G.R. No.
L-10134 June 29, 1957 students, boarded a jeep and when the same started to run, he took
SABINA EXCONDE, plaintiff-appellant,
vs.
DELFIN CAPUNO and DANTE CAPUNO, defendants-appellees.
BAUTISTA ANGELO, J.:
Dante Capuno, son of Delfin Capuno, was accused of double homicide
through reckless imprudence for the death of Isidoro Caperina and
Amado Ticzon on March 31, 1949 in the Court of First Instance of
Laguna (Criminal Case No. 15001). During the trial, Sabina Exconde, as
mother of the deceased Isidoro Caperina, reserved her right to bring a
separate civil action for damages against the accused. After trial, Dante
Capuno was found guilty of the crime charged and, on appeal, the
Court Appeals affirmed the decision. Dante Capuno was only (15) years
old when he committed the crime.
In line with her reservation, Sabina Exconde filed the present action
against Delfin Capuno and his son Dante Capuno asking for damages in
the aggregate amount of P2,959.00 for the death of her son Isidoro
Caperiña. Defendants set up the defense that if any one should be held
liable for the death of Isidoro Caperina, he is Dante Capuno and not his
father Delfin because at the time of the accident, the former was not
under the control, supervision and custody, of the latter. This defense
was sustained by the lower court and, as a consequence it only
convicted Dante Capuno to pay the damages claimed in the complaint.
From decision, plaintiff appealed to the Court of Appeals but the case
was certified to us on the ground that the appeal only involves
questions of law.
It appears that Dante Capuno was a member of the Boy Scouts
Organization and a student of the Bilintawak Elementary School
situated in a barrio in the City of San Pablo and on March 31, 1949 he
attended a parade in honor of Dr. Jose Rizal in said city upon instruction
of the city school's supervisor. From the school Dante, with other
hold of the wheel and drove it while the driver sat on his left side. They
have not gone far when the jeep turned turtle and two of its
passengers, Amado Ticzon and Isidore Caperiña, died as a
consequence. It further appears that Delfin Capuno, father of Dante,
was not with his son at the time of the accident, nor did he know that
his son was going to attend a parade. He only came to know it when
his son told him after the accident that he attended the parade upon
instruction of his teacher.
The only issue involved in this appeal is whether defendant Delfin
Capuno can be held civilly liable, jointly and severally with his son
Dante, for damages resulting from the death of Isidoro Caperiña
caused by the negligent act of minor Dante Capuno.
The case comes under Article 1903 of the Spanish Civil Code, paragraph
1 and 5, which provides:
ART. 1903. The obligation impossed by the next preceding articles is
enforceable not only for personal acts and omissions, but also for those
of persons for whom another is responsible.
The father, and, in case of his death or incapacity, the mother, are
liable for any damages caused by the minor children who live with
them.
xxx xxx xxx
Finally, teachers or directors of arts and trades are liable for any
damages caused by their pupils or apprentices while they are under
their custody.
Plaintiff contends that defendant Delfin Capuno is liable for the
damages in question jointly and severally with his son Dante because
at the time the latter committed the negligent act which resulted in the
death of the victim, he was a minor and was then living with his father,
and inasmuch as these facts are not disputed, the civil liability of the
father is evident. And so, plaintiff contends, the lower court erred in
relieving the father from liability.
We find merit in this claim. It is true that under the law above quoted,
"teachers or directors of arts and trades are liable for any damages
caused by their pupils or apprentices while they are under their
custody", but this provision only applies to an institution of arts and
trades and not to any academic educational institution (Padilla, Civil
Law, 1953, Ed., Vol. IV, p. 841; See 12 Manresa, 4th Ed., p. 557). Here
Dante capuno was then a student of the Balintawak Elementary School
and as part of his extra-curricular activity, he attended the parade in
honor of Dr. Jose Rizal upon instruction of the city school's supervisor.
And it was in connection with that parade that Dante boarded a jeep
with some companions and while driving it, the accident occurred. In
the circumstances, it is clear that neither the head of that school, nor
the city school's supervisor, could be held liable for the negligent act of
Dante because he was not then a student of an institute of arts and
trades as provided by law.
The civil liability which the law impose upon the father, and, in case of
his death or incapacity, the mother, for any damages that may be
caused by the minor children who live with them, is obvious. This is
necessary consequence of the parental authority they exercise over
them which imposes upon the parents the "duty of supporting them,
keeping them in their company, educating them and instructing them
in proportion to their means", while, on the other hand, gives them the
"right to correct and punish them in moderation" (Articles 154 and 155,
Spanish Civil Code). The only way by which they can relieve themselves
of this liability is if they prove that they exercised all the diligence of a
good father of a family to prevent the damage(Article 1903, last
paragraph, Spanish Civil Code). This defendants failed to prove.
WHEREFORE, the decision appealed from is modified in the sense that
defendants Delfin Capuno and Dante Capuno shall pay to plaintiff,
jointly and severally, the sum of P2,959.00 as damages, and the costs
of action.
G.R. No. L-14342 May 30, 1960
CIRIACO L. MERCADO, petitioner,
vs.
THE COURT OF APPEALS, MANUEL QUISUMBING, JR., ET
AL., respondents.
LABRADOR, J.:
This is a petition to review a decision of the Court of Appeals, which
condemned petitioner to pay P2,000 as moral damages and P50 for
medical expenses, for a physical injury caused by the son of petitioner,
Augusto Mercado, on a classmate, Manuel Quisumbing, Jr., both pupils
of the Lourdes Catholic School, Kanlaon, Quezon City. The case had
originated in the Court of First Instance of Manila, Hon. Bienvenido A.
Tan, presiding, which dismissed the complaint filed by Manuel
Quisumbing, Jr. and his father against petitioner, father of the above-
mentioned Mercado. The facts found by the Court of Appeals are as
follows:
Plaintiff-appellant Manuel Quisumbing, Jr. is the son of his co-plaintiff-
appellants Ana Pineda and Manuel L. Quisumbing, while Augusto
Mercado is the son of defendant-appellee Ciriaco L. Mercado, Manuel
Quisumbing, Jr. and Augusto Mercado were classmates in the Lourdes
Catholic School on Kanlaon, Quezon City. A "pitogo", which figures
prominently in this case, may be described as an empty nutshell used
by children as a piggy bank. On February 22, 1956, Augusto Mercado
and Manuel Quisumbing, Jr. quarrelled over a "pitogo". As a result,
Augusto wounded Manuel, Jr. on the right cheek with a piece of razor.
xxx xxx xxx
The facts of record clearly show that it was Augusto Mercado who
started the aggression. Undeniably, the "pitogo" belonged to Augusto
Mercado but he lent it to Benedicto P. Lim and in turn Benedicto lent
it to Renato Legaspi. Renato was not aware that the "pitogo" belonged
to Augusto, because right after Benedicto gave it to him, Benedicto ran
away to get a basket ball with which they could play. Manuel
Quisumbing, Jr. was likewise unaware that the "pitogo" belonged to
Augusto. He thought it was the "pitogo" of Benedicto P. Lim, so that
when Augusto attempted to get the "pitogo" from Renato, Manuel, Jr.
told him not to do so because Renato was better at putting the chain
into the holes of the "pitogo". However, Augusto resented Manuel, Jr.'s
remark and he aggresively pushed the latter. The fight started then.
After Augusto gave successive blows to Manuel, Jr., and the latter was
clutching his stomach which bore the brunt of Augusto's anger,
Augusto seeing that Manuel, Jr. was in a helpless position, cut him on
the right check with a piece of razor.
xxx xxx xxx
Although the doctor who treated Manuel Quisumbing, Jr., Antonio B.
Past, testified for plaintiffs-appellants, he did not declare as to the
amount of fees he collected from plaintiff-appellants for the treatment
of Manuel, Jr. the child was not even hospitalized for the wound. We
believe that the sum of P50.00 is a fair approximation of the medical
expenses incurred by plaintiffs-appellants.
xxx xxx xxx
The damages specified in paragraphs C and D of the aforequoted
portion of plaintiffs-appellant's complaint come under the class of
moral damages. The evidence of record shows that the child suffered
moral damages by reason of the wound inflicted by Augusto Mercado.
Though such kind of damages cannot be fully appreciated in terms of
money, we believe that the sum of P2,000.00 would fully compensate
the child.
As second cause of action, plaintiffs-appellants pray for P5,000.00
covering the moral damages they allegedly suffered due to their son's
being wounded; and the sum of P3,000.00 as attorney's fees. The facts
of record do not warrant the granting of moral damages to plaintiffs-
appellants Manuel Quisumbing and Ana Pineda. "In law mental
anguish is restricted, as a rule, to such mental pain or suffering as arises
from an injury or wrong to the person himself, as distinguished from
that form of mental suffering which is the accompaniment of sympathy
or sorrow for another's suffering of which arises from a contemplation
of wrong committed on the person of another. Pursuant to the rule
stated, a husband or wife cannot recover for mental suffering caused
by his or her sympathy for the other's suffering. Nor can a parent
recover for mental distress and anxiety on account of physical injury
sustained by a child or for anxiety for the safety of his child placed in
peril by the negligence of another." (15 Am. Jur. 597). Plaintiffs-
appellants are not entitled to attorney's fees, it not appearing that
defendant-appellee had wantonly disregarded their claim for
damages.
In the first, second and third assignments of error, counsel for
petitioner argues that since the incident of the inflicting of the wound
on respondent occurred in a Catholic School (during recess time),
through no fault of the father, petitioner herein, the teacher or head
of the school should be held responsible instead of the latter. This
precise question was brought before this Court in Exconde vs. Capuno
and Capuno, 101 Phil., 843, but we held, through Mr. Justice Bautista:
We find merit in this claim. It is true that under the law above-quoted,
"teachers or directors of arts and trades are liable for any damage
caused by their pupils or apprentices while they are under their
custody", but this provision only applies to an institution of arts and
trades and not to any academic educational institution (Padilla, Civil
Law, 1953 Ed., Vol. IV, p. 841; See 12 Manresa, 4th Ed., p. 557)
The last paragraph of Article 2180 of the Civil Code, upon which
petitioner rests his claim that the school where his son was studying
should be made liable, is as follows:
ART. 2180. . . .
Lastly, teachers or heads of establishments of arts and trades shall be
liable for damages caused by their pupils and students or apprentices,
so long as they remain in their custody.
It would be seem that the clause "so long as they remain in their
custody," contemplates a situation where the pupil lives and boards
with the teacher, such that the control, direction and influence on the
pupil supersedes those of the parents. In these circumstances the
control or influence over the conduct and actions of the pupil would
pass from the father and mother to the teacher; and so would the
responsibility for the torts of the pupil. Such a situation does not
appear in the case at bar; the pupils appear to go to school during
school hours and go back to their homes with their parents after school
is over. The situation contemplated in the last paragraph of Article
2180 does not apply, nor does paragraph 2 of said article, which makes
father or mother responsible for the damages caused by their minor
children. The claim of petitioner that responsibility should pass to the
school must, therefore, be held to be without merit.
We next come to the claim of petitioner that the moral damages fixed
at P2,000 are excessive. We note that the wound caused to respondent
was inflicted in the course of an ordinary or common fight between
boys in a grade school. The Court of Appeals fixed the medical expenses
incurred in treating and curing the wound at P50. Said court stated that
the wound did not even require hospitalization. Neither was Mercado
found guilty of any offense nor the scar in Quisumbing's face
pronounced to have caused a deformity, unlike the case of Araneta, et
al. vs. Arreglado, et al., 104 Phil., 529; 55 Off. Gaz. (9) 1561. Petitioner's
counsel argues that if death call for P3,000 to P6,000, certainly the
incised wound could cause mental pain and suffering to the tune of
P2,000.
In the decision of the Court of Appeals, said court pronounces that the
child Quisumbing suffered moral damages "by reason of the wound
inflicted by Augusto Mercado." While moral damages included physical
suffering, which must have been caused to the wounded boy
Quisumbing (Art. 2217, Civil Code), the decision of the court below
does not declare that any of the cases specified in Article 2219 of the
Civil Code in which moral damages may be recovered, has attended or
occasioned the physical injury. The only possible circumstance in the
case at bar in which moral damages are recoverable would be if a
criminal offense or a quasi-delict has been committed.
It does not appear that a criminal action for physical injuries was ever
presented. The offender, Augusto Mercado, was nine years old and it
does not appear that he had acted with discernment when he inflicted
the physical injuries on Manuel Quisumbing, Jr.
It is possible that the Court of Appeals may have considered Augusto
Mercado responsible for or guilty, of a quasi-delict causing physical
injuries, within the meaning of paragraph 2 of Article 2219. Even if we
assume that said court considered Mercado guilty of a quasi-delict
when it imposed the moral damages, yet the facts found by said court
indicate that Augusto's resentment, which motivated the assault, was
occasioned by the fact that Manuel, Jr. had tried to intervene in or
interfere with the attempt of Mercado to get "his pitogo from Renato."
This is, according to the decision appealed from, the reason why
Mercado was incensed and pushed Quisumbing who, in turn, also
pushed Mercado. It is, therefore, apparent that the proximate cause of
the injury caused to Quisumbing was Quisumbing's own fault or
negligence for having interfered with Mercado while trying to get the
pitogo from another boy. (Art. 2179, Civil Code.)
After considering all the facts as found by the Court of Appeals, we find
that none of the cases mentioned in Article 2219 of the Civil Code,
which authorizes the grant of moral damages, was shown to have
existed. Consequently, the grant of moral damages is not justified.
For the foregoing considerations, the decision appealed from is hereby
reversed and the petitioner is declared exempt or free from the
payment of moral damages. The award of P50 for medical expenses,
however, is hereby affirmed. Without costs.
G.R. No. L-29025 October 4, 1971
Spouses MOISES P. PALISOC and BRIGIDA P. PALISOC, plaintiffs-
appellants,
vs.
ANTONIO C. BRILLANTES and TEODOSIO V. VALENTON, owner and
President, respectively, of a school of arts and trades, known under
the name and style of "Manila Technical Institute" (M.I.T.), VIRGILIO
L. DAFFON and SANTIAGO M. QUIBULUE, defendants-appellees.
TEEHANKEE, J.:
An appeal in forma pauperis on pure questions of law from a decision
of the Court of First Instance of Manila. .
Plaintiffs-appellants as parents of their sixteen-year old son,
Dominador Palisoc, and a student in automotive mechanics at the
Manila Technical Institute, Quezon Boulevard, Manila, had filed on
May 19, 1966, the action below for damages arising from the death on
March 10, 1966 of their son at the hands of a fellow student, defendant
Virgilio L. Daffon, at the laboratory room of the said Institute. .
Defendants, per the trial court's decision, are: "(T)he defendant
Antonio C. Brillantes, at the time when the incident which gave rise to
his action occurred was a member of the Board of Directors of the
institute;1 the defendant Teodosio Valenton, the president thereof;
the defendant Santiago M. Quibulue, instructor of the class to which
the deceased belonged; and the defendant Virgilio L. Daffon, a fellow
student of the deceased. At the beginning the Manila Technical
Institute was a single proprietorship, but lately on August 2, 1962, it
was duly incorporated."
The facts that led to the tragic death of plaintiffs' son were thus
narrated by the trial court: "(T)he deceased Dominador Palisoc and the
defendant Virgilio L. Daffon were classmates, and on the afternoon of
March 10, 1966, between two and three o'clock, they, together with
another classmate Desiderio Cruz were in the laboratory room located
on the ground floor. At that time the classes were in recess. Desiderio
Cruz and Virgilio L. Daffon were working on a machine while
Dominador Palisoc was merely looking on at them. Daffon made a
remark to the effect that Palisoc was acting like a foreman. Because of
this remark Palisoc slapped slightly Daffon on the face. Daffon, in
retaliation, gave Palisoc a strong flat blow on the face, which was
followed by other fist blows on the stomach. Palisoc retreated
apparently to avoid the fist blows, but Daffon followed him and both
exchanged blows until Palisoc stumbled on an engine block which
caused him to fall face downward. Palisoc became pale and fainted.
First aid was administered to him but he was not revived, so he was
immediately taken to a hospital. He never regained consciousness;
finally he died. The foregoing is the substance of the testimony of
Desiderio Cruz, the lone witness to the incident."
The trial court expressly gave credence to this version of the incident,
as testified to by the lone eyewitness, Desiderio Cruz, a classmate of
the protagonists, as that of a disinterested witness who "has no motive
or reason to testify one way or another in favor of any party" and
rejected the self-exculpatory version of defendant Daffon denying that
he had inflicted any fist blows on the deceased. .
With the postmortem findings of Dr. Angelo Singian of the Manila
Police Department who performed the autopsy re "Cause of death:
shock due to traumatic fracture of theribs (6th and 7th, left, contusion
of the pancreas and stomach with intra-gastric hemorrhage and slight
subarachnoid hemorrhage on the brain," and his testimony that these
internal injuries of the deceased were caused "probably by strong fist
blows," the trial court found defendant Daffon liable for the quasi
delict under Article 2176 of the Civil Code.3 It held that "(T)he act,
therefore, of the accused Daffon in giving the deceased strong
fistblows in the stomach which ruptured his internal organs and caused
his death falls within the purview of this article of the Code."4
The trial court, however, absolved from liability the three other
defendants-officials of the Manila Technical Institute, in this wise:
... Their liabilities are based on the provisions of Article 2180 of the
New Civil Code which reads:
Art. 2180. ... .
Lastly, teachers or heads of establishments of arts and trades shall be
liable for damages caused by their pupils and students and
apprentices, so long as they remain in their custody.
In the opinion of the Court, this article of the Code is not applicable to
the case at bar, since this contemplates the situation where the control
or influence of the teachers and heads of school establishments over
the conduct and actions by the pupil supersedes those of the parents.
CIVIL LAW: DAMAGES ART 2180. NEW CIVIL CODE CONSTRUED: — The
clause "so long as they remain in their custody" contained in Article
2180 of the new civil code contemplated a situation where the pupil
lives and boards with the teacher, such that the control or influence on
the pupil supersedes those of the parents. In those circumstances the
control or influence over the conduct and actions of the pupil as well
as the responsibilities for their sort would pass from the father and
mother to the teachers. (Ciriaco L. Mercado, Petitioner vs. the Court of
Appeals, Manuel Quisumbing, Jr., et al., respondents, G.R. No. L-14862,
May 30, 1960).5
There is no evidence that the accused Daffon lived and boarded with
his teacher or the other defendant officials of the school. These
defendants cannot therefore be made responsible for the tort of the
defendant Daffon.
Judgment was therefore rendered by the trial court as follows:
1. Sentencing the defendant Virgilio L. Daffon to pay the plaintiffs as
heirs of the deceased Dominador Palisoc (a) P6,000.00 for the death of
Dominador Palisoc; (b) P3,375.00 for actual and compensatory
expenses; (c) P5,000.00 for moral damages; (d) P10,000.00 for loss of
earning power, considering that the deceased was only between
sixteen and seventeen years, and in good health when he died, and (e)
P2,000.00 for attorney's fee, plus the costs of this action. .
2. Absolving the other defendants. .
3. Dismissing the defendants' counterclaim for lack of merit.
Plaintiffs' appeal raises the principal legal question that under the
factual findings of the trial court, which are now beyond review, the
trial court erred in absolving the defendants-school officials instead of
holding them jointly and severally liable as tortfeasors, with defendant
Daffon, for the damages awarded them as a result of their son's death.
The Court finds the appeal, in the main, to be meritorious. .
1. The lower court absolved defendants-school officials on the ground
that the provisions of Article 2180, Civil Code, which expressly hold
"teachers or heads of establishments of arts and trades ... liable for
damages caused by their pupils and students and apprentices, so long
as they remain in their custody," are not applicable to to the case at
bar, since "there is no evidence that the accused Daffon [who inflicted
the fatal fistblows]6 lived and boarded with his teacher or the other
defendants-officials of the school. These defendants cannot therefore
be made responsible for the tort of the defendant Daffon."
The lower court based its legal conclusion expressly on the Court's
dictum in Mercado vs. Court of Appeals,7 that "(I)t would seem that the
clause "so long as they remain in their custody," contemplates a
situation where the pupil lives and boards with the teacher, such that
the control, direction and influence on the pupil supersedes those of
the parents. In these circumstances the control or influence over the
conduct and actions of the pupil would pass from the father and
mother to the teacher; and so would the responsibility for the torts of
the pupil. Such a situation does not appear in the case at bar; the pupils
appear to go to school during school hours and go back to their homes
with their parents after school is over." This dictum had been made in
rejecting therein petitioner father's contention that his minor son's
school, Lourdes Catholic School at Kanlaon, Quezon City [which was
not a party to the case] should be held responsible, rather than him as
father, for the moral damages of P2,000.00 adjudged against him for
the physical injury inflicted by his son on a classmate. [A cut on the
right cheek with a piece of razor which costs only P50.00 by way of
medical expenses to treat and cure, since the wound left no scar.] The
moral damages award was after all set aside by the Court on the
ground that none of the specific cases provided in Article 2219, Civil
Code, for awarding moral damages had been established, petitioner's
son being only nine years old and not having been shown to have
"acted with discernment" in inflicting the injuries on his classmate. .
The dictum in Mercado was based in turn on another dictum in the
earlier case of Exconde vs. Capuno,8 where the only issue involved as
expressly stated in the decision, was whether the therein defendant-
father could be civilly liable for damages resulting from a death caused
in a motor vehicle accident driven unauthorizedly and negligently by
his minor son, (which issue was resolved adversely against the father).
Nevertheless, the dictum in such earlier case that "It is true that under
the law abovequoted, teachers or directors of arts and trades are liable
for any damage caused by their pupils or apprentices while they are
under their custody, but this provision only applies to an institution of
arts and trades and not to any academic educational institution" was
expressly cited and quoted in Mercado. .
2. The case at bar was instituted directly against the school officials and
squarely raises the issue of liability of teachers and heads of schools
under Article 2180, Civil Code, for damages caused by their pupils and
students against fellow students on the school premises. Here, the
parents of the student at fault, defendant Daffon, are not involved,
since Daffon was already of age at the time of the tragic incident. There
is no question, either, that the school involved is a non-academic
school,9 the Manila Technical Institute being admittedly a technical
vocational and industrial school. .
The Court holds that under the cited codal article, defendants head and
teacher of the Manila Technical Institute (defendants Valenton and
Quibulue, respectively) are liable jointly and severally for damages to
plaintiffs-appellants for the death of the latter's minor son at the hands
of defendant Daffon at the school's laboratory room. No liability
attaches to defendant Brillantes as a mere member of the school's
board of directors. The school itself cannot be held similarly liable,
since it has not been properly impleaded as party defendant. While
plaintiffs sought to so implead it, by impleading improperly defendant
Brillantes, its former single proprietor, the lower court found that it
had been incorporated since August 2, 1962, and therefore the school
itself, as thus incorporated, should have been brought in as party
defendant. Plaintiffs failed to do so, notwithstanding that Brillantes
and his co-defendants in their reply to plaintiffs' request for admission
had expressly manifested and made of record that "defendant Antonio
C. Brillantes is not the registered owner/head of the "Manila Technical
Institute" which is now a corporation and is not owned by any
individual person."10
3. The rationale of such liability of school heads and teachers for the
tortious acts of their pupils and students, so long as they remain in their
custody, is that they stand, to a certain extent, as to their pupils and
students, in loco parentis and are called upon to "exercise reasonable
supervision over the conduct of the child."11 This is expressly provided
for in Articles 349, 350 and 352 of the Civil Code.12 In the law of torts,
the governing principle is that the protective custody of the school
heads and teachers is mandatorily substituted for that of the parents,
and hence, it becomes their obligation as well as that of the school
itself to provide proper supervision of the students' activities during
the whole time that they are at attendance in the school, including
recess time, as well as to take the necessary precautions to protect the
students in their custody from dangers and hazards that would
reasonably be anticipated, including injuries that some student
themselves may inflict willfully or through negligence on their fellow
students. .
4. As tersely summarized by Mr. Justice J.B.L. Reyes in his dissenting
opinion in Exconde, "the basis of the presumption of negligence of Art.
1903 [now 2180] is some culpa in vigilando that the parents, teachers,
etc. are supposed to have incurred in the exercise of their
authority" 13 and "where the parent places the child under the
effective authority of the teacher, the latter, and not the parent,
should be the one answerable for the torts committed while under his
custody, for the very reason that the parent is not supposed to
interfere with the discipline of the school nor with the authority and
supervision of the teacher while the child is under instruction." The
school itself, likewise, has to respond for the fault or negligence of its
school head and teachers under the same cited article.14
5. The lower court therefore erred in law in absolving defendants-
school officials on the ground that they could be held liable under
Article 2180, Civil Code, only if the student who inflicted the fatal
fistblows on his classmate and victim "lived and boarded with his
teacher or the other defendants officials of the school." As stated
above, the phrase used in the cited article — "so long as (the students)
remain in their custody" means the protective and supervisory custody
that the school and its heads and teachers exercise over the pupils and
students for as long as they are at attendance in the school, including
recess time. There is nothing in the law that requires that for such
liability to attach the pupil or student who commits the tortious act
must live and board in the school, as erroneously held by the lower
court, and the dicta in Mercado (as well as in Exconde) on which it
relied, must now be deemed to have been set aside by the present
decision. .
6. Defendants Valenton and Quibulue as president and teacher-in-
charge of the school must therefore be held jointly and severally liable
for the quasi-delict of their co-defendant Daffon in the latter's having
caused the death of his classmate, the deceased Dominador Palisoc.
The unfortunate death resulting from the fight between the
protagonists-students could have been avoided, had said defendants
but complied with their duty of providing adequate supervision over
the activities of the students in the school premises to protect their
students from harm, whether at the hands of fellow students or other
parties. At any rate, the law holds them liable unless they relieve
themselves of such liability, in compliance with the last paragraph of
Article 2180, Civil Code, by "(proving) that they observed all the
diligence of a good father of a family to prevent damage." In the light
of the factual findings of the lower court's decision, said defendants
failed to prove such exemption from liability. .
7. Plaintiffs-appellees' contention that the award of P6,000.00 as
indemnity for the death of their son should be increased to P12,000.00
as set by the Court in People vs. Pantoja,15 and observed in all death
indemnity cases thereafter is well taken. The Court, in Pantoja, after
noting the decline in the purchasing power of the Philippine peso, had
expressed its "considered opinion that the amount of award of
compensatory damages for death caused by a crime or quasi-
delict should now be P12,000.00." The Court thereby adjusted the
minimum amount of "compensatory damages for death caused by a
crime or quasi-delict" as per Article 2206, Civil Code, from the old
stated minimum of P3,000.00 to P12,000.00, which amount is to be
awarded "even though there may have been mitigating circumstances"
pursuant to the express provisions of said codal article. .
8. Plaintiffs-appellees' other claims on appeal that the lower court
should have awarded exemplary damages and imposed legal interest
on the total damages awarded, besides increasing the award of
attorney's fees all concern matters that are left by law to the discretion
of the trial court and the Court has not been shown any error or abuse
in the exercise of such discretion on the part of the trial
court.16 Decisive here is the touchstone provision of Article 2231, Civil
Code, that "In quasi-delicts, exemplary damages may be granted if the
defendant acted with gross negligence." No gross negligence on the
part of defendants was found by the trial court to warrant the
imposition of exemplary damages, as well as of interest and increased
attorney's fees, and the Court has not been shown in this appeal any
compelling reason to disturb such finding. .
ACCORDINGLY, the judgment appealed from is modified so as to
provide as follows: .
1. Sentencing the defendants Virgilio L. Daffon, TeodosioV. Valenton
and Santiago M. Quibulue jointly and severally to pay plaintiffs as heirs
of the deceased Dominador Palisoc (a) P12,000.00 for the death of
Dominador Palisoc; (b) P3,375.00 for actual and compensatory
expenses; (c) P5,000.00 for moral, damages; (d) P10,000.00 for loss of
earning power and (e) P2,000.00 for attorney's fee, plus the costs of
this action in both instances; 2. absolving defendant Antonio C.
Brillantes from the complaint; and 3. dismissing defendants'
counterclaims. .
G.R. No. L-47745 April 15, 1988
JOSE S. AMADORA, LORETA A. AMADORA, JOSE A. AMADORA JR.,
NORMA A. YLAYA PANTALEON A. AMADORA, JOSE A. AMADORA III,
LUCY A. AMADORA, ROSALINDA A. AMADORA, PERFECTO A.
AMADORA, SERREC A. AMADORA, VICENTE A. AMADORA and MARIA
TISCALINA A. AMADORA, petitioners
vs.
HONORABLE COURT OF APPEALS, COLEGIO DE SAN JOSE-RECOLETOS,
VICTOR LLUCH SERGIO P. DLMASO JR., CELESTINO DICON, ANIANO
ABELLANA, PABLITO DAFFON thru his parents and natural guardians,
MR. and MRS. NICANOR GUMBAN, and ROLANDO VALENCIA, thru his
guardian, A. FRANCISCO ALONSO, respondents.
CRUZ, J.:
Like any prospective graduate, Alfredo Amadora was looking forward
to the commencement exercises where he would ascend the stage and
in the presence of his relatives and friends receive his high school
diploma. These ceremonies were scheduled on April 16, 1972. As it
turned out, though, fate would intervene and deny him that awaited
experience. On April 13, 1972, while they were in the auditorium of
their school, the Colegio de San Jose-Recoletos, a classmate, Pablito
Damon, fired a gun that mortally hit Alfredo, ending all his expectations
and his life as well. The victim was only seventeen years old. 1
Daffon was convicted of homicide thru reckless imprudence
. 2 Additionally, the herein petitioners, as the victim's parents, filed a
civil action for damages under Article 2180 of the Civil Code against the
Colegio de San Jose-Recoletos, its rector the high school principal, the
dean of boys, and the physics teacher, together with Daffon and two
other students, through their respective parents. The complaint
against the students was later dropped. After trial, the Court of First
Instance of Cebu held the remaining defendants liable to the plaintiffs
in the sum of P294,984.00, representing death compensation, loss of
earning capacity, costs of litigation, funeral expenses, moral damages,
exemplary damages, and attorney's fees .3 On appeal to the
respondent court, however, the decision was reversed and all the
defendants were completely absolved .4
In its decision, which is now the subject of this petition Resolution of all these disagreements will depend on the
for certiorari under Rule 45 of the Rules of Court, the respondent court interpretation of Article 2180 which, as it happens, is invoked by both
found that Article 2180 was not applicable as the Colegio de San Jose- parties in support of their conflicting positions. The pertinent part of
Recoletos was not a school of arts and trades but an academic this article reads as follows:
institution of learning. It also held that the students were not in the
Lastly, teachers or heads of establishments of arts and trades shall be
custody of the school at the time of the incident as the semester had
liable for damages caused by their pupils and students or apprentices
already ended, that there was no clear identification of the fatal gun
so long as they remain in their custody.
and that in any event the defendant, had exercised the necessary
diligence in preventing the injury. 5 Three cases have so far been decided by the Court in connection with
the above-quoted provision, to wit: Exconde v. Capuno 7 Mercado v.
The basic undisputed facts are that Alfredo Amadora went to the San
Court of Appeals, 8 and Palisoc v. Brillantes. 9 These will be briefly
Jose-Recoletos on April 13, 1972, and while in its auditorium was shot
reviewed in this opinion for a better resolution of the case at bar.
to death by Pablito Daffon, a classmate. On the implications and
consequences of these facts, the parties sharply disagree. In the Exconde Case, Dante Capuno, a student of the Balintawak
Elementary School and a Boy Scout, attended a Rizal Day parade on
The petitioners contend that their son was in the school to show his
instructions of the city school supervisor. After the parade, the boy
physics experiment as a prerequisite to his graduation; hence, he was
boarded a jeep, took over its wheel and drove it so recklessly that it
then under the custody of the private respondents. The private
turned turtle, resulting in the death of two of its passengers. Dante was
respondents submit that Alfredo Amadora had gone to the school only
found guilty of double homicide with reckless imprudence. In the
for the purpose of submitting his physics report and that he was no
separate civil action flied against them, his father was held solidarily
longer in their custody because the semester had already ended.
liable with him in damages under Article 1903 (now Article 2180) of the
There is also the question of the identity of the gun used which the Civil Code for the tort committed by the 15-year old boy.
petitioners consider important because of an earlier incident which
This decision, which was penned by Justice Bautista Angelo on June
they claim underscores the negligence of the school and at least one
29,1957, exculpated the school in an obiter dictum (as it was not a
of the private respondents. It is not denied by the respondents that on
party to the case) on the ground that it was riot a school of arts and
April 7, 1972, Sergio Damaso, Jr., the dean of boys, confiscated from
trades. Justice J.B.L. Reyes, with whom Justices Sabino Padilla and Alex
Jose Gumban an unlicensed pistol but later returned it to him without
Reyes concurred, dissented, arguing that it was the school authorities
making a report to the principal or taking any further action . 6 As
who should be held liable Liability under this rule, he said, was imposed
Gumban was one of the companions of Daffon when the latter fired
on (1) teachers in general; and (2) heads of schools of arts and trades
the gun that killed Alfredo, the petitioners contend that this was the
in particular. The modifying clause "of establishments of arts and
same pistol that had been confiscated from Gumban and that their son
trades" should apply only to "heads" and not "teachers."
would not have been killed if it had not been returned by Damaso. The
respondents say, however, that there is no proof that the gun was the Exconde was reiterated in the Mercado Case, and with an elaboration.
same firearm that killed Alfredo. A student cut a classmate with a razor blade during recess time at the
Lourdes Catholic School in Quezon City, and the parents of the victim
sued the culprits parents for damages. Through Justice Labrador, the
Court declared in another obiter (as the school itself had also not been
sued that the school was not liable because it was not an establishment
of arts and trades. Moreover, the custody requirement had not been
proved as this "contemplates a situation where the student lives and
boards with the teacher, such that the control, direction and influences
on the pupil supersede those of the parents." Justice J.B.L. Reyes did
not take part but the other members of the court concurred in this
decision promulgated on May 30, 1960.
In Palisoc vs. Brillantes, decided on October 4, 1971, a 16-year old
student was killed by a classmate with fist blows in the laboratory of
the Manila Technical Institute. Although the wrongdoer — who was
already of age — was not boarding in the school, the head thereof and
the teacher in charge were held solidarily liable with him. The Court
declared through Justice Teehankee:
The phrase used in the cited article — "so long as (the students) remain
in their custody" — means the protective and supervisory custody that
the school and its heads and teachers exercise over the pupils and
students for as long as they are at attendance in the school, including
recess time. There is nothing in the law that requires that for such
liability to attach, the pupil or student who commits the tortious act
must live and board in the school, as erroneously held by the lower
court, and the dicta in Mercado (as well as in Exconde) on which it
relied, must now be deemed to have been set aside by the present
decision.
This decision was concurred in by five other members, 10 including
Justice J.B.L. Reyes, who stressed, in answer to the dissenting opinion,
that even students already of age were covered by the provision since
they were equally in the custody of the school and subject to its
discipline. Dissenting with three others,11 Justice Makalintal was for
retaining the custody interpretation in Mercado and submitted that
the rule should apply only to torts committed by students not yet of
age as the school would be acting only in loco parentis.
In a footnote, Justice Teehankee said he agreed with Justice Reyes'
dissent in the Exconde Case but added that "since the school involved
at bar is a non-academic school, the question as to the applicability of
the cited codal provision to academic institutions will have to await
another case wherein it may properly be raised."
This is the case.
Unlike in Exconde and Mercado, the Colegio de San Jose-Recoletos has
been directly impleaded and is sought to be held liable under Article
2180; and unlike in Palisoc, it is not a school of arts and trades but an
academic institution of learning. The parties herein have also directly
raised the question of whether or not Article 2180 covers even
establishments which are technically not schools of arts and trades,
and, if so, when the offending student is supposed to be "in its
custody."
After an exhaustive examination of the problem, the Court has come
to the conclusion that the provision in question should apply
to all schools, academic as well as non-academic. Where the school is
academic rather than technical or vocational in nature, responsibility
for the tort committed by the student will attach to the teacher in
charge of such student, following the first part of the provision. This is
the general rule. In the case of establishments of arts and trades, it is
the head thereof, and only he, who shall be held liable as an exception
to the general rule. In other words, teachers in general shall be liable
for the acts of their students except where the school is technical in
nature, in which case it is the head thereof who shall be answerable.
Following the canon of reddendo singula singulis "teachers" should
apply to the words "pupils and students" and "heads of establishments
of arts and trades" to the word "apprentices."
The Court thus conforms to the dissenting opinion expressed by Justice
J.B.L. Reyes in Exconde where he said in part:
I can see no sound reason for limiting Art. 1903 of the Old Civil Code to
teachers of arts and trades and not to academic ones. What substantial
difference is there between them insofar as concerns the proper
supervision and vice over their pupils? It cannot be seriously
contended that an academic teacher is exempt from the duty of
watching that his pupils do not commit a tort to the detriment of third
Persons, so long as they are in a position to exercise authority and
Supervision over the pupil. In my opinion, in the phrase "teachers or
heads of establishments of arts and trades" used in Art. 1903 of the old
Civil Code, the words "arts and trades" does not qualify "teachers" but
only "heads of establishments." The phrase is only an updated version
of the equivalent terms "preceptores y artesanos" used in the Italian
and French Civil Codes.
If, as conceded by all commentators, the basis of the presumption of
negligence of Art. 1903 in some culpa in vigilando that the parents,
teachers, etc. are supposed to have incurred in the exercise of their
authority, it would seem clear that where the parent places the child
under the effective authority of the teacher, the latter, and not the
parent, should be the one answerable for the torts committed while
under his custody, for the very reason/that the parent is not supposed
to interfere with the discipline of the school nor with the authority and
supervision of the teacher while the child is under instruction. And if
there is no authority, there can be no responsibility.
There is really no substantial distinction between the academic and the
non-academic schools insofar as torts committed by their students are
concerned. The same vigilance is expected from the teacher over the
students under his control and supervision, whatever the nature of the
school where he is teaching. The suggestion in the Exconde and
Mercado Cases is that the provision would make the teacher or even
the head of the school of arts and trades liable for an injury caused by
any student in its custody but if that same tort were committed in an
academic school, no liability would attach to the teacher or the school
head. All other circumstances being the same, the teacher or the head
of the academic school would be absolved whereas the teacher and
the head of the non-academic school would be held liable, and simply
because the latter is a school of arts and trades.
The Court cannot see why different degrees of vigilance should be
exercised by the school authorities on the basis only of the nature of
their respective schools. There does not seem to be any plausible
reason for relaxing that vigilance simply because the school is academic
in nature and for increasing such vigilance where the school is non-
academic. Notably, the injury subject of liability is caused by the
student and not by the school itself nor is it a result of the operations
of the school or its equipment. The injury contemplated may be caused
by any student regardless of the school where he is registered. The
teacher certainly should not be able to excuse himself by simply
showing that he is teaching in an academic school where, on the other
hand, the head would be held liable if the school were non-academic.
These questions, though, may be asked: If the teacher of the academic
school is to be held answerable for the torts committed by his students,
why is it the head of the school only who is held liable where the injury
is caused in a school of arts and trades? And in the case of the academic
or non- technical school, why not apply the rule also to the head
thereof instead of imposing the liability only on the teacher?
The reason for the disparity can be traced to the fact that historically
the head of the school of arts and trades exercised a closer tutelage
over his pupils than the head of the academic school. The old schools
of arts and trades were engaged in the training of
artisans apprenticed to their master who personally and directly
instructed them on the technique and secrets of their craft. The head
of the school of arts and trades was such a master and so was
personally involved in the task of teaching his students, who usually
even boarded with him and so came under his constant control,
supervision and influence. By contrast, the head of the academic
school was not as involved with his students and exercised only
administrative duties over the teachers who were the persons directly
dealing with the students. The head of the academic school had then
(as now) only a vicarious relationship with the students. Consequently,
while he could not be directly faulted for the acts of the students, the
head of the school of arts and trades, because of his closer ties with
them, could be so blamed.
It is conceded that the distinction no longer obtains at present in view
of the expansion of the schools of arts and trades, the consequent
increase in their enrollment, and the corresponding diminution of the
direct and personal contract of their heads with the students. Article
2180, however, remains unchanged. In its present state, the provision
must be interpreted by the Court according to its clear and original
mandate until the legislature, taking into account the charges in the
situation subject to be regulated, sees fit to enact the necessary
amendment.
The other matter to be resolved is the duration of the responsibility of
the teacher or the head of the school of arts and trades over the
students. Is such responsibility co-extensive with the period when the
student is actually undergoing studies during the school term, as
contended by the respondents and impliedly admitted by the
petitioners themselves?
From a reading of the provision under examination, it is clear that while
the custody requirement, to repeat Palisoc v. Brillantes, does not mean
that the student must be boarding with the school authorities, it does
signify that the student should be within the control and under the
influence of the school authorities at the time of the occurrence of the
injury. This does not necessarily mean that such, custody be co-
terminous with the semester, beginning with the start of classes and
ending upon the close thereof, and excluding the time before or after
such period, such as the period of registration, and in the case of
graduating students, the period before the commencement exercises.
In the view of the Court, the student is in the custody of the school
authorities as long as he is under the control and influence of the
school and within its premises, whether the semester has not yet
begun or has already ended.
It is too tenuous to argue that the student comes under the discipline
of the school only upon the start of classes notwithstanding that before
that day he has already registered and thus placed himself under its
rules. Neither should such discipline be deemed ended upon the last
day of classes notwithstanding that there may still be certain requisites
to be satisfied for completion of the course, such as submission of
reports, term papers, clearances and the like. During such periods, the
student is still subject to the disciplinary authority of the school and
cannot consider himself released altogether from observance of its
rules.
As long as it can be shown that the student is in the school premises in
pursuance of a legitimate student objective, in the exercise of a
legitimate student right, and even in the enjoyment of a legitimate
student right, and even in the enjoyment of a legitimate student
privilege, the responsibility of the school authorities over the student
continues. Indeed, even if the student should be doing nothing more
than relaxing in the campus in the company of his classmates and
friends and enjoying the ambience and atmosphere of the school, he
is still within the custody and subject to the discipline of the school
authorities under the provisions of Article 2180.
During all these occasions, it is obviously the teacher-in-charge who
must answer for his students' torts, in practically the same way that
the parents are responsible for the child when he is in their custody.
The teacher-in-charge is the one designated by the dean, principal, or
other administrative superior to exercise supervision over the pupils in
the specific classes or sections to which they are assigned. It is not
necessary that at the time of the injury, the teacher be physically
present and in a position to prevent it. Custody does not connote
immediate and actual physical control but refers more to the influence
exerted on the child and the discipline instilled in him as a result of such
influence. Thus, for the injuries caused by the student, the teacher and
not the parent shag be held responsible if the tort was committed
within the premises of the school at any time when its authority could
be validly exercised over him.
In any event, it should be noted that the liability imposed by this article
is supposed to fall directly on the teacher or the head of the school of
arts and trades and not on the school itself. If at all, the school,
whatever its nature, may be held to answer for the acts of its teachers
or even of the head thereof under the general principle of respondeat
superior, but then it may exculpate itself from liability by proof that it
had exercised the diligence of a bonus paterfamilias.
Such defense is, of course, also available to the teacher or the head of
the school of arts and trades directly held to answer for the tort
committed by the student. As long as the defendant can show that he
had taken the necessary precautions to prevent the injury complained
of, he can exonerate himself from the liability imposed by Article 2180,
which also states that:
The responsibility treated of in this article shall cease when the Persons
herein mentioned prove that they observed all the diligence of a good
father of a family to prevent damages.
In this connection, it should be observed that the teacher will be held
liable not only when he is acting in loco parentis for the law does not
require that the offending student be of minority age. Unlike the
parent, who wig be liable only if his child is still a minor, the teacher is
held answerable by the law for the act of the student under him
regardless of the student's age. Thus, in the Palisoc Case, liability
attached to the teacher and the head of the technical school although
the wrongdoer was already of age. In this sense, Article 2180 treats the
parent more favorably than the teacher.
The Court is not unmindful of the apprehensions expressed by Justice
Makalintal in his dissenting opinion in Palisoc that the school may be
unduly exposed to liability under this article in view of the increasing
activism among the students that is likely to cause violence and
resulting injuries in the school premises. That is a valid fear, to be sure.
Nevertheless, it should be repeated that, under the present ruling, it is
not the school that will be held directly liable. Moreover, the defense
of due diligence is available to it in case it is sought to be held
answerable as principal for the acts or omission of its head or the
teacher in its employ.
The school can show that it exercised proper measures in selecting the
head or its teachers and the appropriate supervision over them in the
custody and instruction of the pupils pursuant to its rules and
regulations for the maintenance of discipline among them. In almost
all cases now, in fact, these measures are effected through the
assistance of an adequate security force to help the teacher physically
enforce those rules upon the students. Ms should bolster the claim of
the school that it has taken adequate steps to prevent any injury that
may be committed by its students.
A fortiori, the teacher himself may invoke this defense as it would
otherwise be unfair to hold him directly answerable for the damage
caused by his students as long as they are in the school premises and
presumably under his influence. In this respect, the Court is disposed
not to expect from the teacher the same measure of responsibility
imposed on the parent for their influence over the child is not equal in
degree. Obviously, the parent can expect more obedience from the
child because the latter's dependence on him is greater than on the
teacher. It need not be stressed that such dependence includes the
child's support and sustenance whereas submission to the teacher's
influence, besides being coterminous with the period of custody is
usually enforced only because of the students' desire to pass the
course. The parent can instill more las discipline on the child than the
teacher and so should be held to a greater accountability than the
teacher for the tort committed by the child.
And if it is also considered that under the article in question, the
teacher or the head of the school of arts and trades is responsible for
the damage caused by the student or apprentice even if he is already
of age — and therefore less tractable than the minor — then there
should all the more be justification to require from the school
authorities less accountability as long as they can prove reasonable
diligence in preventing the injury. After all, if the parent himself is no
longer liable for the student's acts because he has reached majority
age and so is no longer under the former's control, there is then all the
more reason for leniency in assessing the teacher's responsibility for
the acts of the student.
Applying the foregoing considerations, the Court has arrived at the
following conclusions:
1. At the time Alfredo Amadora was fatally shot, he was still in the
custody of the authorities of Colegio de San Jose-Recoletos
notwithstanding that the fourth year classes had formally ended. It was
immaterial if he was in the school auditorium to finish his physics
experiment or merely to submit his physics report for what is
important is that he was there for a legitimate purpose. As previously
observed, even the mere savoring of the company of his friends in the
premises of the school is a legitimate purpose that would have also
brought him in the custody of the school authorities.
2. The rector, the high school principal and the dean of boys cannot be
held liable because none of them was the teacher-in-charge as
previously defined. Each of them was exercising only a general
authority over the student body and not the direct control and
influence exerted by the teacher placed in charge of particular classes
or sections and thus immediately involved in its discipline. The
evidence of the parties does not disclose who the teacher-in-charge of
the offending student was. The mere fact that Alfredo Amadora had
gone to school that day in connection with his physics report did not
necessarily make the physics teacher, respondent Celestino Dicon, the
teacher-in-charge of Alfredo's killer.
3. At any rate, assuming that he was the teacher-in-charge, there is no
showing that Dicon was negligent in enforcing discipline upon Daffon
or that he had waived observance of the rules and regulations of the
school or condoned their non-observance. His absence when the
tragedy happened cannot be considered against him because he was
not supposed or required to report to school on that day. And while it
is true that the offending student was still in the custody of the
teacher-in-charge even if the latter was physically absent when the tort
was committed, it has not been established that it was caused by his
laxness in enforcing discipline upon the student. On the contrary, the
private respondents have proved that they had exercised due
diligence, through the enforcement of the school regulations, in
maintaining that discipline.
4. In the absence of a teacher-in-charge, it is probably the dean of boys
who should be held liable especially in view of the unrefuted evidence
that he had earlier confiscated an unlicensed gun from one of the
students and returned the same later to him without taking disciplinary
action or reporting the matter to higher authorities. While this was
clearly negligence on his part, for which he deserves sanctions from the
school, it does not necessarily link him to the shooting of Amador as it
has not been shown that he confiscated and returned pistol was the
gun that killed the petitioners' son.
5. Finally, as previously observed, the Colegio de San Jose-Recoletos
cannot be held directly liable under the article because only the
teacher or the head of the school of arts and trades is made responsible
for the damage caused by the student or apprentice. Neither can it be
held to answer for the tort committed by any of the other private
respondents for none of them has been found to have been charged
with the custody of the offending student or has been remiss in the
discharge of his duties in connection with such custody.
In sum, the Court finds under the facts as disclosed by the record and
in the light of the principles herein announced that none of the
respondents is liable for the injury inflicted by Pablito Damon on
Alfredo Amadora that resulted in the latter's death at the auditorium
of the Colegio de San Jose-Recoletos on April 13, 1972. While we
deeply sympathize with the petitioners over the loss of their son under
the tragic circumstances here related, we nevertheless are unable to
extend them the material relief they seek, as a balm to their grief,
under the law they have invoked.
WHEREFORE, the petition is DENIED, without any pronouncement as
to costs. It is so ordered.
G.R. No. 84698 February 4, 1992
PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION, JUAN D. LIM,
BENJAMIN P. PAULINO, ANTONIO M. MAGTALAS, COL. PEDRO SACRO
and LT. M. SORIANO, petitioners,
vs.
COURT OF APPEALS, HON. REGINA ORDOÑEZ-BENITEZ, in her
capacity as Presiding Judge of Branch 47, Regional Trial Court, Manila,
SEGUNDA R. BAUTISTA and ARSENIA D. BAUTISTA, respondents.
PADILLA, J.:
A stabbing incident on 30 August 1985 which caused the death of
Carlitos Bautista while on the second-floor premises of the Philippine
School of Business Administration (PSBA) prompted the parents of the
deceased to file suit in the Regional Trial Court of Manila (Branch 47)
presided over by Judge (now Court of Appeals justice) Regina Ordoñez-
Benitez, for damages against the said PSBA and its corporate officers.
At the time of his death, Carlitos was enrolled in the third year
commerce course at the PSBA. It was established that his assailants
were not members of the school's academic community but were
elements from outside the school.
Specifically, the suit impleaded the PSBA and the following school
authorities: Juan D. Lim (President), Benjamin P. Paulino (Vice-
President), Antonio M. Magtalas (Treasurer/Cashier), Col. Pedro Sacro
(Chief of Security) and a Lt. M. Soriano (Assistant Chief of Security).
Substantially, the plaintiffs (now private respondents) sought to
adjudge them liable for the victim's untimely demise due to their
alleged negligence, recklessness and lack of security precautions,
means and methods before, during and after the attack on the victim.
During the proceedings a quo, Lt. M. Soriano terminated his
relationship with the other petitioners by resigning from his position in
the school.
Defendants a quo (now petitioners) sought to have the suit dismissed,
alleging that since they are presumably sued under Article 2180 of the
Civil Code, the complaint states no cause of action against them, as
jurisprudence on the subject is to the effect that academic institutions,
such as the PSBA, are beyond the ambit of the rule in the afore-stated
article.
The respondent trial court, however, overruled petitioners' contention
and thru an order dated 8 December 1987, denied their motion to
dismiss. A subsequent motion for reconsideration was similarly dealt
with by an order dated 25 January 1988. Petitioners then assailed the
trial court's disposition before the respondent appellate court which,
in a decision * promulgated on 10 June 1988, affirmed the trial court's
orders. On 22 August 1988, the respondent appellate court resolved to
deny the petitioners' motion for reconsideration. Hence, this petition.
At the outset, it is to be observed that the respondent appellate court
primarily anchored its decision on the law of quasi-delicts, as
enunciated in Articles 2176 and 2180 of the Civil Code. 1 Pertinent
portions of the appellate court's now assailed ruling state:
Article 2180 (formerly Article 1903) of the Civil Code is an adoption
from the old Spanish Civil Code. The comments of Manresa and learned
authorities on its meaning should give way to present day changes. The
law is not fixed and flexible (sic); it must be dynamic. In fact, the
greatest value and significance of law as a rule of conduct in (sic) its
flexibility to adopt to changing social conditions and its capacity to
meet the new challenges of progress.
Construed in the light of modern day educational system, Article 2180
cannot be construed in its narrow concept as held in the old case
of Exconde vs. Capuno 2 and Mercado vs. Court of Appeals; 3 hence,
the ruling in the Palisoc 4 case that it should apply to all kinds of
educational institutions, academic or vocational.
At any rate, the law holds the teachers and heads of the school staff
liable unless they relieve themselves of such liability pursuant to the
last paragraph of Article 2180 by "proving that they observed all the
diligence to prevent damage." This can only be done at a trial on the
merits of the case. 5
While we agree with the respondent appellate court that the motion
to dismiss the complaint was correctly denied and the complaint
should be tried on the merits, we do not however agree with the
premises of the appellate court's ruling.
Article 2180, in conjunction with Article 2176 of the Civil Code,
establishes the rule of in loco parentis. This Court discussed this
doctrine in the afore-cited cases of Exconde, Mendoza, Palisoc and,
more recently, in Amadora vs. Court of Appeals. 6 In all such cases, it
had been stressed that the law (Article 2180) plainly provides that the
damage should have been caused or inflicted by pupils or students of
he educational institution sought to be held liable for the acts of its
pupils or students while in its custody. However, this material situation
does not exist in the present case for, as earlier indicated, the
assailants of Carlitos were not students of the PSBA, for whose acts the
school could be made liable.
However, does the appellate court's failure to consider such material
facts mean the exculpation of the petitioners from liability? It does not
necessarily follow.
When an academic institution accepts students for enrollment, there
is established a contract between them, resulting in bilateral
obligations which both parties are bound to comply with. 7 For its part,
the school undertakes to provide the student with an education that
would presumably suffice to equip him with the necessary tools and
skills to pursue higher education or a profession. On the other hand,
the student covenants to abide by the school's academic requirements
and observe its rules and regulations.
Institutions of learning must also meet the implicit or "built-in"
obligation of providing their students with an atmosphere that
promotes or assists in attaining its primary undertaking of imparting
knowledge. Certainly, no student can absorb the intricacies of physics
or higher mathematics or explore the realm of the arts and other
sciences when bullets are flying or grenades exploding in the air or
where there looms around the school premises a constant threat to life
and limb. Necessarily, the school must ensure that adequate steps are
taken to maintain peace and order within the campus premises and to
prevent the breakdown thereof.
Because the circumstances of the present case evince a contractual
relation between the PSBA and Carlitos Bautista, the rules on quasi-
delict do not really govern. 8 A perusal of Article 2176 shows that
obligations arising from quasi-delicts or tort, also known as extra-
contractual obligations, arise only between parties not otherwise
bound by contract, whether express or implied. However, this
impression has not prevented this Court from determining the
existence of a tort even when there obtains a contract. In Air France
vs. Carrascoso (124 Phil. 722), the private respondent was awarded
damages for his unwarranted expulsion from a first-class seat aboard
the petitioner airline. It is noted, however, that the Court referred to
the petitioner-airline's liability as one arising from tort, not one arising
from a contract of carriage. In effect, Air France is authority for the
view that liability from tort may exist even if there is a contract, for the
act that breaks the contract may be also a tort. (Austro-America S.S.
Co. vs. Thomas, 248 Fed. 231).
This view was not all that revolutionary, for even as early as 1918, this
Court was already of a similar mind. In Cangco vs. Manila Railroad (38
Phil. 780), Mr. Justice Fisher elucidated thus:
The field of non-contractual obligation is much broader than that of
contractual obligation, comprising, as it does, the whole extent of
juridical human relations. These two fields, figuratively speaking,
concentric; that is to say, the mere fact that a person is bound to
another by contract does not relieve him from extra-contractual
liability to such person. When such a contractual relation exists the
obligor may break the contract under such conditions that the same
act which constitutes a breach of the contract would have constituted
the source of an extra-contractual obligation had no contract existed
between the parties.
Immediately what comes to mind is the chapter of the Civil Code on
Human Relations, particularly Article 21, which provides:
Any person who wilfully causes loss or injury to another in a
manner that is contrary to morals, good custom or public policy shall
compensate the latter for the damage. (emphasis supplied).
Air France penalized the racist policy of the airline which emboldened
the petitioner's employee to forcibly oust the private respondent to
cater to the comfort of a white man who allegedly "had a better right
to the seat." In Austro-American, supra, the public embarrassment
caused to the passenger was the justification for the Circuit Court of
Appeals, (Second Circuit), to award damages to the latter. From the
foregoing, it can be concluded that should the act which breaches a
contract be done in bad faith and be violative of Article 21, then there
is a cause to view the act as constituting a quasi-delict.
In the circumstances obtaining in the case at bar, however, there is, as
yet, no finding that the contract between the school and Bautista had
been breached thru the former's negligence in providing proper
security measures. This would be for the trial court to determine. And,
even if there be a finding of negligence, the same could give rise
generally to a breach of contractual obligation only. Using the test
of Cangco, supra, the negligence of the school would not be relevant
absent a contract. In fact, that negligence becomes material only
because of the contractual relation between PSBA and Bautista. In
other words, a contractual relation is a condition sine qua non to the
school's liability. The negligence of the school cannot exist
independently of the contract, unless the negligence occurs under the
circumstances set out in Article 21 of the Civil Code.
This Court is not unmindful of the attendant difficulties posed by the
obligation of schools, above-mentioned, for conceptually a school, like
a common carrier, cannot be an insurer of its students against all risks.
This is specially true in the populous student communities of the so-
called "university belt" in Manila where there have been reported
several incidents ranging from gang wars to other forms of
hooliganism. It would not be equitable to expect of schools to
anticipate all types of violent trespass upon their premises, for
notwithstanding the security measures installed, the same may still fail
against an individual or group determined to carry out a nefarious deed
inside school premises and environs. Should this be the case, the
school may still avoid liability by proving that the breach of its
contractual obligation to the students was not due to its negligence,
here statutorily defined to be the omission of that degree of diligence
which is required by the nature of the obligation and corresponding to
the circumstances of persons, time and place. 9
As the proceedings a quo have yet to commence on the substance of
the private respondents' complaint, the record is bereft of all the
material facts. Obviously, at this stage, only the trial court can make
such a determination from the evidence still to unfold.
WHEREFORE, the foregoing premises considered, the petition is
DENIED. The court of origin (RTC, Manila, Br. 47) is hereby ordered to
continue proceedings consistent with this ruling of the Court. Costs
against the petitioners.
SO ORDERED.
G.R. No. 66207 May 18, 1992
MAXIMINO SOLIMAN, JR., represented by his judicial guardian
VIRGINIA C. SOLIMAN, petitioner,
vs.
HON. JUDGE RAMON TUAZON, Presiding Judge of Branch LXI,
Regional Trial Court of Region III, Angeles City, and the REPUBLIC
CENTRAL COLLEGES, represented by its President, respondents.
RESOLUTION
FELICIANO, J.:
On 22 March 1983, petitioner Soliman, Jr. filed a civil complaint for
damages against private respondent Republic Central Colleges
("Colleges"), the R.L. Security Agency Inc. and one Jimmy B. Solomon,
a security guard, as defendants. The complaint alleged that:
. . . on 13 August 1982, in the morning thereof, while the plaintiff was
in the campus ground and premises of the defendant, REPUBLIC
CENTRAL COLLEGES, as he was and is still a regular enrolled student of
said school taking his morning classes, the defendant, JIMMY B.
SOLOMON, who was on said date and hour in the premises of said
school performing his duties and obligations as a duly appointed
security guard under the employment, supervision and control of his
employer-defendant R.L. SECURITY AGENCY, INC., headed by Mr.
Benjamin Serrano, without any provocation, in a wanton, fraudulent,
reckless, oppressive or malevolent manner, with intent to kill, attack,
assault, strike and shoot the plaintiff on the abdomen with a .38 Caliber
Revolver, a deadly weapon, which ordinarily such wound sustained
would have caused plaintiff's death were it not for the timely medical
assistance given to him. The plaintiff was treated and confined at
Angeles Medical Center, Angeles City, and, as per doctor's opinion, the
plaintiff may not be able to attend to his regular classes and will be
incapacitated in the performance of his usual work for a duration of
from three to four months before his wounds would be completely
healed. 1
Private respondent Colleges filed a motion to dismiss, contending that
the complaint stated no cause of action against it. Private respondent
argued that it is free from any liability for the injuries sustained by
petitioner student for the reason that private respondent school was
not the employer of the security guard charged, Jimmy Solomon, and
hence was not responsible for any wrongful act of Solomon. Private
respondent school further argued that Article 2180, 7th paragraph, of
the Civil Code did not apply, since said paragraph holds teachers and
heads of establishment of arts and trades liable for damages caused by
their pupils and students or apprentices, while security guard Jimmy
Solomon was not a pupil, student or apprentice of the school.
In an order dated 29 November 1983, respondent Judge granted
private respondent school's motion to dismiss, holding that security
guard Jimmy Solomon was not an employee of the school which
accordingly could not be held liable for his acts or omissions. Petitioner
moved for reconsideration, without success.
In this Petition for Certiorari and Prohibition, it is contended that
respondent trial judge committed a grave abuse of discretion when he
refused to apply the provisions of Article 2180, as well as those of
Articles 349, 350 and 352, of the Civil Code and granted the school's assigned to it; the duty to observe the diligence of a good father of a
motion to dismiss. family in the selection of the guards cannot, in the ordinary course of
events, be demanded from the client whose premises or property are
Under Article 2180 of the Civil Code, the obligation to respond for
protected by the security guards. The fact that a client company may
damage inflicted by one against another by fault or negligence exists
give instructions or directions to the security guards assigned to it, does
not only for one's own act or omission, but also for acts or omissions
not, by itself, render the client responsible as an employer of the
of a person for whom one is by law responsible. Among the persons
security guards concerned and liable for their wrongful acts or
held vicariously responsible for acts or omissions of another person are
omissions. Those instructions or directions are ordinarily no more than
the following:
requests commonly envisaged in the contract for services entered into
xxx xxx xxx with the security agency. There being no employer-employee
relationship between the Colleges and Jimmy Solomon, petitioner
Employers shall be liable for the damages caused by their employees
student cannot impose vicarious liability upon the Colleges for the acts
and household helpers acting within the scope of their assigned tasks,
of security guard Solomon.
even though the former are not engaged in any business or industry.
Since there is no question that Jimmy Solomon was not a pupil or
xxx xxx xxx
student or an apprentice of the Colleges, he being in fact an employee
Lastly, teachers or heads of establishments of arts and trades shall be of the R.L. Security Agency Inc., the other above-quoted paragraph of
liable for damages caused by their pupils, their students or Article 2180 of the Civil Code is similarly not available for imposing
apprentices, so long as they remain in their custody. liability upon the Republic Central Colleges for the acts or omissions of
Jimmy Solomon.
xxx xxx xxx
The relevant portions of the other Articles of the Civil Code invoked by
The first paragraph quoted above offers no basis for holding the
petitioner are as follows:
Colleges liable for the alleged wrongful acts of security guard Jimmy B.
Solomon inflicted upon petitioner Soliman, Jr. Private respondent Art. 349. The following persons shall exercise substitute parental
school was not the employer of Jimmy Solomon. The employer of authority:
Jimmy Solomon was the R.L. Security Agency Inc., while the school was
xxx xxx xxx
the client or customer of the R.L. Security Agency Inc. It is settled that
where the security agency, as here, recruits, hires and assigns the work (2) Teachers and professors;
of its watchmen or security guards, the agency is the employer of such
xxx xxx xxx
guards or watchmen. 2 Liability for illegal or harmful acts committed
by the security guards attaches to the employer agency, and not to the (4) Directors of trade establishments with regard to apprentices;
clients or customers of such agency. 3 As a general rule, a client or
xxx xxx xxx
customer of a security agency has no hand in selecting who among the
pool of security guards or watchmen employed by the agency shall be
Art. 350. The persons named in the preceding article shall exercise The very recent case of the Philippine School of Business
reasonable supervision over the conduct of the child. Administration (PSBA) v. Court of Appeals, 5 requires us to give a
negative answer to that question.
xxx xxx xxx
In PSBA, the Court held that Article 2180 of the Civil Code was not
Art. 352. The relations between teacher and pupil, professor and
applicable where a student had been injured by one who was an
student are fixed by government regulations and those of each school
outsider or by one over whom the school did not exercise any custody
or institution. In no case shall corporal punishment be countenanced.
or control or supervision. At the same time, however, the Court
The teacher or professor shall cultivate the best potentialities of the
stressed that an implied contract may be held to be established
heart and mind of the pupil or student.
between a school which accepts students for enrollment, on the one
In Palisoc v. Brillantes, 4 invoked by petitioner, the Court held the hand, and the students who are enrolled, on the other hand, which
owner and president of a school of arts and trades known as the contract results in obligations for both parties:
"Manila Technical Institute," Quezon Blvd., Manila, responsible in
When an academic institution accepts students for enrollment, there
damages for the death of Dominador Palisoc, a student of Institute,
is established a contract between them, resulting in bilateral
which resulted from fist blows delivered by Virgilio L. Daffon, another
obligations which parties are bound to comply with. For its part, the
student of the Institute. It will be seen that the facts of Palisoc
school undertakes to provide the student with an education that would
v. Brillantes brought it expressly within the 7th paragraph of Article
presumably suffice to equip him with the necessary tools and skills to
2180, quoted above; but those facts are entirely different from the
pursue higher education or a profession. On the other hand, the
facts existing in the instant case.
student covenants to abide by the school's academic requirements and
Persons exercising substitute parental authority are made responsible observe its rules and regulations.
for damage inflicted upon a third person by the child or person subject
Institutions of learning must also meet the implicit or "built-in"
to such substitute parental authority. In the instant case, as already
obligation of providing their students with an atmosphere that
noted, Jimmy Solomon who committed allegedly tortious acts resulting
promotes or assists in attaining its primary undertaking of imparting
in injury to petitioner, was not a pupil, student or apprentice of the
knowledge. Certainly, no student can absorb the intricacies of physics
Republic Central Colleges; the school had no substitute parental
or higher mathematics or explore the realm of the arts and other
authority over Solomon.
sciences when bullets are flying or grenades exploding in the air or
Clearly, within the confines of its limited logic, i.e., treating the where there looms around the school premises a constant threat to life
petitioner's claim as one based wholly and exclusively on Article 2180 and limb. Necessarily, the school must ensure that adequate steps are
of the Civil Code, the order of the respondent trial judge was correct. taken to maintain peace and order within the campus premises and to
Does it follow, however, that respondent Colleges could not be held prevent the breakdown thereof. 6
liable upon any other basis in law, for or in respect of the injury
In that case, the Court was careful to point out that:
sustained by petitioner, so as to entitle respondent school to dismissal
of petitioner's complaint in respect of itself?
In the circumstances obtaining in the case at bar, however, there is, as
yet, no finding that the contract between the school and Bautista had
been breached thru the former's negligence in providing proper
security measures. This would be for the trial court to determine. And,
even if there be a finding of negligence, the same could give rise
generally to a breach of contractual obligation only. Using the test
of Cangco, supra, the negligence of the school would not be relevant
absent a contract. In fact, that negligence becomes material only
because of the contractual relation between PSBA and Bautista. In
other words, a contractual relation is a condition sine qua non to the
school's liability. The negligence of the school cannot exist
independently of the contract, unless the negligence occurs under the
circumstances set out in Article 21 of the Civil Code.
The Court is not unmindful of the attendant difficulties posed by the
obligation of schools, above-mentioned, for conceptually a school, like
a common carrier, cannot be an insurer of its students against all risks.
This is specially true in the populous student communities of the so-
called "university belt" in Manila where there have been reported
several incidents ranging from gang wars to other forms of
hooliganism. It would not be equitable to expect of schools to
anticipate all types of violent trespass upon their premises, for
notwithstanding the security measures installed, the same may still fail
against an individual or group determined to carry out a nefarious deed
inside school premises and environs. Should this be the case, the
school may still avoid liability by proving that the breach of its
contractual obligation to the students was not due to its negligence,
here statutorily defined to be the omission of that degree of diligence
which is required by the nature of obligation and corresponding to the
circumstances of person, time and place. 7
In the PSBA case, the trial court had denied the school's motion to
dismiss the complaint against it, and both the Court of Appeals and this
Court affirmed the trial court's order. In the case at bar, the court a
quo granted the motion to dismiss filed by respondent Colleges, upon
the assumption that petitioner's cause of action was based, and could
have been based, only on Article 2180 of the Civil Code. As PSBA,
however, states, acts which are tortious or allegedly tortious in
character may at the same time constitute breach of a contractual, or
other legal, obligation. Respondent trial judge was in serious error
when he supposed that petitioner could have no cause of action other
than one based on Article 2180 of the Civil Code. Respondent trial
judge should not have granted the motion to dismiss but rather should
have, in the interest of justice, allowed petitioner to prove acts
constituting breach of an obligation ex contractu or ex lege on the part
of respondent Colleges.
In line, therefore, with the most recent jurisprudence of this Court, and
in order to avoid a possible substantial miscarriage of justice, and
putting aside technical considerations, we consider that respondent
trial judge committed serious error correctible by this Court in the
instant case.
ACCORDINGLY, the Court Resolved to GRANT DUE COURSE to the
Petition, to TREAT the comment of respondent Colleges as its answer,
and to REVERSE and SET ASIDE the Order dated 29 November 1983.
This case is REMANDED to the court a quo for further proceedings
consistent with this Resolution.
G.R. No. 156109 November 18, 2004
KHRISTINE REA M. REGINO, Assisted and Represented by ARMANDO
REGINO, petitioner,
vs.
PANGASINAN COLLEGES OF SCIENCE AND TECHNOLOGY, RACHELLE
A. GAMUROT and ELISSA BALADAD, respondents.
DECISION
PANGANIBAN, J.:
Upon enrolment, students and their school enter upon a reciprocal
contract. The students agree to abide by the standards of academic
performance and codes of conduct, issued usually in the form of
manuals that are distributed to the enrollees at the start of the school
term. Further, the school informs them of the itemized fees they are
expected to pay. Consequently, it cannot, after the enrolment of a
student, vary the terms of the contract. It cannot require fees other
than those it specified upon enrolment.
The Case
Before the Court is a Petition for Review under Rule 45,1 seeking to
nullify the July 12, 20022 and the November 22, 20023 Orders of the
Regional Trial Court (RTC) of Urdaneta City, Pangasinan (Branch 48) in
Civil Case No. U-7541. The decretal portion of the first assailed Order
reads:
"WHEREFORE, the Court GRANTS the instant motion to dismiss for lack
of cause of action."4
The second challenged Order denied petitioner's Motion for
Reconsideration.
The Facts
Petitioner Khristine Rea M. Regino was a first year computer science
student at Respondent Pangasinan Colleges of Science and Technology
(PCST). Reared in a poor family, Regino went to college mainly through
the financial support of her relatives. During the second semester of
school year 2001-2002, she enrolled in logic and statistics subjects
under Respondents Rachelle A. Gamurot and Elissa Baladad,
respectively, as teachers.
In February 2002, PCST held a fund raising campaign dubbed the "Rave
Party and Dance Revolution," the proceeds of which were to go to the
construction of the school's tennis and volleyball courts. Each student
was required to pay for two tickets at the price of P100 each. The
project was allegedly implemented by recompensing students who
purchased tickets with additional points in their test scores; those who
refused to pay were denied the opportunity to take the final
examinations.
Financially strapped and prohibited by her religion from attending
dance parties and celebrations, Regino refused to pay for the tickets.
On March 14 and March 15, 2002, the scheduled dates of the final
examinations in logic and statistics, her teachers -- Respondents
Rachelle A. Gamurot and Elissa Baladad -- allegedly disallowed her
from taking the tests. According to petitioner, Gamurot made her sit
out her logic class while her classmates were taking their examinations.
The next day, Baladad, after announcing to the entire class that she
was not permitting petitioner and another student to take their
statistics examinations for failing to pay for their tickets, allegedly
ejected them from the classroom. Petitioner's pleas ostensibly went
unheeded by Gamurot and Baladad, who unrelentingly defended their
positions as compliance with PCST's policy.
On April 25, 2002, petitioner filed, as a pauper litigant, a Complaint5 for
damages against PCST, Gamurot and Baladad. In her Complaint, she
prayed for P500,000 as nominal damages; P500,000 as moral damages;
at least P1,000,000 as exemplary damages; P250,000 as actual
damages; plus the costs of litigation and attorney's fees.
On May 30, 2002, respondents filed a Motion to Dismiss6 on the ground
of petitioner's failure to exhaust administrative remedies. According to
respondents, the question raised involved the determination of the
wisdom of an administrative policy of the PCST; hence, the case should
have been initiated before the proper administrative body, the
Commission of Higher Education (CHED).
In her Comment to respondents' Motion, petitioner argued that prior
exhaustion of administrative remedies was unnecessary, because her
action was not administrative in nature, but one purely for damages
arising from respondents' breach of the laws on human relations. As
such, jurisdiction lay with the courts.
On July 12, 2002, the RTC dismissed the Complaint for lack of cause of
action.
Ruling of the Regional Trial Court
In granting respondents' Motion to Dismiss, the trial court noted that
the instant controversy involved a higher institution of learning, two of
its faculty members and one of its students. It added that Section 54 of
the Education Act of 1982 vested in the Commission on Higher
Education (CHED) the supervision and regulation of tertiary schools.
Thus, it ruled that the CHED, not the courts, had jurisdiction over the
controversy.7
In its dispositive portion, the assailed Order dismissed the Complaint
for "lack of cause of action" without, however, explaining this ground.
Aggrieved, petitioner filed the present Petition on pure questions of
law.8
Issues
In her Memorandum, petitioner raises the following issues for our
consideration:
"Whether or not the principle of exhaustion of administrative remedies
applies in a civil action exclusively for damages based on violation of
the human relation provisions of the Civil Code, filed by a student
against her former school.
"Whether or not there is a need for prior declaration of invalidity of a
certain school administrative policy by the Commission on Higher
Education (CHED) before a former student can successfully maintain an
action exclusively for damages in regular courts.
"Whether or not the Commission on Higher Education (CHED) has
exclusive original jurisdiction over actions for damages based upon
violation of the Civil Code provisions on human relations filed by a
student against the school."9
All of the foregoing point to one issue -- whether the doctrine of
exhaustion of administrative remedies is applicable. The Court,
however, sees a second issue which, though not expressly raised by
petitioner, was impliedly contained in her Petition: whether the
Complaint stated sufficient cause(s) of action.
The Court's Ruling
The Petition is meritorious.
First Issue:
Exhaustion of Administrative Remedies
Respondents anchored their Motion to Dismiss on petitioner's alleged
failure to exhaust administrative remedies before resorting to the RTC.
According to them, the determination of the controversy hinge on the
validity, the wisdom and the propriety of PCST's academic policy. Thus,
the Complaint should have been lodged in the CHED, the
administrative body tasked under Republic Act No. 7722 to implement
the state policy to "protect, foster and promote the right of all citizens
to affordable quality education at all levels and to take appropriate
steps to ensure that education is accessible to all."10
Petitioner counters that the doctrine finds no relevance to the present
case since she is praying for damages, a remedy beyond the domain of
the CHED and well within the jurisdiction of the courts.11
Petitioner is correct. First, the doctrine of exhaustion of administrative
remedies has no bearing on the present case. In Factoran Jr. v. CA,12 the
Court had occasion to elucidate on the rationale behind this doctrine:
"The doctrine of exhaustion of administrative remedies is basic. Courts,
for reasons of law, comity, and convenience, should not entertain suits
unless the available administrative remedies have first been resorted
to and the proper authorities have been given the appropriate
opportunity to act and correct their alleged errors, if any, committed
in the administrative forum. x x x.13 "
Petitioner is not asking for the reversal of the policies of PCST. Neither
is she demanding it to allow her to take her final examinations; she was
already enrolled in another educational institution. A reversal of the
acts complained of would not adequately redress her grievances;
under the circumstances, the consequences of respondents' acts could
no longer be undone or rectified.
Second, exhaustion of administrative remedies is applicable when
there is competence on the part of the administrative body to act upon
the matter complained of.14 Administrative agencies are not courts;
they are neither part of the judicial system, nor are they deemed
judicial tribunals.15 Specifically, the CHED does not have the power to
award damages.16 Hence, petitioner could not have commenced her
case before the Commission.
Third, the exhaustion doctrine admits of exceptions, one of which
arises when the issue is purely legal and well within the jurisdiction of
the trial court.17 Petitioner's action for damages inevitably calls for the
application and the interpretation of the Civil Code, a function that falls
within the jurisdiction of the courts.18
Second Issue:
Cause of Action
Sufficient Causes of Action Stated in the Allegations in the Complaint
As a rule, every complaint must sufficiently allege a cause of action;
failure to do so warrants its dismissal.19 A complaint is said to assert a
sufficient cause of action if, admitting what appears solely on its face
to be correct, the plaintiff would be entitled to the relief prayed for.
Assuming the facts that are alleged to be true, the court should be able
to render a valid judgment in accordance with the prayer in the
complaint.20
A motion to dismiss based on lack of cause of action hypothetically
admits the truth of the alleged facts. In their Motion to Dismiss,
respondents did not dispute any of petitioner's allegations, and they
admitted that "x x x the crux of plaintiff's cause of action is the
determination of whether or not the assessment of P100 per ticket is
excessive or oppressive."21 They thereby premised their prayer for
dismissal on the Complaint's alleged failure to state a cause of action.
Thus, a reexamination of the Complaint is in order.
The Complaint contains the following factual allegations:
"10. In the second week of February 2002, defendant Rachelle A.
Gamurot, in connivance with PCST, forced plaintiff and her classmates
to buy or take two tickets each, x x x;
"11. Plaintiff and many of her classmates objected to the forced
distribution and selling of tickets to them but the said defendant
warned them that if they refused [to] take or pay the price of the two
tickets they would not be allowed at all to take the final examinations;
"12. As if to add insult to injury, defendant Rachelle A. Gamurot bribed
students with additional fifty points or so in their test score in her
subject just to unjustly influence and compel them into taking the
tickets;
"13. Despite the students' refusal, they were forced to take the tickets
because [of] defendant Rachelle A. Gamurot's coercion and act of
intimidation, but still many of them including the plaintiff did not
attend the dance party imposed upon them by defendants PCST and
Rachelle A. Gamurot;
"14. Plaintiff was not able to pay the price of her own two tickets
because aside form the fact that she could not afford to pay them it is
also against her religious practice as a member of a certain religious
congregation to be attending dance parties and celebrations;
"15. On March 14, 2002, before defendant Rachelle A. Gamurot gave
her class its final examination in the subject 'Logic' she warned that
students who had not paid the tickets would not be allowed to
participate in the examination, for which threat and intimidation many
students were eventually forced to make payments:
"16. Because plaintiff could not afford to pay, defendant Rachelle A.
Gamurot inhumanly made plaintiff sit out the class but the defendant
did not allow her to take her final examination in 'Logic;'
"17. On March 15, 2002 just before the giving of the final examination
in the subject 'Statistics,' defendant Elissa Baladad, in connivance with
defendants Rachelle A. Gamurot and PCST, announced in the
classroom that she was not allowing plaintiff and another student to
take the examination for their failure and refusal to pay the price of the
tickets, and thenceforth she ejected plaintiff and the other student
from the classroom;
"18. Plaintiff pleaded for a chance to take the examination but all
defendants could say was that the prohibition to give the examinations
to non-paying students was an administrative decision;
"19. Plaintiff has already paid her tuition fees and other obligations in
the school;
"20. That the above-cited incident was not a first since PCST also did
another forced distribution of tickets to its students in the first
semester of school year 2001-2002; x x x " 22
The foregoing allegations show two causes of action; first, breach of
contract; and second, liability for tort.
Reciprocity of the
School-Student Contract
In Alcuaz v. PSBA,23 the Court characterized the relationship between
the school and the student as a contract, in which "a student, once
admitted by the school is considered enrolled for one semester."24 Two
years later, in Non v. Dames II,25 the Court modified the "termination
of contract theory" in Alcuaz by holding that the contractual
relationship between the school and the student is not only semestral
in duration, but for the entire period the latter are expected to
complete it."26 Except for the variance in the period during which the
contractual relationship is considered to subsist, both Alcuaz and Non
were unanimous in characterizing the school-student relationship as
contractual in nature.
The school-student relationship is also reciprocal. Thus, it has
consequences appurtenant to and inherent in all contracts of such kind
-- it gives rise to bilateral or reciprocal rights and obligations. The
school undertakes to provide students with education sufficient to
enable them to pursue higher education or a profession. On the other
hand, the students agree to abide by the academic requirements of the
school and to observe its rules and regulations.27
The terms of the school-student contract are defined at the moment
of its inception -- upon enrolment of the student. Standards of
academic performance and the code of behavior and discipline are
usually set forth in manuals distributed to new students at the start of
every school year. Further, schools inform prospective enrollees the
amount of fees and the terms of payment.
In practice, students are normally required to make a down payment
upon enrollment, with the balance to be paid before every preliminary,
midterm and final examination. Their failure to pay their financial
obligation is regarded as a valid ground for the school to deny them
the opportunity to take these examinations.
The foregoing practice does not merely ensure compliance with
financial obligations; it also underlines the importance of major
examinations. Failure to take a major examination is usually fatal to the
students' promotion to the next grade or to graduation. Examination
results form a significant basis for their final grades. These tests are
usually a primary and an indispensable requisite to their elevation to
the next educational level and, ultimately, to their completion of a
course.
Education is not a measurable commodity. It is not possible to
determine who is "better educated" than another. Nevertheless, a
student's grades are an accepted approximation of what would
otherwise be an intangible product of countless hours of study. The
importance of grades cannot be discounted in a setting where
education is generally the gate pass to employment opportunities and
better life; such grades are often the means by which a prospective
employer measures whether a job applicant has acquired the
necessary tools or skills for a particular profession or trade.
Thus, students expect that upon their payment of tuition fees,
satisfaction of the set academic standards, completion of academic
requirements and observance of school rules and regulations, the
school would reward them by recognizing their "completion" of the
course enrolled in.
The obligation on the part of the school has been established in
Magtibay v. Garcia,28 Licup v. University of San Carlos29 and Ateneo de
Manila University v. Garcia,30 in which the Court held that, barring any
violation of the rules on the part of the students, an institution of
higher learning has a contractual obligation to afford its students a fair
opportunity to complete the course they seek to pursue.
We recognize the need of a school to fund its facilities and to meet
astronomical operating costs; this is a reality in running it. Crystal v.
Cebu International School31 upheld the imposition by respondent
school of a "land purchase deposit" in the amount of P50,000 per
student to be used for the "purchase of a piece of land and for the
construction of new buildings and other facilities x x x which the school
would transfer [to] and occupy after the expiration of its lease contract
over its present site."
The amount was refundable after the student graduated or left the
school. After noting that the imposition of the fee was made only after
prior consultation and approval by the parents of the students, the
Court held that the school committed no actionable wrong in refusing
to admit the children of the petitioners therein for their failure to pay
the "land purchase deposit" and the 2.5 percent monthly surcharge
thereon.
In the present case, PCST imposed the assailed revenue-raising
measure belatedly, in the middle of the semester. It exacted the dance
party fee as a condition for the students' taking the final examinations,
and ultimately for its recognition of their ability to finish a course. The
fee, however, was not part of the school-student contract entered into
at the start of the school year. Hence, it could not be unilaterally
imposed to the prejudice of the enrollees.
Such contract is by no means an ordinary one. In Non, we stressed that
the school-student contract "is imbued with public interest,
considering the high priority given by the Constitution to education and
the grant to the State of supervisory and regulatory powers over all
educational institutions."32 Sections 5 (1) and (3) of Article XIV of the
1987 Constitution provide:
"The State shall protect and promote the right of all citizens to quality
education at all levels and shall take appropriate steps to make such
declaration accessible to all.
"Every student has a right to select a profession or course of study,
subject to fair, reasonable and equitable admission and academic
requirements."
The same state policy resonates in Section 9(2) of BP 232, otherwise
known as the Education Act of 1982:
"Section 9. Rights of Students in School. – In addition to other rights,
and subject to the limitations prescribed by law and regulations,
students and pupils in all schools shall enjoy the following rights:
xxx xxx xxx
(2) The right to freely choose their field of study subject to existing
curricula and to continue their course therein up to graduation, except
in cases of academic deficiency, or violation of disciplinary
regulations."
Liability for Tort
In her Complaint, petitioner also charged that private respondents
"inhumanly punish students x x x by reason only of their poverty,
religious practice or lowly station in life, which inculcated upon
[petitioner] the feelings of guilt, disgrace and unworthiness;"33 as a
result of such punishment, she was allegedly unable to finish any of her
subjects for the second semester of that school year and had to lag
behind in her studies by a full year. The acts of respondents supposedly
caused her extreme humiliation, mental agony and "demoralization of
unimaginable proportions" in violation of Articles 19, 21 and 26 of the
Civil Code. These provisions of the law state thus:
"Article 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."
"Article 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."
"Article 26. Every person shall respect the dignity, personality, privacy
and peace of mind of his neighbors and other persons. The following
and similar acts, though they may not constitute a criminal offense,
shall produce a cause of action for damages, prevention and other
relief:
(1) Prying into the privacy of another's residence;
(2) Meddling with or disturbing the private life or family relations of
another;
(3) Intriguing to cause another to be alienated from his friends;
(4) Vexing or humiliating another on account of his beliefs, lowly
station in life, place of birth, physical defect, or other personal
condition."
Generally, liability for tort arises only between parties not otherwise
bound by a contract. An academic institution, however, may be held
liable for tort even if it has an existing contract with its students, since
the act that violated the contract may also be a tort. We ruled thus in
PSBA vs. CA,34 from which we quote:
"x x x A perusal of Article 2176 [of the Civil Code] shows that obligations
arising from quasi-delicts or tort, also known as extra-contractual
obligations, arise only between parties not otherwise bound by
contract, whether express or implied. However, this impression has
not prevented this Court from determining the existence of a tort even
when there obtains a contract. In Air France v. Carrascoso (124 Phil.
722), the private respondent was awarded damages for his
unwarranted expulsion from a first-class seat aboard the petitioner
airline. It is noted, however, that the Court referred to the petitioner-
airline's liability as one arising from tort, not one arising form a contract
of carriage. In effect, Air France is authority for the view that liability
from tort may exist even if there is a contract, for the act that breaks
the contract may be also a tort. x x x This view was not all that
revolutionary, for even as early as 1918, this Court was already of a
similar mind. In Cangco v. Manila Railroad (38 Phil. 780), Mr. Justice
Fisher elucidated thus: 'x x x. When such a contractual relation exists
the obligor may break the contract under such conditions that the
same act which constitutes a breach of the contract would have
constituted the source of an extra-contractual obligation had no
contract existed between the parties.'
"Immediately what comes to mind is the chapter of the Civil Code on
Human Relations, particularly Article 21 x x x."35
Academic Freedom
In their Memorandum, respondents harp on their right to "academic
freedom." We are not impressed. According to present jurisprudence,
academic freedom encompasses the independence of an academic
institution to determine for itself (1) who may teach, (2) what may be
taught, (3) how it shall teach, and (4) who may be admitted to
study.36 In Garcia v. the Faculty Admission Committee, Loyola School of
Theology,37 the Court upheld the respondent therein when it denied a
female student's admission to theological studies in a seminary for
prospective priests. The Court defined the freedom of an academic
institution thus: "to decide for itself aims and objectives and how best
to attain them x x x free from outside coercion or interference save
possibly when overriding public welfare calls for some restraint."38
In Tangonan v. Paño,39 the Court upheld, in the name of academic
freedom, the right of the school to refuse readmission of a nursing
student who had been enrolled on probation, and who had failed her
nursing subjects. These instances notwithstanding, the Court has
emphasized that once a school has, in the name of academic freedom,
set its standards, these should be meticulously observed and should
not be used to discriminate against certain students.40 After accepting
them upon enrollment, the school cannot renege on its contractual
obligation on grounds other than those made known to, and accepted
by, students at the start of the school year.
In sum, the Court holds that the Complaint alleges sufficient causes of
action against respondents, and that it should not have been
summarily dismissed. Needless to say, the Court is not holding
respondents liable for the acts complained of. That will have to be
ruled upon in due course by the court a quo.
WHEREFORE, the Petition is hereby GRANTED, and the assailed Orders
REVERSED. The trial court is DIRECTED to reinstate the Complaint and,
with all deliberate speed, to continue the proceedings in Civil Case No.
U-7541. No costs.
SO ORDERED.
G.R. No. 164012 June 8, 2007
FLORDELIZA MENDOZA, petitioner,
vs.
MUTYA SORIANO and Minor JULIE ANN SORIANO duly represented
by her natural mother and guardian ad litem MUTYA
SORIANO, respondents.
DECISION
QUISUMBING, J.:
In this petition for review under Rule 45 of the Rules of Court,
petitioner asks this Court to reverse and set aside the Decision1 dated
November 17, 2003 and the Resolution2 dated May 24, 2004 of the
Court of Appeals in CA-G.R. CV No. 69037. The appellate court found
petitioner, as employer of Lomer Macasasa, liable for damages.
The facts are as follows:
At around 1:00 a.m., July 14, 1997, Sonny Soriano, while crossing
Commonwealth Avenue near Luzon Avenue in Quezon City, was hit by
a speeding Tamaraw FX driven by Lomer Macasasa. Soriano was
thrown five meters away, while the vehicle only stopped some 25
meters from the point of impact. Gerard Villaspin, one of Soriano’s Respondents appealed. The Court of Appeals reversed the trial court.
companions, asked Macasasa to bring Soriano to the hospital, but after The dispositive portion of the appellate court’s decision reads:
checking out the scene of the incident, Macasasa returned to the FX,
WHEREFORE, the judgment appealed from is REVERSED, and another
only to flee. A school bus brought Soriano to East Avenue Medical
one is hereby rendered ordering [petitioner] Flordeliza Mendoza to pay
Center where he later died. Subsequently, the Quezon City Prosecutor
[respondents] Mutya Soriano and Julie Ann Soriano the following
recommended the filing of a criminal case for reckless imprudence
amounts:
resulting to homicide against Macasasa.3
1. Hospital and Burial Expenses ₱80,926.25
On August 20, 1997, respondents Mutya Soriano and Julie Ann Soriano,
Soriano’s wife and daughter, respectively, filed a complaint for 2. Loss of earning capacity ₱77,000.00
damages against Macasasa and petitioner Flordeliza Mendoza, the
3. Moral Damages ₱20,000.00
registered owner of the vehicle. The complaint was docketed as Civil
Case No. C-18038 in the Regional Trial Court of Caloocan City, Branch 4. Indemnity for the death of Sonny Soriano ₱50,000.00
121. Respondents prayed that Macasasa and petitioner be ordered to
Actual payment of the aforementioned amounts should, however, be
pay them: ₱200,000 moral damages; ₱500,000 for lost income;
reduced by twenty (20%) per cent due to the presence of contributory
₱22,250 for funeral services; ₱45,000 for burial lot; ₱15,150 for
negligence by the victim as provided for in Article 2179 of the Civil
interment and lapida; ₱8,066 for hospitalization, other medical and
Code.
transportation expenses; ₱28,540 for food and drinks during the wake;
₱50,000 exemplary damages; ₱60,000 indemnity for Soriano’s death; SO ORDERED.7
and ₱25,000 for attorney’s fees plus ₱500 per court appearance.4
While the appellate court agreed that Soriano was negligent, it also
In her answer, petitioner Mendoza maintained that she was not liable found Macasasa negligent for speeding, such that he was unable to
since as owner of the vehicle, she had exercised the diligence of a good avoid hitting the victim. It observed that Soriano’s own negligence did
father of a family over her employee, Macasasa. not preclude recovery of damages from Macasasa’s negligence. It
further held that since petitioner failed to present evidence to the
Upon respondents’ motion, the complaint for damages against
contrary, and conformably with Article 21808 of the Civil Code, the
Macasasa was dismissed.
presumption of negligence of the employer in the selection and
After trial, the trial court also dismissed the complaint against supervision of employees stood.
petitioner.5 It found Soriano negligent for crossing Commonwealth
Petitioner’s motion for reconsideration was denied by the appellate
Avenue by using a small gap in the island’s fencing rather than the
court in a Resolution9 dated May 24, 2004.
pedestrian overpass. The lower court also ruled that petitioner was not
negligent in the selection and supervision of Macasasa since Hence, this appeal where petitioner alleges that:
complainants presented no evidence to support their allegation of
I.
petitioner’s negligence.6
THE TOTAL AMOUNT PRAYED FOR IN THE COMPLAINT IS NOT WITHIN
THE JURISDICTION OF THE REGIONAL TRIAL COURT.
II.
[COROLLARILY], THE AWARD OF DAMAGES IN FAVOR OF THE
RESPONDENTS [HAS] NO BASIS IN LAW.10
The issues are simple: (1) Did the Regional Trial Court have jurisdiction
to try the case? and (2) Was there sufficient legal basis to award
damages?
Petitioner argues that the amount claimed by respondents is within the
jurisdiction of the Metropolitan Trial Court. She posits that to
determine the jurisdictional amount, what should only be considered
are the following: ₱22,250 for funeral services; ₱45,000 for burial lot;
₱15,150 for interment and lapida; ₱8,066 for hospitalization and
transportation; ₱28,540 for food and drinks during the wake; and
₱60,000 indemnity for Soriano’s death. She maintains that the sum of
these amounts, ₱179,006, is below the jurisdictional amount of the
Regional Trial Court. She states that under Section 19(8) of the
Judiciary Reorganization Act of 1980, the following claims of
respondents must be excluded: ₱200,000 moral damages, ₱500,000
for lost income; ₱50,000 exemplary damages; ₱25,000 attorney’s fees
plus ₱500 per court appearance. Petitioner thus prays that the decision
of the Court of Appeals be reversed, and the dismissal of the case by
the trial court be affirmed on the ground of lack of jurisdiction.
Section 19(8) of Batas Pambansa Blg. 129,11 as amended by Republic
Act No. 7691, states the pertinent law.
SEC. 19. Jurisdiction in civil cases.–Regional Trial Courts shall exercise
exclusive original jurisdiction:
xxxx
(8) In all other cases in which the demand, exclusive of interest,
damages of whatever kind, attorney's fees, litigation expenses, and
costs or the value of the property in controversy exceeds One hundred
thousand pesos (₱100,000.00) or, in such other cases in Metro Manila,
where the demand, exclusive of the abovementioned items exceeds
Two hundred thousand pesos (₱200,000.00).
But relatedly, Administrative Circular No. 09-9412 expressly states:
xxxx
2. The exclusion of the term "damages of whatever kind" in
determining the jurisdictional amount under Section 19(8) and Section
33(1) of BP Blg. 129, as amended by RA No. 7691, applies to cases
where the damages are merely incidental to or a consequence of the
main cause of action. However, in cases where the claim for damages
is the main cause of action, or one of the causes of action, the amount
of such claim shall be considered in determining the jurisdiction of the
court. (Underscoring supplied.)
Actions for damages based on quasi-delicts, as in this case, are
primarily and effectively actions for the recovery of a sum of money for
the damages for tortious acts.13 In this case, respondents’ claim of
₱929,006 in damages and ₱25,000 attorney’s fees plus ₱500 per court
appearance represents the monetary equivalent for compensation of
the alleged injury. These money claims are the principal reliefs sought
by respondents in their complaint for damages.14 Consequently then,
we hold that the Regional Trial Court of Caloocan City possessed and
properly exercised jurisdiction over the case.15
Petitioner further argues that since respondents caused the dismissal
of the complaint against Macasasa, there is no longer any basis to find
her liable. She claims that "no iota of evidence" was presented in this
case to prove Macasasa’s negligence, and besides, respondents can
recover damages in the criminal case against him.
Respondents counter that as Macasasa’s employer, petitioner was
presumed negligent in selecting and supervising Macasasa after he was
found negligent by the Court of Appeals.
The records show that Macasasa violated two traffic rules under the
Land Transportation and Traffic Code. First, he failed to maintain a safe
speed to avoid endangering lives.16 Both the trial and the appellate
courts found Macasasa overspeeding.17 The records show also that
Soriano was thrown five meters away after he was hit.18 Moreover, the
vehicle stopped only some 25 meters from the point of impact.19
Both circumstances support the conclusion that the FX vehicle driven
by Macasasa was overspeeding. Second, Macasasa, the vehicle driver,
did not aid Soriano, the accident victim, in violation of Section
55,20 Article V of the Land Transportation and Traffic Code. While
Macasasa at first agreed to bring Soriano to the hospital, he fled the
scene in a hurry. Contrary to petitioner’s claim, there is no showing of
any factual basis that Macasasa fled for fear of the people’s wrath.
What remains undisputed is that he did not report the accident to a
police officer, nor did he summon a doctor. Under Article 218521 of the
Civil Code, a person driving a motor vehicle is presumed negligent if at
the time of the mishap, he was violating traffic regulations.
While respondents could recover damages from Macasasa in a criminal
case and petitioner could become subsidiarily liable, still petitioner, as
owner and employer, is directly and separately civilly liable for her
failure to exercise due diligence in supervising Macasasa.22 We must
emphasize that this damage suit is for the quasi-delict of petitioner, as
owner and employer, and not for the delict of Macasasa, as driver and
employee.
Under Article 2180 of the Civil Code, employers are liable for the
damages caused by their employees acting within the scope of their
assigned tasks. The liability arises due to the presumed negligence of
the employers in supervising their employees unless they prove that
they observed all the diligence of a good father of a family to prevent
the damage.
In this case, we hold petitioner primarily and solidarily liable for the
damages caused by Macasasa.23 Respondents could recover directly
from petitioner24 since petitioner failed to prove that she exercised the
diligence of a good father of a family in supervising
Macasasa.25 Indeed, it is unfortunate that petitioner harbored the
notion that the Regional Trial Court did not have jurisdiction over the
case and opted not to present her evidence on this point.
Lastly, we agree that the Court of Appeals did not err in ruling that
Soriano was guilty of contributory negligence for not using the
pedestrian overpass while crossing Commonwealth Avenue. We even
note that the respondents now admit this point, and concede that the
appellate court had properly reduced by 20% the amount of damages
it awarded. Hence, we affirm the reduction26 of the amount earlier
awarded, based on Article 2179 of the Civil Code which reads:
When the plaintiff's own negligence was the immediate and proximate
cause of his injury, he cannot recover damages. But if his negligence
was only contributory, the immediate and proximate cause of the
injury being the defendant's lack of due care, the plaintiff may recover
damages, but the courts shall mitigate the damages to be awarded.
WHEREFORE, we DENY the petition for lack of merit and
hereby AFFIRM the Decision dated November 17, 2003 and the
Resolution dated May 24, 2004 of the Court of Appeals in CA-G.R. CV
No. 69037.
Costs against petitioner.
G.R. No. 126297 January 31, 2007
PROFESSIONAL SERVICES, INC., Petitioner,
vs.
NATIVIDAD and ENRIQUE AGANA, Respondents.
x-----------------------x
G.R. No. 126467 January 31, 2007
NATIVIDAD (Substituted by her children MARCELINO AGANA III,
ENRIQUE AGANA, JR., EMMA AGANA ANDAYA, JESUS AGANA, and
RAYMUND AGANA) and ENRIQUE AGANA, Petitioners,
vs.
JUAN FUENTES, Respondent.
x- - - - - - - - - - - - - - - - - - - -- - - - x
G.R. No. 127590 January 31, 2007
MIGUEL AMPIL, Petitioner,
vs.
NATIVIDAD AGANA and ENRIQUE AGANA, Respondents.
DECISION
SANDOVAL-GUTIERREZ, J.:
Hospitals, having undertaken one of mankind’s most important and
delicate endeavors, must assume the grave responsibility of pursuing
it with appropriate care. The care and service dispensed through this
high trust, however technical, complex and esoteric its character may
be, must meet standards of responsibility commensurate with the
undertaking to preserve and protect the health, and indeed, the very
lives of those placed in the hospital’s keeping.1
Assailed in these three consolidated petitions for review on certiorari
is the Court of Appeals’ Decision2 dated September 6, 1996 in CA-G.R.
CV No. 42062 and CA-G.R. SP No. 32198 affirming with modification
the Decision3 dated March 17, 1993 of the Regional Trial Court (RTC),
Branch 96, Quezon City in Civil Case No. Q-43322 and nullifying its
Order dated September 21, 1993.
The facts, as culled from the records, are:
On April 4, 1984, Natividad Agana was rushed to the Medical City
General Hospital (Medical City Hospital) because of difficulty of bowel
movement and bloody anal discharge. After a series of medical
examinations, Dr. Miguel Ampil, petitioner in G.R. No. 127590,
diagnosed her to be suffering from "cancer of the sigmoid."
On April 11, 1984, Dr. Ampil, assisted by the medical staff4 of the
Medical City Hospital, performed an anterior resection surgery on
Natividad. He found that the malignancy in her sigmoid area had
spread on her left ovary, necessitating the removal of certain portions
of it. Thus, Dr. Ampil obtained the consent of Natividad’s husband,
Enrique Agana, to permit Dr. Juan Fuentes, respondent in G.R. No.
126467, to perform hysterectomy on her.
After Dr. Fuentes had completed the hysterectomy, Dr. Ampil took
over, completed the operation and closed the incision.
However, the operation appeared to be flawed. In the corresponding
Record of Operation dated April 11, 1984, the attending nurses
entered these remarks:
"sponge count lacking 2
"announced to surgeon searched (sic) done but to no avail continue for
closure."
On April 24, 1984, Natividad was released from the hospital. Her
hospital and medical bills, including the doctors’ fees, amounted to
P60,000.00.
After a couple of days, Natividad complained of excruciating pain in her
anal region. She consulted both Dr. Ampil and Dr. Fuentes about it.
They told her that the pain was the natural consequence of the surgery.
Dr. Ampil then recommended that she consult an oncologist to
examine the cancerous nodes which were not removed during the
operation.
On May 9, 1984, Natividad, accompanied by her husband, went to the
United States to seek further treatment. After four months of
consultations and laboratory examinations, Natividad was told she was
free of cancer. Hence, she was advised to return to the Philippines.
On August 31, 1984, Natividad flew back to the Philippines, still
suffering from pains. Two weeks thereafter, her daughter found a
piece of gauze protruding from her vagina. Upon being informed about
it, Dr. Ampil proceeded to her house where he managed to extract by
hand a piece of gauze measuring 1.5 inches in width. He then assured
her that the pains would soon vanish.
Dr. Ampil’s assurance did not come true. Instead, the pains intensified,
prompting Natividad to seek treatment at the Polymedic General
Hospital. While confined there, Dr. Ramon Gutierrez detected the
presence of another foreign object in her vagina -- a foul-smelling
gauze measuring 1.5 inches in width which badly infected her vaginal
vault. A recto-vaginal fistula had formed in her reproductive organs
which forced stool to excrete through the vagina. Another surgical
operation was needed to remedy the damage. Thus, in October 1984,
Natividad underwent another surgery.
On November 12, 1984, Natividad and her husband filed with the RTC,
Branch 96, Quezon City a complaint for damages against the
Professional Services, Inc. (PSI), owner of the Medical City Hospital, Dr.
Ampil, and Dr. Fuentes, docketed as Civil Case No. Q-43322. They
alleged that the latter are liable for negligence for leaving two pieces
of gauze inside Natividad’s body and malpractice for concealing their
acts of negligence.
Meanwhile, Enrique Agana also filed with the Professional Regulation
Commission (PRC) an administrative complaint for gross negligence
and malpractice against Dr. Ampil and Dr. Fuentes, docketed as
Administrative Case No. 1690. The PRC Board of Medicine heard the
case only with respect to Dr. Fuentes because it failed to acquire
jurisdiction over Dr. Ampil who was then in the United States.
On February 16, 1986, pending the outcome of the above cases,
Natividad died and was duly substituted by her above-named children
(the Aganas).
On March 17, 1993, the RTC rendered its Decision in favor of the
Aganas, finding PSI, Dr. Ampil and Dr. Fuentes liable for negligence and
malpractice, the decretal part of which reads:
WHEREFORE, judgment is hereby rendered for the plaintiffs ordering
the defendants PROFESSIONAL SERVICES, INC., DR. MIGUEL AMPIL and
DR. JUAN FUENTES to pay to the plaintiffs, jointly and severally, except
in respect of the award for exemplary damages and the interest
thereon which are the liabilities of defendants Dr. Ampil and Dr.
Fuentes only, as follows:
1. As actual damages, the following amounts:
a. The equivalent in Philippine Currency of the total of US$19,900.00 at
the rate of P21.60-US$1.00, as reimbursement of actual expenses
incurred in the United States of America;
b. The sum of P4,800.00 as travel taxes of plaintiffs and their physician
daughter;
c. The total sum of P45,802.50, representing the cost of hospitalization
at Polymedic Hospital, medical fees, and cost of the saline solution;
2. As moral damages, the sum of P2,000,000.00;
3. As exemplary damages, the sum of P300,000.00;
4. As attorney’s fees, the sum of P250,000.00;
5. Legal interest on items 1 (a), (b), and (c); 2; and 3 hereinabove, from
date of filing of the complaint until full payment; and
6. Costs of suit.
SO ORDERED.
Aggrieved, PSI, Dr. Fuentes and Dr. Ampil interposed an appeal to the
Court of Appeals, docketed as CA-G.R. CV No. 42062.
Incidentally, on April 3, 1993, the Aganas filed with the RTC a motion
for a partial execution of its Decision, which was granted in an Order
dated May 11, 1993. Thereafter, the sheriff levied upon certain
properties of Dr. Ampil and sold them for P451,275.00 and delivered
the amount to the Aganas.
Following their receipt of the money, the Aganas entered into an
agreement with PSI and Dr. Fuentes to indefinitely suspend any further
execution of the RTC Decision. However, not long thereafter, the
Aganas again filed a motion for an alias writ of execution against the
properties of PSI and Dr. Fuentes. On September 21, 1993, the RTC
granted the motion and issued the corresponding writ, prompting Dr.
Fuentes to file with the Court of Appeals a petition for certiorari and
prohibition, with prayer for preliminary injunction, docketed as CA-
G.R. SP No. 32198. During its pendency, the Court of Appeals issued a
Resolution5 dated October 29, 1993 granting Dr. Fuentes’ prayer for
injunctive relief.
On January 24, 1994, CA-G.R. SP No. 32198 was consolidated with CA-
G.R. CV No. 42062.
Meanwhile, on January 23, 1995, the PRC Board of Medicine rendered
its Decision6 in Administrative Case No. 1690 dismissing the case
against Dr. Fuentes. The Board held that the prosecution failed to show
that Dr. Fuentes was the one who left the two pieces of gauze inside
Natividad’s body; and that he concealed such fact from Natividad.
On September 6, 1996, the Court of Appeals rendered its Decision
jointly disposing of CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198,
thus:
WHEREFORE, except for the modification that the case against
defendant-appellant Dr. Juan Fuentes is hereby DISMISSED, and with
the pronouncement that defendant-appellant Dr. Miguel Ampil is
liable to reimburse defendant-appellant Professional Services, Inc.,
whatever amount the latter will pay or had paid to the plaintiffs-
appellees, the decision appealed from is hereby AFFIRMED and the
instant appeal DISMISSED.
Concomitant with the above, the petition for certiorari and prohibition
filed by herein defendant-appellant Dr. Juan Fuentes in CA-G.R. SP No.
32198 is hereby GRANTED and the challenged order of the respondent
judge dated September 21, 1993, as well as the alias writ of execution
issued pursuant thereto are hereby NULLIFIED and SET ASIDE. The
bond posted by the petitioner in connection with the writ of
preliminary injunction issued by this Court on November 29, 1993 is
hereby cancelled.
Costs against defendants-appellants Dr. Miguel Ampil and Professional
Services, Inc.
SO ORDERED.
Only Dr. Ampil filed a motion for reconsideration, but it was denied in
a Resolution7 dated December 19, 1996.
Hence, the instant consolidated petitions.
In G.R. No. 126297, PSI alleged in its petition that the Court of Appeals
erred in holding that: (1) it is estopped from raising the defense that
Dr. Ampil is not its employee; (2) it is solidarily liable with Dr. Ampil;
and (3) it is not entitled to its counterclaim against the Aganas. PSI
contends that Dr. Ampil is not its employee, but a mere consultant or
independent contractor. As such, he alone should answer for his
negligence.
In G.R. No. 126467, the Aganas maintain that the Court of Appeals
erred in finding that Dr. Fuentes is not guilty of negligence or medical
malpractice, invoking the doctrine of res ipsa loquitur. They contend
that the pieces of gauze are prima facie proofs that the operating
surgeons have been negligent.
Finally, in G.R. No. 127590, Dr. Ampil asserts that the Court of Appeals
erred in finding him liable for negligence and malpractice sans
evidence that he left the two pieces of gauze in Natividad’s vagina. He The glaring truth is that all the major circumstances, taken together, as
pointed to other probable causes, such as: (1) it was Dr. Fuentes who specified by the Court of Appeals, directly point to Dr. Ampil as the
used gauzes in performing the hysterectomy; (2) the attending nurses’ negligent party, thus:
failure to properly count the gauzes used during surgery; and (3) the
First, it is not disputed that the surgeons used gauzes as sponges to
medical intervention of the American doctors who examined Natividad
control the bleeding of the patient during the surgical operation.
in the United States of America.
Second, immediately after the operation, the nurses who assisted in
For our resolution are these three vital issues: first, whether the Court
the surgery noted in their report that the ‘sponge count (was) lacking
of Appeals erred in holding Dr. Ampil liable for negligence and
2’; that such anomaly was ‘announced to surgeon’ and that a ‘search
malpractice; second, whether the Court of Appeals erred in absolving
was done but to no avail’ prompting Dr. Ampil to ‘continue for closure’
Dr. Fuentes of any liability; and third, whether PSI may be held
x x x.
solidarily liable for the negligence of Dr. Ampil.
Third, after the operation, two (2) gauzes were extracted from the
I - G.R. No. 127590
same spot of the body of Mrs. Agana where the surgery was
Whether the Court of Appeals Erred in Holding Dr. Ampil performed.
Liable for Negligence and Malpractice. An operation requiring the placing of sponges in the incision is not
complete until the sponges are properly removed, and it is settled that
Dr. Ampil, in an attempt to absolve himself, gears the Court’s attention
the leaving of sponges or other foreign substances in the wound after
to other possible causes of Natividad’s detriment. He argues that the
the incision has been closed is at least prima facie negligence by the
Court should not discount either of the following possibilities: first, Dr.
operating surgeon.8 To put it simply, such act is considered so
Fuentes left the gauzes in Natividad’s body after performing
inconsistent with due care as to raise an inference of negligence. There
hysterectomy; second, the attending nurses erred in counting the
are even legions of authorities to the effect that such act is negligence
gauzes; and third, the American doctors were the ones who placed the
per se.9
gauzes in Natividad’s body.
Of course, the Court is not blind to the reality that there are times when
Dr. Ampil’s arguments are purely conjectural and without basis.
danger to a patient’s life precludes a surgeon from further searching
Records show that he did not present any evidence to prove that the
missing sponges or foreign objects left in the body. But this does not
American doctors were the ones who put or left the gauzes in
leave him free from any obligation. Even if it has been shown that a
Natividad’s body. Neither did he submit evidence to rebut the
surgeon was required by the urgent necessities of the case to leave a
correctness of the record of operation, particularly the number of
sponge in his patient’s abdomen, because of the dangers attendant
gauzes used. As to the alleged negligence of Dr. Fuentes, we are
upon delay, still, it is his legal duty to so inform his patient within a
mindful that Dr. Ampil examined his (Dr. Fuentes’) work and found it in
reasonable time thereafter by advising her of what he had been
order.
compelled to do. This is in order that she might seek relief from the
effects of the foreign object left in her body as her condition might
permit. The ruling in Smith v. Zeagler10 is explicit, thus:
The removal of all sponges used is part of a surgical operation, and
when a physician or surgeon fails to remove a sponge he has placed in
his patient’s body that should be removed as part of the operation, he
thereby leaves his operation uncompleted and creates a new condition
which imposes upon him the legal duty of calling the new condition to
his patient’s attention, and endeavoring with the means he has at hand
to minimize and avoid untoward results likely to ensue therefrom.
Here, Dr. Ampil did not inform Natividad about the missing two pieces
of gauze. Worse, he even misled her that the pain she was experiencing
was the ordinary consequence of her operation. Had he been more
candid, Natividad could have taken the immediate and appropriate
medical remedy to remove the gauzes from her body. To our mind,
what was initially an act of negligence by Dr. Ampil has ripened into a
deliberate wrongful act of deceiving his patient.
This is a clear case of medical malpractice or more appropriately,
medical negligence. To successfully pursue this kind of case, a patient
must only prove that a health care provider either failed to do
something which a reasonably prudent health care provider would
have done, or that he did something that a reasonably prudent
provider would not have done; and that failure or action caused injury
to the patient.11 Simply put, the elements are duty, breach, injury and
proximate causation. Dr, Ampil, as the lead surgeon, had the duty to
remove all foreign objects, such as gauzes, from Natividad’s body
before closure of the incision. When he failed to do so, it was his duty
to inform Natividad about it. Dr. Ampil breached both duties. Such
breach caused injury to Natividad, necessitating her further
examination by American doctors and another surgery. That Dr.
Ampil’s negligence is the proximate cause12 of Natividad’s injury could
be traced from his act of closing the incision despite the information
given by the attending nurses that two pieces of gauze were still
missing. That they were later on extracted from Natividad’s vagina
established the causal link between Dr. Ampil’s negligence and the
injury. And what further aggravated such injury was his deliberate
concealment of the missing gauzes from the knowledge of Natividad
and her family.
II - G.R. No. 126467
Whether the Court of Appeals Erred in Absolving
Dr. Fuentes of any Liability
The Aganas assailed the dismissal by the trial court of the case against
Dr. Fuentes on the ground that it is contrary to the doctrine of res ipsa
loquitur. According to them, the fact that the two pieces of gauze were
left inside Natividad’s body is a prima facie evidence of Dr. Fuentes’
negligence.
We are not convinced.
Literally, res ipsa loquitur means "the thing speaks for itself." It is the
rule that the fact of the occurrence of an injury, taken with the
surrounding circumstances, may permit an inference or raise a
presumption of negligence, or make out a plaintiff’s prima facie case,
and present a question of fact for defendant to meet with an
explanation.13 Stated differently, where the thing which caused the
injury, without the fault of the injured, is under the exclusive control of
the defendant and the injury is such that it should not have occurred if
he, having such control used proper care, it affords reasonable
evidence, in the absence of explanation that the injury arose from the
defendant’s want of care, and the burden of proof is shifted to him to
establish that he has observed due care and diligence.14
From the foregoing statements of the rule, the requisites for the
applicability of the doctrine of res ipsa loquitur are: (1) the occurrence
of an injury; (2) the thing which caused the injury was under the control
and management of the defendant; (3) the occurrence was such that
in the ordinary course of things, would not have happened if those who
had control or management used proper care; and (4) the absence of
explanation by the defendant. Of the foregoing requisites, the most
instrumental is the "control and management of the thing which
caused the injury."15
We find the element of "control and management of the thing which
caused the injury" to be wanting. Hence, the doctrine of res ipsa
loquitur will not lie.
It was duly established that Dr. Ampil was the lead surgeon during the
operation of Natividad. He requested the assistance of Dr. Fuentes only
to perform hysterectomy when he (Dr. Ampil) found that the
malignancy in her sigmoid area had spread to her left ovary. Dr.
Fuentes performed the surgery and thereafter reported and showed
his work to Dr. Ampil. The latter examined it and finding everything to
be in order, allowed Dr. Fuentes to leave the operating room. Dr. Ampil
then resumed operating on Natividad. He was about to finish the
procedure when the attending nurses informed him that two pieces of
gauze were missing. A "diligent search" was conducted, but the
misplaced gauzes were not found. Dr. Ampil then directed that the
incision be closed. During this entire period, Dr. Fuentes was no longer
in the operating room and had, in fact, left the hospital.
Under the "Captain of the Ship" rule, the operating surgeon is the
person in complete charge of the surgery room and all personnel
connected with the operation. Their duty is to obey his orders.16 As
stated before, Dr. Ampil was the lead surgeon. In other words, he was
the "Captain of the Ship." That he discharged such role is evident from
his following conduct: (1) calling Dr. Fuentes to perform a
hysterectomy; (2) examining the work of Dr. Fuentes and finding it in
order; (3) granting Dr. Fuentes’ permission to leave; and (4) ordering
the closure of the incision. To our mind, it was this act of ordering the
closure of the incision notwithstanding that two pieces of gauze
remained unaccounted for, that caused injury to Natividad’s body.
Clearly, the control and management of the thing which caused the
injury was in the hands of Dr. Ampil, not Dr. Fuentes.
In this jurisdiction, res ipsa loquitur is not a rule of substantive law,
hence, does not per se create or constitute an independent or separate
ground of liability, being a mere evidentiary rule.17 In other words,
mere invocation and application of the doctrine does not dispense with
the requirement of proof of negligence. Here, the negligence was
proven to have been committed by Dr. Ampil and not by Dr. Fuentes.
III - G.R. No. 126297
Whether PSI Is Liable for the Negligence of Dr. Ampil
The third issue necessitates a glimpse at the historical development of
hospitals and the resulting theories concerning their liability for the
negligence of physicians.
Until the mid-nineteenth century, hospitals were generally charitable
institutions, providing medical services to the lowest classes of society,
without regard for a patient’s ability to pay.18 Those who could afford
medical treatment were usually treated at home by their
doctors.19 However, the days of house calls and philanthropic health
care are over. The modern health care industry continues to distance
itself from its charitable past and has experienced a significant
conversion from a not-for-profit health care to for-profit hospital
businesses. Consequently, significant changes in health law have
accompanied the business-related changes in the hospital industry.
One important legal change is an increase in hospital liability for
medical malpractice. Many courts now allow claims for hospital
vicarious liability under the theories of respondeat superior, apparent
authority, ostensible authority, or agency by estoppel. 20
In this jurisdiction, the statute governing liability for negligent acts is
Article 2176 of the Civil Code, which reads:
Art. 2176. Whoever by act or omission causes damage to another,
there being fault or negligence, is obliged to pay for the damage done.
Such fault or negligence, if there is no pre-existing contractual relation
between the parties, is called a quasi-delict and is governed by the
provisions of this Chapter.
A derivative of this provision is Article 2180, the rule governing
vicarious liability under the doctrine of respondeat superior, thus:
ART. 2180. The obligation imposed by Article 2176 is demandable not
only for one’s own acts or omissions, but also for those of persons for
whom one is responsible.
x x x x x x
The owners and managers of an establishment or enterprise are
likewise responsible for damages caused by their employees in the
service of the branches in which the latter are employed or on the
occasion of their functions.
Employers shall be liable for the damages caused by their employees
and household helpers acting within the scope of their assigned tasks
even though the former are not engaged in any business or industry.
x x x x x x
The responsibility treated of in this article shall cease when the persons
herein mentioned prove that they observed all the diligence of a good
father of a family to prevent damage.
A prominent civilist commented that professionals engaged by an
employer, such as physicians, dentists, and pharmacists, are not
"employees" under this article because the manner in which they
perform their work is not within the control of the latter (employer). In
other words, professionals are considered personally liable for the
fault or negligence they commit in the discharge of their duties, and
their employer cannot be held liable for such fault or negligence. In the
context of the present case, "a hospital cannot be held liable for the
fault or negligence of a physician or surgeon in the treatment or
operation of patients."21
The foregoing view is grounded on the traditional notion that the
professional status and the very nature of the physician’s calling
preclude him from being classed as an agent or employee of a hospital,
whenever he acts in a professional capacity.22 It has been said that
medical practice strictly involves highly developed and specialized
knowledge,23 such that physicians are generally free to exercise their
own skill and judgment in rendering medical services sans
interference.24 Hence, when a doctor practices medicine in a hospital
setting, the hospital and its employees are deemed to subserve him in
his ministrations to the patient and his actions are of his own
responsibility.25
The case of Schloendorff v. Society of New York Hospital26 was then
considered an authority for this view. The "Schloendorff doctrine"
regards a physician, even if employed by a hospital, as an independent
contractor because of the skill he exercises and the lack of control
exerted over his work. Under this doctrine, hospitals are exempt from
the application of the respondeat superior principle for fault or
negligence committed by physicians in the discharge of their
profession.
However, the efficacy of the foregoing doctrine has weakened with the
significant developments in medical care. Courts came to realize that
modern hospitals are increasingly taking active role in supplying and
regulating medical care to patients. No longer were a hospital’s
functions limited to furnishing room, food, facilities for treatment and
operation, and attendants for its patients. Thus, in Bing v. Thunig,27 the
New York Court of Appeals deviated from the Schloendorff doctrine,
noting that modern hospitals actually do far more than provide
facilities for treatment. Rather, they regularly employ, on a salaried
basis, a large staff of physicians, interns, nurses, administrative and
manual workers. They charge patients for medical care and treatment,
even collecting for such services through legal action, if necessary. The
court then concluded that there is no reason to exempt hospitals from
the universal rule of respondeat superior.
In our shores, the nature of the relationship between the hospital and
the physicians is rendered inconsequential in view of our categorical
pronouncement in Ramos v. Court of Appeals28 that for purposes of
apportioning responsibility in medical negligence cases, an employer-
employee relationship in effect exists between hospitals and their
attending and visiting physicians. This Court held:
"We now discuss the responsibility of the hospital in this particular
incident. The unique practice (among private hospitals) of filling up
specialist staff with attending and visiting "consultants," who are
allegedly not hospital employees, presents problems in apportioning
responsibility for negligence in medical malpractice cases. However,
the difficulty is more apparent than real.
In the first place, hospitals exercise significant control in the hiring and
firing of consultants and in the conduct of their work within the
hospital premises. Doctors who apply for ‘consultant’ slots, visiting or
attending, are required to submit proof of completion of residency,
their educational qualifications, generally, evidence of accreditation by
the appropriate board (diplomate), evidence of fellowship in most
cases, and references. These requirements are carefully scrutinized by
members of the hospital administration or by a review committee set
up by the hospital who either accept or reject the application. x x x.
After a physician is accepted, either as a visiting or attending
consultant, he is normally required to attend clinico-pathological
conferences, conduct bedside rounds for clerks, interns and residents,
moderate grand rounds and patient audits and perform other tasks
and responsibilities, for the privilege of being able to maintain a clinic
in the hospital, and/or for the privilege of admitting patients into the
hospital. In addition to these, the physician’s performance as a
specialist is generally evaluated by a peer review committee on the
basis of mortality and morbidity statistics, and feedback from patients,
nurses, interns and residents. A consultant remiss in his duties, or a
consultant who regularly falls short of the minimum standards
acceptable to the hospital or its peer review committee, is normally
politely terminated.
In other words, private hospitals, hire, fire and exercise real control
over their attending and visiting ‘consultant’ staff. While ‘consultants’
are not, technically employees, x x x, the control exercised, the hiring,
and the right to terminate consultants all fulfill the important hallmarks
of an employer-employee relationship, with the exception of the
payment of wages. In assessing whether such a relationship in fact
exists, the control test is determining. Accordingly, on the basis of the
foregoing, we rule that for the purpose of allocating responsibility in
medical negligence cases, an employer-employee relationship in effect
exists between hospitals and their attending and visiting physicians. "
But the Ramos pronouncement is not our only basis in sustaining PSI’s
liability. Its liability is also anchored upon the agency principle of
apparent authority or agency by estoppel and the doctrine of
corporate negligence which have gained acceptance in the
determination of a hospital’s liability for negligent acts of health
professionals. The present case serves as a perfect platform to test the
applicability of these doctrines, thus, enriching our jurisprudence.
Apparent authority, or what is sometimes referred to as the "holding
out" theory, or doctrine of ostensible agency or agency by
estoppel,29 has its origin from the law of agency. It imposes liability, not
as the result of the reality of a contractual relationship, but rather
because of the actions of a principal or an employer in somehow
misleading the public into believing that the relationship or the
authority exists.30 The concept is essentially one of estoppel and has
been explained in this manner:
"The principal is bound by the acts of his agent with the apparent
authority which he knowingly permits the agent to assume, or which
he holds the agent out to the public as possessing. The question in
every case is whether the principal has by his voluntary act placed the
agent in such a situation that a person of ordinary prudence,
conversant with business usages and the nature of the particular
business, is justified in presuming that such agent has authority to
perform the particular act in question.31
The applicability of apparent authority in the field of hospital liability
was upheld long time ago in Irving v. Doctor Hospital of Lake Worth,
Inc.32 There, it was explicitly stated that "there does not appear to be
any rational basis for excluding the concept of apparent authority from
the field of hospital liability." Thus, in cases where it can be shown that
a hospital, by its actions, has held out a particular physician as its agent
and/or employee and that a patient has accepted treatment from that
physician in the reasonable belief that it is being rendered in behalf of
the hospital, then the hospital will be liable for the physician’s
negligence.
Our jurisdiction recognizes the concept of an agency by implication or
estoppel. Article 1869 of the Civil Code reads:
ART. 1869. Agency may be express, or implied from the acts of the
principal, from his silence or lack of action, or his failure to repudiate
the agency, knowing that another person is acting on his behalf
without authority.
In this case, PSI publicly displays in the lobby of the Medical City
Hospital the names and specializations of the physicians associated or
accredited by it, including those of Dr. Ampil and Dr. Fuentes. We
concur with the Court of Appeals’ conclusion that it "is now estopped
from passing all the blame to the physicians whose names it proudly
paraded in the public directory leading the public to believe that it
vouched for their skill and competence." Indeed, PSI’s act is
tantamount to holding out to the public that Medical City Hospital,
through its accredited physicians, offers quality health care services. By
accrediting Dr. Ampil and Dr. Fuentes and publicly advertising their
qualifications, the hospital created the impression that they were its
agents, authorized to perform medical or surgical services for its
patients. As expected, these patients, Natividad being one of them,
accepted the services on the reasonable belief that such were being
rendered by the hospital or its employees, agents, or servants. The trial
court correctly pointed out:
x x x regardless of the education and status in life of the patient, he
ought not be burdened with the defense of absence of employer-
employee relationship between the hospital and the independent
physician whose name and competence are certainly certified to the
general public by the hospital’s act of listing him and his specialty in its
lobby directory, as in the case herein. The high costs of today’s medical
and health care should at least exact on the hospital greater, if not
broader, legal responsibility for the conduct of treatment and surgery
within its facility by its accredited physician or surgeon, regardless of
whether he is independent or employed."33
The wisdom of the foregoing ratiocination is easy to discern. Corporate
entities, like PSI, are capable of acting only through other individuals,
such as physicians. If these accredited physicians do their job well, the
hospital succeeds in its mission of offering quality medical services and
thus profits financially. Logically, where negligence mars the quality of
its services, the hospital should not be allowed to escape liability for
the acts of its ostensible agents.
We now proceed to the doctrine of corporate negligence or corporate
responsibility.
One allegation in the complaint in Civil Case No. Q-43332 for
negligence and malpractice is that PSI as owner, operator and manager
of Medical City Hospital, "did not perform the necessary supervision
nor exercise diligent efforts in the supervision of Drs. Ampil and
Fuentes and its nursing staff, resident doctors, and medical interns
who assisted Drs. Ampil and Fuentes in the performance of their duties
as surgeons."34 Premised on the doctrine of corporate negligence, the
trial court held that PSI is directly liable for such breach of duty.
We agree with the trial court.
Recent years have seen the doctrine of corporate negligence as the
judicial answer to the problem of allocating hospital’s liability for the
negligent acts of health practitioners, absent facts to support the
application of respondeat superior or apparent authority. Its
formulation proceeds from the judiciary’s acknowledgment that in
these modern times, the duty of providing quality medical service is no
longer the sole prerogative and responsibility of the physician. The
modern hospitals have changed structure. Hospitals now tend to
organize a highly professional medical staff whose competence and
performance need to be monitored by the hospitals commensurate
with their inherent responsibility to provide quality medical care.35
The doctrine has its genesis in Darling v. Charleston Community
Hospital.36 There, the Supreme Court of Illinois held that "the jury
could have found a hospital negligent, inter alia, in failing to have a
sufficient number of trained nurses attending the patient; failing to
require a consultation with or examination by members of the hospital
staff; and failing to review the treatment rendered to the patient." On
the basis of Darling, other jurisdictions held that a hospital’s corporate
negligence extends to permitting a physician known to be incompetent
to practice at the hospital.37 With the passage of time, more duties
were expected from hospitals, among them: (1) the use of reasonable
care in the maintenance of safe and adequate facilities and equipment;
(2) the selection and retention of competent physicians; (3) the
overseeing or supervision of all persons who practice medicine within
its walls; and (4) the formulation, adoption and enforcement of
adequate rules and policies that ensure quality care for its
patients.38 Thus, in Tucson Medical Center, Inc. v. Misevich,39 it was
held that a hospital, following the doctrine of corporate responsibility,
has the duty to see that it meets the standards of responsibilities for
the care of patients. Such duty includes the proper supervision of the
members of its medical staff. And in Bost v. Riley,40 the court concluded
that a patient who enters a hospital does so with the reasonable
expectation that it will attempt to cure him. The hospital accordingly
has the duty to make a reasonable effort to monitor and oversee the
treatment prescribed and administered by the physicians practicing in
its premises.
In the present case, it was duly established that PSI operates the
Medical City Hospital for the purpose and under the concept of
providing comprehensive medical services to the public. Accordingly, it
has the duty to exercise reasonable care to protect from harm all
patients admitted into its facility for medical treatment. Unfortunately,
PSI failed to perform such duty. The findings of the trial court are
convincing, thus:
x x x PSI’s liability is traceable to its failure to conduct an investigation
of the matter reported in the nota bene of the count nurse. Such failure
established PSI’s part in the dark conspiracy of silence and
concealment about the gauzes. Ethical considerations, if not also legal,
dictated the holding of an immediate inquiry into the events, if not for
the benefit of the patient to whom the duty is primarily owed, then in
the interest of arriving at the truth. The Court cannot accept that the
medical and the healing professions, through their members like
defendant surgeons, and their institutions like PSI’s hospital facility,
can callously turn their backs on and disregard even a mere probability
of mistake or negligence by refusing or failing to investigate a report of
such seriousness as the one in Natividad’s case.
It is worthy to note that Dr. Ampil and Dr. Fuentes operated on
Natividad with the assistance of the Medical City Hospital’s staff,
composed of resident doctors, nurses, and interns. As such, it is
reasonable to conclude that PSI, as the operator of the hospital, has
actual or constructive knowledge of the procedures carried out,
particularly the report of the attending nurses that the two pieces of
gauze were missing. In Fridena v. Evans,41 it was held that a corporation
is bound by the knowledge acquired by or notice given to its agents or
officers within the scope of their authority and in reference to a matter
to which their authority extends. This means that the knowledge of any
of the staff of Medical City Hospital constitutes knowledge of PSI. Now,
the failure of PSI, despite the attending nurses’ report, to investigate
and inform Natividad regarding the missing gauzes amounts to callous
negligence. Not only did PSI breach its duties to oversee or supervise
all persons who practice medicine within its walls, it also failed to take
an active step in fixing the negligence committed. This renders PSI, not
only vicariously liable for the negligence of Dr. Ampil under Article 2180
of the Civil Code, but also directly liable for its own negligence under
Article 2176. In Fridena, the Supreme Court of Arizona held:
x x x In recent years, however, the duty of care owed to the patient by
the hospital has expanded. The emerging trend is to hold the hospital
responsible where the hospital has failed to monitor and review
medical services being provided within its walls. See Kahn Hospital
Malpractice Prevention, 27 De Paul . Rev. 23 (1977).
Among the cases indicative of the ‘emerging trend’ is Purcell v.
Zimbelman, 18 Ariz. App. 75,500 P. 2d 335 (1972). In Purcell, the
hospital argued that it could not be held liable for the malpractice of a
medical practitioner because he was an independent contractor within
the hospital. The Court of Appeals pointed out that the hospital had
created a professional staff whose competence and performance was
to be monitored and reviewed by the governing body of the hospital,
and the court held that a hospital would be negligent where it had
knowledge or reason to believe that a doctor using the facilities was
employing a method of treatment or care which fell below the
recognized standard of care.
Subsequent to the Purcell decision, the Arizona Court of Appeals held
that a hospital has certain inherent responsibilities regarding the
quality of medical care furnished to patients within its walls and it must
meet the standards of responsibility commensurate with this
undertaking. Beeck v. Tucson General Hospital, 18 Ariz. App. 165, 500
P. 2d 1153 (1972). This court has confirmed the rulings of the Court of
Appeals that a hospital has the duty of supervising the competence of
the doctors on its staff. x x x.
x x x x x x
In the amended complaint, the plaintiffs did plead that the operation
was performed at the hospital with its knowledge, aid, and assistance,
and that the negligence of the defendants was the proximate cause of
the patient’s injuries. We find that such general allegations of
negligence, along with the evidence produced at the trial of this case,
are sufficient to support the hospital’s liability based on the theory of
negligent supervision."
Anent the corollary issue of whether PSI is solidarily liable with Dr.
Ampil for damages, let it be emphasized that PSI, apart from a general
denial of its responsibility, failed to adduce evidence showing that it
exercised the diligence of a good father of a family in the accreditation
and supervision of the latter. In neglecting to offer such proof, PSI
failed to discharge its burden under the last paragraph of Article 2180
cited earlier, and, therefore, must be adjudged solidarily liable with Dr.
Ampil. Moreover, as we have discussed, PSI is also directly liable to the
Aganas.
One final word. Once a physician undertakes the treatment and care
of a patient, the law imposes on him certain obligations. In order to
escape liability, he must possess that reasonable degree of learning,
skill and experience required by his profession. At the same time, he
must apply reasonable care and diligence in the exercise of his skill and
the application of his knowledge, and exert his best judgment.
WHEREFORE, we DENY all the petitions and AFFIRM the challenged
Decision of the Court of Appeals in CA-G.R. CV No. 42062 and CA-G.R.
SP No. 32198.
G.R. No. 150843 March 14, 2003
CATHAY PACIFIC AIRWAYS, LTD., petitioner,
vs.
SPOUSES DANIEL VAZQUEZ and MARIA LUISA MADRIGAL
VAZQUEZ, respondents.
DAVIDE, JR., C.J.:
Is an involuntary upgrading of an airline passenger’s 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 Cathay’s 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 Cathay’s 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 Cathay’s 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
Cathay’s Country Manager Argus Guy Robson, informed the Vazquezes
that Cathay would investigate the incident and get back to them within
a week’s time.
On 8 November 1996, after Cathay’s 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
attorney’s fees.
In their complaint, the Vazquezes alleged that when they 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. Chiu’s 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, Cathay’s 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. Vazquez’s 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 Cathay’s 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
attorney’s fees. Hence, it prayed for the dismissal of the complaint and
for payment of P100,000 for exemplary damages and P300,000 as
attorney’s 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
Cathay’s 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 attorney’s fees and other
litigation expenses, such as those for the taking of the depositions of
Yuen and Chiu.
In its decision1 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) Attorney’s 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 Cathay’s revenues. Cathay’s 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 attorney’s 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
former’s 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 Appeals3 where we recognized that, in accordance with the
Civil Aeronautics Board’s 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 attorney’s 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
attorney’s 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 passenger’s 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 Cathay’s 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 Cathay’s 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 defendant’s 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 attorney’s fees.17
The most that can be adjudged in favor of the Vazquezes for Cathay’s
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 Cathay’s 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 court’s 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
attorney’s 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 Court’s 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 attorney’s fees are set aside and deleted, and the award
for nominal damages is reduced to P5,000.
G.R. No. 142305 December 10, 2003
SINGAPORE AIRLINES LIMITED, petitioner,
vs.
ANDION FERNANDEZ, respondent.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari assailing the Decision1 of the
Court of Appeals which affirmed in toto the decision 2 of the Regional
Trial Court of 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
Master’s 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 respondent’s persistence, she
was told that she can actually fly to Hong Kong going 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 petitioner’s counter which says: "Immediate Attention
To Passengers with Immediate Booking." There were four or five
passengers in line. The respondent approached petitioner’s male
employee at the counter to make arrangements for immediate
booking only to be told: "Can’t you see I am doing something." She
explained her predicament but the male employee uncaringly
retorted: "It’s 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 respondent’s 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 respondent’s performance before the
Royal Family of Malaysia was below par. Because of the rude and
unkind treatment she received from the petitioner’s 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 plaintiff’s 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 attorney’s 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
PETITIONER’S 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 petitioner’s control. Inclement weather
prevented the petitioner’s 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 petitioner’s 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
₱1,000,000; exemplary damages of ₱500,000; and attorney’s fees also
in the amount of ₱500,000.18
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 petitioner’s control is unavailing. In PAL vs. CA,22 we held
that:
.... Undisputably, PAL’s diversion of its flight due to inclement weather
was a fortuitous event. Nonetheless, such occurrence did not
terminate PAL’s 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 carrier’s 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
defendant’s 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 petitioner’s 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 petitioner’s 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 petitioner’s 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 defendant’s pilot. However, knowing fully well
that even before the plaintiff boarded defendant’s 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 airline’s 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 petitioner’s 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 Manila would 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, "Don’t 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 petitioner’s 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.1âwphi1 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 petitioner’s
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 company’s 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 petitioner’s
personnel to respondent’s 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, petitioner’s 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.
[G.R. NO. 171545 : December 19, 2007]
EQUITABLE PCI BANK,* AIMEE YU and BEJAN LIONEL
APAS, Petitioners, v. NG SHEUNG NGOR** doing business under the
name and style "KEN MARKETING," KEN APPLIANCE DIVISION, INC.
and BENJAMIN E. GO, Respondents.
DECISION
CORONA, J.:
This Petition for Review on Certiorari 1 seeks to set aside the
decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 83112 and its
resolution3 denying reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor,4 Ken Appliance
Division, Inc. and Benjamin E. Go filed an action for annulment and/or
reformation of documents and contracts5 against petitioner Equitable
PCI Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel
Apas, in the Regional Trial Court (RTC), Branch 16 of Cebu City.6 They
claimed that Equitable induced them to avail of its peso and dollar
credit facilities by offering low interest rates7 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 escalation clauses granting
Equitable authority to increase interest rates without their consent.8
Equitable, in its answer, asserted that respondents knowingly accepted
all the terms and conditions contained in the promissory notes.9 In
fact, they continuously availed of and benefited from Equitable's credit
facilities for five years.10
After trial, the RTC upheld the validity of the promissory notes. It found
that, in 2001 alone, Equitable restructured respondents' loans
amounting to US$228,200 and P1,000,000.11 The trial court, however,
invalidated the escalation clause contained therein because it violated
the principle of mutuality of contracts.12 Nevertheless, it took judicial
notice of the steep depreciation of the peso during the intervening
period13 and declared the existence of extraordinary
14
deflation. Consequently, the RTC ordered the use of the 1996 dollar
exchange rate in computing respondents' dollar-denominated
loans.15 Lastly, because the business reputation of respondents was
(allegedly) severely damaged when Equitable froze their
accounts,16 the trial court awarded moral and exemplary damages to
them.17
The dispositive portion of the February 5, 2004 RTC
decision18 provided:
WHEREFORE, premises considered, judgment is hereby rendered:
A) Ordering [Equitable] to reinstate and return the amount of
[respondents'] deposit placed on hold status;
B) Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion
[p]esos as moral damages;
C) Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion
[p]esos as exemplary damages;
D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay
[respondents], jointly and severally, the sum of [t]wo [m]illion [p]esos
as moral and exemplary damages;
E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and
severally, to pay [respondents'] attorney's fees in the sum of P300,000;
litigation expenses in the sum of P50,000 and the cost of suit;
F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay to the RTC, because respondents did not move for the reconsideration
[Equitable] the unpaid principal obligation for the peso loan as well as of the previous order (denying due course to the parties' notices of
the unpaid obligation for the dollar denominated loan; appeal),27 the February 5, 2004 decision became final and executory as
to both parties and a writ of execution against Equitable was in order.28
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay
[Equitable] interest as follows: A writ of execution was thereafter issued29 and three real properties of
Equitable were levied upon.30
1) 12% per annum for the peso loans;
On March 26, 2004, Equitable filed a petition for relief in the RTC from
2) 8% per annum for the dollar loans. The basis for the payment of the
the March 1, 2004 order.31 It, however, withdrew that petition on
dollar obligation is the conversion rate of P26.50 per dollar availed of
March 30, 200432 and instead filed a petition for certiorari with an
at the time of incurring of the obligation in accordance with Article
application for an injunction in the CA to enjoin the implementation
1250 of the Civil Code of the Philippines;
and execution of the March 24, 2004 omnibus order.33
H) Dismissing [Equitable's] counterclaim except the payment of the
On June 16, 2004, the CA granted Equitable's application for injunction.
aforestated unpaid principal loan obligations and interest.
A writ of preliminary injunction was correspondingly issued.34
SO ORDERED.19
Notwithstanding the writ of injunction, the properties of Equitable
Equitable and respondents filed their respective notices of appeal.20 previously levied upon were sold in a public auction on July 1, 2004.
Respondents were the highest bidders and certificates of sale were
In the March 1, 2004 order of the RTC, both notices were denied due
issued to them.35
course because Equitable and respondents "failed to submit proof that
they paid their respective appeal fees."21 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
WHEREFORE, premises considered, the appeal interposed by
proceeding with the auction despite the injunction order of the CA.36
defendants from the Decision in the above-entitled case is DENIED due
course. As of February 27, 2004, the Decision dated February 5, 2004, On October 28, 2005, the CA dismissed the petition for certiorari .37 It
is considered final and executory in so far as [Equitable, Aimee Yu and found Equitable guilty of forum shopping because the bank filed its
Bejan Lionel Apas] are concerned.22 (emphasis supplied) petition for certiorari in the CA several hours before withdrawing its
petition for relief in the RTC.38 Moreover, Equitable failed to disclose,
Equitable moved for the reconsideration of the March 1, 2004 order of
both in the statement of material dates and certificate of non-forum
the RTC23 on the ground that it did in fact pay the appeal fees.
shopping (attached to its petition for certiorari in the CA), that it had a
Respondents, on the other hand, prayed for the issuance of a writ of
pending petition for relief in the RTC.39
execution.24
Equitable moved for reconsideration40 but it was denied.41 Thus, this
On March 24, 2004, the RTC issued an omnibus order denying
petition.
Equitable's motion for reconsideration for lack of merit 25 and ordered
the issuance of a writ of execution in favor of respondents.26 According
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.
Equitable Was Not Guilty Of Forum shopping
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 RTC's 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.
The Trial Court Committed Grave Abuse of Discretion In Issuing Its
March 1, 2004 and March 24, 2004 Orders
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;
andcralawlibrary
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.
Equitable Raised Pure Questions of Law in Its Petition For Review
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 RTC's 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 Promissory Notes Were Valid
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 2. that the stipulated rate of interest will be reduced if the applicable
the opportunity to bargain on equal footing.61 maximum rate of interest is reduced by law or by the Monetary Board
(de-escalation clause).69
That was not the case here. As the trial court noted, if the terms and
conditions offered by Equitable had been truly prejudicial to The RTC found that Equitable's promissory notes uniformly stated:
respondents, they would have walked out and negotiated with another
If subject promissory note is extended, the interest for subsequent
bank at the first available instance. But they did not. Instead, they
extensions shall be at such rate as shall be determined by the bank.70
continuously availed of Equitable's credit facilities for five long years.
Equitable dictated the interest rates if the term (or period for
While the RTC categorically found that respondents had outstanding
repayment) of the loan was extended. Respondents had no choice but
dollar - and peso-denominated loans with Equitable, it, however, failed
to accept them. This was a violation of Article 1308 of the Civil Code.
to ascertain the total amount due (principal, interest and penalties, if
Furthermore, the assailed escalation clause did not contain the
any) as of July 9, 2001. The trial court did not explain how it arrived at
necessary provisions for validity, that is, it neither provided that the
the amounts of US$228,200 and P1,000,000.62 In Metro Manila Transit
rate of interest would be increased only if allowed by law or the
Corporation v. D.M. Consunji,63 we reiterated that this Court is not a
Monetary Board, nor allowed de-escalation. For these reasons, the
trier of facts and it shall pass upon them only for compelling reasons
escalation clause was void.
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 With regard to the proper rate of interest, in New Sampaguita Builders
amount of actual damages.65 v. Philippine National Bank71 we held that, because the escalation
clause was annulled, the principal amount of the loan was subject to
Escalation Clause Violated The Principle Of Mutuality Of Contracts
the original or stipulated rate of interest. Upon maturity, the amount
Escalation clauses are not void per se. However, one "which grants the due was subject to legal interest at the rate of 12% per annum.72
creditor an unbridled right to adjust the interest independently and
Consequently, respondents should pay Equitable the interest rates of
upwardly, completely depriving the debtor of the right to assent to an
12.66% p.a. for their dollar-denominated loans and 20% p.a. for their
important modification in the agreement" is void. Clauses of that
peso-denominated loans from January 10, 2001 to July 9, 2001.
nature violate the principle of mutuality of contracts.66 Article
Thereafter, Equitable was entitled to legal interest of 12% p.a. on all
130867 of the Civil Code holds that a contract must bind both
amounts due.
contracting parties; its validity or compliance cannot be left to the will
of one of them.68 There Was No Extraordinary Deflation
For this reason, we have consistently held that a valid escalation clause Extraordinary inflation exists when there is an unusual decrease in the
provides: purchasing power of currency (that is, beyond the common fluctuation
in the value of currency) and such decrease could not be reasonably
1. that the rate of interest will only be increased if the applicable
foreseen or was manifestly beyond the contemplation of the parties at
maximum rate of interest is increased by law or by the Monetary
Board; andcralawlibrary
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
The Award Of Moral And Exemplary Damages Lacked Basis
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 221980 and 222081 .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 indebtedness.88
Respondents indeed defaulted on their obligation. For this reason,
Equitable had the option to exercise its legal right to set-off or
compensation. However, the RTC mistakenly (or, as it now appears,
deliberately) concluded that Equitable acted "fraudulently or in bad
faith or in wanton disregard" of its contractual obligations despite the
absence of proof. The undeniable fact was that, whatever damage
respondents sustained was purely the consequence of their failure to
pay their loans. There was therefore absolutely no basis for the award
of moral damages to them.
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 not
entitled to moral and exemplary damages, neither could they be
awarded attorney's fees and litigation expenses.90
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the
Court of Appeals in CA-G.R. SP No. 83112 are
hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch
16, Cebu City in Civil Case No. CEB-26983 is hereby ANNULLED for
being rendered with grave abuse of discretion amounting to lack or
excess of jurisdiction. All proceedings undertaken pursuant thereto are
likewise declared null and void.
The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu
City in Civil Case No. CEB-26983 is hereby SET ASIDE. The appeal of
petitioners Equitable PCI Bank, Aimee Yu and Bejan Lionel Apas is
therefore given due course.chanrobles virtual law library
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of
Cebu City in Civil Case No. CEB-26983 is accordingly SET ASIDE. New
judgment is hereby entered:
1. ordering respondents Ng Sheung Ngor, doing business under the
name and style of "Ken Marketing," Ken Appliance Division, Inc. and
Benjamin E. Go to pay petitioner Equitable PCI Bank the principal
amount of their dollar - and peso-denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under the
name and style of "Ken Marketing," Ken Appliance Division, Inc. and
Benjamin E. Go to pay petitioner Equitable PCI Bank interest at:
a) 12.66% p.a. with respect to their dollar-denominated loans from
January 10, 2001 to July 9, 2001;
b) 20% p.a. with respect to their peso-denominated loans from January
10, 2001 to July 9, 2001;91
c) pursuant to our ruling in Eastern Shipping Lines v. Court of
Appeals,92 the total amount due on July 9, 2001 shall earn legal interest
at 12% p.a. from the time petitioner Equitable PCI Bank demanded
payment, whether judicially or extra-judicially; andcralawlibrary
d) after this Decision becomes final and executory, the applicable rate
shall be 12% p.a. until full satisfaction;
3. all other claims and counterclaims are dismissed.
As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall
compute the exact amounts due on the respective dollar-denominated
and peso-denominated loans, as of July 9, 2001, of respondents Ng
Sheung Ngor, doing business under the name and style of "Ken
Marketing," Ken Appliance Division and Benjamin E. Go.
SO ORDERED.
 G.R. No. 175490 September 17, 2009
ILEANA DR. MACALINAO, Petitioner,
vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.
DECISION
VELASCO, JR., J.:
The Case
Before us is a Petition for Review on Certiorari under Rule 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, 2006 Resolution2 denying petitioner’s motion for reconsideration.
The Facts
Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of the credit card facilities of respondent Bank of the Philippine
Islands (BPI).3 Petitioner Macalinao made some purchases through the use of the said credit card and defaulted in paying for said purchases. She
subsequently received a letter dated January 5, 2004 from respondent BPI, demanding payment of the amount of one hundred forty-one thousand
five hundred eighteen pesos and thirty-four centavos (PhP 141,518.34), as follows:

Statement Previous Purchases Penalty Finance Balance

Date Balance (Payments) Interest Charges Due

10/27/2002 94,843.70 559.72 3,061.99 98,456.41

11/27/2002 98,465.41 (15,000) 0 2,885.61 86,351.02

12/31/2002 86,351.02 30,308.80 259.05 2,806.41 119,752.28

1/27/2003 119,752.28 618.23 3,891.07 124,234.58

2/27/2003 124,234.58 990.93 4,037.62 129,263.13

3/27/2003 129,263.13 (18,000.00) 298.72 3,616.05 115,177.90

 4/27/2003 115,177.90 644.26 3,743.28 119,565.44

5/27/2003 119,565.44 (10,000.00) 402.95 3,571.71 113,540.10

8,362.50
6/29/2003 113,540.10 323.57 3,607.32 118,833.49
(7,000.00)

7/27/2003 118,833.49 608.07 3,862.09 123,375.65

8/27/2003 123,375.65 1,050.20 4,009.71 128,435.56

9/28/2003 128,435.56 1,435.51 4,174.16 134,045.23

10/28/2003

11/28/2003

12/28/2003

1/27/2004 141,518.34 8,491.10 4,599.34 154,608.78

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 3% per month and an additional
penalty fee equivalent to another 3% 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 Cardholder’s 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 month’s 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 BCC’s 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 BCC’s right of considering Cardholder’s 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.)1avvphi1
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 attorney’s 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.101avvphi1
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 attorney’s 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 attorney’s 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 Macalinao’s 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 PETITIONER’S 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 attorney’s fees claimed for being excessive or
otherwise unconscionable. This is without prejudice to the applicability of Section 3(c), Rule 10 of the Rules of Court, if there are two or more
defendants. (As amended by the 1997 Rules of Civil Procedure; emphasis supplied.)
Considering the foregoing rule, respondent BPI should not be made to suffer for petitioner Macalinao’s failure to file an answer and concomitantly,
to allow the latter to submit additional evidence by dismissing or remanding the case for further reception of evidence. Significantly, petitioner
Macalinao herself admitted the existence of her obligation to respondent BPI, albeit with reservation 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 further reception of evidence would unduly prolong the
proceedings of the instant case and render inutile the proceedings conducted before the lower courts.
Significantly, the CA correctly used the beginning balance of PhP 94,843.70 as basis for the re-computation of the interest considering that this was
the first amount which appeared on the Statement of Account of petitioner Macalinao. There is no other amount on which the re-computation could
be based, as can be 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
In view of the ruling that only 1% monthly interest and 1% penalty charge can be applied to the beginning balance of PhP 94,843.70, this Court finds
the following computation more appropriate:

Total
Penalty
Statement Previous Purchases Interest Amount Due
Balance Charge
Date Balance (Payments) (1%) for the
(1%)
Month

10/27/2002 94,843.70 94,843.70 948.44 948.44 96,740.58

11/27/2002 94,843.70 (15,000) 79,843.70 798.44 798.44 81,440.58

12/31/2002 79,843.70 30,308.80 110,152.50 1,101.53 1,101.53 112,355.56

1/27/2003 110,152.50 110,152.50 1,101.53 1,101.53 112,355.56

2/27/2003 110,152.50 110,152.50 1,101.53 1,101.53 112,355.56

3/27/2003 110,152.50 (18,000.00) 92,152.50 921.53 921.53 93,995.56

4/27/2003 92,152.50 92,152.50 921.53 921.53 93,995.56

5/27/2003 92,152.50 (10,000.00) 82,152.50 821.53 821.53 83,795.56

8,362.50
6/29/2003 82,152.50 83,515.00 835.15 835.15 85,185.30
(7,000.00)

7/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30

8/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30

9/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30

10/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30

11/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30

12/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30

1/27/2004 83,515.00 83,515.00 835.15 835.15 85,185.30

TOTAL 83,515.00 14,397.26 14,397.26 112,309.52

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 attorney’s fees; and
(3) Cost of suit.
SO ORDERED.

The Court adopts the following summary of the antecedents rendered

by the Court in Medel v. Court of Appeals,2 the case from which this
G.R. No. 159709 June 27, 2012
case originated, to wit:
HEIRS OF SERVANDO FRANCO, Petitioners,
On November 7, 1985, Servando Franco and Leticia Medel (hereafter
vs.
Servando and Leticia) obtained a loan from Veronica R. Gonzales
SPOUSES VERONICA AND DANILO GONZALES, Respondents.
(hereafter Veronica), who was engaged in the money lending business
DECISION under the name "Gonzales Credit Enterprises", in the amount of
₱50,000.00, payable in two months. Veronica gave only the amount of
BERSAMIN, J.:
₱47,000.00, to the borrowers, as she retained ₱3,000.00, as advance
There is novation when there is an irreconcilable incompatibility interest for one month at 6% per month. Servado and Leticia executed
between the old and the new obligations. There is no novation in case a promissory note for ₱50,000.00, to evidence the loan, payable on
of only slight modifications; hence, the old obligation prevails. January 7, 1986.

The petitioners challenge the decision promulgated on March 19,
2003,1 whereby the Court of Appeals (CA) upheld the issuance of a writ
of execution by the Regional Trial Court (RTC), Branch 16, in Malolos,
Bulacan.
Antecedents
On November 19, 1985, Servando and Leticia obtained from Veronica
another loan in the amount of ₱90,000.00, payable in two months, at
6% interest per month. They executed a promissory note to evidence
the loan, maturing on January 19, 1986. They received only
₱84,000.00, out of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay
the indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still
another loan in the amount of ₱300,000.00, 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 ₱300,000.00, after a month, or on July 11, 1986. However, only
the sum of ₱275,000.00, was given to them out of the proceeds of the
loan.
Like the previous loans, Servando and Medel failed to pay the third
loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr.
Rafael Medel, consolidated all their previous unpaid loans totaling
₱440,000.00, and sought from Veronica another loan in the amount of
₱60,000.00, bringing their indebtedness to a total of ₱500,000.00,
payable on August 23, 1986. They executed a promissory note, reading
as follows:
"Baliwag, Bulacan July 23, 1986
"Maturity Date August 23, 1986
"₱500,000.00
"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 interest thereon at the rate of 5.5 PER CENT per month
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 per cent (1%) per month of th
e amount due and demandable as penalty charges in the form of liqui
dated 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 Accordingly, on December 9, 1991, the trial court rendered judgment,
of ₱500,000.00, plus interests and penalties, evidenced by the above- the dispositive portion of which reads as follows:
quoted promissory note.
"WHEREFORE, premises considered, judgment is hereby rendered, as
On February 20, 1990, Veronica R. Gonzales, joined by her husband follows:
Danilo G. Gonzales, filed with the Regional Trial Court of Bulacan,
"1. Ordering the defendants Servando Franco and Leticia Medel, jointly
Branch 16, at Malolos, Bulacan, a complaint for collection of the full
and severally, to pay plaintiffs the amount of ₱47,000.00 plus 12%
amount of the loan including interests and other charges.
interest per annum from November 7, 1985 and 1% per month as
In his answer to the complaint filed with the trial court on April 5, 1990, penalty, until the entire amount is paid in full.
defendant Servando alleged that he did not obtain any loan from the
"2. Ordering the defendants Servando Franco and Leticia Y. Medel to
plaintiffs; that it was defendants Leticia and Dr. Rafael Medel who
plaintiffs, jointly and severally the amount of ₱84,000.00 with 12%
borrowed from the plaintiffs the sum of ₱500,000.00, and actually
interest per annum and 1% per cent per month as penalty from
received the amount and benefited therefrom; that the loan was
November 19,1985 until the whole amount is fully paid;
secured by a real estate mortgage executed in favor of the plaintiffs,
and that he (Servando Franco) signed the promissory note only as a "3. Ordering the defendants to pay the plaintiffs, jointly and severally,
witness. the amount of ₱285,000.00 plus 12% interest per annum and 1% per
month as penalty from July 11, 1986, until the whole amount is fully
In their separate answer filed on April 10,1990, defendants Leticia and
paid;
Rafael Medel alleged that the loan was the transaction of Leticia
Yaptinchay, who executed a mortgage in favor of the plaintiffs over a "4. Ordering the defendants to pay plaintiffs, jointly and severally, the
parcel of real estate situated in San Juan, Batangas; that the interest amount of ₱50,000.00 as attorney's fees;
rate is excessive at 5.5% per month with additional service charge of
"5. All counterclaims are hereby dismissed.
2% per annum, and penalty charge of 1% per month; that the
stipulation for attorney's fees of 25% of the amount due is "With costs against the defendants."
unconscionable, illegal and excessive, and that substantial payments
In due time, both plaintiffs and defendants appealed to the Court of
made were applied to interest, penalties and other charges.
Appeals.
After due trial, the lower court declared that the due execution and
In their appeal, plaintiffs-appellants argued that the promissory note,
genuineness of the four promissory notes had been duly proved, and
which consolidated all the unpaid loans of the defendants, is the law
ruled that although the Usury Law had been repealed, the interest
that governs the parties. They further argued that Circular No. 416 of
charged by the plaintiffs on the loans was unconscionable and
the Central Bank prescribing the rate of interest for loans or
"revolting to the conscience". Hence, the trial court applied "the
forbearance of money, goods or credit at 12% per annum, applies only
provision of the New [Civil] Code" that the "legal rate of interest for
in the absence of a stipulation on interest rate, but not when the
loan or forbearance of money, goods or credit is 12% per annum."
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
₱500,000.00, 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 ₱50,000.00 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
6
opposed, claiming that he and the respondents had agreed to fix the
entire obligation at ₱775,000.00.7 According to Servando, their
agreement, which was allegedly embodied in a receipt dated February
5, 1992,8 whereby he made an initial payment of ₱400,000.00 and
promised to pay the balance of ₱375,000.00 on February 29, 1992,
superseded the July 23, 1986 promissory note.
The RTC granted the motion for execution over Servando’s 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 Moreover, under the circumstances of this case, petitioner does not
the Motion for Execution of Judgment. 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
Accordingly, let a writ of execution be issued for implementation by
execution is only the balance of petitioner’s obligation after deducting
the Deputy Sheriff of this Court.
the payments made on the basis of the compromise agreement.
SO ORDERED.9
WHEREFORE, premises considered, the instant petition is hereby
On March 8, 2001, the RTC issued the writ of execution.10 DENIED DUE COURSE and consequently DISMISSED for lack of merit.

Servando moved for reconsideration,11 but the RTC denied his SO ORDERED.
motion.12
His motion for reconsideration having been denied,14 Servando
On March 19, 2003, the CA affirmed the RTC through its assailed appealed. He was eventually substituted by his heirs, now the
decision, ruling that the execution was proper because of Servando’s petitioners herein, on account of his intervening death. The
failure to comply with the terms of the compromise agreement, substitution was pursuant to the resolution dated June 15, 2005.15
stating:13
Issue
Petitioner cannot deny the fact that there was no full compliance with
The petitioners submit that the CA erred in ruling that:
the tenor of the compromise agreement. Private respondents on their
part did not disregard the payments made by the petitioner. They even I
offered that whatever payments made by petitioner, it can be
THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL
deducted from the principal obligation including interest. However,
TRIAL COURT OF MALOLOS, BULACAN WAS NOT NOVATED BY THE
private respondents posit that the payments made cannot alter,
COMPROMISE AGREEMENT BETWEEN THE PARTIES ON 5 FEBRUARY
modify or revoke the decision of the Supreme Court in the instant case.
1992.
In the case of Prudence Realty and Development Corporation vs. Court
II
of Appeals, the Supreme Court ruled that:
THE LIABILITY OF THE PETITIONER TO RESPONDENTS SHOULD BE
"When the terms of the compromise judgment is violated, the
BASED ON THE DECEMBER 1991 DECISION OF BRANCH 16 OF THE
aggrieved party must move for its execution, not its invalidation."
REGIONAL TRIAL COURT OF MALOLOS, BULACAN AND NOT ON THE
It is clear from the aforementioned jurisprudence that even if there is COMPROMISE AGREEMENT EXECUTED IN 1992.
a compromise agreement and the terms have been violated, the
The petitioners insist that the RTC could not validly enforce a judgment
aggrieved party, such as the private respondents, has the right to move
based on a promissory note that had been already novated; that the
for the issuance of a writ of execution of the final judgment subject of
promissory note had been impliedly novated when the principal
the compromise agreement.
obligation of ₱500,000.00 had been fixed at ₱750,000.00, 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 Servando’s previous payment would be deducted from
the total liability of the debtors based on the RTC’s 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
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
Servando’s obligation was fixed at ₱750,000.00. 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 Manager’s Check No. 001700
in the amount of ₱400,00.00 as partial payment of loan. Balance of
₱375,000.00 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.
(Sgd)
V. Gonzalez19
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.1âwphi1 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
obligation. Instead, the respondents only thereby recognized the
original obligation by stating in the receipt that the ₱400,000.00 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 ₱500,000.00 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 Servando’s
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 creditor’s acceptance
of payment after demand does not operate as a modification of the
original contract.26
Worth noting is that Servando’s 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 ₱400,000.00
The petitioners argue that Servando’s remaining liability amounted to
only ₱375,000.00, 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 ₱375,000.00 was premised on the taking place of a
novation. However, as found now, novation did not take place.
Accordingly, Servando’s obligation, being solidary, remained to be that
decreed in the December 9, 1991 decision of the RTC, inclusive of
interests, less the amount of ₱400,000.00 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
₱400,000.00 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.
(Signed)
Charo Santos-Concio
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 petition17 challenging 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
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." 45 However, when any of the
elements of the contract is modified upon acceptance, such alteration
amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of 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
48
apply. 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. Willets and Paterson, 44 Phil. 634). As a mere agent,
recognized as such by plaintiff, Del Rosario could not be held liable
jointly and severally with Viva and his inclusion as party defendant has
no legal basis. (Salonga vs. Warner Barner [sic] , COLTA , 88 Phil. 125;
Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations in the complaint are
clear admissions that what was supposed to have been agreed upon at
the Tamarind Grill between Mr. Lopez and Del Rosario was not a
binding agreement. It is as it should be because corporate power to
enter into a contract is lodged in the Board of Directors. (Sec. 23,
Corporation Code). Without such board approval by the Viva board,
whatever agreement Lopez and Del Rosario arrived at could not ripen
into a valid contract binding upon Viva (Yao Ka Sin Trading vs. Court of
Appeals, 209 SCRA 763). The evidence adduced shows that the Board
of Directors of Viva rejected Exhibit "C" and insisted that the film
package for 140 films be maintained (Exh. "7-1" - Viva ). 49
The contention that ABS-CBN had yet to fully exercise its right of first
refusal over twenty-four films under the 1990 Film Exhibition
Agreement and that the meeting between Lopez and Del Rosario was
a continuation of said previous contract is untenable. As observed by
the trial court, ABS-CBN right of first refusal had already been exercised
when Ms. Concio wrote to VIVA ticking off ten films, Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after this
letter was sent, was for an entirely different package. Ms. Concio
herself admitted on cross-examination to having used or exercised the
right of first refusal. She stated that the list was not acceptable and was
indeed not accepted by ABS-CBN, (TSN, June 8, 1992, pp. 8-10). Even
Mr. Lopez himself admitted that the right of the first refusal may have
been already exercised by Ms. Concio (as she had). (TSN, June 8, 1992,
pp. 71-75). Del Rosario himself knew and understand [sic] that ABS-
CBN has lost its rights of the first refusal when his list of 36 titles were
rejected (Tsn, June 9, 1992, pp. 10-11) 50
II
However, we find for ABS-CBN on the issue of damages. We shall first
take up actual damages. Chapter 2, Title XVIII, Book IV of the Civil Code
is the specific law on actual or compensatory damages. Except as
provided by law or by stipulation, one is entitled to compensation for
actual damages only for such pecuniary loss suffered by him as he has
duly proved. 51 The indemnification shall comprehend not only the
value of the loss suffered, but also that of the profits that the obligee
failed to obtain. 52 In contracts and quasi-contracts the damages which
may be awarded are dependent on whether the obligor acted with
good faith or otherwise, It case of good faith, the damages recoverable
are those which are the natural and probable consequences of the
breach of the obligation and which the parties have foreseen or could
have reasonably foreseen at the time of the constitution of the
obligation. If the obligor acted with fraud, bad faith, malice, or wanton
attitude, he shall be responsible for all damages which may be
reasonably attributed to the non-performance of the obligation. 53 In
crimes and quasi-delicts, the defendant shall be liable for all damages
which are the natural and probable consequences of the act or
omission complained of, whether or not such damages has been
foreseen or could have reasonably been foreseen by the defendant.54
Actual damages may likewise be recovered for loss or impairment of
earning capacity in cases of temporary or permanent personal injury,
or for injury to the 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.60 Even
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 Verily then, malice or bad faith is at the core of Articles 19, 20, and 21.
corporation because, being an artificial person and having existence Malice or bad faith implies a conscious and intentional design to do a
only in legal contemplation, it has no feelings, no emotions, no senses, wrongful act for a dishonest purpose or moral obliquity. 73 Such must
It cannot, therefore, experience physical suffering and mental anguish, be substantiated by evidence. 74
which call be experienced only by one having a nervous system. 65 The
There is no adequate proof that ABS-CBN was inspired by malice or bad
statement in People v. Manero 66 and Mambulao Lumber
67 faith. It was honestly convinced of the merits of its cause after it had
Co. v. PNB that a corporation may recover moral damages if it "has a
undergone serious negotiations culminating in its formal submission of
good reputation that is debased, resulting in social humiliation" is
a draft contract. Settled is the rule that the adverse result of an action
an obiter dictum. On this score alone the award for damages must be
does not per se make the action wrongful and subject the actor to
set aside, since RBS is a corporation.
damages, for the law could not have meant to impose a penalty on the
The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, right to litigate. If damages result from a person's exercise of a right, it
Book IV of the Civil Code. These are imposed by way of example or is damnum absque injuria.75
correction for the public good, in addition to moral, temperate,
WHEREFORE, the instant petition is GRANTED. The challenged decision
liquidated or compensatory damages. 68 They are recoverable in
of the Court of Appeals in CA-G.R. CV No, 44125 is hereby REVERSED
criminal cases as part of the civil liability when the crime was
except as to unappealed award of attorney's fees in favor of VIVA
committed with one or more aggravating circumstances; 69 in quasi-
Productions, Inc.
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
G.R. No. 194366 October 10, 2012
It may be reiterated that the claim of RBS against ABS-CBN is not based
NAPOLEON D. NERI, ALICIA D. NERI-MONDEJAR, VISMINDA D. NERI-
on contract, quasi-contract, delict, or quasi-delict, Hence, the claims
CHAMBERS, ROSA D. NERI-MILLAN, DOUGLAS D. NERI, EUTROPIA D.
for moral and exemplary damages can only be based on Articles 19, 20,
ILLUT-COCKINOS AND VICTORIA D. ILLUT-PIALA, Petitioners,
and 21 of the Civil Code.
vs.
The elements of abuse of right under Article 19 are the following: (1) HEIRS OF HADJI YUSOP UY AND JULPHA* IBRAHIM UY, Respondents.
the existence of a legal right or duty, (2) which is exercised in bad faith,
DECISION
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 PERLAS-BERNABE, J.:
not especially provide for their own sanction; while Article 21 deals
In this Petition for Review on Certiorari1 under Rule 45 of the Rules of
with acts contra bonus mores, and has the following elements; (1)
Court, petitioners Napoleon D. Neri (Napoleon), Alicia D. Neri-
there is an act which is legal, (2) but which is contrary to morals, good
Mondejar (Alicia), Visminda D. Neri-Chambers (Visminda), Rosa D.
custom, public order, or public policy, and (3) and it is done with intent
Neri-Millan (Rosa), Douglas D. Neri (Douglas), Eutropia D. Illut-Cockinos
to injure. 72
(Eutropia), and Victoria D. Illut-Piala (Victoria) seek to reverse and set
aside the April 27, 2010 Decision2 and October 18, 2010 Resolution3 of and deprived of their legitimes as childrenof Anunciacion from her first
the Court of Appeals (CA) in CA-G.R. CV No. 01031-MIN which annulled marriage.
the October 25, 2004 Decision4 of the Regional Trial Court (RTC) of
In their amended answer with counterclaim, the heirs of Uy countered
Panabo City, Davao del Norte and instead, entered a new one
that the sale took place beyond the 5-year prohibitory period from the
dismissing petitioners’ complaint for annulment of sale, damages and
issuance of the homestead patents. They also denied knowledge of
attorney’s feesagainst herein respondents heirs of spouses Hadji Yusop
Eutropia and Victoria’s exclusionfrom the extrajudicial settlement and
Uy and Julpha Ibrahim Uy (heirs of Uy).
sale of the subject properties, and interposed further the defenses of
The Facts prescription and laches.
During her lifetime, Anunciacion Neri (Anunciacion) had seven The RTC Ruling
children, two (2) from her first marriage with Gonzalo Illut (Gonzalo),
On October 25, 2004, the RTC rendered a decision ordering, among
namely: Eutropia and Victoria, and five (5) from her second marriage
others, the annulment of the Extra-Judicial Settlement of the Estate
with Enrique Neri (Enrique), namely: Napoleon, Alicia, Visminda,
with Absolute Deed of Sale. It ruled that while the sale occurred
Douglas and Rosa. Throughout the marriage of spouses Enrique and
beyond the 5-year prohibitory period, the sale is still void because
Anunciacion, they acquired several homestead properties with a total
Eutropia and Victoria were deprived of their hereditary rights and that
area of 296,555 square meters located in Samal, Davao del Norte,
Enrique had no judicial authority to sell the shares of his minor
embraced by Original Certificate of Title (OCT) Nos. (P-7998) P-21285 ,
children, Rosa and Douglas.
(P-14608) P-51536 and P-20551 (P-8348)7 issued on February 15, 1957,
August 27, 1962 and July 7, 1967, respectively. Consequently, it rejected the defenses of laches and prescription
raised by spouses Uy, who claimed possession of the subject properties
On September 21, 1977, Anunciacion died intestate. Her husband,
for 17 years, holding that co-ownership rights are imprescriptible.
Enrique, in his personal capacity and as natural guardian of his minor
children Rosa and Douglas, together with Napoleon, Alicia, and The CA Ruling
Vismindaexecuted an Extra-Judicial Settlement of the Estate with
On appeal, the CAreversed and set aside the ruling of the RTC in its
Absolute Deed of Sale8 on July 7, 1979, adjudicating among themselves
April 27, 2010 Decision and dismissed the complaint of the petitioners.
the said homestead properties, and thereafter, conveying themto the
It held that, while Eutropia and Victoria had no knowledge of the
late spouses Hadji Yusop Uy and Julpha Ibrahim Uy (spouses Uy)for a
extrajudicial settlement and sale of the subject properties and as such,
consideration of ₱ 80,000.00.
were not bound by it, the CA found it unconscionable to permit the
On June 11, 1996, the children of Enrique filed a complaint for annulment of the sale considering spouses Uy’s possession thereof for
annulment of saleof the said homestead properties against spouses Uy 17 years, and thatEutropia and Victoriabelatedlyfiled their actionin
(later substituted by their heirs)before the RTC, docketed as Civil Case 1997, ormore than two years fromknowledge of their exclusion as heirs
No.96-28, assailing the validity of the sale for having been sold within in 1994 when their stepfather died. It, however, did not preclude the
the prohibited period. Thecomplaint was later amended to include excluded heirs from recovering their legitimes from their co-heirs.
Eutropia and Victoriaas additional plaintiffs for having been excluded
Similarly, the CA declared the extrajudicial settlement and the
subsequent saleas valid and binding with respect to Enrique and
hischildren, holding that as co-owners, they have the right to dispose
of their respective shares as they consider necessary or fit.While
recognizing Rosa and Douglas to be minors at that time, they were
deemed to have ratified the sale whenthey failed to question it upon
reaching the age of majority.Italso found laches to have set in because
of their inaction for a long period of time.
The Issues
In this petition, petitioners imputeto the CA the following errors:
xxx
ART. 980. The children of the deceased shall always inherit from him in
their own right, dividing the inheritance in equal shares.
As such, upon the death of Anunciacion on September 21, 1977, her
children and Enrique acquired their respective inheritances,9 entitling
them to their pro indiviso shares in her whole estate, as follows:
Enrique 9/16 (1/2 of the conjugal assets + 1/16)
Eutropia 1/16

I. WHEN IT UPHELDTHE VALIDITY OF THE "EXTRA JUDICIAL Victoria 1/16

SETTLEMENT OF THE ESTATE WITH ABSOLUTE DEED OF SALE" AS FAR
AS THE SHARES OF EUTROPIA AND VICTORIA WERE CONCERNED, Napoleon 1/16
THEREBY DEPRIVING THEM OF THEIR INHERITANCE;
Alicia 1/16
II. WHEN IT DID NOT NULLIFY OR ANNUL THE "EXTRA JUDICIAL
SETTLEMENT OF THE ESTATE WITH ABSOLUTE DEED OF SALE" WITH Visminda 1/16
RESPECT TO THE SHARESOF ROSA AND DOUGLAS, THEREBY DEPRIVING
THEM OF THEIR INHERITANCE; and Rosa 1/16
III. WHEN IT FOUND THAT LACHES OR PRESCRIPTION HAS SET IN.
Douglas 1/16
The Ruling of the Court
Hence, in the execution of the Extra-Judicial Settlement of the Estate
The petitionis meritorious. with Absolute Deed of Sale in favor of spouses Uy, all the heirs of
It bears to stress that all the petitioners herein are indisputably Anunciacionshould have participated. Considering that Eutropia and
legitimate children of Anunciacion from her first and second marriages Victoria were admittedly excluded and that then minors Rosa and
with Gonzalo and Enrique, respectively, and consequently, are entitled Douglas were not properly represented therein, the settlement was
to inherit from her in equal shares, pursuant to Articles 979 and 980 of not valid and binding uponthem and consequently, a total nullity.
the Civil Code which read: Section 1, Rule 74 of the Rules of Court provides:
ART. 979. Legitimate children and their descendants succeed the SECTION 1. Extrajudicial settlement by agreement between heirs. – x x
parents and other ascendants, without distinction as to sex or age, and x
even if they should come from different marriages.
The fact of the extrajudicial settlement or administration shall be
published in a newspaper of general circulation in the manner provided
in the next succeeding section; but no extrajudicial settlement shall be
binding upon any person who has not participated therein or had no
notice thereof. (Underscoring added)
The effect of excluding the heirs in the settlement of estate was further
elucidated in Segura v. Segura,10 thus:
It is clear that Section 1 of Rule 74 does not apply to the partition in
question which was null and void as far as the plaintiffs were
concerned. The rule covers only valid partitions. The partition in the
present case was invalid because it excluded six of the nine heirs who
were entitled to equal shares in the partitioned property. Under the
rule "no extrajudicial settlement shall be binding upon any person who
has not participated therein or had no notice thereof." As the partition
was a total nullity and did not affect the excluded heirs, it was not
correct for the trial court to hold that their right to challenge the
partition had prescribed after two years from its execution…
However, while the settlement of the estate is null and void, the
subsequent sale of the subject propertiesmade by Enrique and his
children, Napoleon, Alicia and Visminda, in favor of the respondents
isvalid but only with respect to their proportionate shares therein.It
cannot be denied that these heirs have acquired their respective
shares in the properties of Anunciacion from the moment of her
death11 and that, as owners thereof, they can very well sell their
undivided share in the estate.12
With respect to Rosa and Douglas who were minors at the time of the
execution of the settlement and sale, their natural guardian and father,
Enrique, represented them in the transaction. However, on the basis
of the laws prevailing at that time, Enrique was merely clothed with
powers of administration and bereft of any authority to dispose of their
2/16 shares in the estate of their mother, Anunciacion.
Articles 320 and 326 of the Civil Code, the laws in force at the time of
the execution of the settlement and sale, provide:
ART. 320. The father, or in his absence the mother, is the legal
administrator of the property pertaining to the child under parental
authority. If the property is worth more than two thousand pesos, the
father or mother shall give a bond subject to the approval of the Court
of First Instance.
ART. 326. When the property of the child is worth more than two
thousand pesos, the father or mother shall be considered a guardian
of the child’s property, subject to the duties and obligations of
guardians under the Rules of Court.
Corollarily, Section 7, Rule 93 of the Rules of Court also provides:
SEC. 7. Parents as Guardians. – When the property of the child under
parental authority is worth two thousand pesos or less, the father or
the mother, without the necessity of court appointment, shall be his
legal guardian. When the property of the child is worth more than two
thousand pesos, the father or the mother shall be considered guardian
of the child’s property, with the duties and obligations of guardians
under these Rules, and shall file the petition required by Section 2
hereof. For good reasons, the court may, however, appoint another
suitable persons.
Administration includes all acts for the preservation of the property
and the receipt of fruits according to the natural purpose of the thing.
Any act of disposition or alienation, or any reduction in the substance
of the patrimony of child, exceeds the limits of administration.13 Thus,
a father or mother, as the natural guardian of the minor under parental
authority, does not have the power to dispose or encumber the
property of the latter. Such power is granted by law only to a judicial
guardian of the ward’s property and even then only with courts’ prior
approval secured in accordance with the proceedings set forth by the
Rules of Court.14
Consequently, the disputed sale entered into by Enrique in behalf of
his minor children without the proper judicial authority, unless ratified
by them upon reaching the age of majority,15 is unenforceable in
accordance with Articles 1317 and 1403(1) of the Civil Code which
provide:
ART. 1317. No one may contract in the name of another without being
authorized by the latter or unless he has by law a right to represent
him.
A contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his powers,
shall be unenforceable, unless it is ratified, expressly or impliedly, by
the person on whose behalf it has been executed, before it is revoked
by the other contracting party.
ART. 1403. The following contracts are unenforceable, unless they are
ratified:
(1) Those entered into the name of another person by one who has
been given no authority or legal representation, or who has acted
beyond his powers;
xxx
Ratification means that one under no disability voluntarily adopts and
gives sanction to some unauthorized act or defective proceeding,
which without his sanction would not be binding on him. It is this
voluntary choice, knowingly made, which amounts to a ratification of
what was theretofore unauthorized, and becomes the authorized act
of the party so making the ratification.16 Once ratified, expressly or
impliedly such as when the person knowingly received benefits from it,
the contract is cleansed from all its defects from the moment it was
constituted,17 as it has a retroactive effect.
Records, however, show that Rosa had ratified the extrajudicial
settlement of the estate with absolute deed of sale. In Napoleon and
Rosa’s Manifestation18 before the RTC dated July 11, 1997,they stated:
"Concerning the sale of our parcel of land executed by our father,
Enrique Neri concurred in and conformed to by us and our other two
sisters and brother (the other plaintiffs), in favor of Hadji Yusop Uy and
his spouse Hadja Julpa Uy on July 7, 1979, we both confirmed that the
same was voluntary and freely made by all of us and therefore the sale
was absolutely valid and enforceable as far as we all plaintiffs in this
case are concerned;" (Underscoring supplied)
In their June 30, 1997 Joint-Affidavit,19 Napoleon and Rosa also alleged:
"That we are surprised that our names are included in this case since
we do not have any intention to file a case against Hadji Yusop Uy and
Julpha Ibrahim Uy and their family and we respect and acknowledge
the validity of the Extra-Judicial Settlement of the Estate with Absolute
Deed of Sale dated July 7, 1979;" (Underscoring supplied)
Clearly, the foregoing statements constitutedratification of the
settlement of the estate and the subsequent sale, thus, purging all the
defects existing at the time of its execution and legitimizing the
conveyance of Rosa’s 1/16 share in the estate of Anunciacion to
spouses Uy. The same, however, is not true with respect to Douglas for
lack of evidence showing ratification.
Considering, thus, that the extrajudicial settlement with sale is invalid
and therefore, not binding on Eutropia, Victoria and Douglas, only the
shares ofEnrique, Napoleon, Alicia, Visminda and Rosa in the
homestead properties have effectivelybeen disposed in favor of
spouses Uy. "A person can only sell what he owns, or is authorized to
sell and the buyer can as a consequence acquire no more than what
the sellercan legally transfer."20 On this score, Article 493 of the Civil
Codeis relevant, which provides:
Each co-owner shall have the full ownership of his part and of the fruits
and benefits pertaining thereto, and he may therefore alienate, assign
or mortgage it, and even substitute another person in its enjoyment,
except when personal rights are involved. But the effect of the
alienation or the mortgage, with respect to the co-owners, shall be
limited to the portion which may be allotted to him in the division upon
the termination of the co-ownership.
Consequently, spouses Uy or their substituted heirs became pro
indiviso co-owners of the homestead properties with Eutropia, Victoria
and Douglas, who retained title to their respective 1/16 shares. They
were deemed to be holding the 3/16 shares of Eutropia, Victoria and
Douglas under an implied constructive trust for the latter’s benefit,
conformably with Article 1456 of the Civil Code which states:"if
property is acquired through mistake or fraud, the person obtaining it
is, by force of law, considered a trustee of an implied trust for the
benefit of the person from whom the property comes." As such, it is
only fair, just and equitable that the amount paid for their shares
equivalent to ₱ 5,000.0021 each or a total of ₱ 15,000.00 be returned
to spouses Uy with legal interest.
On the issue of prescription, the Court agrees with petitioners that the
present action has not prescribed in so far as it seeks to annul the
extrajudicial settlement of the estate. Contrary to the ruling of the CA,
the prescriptive period of 2 years provided in Section 1 Rule 74 of the
Rules of
Court reckoned from the execution of the extrajudicial settlement
finds no application to petitioners Eutropia, Victoria and Douglas, who
were deprived of their lawful participation in the subject estate.
Besides, an "action or defense for the declaration of the inexistence of
a contract does not prescribe" in accordance with Article 1410 of the
Civil Code.
However, the action to recover property held in trust prescribes after
10 years from the time the cause of action accrues,22 which is from the
time of actual notice in case of unregistered deed.23 In this case,
Eutropia, Victoria and Douglas claimed to have knowledge of the
extrajudicial settlement with sale after the death of their father,
Enrique, in 1994 which spouses Uy failed to refute. Hence, the
complaint filed in 1997 was well within the prescriptive period of 10
years.
WHEREFORE, the instant petition is GRANTED. The April 27, 2010
Decision and October 18, 2010 Resolution of the Court of Appeals
are REVERSED and SET ASIDE and a new judgment is entered:
1. Declaring the Extra-Judicial Settlement of the Estate of Anunciacion
Neri NULL and VOID;
2. Declaring the Absolute Deed of Sale in favor of the late spouses Hadji
Yusop Uy and Julpha Ibrahim Uy as regards the 13/16 total shares of
the late Enrique Neri, Napoleon Neri, Alicia D. Neri-Mondejar,
Visminda D. Neri-Chambers and Rosa D. Neri-Millan VALID;
3. Declaring Eutropia D. Illut-Cockinos, Victoria D. Illut-Piala and
Douglas D. Neri as the LAWFUL OWNERS of the 3/16 portions of the
subject homestead properties, covered by Original Certificate of Title
Nos. (P-7998) P-2128, (P-14608) P-5153 and P-20551 (P-8348); and
4. Ordering the estate of the late Enrique Neri, as well as Napoleon
Neri, Alicia D. Neri-Mondejar, Visminda D. Neri-Chambers and Rosa D.
Neri-Millan to return to the respondents jointly and solidarily the
amount paid corresponding to the 3/16 shares of Eutropia, Victoria and
Douglas in the total amount of ₱ 15,000.00, with legal interest at 6%
per annum computed from the time of payment until finality of this
decision and 12% per annum thereafter until fully paid.
No pronouncement as to costs.
G.R. No. 155001 May 5, 2003
DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B.
REUNILLA, MANUEL ANTONIO B. BOÑE, 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,
x---------------------------------------------------------x
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,
x---------------------------------------------------------x
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.
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 DOTC to NEDA on December 13, 1995. On January 5, 1996, the NEDA
Agreement dated June 22, 2001 (collectively, the PIATCO Contracts). Investment Coordinating Council (NEDA ICC) – Technical Board
favorably endorsed the project to the ICC – Cabinet Committee which
The facts are as follows:
approved the same, subject to certain conditions, on January 19, 1996.
In August 1989, the DOTC engaged the services of Aeroport de Paris On February 13, 1996, the NEDA passed Board Resolution No. 2 which
(ADP) to conduct a comprehensive study of the Ninoy Aquino approved the NAIA IPT III project.
International Airport (NAIA) and determine whether the present
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two
airport can cope with the traffic development up to the year 2010. The
daily newspapers of an invitation for competitive or comparative
study consisted of two parts: first, traffic forecasts, capacity of existing
proposals on AEDC's unsolicited proposal, in accordance with Sec. 4-A
facilities, NAIA future requirements, proposed master plans and
of RA 6957, as amended. The alternative bidders were required to
development plans; and second, presentation of the preliminary
submit three (3) sealed envelopes on or before 5:00 p.m. of September
design of the passenger terminal building. The ADP submitted a Draft
20, 1996. The first envelope should contain the Prequalification
Final Report to the DOTC in December 1989.
Documents, the second envelope the Technical Proposal, and the third
Some time in 1993, six business leaders consisting of John Gokongwei, envelope the Financial Proposal of the proponent.
Andrew Gotianun, Henry Sy, Sr., Lucio Tan, George Ty and Alfonso
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the
Yuchengco met with then President Fidel V. Ramos to explore the
availment of the Bid Documents and the submission of the
possibility of investing in the construction and operation of a new
comparative bid proposals. Interested firms were permitted to obtain
international airport terminal. To signify their commitment to pursue
the Request for Proposal Documents beginning June 28, 1996, upon
the project, they formed the Asia's Emerging Dragon Corp. (AEDC)
submission of a written application and payment of a non-refundable
which was registered with the Securities and Exchange Commission
fee of P50,000.00 (US$2,000).
(SEC) on September 15, 1993.
The Bid Documents issued by the PBAC provided among others that
On October 5, 1994, AEDC submitted an unsolicited proposal to the
the proponent must have adequate capability to sustain the financing
Government through the DOTC/MIAA for the development of NAIA
requirement for the detailed engineering, design, construction,
International Passenger Terminal III (NAIA IPT III) under a build-
operation, and maintenance phases of the project. The proponent
operate-and-transfer arrangement pursuant to RA 6957 as amended
would be evaluated based on its ability to provide a minimum amount
by RA 7718 (BOT Law).1
of equity to the project, and its capacity to secure external financing
On December 2, 1994, the DOTC issued Dept. Order No. 94-832 for the project.
constituting the Prequalification Bids and Awards Committee (PBAC)
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all
for the implementation of the NAIA IPT III project.
bidders to a pre-bid conference on July 29, 1996.
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
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 proponent's
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 proponent's proposal.
On August 29, 1996, the Second Pre-Bid Conference was held where
certain clarifications were made. Upon the request of prospective
bidder People's 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 PBAC's 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." Paircargo's queries and the PBAC's 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 corporation's current authorized capital stock just for
prequalification purposes.
In prequalification, the agency is interested in one's 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 they'd (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 People's 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 Paircargo's 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 AEDC's 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 Concessionaire's 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 Malacañang Palace, stated that she will
not "honor (PIATCO) contracts which the Executive Branch's 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 providers7 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 Imus13 and Gonzales v. Raquiza14 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
Court's 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
country's 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 court's decision denying petitioner's 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 The financial statement or the net worth is not the sole basis in
Is PIATCO a qualified bidder?
Public respondents argue that the Paircargo Consortium, PIATCO's
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.
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.
xxx xxx xxx
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 proponent's 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 agreement. The
debt portion of the project financing should not 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.
Paircargo's 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 Bank's 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 total investment 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 or majority-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.
xxx xxx xxx
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 bidder's 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 bidder's
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 PIATCO's predecessor would come into play and
necessarily result in the nullity of all the subsequent contracts entered
by it in pursuance of the project, the Court feels that it is 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 proponent's 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 proponent's
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 For fees under the first category, i.e., those which are subject to
terms is awarded the contract subject of the bid, and it is obvious that periodic adjustment in accordance with a prescribed parametric
such protection and best possible advantages to the public will formula and effective only upon written approval by MIAA, the draft
disappear if the parties to a contract executed after public bidding may Concession Agreement includes the following:36
alter or amend it without another previous public bidding.35
(1) aircraft parking fees;
Hence, the question that comes to fore is this: is the 1997 Concession
(2) aircraft tacking fees;
Agreement the same agreement that was offered for public bidding,
i.e., the draft Concession Agreement attached to the Bid Documents? (3) groundhandling fees;
A close comparison of the draft Concession Agreement attached to the
(4) rentals and airline offices;
Bid Documents and the 1997 Concession Agreement reveals that the
documents differ in at least two material respects: (5) check-in counter rentals; and
a. Modification on the Public (6) porterage fees.
Utility Revenues and Non-Public Under the 1997 Concession Agreement, fees which are subject to
adjustment and effective upon MIAA approval are classified as "Public
Utility Revenues that may be
Utility Revenues" and include:37
collected by PIATCO
(1) aircraft parking fees;
The fees that may be imposed and collected by PIATCO under the draft
(2) aircraft tacking fees;
Concession Agreement and the 1997 Concession Agreement may be
classified into three distinct categories: (1) fees which are subject to (3) check-in counter fees; and
periodic adjustment of once every two years in accordance with a
(4) Terminal Fees.
prescribed parametric formula and adjustments are made effective
only upon written approval by MIAA; (2) fees other than those included The implication of the reduced number of fees that are subject to MIAA
in the first category which maybe adjusted by PIATCO whenever it approval is best appreciated in relation to fees included in the second
deems necessary without need for consent of DOTC/MIAA; and (3) new category identified above. Under the 1997 Concession
fees and charges that may be imposed by PIATCO which have not been Agreement, fees which PIATCO may adjust whenever it deems
previously imposed or collected at the Ninoy Aquino International necessary without need for consent of DOTC/MIAA are "Non-Public
Airport Passenger Terminal I, pursuant to Administrative Order No. 1, Utility Revenues" and is defined as "all other income not classified as
Series of 1993, as amended. The glaring distinctions between the draft Public Utility Revenues derived from operations of the Terminal and
Concession Agreement and the 1997 Concession Agreement lie in the the Terminal Complex."38 Thus, under the 1997 Concession
types of fees included in each category and the extent of the Agreement, ground handling fees, rentals from airline offices and
supervision and regulation which MIAA is allowed to exercise in porterage fees are no longer subject to MIAA regulation.
relation thereto.
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.
xxx xxx xxx
(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
Dollars44 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 latter's
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 PIATCO's 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.
xxx xxx xxx
(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 GRP's 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 PIATCO's 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 advantages
through open competition.45 It has been held that the 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
xxx xxx xxx
(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 GRP's 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.
….
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 PIATCO's
creditors upon PIATCO's 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 PIATCO's
unpaid creditors operate NAIA IPT III, the Government is still at a risk
of being liable to PIATCO's 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 PIATCO's failure to fulfill its loan obligations, the Government is
still at a risk of assuming PIATCO's outstanding loans. This is due to
the fact that the Government would only be free from assuming
PIATCO's debts if the unpaid creditors would be able to designate a
qualified operator within the period provided for in the contract.
Thus, the Government's 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.
Section 2(n) of the BOT Law defines direct guarantee as follows:
(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 PIATCO's 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
xxx xxx xxx
(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:
xxx xxx xxx
(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 any
Senior Lenders' agent may have (including without limitation 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 Concessionaire's [PIATCO] rights and
obligations under this Agreement to a transferee which is qualified
under sub-clause (viii) below;
xxx xxx xxx
(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;
xxx xxx xxx
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, services upon PIATCO's default in its loan obligation with its Senior
interest, associated fees, charges, reimbursements, and other related Lenders. The fact that the Government's obligation to pay PIATCO's
expenses (including the fees, charges and expenses of any agents or lenders for the latter's obligation would only arise after the Senior
trustees of such persons or entities), whether payable at maturity, by Lenders fail to appoint a qualified nominee or transferee does not
acceleration or otherwise, and further including amounts owed by detract from the fact that, should the conditions as stated in the
Concessionaire [PIATCO] to its professional consultants and advisers, contract occur, the ARCA still obligates the Government to pay any and
suppliers, contractors and sub-contractors.54 all amounts owed by PIATCO to its lenders in connection with NAIA IPT
III. Worse, the conditions that would make the Government liable for
It is clear from the foregoing contractual provisions that in the event
PIATCO's debts is triggered by PIATCO's own default of its loan
that PIATCO fails to fulfill its loan obligations to its Senior Lenders, the
obligations to its Senior Lenders to which loan contracts the
Government is obligated to directly negotiate and enter into an
Government was never a party to. The Government was not even given
agreement relating to NAIA IPT III with the Senior Lenders, should the
an option as to what course of action it should take in case PIATCO
latter fail to appoint a qualified nominee or transferee who will take
defaulted in the payment of its senior loans. The Government, upon
the place of PIATCO. If the Senior Lenders and the Government are
PIATCO's default, would be merely notified by the Senior Lenders of
unable to enter into an agreement after the prescribed period, the
the same and it is the Senior Lenders who are authorized to appoint a
Government must then pay PIATCO, upon transfer of NAIA IPT III to the
qualified nominee or transferee. Should the Senior Lenders fail to make
Government, termination payment equal to the appraised value of the
such an appointment, the Government is then automatically obligated
project or the value of the attendant liabilities whichever is greater.
to "directly deal and negotiate" with the Senior Lenders regarding NAIA
Attendant liabilities as defined in the ARCA includes all amounts owed
IPT III. The only way the Government would not be liable for PIATCO's
or thereafter may be owed by PIATCO not only to the Senior Lenders
debt is for a qualified nominee or transferee to be appointed in place
with whom PIATCO has defaulted in its loan obligations but to all other
of PIATCO to continue the construction, operation and maintenance of
persons who may have loaned, advanced funds or provided any other
NAIA IPT III. This "pre-condition", however, will not take the contract
type of financial facilities to PIATCO for NAIA IPT III. The amount of
out of the ambit of a direct guarantee by the government as the
PIATCO's debt that the Government would have to pay as a result of
existence, availability and willingness of a qualified nominee or
PIATCO's default in its loan obligations -- in case no qualified nominee
transferee is totally out of the government's control. As such the
or transferee is appointed by the Senior Lenders and no other
Government is virtually at the mercy of PIATCO (that it would not
agreement relating to NAIA IPT III has been reached between the
default on its loan obligations to its Senior Lenders), the Senior Lenders
Government and the Senior Lenders -- includes, but is not limited to,
(that they would appoint a qualified nominee or transferee or agree to
"all principal, interest, associated fees, charges, reimbursements, and
some other arrangement with the Government) and the existence of a
other related expenses . . . whether payable at maturity, by
qualified nominee or transferee who is able and willing to take the
acceleration or otherwise."55
place of PIATCO in NAIA IPT III.
It is clear from the foregoing that the ARCA provides for a direct
The proscription against government guarantee in any form is one of
guarantee by the government to pay PIATCO's loans not only to its
the policy considerations behind the BOT Law. Clearly, in the present
Senior Lenders but all other entities who provided PIATCO funds or
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 transferee. This in effect would make
the Government liable for PIATCO's 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
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 The operation of an international passenger airport terminal is no
public interest so requires. No combinations in restraint of trade or doubt an undertaking imbued with public interest. In entering into a
unfair competition shall be allowed. Build–Operate-and-Transfer contract for the construction, operation
and maintenance of NAIA IPT III, the government has determined that
Clearly, monopolies are not per se prohibited by the Constitution but
public interest would be served better if private sector resources were
may be permitted to exist to aid the government in carrying on an
used in its construction and an exclusive right to operate be granted to
enterprise or to aid in the performance of various services and
the private entity undertaking the said project, in this case PIATCO.
functions in the interest of the public.67 Nonetheless, a determination
Nonetheless, the privilege given to PIATCO is subject to reasonable
must first be made as to whether public interest requires a monopoly.
regulation and supervision by the Government through the MIAA,
As monopolies are subject to abuses that can inflict severe prejudice
which is the government agency authorized to operate the NAIA
to the public, they are subject to a higher level of State regulation than
complex, as well as DOTC, the department to which MIAA is attached.74
an ordinary business undertaking.
This is in accord with the Constitutional mandate that a monopoly
In the cases at bar, PIATCO, under the 1997 Concession Agreement and
which is not prohibited must be regulated.75 While it is the declared
the ARCA, is granted the "exclusive right to operate a commercial
policy of the BOT Law to encourage private sector participation by
international passenger terminal within the Island of Luzon" at the
"providing a climate of minimum government regulations,"76 the same
NAIA IPT III.68 This is with the exception of already existing
does not mean that Government must completely surrender its
international airports in Luzon such as those located in the Subic Bay
sovereign power to protect public interest in the operation of a public
Freeport Special Economic Zone ("SBFSEZ"), Clark Special Economic
utility as a monopoly. The operation of said public utility can not be
Zone ("CSEZ") and in Laoag City.69 As such, upon commencement of
done in an arbitrary manner to the detriment of the public which it
PIATCO's operation of NAIA IPT III, Terminals 1 and 2 of NAIA would
seeks to serve. The right granted to the public utility may be exclusive
cease to function as international passenger terminals. This, however,
but the exercise of the right cannot run riot. Thus, while PIATCO may
does not prevent MIAA to use Terminals 1 and 2 as domestic passenger
be authorized to exclusively operate NAIA IPT III as an international
terminals or in any other manner as it may deem appropriate except
passenger terminal, the Government, through the MIAA, has the right
those activities that would compete with NAIA IPT III in the latter's
and the duty to ensure that it is done in accord with public interest.
operation as an international passenger terminal.70 The right granted
PIATCO's right to operate NAIA IPT III cannot also violate the rights of
to PIATCO to exclusively operate NAIA IPT III would be for a period of
third parties.
twenty-five (25) years from the In-Service Date71 and renewable for
another twenty-five (25) years at the option of the government.72 Both Section 3.01(e) of the 1997 Concession Agreement and the ARCA
the 1997 Concession Agreement and the ARCA further provide that, provide:
in view of the exclusive right granted to PIATCO, the concession
3.01 Concession Period
contracts of the service providers currently servicing Terminals 1 and
2 would no longer be renewed and those concession contracts whose xxx xxx xxx
expiration are subsequent to the In-Service Date would cease to be
effective on the said date.73
(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 Concessionaire is under no legal
obligation to permit such carry-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 Concessionaire's 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 III's 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. Lazaro78 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 MIAA's
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 review1 of the 21 June 2000 Decision2 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
decision3 of the Regional Trial Court of Quezon City, Branch
81,4 affirming the 15 December 1995 decision5 of the Metropolitan
Trial Court of Quezon City, Branch 31.6
The Antecedents
In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid ₱400 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
Pajuyo’s 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 (₱300.00)
monthly as reasonable compensation for the use of the premises
starting from the last demand;
C) pay plaintiff the sum of ₱3,000.00 as and by way of attorney’s 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
Resolution9 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 Resolution10 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 Guevara’s 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
Guevarra’s petition for review because it was filed out of time.
Moreover, it was Guevarra’s counsel and not Guevarra who signed the
certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution
denying Pajuyo’s 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,
Guevarra’s refusal to vacate the house on Pajuyo’s demand made
Guevarra’s 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 Kasunduan bound Guevarra to return possession of the house on
demand.
The RTC rejected Guevarra’s 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 Guevarra’s 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 Pajuyo’s motion for reconsideration, the appellate court
debunked Pajuyo’s claim that Guevarra filed his motion for extension
beyond the period to appeal.
The Court of Appeals pointed out that Guevarra’s motion for extension
filed before the Supreme Court was stamped "13 December 1996 at
4:09 PM" by the Supreme Court’s Receiving Clerk. The Court of Appeals
concluded that the motion for extension bore a date, contrary to
Pajuyo’s 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 Pajuyo’s argument that the appellate
court should have dismissed the petition for review because it was
Guevarra’s 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 Respondent’s 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 respondent’s
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
Guevarra’s petition for review because the RTC decision had already
become final and executory when the appellate court acted on
Guevarra’s 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 Guevarra’s 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. Guevarra’s 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 squatter’s 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 Liboro’s 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 Guevarra’s 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 Court’s 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 Guevarra’s
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
Guevarra’s favor that Pajuyo raised the procedural issues against
Guevarra’s 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 court’s jurisdiction after
voluntarily submitting to it is against public policy.26
In his Comment before the Court of Appeals, Pajuyo also failed to
discuss Guevarra’s failure to sign the certification against forum
shopping. Instead, Pajuyo harped on Guevarra’s counsel signing the
verification, claiming that the counsel’s verification is insufficient since
it is based only on "mere information."
A party’s failure to sign the certification against forum shopping is
different from the party’s 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 party’s 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 defendant’s 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 party’s 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 Pitargue44 as squatters, strictly speaking, their entry into the
disputed land was illegal. Both the plaintiff and defendant entered the
public land without the owner’s 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 Code48 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
Guevarra’s 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 Guevarra’s 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 Pajuyo’s 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, sila’y 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 Pajuyo’s demand but Guevarra broke his promise and
refused to heed Pajuyo’s 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 former’s 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 defendant’s 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 Kasunduan expressly articulated Pajuyo’s 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.
Guevarra’s refusal to comply with Pajuyo’s demand to vacate made
Guevarra’s 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 a precarium.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 tenant’s
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 Guevarra’s
recognition of Pajuyo’s 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
Pajuyo’s withdrawal of his permission to Guevarra terminated
the Kasunduan. Guevarra’s 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 Pajuyo’s 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.
Pajuyo’s 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 one’s 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.
Attorney’s Fees and Rentals
The MTC and RTC failed to justify the award of ₱3,000 attorney’s fees
to Pajuyo. Attorney’s fees as part of damages are awarded only in the
instances enumerated in Article 2208 of the Civil Code.83 Thus, the
award of attorney’s fees is the exception rather than the
rule.84 Attorney’s 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 attorney’s fees awarded to
Pajuyo.
We sustain the ₱300 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 ₱300 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 attorney’s fees is deleted. No costs.
SO ORDERED.