners,
vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO.,
INC., MANILA INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT OF TRANSPORTATION AND
COMMUNICATIONS, SECRETARY LEANDRO M.
MENDOZA, in his capacity as Head of the Department of
Transportation and Communications, respondents.
DECISION
PUNO, J.:
Petitioners and petitioners-in-intervention filed the instant
petitions for prohibition under Rule 65 of the Revised Rules of Court
seeking to prohibit the Manila International Airport Authority (MIAA)
and the Department of Transportation and Communications (DOTC)
and its Secretary from implementing the following agreements
executed by the Philippine Government through the DOTC and the
MIAA and the Philippine International Air Terminals Co., Inc.
(PIATCO): (1) the Concession Agreement signed on July 12, 1997, (2)
the Amended and Restated Concession Agreement dated November
26, 1999, (3) the First Supplement to the Amended and Restated
Concession Agreement dated August 27, 1999, (4) the Second
Supplement to the Amended and Restated Concession Agreement
dated September 4, 2000, and (5) the Third Supplement to the
Amended and Restated Concession Agreement dated June 22, 2001
(collectively, the PIATCO Contracts).
The facts are as follows:
In August 1989, the DOTC engaged the services of Aeroport de
Paris (ADP) to conduct a comprehensive study of the Ninoy Aquino
International Airport (NAIA) and determine whether the present
airport can cope with the traffic development up to the year
2010. The study consisted of two parts: first, traffic forecasts,
capacity of existing facilities, NAIA future requirements, proposed
master plans and development plans; and second, presentation of
the preliminary design of the passenger terminal building. The ADP
submitted a Draft Final Report to the DOTC in December 1989.
Some time in 1993, six business leaders consisting of John
Gokongwei, Andrew Gotianun, Henry Sy, Sr., Lucio Tan, George Ty
and Alfonso Yuchengco met with then President Fidel V. Ramos to
explore the possibility of investing in the construction and operation
of a new international airport terminal. To signify their commitment
to pursue the project, they formed the Asias Emerging Dragon Corp.
(AEDC) which was registered with the Securities and Exchange
Commission (SEC) on September 15, 1993.
On October 5, 1994, AEDC submitted an unsolicited proposal
to the Government through the DOTC/MIAA for the development of
NAIA International Passenger Terminal III (NAIA IPT III) under a build-
operate-and-transfer arrangement pursuant to RA 6957 as amended
by RA 7718 (BOT Law).[1]
On December 2, 1994, the DOTC issued Dept. Order No. 94-
832 constituting the Prequalification Bids and Awards Committee
(PBAC) for the implementation of the NAIA IPT III project.
On March 27, 1995, then DOTC Secretary Jose Garcia endorsed
the proposal of AEDC to the National Economic and Development
Authority (NEDA).A revised proposal, however, was forwarded by
the DOTC to NEDA on December 13, 1995. On January 5, 1996, the
NEDA Investment Coordinating Council (NEDA ICC) Technical Board
favorably endorsed the project to the ICC Cabinet Committee which
approved the same, subject to certain conditions, on January 19,
1996. On February 13, 1996, the NEDA passed Board Resolution No.
2 which approved the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the
publication in two daily newspapers of an invitation for competitive
or comparative proposals on AEDCs unsolicited proposal, in
accordance with Sec. 4-A of RA 6957, as amended. The alternative
bidders were required to submit three (3) sealed envelopes on or
before 5:00 p.m. of September 20, 1996. The first envelope should
contain the Prequalification Documents, the second envelope the
Technical Proposal, and the third envelope the Financial Proposal of
the proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing
the availment of the Bid Documents and the submission of the
comparative bid proposals. Interested firms were permitted to obtain
the Request for Proposal Documents beginning June 28, 1996, upon
submission of a written application and payment of a non-refundable
fee of P50,000.00 (US$2,000).
The Bid Documents issued by the PBAC provided among others
that the proponent must have adequate capability to sustain the
financing requirement for the detailed engineering, design,
construction, operation, and maintenance phases of the project. The
proponent would be evaluated based on its ability to provide a
minimum amount of equity to the project, and its capacity to secure
external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting
all bidders to a pre-bid conference on July 29, 1996.
On August 16, 1996, the PBAC issued PBAC Bulletin No. 3
amending the Bid Documents. The following amendments were
made on the Bid Documents:
a. Aside from the fixed Annual Guaranteed Payment, the proponent
shall include in its financial proposal an additional percentage of
gross revenue share of the Government, as follows:
i. First 5 years 5.0%
ii. Next 10 years 7.5%
iii. Next 10 years 10.0%
b. The amount of the fixed Annual Guaranteed Payment shall be
subject of the price challenge. Proponent may offer an Annual
Guaranteed Payment which need not be of equal amount, but
payment of which shall start upon site possession.
c. The project proponent must have adequate capability to sustain
the financing requirement for the detailed engineering, design,
construction, and/or operation and maintenance phases of the
project as the case may be. For purposes of pre-qualification, this
capability shall be measured in terms of:
i. Proof of the availability of the project proponent and/or the
consortium to provide the minimum amount of equity for the
project; and
ii. a letter testimonial from reputable banks attesting that the project
proponent and/or the members of the consortium are banking with
them, that the project proponent and/or the members are of good
financial standing, and have adequate resources.
d. The basis for the prequalification shall be the proponents
compliance with the minimum technical and financial requirements
provided in the Bid Documents and the IRR of the BOT Law. The
minimum amount of equity shall be 30% of the Project Cost.
e. Amendments to the draft Concession Agreement shall be issued
from time to time. Said amendments shall only cover items that
would not materially affect the preparation of the proponents
proposal.
On August 29, 1996, the Second Pre-Bid Conference was held
where certain clarifications were made. Upon the request of
prospective bidder Peoples Air Cargo & Warehousing Co., Inc
(Paircargo), the PBAC warranted that based on Sec. 11.6, Rule 11 of
the Implementing Rules and Regulations of the BOT Law, only the
proposed Annual Guaranteed Payment submitted by the challengers
would be revealed to AEDC, and that the challengers technical and
financial proposals would remain confidential. The PBAC also
clarified that the list of revenue sources contained in Annex 4.2a of
the Bid Documents was merely indicative and that other revenue
sources may be included by the proponent, subject to approval by
DOTC/MIAA. Furthermore, the PBAC clarified that only those fees
and charges denominated as Public Utility Fees would be subject to
regulation, and those charges which would be actually deemed
Public Utility Fees could still be revised, depending on the outcome
of PBACs query on the matter with the Department of Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled
Answers to the Queries of PAIRCARGO as Per Letter Dated
September 3 and 10, 1996. Paircargos queries and the PBACs
responses were as follows:
1. It is difficult for Paircargo and Associates to meet the required
minimum equity requirement as prescribed in Section 8.3.4 of the Bid
Documents considering that the capitalization of each member
company is so structured to meet the requirements and needs of their
current respective business undertaking/activities. In order to comply
with this equity requirement, Paircargo is requesting PBAC to just allow
each member of (sic) corporation of the Joint Venture to just execute an
agreement that embodies a commitment to infuse the required capital
in case the project is awarded to the Joint Venture instead of increasing
each corporations current authorized capital stock just for
prequalification purposes.
In prequalification, the agency is interested in ones financial
capability at the time of prequalification, not future or potential
capability.
A commitment to put up equity once awarded the project is not
enough to establish that present financial capability. However, total
financial capability of all member companies of the Consortium, to
be established by submitting the respective companies audited
financial statements, shall be acceptable.
2. At present, Paircargo is negotiating with banks and other institutions
for the extension of a Performance Security to the joint venture in the
event that the Concessions Agreement (sic) is awarded to
them. However, Paircargo is being required to submit a copy of the
draft concession as one of the documentary requirements. Therefore,
Paircargo is requesting that theyd (sic) be furnished copy of the
approved negotiated agreement between the PBAC and the AEDC at
the soonest possible time.
A copy of the draft Concession Agreement is included in the Bid
Documents. Any material changes would be made known to
prospective challengers through bid bulletins. However, a final
version will be issued before the award of contract.
The PBAC also stated that it would require AEDC to sign
Supplement C of the Bid Documents (Acceptance of Criteria and
Waiver of Rights to Enjoin Project) and to submit the same with the
required Bid Security.
On September 20, 1996, the consortium composed of Peoples
Air Cargo and Warehousing Co., Inc. (Paircargo), Phil. Air and
Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security
Bank) (collectively, Paircargo Consortium) submitted their
competitive proposal to the PBAC. On September 23, 1996, the
PBAC opened the first envelope containing the prequalification
documents of the Paircargo Consortium. On the following day,
September 24, 1996, the PBAC prequalified the Paircargo
Consortium.
On September 26, 1996, AEDC informed the PBAC in writing of
its reservations as regards the Paircargo Consortium, which include:
a. The lack of corporate approvals and financial capability of
PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;
c. The prohibition imposed by RA 337, as amended (the General
Banking Act) on the amount that Security Bank could legally invest in
the project;
d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint
Venture, for prequalification purposes; and
e. The appointment of Lufthansa as the facility operator, in view of
the Philippine requirement in the operation of a public utility.
The PBAC gave its reply on October 2, 1996, informing AEDC
that it had considered the issues raised by the latter, and that based
on the documents submitted by Paircargo and the established
prequalification criteria, the PBAC had found that the challenger,
Paircargo, had prequalified to undertake the project. The Secretary
of the DOTC approved the finding of the PBAC.
The PBAC then proceeded with the opening of the second
envelope of the Paircargo Consortium which contained its Technical
Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly
with respect to Paircargos financial capability, in view of the
restrictions imposed by Section 21-B of the General Banking Act and
Sections 1380 and 1381 of the Manual Regulations for Banks and
Other Financial Intermediaries. On October 7, 1996, AEDC again
manifested its objections and requested that it be furnished with
excerpts of the PBAC meeting and the accompanying technical
evaluation report where each of the issues they raised were
addressed.
On October 16, 1996, the PBAC opened the third envelope
submitted by AEDC and the Paircargo Consortium containing their
respective financial proposals. Both proponents offered to build the
NAIA Passenger Terminal III for at least $350 million at no cost to the
government and to pay the government: 5% share in gross revenues
for the first five years of operation, 7.5% share in gross revenues for
the next ten years of operation, and 10% share in gross revenues for
the last ten years of operation, in accordance with the Bid
Documents. However, in addition to the foregoing, AEDC offered to
pay the government a total of P135 million as guaranteed payment
for 27 years while Paircargo Consortium offered to pay the
government a total of P17.75 billion for the same period.
Thus, the PBAC formally informed AEDC that it had accepted
the price proposal submitted by the Paircargo Consortium, and gave
AEDC 30 working days or until November 28, 1996 within which to
match the said bid, otherwise, the project would be awarded to
Paircargo.
As AEDC failed to match the proposal within the 30-day period,
then DOTC Secretary Amado Lagdameo, on December 11, 1996,
issued a notice to Paircargo Consortium regarding AEDCs failure to
match the proposal.
On February 27, 1997, Paircargo Consortium incorporated into
Philippine International Airport Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged undue preference
given to PIATCO and reiterated its objections as regards the
prequalification of PIATCO.
On April 11, 1997, the DOTC submitted the concession
agreement for the second-pass approval of the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of
Pasig a Petition for Declaration of Nullity of the Proceedings,
Mandamus and Injunction against the Secretary of the DOTC, the
Chairman of the PBAC, the voting members of the PBAC and
Pantaleon D. Alvarez, in his capacity as Chairman of the PBAC
Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad
referendum to facilitate the approval, on a no-objection basis, of the
BOT agreement between the DOTC and PIATCO. As the ad
referendum gathered only four (4) of the required six (6) signatures,
the NEDA merely noted the agreement.
On July 9, 1997, the DOTC issued the notice of award for the
project to PIATCO.
On July 12, 1997, the Government, through then DOTC
Secretary Arturo T. Enrile, and PIATCO, through its President, Henry
T. Go, signed the Concession Agreement for the Build-Operate-and-
Transfer Arrangement of the Ninoy Aquino International Airport
Passenger Terminal III (1997 Concession Agreement). The
Government granted PIATCO the franchise to operate and maintain
the said terminal during the concession period and to collect the fees,
rentals and other charges in accordance with the rates or schedules
stipulated in the 1997 Concession Agreement. The Agreement
provided that the concession period shall be for twenty-five (25)
years commencing from the in-service date, and may be renewed at
the option of the Government for a period not exceeding twenty-five
(25) years. At the end of the concession period, PIATCO shall transfer
the development facility to MIAA.
On November 26, 1998, the Government and PIATCO signed
an Amended and Restated Concession Agreement (ARCA). Among
the provisions of the 1997 Concession Agreement that were
amended by the ARCA were: Sec. 1.11 pertaining to the definition of
certificate of completion; Sec. 2.05 pertaining to the Special
Obligations of GRP; Sec. 3.02 (a) dealing with the exclusivity of the
franchise given to the Concessionaire; Sec. 4.04 concerning the
assignment by Concessionaire of its interest in the Development
Facility; Sec. 5.08 (c) dealing with the proceeds of Concessionaires
insurance; Sec. 5.10 with respect to the temporary take-over of
operations by GRP; Sec. 5.16 pertaining to the taxes, duties and
other imposts that may be levied on the Concessionaire; Sec. 6.03 as
regards the periodic adjustment of public utility fees and charges; the
entire Article VIII concerning the provisions on the termination of the
contract; and Sec. 10.02 providing for the venue of the arbitration
proceedings in case a dispute or controversy arises between the
parties to the agreement.
Subsequently, the Government and PIATCO signed three
Supplements to the ARCA. The First Supplement was signed on
August 27, 1999; the Second Supplement on September 4, 2000; and
the Third Supplement on June 22, 2001 (collectively, Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the
ARCA defining Revenues or Gross Revenues; Sec. 2.05 (d) of the
ARCA referring to the obligation of MIAA to provide sufficient funds
for the upkeep, maintenance, repair and/or replacement of all airport
facilities and equipment which are owned or operated by MIAA; and
further providing additional special obligations on the part of GRP
aside from those already enumerated in Sec. 2.05 of the ARCA.The
First Supplement also provided a stipulation as regards the
construction of a surface road to connect NAIA Terminal II and
Terminal III in lieu of the proposed access tunnel crossing Runway
13/31; the swapping of obligations between GRP and PIATCO
regarding the improvement of Sales Road; and the changes in the
timetable. It also amended Sec. 6.01 (c) of the ARCA pertaining to
the Disposition of Terminal Fees; Sec. 6.02 of the ARCA by inserting
an introductory paragraph; and Sec. 6.02 (a) (iii) of the ARCA
referring to the Payments of Percentage Share in Gross Revenues.
The Second Supplement to the ARCA contained provisions
concerning the clearing, removal, demolition or disposal of
subterranean structures uncovered or discovered at the site of the
construction of the terminal by the Concessionaire. It defined the
scope of works; it provided for the procedure for the demolition of
the said structures and the consideration for the same which the GRP
shall pay PIATCO; it provided for time extensions, incremental and
consequential costs and losses consequent to the existence of such
structures; and it provided for some additional obligations on the
part of PIATCO as regards the said structures.
Finally, the Third Supplement provided for the obligations of
the Concessionaire as regards the construction of the surface road
connecting Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance
and operation of the NAIA Terminals I and II, had existing concession
contracts with various service providers to offer international airline
airport services, such as in-flight catering, passenger handling, ramp
and ground support, aircraft maintenance and provisions, cargo
handling and warehousing, and other services, to several
international airlines at the NAIA. Some of these service providers
are the Miascor Group, DNATA-Wings Aviation Systems Corp., and
the MacroAsia Group. Miascor, DNATA and MacroAsia, together
with Philippine Airlines (PAL), are the dominant players in the
industry with an aggregate market share of 70%.
On September 17, 2002, the workers of the international airline
service providers, claiming that they stand to lose their employment
upon the implementation of the questioned agreements, filed before
this Court a petition for prohibition to enjoin the enforcement of said
agreements.[2]
On October 15, 2002, the service providers, joining the cause of
the petitioning workers, filed a motion for intervention and a
petition-in-intervention.
On October 24, 2002, Congressmen Salacnib Baterina, Clavel
Martinez and Constantino Jaraula filed a similar petition with this
Court.[3]
On November 6, 2002, several employees of the MIAA likewise
filed a petition assailing the legality of the various agreements.[4]
On December 11, 2002. another group of Congressmen, Hon.
Jacinto V. Paras, Rafael P. Nantes, Eduardo C. Zialcita, Willie B.
Villarama, Prospero C. Nograles, Prospero A. Pichay, Jr., Harlin Cast
Abayon and Benasing O. Macaranbon, moved to intervene in the
case as Respondents-Intervenors. They filed their Comment-In-
Intervention defending the validity of the assailed agreements and
praying for the dismissal of the petitions.
During the pendency of the case before this Court, President
Gloria Macapagal Arroyo, on November 29, 2002, in her speech at
the 2002 Golden Shell Export Awards at Malacaang Palace, stated
that she will not honor (PIATCO) contracts which the Executive
Branchs legal offices have concluded (as) null and void.[5]
Respondent PIATCO filed its Comments to the present
petitions on November 7 and 27, 2002. The Office of the Solicitor
General and the Office of the Government Corporate Counsel filed
their respective Comments in behalf of the public respondents.
On December 10, 2002, the Court heard the case on oral
argument. After the oral argument, the Court then resolved in open
court to require the parties to file simultaneously their respective
Memoranda in amplification of the issues heard in the oral
arguments within 30 days and to explore the possibility of arbitration
or mediation as provided in the challenged contracts.
In their consolidated Memorandum, the Office of the Solicitor
General and the Office of the Government Corporate Counsel prayed
that the present petitions be given due course and that judgment be
rendered declaring the 1997 Concession Agreement, the ARCA and
the Supplements thereto void for being contrary to the Constitution,
the BOT Law and its Implementing Rules and Regulations.
On March 6, 2003, respondent PIATCO informed the Court that
on March 4, 2003 PIATCO commenced arbitration proceedings
before the International Chamber of Commerce, International Court
of Arbitration (ICC) by filing a Request for Arbitration with the
Secretariat of the ICC against the Government of the Republic of the
Philippines acting through the DOTC and MIAA.
In the present cases, the Court is again faced with the task of
resolving complicated issues made difficult by their intersecting legal
and economic implications. The Court is aware of the far reaching fall
out effects of the ruling which it makes today. For more than a
century and whenever the exigencies of the times demand it, this
Court has never shirked from its solemn duty to dispense justice and
resolve actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not there
has been grave abuse of discretion amounting to lack or excess of
jurisdiction.[6]To be sure, this Court will not begin to do otherwise
today.
We shall first dispose of the procedural issues raised by
respondent PIATCO which they allege will bar the resolution of the
instant controversy.
Petitioners Legal Standing to File
the present Petitions
a. G.R. Nos. 155001 and 155661
In G.R. No. 155001 individual petitioners are employees of
various service providers[7] having separate concession contracts with
MIAA and continuing service agreements with various international
airlines to provide in-flight catering, passenger handling, ramp and
ground support, aircraft maintenance and provisions, cargo handling
and warehousing and other services. Also included as petitioners are
labor unions MIASCOR Workers Union-National Labor Union and
Philippine Airlines Employees Association. These petitioners filed the
instant action for prohibition as taxpayers and as parties whose rights
and interests stand to be violated by the implementation of the
PIATCO Contracts.
Petitioners-Intervenors in the same case are all corporations
organized and existing under Philippine laws engaged in the business
of providing in-flight catering, passenger handling, ramp and ground
support, aircraft maintenance and provisions, cargo handling and
warehousing and other services to several international airlines at the
Ninoy Aquino International Airport. Petitioners-Intervenors allege
that as tax-paying international airline and airport-related service
operators, each one of them stands to be irreparably injured by the
implementation of the PIATCO Contracts. Each of the petitioners-
intervenors have separate and subsisting concession agreements
with MIAA and with various international airlines which they allege
are being interfered with and violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA
and Samahang Manggagawa sa Paliparan ng Pilipinas - a legitimate
labor union and accredited as the sole and exclusive bargaining agent
of all the employees in MIAA. Petitioners anchor their petition for
prohibition on the nullity of the contracts entered into by the
Government and PIATCO regarding the build-operate-and-transfer
of the NAIA IPT III. They filed the petition as taxpayers and persons
who have a legitimate interest to protect in the implementation of
the PIATCO Contracts.
Petitioners in both cases raise the argument that the PIATCO
Contracts contain stipulations which directly contravene numerous
provisions of the Constitution, specific provisions of the BOT Law and
its Implementing Rules and Regulations, and public policy.
Petitioners contend that the DOTC and the MIAA, by entering into
said contracts, have committed grave abuse of discretion amounting
to lack or excess of jurisdiction which can be remedied only by a writ
of prohibition, there being no plain, speedy or adequate remedy in
the ordinary course of law.
In particular, petitioners assail the provisions in the 1997
Concession Agreement and the ARCA which grant PIATCO the
exclusive right to operate a commercial international passenger
terminal within the Island of Luzon, except those international
airports already existing at the time of the execution of the
agreement. The contracts further provide that upon the
commencement of operations at the NAIA IPT III, the Government
shall cause the closure of Ninoy Aquino International Airport
Passenger Terminals I and II as international passenger terminals.
With respect to existing concession agreements between MIAA and
international airport service providers regarding certain services or
operations, the 1997 Concession Agreement and the ARCA uniformly
provide that such services or operations will not be carried over to the
NAIA IPT III and PIATCO is under no obligation to permit such carry
over except through a separate agreement duly entered into with
PIATCO.[8]
With respect to the petitioning service providers and their
employees, upon the commencement of operations of the NAIA IPT
III, they allege that they will be effectively barred from providing
international airline airport services at the NAIA Terminals I and II as
all international airlines and passengers will be diverted to the NAIA
IPT III. The petitioning service providers will thus be compelled to
contract with PIATCO alone for such services, with no assurance that
subsisting contracts with MIAA and other international airlines will be
respected. Petitioning service providers stress that despite the very
competitive market, the substantial capital investments required and
the high rate of fees, they entered into their respective contracts
with the MIAA with the understanding that the said contracts will be
in force for the stipulated period, and thereafter, renewed so as to
allow each of the petitioning service providers to recoup their
investments and obtain a reasonable return thereon.
Petitioning employees of various service providers at the NAIA
Terminals I and II and of MIAA on the other hand allege that with the
closure of the NAIA Terminals I and II as international passenger
terminals under the PIATCO Contracts, they stand to lose
employment.
The question on legal standing is whether such parties have
alleged such a personal stake in the outcome of the controversy as to
assure that concrete adverseness which sharpens the presentation of
issues upon which the court so largely depends for illumination of
difficult constitutional questions.[9]Accordingly, it has been held that
the interest of a person assailing the constitutionality of a statute
must be direct and personal. He must be able to show, not only that
the law or any government act is invalid, but also that he sustained or
is in imminent danger of sustaining some direct injury as a result of
its enforcement, and not merely that he suffers thereby in some
indefinite way. It must appear that the person complaining has been
or is about to be denied some right or privilege to which he is lawfully
entitled or that he is about to be subjected to some burdens or
penalties by reason of the statute or act complained of.[10]
We hold that petitioners have the requisite standing. In the
above-mentioned cases, petitioners have a direct and substantial
interest to protect by reason of the implementation of the PIATCO
Contracts. They stand to lose their source of livelihood, a property
right which is zealously protected by the Constitution. Moreover,
subsisting concession agreements between MIAA and petitioners-
intervenors and service contracts between international airlines and
petitioners-intervenors stand to be nullified or terminated by the
operation of the NAIA IPT III under the PIATCO Contracts. The
financial prejudice brought about by the PIATCO Contracts on
petitioners and petitioners-intervenors in these cases are legitimate
interests sufficient to confer on them the requisite standing to file
the instant petitions.
b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition
as members of the House of Representatives, citizens and taxpayers.
They allege that as members of the House of Representatives, they
are especially interested in the PIATCO Contracts, because the
contracts compel the Government and/or the House of
Representatives to appropriate funds necessary to comply with the
provisions therein.[11] They cite provisions of the PIATCO Contracts
which require disbursement of unappropriated amounts in
compliance with the contractual obligations of the Government.
They allege that the Government obligations in the PIATCO
Contracts which compel government expenditure without
appropriation is a curtailment of their prerogatives as legislators,
contrary to the mandate of the Constitution that [n]o money shall be
paid out of the treasury except in pursuance of an appropriation
made by law.[12]
Standing is a peculiar concept in constitutional law because in
some cases, suits are not brought by parties who have been
personally injured by the operation of a law or any other government
act but by concerned citizens, taxpayers or voters who actually sue in
the public interest. Although we are not unmindful of the cases
of Imus Electric Co. v. Municipality of Imus[13] and Gonzales v.
Raquiza[14] wherein this Court held that appropriation must be made
only on amounts immediately demandable, public interest demands
that we take a more liberal view in determining whether the
petitioners suing as legislators, taxpayers and citizens have locus
standi to file the instant petition. In Kilosbayan, Inc. v.
Guingona,[15] this Court held [i]n line with the liberal policy of this
Court on locus standi, ordinary taxpayers, members of Congress, and
even association of planters, and non-profit civic organizations were
allowed to initiate and prosecute actions before this Court to
question the constitutionality or validity of laws, acts, decisions,
rulings, or orders of various government agencies or
instrumentalities.[16] Further, insofar as taxpayers' suits are
concerned . . . (this Court) is not devoid of discretion as to whether
or not it should be entertained.[17] As such . . . even if, strictly
speaking, they [the petitioners] are not covered by the definition, it is
still within the wide discretion of the Court to waive the requirement
and so remove the impediment to its addressing and resolving the
serious constitutional questions raised.[18] In view of the serious legal
questions involved and their impact on public interest, we resolve to
grant standing to the petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this Court is without
jurisdiction to review the instant cases as factual issues are involved
which this Court is ill-equipped to resolve. Moreover, PIATCO alleges
that submission of this controversy to this Court at the first instance
is a violation of the rule on hierarchy of courts. They contend that
trial courts have concurrent jurisdiction with this Court with respect
to a special civil action for prohibition and hence, following the rule
on hierarchy of courts, resort must first be had before the trial courts.
After a thorough study and careful evaluation of the issues
involved, this Court is of the view that the crux of the instant
controversy involves significant legal questions. The facts necessary
to resolve these legal questions are well established and, hence, need
not be determined by a trial court.
The rule on hierarchy of courts will not also prevent this Court
from assuming jurisdiction over the cases at bar. The said rule may be
relaxed when the redress desired cannot be obtained in the
appropriate courts or where exceptional and compelling
circumstances justify availment of a remedy within and calling for
the exercise of this Courts primary jurisdiction.[19]
It is easy to discern that exceptional circumstances exist in the
cases at bar that call for the relaxation of the rule. Both petitioners
and respondents agree that these cases are of transcendental
importance as they involve the construction and operation of the
countrys premier international airport. Moreover, the crucial issues
submitted for resolution are of first impression and they entail the
proper legal interpretation of key provisions of the Constitution, the
BOT Law and its Implementing Rules and Regulations. Thus,
considering the nature of the controversy before the Court,
procedural bars may be lowered to give way for the speedy
disposition of the instant cases.
Legal Effect of the Commencement
of Arbitration Proceedings by
PIATCO
There is one more procedural obstacle which must be
overcome. The Court is aware that arbitration proceedings pursuant
to Section 10.02 of the ARCA have been filed at the instance of
respondent PIATCO. Again, we hold that the arbitration step taken
by PIATCO will not oust this Court of its jurisdiction over the cases at
bar.
In Del Monte Corporation-USA v. Court of Appeals,[20] even
after finding that the arbitration clause in the Distributorship
Agreement in question is valid and the dispute between the parties is
arbitrable, this Court affirmed the trial courts decision denying
petitioners Motion to Suspend Proceedings pursuant to the
arbitration clause under the contract. In so ruling, this Court held that
as contracts produce legal effect between the parties, their assigns
and heirs, only the parties to the Distributorship Agreement are
bound by its terms, including the arbitration clause stipulated
therein. This Court ruled that arbitration proceedings could be called
for but only with respect to the parties to the contract in question.
Considering that there are parties to the case who are neither parties
to the Distributorship Agreement nor heirs or assigns of the parties
thereto, this Court, citing its previous ruling in Salas, Jr. v. Laperal
Realty Corporation,[21] held that to tolerate the splitting of
proceedings by allowing arbitration as to some of the parties on the
one hand and trial for the others on the other hand would, in effect,
result in multiplicity of suits, duplicitous procedure and
unnecessary delay.[22] Thus, we ruled that the interest of
justice would best be served if the trial court hears and adjudicates
the case in a single and complete proceeding.
It is established that petitioners in the present cases who have
presented legitimate interests in the resolution of the controversy
are not parties to the PIATCO Contracts. Accordingly, they cannot
be bound by the arbitration clause provided for in the ARCA and
hence, cannot be compelled to submit to arbitration proceedings. A
speedy and decisive resolution of all the critical issues in the
present controversy, including those raised by petitioners, cannot
be made before an arbitral tribunal. The object of arbitration is
precisely to allow an expeditious determination of a dispute. This
objective would not be met if this Court were to allow the parties to
settle the cases by arbitration as there are certain issues involving
non-parties to the PIATCO Contracts which the arbitral tribunal will
not be equipped to resolve.
Now, to the merits of the instant controversy.
I agreement. The debt portion of the project financing should not
Is PIATCO a qualified bidder?
Public respondents argue that the Paircargo Consortium,
PIATCOs predecessor, was not a duly pre-qualified bidder on the
unsolicited proposal submitted by AEDC as the Paircargo Consortium
failed to meet the financial capability required under the BOT Law
and the Bid Documents. They allege that in computing the ability of
the Paircargo Consortium to meet the minimum equity requirements
for the project, the entire net worth of Security Bank, a member of
the consortium, should not be considered.
PIATCO relies, on the other hand, on the strength of the
Memorandum dated October 14, 1996 issued by the DOTC
Undersecretary Primitivo C. Cal stating that the Paircargo
Consortium is found to have a combined net worth
of P3,900,000,000.00, sufficient to meet the equity requirements of
the project. The said Memorandum was in response to a letter from
Mr. Antonio Henson of AEDC to President Fidel V. Ramos
questioning the financial capability of the Paircargo Consortium on
the ground that it does not have the financial resources to put up the
required minimum equity of P2,700,000,000.00. This contention is
based on the restriction under R.A. No. 337, as amended or the
General Banking Act that a commercial bank cannot invest in any
single enterprise in an amount more than 15% of its net worth. In the
said Memorandum, Undersecretary Cal opined:
The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5,
require that financial capability will be evaluated based on total
financial capability of all the member companies of the [Paircargo]
Consortium. In this connection, the Challenger was found to have a
combined net worth of P3,926,421,242.00 that could support a
project costing approximately P13 Billion.
It is not a requirement that the net worth must be unrestricted. To
impose that as a requirement now will be nothing less than unfair.
The financial statement or the net worth is not the sole basis in
establishing financial capability. As stated in Bid Bulletin No. 3,
financial capability may also be established by testimonial letters
issued by reputable banks. The Challenger has complied with this
requirement.
To recap, net worth reflected in the Financial Statement should not
be taken as the amount of the money to be used to answer the
required thirty percent (30%) equity of the challenger but rather to be
used in establishing if there is enough basis to believe that the
challenger can comply with the required 30% equity. In fact, proof of
sufficient equity is required as one of the conditions for award of
contract (Section 12.1 IRR of the BOT Law) but not for pre-
qualification (Section 5.4 of the same document).[23]
Under the BOT Law, in case of a build-operate-and-transfer
arrangement, the contract shall be awarded to the bidder who,
having satisfied the minimum financial, technical, organizational
and legal standards required by the law, has submitted the lowest
bid and most favorable terms of the project.[24] Further, the 1994
Implementing Rules and Regulations of the BOT Law provide:
Section 5.4 Pre-qualification Requirements.
.
c. Financial Capability: The project proponent must have adequate
capability to sustain the financing requirements for the detailed
engineering design, construction and/or operation and maintenance
phases of the project, as the case may be. For purposes of pre-
qualification, this capability shall be measured in terms of (i) proof of
the ability of the project proponent and/or the consortium to
provide a minimum amount of equity to the project, and (ii) a
letter testimonial from reputable banks attesting that the project
proponent and/or members of the consortium are banking with
them, that they are in good financial standing, and that they have
adequate resources. The government agency/LGU concerned shall
determine on a project-to-project basis and before pre-qualification,
the minimum amount of equity needed. (emphasis supplied)
Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3
dated August 16, 1996 amending the financial capability
requirements for pre-qualification of the project proponent as
follows:
6. Basis of Pre-qualification
The basis for the pre-qualification shall be on the compliance of the
proponent to the minimum technical and financial requirements
provided in the Bid Documents and in the IRR of the BOT Law, R.A.
No. 6957, as amended by R.A. 7718.
The minimum amount of equity to which the proponents financial
capability will be based shall be thirty percent (30%) of the project
cost instead of the twenty percent (20%) specified in Section 3.6.4
of the Bid Documents. This is to correlate with the required debt-to-
equity ratio of 70:30 in Section 2.01a of the draft concession
exceed 70% of the actual project cost.
Accordingly, based on the above provisions of law, the
Paircargo Consortium or any challenger to the unsolicited proposal of
AEDC has to show that it possesses the requisite financial capability
to undertake the project in the minimum amount of 30% of the
project cost through (i) proof of the ability to provide a minimum
amount of equity to the project, and (ii) a letter testimonial from
reputable banks attesting that the project proponent or members of
the consortium are banking with them, that they are in good financial
standing, and that they have adequate resources.
 As the minimum project cost was estimated to be
US$350,000,000.00 or roughly P9,183,650,000.00,[25] the Paircargo
Consortium had to show to the satisfaction of the PBAC that it had
the ability to provide the minimum equity for the project in the
amount of at least P2,755,095,000.00.
Paircargos Audited Financial Statements as of 1993 and 1994
indicated that it had a net worth of P2,783,592.00 and P3,123,515.00
respectively.[26]PAGS Audited Financial Statements as of 1995
indicate that it has approximately P26,735,700.00 to invest as its
equity for the project.[27] Security Banks Audited Financial
Statements as of 1995 show that it has a net worth equivalent to its
capital funds in the amount of P3,523,504,377.00.[28]
We agree with public respondents that with respect to Security
Bank, the entire amount of its net worth could not be invested in a
single undertaking or enterprise, whether allied or non-allied in
accordance with the provisions of R.A. No. 337, as amended or the
General Banking Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary
notwithstanding, the Monetary Board, whenever it shall deem
appropriate and necessary to further national development
objectives or support national priority projects, may authorize a
commercial bank, a bank authorized to provide commercial
banking services, as well as a government-owned and controlled
bank, to operate under an expanded commercial banking
authority and by virtue thereof exercise, in addition to powers
authorized for commercial banks, the powers of an Investment
House as provided in Presidential Decree No. 129, invest in the
equity of a non-allied undertaking, or own a majority or all of the
equity in a financial intermediary other than a commercial bank or a
bank authorized to provide commercial banking services: Provided,
That (a) the totalinvestment in equities shall not exceed fifty
percent (50%) of the net worth of the bank; (b) the equity
investment in any one enterprise whether allied or non-allied
shall not exceed fifteen percent (15%) of the net worth of the
bank; (c) the equity investment of the bank, or of its wholly
ormajority-owned subsidiary, in a single non-allied undertaking shall
not exceed thirty-five percent (35%) of the total equity in the
enterprise nor shall it exceed thirty-five percent (35%) of the voting
stock in that enterprise; and (d) the equity investment in other banks
shall be deducted from the investing bank's net worth for purposes of
computing the prescribed ratio of net worth to risk assets.
. entered by it in pursuance of the project, the Court feels that it is
Further, the 1993 Manual of Regulations for Banks provides:
SECTION X383. Other Limitations and Restrictions. The following
limitations and restrictions shall also apply regarding equity
investments of banks.
a. In any single enterprise. The equity investments of banks in any
single enterprise shall not exceed at any time fifteen percent (15%) of
the net worth of the investing bank as defined in Sec. X106 and
Subsec. X121.5.
Thus, the maximum amount that Security Bank could validly
invest in the Paircargo Consortium is only P528,525,656.55,
representing 15% of its entire net worth. The total net worth
therefore of the Paircargo Consortium, after considering
the maximum amounts that may be validly invested by each of its
members is P558,384,871.55 or only 6.08% of the project
cost,[29] an amount substantially less than the prescribed minimum
equity investment required for the project in the amount
of P2,755,095,000.00 or 30% of the project cost.
The purpose of pre-qualification in any public bidding is to
determine, at the earliest opportunity, the ability of the bidder to
undertake the project. Thus, with respect to the bidders financial
capacity at the pre-qualification stage, the law requires the
government agency to examine and determine the ability of the
bidder to fund the entire cost of the project by considering the
maximum amounts that each bidder may invest in the project at
the time of pre-qualification.
The PBAC has determined that any prospective bidder for the
construction, operation and maintenance of the NAIA IPT III project
should prove that it has the ability to provide equity in the minimum
amount of 30% of the project cost, in accordance with the 70:30
debt-to-equity ratio prescribed in the Bid Documents. Thus, in the
case of Paircargo Consortium, the PBAC should determine
the maximum amounts that each member of the consortium may
commit for the construction, operation and maintenance of the NAIA
IPT III project at the time of pre-qualification. With respect to
Security Bank, the maximum amount which may be invested by it
would only be 15% of its net worth in view of the restrictions imposed
by the General Banking Act. Disregarding the investment ceilings
provided by applicable law would not result in a proper evaluation of
whether or not a bidder is pre-qualified to undertake the project as
for all intents and purposes, such ceiling or legal restriction
determines the true maximum amount which a bidder may invest in
the project.
Further, the determination of whether or not a bidder is pre-
qualified to undertake the project requires an evaluation of the
financial capacity of the said bidder at the time the bid is
submitted based on the required documents presented by the
bidder. The PBAC should not be allowed to speculate on the future
financial ability of the bidder to undertake the project on the basis of
documents submitted. This would open doors to abuse and defeat
the very purpose of a public bidding. This is especially true in the case
at bar which involves the investment of billions of pesos by the
project proponent. The relevant government authority is duty-bound
to ensure that the awardee of the contract possesses the minimum
required financial capability to complete the project. To allow the
PBAC to estimate the bidders future financial capability would not
secure the viability and integrity of the project. A restrictive and
conservative application of the rules and procedures of public bidding
is necessary not only to protect the impartiality and regularity of the
proceedings but also to ensure the financial and technical reliability
of the project. It has been held that:
The basic rule in public bidding is that bids should be evaluated based
on the required documents submitted before and not after the
opening of bids. Otherwise, the foundation of a fair and competitive
public bidding would be defeated. Strict observance of the rules,
regulations, and guidelines of the bidding process is the only
safeguard to a fair, honest and competitive public bidding.[30]
Thus, if the maximum amount of equity that a bidder may
invest in the project at the time the bids are submitted falls short of
the minimum amounts required to be put up by the bidder, said
bidder should be properly disqualified. Considering that at the pre-
qualification stage, the maximum amounts which the Paircargo
Consortium may invest in the project fell short of the minimum
amounts prescribed by the PBAC, we hold that Paircargo Consortium
was not a qualified bidder. Thus the award of the contract by the
PBAC to the Paircargo Consortium, a disqualified bidder, is null and
void.
While it would be proper at this juncture to end the resolution
of the instant controversy, as the legal effects of the disqualification
of respondent PIATCOs predecessor would come into play and
necessarily result in the nullity of all the subsequent contracts
necessary to discuss in full the pressing issues of the present
controversy for a complete resolution thereof.
II
Is the 1997 Concession Agreement valid?
Petitioners and public respondents contend that the 1997
Concession Agreement is invalid as it contains provisions that
substantially depart from the draft Concession Agreement included
in the Bid Documents. They maintain that a substantial departure
from the draft Concession Agreement is a violation of public policy
and renders the 1997 Concession Agreement null and void.
PIATCO maintains, however, that the Concession Agreement
attached to the Bid Documents is intended to be a draft, i.e., subject
to change, alteration or modification, and that this intention was
clear to all participants, including AEDC, and DOTC/MIAA. It argued
further that said intention is expressed in Part C (6) of Bid Bulletin
No. 3 issued by the PBAC which states:
6. Amendments to the Draft Concessions Agreement
Amendments to the Draft Concessions Agreement shall be issued
from time to time. Said amendments shall only cover items that
would not materially affect the preparation of the proponents
proposal.
By its very nature, public bidding aims to protect the public
interest by giving the public the best possible advantages through
open competition. Thus:
Competition must be legitimate, fair and honest. In the field of
government contract law, competition requires, not only `bidding
upon a common standard, a common basis, upon the same thing, the
same subject matter, the same undertaking,' but also that it be
legitimate, fair and honest; and not designed to injure or defraud the
government.[31]
An essential element of a publicly bidded contract is that all
bidders must be on equal footing. Not simply in terms of application
of the procedural rules and regulations imposed by the relevant
government agency, but more importantly, on the contract bidded
upon. Each bidder must be able to bid on the same thing. The
rationale is obvious. If the winning bidder is allowed to later include
or modify certain provisions in the contract awarded such that the
contract is altered in any material respect, then the essence of fair
competition in the public bidding is destroyed. A public bidding
would indeed be a farce if after the contract is awarded, the winning
bidder may modify the contract and include provisions which are
favorable to it that were not previously made available to the other
bidders. Thus:
It is inherent in public biddings that there shall be a fair competition
among the bidders. The specifications in such biddings provide the
common ground or basis for the bidders. The specifications should,
accordingly, operate equally or indiscriminately upon all bidders.[32]
The same rule was restated by Chief Justice Stuart of the
Supreme Court of Minnesota:
The law is well settled that where, as in this case, municipal
authorities can only let a contract for public work to the lowest
responsible bidder, the proposals and specifications therefore must
be so framed as to permit free and full competition. Nor can they
enter into a contract with the best bidder containing substantial
provisions beneficial to him, not included or contemplated in the
terms and specifications upon which the bids were invited. [33]
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to
support its argument that the draft concession agreement is subject
to amendment, the pertinent portion of which was quoted above, the
PBAC also clarified that [s]aid amendments shall only cover items
that would not materially affect the preparation of the
proponents proposal.
While we concede that a winning bidder is not precluded from
modifying or amending certain provisions of the contract bidded
upon, such changes must not constitute substantial or material
amendments that would alter the basic parameters of the
contract and would constitute a denial to the other bidders of the
opportunity to bid on the same terms. Hence, the determination of
whether or not a modification or amendment of a contract bidded
out constitutes a substantial amendment rests on whether the
contract, when taken as a whole, would contain substantially
different terms and conditions that would have the effect of altering
the technical and/or financial proposals previously submitted by
other bidders. The alterations and modifications in the contract
executed between the government and the winning bidder must be
such as to render such executed contract to be an entirely different
contract from the one that was bidded upon.
In the case of Caltex (Philippines), Inc. v. Delgado Brothers,
Inc.,[34] this Court quoted with approval the ruling of the trial court
that an amendment to a contract awarded through public bidding,
when such subsequent amendment was made without a new public
bidding, is null and void:
The Court agrees with the contention of counsel for the plaintiffs that
the due execution of a contract after public bidding is a limitation
upon the right of the contracting parties to alter or amend it without
another public bidding, for otherwise what would a public bidding
be good for if after the execution of a contract after public
bidding, the contracting parties may alter or amend the contract,
or even cancel it, at their will? Public biddings are held for the
protection of the public, and to give the public the best possible
advantages by means of open competition between the bidders. He
who bids or offers the best terms is awarded the contract subject
of the bid, and it is obvious that such protection and best possible
advantages to the public will disappear if the parties to a contract
executed after public bidding may alter or amend it without
another previous public bidding.[35]
Hence, the question that comes to fore is this: is the 1997
Concession Agreement the same agreement that was offered for
public bidding, i.e., the draft Concession Agreement attached to the
Bid Documents? A close comparison of the draft Concession
Agreement attached to the Bid Documents and the 1997 Concession
Agreement reveals that the documents differ in at least two material
respects:
a. Modification on the Public
Utility Revenues and Non-Public
Utility Revenues that may be
collected by PIATCO
The fees that may be imposed and collected by PIATCO under
the draft Concession Agreement and the 1997 Concession
Agreement may be classified into three distinct categories: (1) fees
which are subject to periodic adjustment of once every two years in
accordance with a prescribed parametric formula and adjustments
are made effective only upon written approval by MIAA; (2) fees
other than those included in the first category which maybe adjusted
by PIATCO whenever it deems necessary without need for consent of
DOTC/MIAA; and (3) new fees and charges that may be imposed by
PIATCO which have not been previously imposed or collected at the
Ninoy Aquino International Airport Passenger Terminal I, pursuant to
Administrative Order No. 1, Series of 1993, as amended. The glaring
distinctions between the draft Concession Agreement and the 1997
Concession Agreement lie in the types of fees included in each
category and the extent of the supervision and regulation which
MIAA is allowed to exercise in relation thereto.
For fees under the first category, i.e., those which are subject
to periodic adjustment in accordance with a prescribed parametric
formula and effective only upon written approval by MIAA, the draft
Concession Agreement includes the following:[36]
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) groundhandling fees;
(4) rentals and airline offices;
(5) check-in counter rentals; and
(6) porterage fees.
Under the 1997 Concession Agreement, fees which are subject
to adjustment and effective upon MIAA approval are classified as
Public Utility Revenues and include:[37]
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) check-in counter fees; and
(4) Terminal Fees.
The implication of the reduced number of fees that are subject
to MIAA approval is best appreciated in relation to fees included in
the second category identified above. Under the 1997 Concession
Agreement, fees which PIATCO may adjust whenever it deems
necessary without need for consent of DOTC/MIAA are Non-Public
Utility Revenues and is defined as all other income not classified as
Public Utility Revenues derived from operations of the Terminal and
the Terminal Complex.[38] Thus, under the 1997 Concession
Agreement, groundhandling fees, rentals from airline offices and
porterage fees are no longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession
Agreement, MIAA reserves the right to regulate (1) lobby and
vehicular parking fees and (2) other new fees and charges that may
be imposed by PIATCO. Such regulation may be made by periodic
adjustment and is effective only upon written approval of MIAA. The
full text of said provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments
in the aircraft parking fees, aircraft tacking fees, groundhandling
fees, rentals and airline offices, check-in-counter rentals and
porterage fees shall be allowed only once every two years and in
accordance with the Parametric Formula attached hereto as Annex F.
Provided that adjustments shall be made effective only after the
written express approval of the MIAA. Provided, further, that such
approval of the MIAA, shall be contingent only on the conformity of
the adjustments with the above said parametric formula. The first
adjustment shall be made prior to the In-Service Date of the
Terminal.
The MIAA reserves the right to regulate under the foregoing terms
and conditions the lobby and vehicular parking fees and other new
fees and charges as contemplated in paragraph 2 of Section 6.01 if
in its judgment the users of the airport shall be deprived of a free
option for the services they cover.[39]
On the other hand, the equivalent provision under the 1997
Concession Agreement reads:
Section 6.03 Periodic Adjustment in Fees and Charges.
.
(c) Concessionaire shall at all times be judicious in fixing fees and
charges constituting Non-Public Utility Revenues in order to ensure
that End Users are not unreasonably deprived of services. While the
vehicular parking fee, porterage fee and greeter/well wisher fee
constitute Non-Public Utility Revenues of Concessionaire, GRP
may intervene and require Concessionaire to explain and justify
the fee it may set from time to time, if in the reasonable opinion of
GRP the said fees have become exorbitant resulting in the
unreasonable deprivation of End Users of such services.[40]
Thus, under the 1997 Concession Agreement, with respect to
(1) vehicular parking fee, (2) porterage fee and (3) greeter/well wisher
fee, all that MIAA can do is to require PIATCO to explain and
justify the fees set by PIATCO. In the draft Concession Agreement,
vehicular parking fee is subject to MIAA regulation and approval
under the second paragraph of Section 6.03 thereof while porterage
fee is covered by the first paragraph of the same provision. There is
an obvious relaxation of the extent of control and regulation by MIAA
with respect to the particular fees that may be charged by PIATCO.
Moreover, with respect to the third category of fees that may
be imposed and collected by PIATCO, i.e., new fees and charges that
may be imposed by PIATCO which have not been previously imposed
or collected at the Ninoy Aquino International Airport Passenger
Terminal I, under Section 6.03 of the draft Concession
Agreement MIAA has reserved the right to regulate the same under
the same conditions that MIAA may regulate fees under the first
category, i.e., periodic adjustment of once every two years in
accordance with a prescribed parametric formula and effective only
upon written approval by MIAA. However, under the 1997
Concession Agreement, adjustment of fees under the third category
is not subject to MIAA regulation.
With respect to terminal fees that may be charged by
PIATCO,[41] as shown earlier, this was included within the category of
Public Utility Revenues under the 1997 Concession Agreement. This
classification is significant because under the 1997 Concession
Agreement, Public Utility Revenues are subject to an Interim
Adjustment of fees upon the occurrence of certain extraordinary
events specified in the agreement.[42] However, under the draft
Concession Agreement, terminal fees are not included in the types
of fees that may be subject to Interim Adjustment.[43]
Finally, under the 1997 Concession Agreement, Public Utility
Revenues, except terminal fees, are denominated in US
Dollars[44] while payments to the Government are in Philippine Pesos.
In the draft Concession Agreement, no such stipulation was
included. By stipulating that Public Utility Revenues will be paid to
PIATCO in US Dollars while payments by PIATCO to the Government
are in Philippine currency under the 1997 Concession Agreement,
PIATCO is able to enjoy the benefits of depreciations of the
Philippine Peso, while being effectively insulated from the
detrimental effects of exchange rate fluctuations.
When taken as a whole, the changes under the 1997
Concession Agreement with respect to reduction in the types of fees
that are subject to MIAA regulation and the relaxation of such
regulation with respect to other fees are significant amendments
that substantially distinguish the draft Concession Agreement from
the 1997 Concession Agreement. The 1997 Concession Agreement,
in this respect, clearly gives PIATCO more favorable terms than
what was available to other bidders at the time the contract was
bidded out. It is not very difficult to see that the changes in the 1997
Concession Agreement translate to direct and concrete financial
advantages for PIATCO which were not available at the time the
contract was offered for bidding. It cannot be denied that under the
1997 Concession Agreement only Public Utility Revenues are
subject to MIAA regulation. Adjustments of all other fees imposed
and collected by PIATCO are entirely within its control. Moreover,
with respect to terminal fees, under the 1997 Concession Agreement,
the same is further subject to Interim Adjustments not previously
stipulated in the draft Concession Agreement. Finally, the change in
the currency stipulated for Public Utility Revenues under the 1997
Concession Agreement, except terminal fees, gives PIATCO an
added benefit which was not available at the time of bidding.
b. Assumption by the
Government of the liabilities of
PIATCO in the event of the latters
default thereof
Under the draft Concession Agreement, default by PIATCO of
any of its obligations to creditors who have provided, loaned or
advanced funds for the NAIA IPT III project does not result in the
assumption by the Government of these liabilities. In fact, nowhere
in the said contract does default of PIATCOs loans figure in the
agreement. Such default does not directly result in any concomitant
right or obligation in favor of the Government.
However, the 1997 Concession Agreement provides:
Section 4.04 Assignment.
. advantages through open competition.[45] It has been held that the
(b) In the event Concessionaire should default in the payment of an
Attendant Liability, and the default has resulted in the acceleration
of the payment due date of the Attendant Liability prior to its stated
date of maturity, the Unpaid Creditors and Concessionaire shall
immediately inform GRP in writing of such default. GRP shall, within
one hundred eighty (180) Days from receipt of the joint written
notice of the Unpaid Creditors and Concessionaire, either (i) take
over the Development Facility and assume the Attendant Liabilities,
or (ii) allow the Unpaid Creditors, if qualified, to be substituted as
concessionaire and operator of the Development Facility in
accordance with the terms and conditions hereof, or designate a
qualified operator acceptable to GRP to operate the Development
Facility, likewise under the terms and conditions of this Agreement;
Provided that if at the end of the 180-day period GRP shall not have
served the Unpaid Creditors and Concessionaire written notice of its
choice, GRP shall be deemed to have elected to take over the
Development Facility with the concomitant assumption of Attendant
Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to be
substituted as concessionaire, the latter shall form and organize a
concession company qualified to take over the operation of the
Development Facility. If the concession company should elect to
designate an operator for the Development Facility, the concession
company shall in good faith identify and designate a qualified
operator acceptable to GRP within one hundred eighty (180) days
from receipt of GRPs written notice. If the concession company,
acting in good faith and with due diligence, is unable to designate a
qualified operator within the aforesaid period, then GRP shall at the
end of the 180-day period take over the Development Facility and
assume Attendant Liabilities.
The term Attendant Liabilities under the 1997 Concession
Agreement is defined as:
Attendant Liabilities refer to all amounts recorded and from time to
time outstanding in the books of the Concessionaire as owing to
Unpaid Creditors who have provided, loaned or advanced funds
actually used for the Project, including all interests, penalties,
associated fees, charges, surcharges, indemnities, reimbursements
and other related expenses, and further including amounts owed by
Concessionaire to its suppliers, contractors and sub-contractors.
Under the above quoted portions of Section 4.04 in relation to
the definition of Attendant Liabilities, default by PIATCO of its
loans used to finance the NAIA IPT III project triggers the
occurrence of certain events that leads to the assumption by the
Government of the liability for the loans. Only in one instance may
the Government escape the assumption of PIATCOs liabilities, i.e.,
when the Government so elects and allows a qualified operator to
take over as Concessionaire. However, this circumstance is
dependent on the existence and availability of a qualified operator
who is willing to take over the rights and obligations of PIATCO
under the contract, a circumstance that is not entirely within the
control of the Government.
Without going into the validity of this provision at this juncture,
suffice it to state that Section 4.04 of the 1997 Concession
Agreement may be considered a form of security for the loans
PIATCO has obtained to finance the project, an option that was not
made available in the draft Concession Agreement. Section 4.04 is an
important amendment to the 1997 Concession Agreement because it
grants PIATCO a financial advantage or benefit which was not
previously made available during the bidding process. This
financial advantage is a significant modification that translates to
better terms and conditions for PIATCO.
PIATCO, however, argues that the parties to the bidding
procedure acknowledge that the draft Concession Agreement is
subject to amendment because the Bid Documents permit financing
or borrowing. They claim that it was the lenders who proposed the
amendments to the draft Concession Agreement which resulted in
the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and
purpose of the BOT Law to allow the project proponent or the
winning bidder to obtain financing for the project, especially in this
case which involves the construction, operation and maintenance of
the NAIA IPT III. Expectedly, compliance by the project proponent of
its undertakings therein would involve a substantial amount of
investment. It is therefore inevitable for the awardee of the contract
to seek alternate sources of funds to support the project. Be that as it
may, this Court maintains that amendments to the contract bidded
upon should always conform to the general policy on public bidding if
such procedure is to be faithful to its real nature and purpose. By its
very nature and characteristic, competitive public bidding aims to
protect the public interest by giving the public the best possible
three principles in public bidding are (1) the offer to the public; (2)
opportunity for competition; and (3) a basis for the exact comparison
of bids. A regulation of the matter which excludes any of these
factors destroys the distinctive character of the system and thwarts
the purpose of its adoption.[46]These are the basic parameters which
every awardee of a contract bidded out must conform to,
requirements of financing and borrowing notwithstanding. Thus,
upon a concrete showing that, as in this case, the contract signed by
the government and the contract-awardee is an entirely different
contract from the contract bidded, courts should not hesitate to
strike down said contract in its entirety for violation of public policy
on public bidding. A strict adherence on the principles, rules and
regulations on public bidding must be sustained if only to preserve
the integrity and the faith of the general public on the procedure.
Public bidding is a standard practice for procuring government
contracts for public service and for furnishing supplies and other
materials. It aims to secure for the government the lowest possible
price under the most favorable terms and conditions, to curtail
favoritism in the award of government contracts and avoid suspicion
of anomalies and it places all bidders in equal footing.[47] Any
government action which permits any substantial variance
between the conditions under which the bids are invited and the
contract executed after the award thereof is a grave abuse of
discretion amounting to lack or excess of jurisdiction which
warrants proper judicial action.
In view of the above discussion, the fact that the foregoing
substantial amendments were made on the 1997 Concession
Agreement renders the same null and void for being contrary to
public policy. These amendments convert the 1997 Concession
Agreement to an entirely different agreement from the contract
bidded out or the draft Concession Agreement. It is not difficult to
see that the amendments on (1) the types of fees or charges that are
subject to MIAA regulation or control and the extent thereof and (2)
the assumption by the Government, under certain conditions, of the
liabilities of PIATCO directly translates concrete financial
advantages to PIATCO that were previously not available during
the bidding process. These amendments cannot be taken as merely
supplements to or implementing provisions of those already existing
in the draft Concession Agreement. The amendments discussed
above present new terms and conditions which provide financial
benefit to PIATCO which may have altered the technical and financial
parameters of other bidders had they known that such terms were
available.
III
Direct Government Guarantee
Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of
the 1997 Concession Agreement provides:
Section 4.04 Assignment
. Section 2(n) of the BOT Law defines direct guarantee as follows:
(b) In the event Concessionaire should default in the payment of an
Attendant Liability, and the default resulted in the acceleration of
the payment due date of the Attendant Liability prior to its stated
date of maturity, the Unpaid Creditors and Concessionaire shall
immediately inform GRP in writing of such default. GRP shall within
one hundred eighty (180) days from receipt of the joint written notice
of the Unpaid Creditors and Concessionaire, either (i) take over the
Development Facility and assume the Attendant Liabilities, or (ii)
allow the Unpaid Creditors, if qualified to be substituted as
concessionaire and operator of the Development facility in
accordance with the terms and conditions hereof, or designate a
qualified operator acceptable to GRP to operate the Development
Facility, likewise under the terms and conditions of this Agreement;
Provided, that if at the end of the 180-day period GRP shall not have
served the Unpaid Creditors and Concessionaire written notice of its
choice, GRP shall be deemed to have elected to take over the
Development Facility with the concomitant assumption of
Attendant Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be
substituted as concessionaire, the latter shall form and organize a
concession company qualified to takeover the operation of the
Development Facility. If the concession company should elect to
designate an operator for the Development Facility, the concession
company shall in good faith identify and designate a qualified
operator acceptable to GRP within one hundred eighty (180) days
from receipt of GRPs written notice. If the concession company,
acting in good faith and with due diligence, is unable to designate a
qualified operator within the aforesaid period, then GRP shall at the
end of the 180-day period take over the Development Facility and
assume Attendant Liabilities.
. any Senior Lenders agent may have (including without limitation
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from time to
time outstanding in the books of the Concessionaire as owing to
Unpaid Creditors who have provided, loaned or advanced funds
actually used for the Project, including all interests, penalties,
associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses, and further including
amounts owed by Concessionaire to its suppliers, contractors and
sub-contractors.[48]
It is clear from the above-quoted provisions that Government,
in the event that PIATCO defaults in its loan obligations, is
obligated to pay all amounts recorded and from time to time
outstanding from the books of PIATCO which the latter owes to its
creditors.[49] These amounts include all interests, penalties,
associated fees, charges, surcharges, indemnities, reimbursements
and other related expenses.[50] This obligation of the Government to
pay PIATCOs creditors upon PIATCOs default would arise if the
Government opts to take over NAIA IPT III. It should be noted,
however, that even if the Government chooses the second option,
which is to allow PIATCOs unpaid creditors operate NAIA IPT III, the
Government is still at a risk of being liable to PIATCOs creditors
should the latter be unable to designate a qualified operator within
the prescribed period.[51] In effect, whatever option the
Government chooses to take in the event of PIATCOs failure to
fulfill its loan obligations, the Government is still at a risk of
assuming PIATCOs outstanding loans. This is due to the fact that
the Government would only be free from assuming PIATCOs debts if
the unpaid creditors would be able to designate a qualified operator
within the period provided for in the contract. Thus, the
Governments assumption of liability is virtually out of its
control. The Government under the circumstances provided for in
the 1997 Concession Agreement is at the mercy of the existence,
availability and willingness of a qualified operator. The above
contractual provisions constitute a direct government guarantee
which is prohibited by law.
One of the main impetus for the enactment of the BOT Law is
the lack of government funds to construct the infrastructure and
development projects necessary for economic growth and
development. This is why private sector resources are being tapped
in order to finance these projects. The BOT law allows the private
sector to participate, and is in fact encouraged to do so by way of
incentives, such as minimizing the unstable flow of
returns,[52] provided that the government would not have to
unnecessarily expend scarcely available funds for the project
itself. As such, direct guarantee, subsidy and equity by the
government in these projects are strictly prohibited.[53] This is but
logical for if the government would in the end still be at a risk of
paying the debts incurred by the private entity in the BOT
projects, then the purpose of the law is subverted.
(n) Direct government guarantee An agreement whereby the
government or any of its agencies or local government units assume
responsibility for the repayment of debt directly incurred by the
project proponent in implementing the project in case of a loan
default.
Clearly by providing that the Government assumes the
attendant liabilities, which consists of PIATCOs unpaid debts, the
1997 Concession Agreement provided for a direct government
guarantee for the debts incurred by PIATCO in the implementation
of the NAIA IPT III project. It is of no moment that the relevant
sections are subsumed under the title of assignment. The provisions
providing for direct government guarantee which is prohibited by law
is clear from the terms thereof.
The fact that the ARCA superseded the 1997 Concession
Agreement did not cure this fatal defect. Article IV, Section 4.04(c),
in relation to Article I, Section 1.06, of the ARCA provides:
Section 4.04 Security
.
(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate
in good faith and enter into direct agreement with the Senior
Lenders, or with an agent of such Senior Lenders (which agreement
shall be subject to the approval of the Bangko Sentral ng Pilipinas), in
such form as may be reasonably acceptable to both GRP and Senior
Lenders, with regard, inter alia, to the following parameters:
.
(iv) If the Concessionaire [PIATCO] is in default under a payment
obligation owed to the Senior Lenders, and as a result thereof the
Senior Lenders have become entitled to accelerate the Senior Loans,
the Senior Lenders shall have the right to notify GRP of the same,
and without prejudice to any other rights of the Senior Lenders or
under security interests granted in favor of the Senior Lenders), to
either in good faith identify and designate a nominee which is
qualified under sub-clause (viii)(y) below to operate the Development
Facility [NAIA Terminal 3] or transfer the Concessionaires [PIATCO]
rights and obligations under this Agreement to a transferee which is
qualified under sub-clause (viii) below;
.
(vi) if the Senior Lenders, acting in good faith and using reasonable
efforts, are unable to designate a nominee or effect a transfer in
terms and conditions satisfactory to the Senior Lenders within one
hundred eighty (180) days after giving GRP notice as referred to
respectively in (iv) or (v) above, then GRP and the Senior Lenders
shall endeavor in good faith to enter into any other arrangement
relating to the Development Facility [NAIA Terminal 3] (other than a
turnover of the Development Facility [NAIA Terminal 3] to GRP)
within the following one hundred eighty (180) days. If no
agreement relating to the Development Facility [NAIA Terminal 3] is
arrived at by GRP and the Senior Lenders within the said 180-day
period, then at the end thereof the Development Facility [NAIA
Terminal 3] shall be transferred by the Concessionaire [PIATCO] to
GRP or its designee and GRP shall make a termination payment to
Concessionaire [PIATCO] equal to the Appraised Value (as
hereinafter defined) of the Development Facility [NAIA Terminal
3] or the sum of the Attendant Liabilities, if
greater. Notwithstanding Section 8.01(c) hereof, this Agreement
shall be deemed terminated upon the transfer of the Development
Facility [NAIA Terminal 3] to GRP pursuant hereto;
. transferee. This in effect would make the Government liable for
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts in each case supported by
verifiable evidence from time to time owed or which may become
owing by Concessionaire [PIATCO] to Senior Lenders or any other
persons or entities who have provided, loaned, or advanced funds
or provided financial facilities to Concessionaire [PIATCO] for the
Project [NAIA Terminal 3], including, without limitation, all
principal, interest, associated fees, charges, reimbursements, and
other related expenses (including the fees, charges and expenses of
any agents or trustees of such persons or entities), whether payable
at maturity, by acceleration or otherwise, and further including
amounts owed by Concessionaire [PIATCO] to its professional
consultants and advisers, suppliers, contractors and sub-
contractors.[54]
It is clear from the foregoing contractual provisions that in the
event that PIATCO fails to fulfill its loan obligations to its Senior
Lenders, the Government is obligated to directly negotiate and enter
into an agreement relating to NAIA IPT III with the Senior Lenders,
should the latter fail to appoint a qualified nominee or transferee
who will take the place of PIATCO. If the Senior Lenders and the
Government are unable to enter into an agreement after the
prescribed period, the Government must then pay PIATCO, upon
transfer of NAIA IPT III to the Government, termination payment
equal to the appraised value of the project or the value of the
attendant liabilities whichever is greater. Attendant liabilities as
defined in the ARCA includes all amounts owed or thereafter may be
owed by PIATCO not only to the Senior Lenders with whom PIATCO
has defaulted in its loan obligations but to all other persons who may
have loaned, advanced funds or provided any other type of financial
facilities to PIATCO for NAIA IPT III. The amount of PIATCOs debt
that the Government would have to pay as a result of PIATCOs
default in its loan obligations -- in case no qualified nominee or
transferee is appointed by the Senior Lenders and no other
agreement relating to NAIA IPT III has been reached between the
Government and the Senior Lenders -- includes, but is not limited
to, all principal, interest, associated fees, charges, reimbursements,
and other related expenses . . . whether payable at maturity, by
acceleration or otherwise.[55]
It is clear from the foregoing that the ARCA provides for a
direct guarantee by the government to pay PIATCOs loans not
only to its Senior Lenders but all other entities who provided
PIATCO funds or services upon PIATCOs default in its loan
obligation with its Senior Lenders. The fact that the Governments
obligation to pay PIATCOs lenders for the latters obligation would
only arise after the Senior Lenders fail to appoint a qualified nominee
or transferee does not detract from the fact that, should the
conditions as stated in the contract occur, the ARCA still obligates
the Government to pay any and all amounts owed by PIATCO to its
lenders in connection with NAIA IPT III. Worse, the conditions that
would make the Government liable for PIATCOs debts is triggered by
PIATCOs own default of its loan obligations to its Senior Lenders to
which loan contracts the Government was never a party to. The
Government was not even given an option as to what course of
action it should take in case PIATCO defaulted in the payment of its
senior loans. The Government, upon PIATCOs default, would be
merely notified by the Senior Lenders of the same and it is the Senior
Lenders who are authorized to appoint a qualified nominee or
transferee. Should the Senior Lenders fail to make such an
appointment, the Government is then automatically obligated to
directly deal and negotiate with the Senior Lenders regarding NAIA
IPT III. The only way the Government would not be liable for
PIATCOs debt is for a qualified nominee or transferee to be
appointed in place of PIATCO to continue the construction, operation
and maintenance of NAIA IPT III. This pre-condition, however, will
not take the contract out of the ambit of a direct guarantee by the
government as the existence, availability and willingness of a
qualified nominee or transferee is totally out of the governments
control. As such the Government is virtually at the mercy of
PIATCO (that it would not default on its loan obligations to its Senior
Lenders), the Senior Lenders (that they would appoint a qualified
nominee or transferee or agree to some other arrangement with the
Government) and the existence of a qualified nominee or transferee
who is able and willing to take the place of PIATCO in NAIA IPT III.
The proscription against government guarantee in any form
is one of the policy considerations behind the BOT Law. Clearly, in
the present case, the ARCA obligates the Government to pay for all
loans, advances and obligations arising out of financial facilities
extended to PIATCO for the implementation of the NAIA IPT III
project should PIATCO default in its loan obligations to its Senior
Lenders and the latter fails to appoint a qualified nominee or
PIATCOs loans should the conditions as set forth in the ARCA
arise. This is a form of direct government guarantee.
The BOT Law and its implementing rules provide that in order
for an unsolicited proposal for a BOT project may be accepted, the
following conditions must first be met: (1) the project involves a new
concept in technology and/or is not part of the list of priority
projects, (2) no direct government guarantee, subsidy or equity is
required, and (3) the government agency or local government unit
has invited by publication other interested parties to a public bidding
and conducted the same.[56] The failure to meet any of the above
conditions will result in the denial of the proposal. It is further
provided that the presence of direct government guarantee, subsidy
or equity will necessarily disqualify a proposal from being treated and
accepted as an unsolicited proposal.[57] The BOT Law clearly and
strictly prohibits direct government guarantee, subsidy and equity in
unsolicited proposals that the mere inclusion of a provision to that
effect is fatal and is sufficient to deny the proposal. It stands to
reason therefore that if a proposal can be denied by reason of the
existence of direct government guarantee, then its inclusion in the
contract executed after the said proposal has been accepted is
likewise sufficient to invalidate the contract itself. A prohibited
provision, the inclusion of which would result in the denial of a
proposal cannot, and should not, be allowed to later on be inserted in
the contract resulting from the said proposal. The basic rules of
justice and fair play alone militate against such an occurrence and
must not, therefore, be countenanced particularly in this instance
where the government is exposed to the risk of shouldering hundreds
of million of dollars in debt.
This Court has long and consistently adhered to the legal
maxim that those that cannot be done directly cannot be done
indirectly.[58] To declare the PIATCO contracts valid despite the
clear statutory prohibition against a direct government guarantee
would not only make a mockery of what the BOT Law seeks to
prevent -- which is to expose the government to the risk of
incurring a monetary obligation resulting from a contract of loan
between the project proponent and its lenders and to which the
Government is not a party to -- but would also render the BOT
Law useless for what it seeks to achieve - to make use of the
resources of the private sector in the financing, operation and
maintenance of infrastructure and development projects[59] which
are necessary for national growth and development but which the
government, unfortunately, could ill-afford to finance at this
point in time.
IV
Temporary takeover of business affected with public interest
Article XII, Section 17 of the 1987 Constitution provides:
Section 17. In times of national emergency, when the public interest
so requires, the State may, during the emergency and under
reasonable terms prescribed by it, temporarily take over or direct the
operation of any privately owned public utility or business affected
with public interest.
The above provision pertains to the right of the State in times
of national emergency, and in the exercise of its police power, to
temporarily take over the operation of any business affected with
public interest. In the 1986 Constitutional Commission, the term
national emergency was defined to include threat from external
aggression, calamities or national disasters, but not strikes unless it is
of such proportion that would paralyze government service.[60] The
duration of the emergency itself is the determining factor as to how
long the temporary takeover by the government would last.[61] The
temporary takeover by the government extends only to the
operation of the business and not to the ownership thereof. As such
the government is not required to compensate the private entity-
owner of the said business as there is no transfer of ownership,
whether permanent or temporary. The private entity-owner affected
by the temporary takeover cannot, likewise, claim just compensation
for the use of the said business and its properties as the temporary
takeover by the government is in exercise of its police power and not
of its power of eminent domain.
Article V, Section 5.10 (c) of the 1997 Concession Agreement
provides:
Section 5.10 Temporary Take-over of operations by GRP.
.
(c) In the event the development Facility or any part thereof and/or
the operations of Concessionaire or any part thereof, become the
subject matter of or be included in any notice, notification, or
declaration concerning or relating to acquisition, seizure or
appropriation by GRP in times of war or national emergency, GRP
shall, by written notice to Concessionaire, immediately take over the
operations of the Terminal and/or the Terminal Complex. During
such take over by GRP, the Concession Period shall be suspended;
provided, that upon termination of war, hostilities or national
emergency, the operations shall be returned to Concessionaire, at
which time, the Concession period shall commence to run
again.Concessionaire shall be entitled to reasonable
compensation for the duration of the temporary take over by
GRP, which compensation shall take into account the reasonable
cost for the use of the Terminal and/or Terminal Complex, (which
is in the amount at least equal to the debt service requirements of
Concessionaire, if the temporary take over should occur at the time
when Concessionaire is still servicing debts owed to project lenders),
any loss or damage to the Development Facility, and other
consequential damages. If the parties cannot agree on the
reasonable compensation of Concessionaire, or on the liability of
GRP as aforesaid, the matter shall be resolved in accordance with
Section 10.01 [Arbitration]. Any amount determined to be payable by
GRP to Concessionaire shall be offset from the amount next payable
by Concessionaire to GRP.[62]
PIATCO cannot, by mere contractual stipulation, contravene
the Constitutional provision on temporary government takeover
and obligate the government to pay reasonable cost for the use of
the Terminal and/or Terminal Complex.[63] Article XII, section 17 of
the 1987 Constitution envisions a situation wherein the exigencies of
the times necessitate the government to temporarily take over or
direct the operation of any privately owned public utility or business
affected with public interest. It is the welfare and interest of the
public which is the paramount consideration in determining whether
or not to temporarily take over a particular business. Clearly, the
State in effecting the temporary takeover is exercising its police
power. Police power is the most essential, insistent, and illimitable of
powers.[64] Its exercise therefore must not be unreasonably
hampered nor its exercise be a source of obligation by the
government in the absence of damage due to arbitrariness of its
exercise.[65] Thus, requiring the government to pay reasonable
compensation for the reasonable use of the property pursuant to the
operation of the business contravenes the Constitution.
V Concessionaire is under no legal obligation to permit such carry-
Regulation of Monopolies
A monopoly is a privilege or peculiar advantage vested in one
or more persons or companies, consisting in the exclusive right (or
power) to carry on a particular business or trade, manufacture a
particular article, or control the sale of a particular
commodity.[66] The 1987 Constitution strictly regulates
monopolies, whether private or public, and even provides for their
prohibition if public interest so requires. Article XII, Section 19 of the
1987 Constitution states:
Sec. 19. The state shall regulate or prohibit monopolies when the
public interest so requires. No combinations in restraint of trade or
unfair competition shall be allowed.
Clearly, monopolies are not per se prohibited by the
Constitution but may be permitted to exist to aid the government in
carrying on an enterprise or to aid in the performance of various
services and functions in the interest of the public.[67] Nonetheless, a
determination must first be made as to whether public interest
requires a monopoly. As monopolies are subject to abuses that can
inflict severe prejudice to the public, they are subject to a higher level
of State regulation than an ordinary business undertaking.
In the cases at bar, PIATCO, under the 1997 Concession
Agreement and the ARCA, is granted the exclusive right to operate a
commercial international passenger terminal within the Island of
Luzon at the NAIA IPT III.[68] This is with the exception of already
existing international airports in Luzon such as those located in the
Subic Bay Freeport Special Economic Zone (SBFSEZ), Clark Special
Economic Zone (CSEZ) and in Laoag City.[69] As such, upon
commencement of PIATCOs operation of NAIA IPT III, Terminals 1
and 2 of NAIA would cease to function as international passenger
terminals. This, however, does not prevent MIAA to use Terminals 1
and 2 as domestic passenger terminals or in any other manner as it
may deem appropriate except those activities that would compete
with NAIA IPT III in the latters operation as an international
passenger terminal.[70] The right granted to PIATCO to exclusively
operate NAIA IPT III would be for a period of twenty-five (25) years
from the In-Service Date[71] and renewable for another twenty-five
(25) years at the option of the government.[72] Both the 1997
Concession Agreement and the ARCA further provide that, in view
of the exclusive right granted to PIATCO, the concession
contracts of the service providers currently servicing Terminals 1
and 2 would no longer be renewed and those concession contracts
whose expiration are subsequent to the In-Service Date would
cease to be effective on the said date.[73]
The operation of an international passenger airport terminal is
no doubt an undertaking imbued with public interest. In entering into
a BuildOperate-and-Transfer contract for the construction, operation
and maintenance of NAIA IPT III, the government has determined
that public interest would be served better if private sector resources
were used in its construction and an exclusive right to operate be
granted to the private entity undertaking the said project, in this case
PIATCO. Nonetheless, the privilege given to PIATCO is subject to
reasonable regulation and supervision by the Government through
the MIAA, which is the government agency authorized to operate the
NAIA complex, as well as DOTC, the department to which MIAA is
attached.[74]
This is in accord with the Constitutional mandate that a
monopoly which is not prohibited must be regulated.[75] While it is
the declared policy of the BOT Law to encourage private sector
participation by providing a climate of minimum government
regulations,[76] the same does not mean that Government must
completely surrender its sovereign power to protect public interest in
the operation of a public utility as a monopoly. The operation of said
public utility can not be done in an arbitrary manner to the detriment
of the public which it seeks to serve. The right granted to the public
utility may be exclusive but the exercise of the right cannot run
riot. Thus, while PIATCO may be authorized to exclusively operate
NAIA IPT III as an international passenger terminal, the Government,
through the MIAA, has the right and the duty to ensure that it is done
in accord with public interest. PIATCOs right to operate NAIA IPT III
cannot also violate the rights of third parties.
Section 3.01(e) of the 1997 Concession Agreement and the
ARCA provide:
3.01 Concession Period
.
(e) GRP confirms that certain concession agreements relative to
certain services and operations currently being undertaken at the
Ninoy Aquino International Airport passenger Terminal I have a
validity period extending beyond the In-Service Date. GRP
through DOTC/MIAA, confirms that these services and
operations shall not be carried over to the Terminal and the
over except through a separate agreement duly entered into with
Concessionaire. In the event Concessionaire becomes involved in any
litigation initiated by any such concessionaire or operator, GRP
undertakes and hereby holds Concessionaire free and harmless on
full indemnity basis from and against any loss and/or any liability
resulting from any such litigation, including the cost of litigation and
the reasonable fees paid or payable to Concessionaires counsel of
choice, all such amounts shall be fully deductible by way of an offset
from any amount which the Concessionaire is bound to pay GRP
under this Agreement.
During the oral arguments on December 10, 2002, the counsel
for the petitioners-in-intervention for G.R. No. 155001 stated that
there are two service providers whose contracts are still existing and
whose validity extends beyond the In-Service Date. One contract
remains valid until 2008 and the other until 2010.[77]
We hold that while the service providers presently operating at
NAIA Terminal 1 do not have an absolute right for the renewal or the
extension of their respective contracts, those contracts whose
duration extends beyond NAIA IPT IIIs In-Service-Date should not be
unduly prejudiced. These contracts must be respected not just by the
parties thereto but also by third parties. PIATCO cannot, by law and
certainly not by contract, render a valid and binding contract
nugatory. PIATCO, by the mere expedient of claiming an exclusive
right to operate, cannot require the Government to break its
contractual obligations to the service providers. In contrast to the
arrastre and stevedoring service providers in the case of Anglo-Fil
Trading Corporation v. Lazaro[78] whose contracts consist of
temporary hold-over permits, the affected service providers in the
cases at bar, have a valid and binding contract with the Government,
through MIAA, whose period of effectivity, as well as the other terms
and conditions thereof, cannot be violated.
In fine, the efficient functioning of NAIA IPT III is imbued with
public interest. The provisions of the 1997 Concession Agreement
and the ARCA did not strip government, thru the MIAA, of its right to
supervise the operation of the whole NAIA complex, including NAIA
IPT III. As the primary government agency tasked with the job,[79] it is
MIAAs responsibility to ensure that whoever by contract is given the
right to operate NAIA IPT III will do so within the bounds of the law
and with due regard to the rights of third parties and above all, the
interest of the public.
 VI
CONCLUSION
In sum, this Court rules that in view of the absence of the
requisite financial capacity of the Paircargo Consortium, predecessor
of respondent PIATCO, the award by the PBAC of the contract for
the construction, operation and maintenance of the NAIA IPT III is
null and void. Further, considering that the 1997 Concession
Agreement contains material and substantial amendments, which
amendments had the effect of converting the 1997 Concession
Agreement into an entirely different agreement from the contract
bidded upon, the 1997 Concession Agreement is similarly null and
void for being contrary to public policy. The provisions
under Sections 4.04(b) and (c) in relation to Section 1.06 of the 1997
Concession Agreement and Section 4.04(c) in relation to Section 1.06
of the ARCA, which constitute a direct government guarantee
expressly prohibited by, among others, the BOT Law and its
Implementing Rules and Regulations are also null and void. The
Supplements, being accessory contracts to the ARCA, are likewise
null and void.
WHEREFORE, the 1997 Concession Agreement, the Amended
and Restated Concession Agreement and the Supplements thereto
are set aside for being null and void.
SO ORDERED.
G.R. No. 146364. June 3, 2004]
COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and
EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review[1] of the 21 June 2000
Decision[2] and 14 December 2000 Resolution of the Court of Appeals
in CA-G.R. SP No. 43129. The Court of Appeals set aside the 11
November 1996 decision[3] of the Regional Trial Court of Quezon
City, Branch 81,[4] affirming the 15 December 1995 decision[5] of the
Metropolitan Trial Court of Quezon City, Branch 31.[6]
The Antecedents
In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a
certain Pedro Perez for the rights over a 250-square meter lot in
Barrio Payatas, Quezon City. Pajuyo then constructed a house made
of light materials on the lot. Pajuyo and his family lived in the house
from 1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie
Guevarra (Guevarra) executed a Kasunduan or agreement. Pajuyo, as
owner of the house, allowed Guevarra to live in the house for free
provided Guevarra would maintain the cleanliness and orderliness of
the house. Guevarra promised that he would voluntarily vacate the
premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of
the house and demanded that Guevarra vacate the house. Guevarra
refused.
Pajuyo filed an ejectment case against Guevarra with the
Metropolitan Trial Court of Quezon City, Branch 31 (MTC).
In his Answer, Guevarra claimed that Pajuyo had no valid title
or right of possession over the lot where the house stands because
the lot is within the 150 hectares set aside by Proclamation No. 137
for socialized housing. Guevarra pointed out that from December
1985 to September 1994, Pajuyo did not show up or communicate
with him. Guevarra insisted that neither he nor Pajuyo has valid title
to the lot.
On 15 December 1995, the MTC rendered its decision in favor
of Pajuyo. The dispositive portion of the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for
the plaintiff and against defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or
any other person or persons claiming any right under
him;
B) pay unto plaintiff the sum of THREE HUNDRED
PESOS (P300.00) monthly as reasonable
compensation for the use of the premises starting
from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of
attorneys fees; and
D) pay the cost of suit.
SO ORDERED.[7]
Aggrieved, Guevarra appealed to the Regional Trial Court of
Quezon City, Branch 81 (RTC).
On 11 November 1996, the RTC affirmed the MTC decision. The
dispositive portion of the RTC decision reads:
WHEREFORE, premises considered, the Court finds no reversible
error in the decision appealed from, being in accord with the law and
evidence presented, and the same is hereby affirmed en toto.
SO ORDERED.[8]
Guevarra received the RTC decision on 29 November
1996. Guevarra had only until 14 December 1996 to file his appeal
with the Court of Appeals. Instead of filing his appeal with the Court
of Appeals, Guevarra filed with the Supreme Court a Motion for
Extension of Time to File Appeal by Certiorari Based on Rule 42
(motion for extension). Guevarra theorized that his appeal raised
pure questions of law. The Receiving Clerk of the Supreme Court
received the motion for extension on 13 December 1996 or one day
before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with
the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court
issued a Resolution[9] referring the motion for extension to the Court
of Appeals which has concurrent jurisdiction over the case. The case
presented no special and important matter for the Supreme Court to
take cognizance of at the first instance.
On 28 January 1997, the Thirteenth Division of the Court of
Appeals issued a Resolution[10] granting the motion for extension
conditioned on the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to
comment on Guevaras petition for review. On 11 April 1997, Pajuyo
filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision
reversing the RTC decision. The dispositive portion of the decision
reads:
WHEREFORE, premises considered, the assailed Decision of the
court a quo in Civil Case No. Q-96-26943 is REVERSED and SET
ASIDE; and it is hereby declared that the ejectment case filed against
defendant-appellant is without factual and legal basis.
SO ORDERED.[11]
Pajuyo filed a motion for reconsideration of the
decision. Pajuyo pointed out that the Court of Appeals should have
dismissed outright Guevarras petition for review because it was filed
out of time. Moreover, it was Guevarras counsel and not Guevarra
who signed the certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution
denying Pajuyos motion for reconsideration. The dispositive portion
of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is
hereby DENIED. No costs.
SO ORDERED.[12]
The Ruling of the MTC
The MTC ruled that the subject of the agreement between
Pajuyo and Guevarra is the house and not the lot. Pajuyo is the owner
of the house, and he allowed Guevarra to use the house only by
tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos
demand made Guevarras continued possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord
and tenant relationship between Pajuyo and Guevarra. The terms of
the Kasunduanbound Guevarra to return possession of the house on
demand.
The RTC rejected Guevarras claim of a better right under
Proclamation No. 137, the Revised National Government Center
Housing Project Code of Policies and other pertinent laws. In an
ejectment suit, the RTC has no power to decide Guevarras rights
under these laws. The RTC declared that in an ejectment case, the
only issue for resolution is material or physical possession, not
ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are
squatters. Pajuyo and Guevarra illegally occupied the contested lot
which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was
also a squatter. Perez had no right or title over the lot because it is
public land. The assignment of rights between Perez and Pajuyo, and
the Kasunduan between Pajuyo and Guevarra, did not have any legal
effect. Pajuyo and Guevarra are in pari delicto or in equal fault. The
court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which
held that the Kasunduan between Pajuyo and Guevarra created a
legal tie akin to that of a landlord and tenant relationship. The Court
of Appeals ruled that the Kasunduan is not a lease contract but
a commodatum because the agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim
the property, the appellate court held that Guevarra has a better
right over the property under Proclamation No. 137. President
Corazon C. Aquino (President Aquino) issued Proclamation No. 137
on 7 September 1987. At that time, Guevarra was in physical
possession of the property. Under Article VI of the Code of Policies
Beneficiary Selection and Disposition of Homelots and Structures in
the National Housing Project (the Code), the actual occupant or
caretaker of the lot shall have first priority as beneficiary of the
project. The Court of Appeals concluded that Guevarra is first in the
hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate
court debunked Pajuyos claim that Guevarra filed his motion for
extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for
extension filed before the Supreme Court was stamped 13 December
1996 at 4:09 PM by the Supreme Courts Receiving Clerk. The Court
of Appeals concluded that the motion for extension bore a date,
contrary to Pajuyos claim that the motion for extension was
undated. Guevarra filed the motion for extension on time on 13
December 1996 since he filed the motion one day before the
expiration of the reglementary period on 14 December 1996. Thus,
the motion for extension properly complied with the condition
imposed by the Court of Appeals in its 28 January 1997
Resolution. The Court of Appeals explained that the thirty-day
extension to file the petition for review was deemed granted because
of such compliance.
The Court of Appeals rejected Pajuyos argument that the
appellate court should have dismissed the petition for review
because it was Guevarras counsel and not Guevarra who signed the
certification against forum-shopping. The Court of Appeals pointed
out that Pajuyo did not raise this issue in his Comment. The Court of
Appeals held that Pajuyo could not now seek the dismissal of the
case after he had extensively argued on the merits of the case.This
technicality, the appellate court opined, was clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS
AUTHORITY AND DISCRETION TANTAMOUNT TO LACK OF
JURISDICTION:
1) in GRANTING, instead of denying, Private
Respondents Motion for an Extension of
thirty days to file petition for review at
the time when there was no more period
to extend as the decision of the Regional
Trial Court had already become final and
executory.
2) in giving due course, instead of dismissing,
private respondents Petition for Review
even though the certification against
forum-shopping was signed only by
counsel instead of by petitioner himself.
3) in ruling that the Kasunduan voluntarily
entered into by the parties was in fact a
commodatum, instead of a Contract of
Lease as found by the Metropolitan Trial
Court and in holding that the
ejectment case filed against defendant-
appellant is without legal and factual
basis.
4) in reversing and setting aside the Decision
of the Regional Trial Court in Civil Case
No. Q-96-26943 and in holding that the
parties are in pari delicto being both
squatters, therefore, illegal occupants of
the contested parcel of land.
5) in deciding the unlawful detainer case
based on the so-called Code of Policies of
the National Government Center
Housing Project instead of deciding the
same under the Kasunduan voluntarily
executed by the parties, the terms and
conditions of which are the laws between
themselves.[13]
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However,
we find merit in the substantive issues Pajuyo is submitting for
resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed
outright Guevarras petition for review because the RTC decision had
already become final and executory when the appellate court acted
on Guevarras motion for extension to file the petition. Pajuyo points
out that Guevarra had only one day before the expiry of his period to
appeal the RTC decision. Instead of filing the petition for review with
the Court of Appeals, Guevarra filed with this Court an undated
motion for extension of 30 days to file a petition for review. This
Court merely referred the motion to the Court of Appeals. Pajuyo
believes that the filing of the motion for extension with this Court did
not toll the running of the period to perfect the appeal. Hence, when
the Court of Appeals received the motion, the period to appeal had
already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their
appellate jurisdiction are appealable to the Court of Appeals by
petition for review in cases involving questions of fact or mixed
questions of fact and law.[14] Decisions of the regional trial courts
involving pure questions of law are appealable directly to this Court
by petition for review.[15] These modes of appeal are now embodied
in Section 2, Rule 41 of the 1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved
only questions of law. Guevarra thus filed his motion for extension to
file petition for review before this Court on 14 December 1996. On 3
January 1997, Guevarra then filed his petition for review with this
Court. A perusal of Guevarras petition for review gives the impression
that the issues he raised were pure questions of law. There is a
question of law when the doubt or difference is on what the law is on
a certain state of facts.[16] There is a question of fact when the doubt
or difference is on the truth or falsity of the facts alleged.[17]
In his petition for review before this Court, Guevarra no longer
disputed the facts. Guevarras petition for review raised these
questions: (1) Do ejectment cases pertain only to possession of a
structure, and not the lot on which the structure stands? (2) Does a
suit by a squatter against a fellow squatter constitute a valid case for
ejectment? (3) Should a Presidential Proclamation governing the lot
on which a squatters structure stands be considered in an ejectment
suit filed by the owner of the structure?
These questions call for the evaluation of the rights of the
parties under the law on ejectment and the Presidential
Proclamation. At first glance, the questions Guevarra raised
appeared purely legal. However, some factual questions still have to
be resolved because they have a bearing on the legal questions raised
in the petition for review. These factual matters refer to the metes
and bounds of the disputed property and the application of Guevarra
as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of
time to file a petition for review. In Lacsamana v. Second Special
Cases Division of the Intermediate Appellate Court,[18] we declared
that the Court of Appeals could grant extension of time in appeals by
petition for review. In Liboro v. Court of Appeals,[19] we clarified that
the prohibition against granting an extension of time applies only in a
case where ordinary appeal is perfected by a mere notice of
appeal. The prohibition does not apply in a petition for review where
the pleading needs verification. A petition for review, unlike an
ordinary appeal, requires preparation and research to present a
persuasive position.[20] The drafting of the petition for review entails
more time and effort than filing a notice of appeal.[21] Hence, the
Court of Appeals may allow an extension of time to file a petition for
review.
In the more recent case of Commissioner of Internal Revenue
v. Court of Appeals,[22] we held that Liboros clarification
of Lacsamana is consistent with the Revised Internal Rules of the
Court of Appeals and Supreme Court Circular No. 1-91. They all allow
an extension of time for filing petitions for review with the Court of
Appeals. The extension, however, should be limited to only fifteen
days save in exceptionally meritorious cases where the Court of
Appeals may grant a longer period.
A judgment becomes final and executory by operation of law.
Finality of judgment becomes a fact on the lapse of the reglementary
period to appeal if no appeal is perfected.[23] The RTC decision could
not have gained finality because the Court of Appeals granted the 30-
day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion
when it approved Guevarras motion for extension. The Court of
Appeals gave due course to the motion for extension because it
complied with the condition set by the appellate court in its
resolution dated 28 January 1997. The resolution stated that the
Court of Appeals would only give due course to the motion for
extension if filed on time. The motion for extension met this
condition.
The material dates to consider in determining the timeliness of
the filing of the motion for extension are (1) the date of receipt of the
judgment or final order or resolution subject of the petition, and (2)
the date of filing of the motion for extension.[24] It is the date of the
filing of the motion or pleading, and not the date of execution, that
determines the timeliness of the filing of that motion or
pleading. Thus, even if the motion for extension bears no date, the
date of filing stamped on it is the reckoning point for determining the
timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the
RTC decision. Guevarra filed his motion for extension before this
Court on 13 December 1996, the date stamped by this Courts
Receiving Clerk on the motion for extension. Clearly, Guevarra filed
the motion for extension exactly one day before the lapse of the
reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed
Guevarras appeal on technical grounds, Pajuyo did not ask the
appellate court to deny the motion for extension and dismiss the
petition for review at the earliest opportunity. Instead, Pajuyo
vigorously discussed the merits of the case. It was only when the
Court of Appeals ruled in Guevarras favor that Pajuyo raised the
procedural issues against Guevarras petition for review.
A party who, after voluntarily submitting a dispute for
resolution, receives an adverse decision on the merits, is estopped
from attacking the jurisdiction of the court.[25] Estoppel sets in not
because the judgment of the court is a valid and conclusive
adjudication, but because the practice of attacking the courts
jurisdiction after voluntarily submitting to it is against public
policy.[26]
In his Comment before the Court of Appeals, Pajuyo also failed
to discuss Guevarras failure to sign the certification against forum
shopping. Instead, Pajuyo harped on Guevarras counsel signing the
verification, claiming that the counsels verification is insufficient
since it is based only on mere information.
A partys failure to sign the certification against forum shopping
is different from the partys failure to sign personally the
verification. The certificate of non-forum shopping must be signed by
the party, and not by counsel.[27] The certification of counsel renders
the petition defective.[28]
On the other hand, the requirement on verification of a
pleading is a formal and not a jurisdictional requisite.[29] It is intended
simply to secure an assurance that what are alleged in the pleading
are true and correct and not the product of the imagination or a
matter of speculation, and that the pleading is filed in good
faith.[30] The party need not sign the verification. A partys
representative, lawyer or any person who personally knows the truth
of the facts alleged in the pleading may sign the verification.[31]
We agree with the Court of Appeals that the issue on the
certificate against forum shopping was merely an afterthought.
Pajuyo did not call the Court of Appeals attention to this defect at the
early stage of the proceedings. Pajuyo raised this procedural issue
too late in the proceedings.
Absence of Title over the Disputed Property will not Divest the
Courts of Jurisdiction to Resolve the Issue of Possession
Settled is the rule that the defendants claim of ownership of
the disputed property will not divest the inferior court of its
jurisdiction over the ejectment case.[32] Even if the pleadings raise the
issue of ownership, the court may pass on such issue to determine
only the question of possession, especially if the ownership is
inseparably linked with the possession.[33] The adjudication on the
issue of ownership is only provisional and will not bar an action
between the same parties involving title to the land.[34] This doctrine
is a necessary consequence of the nature of the two summary actions
of ejectment, forcible entry and unlawful detainer, where the only
issue for adjudication is the physical or material possession over the
real property.[35]
In this case, what Guevarra raised before the courts was that he
and Pajuyo are not the owners of the contested property and that
they are mere squatters. Will the defense that the parties to the
ejectment case are not the owners of the disputed lot allow the
courts to renounce their jurisdiction over the case? The Court of
Appeals believed so and held that it would just leave the parties
where they are since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not
at issue in an action for recovery of possession. The parties cannot
present evidence to prove ownership or right to legal possession
except to prove the nature of the possession when necessary to
resolve the issue of physical possession.[36]The same is true when the
defendant asserts the absence of title over the property. The absence
of title over the contested lot is not a ground for the courts to
withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment
proceedings is - who is entitled to the physical possession of the
premises, that is, to the possession de facto and not to the
possession de jure.[37] It does not even matter if a partys title to the
property is questionable,[38] or when both parties intruded into public
land and their applications to own the land have yet to be approved
by the proper government agency.[39] Regardless of the actual
condition of the title to the property, the party in peaceable quiet
possession shall not be thrown out by a strong hand, violence or
terror.[40] Neither is the unlawful withholding of property
allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such
possession even against the owner himself.[41] Whatever may be the
character of his possession, if he has in his favor prior possession in
time, he has the security that entitles him to remain on the property
until a person with a better right lawfully ejects him.[42] To repeat, the
only issue that the court has to settle in an ejectment suit is the right
to physical possession.
In Pitargue v. Sorilla,[43] the government owned the land in
dispute. The government did not authorize either the plaintiff or the
defendant in the case of forcible entry case to occupy the land. The
plaintiff had prior possession and had already introduced
improvements on the public land. The plaintiff had a pending
application for the land with the Bureau of Lands when the
defendant ousted him from possession. The plaintiff filed the action
of forcible entry against the defendant. The government was not a
party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to
settle the issue of possession because while the application of the
plaintiff was still pending, title remained with the government, and
the Bureau of Public Lands had jurisdiction over the case. We
disagreed with the defendant. We ruled that courts have jurisdiction
to entertain ejectment suits even before the resolution of the
application. The plaintiff, by priority of his application and of his
entry, acquired prior physical possession over the public land applied
for as against other private claimants. That prior physical possession
enjoys legal protection against other private claimants because only
a court can take away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the defendant
in Pitargue[44] as squatters, strictly speaking, their entry into the
disputed land was illegal.Both the plaintiff and defendant entered
the public land without the owners permission. Title to the land
remained with the government because it had not awarded to
anyone ownership of the contested public land. Both the plaintiff and
the defendant were in effect squatting on government property. Yet,
we upheld the courts jurisdiction to resolve the issue of possession
even if the plaintiff and the defendant in the ejectment case did not
have any title over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue
of physical possession because of the public need to preserve the
basic policy behind the summary actions of forcible entry and
unlawful detainer. The underlying philosophy behind ejectment suits
is to prevent breach of the peace and criminal disorder and to compel
the party out of possession to respect and resort to the law alone to
obtain what he claims is his.[45] The party deprived of possession
must not take the law into his own hands.[46] Ejectment proceedings
are summary in nature so the authorities can settle speedily actions
to recover possession because of the overriding need to quell social
disturbances.[47]
We further explained in Pitargue the greater interest that is at
stake in actions for recovery of possession. We made the following
pronouncements in Pitargue:
The question that is before this Court is: Are courts without
jurisdiction to take cognizance of possessory actions involving these
public lands before final award is made by the Lands Department,
and before title is given any of the conflicting claimants? It is one of
utmost importance, as there are public lands everywhere and there
are thousands of settlers, especially in newly opened regions. It also
involves a matter of policy, as it requires the determination of the
respective authorities and functions of two coordinate branches of
the Government in connection with public land conflicts.
Our problem is made simple by the fact that under the Civil Code,
either in the old, which was in force in this country before the
American occupation, or in the new, we have a possessory action, the
aim and purpose of which is the recovery of the physical possession
of real property, irrespective of the question as to who has the title
thereto. Under the Spanish Civil Code we had the accion interdictal, a
summary proceeding which could be brought within one year from
dispossession (Roman Catholic Bishop of Cebu vs. Mangaron, 6 Phil.
286, 291); and as early as October 1, 1901, upon the enactment of the
Code of Civil Procedure (Act No. 190 of the Philippine Commission)
we implanted the common law action of forcible entry (section 80 of
Act No. 190), the object of which has been stated by this Court to
be to prevent breaches of the peace and criminal disorder which
would ensue from the withdrawal of the remedy, and the
reasonable hope such withdrawal would create that some
advantage must accrue to those persons who, believing themselves
entitled to the possession of property, resort to force to gain
possession rather than to some appropriate action in the court to
assert their claims. (Supia and Batioco vs. Quintero and Ayala, 59
Phil. 312, 314.) So before the enactment of the first Public Land Act
(Act No. 926) the action of forcible entry was already available in the
courts of the country. So the question to be resolved is, Did the
Legislature intend, when it vested the power and authority to
alienate and dispose of the public lands in the Lands Department, to
exclude the courts from entertaining the possessory action of forcible
entry between rival claimants or occupants of any land before award
thereof to any of the parties? Did Congress intend that the lands
applied for, or all public lands for that matter, be removed from the
jurisdiction of the judicial Branch of the Government, so that any
troubles arising therefrom, or any breaches of the peace or disorders
caused by rival claimants, could be inquired into only by the Lands
Department to the exclusion of the courts? The answer to this
question seems to us evident. The Lands Department does not have
the means to police public lands; neither does it have the means to
prevent disorders arising therefrom, or contain breaches of the peace
among settlers; or to pass promptly upon conflicts of
possession. Then its power is clearly limited to disposition and
alienation, and while it may decide conflicts of possession in order
to make proper award, the settlement of conflicts of possession
which is recognized in the court herein has another ultimate
purpose, i.e., the protection of actual possessors and occupants
with a view to the prevention of breaches of the peace. The power
to dispose and alienate could not have been intended to include the
power to prevent or settle disorders or breaches of the peace among
rival settlers or claimants prior to the final award. As to this,
therefore, the corresponding branches of the Government must
continue to exercise power and jurisdiction within the limits of their
respective functions. The vesting of the Lands Department with
authority to administer, dispose, and alienate public lands,
therefore, must not be understood as depriving the other branches
of the Government of the exercise of the respective functions or
powers thereon, such as the authority to stop disorders and quell
breaches of the peace by the police, the authority on the part of the
courts to take jurisdiction over possessory actions arising therefrom
not involving, directly or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in American
courts to the effect that courts have no jurisdiction to determine the
rights of claimants to public lands, and that until the disposition of
the land has passed from the control of the Federal Government, the
courts will not interfere with the administration of matters
concerning the same. (50 C. J. 1093-1094.) We have no quarrel with
this principle. The determination of the respective rights of rival
claimants to public lands is different from the determination of who
has the actual physical possession or occupation with a view to
protecting the same and preventing disorder and breaches of the
peace. A judgment of the court ordering restitution of the possession
of a parcel of land to the actual occupant, who has been deprived
thereof by another through the use of force or in any other illegal
manner, can never be prejudicial interference with the disposition or
alienation of public lands. On the other hand, if courts were deprived
of jurisdiction of cases involving conflicts of possession, that threat
of judicial action against breaches of the peace committed on public
lands would be eliminated, and a state of lawlessness would
probably be produced between applicants, occupants or squatters,
where force or might, not right or justice, would rule.
It must be borne in mind that the action that would be used to solve
conflicts of possession between rivals or conflicting applicants or
claimants would be no other than that of forcible entry. This action,
both in England and the United States and in our jurisdiction, is a
summary and expeditious remedy whereby one in peaceful and quiet
possession may recover the possession of which he has been
deprived by a stronger hand, by violence or terror; its ultimate object
being to prevent breach of the peace and criminal disorder. (Supia
and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of
the remedy is mere possession as a fact, of physical possession, not a
legal possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or
right to possession is never in issue in an action of forcible entry; as a
matter of fact, evidence thereof is expressly banned, except to prove
the nature of the possession. (Second 4, Rule 72, Rules of Court.)
With this nature of the action in mind, by no stretch of the
imagination can conclusion be arrived at that the use of the remedy
in the courts of justice would constitute an interference with the
alienation, disposition, and control of public lands. To limit ourselves
to the case at bar can it be pretended at all that its result would in any
way interfere with the manner of the alienation or disposition of the
land contested? On the contrary, it would facilitate adjudication, for
the question of priority of possession having been decided in a final
manner by the courts, said question need no longer waste the time of
the land officers making the adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari
delicto to this case.
Articles 1411 and 1412 of the Civil Code[48] embody the principle
of pari delicto. We explained the principle of pari delicto in these
words:
The rule of pari delicto is expressed in the maxims ex dolo malo non
eritur actio and in pari delicto potior est conditio defedentis. The law
will not aid either party to an illegal agreement. It leaves the parties
where it finds them.[49]
The application of the pari delicto principle is not absolute, as
there are exceptions to its application. One of these exceptions is
where the application of the pari delicto rule would violate well-
established public policy.[50]
In Drilon v. Gaurana,[51] we reiterated the basic policy behind
the summary actions of forcible entry and unlawful detainer. We held
that:
It must be stated that the purpose of an action of forcible entry and
detainer is that, regardless of the actual condition of the title to the
property, the party in peaceable quiet possession shall not be turned
out by strong hand, violence or terror. In affording this remedy of
restitution the object of the statute is to prevent breaches of the
peace and criminal disorder which would ensue from the withdrawal
of the remedy, and the reasonable hope such withdrawal would
create that some advantage must accrue to those persons who,
believing themselves entitled to the possession of property, resort to
force to gain possession rather than to some appropriate action in
the courts to assert their claims. This is the philosophy at the
foundation of all these actions of forcible entry and detainer which
are designed to compel the party out of possession to respect and
resort to the law alone to obtain what he claims is his.[52]
Clearly, the application of the principle of pari delicto to a case
of ejectment between squatters is fraught with danger. To shut out
relief to squatters on the ground of pari delicto would openly invite
mayhem and lawlessness. A squatter would oust another squatter
from possession of the lot that the latter had illegally occupied,
emboldened by the knowledge that the courts would leave them
where they are. Nothing would then stand in the way of the ousted
squatter from re-claiming his prior possession at all cost.
Petty warfare over possession of properties is precisely what
ejectment cases or actions for recovery of possession seek to
prevent.[53] Even the owner who has title over the disputed property
cannot take the law into his own hands to regain possession of his
property. The owner must go to court.
Courts must resolve the issue of possession even if the parties
to the ejectment suit are squatters. The determination of priority and
superiority of possession is a serious and urgent matter that cannot
be left to the squatters to decide. To do so would make squatters
receive better treatment under the law. The law restrains property
owners from taking the law into their own hands. However, the
principle of pari delicto as applied by the Court of Appeals would give
squatters free rein to dispossess fellow squatters or violently retake
possession of properties usurped from them. Courts should not leave
squatters to their own devices in cases involving recovery of
possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple
case of ejectment. The Court of Appeals refused to rule on the issue
of physical possession. Nevertheless, the appellate court held that
the pivotal issue in this case is who between Pajuyo and Guevarra has
the priority right as beneficiary of the contested land under
Proclamation No. 137.[54] According to the Court of Appeals,
Guevarra enjoys preferential right under Proclamation No. 137
because Article VI of the Code declares that the actual occupant or
caretaker is the one qualified to apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal
basis.
First. Guevarra did not present evidence to show that the
contested lot is part of a relocation site under Proclamation No.
137. Proclamation No. 137 laid down the metes and bounds of the
land that it declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the
land specified by Proclamation No. 137. Guevarra had the burden to
prove that the disputed lot is within the coverage of Proclamation
No. 137. He failed to do so.
Second. The Court of Appeals should not have given credence
to Guevarras unsubstantiated claim that he is the beneficiary of
Proclamation No. 137. Guevarra merely alleged that in the survey the
project administrator conducted, he and not Pajuyo appeared as the
actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits
of Proclamation No. 137. Pajuyo allowed Guevarra to occupy the
disputed property in 1985. President Aquino signed Proclamation No.
137 into law on 11 March 1986. Pajuyo made his earliest demand for
Guevarra to vacate the property in September 1994.
During the time that Guevarra temporarily held the property up
to the time that Proclamation No. 137 allegedly segregated the
disputed lot, Guevarra never applied as beneficiary of Proclamation
No. 137. Even when Guevarra already knew that Pajuyo was
reclaiming possession of the property, Guevarra did not take any step
to comply with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the
coverage of Proclamation No. 137 and Guevarra has a pending
application over the lot, courts should still assume jurisdiction and
resolve the issue of possession. However, the jurisdiction of the
courts would be limited to the issue of physical possession only.
In Pitargue,[55] we ruled that courts have jurisdiction over
possessory actions involving public land to determine the issue of
physical possession. The determination of the respective rights of
rival claimants to public land is, however, distinct from the
determination of who has the actual physical possession or who has a
better right of physical possession.[56] The administrative disposition
and alienation of public lands should be threshed out in the proper
government agency.[57]
The Court of Appeals determination of Pajuyo and Guevarras
rights under Proclamation No. 137 was premature. Pajuyo and
Guevarra were at most merely potential beneficiaries of the law.
Courts should not preempt the decision of the administrative agency
mandated by law to determine the qualifications of applicants for the
acquisition of public lands. Instead, courts should expeditiously
resolve the issue of physical possession in ejectment cases to prevent
disorder and breaches of peace.[58]
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyos prior possession of the lot
and ownership of the house built on it. Guevarra expressly admitted
the existence and due execution of
the Kasunduan. The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas,
Quezon City, ay nagbibigay pahintulot kay G. Eddie Guevarra, na
pansamantalang manirahan sa nasabing bahay at lote ng walang
bayad. Kaugnay nito, kailangang panatilihin nila ang kalinisan at
kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis
ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside
in the house and lot free of rent, but Guevarra was under obligation
to maintain the premises in good condition. Guevarra promised to
vacate the premises on Pajuyos demand but Guevarra broke his
promise and refused to heed Pajuyos demand to vacate.
These facts make out a case for unlawful detainer. Unlawful
detainer involves the withholding by a person from another of the
possession of real property to which the latter is entitled after the
expiration or termination of the formers right to hold
possession under a contract, express or implied.[59]
Where the plaintiff allows the defendant to use his property by
tolerance without any contract, the defendant is necessarily bound
by an implied promise that he will vacate on demand, failing which,
an action for unlawful detainer will lie.[60] The defendants refusal to
comply with the demand makes his continued possession of the
property unlawful.[61] The status of the defendant in such a case is
similar to that of a lessee or tenant whose term of lease has expired
but whose occupancy continues by tolerance of the owner.[62]
This principle should apply with greater force in cases where a
contract embodies the permission or tolerance to use the
property. The Kasunduanexpressly articulated Pajuyos forbearance.
Pajuyo did not require Guevarra to pay any rent but only to maintain
the house and lot in good condition.Guevarra expressly vowed in
the Kasunduan that he would vacate the property on demand.
Guevarras refusal to comply with Pajuyos demand to vacate made
Guevarras continued possession of the property unlawful.
We do not subscribe to the Court of Appeals theory that
the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers to
another something not consumable so that the latter may use the
same for a certain time and return it.[63] An essential feature
of commodatum is that it is gratuitous. Another feature
of commodatum is that the use of the thing belonging to another is
for a certain period.[64] Thus, the bailor cannot demand the return of
the thing loaned until after expiration of the period stipulated, or
after accomplishment of the use for which
the commodatum is constituted.[65] If the bailor should have urgent
need of the thing, he may demand its return for temporary use.[66] If
the use of the thing is merely tolerated by the bailor, he can demand
the return of the thing at will, in which case the contractual relation is
called aprecarium.[67] Under the Civil Code, precarium is a kind
of commodatum.[68]
The Kasunduan reveals that the accommodation accorded by
Pajuyo to Guevarra was not essentially gratuitous. While
the Kasunduan did not require Guevarra to pay rent, it obligated him
to maintain the property in good condition. The imposition of this
obligation makes the Kasunduan a contract different from
a commodatum. The effects of the Kasunduan are also different from
that of a commodatum. Case law on ejectment has treated
relationship based on tolerance as one that is akin to a landlord-
tenant relationship where the withdrawal of permission would result
in the termination of the lease.[69] The tenants withholding of the
property would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and
Guevarra is one of commodatum, Guevarra as bailee would still have
the duty to turn over possession of the property to Pajuyo, the
bailor. The obligation to deliver or to return the thing received
attaches to contracts for safekeeping, or contracts of commission,
administration and commodatum.[70] These contracts certainly
involve the obligation to deliver or return the thing received.[71]
Guevarra turned his back on the Kasunduan on the sole ground
that like him, Pajuyo is also a squatter. Squatters, Guevarra pointed
out, cannot enter into a contract involving the land they illegally
occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between
squatters. Guevarra freely entered into the Kasunduan. Guevarra
cannot now impugn the Kasunduan after he had benefited from
it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who
between Pajuyo and Guevarra has a right to physical possession of
the contested property.The Kasunduan is the undeniable evidence of
Guevarras recognition of Pajuyos better right of physical possession.
Guevarra is clearly a possessor in bad faith. The absence of a contract
would not yield a different result, as there would still be an implied
promise to vacate.
Guevarra contends that there is a pernicious evil that is sought
to be avoided, and that is allowing an absentee squatter who (sic)
makes (sic) a profit out of his illegal act.[72] Guevarra bases his
argument on the preferential right given to the actual occupant or
caretaker under Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra
because Guevarra stayed in the property without paying any
rent. There is also no proof that Pajuyo is a professional squatter who
rents out usurped properties to other squatters. Moreover, it is for
the proper government agency to decide who between Pajuyo and
Guevarra qualifies for socialized housing. The only issue that we are
addressing is physical possession.
Prior possession is not always a condition sine qua non in
ejectment.[73] This is one of the distinctions between forcible entry
and unlawful detainer.[74]In forcible entry, the plaintiff is deprived of
physical possession of his land or building by means of force,
intimidation, threat, strategy or stealth. Thus, he must allege and
prove prior possession.[75] But in unlawful detainer, the defendant
unlawfully withholds possession after the expiration or termination
of his right to possess under any contract, express or implied. In such
a case, prior physical possession is not required.[76]
Pajuyos withdrawal of his permission to Guevarra terminated
the Kasunduan. Guevarras transient right to possess the property
ended as well.Moreover, it was Pajuyo who was in actual possession
of the property because Guevarra had to seek Pajuyos permission to
temporarily hold the property and Guevarra had to follow the
conditions set by Pajuyo in the Kasunduan. Control over the property
still rested with Pajuyo and this is evidence of actual possession.
Pajuyos absence did not affect his actual possession of the
disputed property. Possession in the eyes of the law does not mean
that a man has to have his feet on every square meter of the ground
before he is deemed in possession.[77] One may acquire possession
not only by physical occupation, but also by the fact that a thing is
subject to the action of ones will.[78] Actual or physical occupation is
not always necessary.[79]
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we
declared that squatters and intruders who clandestinely enter into
titled government property cannot, by such act, acquire any legal
right to said property.[80] We made this declaration because the
person who had title or who had the right to legal possession over
the disputed property was a party in the ejectment suit and that
party instituted the case against squatters or usurpers.
In this case, the owner of the land, which is the government, is
not a party to the ejectment case. This case is between
squatters. Had the government participated in this case, the courts
could have evicted the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property
is not impleaded in this case, we cannot evict on our own the parties.
Such a ruling would discourage squatters from seeking the aid of the
courts in settling the issue of physical possession. Stripping both the
plaintiff and the defendant of possession just because they are
squatters would have the same dangerous implications as the
application of the principle of pari delicto. Squatters would then
rather settle the issue of physical possession among themselves than
seek relief from the courts if the plaintiff and defendant in the
ejectment case would both stand to lose possession of the disputed
property. This would subvert the policy underlying actions for
recovery of possession.
Since Pajuyo has in his favor priority in time in holding the
property, he is entitled to remain on the property until a person who
has title or a better right lawfully ejects him. Guevarra is certainly not
that person. The ruling in this case, however, does not preclude
Pajuyo and Guevarra from introducing evidence and presenting
arguments before the proper administrative agency to establish any
right to which they may be entitled under the law.[81]
In no way should our ruling in this case be interpreted to
condone squatting. The ruling on the issue of physical possession
does not affect title to the property nor constitute a binding and
conclusive adjudication on the merits on the issue of
ownership.[82] The owner can still go to court to recover lawfully the
property from the person who holds the property without legal
title. Our ruling here does not diminish the power of government
agencies, including local governments, to condemn, abate, remove
or demolish illegal or unauthorized structures in accordance with
existing laws.
Attorneys Fees and Rentals
The MTC and RTC failed to justify the award of P3,000
attorneys fees to Pajuyo. Attorneys fees as part of damages are
awarded only in the instances enumerated in Article 2208 of the Civil
Code.[83] Thus, the award of attorneys fees is the exception rather
than the rule.[84] Attorneys fees are not awarded every time a party
prevails in a suit because of the policy that no premium should be
placed on the right to litigate.[85] We therefore delete the attorneys
fees awarded to Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC
assessed against Guevarra. Guevarra did not dispute this factual
finding of the two courts. We find the amount reasonable
compensation to Pajuyo. The P300 monthly rental is counted from
the last demand to vacate, which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21
June 2000 and Resolution dated 14 December 2000 of the Court of
Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The Decision dated
11 November 1996 of the Regional Trial Court of Quezon City, Branch
81 in Civil Case No. Q-96-26943, affirming the Decision dated 15
December 1995 of the Metropolitan Trial Court of Quezon City,
Branch 31 in Civil Case No. 12432, is REINSTATED with
MODIFICATION. The award of attorneys fees is deleted. No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, Ynares-
Santiago, and Azcuna, JJ., concur.