G.R. No. 138814. April 16, 2009.
*MAKATI STOCK Same; Same; Same; Civil Law; Pleadings and Practice;
EXCHANGE, INC., MA. VIVIAN YUCHENGCO,
ADOLFO M. DUARTE, MYRON C. PAPA, NORBERTO
C. NAZARENO, GEORGE UY-TIOCO, ANTONIO A.
LOPA, RAMON B. ARNAIZ, LUIS J.L. VIRATA, and
ANTONIO GARCIA, JR., petitioners, vs. MIGUEL V.
CAMPOS, substituted by JULIA ORTIGAS VDA. DE
CAMPOS,1 respondent.
Actions; Causes of Action; Obligations; Motion to
Dismiss; If a defendant moves to dismiss the complaint
on the ground of lack of cause of action, he is regarded
as having hypothetically admitted all the averments
thereof.—A cause of action is the act or omission by
which a party violates a right of another. A complaint
states a cause of action where it contains three essential
elements of a cause of action, namely: (1) the legal right
of the plaintiff, (2) the correlative obligation of the
defendant, and (3) the act or omission of the defendant
in violation of said legal right. If these elements are
absent, the complaint becomes vulnerable to dismissal
on the ground of failure to state a cause of action. If a
defendant moves to dismiss the complaint on the ground
of lack of cause of action, he is regarded as having
hypothetically admitted all the averments thereof. The
test of sufficiency of the facts found in a complaint as
constituting a cause of action is whether or not admitting
the facts alleged, the court can render a valid judgment
upon the same in accordance with the prayer thereof.
The hypothetical admission extends to the relevant and
material facts well pleaded in the complaint and
inferences fairly deducible therefrom. Hence, if the
allegations in the complaint furnish sufficient basis by
which the complaint can be maintained, the same should
not be dismissed regardless of the defense that may be
assessed by the defendant.
Same; Same; Same; Words and Phrases; Right and
obligation are legal terms with specific legal meaning—a
right is a claim or title to an interest in anything
whatsoever that is enforceable by law while an obligation
is defined in the Civil Code as a juridical necessity to
give, to do or not to do; For every right enjoyed by any
person, there is a corresponding obligation on the part of
another person to respect such right.—There is no
question that the Petition in SEC Case No. 02-94-4678
asserts a right in favor of respondent, particularly,
respondent’s alleged right to subscribe to the IPOs of
corporations listed in the stock market at their offering
prices; and stipulates the correlative obligation of
petitioners to respect respondent’s right, specifically, by
continuing to allow respondent to subscribe to the IPOs
of corporations listed in the stock market at their offering
prices. However, the terms right and obligation in
respondent’s Petition are not magic words that would
automatically lead to the conclusion that such Petition
sufficiently states a cause of action. Right and obligation
are legal terms with specific legal meaning. A right is a
claim or title to an interest in anything whatsoever that is
enforceable by law. An obligation is defined in the Civil
Code as a juridical necessity to give, to do or not to do.
For every right enjoyed by any person, there is a
corresponding obligation on the part of another person to
respect such right. Thus, Justice J.B.L. Reyes offers the
definition given by Arias Ramos as a more complete
definition: An obligation is a juridical relation whereby a
person (called the creditor) may demand from another
(called the debtor) the observance of a determinative
conduct (the giving, doing or not doing), and in case of
breach, may demand satisfaction from the assets of the
latter.
The mere assertion of a right and claim of an obligation
in an initiatory pleading, whether a Complaint or Petition,
without identifying the basis or source thereof, is merely
a conclusion of fact and law—a pleading should state the
ultimate facts essential to the rights of action or defense
asserted, as distinguished from mere conclusions of fact
or conclusions of law.—The Civil Code enumerates the
sources of obligations: Art. 1157. Obligations arise from:
(1) Law; (2) Contracts; (3) Quasi-contracts; (4) Acts or
omissions punished by law; and (5) Quasi-delicts.
Therefore, an obligation imposed on a person, and the
corresponding right granted to another, must be rooted in
at least one of these five sources. The mere assertion of
a right and claim of an obligation in an initiatory pleading,
whether a Complaint or Petition, without identifying the
basis or source thereof, is merely a conclusion of fact
and law. A pleading should state the ultimate facts
essential to the rights of action or defense asserted, as
distinguished from mere conclusions of fact or
conclusions of law. Thus, a Complaint or Petition filed by
a person claiming a right to the Office of the President of
this Republic, but without stating the source of his
purported right, cannot be said to have sufficiently stated
a cause of action. Also, a person claiming to be the
owner of a parcel of land cannot merely state that he has
a right to the ownership thereof, but must likewise assert
in the Complaint either a mode of acquisition of
ownership or at least a certificate of title in his name.
Same; Same; Same; Words and Phrases; A practice or
custom is, as a general rule, not a source of a legally
demandable or enforceable right.—A meticulous review
of the Petition reveals that the allocation of IPO shares
was merely alleged to have been done in accord with a
practice normally observed by the members of the stock
exchange, to wit: IPOs are shares of corporations offered
for sale to the public, prior to their listing in the trading
floor of the country’s two stock exchanges. Normally,
Twenty-Five Percent (25%) of these shares are divided
equally between the two stock exchanges which in turn
divide these equally among their members, who pay
therefor at the offering price. A practice or custom is, as
a general rule, not a source of a legally demandable or
enforceable right. Indeed, in labor cases, benefits which
were voluntarily given by the employer, and which have
ripened into company practice, are considered as rights
that cannot be diminished by the employer.
Nevertheless, even in such cases, the source of the
employees’ right is not custom, but ultimately, the law,
since Article 100 of the Labor Code explicitly prohibits
elimination or diminution of benefits.
PETITION for review on certiorari of the decision and
resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
This is a Petition for Review on Certiorari under Rule 45
seeking the reversal of the Decision2 dated 11 February
1997 and Resolution dated 18 May 1999 of the Court of
Appeals in CA-G.R. SP No. 38455.
The facts of the case are as follows:
SEC Case No. 02-94-4678 was instituted on 10 February
1994 by respondent Miguel V. Campos, who filed with
the Securities, Investigation and Clearing Department
(SICD) of the Securities and Exchange Commission
(SEC), a Petition against herein petitioners Makati Stock
Exchange, Inc. (MKSE) and MKSE directors, Ma. Vivian
Yuchengco, Adolfo M. Duarte, Myron C. Papa, Norberto
C. Nazareno, George Uy-Tioco, Antonio A. Lopa, Ramon
B. Arnaiz, Luis J.L. Virata, and Antonio Garcia, Jr.
Respondent, in said Petition, sought: (1) the nullification
of the Resolution dated 3 June 1993 of the MKSE Board
of Directors, which allegedly deprived him of his right to
participate equally in the allocation of Initial Public
Offerings (IPO) of corporations registered with MKSE; (2)
the delivery of the IPO shares he was allegedly deprived
of, for which he would pay IPO prices; and (3) the
payment of P2 million as moral damages, P1 million as
exemplary damages, and P500,000.00 as attorney’s fees
and litigation expenses.
On 14 February 1994, the SICD issued an Order
granting respondent’s prayer for the issuance of a
Temporary Restraining Order to enjoin petitioners from
implementing or enforcing the 3 June 1993 Resolution of
the MKSE Board of Directors.
The SICD subsequently issued another Order on 10
March 1994 granting respondent’s application for a Writ
of Preliminary Injunction, to continuously enjoin, during
the pendency of SEC Case No. 02-94-4678, the
implementation or enforcement of the MKSE Board
Resolution in question. Petitioners assailed this SICD
Order dated 10 March 1994 in a Petition for Certiorari
filed with the SEC en banc, docketed as SEC-EB No.
393.
On 11 March 1994, petitioners filed a Motion to Dismiss
respondent’s Petition in SEC Case No. 02-94-4678,
based on the following grounds: (1) the Petition became
moot due to the cancellation of the license of MKSE; (2)
the SICD had no jurisdiction over the Petition; and (3) the
Petition failed to state a cause of action.
The SICD denied petitioner’s Motion to Dismiss in an
Order dated 4 May 1994. Petitioners again challenged
the 4 May 1994 Order of SICD before the SEC en banc
through another Petition for Certiorari, docketed as SEC-
EB No. 403.
In an Order dated 31 May 1995 in SEC-EB No. 393, the
SEC en banc nullified the 10 March 1994 Order of SICD
in SEC Case No. 02-94-4678 granting a Writ of
Preliminary Injunction in favor of respondent. Likewise, in
an Order dated 14 August 1995 in SEC-EB No. 403, the
SEC en banc annulled the 4 May 1994 Order of SICD in
SEC Case No. 02-94-4678 denying petitioners’ Motion to
Dismiss, and accordingly ordered the dismissal of
respondent’s Petition before the SICD.
Respondent filed a Petition for Certiorari with the Court of
Appeals assailing the Orders of the SEC en banc dated
31 May 1995 and 14 August 1995 in SEC-EB No. 393
and SEC-EB No. 403, respectively. Respondent’s
Petition before the appellate court was docketed as CA-
G.R. SP No. 38455.
On 11 February 1997, the Court of Appeals promulgated
its Decision in CA-G.R. SP No. 38455, granting
respondent’s Petition for Certiorari, thus:
“WHEREFORE, the petition in so far as it prays for
annulment of the Orders dated May 31, 1995 and August
14, 1995 in SEC-EB Case Nos. 393 and 403 is
GRANTED. The said orders are hereby rendered null
and void and set aside.”
Petitioners filed a Motion for Reconsideration of the
foregoing Decision but it was denied by the Court of
Appeals in a Resolution dated 18 May 1999.
Hence, the present Petition for Review raising the
following arguments:
I.
THE SEC EN BANC DID NOT COMMIT GRAVE ABUSE
OF DISCRETION AMOUNTING TO LACK OR EXCESS
OF JURISDICTION WHEN IT DISMISSED THE
PETITION FILED BY RESPONDENT BECAUSE ON ITS
FACE, IT FAILED TO STATE A CAUSE OF ACTION.
II.
THE GRANT OF THE IPO ALLOCATIONS IN FAVOR
OF RESPONDENT WAS A MERE ACCOMMODATION
GIVEN TO HIM BY THE BOARD OF [DIRECTORS] OF
THE MAKATI STOCK EXCHANGE, INC.
III.
THE COURT OF APPEALS ERRED IN HOLDING THAT
THE SEC EN BANC COMMITTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT MADE AN EXTENDED
INQUIRY AND PROCEEDED TO MAKE A
DETERMINATION AS TO THE TRUTH OF
RESPONDENT’S ALLEGATIONS IN HIS PETITION
AND USED AS BASIS THE EVIDENCE ADDUCED
DURING THE HEARING ON THE APPLICATION FOR
THE WRIT OF PRELIMINARY INJUNCTION TO
DETERMINE THE EXISTENCE OR VALIDITY OF A
STATED CAUSE OF ACTION.
IV.
IPO ALLOCATIONS GRANTED TO BROKERS ARE
NOT TO BE BOUGHT BY THE BROKERS FOR
THEMSELVES BUT ARE TO BE DISTRIBUTED TO
THE INVESTING PUBLIC. HENCE, RESPONDENT’S
CLAIM FOR DAMAGES IS ILLUSORY AND HIS
PETITION A NUISANCE SUIT.3
On 18 September 2001, counsel for respondent
manifested to this Court that his client died on 7 May
2001. In a Resolution dated 24 October 2001, the Court
directed the substitution of respondent by his surviving
spouse, Julia Ortigas vda. de Campos.
Petitioners want this Court to affirm the dismissal by the
SEC en banc of respondent’s Petition in SEC Case No.
02-94-4678 for failure to state a cause of action. On the
other hand, respondent insists on the sufficiency of his
Petition and seeks the continuation of the proceedings
before the SICD.
A cause of action is the act or omission by which a party
violates a right of another.4 A complaint states a cause
of action where it contains three essential elements of a
cause of action, namely: (1) the legal right of the plaintiff,
(2) the correlative obligation of the defendant, and (3) the
act or omission of the defendant in violation of said legal
right. If these elements are absent, the complaint
becomes vulnerable to dismissal on the ground of failure
to state a cause of action.
If a defendant moves to dismiss the complaint on the
ground of lack of cause of action, he is regarded as
having hypothetically admitted all the averments thereof.
The test of sufficiency of the facts found in a complaint
as constituting a cause of action is whether or not
admitting the facts alleged, the court can render a valid
judgment upon the same in accordance with the prayer
thereof. The hypothetical admission extends to the
relevant and material facts well pleaded in the complaint
and inferences fairly deducible therefrom. Hence, if the
allegations in the complaint furnish sufficient basis by
which the complaint can be maintained, the same should
not be dismissed regardless of the defense that may be
assessed by the defendant.5
Given the foregoing, the issue of whether respondent’s
Petition in SEC Case No. 02-94-4678 sufficiently states a
cause of action may be alternatively stated as whether,
hypothetically admitting to be true the allegations in
respondent’s Petition in SEC Case No. 02-94-4678, the
SICD may render a valid judgment in accordance with
the prayer of said Petition.
A reading of the exact text of respondent’s Petition in
SEC Case No. 02-94-4678 is, therefore, unavoidable.
Pertinent portions of the said Petition reads:
“7. In recognition of petitioner’s invaluable services, the
general membership of respondent corporation [MKSE]
passed a resolution sometime in 1989 amending its
Articles of Incorporation, to include the following
provision therein:
“ELEVENTH—WHEREAS, Mr. Miguel Campos is the
only surviving incorporator of the Makati Stock
Exchange, Inc. who has maintained his membership;
“WHEREAS, he has unselfishly served the Exchange in
various capacities, as governor from 1977 to the present
and as President from 1972 to 1976 and again as
President from 1988 to the present;
“WHEREAS, such dedicated service and leadership
which has contributed to the advancement and well
being not only of the Exchange and its members but also
to the Securities industry, needs to be recognized and
appreciated;
“WHEREAS, as such, the Board of Governors in its
meeting held on February 09, 1989 has correspondingly
adopted a resolution recognizing his valuable service to
the Exchange, reward the same, and preserve for
posterity such recognition by proposing a resolution to
the membership body which would make him as
Chairman Emeritus for life and install in the Exchange
premises a commemorative bronze plaque in his honor;
“NOW, THEREFORE, for and in consideration of the
above premises, the position of the “Chairman Emeritus”
to be occupied by Mr. Miguel Campos during his lifetime
and irregardless of his continued membership in the
Exchange with the Privilege to attend all membership
meetings as well as the meetings of the Board of
Governors of the Exchange, is hereby created.”
8. Hence, to this day, petitioner is not only an active
member of the respondent corporation, but its Chairman
Emeritus as well.
9. Correspondingly, at all times material to this petition,
as an active member and Chairman Emeritus of
respondent corporation, petitioner has always enjoyed
the right given to all the other members to participate
equally in the Initial Public Offerings (IPOs for brevity) of
corporations.
10. IPOs are shares of corporations offered for sale to
the public, prior to the listing in the trading floor of the
country’s two stock exchanges. Normally, Twenty Five
Percent (25%) of these shares are divided equally
between the two stock exchanges which in turn divide
these equally among their members, who pay therefore
at the offering price.
11. However, on June 3, 1993, during a meeting of the
Board of Directors of respondent-corporation, individual
respondents passed a resolution to stop giving petitioner
the IPOs he is entitled to, based on the ground that these
shares were allegedly benefiting Gerardo O. Lanuza, Jr.,
who these individual respondents wanted to get even
with, for having filed cases before the Securities and
Exchange (SEC) for their disqualification as member of
the Board of Directors of respondent corporation.
12. Hence, from June 3, 1993 up to the present time,
petitioner has been deprived of his right to subscribe to
the IPOs of corporations listing in the stock market at
their offering prices.
13. The collective act of the individual respondents in
depriving petitioner of his right to a share in the IPOs for
the aforementioned reason, is unjust, dishonest and
done in bad faith, causing petitioner substantial financial
damage.”6
There is no question that the Petition in SEC Case No.
02-94-4678 asserts a right in favor of respondent,
particularly, respondent’s alleged right to subscribe to the
IPOs of corporations listed in the stock market at their
offering prices; and stipulates the correlative obligation of
petitioners to respect respondent’s right, specifically, by
continuing to allow respondent to subscribe to the IPOs
of corporations listed in the stock market at their offering
prices.
However, the terms right and obligation in respondent’s
Petition are not magic words that would automatically
lead to the conclusion that such Petition sufficiently
states a cause of action. Right and obligation are legal
terms with specific legal meaning. A right is a claim or
title to an interest in anything whatsoever that is
enforceable by law.7 An obligation is defined in the Civil
Code as a juridical necessity to give, to do or not to do.8
For every right enjoyed by any person, there is a
corresponding obligation on the part of another person to
respect such right. Thus, Justice J.B.L. Reyes offers9 the
definition given by Arias Ramos as a more complete
definition:
“An obligation is a juridical relation whereby a person
(called the creditor) may demand from another (called
the debtor) the observance of a determinative conduct
(the giving, doing or not doing), and in case of breach,
may demand satisfaction from the assets of the latter.”
The Civil Code enumerates the sources of obligations:
“Art. 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.”
Therefore, an obligation imposed on a person, and the
corresponding right granted to another, must be rooted in
at least one of these five sources. The mere assertion of
a right and claim of an obligation in an initiatory pleading,
whether a Complaint or Petition, without identifying the
basis or source thereof, is merely a conclusion of fact
and law. A pleading should state the ultimate facts
essential to the rights of action or defense asserted, as
distinguished from mere conclusions of fact or
conclusions of law.10 Thus, a Complaint or Petition filed
by a person claiming a right to the Office of the President
of this Republic, but without stating the source of his
purported right, cannot be said to have sufficiently stated
a cause of action. Also, a person claiming to be the
owner of a parcel of land cannot merely state that he has
a right to the ownership thereof, but must likewise assert
in the Complaint either a mode of acquisition of
ownership or at least a certificate of title in his name.
In the case at bar, although the Petition in SEC Case No.
02-94-4678 does allege respondent’s right to subscribe
to the IPOs of corporations listed in the stock market at
their offering prices, and petitioners’ obligation to
continue respecting and observing such right, the
Petition utterly failed to lay down the source or basis of
respondent’s right and/or petitioners’ obligation.
Respondent merely quoted in his Petition the MKSE
Board Resolution, passed sometime in 1989, granting
him the position of Chairman Emeritus of MKSE for life.
However, there is nothing in the said Petition from which
the Court can deduce that respondent, by virtue of his
position as Chairman Emeritus of MKSE, was granted by
law, contract, or any other legal source, the right to
subscribe to the IPOs of corporations listed in the stock
market at their offering prices.
A meticulous review of the Petition reveals that the
allocation of IPO shares was merely alleged to have
been done in accord with a practice normally observed
by the members of the stock exchange, to wit:
“IPOs are shares of corporations offered for sale to the
public, prior to their listing in the trading floor of the
country’s two stock exchanges. Normally, Twenty-Five
Percent (25%) of these shares are divided equally
between the two stock exchanges which in turn divide
these equally among their members, who pay therefor at
the offering price.”11 (Emphasis supplied)
A practice or custom is, as a general rule, not a source of
a legally demandable or enforceable right.12 Indeed, in
labor cases, benefits which were voluntarily given by the
employer, and which have ripened into company
practice, are considered as rights that cannot be
diminished by the employer.13 Nevertheless, even in
such cases, the source of the employees’ right is not
custom, but ultimately, the law, since Article 100 of the
Labor Code explicitly prohibits elimination or diminution
of benefits.
There is no such law in this case that converts the
practice of allocating IPO shares to MKSE members, for
subscription at their offering prices, into an enforceable
or demandable right. Thus, even if it is hypothetically
admitted that normally, twenty five percent (25%) of the
IPOs are divided equally between the two stock
exchanges—which, in turn,divide their respective
allocation equally among their members, including the
Chairman Emeritus, who pay for IPO shares at the
offering price—the Court cannot grant respondent’s
prayer for damages which allegedly resulted from the
MKSE Board Resolution dated 3 June 1993 deviating
from said practice by no longer allocating any shares to
respondent.
Accordingly, the instant Petition should be granted. The
Petition in SEC Case No. 02-94-4678 should be
dismissed for failure to state a cause of action. It does
not matter that the SEC en banc, in its Order dated 14
August 1995 in SEC-EB No. 403, overstepped its bounds
by not limiting itself to the issue of whether respondent’s
Petition before the SICD sufficiently stated a cause of
action. The SEC en banc may have been mistaken in
considering extraneous evidence in granting petitioners’
Motion to Dismiss, but its discussion thereof are merely
superfluous and obiter dictum. In the main, the SEC en
banc did correctly dismiss the Petition in SEC Case No.
02-94-4678 for its failure to state the basis for
respondent’s alleged right, to wit:
“Private respondent Campos has failed to establish the
basis or authority for his alleged right to participate
equally in the IPO allocations of the Exchange. He cited
paragraph 11 of the amended articles of incorporation of
the Exchange in support of his position but a careful
reading of the said provision shows nothing therein that
would bear out his claim. The provision merely created
the position of chairman emeritus of the Exchange but it
mentioned nothing about conferring upon the occupant
thereof the right to receive IPO allocations.”14
With the dismissal of respondent’s Petition in SEC Case
No. 02-94-4678, there is no more need for this Court to
resolve the propriety of the issuance by SCID of a writ of
preliminary injunction in said case.
WHEREFORE, the Petition is GRANTED. The Decision
of the Court of Appeals dated 11 February 1997 and its
Resolution dated 18 May 1999 in CA-G.R. SP No. 38455
are REVERSED and SET ASIDE. The Orders dated 31
May 1995 and 14 August 1995 of the Securities and
Exchange Commission en banc in SEC-EB Case No.
393 and No. 403, respectively, are hereby reinstated. No
pronouncement as to costs.
SO ORDERED.
Ynares-Santiago (Chairperson), Austria-Martinez,
Nachura and Peralta, JJ., concur.
Petition granted, judgment and resolution reversed and
set aside.
Notes.—The jurisdiction of the court over the subject
matter is determined upon the allegations made in
the complaint, irrespective of whether the plaintiff is
entitled or not to recover upon the claim asserted.
(Davao Abaca Plantation Company, Inc. vs. Dole
Philippines, Inc., 346 SCRA 682 [2000])
If the suit is not brought in the name of, or against,
the real party in interest, a Motion to Dismiss may be
filed on the ground that the Complaint states no
cause of action. (Strongworld Construction
Corporation vs. Perello, 496 SCRA 700 [2006])
----------------------------------------------------------------------------
---
ANG YU ASUNCION VS. COURT OF APPEALS
G.R. NO. 109125. DECEMBER 2, 1994.*
ANG YU ASUNCION, ARTHUR GO AND KEH TIONG,
petitioners, vs. THE HON. COURT OF APPEALS and
BUEN REALTY DEVELOPMENT CORPORATION,
respondents.
Obligations; Essential elements of an obligation.—An
obligation is a juridical necessity to give, to do or not to
do (Art. 1156, Civil Code). The obligation is constituted
upon the concurrence of the essential elements thereof,
viz: (a) The vinculum juris or juridical tie which is the
efficient cause established by the various sources of
obligations (law, contracts, quasi-contracts, delicts and
quasi-delicts); (b) the object which is the prestation or
conduct, required to be observed (to give, to do or not to
do); and (c) the subject-persons who, viewed from the
demandability of the obligation, are the active (obligee)
and the passive (obligor) subjects.
Same; Contracts; Various stages of a contract.—Among
the sources of an obligation is a contract (Art. 1157, Civil
Code), which is a meeting of minds between two persons
whereby one binds himself, with respect to the other, to
give something or to render some service (Art. 1305,
Civil Code). A contract undergoes various stages that
include its negotiation or preparation, its perfection and,
finally, its consummation. Negotiation covers the period
from the time the prospective contracting parties indicate
interest in the contract to the time the contract is
concluded (perfected). The perfection of the contract
takes place upon the concurrence of the essential
elements thereof. A contract which is consensual as to
perfection is so established upon a mere meeting of
minds, i.e., the concurrence of offer and acceptance, on
the object and on the cause thereof. A contract which
requires, in addition to the above, the delivery of the
object of the agreement, as in a pledge or commodatum,
is commonly referred to as a real contract. In a solemn
contract, compliance with certain formalities prescribed
by law, such as in a donation of real property, is essential
in order to make the act valid, the prescribed form being
thereby an essential element thereof. The stage of
consummation begins when the parties perform their
respective undertakings under the contract culminating in
the extinguishment thereof.
Same; Same; Sales; In sales, the contract is perfected
when the seller obligates himself, for a price certain, to
deliver and to transfer ownership of a thing or right to the
buyer, over which the latter agrees.—Until the contract is
perfected, it cannot, as an independent source of
obligation, serve as a binding juridical relation. In sales,
particularly, to which the topic for discussion about the
case at bench belongs, the contract is perfected when a
person, called the seller, obligates himself, for a price
certain, to deliver and to transfer ownership of a thing or
right to another, called the buyer, over which the latter
agrees.
Same; Same; Same; When the sale is not absolute but
conditional, the breach of the condition will prevent the
obligation to convey title from acquiring an obligatory
force.—When the sale is not absolute but conditional,
such as in a “Contract to Sell” where invariably the
ownership of the thing sold is retained until the fulfillment
of a positive suspensive condition (normally, the full
payment of the purchase price), the breach of the
condition will prevent the obligation to convey title from
acquiring an obligatory force. In Dignos vs. Court of
Appeals (158 SCRA 375), we have said that, although
denominated a “Deed of Conditional Sale,” a sale is still
absolute where the contract is devoid of any proviso that
title is reserved or the right to unilaterally rescind is
stipulated, e.g., until or unless the price is paid.
Ownership will then be transferred to the buyer upon
actual or constructive delivery (e.g., by the execution of a
public document) of the property sold. Where the
condition is imposed upon the perfection of the contract
itself, the failure of the condition would prevent such
perfection. If the condition is imposed on the obligation of
a party which is not fulfilled, the other party may either
waive the condition or refuse to proceed with the sale
(Art. 1545, Civil Code)
Same; Same; Same; An unconditional mutual promise to
buy and sell, with an object that is determinate and the
price fixed, can be obligatory on the parties.—An
unconditional mutual promise to buy and sell, as long as
the object is made determinate and the price is fixed, can
be obligatory on the parties, and compliance therewith
may accordingly be exacted.
Same; Same; Same; Options; An accepted unilateral
promise which specifies the thing to be sold and the price
to be paid, when coupled with a valuable consideration
distinct and separate from the price, may be termed a
perfected contract of option.—An accepted unilateral
promise which specifies the thing to be sold and the price
to be paid, when coupled with a valuable consideration
distinct and separate from the price, is what may properly
be termed a perfected contract of option. This contract is
legally binding, and in sales, it conforms with the second
paragraph of Article 1479 of the Civil Code. Observe,
however, that the option is not the contract of sale itself.
The optionee has the right, but not the obligation, to buy.
Once the option is exercised timely, i.e., the offer is
accepted before a breach of the option, a bilateral
promise to sell and to buy ensues and both parties are
then reciprocally bound to comply with their respective
undertakings.
Same; Same; Same; Same; Rules applicable where a
period is given to the offeree within which to accept the
offer.—Where a period is given to the offeree within
which to accept the offer, the following rules generally
govern: (1) If the period is not itself founded upon or
supported by a consideration, the offeror is still free and
has the right to withdraw the offer before its acceptance,
or, if an acceptance has been made, before the offeror’s
coming to know of such fact, by communicating that
withdrawal to the offeree. The right to withdraw, however,
must not be exercised whimsically or arbitrarily;
otherwise, it could give rise to a damage claim under
Article 19 of the Civil Code; (2) If the period has a
separate consideration, a contract of “option” is deemed
perfected, and it would be a breach of that contract to
withdraw the offer during the agreed period. The option,
however, is an independent contract by itself, and it is to
be distinguished from the projected main agreement
(subject matter of the option) which is obviously yet to be
concluded. If, in fact, the optioner-offeror withdraws the
offer before its acceptance (exercise of the option) by the
optionee-offeree, the latter may not sue for specific
performance on the proposed contract (“object” of the
option) since it has failed to reach its own stage of
perfection. The optionee-offeror, however, renders
himself liable for damages for breach of the option. In
these cases, care should be taken on the real nature of
the consideration given, for if, in fact, it has been
intended to be part of the consideration for the main
contract with a right of withdrawal on the part of the
optionee, the main contract could be deemed perfected;
a similar instance would be an “earnest money” in a
contract of sale that can evidence its perfection (Art.
1482, Civil Code).
Same; Same; Same; Same; Words and Phrases; “Right
of First Refusal,” Explained; In the law on sales, the so-
called “right of first refusal” is an innovative juridical
relation, but it cannot be deemed a perfected contract of
sale under Article 1458 of the Civil Code.—In the law on
sales, the so-called “right of first refusal” is an innovative
juridical relation. Needless to point out, it cannot be
deemed a perfected contract of sale under Article 1458
of the Civil Code, Neither can the right of first refusal,
understood in its normal concept, per se be brought
within the purview of an option under the second
paragraph of Article 1479, aforequoted, or possibly of an
offer under Article 1319 of the same Code. An option or
an offer would require, among other things, a clear
certainty on both the object and the cause or
consideration of the envisioned contract. In a right of first
refusal, while the object might be made determinate, the
exercise of the right, however, would be dependent not
only on the grantor’s eventual intention to enter into a
binding juridical relation with another but also on terms,
including the price, that obviously are yet to be later
firmed up. Prior thereto, it can at best be so described as
merely belonging to a class of preparatory juridical
relations governed not by contracts (since the essential
elements to establish the vinculum juris would still be
indefinite and inconclusive) but by, among other laws of
general application, the pertinent scattered provisions of
the Civil Code on human conduct.
Same; Same; Same; Same; Same; Same; Breach of a
right of first refusal decreed under a final judgment does
not entitle the aggrieved party to a writ of execution of
the judgment but to an action for damages.—Even on the
premise that such right of first refusal has been decreed
under a final judgment, like here, its breach cannot justify
correspondingly an issuance of a writ of execution under
a judgment that merely recognizes its existence, nor
would it sanction an action for specific performance
without thereby negating the indispensable element of
consensuality in the perfection of contracts. It is not to
say, however, that the right of first refusal would be
inconsequential for, such as already intimated above, an
unjustified disregard thereof, given, for instance, the
circumstances expressed in Article 19 of the Civil Code,
can warrant a recovery for damages. The final judgment
in Civil Case No. 87-41058, it must be stressed, has
merely accorded a “right of first refusal” in favor of
petitioners. The consequence of such a declaration
entails no more than what has heretofore been said. In
fine, if, as it is here so conveyed to us, petitioners are
aggrieved by the failure of private respondents to honor
the right of first refusal, the remedy is not a writ of
execution on the judgment, since there is none to
execute, but an action for damages in a proper forum for
the purpose.
Due Process; Actions; A party not impleaded in an action
cannot be held subject to the writ of execution issued
therein.—Furthermore, whether private respondent Buen
Realty Development Corporation, the allegedpurchaser
of the property, has acted in good faith or bad faith and
whether or not it should, in any case, be considered
bound to respect the registration of the lis pendens in
Civil Case No. 87-41058 are matters that must be
independently addressed in appropriate proceedings.
Buen Realty, not having been impleaded in Civil Case
No.87-41058, cannot be held subject to the writ of
execution issued by respondent Judge, let alone ousted
from the ownership and possession of the property,
without first being duly afforded its day in court.
PETITION for review of a decision of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Antonio M. Albano for petitioners.
Umali, Soriano & Associates for private respondent.
VITUG, J.:
Assailed, in this petition for review, is the decision of the
Court of Appeals, dated 04 December 1991, in CA-G.R.
SP No. 26345 setting aside and declaring without force
and effect the orders of execution of the trial court, dated
30 August 1991 and 27 September 1991, in Civil Case
No. 87-41058.
The antecedents are recited in good detail by the
appellate court thusly:
“On July 29, 1987 a Second Amended Complaint for
Specific Performance was filed by Ann Yu Asuncion and
Keh Tiong, et al., against Bobby Cu Unjieng, Rose Cu
Unjieng and Jose Tan before the Regional Trial Court,
Branch 31, Manila in Civil Case No. 87-41058, alleging,
among others, that plaintiffs are tenants or lessees of
residential and commercial spaces owned by defendants
described as Nos. 630-638 Ongpin Street, Binondo,
Manila; that they have occupied said spaces since 1935
and have been religiously paying the rental and
complying with all the conditions of the lease contract;
that on several occasions before October 9, 1986,
defendants informed plaintiffs that they are offering to
sell the premises and are giving them priority to acquire
the same; that during the negotiations, Bobby Cu Unjieng
offered a price of P6-million while plaintiffs made a
counter offer of P5-million; that plaintiffs thereafter asked
the defendants to put their offer in writing to which
request defendants acceded; that in reply to defendants’
letter, plaintiffs wrote them on October 24, 1986 asking
that they specify the terms and conditions of the offer to
sell; that when plaintiffs did not receive any reply, they
sent another letter dated January 28, 1987 with the same
request; that since defendants failed to specify the terms
and conditions of the offer to sell and because of
information received that defendants were about to sell
the property, plaintiffs were compelled to file the
complaint to compel defendants to sell the property to
them.
“Defendants filed their answer denying the material
allegations of the complaint and interposing a special
defense of lack of cause of action.
“After the issues were joined, defendants filed a motion
for summary judgment which was granted by the lower
court. The trial court found that defendants’ offer to sell
was never accepted by the plaintiffs for the reason that
the parties did not agree upon the terms and conditions
of the proposed sale, hence, there was no contract of
sale at all. Nonetheless, the lower court ruled that should
the defendants subsequently offer their property for sale
at a price of P11-million or below, plaintiffs will have the
right of first refusal. Thus the dispositive portion of the
decision states:
“‘WHEREFORE, judgment is hereby rendered in favor of
the defendants and against the plaintiffs summarily
dismissing the complaint subject to the aforementioned
condition that if the defendants subsequently decide to
offer their property for sale for a purchase price of Eleven
Million Pesos or lower, then the plaintiffs has the option
to purchase the property or of first refusal, otherwise,
defendants need not offer the property to the plaintiffs if
the purchase price is higher than Eleven Million Pesos.
“‘SO ORDERED.’
“Aggrieved by the decision, plaintiffs appealed to this
Court in CA-G.R. CV No. 21123. In a decision
promulgated on September 21, 1990 (penned by Justice
Segundino G. Chua and concurred in by Justices Vicente
V. Mendoza and Fernando A. Santiago), this Court
affirmed with modification the lower court’s judgment,
holding:
“‘In resume, there was no meeting of the minds between
the parties concerning the sale of the property. Absent
such requirement, the claim for specific performance will
not lie. Appellants’ demand for actual, moral and
exemplary damages will likewise fail as there exists no
justifiable ground for its award. Summary judgment for
defendants was properly granted. Courts may render
summary judgment when there is no genuine issue as to
any material fact and the moving party is entitled to a
judgment as a matter of law (Garcia vs. Court of
Appeals, 176 SCRA 815). All requisites obtaining, the
decision of the court a quo is legally justifiable.
‘WHEREFORE, finding the appeal unmeritorious, the
judgment appealed from is hereby AFFIRMED, but
subject to the following modification: The court a quo in
the aforestated decision gave the plaintiffs-appellants the
right of first refusal only if the property is sold for a
purchase price of Eleven Million pesos or lower;
however, considering the mercurial and uncertain forces
in our market economy today. We find no reason not to
grant the same right of first refusal to herein appellants in
the event that the subject property is sold for a price in
excess of Eleven Million pesos. No pronouncement as to
costs.
‘SO ORDERED.’
“The decision of this Court was brought to the Supreme
Court by petition for review on certiorari. The Supreme
Court denied the appeal on May 6, 1991 ‘for insufficiency
in form and substance’ (Annex H, Petition).
“On November 15, 1990, while CA-G.R. CV No. 21123
was pending consideration by this Court, the Cu Unjieng
spouses executed a Deed of Sale (Annex D, Petition)
transferring the property in question to herein petitioner
Buen Realty and Development Corporation, subject to
the following terms and conditions:
“‘1. That for and in consideration of the sum of FIFTEEN
MILLION PESOS (P15,000,000.00), receipt of which in
full is hereby acknowledged, the VENDORS hereby sells,
transfers and conveys for and in favor of the VENDEE,
his heirs, executors, administrators or assigns, the
above-described property with all the improvements
found therein including all the rights and interest in the
said property free from all liens and encumbrances of
whatever nature, except the pending ejectment
proceeding;
‘2. That the VENDEE shall pay the Documentary Stamp
Tax, registration fees for the transfer of title in his favor
and other expenses incidental to the sale of above-
described property including capital gains tax and
accrued real estate taxes.’
“As a consequence of the sale, TCT No. 105254/T-881 in
the name of the Cu Unjieng spouses was cancelled and,
in lieu thereof, TCT No. 195816 was issued in the name
of petitioner on December 3, 1990.
“On July 1, 1991, petitioner as the new owner of the
subject property wrote a letter to the lessees demanding
that the latter vacate the premises.
“On July 16, 1991, the lessees wrote a reply to petitioner
stating that petitioner brought the property subject to the
notice of lis pendens regarding Civil Case No. 87-41058
annotated on TCT No. 105254/T-881 in the name of the
Cu Unjiengs.
“The lessees filed a Motion for Execution dated August
27, 1991 of the decision in Civil Case No. 87-41058 as
modified by the Court of Appeals in CA-G.R. CV No.
21123.
“On August 30, 1991, respondent Judge issued an order
(Annex A, Petition) quoted as follows:
“‘Presented before the Court is a Motion for Execution
filed by plaintiff represented by Atty. Antonio Albano.
Both defendants Bobby Cu Unjieng and Rose Cu
Unjieng represented by Atty. Vicente Sison and Atty.
Anacleto Magno respectively were duly notified in today’s
consideration of the motion as evidenced by the rubber
stamp and signatures upon the copy of the Motion for
Execution.
‘The gist of the motion is that the Decision of the Court
dated September 21, 1990 as modified by the Court of
Appeals in its decision in CA G.R. CV-21123, and
elevated to the Supreme Court upon the petition for
review and that the same was denied by the highest
tribunal in its resolution dated May 6, 1991 in G.R. No. L-
97276, had now become final and executory. As a
consequence, there was an Entry of Judgment by the
Supreme Court as of June 6, 1991, stating that the
aforesaid modified decision had already become final
and executory.
‘It is the observation of the Court that this property in
dispute was the subject of the Notice of Lis Pendens and
that the modified decision of this Court promulgated by
the Court of Appeals which had become final to the effect
that should the defendants decide to offer the property
for sale for a price of P11 Million or lower, and
considering the mercurial and uncertain forces in our
market economy today, the same right of first refusal to
herein plaintiffs/appellants in the event that the subject
property is sold for a price in excess of Eleven Million
pesos or more.
‘WHEREFORE, defendants are hereby ordered to
execute the necessary Deed of Sale of the property in
litigation in favor of plaintiffs Ang Yu Asuncion, Keh Tiong
and Arthur Go for the consideration of P15 Million pesos
in recognition of plaintiffs’ right of first refusal and that a
new Transfer Certificate of Title be issued in favor of the
buyer.
‘All previous transactions involving the same property
notwithstanding the issuance of another title to Buen
Realty Corporation, is hereby set aside as having been
executed in bad faith.
‘SO ORDERED.’
“On September 22, 1991 respondent Judge issued
another order, the dispositive portion of which reads:
“‘WHEREFORE, let there be Writ of Execution issue in
the above-entitled case directing the Deputy Sheriff
Ramon Enriquez of this Court to implement said Writ of
Execution ordering the defendants among others to
comply with the aforesaid Order of this Court within a
period of one (1) week from receipt of this Order and for
defendants to execute the necessary Deed of Sale of the
property in litigation in favor of the plaintiffs Ang Yu
Asuncion, Keh Tiong and Arthur Go for the consideration
of P15,000,000.00 and ordering the Register of Deeds of
the City of Manila, to cancel and set aside the title
already issued in favor of Buen Realty Corporation which
was previously executed between the latter and
defendants and to register the new title in favor of the
aforesaid plaintiffs Ang Yu Asuncion, Keh Tiong and
Arthur Go.
‘SO ORDERED.’
“On the same day, September 27, 1991 the
corresponding writ of execution (Annex C, Petition) was
issued.”1
On 04 December 1991, the appellate court, on appeal to
it by private respondent, set aside and declared without
force and effect the above questioned orders of the court
a quo.
In this petition for review on certiorari, petitioners contend
that Buen Realty can be held bound by the writ of
execution by virtue of the notice of lis pendens, carried
over on TCT No. 195816 issued in the name of Buen
Realty, at the time of the latter’s purchase of the property
on 15 November 1991 from the Cu Unjiengs.
We affirm the decision of the appellate court.
A not too recent development in real estate transactions
is the adoption of such arrangements as the right of first
refusal, a purchase option and a contract to sell. For
ready reference, we might point out some fundamental
precepts that may find some relevance to this discussion.
An obligation is a juridical necessity to give, to do or not
to do (Art. 1156, Civil Code). The obligation is constituted
upon the concurrence of the essential elements thereof,
viz: (a) The vinculum juris or juridical tie which is the
efficient cause established by the various sources of
obligations (law, contracts, quasicontracts, delicts and
quasi-delicts); (b) the object which is the prestation or
conduct, required to be observed (to give, to do or not to
do); and (c) the subject-persons who, viewed from the
demandability of the obligation, are the active (obligee)
and the passive (obligor) subjects.
Among the sources of an obligation is a contract (Art.
1157, Civil Code), which is a meeting of minds between
two persons whereby one binds himself, with respect to
the other, to give something or to render some service
(Art. 1305, Civil Code). A contract undergoes various
stages that include its negotiation or preparation, its
perfection and, finally, its consummation. Negotiation
covers the period from the time the prospective
contracting parties indicate interest in the contract tothe
time the contract is concluded (perfected). The perfection
of the contract takes place upon the concurrence of the
essential elements thereof. A contract which is
consensual as to perfection is so established upon a
mere meeting of minds, i.e., the concurrence of offer and
acceptance, on the object and on the cause thereof. A
contract which requires, in addition to the above, the
delivery of the object of the agreement, as in a pledge or
commodatum, is commonly referred to as a real contract.
In a solemn contract, compliance with certain formalities
prescribed by law, such as in a donation of real property,
is essential in order to make the act valid, the prescribed
form being thereby an essential element thereof. The
stage of consummation begins when the parties perform
their respective undertakings under the contract
culminating in the extinguishment thereof.
Until the contract is perfected, it cannot, as an
independent source of obligation, serve as a binding
juridical relation. In sales, particularly, to which the topic
for discussion about the case at bench belongs, the
contract is perfected when a person, called the seller,
obligates himself, for a price certain, to deliver and to
transfer ownership of a thing or right to another, called
the buyer, over which the latter agrees. Article 1458 of
the Civil Code provides:
“Art. 1458. By the contract of sale one of the contracting
parties obligates himself to transfer the ownership of and
to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent.
“A contract of sale may be absolute or conditional.”
When the sale is not absolute but conditional, such as in
a “Contract to Sell” where invariably the ownership of the
thing sold is retained until the fulfillment of a positive
suspensive condition (normally, the full payment of the
purchase price), the breach of the condition will prevent
the obligation to convey title from acquiring an obligatory
force.2 In Dignos vs. Court of Appeals (158 SCRA 375),
we have said that, although denominated a “Deed of
Conditional Sale,” a sale is still absolute where the
contract is devoid of any proviso that title is reserved or
the right to unilaterally rescind is stipulated, e.g., until or
unless the price is paid. Ownership will then be
transferred to the buyer upon actual or constructive
delivery (e.g., by the execution of a public document) of
the property sold. Where the condition is imposed upon
the perfection of the contract itself, the failure of the
condition would prevent such perfection.3 If the condition
is imposed on the obligation of a party which is not
fulfilled, the other party may either waive the condition or
refuse to proceed with the sale (Art. 1545, Civil Code).4
An unconditional mutual promise to buy and sell, as long
as the object is made determinate and the price is fixed,
can be obligatory on the parties, and compliance
therewith may accordingly be exacted.5
An accepted unilateral promise which specifies the thing
to be sold and the price to be paid, when coupled with a
valuable consideration distinct and separate from the
price, is what may properly be termed a perfected
contract of option. This contract is legally binding, and in
sales, it conforms with the second paragraph of Article
1479 of the Civil Code, viz:
“ART. 1479. x x x.
“An accepted unilateral promise to buy or to sell a
determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration
distinct from the price. (1451a).”6
6 It is well to note that when the consideration given, for
what otherwise would have been an option, partakes the
nature in reality of a part payment of the purchase price
(termed as “earnest money” and
Observe, however, that the option is not the contract of
sale itself.7 The optionee has the right, but not the
obligation, to buy. Once the option is exercised timely,
i.e., the offer is accepted before a breach of the option, a
bilateral promise to sell and to buy ensues and both
parties are then reciprocally bound to comply with their
respective undertakings.8
Let us elucidate a little. A negotiation is formally initiated
by an offer. An imperfect promise (policitacion) is merely
an offer. Public advertisements or solicitations and the
like are ordinarily construed as mere invitations to make
offers or only as proposals. These relations, until a
contract is perfected, are not considered binding
commitments. Thus, at any time prior to the perfection of
the contract, either negotiating party may stop the
negotiation. The offer, at this stage, may be withdrawn;
the withdrawal is effective immediately after its
manifestation, such as by its mailing and not necessarily
when the offeree learns of the withdrawal (Laudico vs.
Arias, 43 Phil. 270). Where a period is given to the
offeree within which to accept the offer, the following
rules generally govern:
(1) If the period is not itself founded upon or supported
by a consideration, the offeror is still free and has the
right to withdraw the offer before its acceptance, or, if an
acceptance has been made, before the offeror’s coming
to know of such fact, by communicating that withdrawal
to the offeree (see Art. 1324, Civil Code; see also Atkins,
Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is
applicable to a unilateral promise to sell under Art. 1479,
modifying the previous decision in South Western Sugar
vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil
Code; Rural Bank of Parañaque, Inc. vs. Remolado, 135
SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right
to withdraw, however, must not be exercised whimsically
or arbitrarily otherwise, it could give rise to a damage
claim under Article 19 of the Civil Code which ordains
that “every person must, in the exercise of his rights and
in the performance of his duties, act considered as an
initial payment thereof), an actual contract of sale is
deemed entered into and enforceable as such with
justice, give everyone his due, and observe honesty and
good faith.”
(2) If the period has a separate consideration, a contract
of “option” is deemed perfected, and it would be a breach
of that contract to withdraw the offer during the agreed
period. The option, however, is an independent contract
by itself, and it is to be distinguished from the projected
main agreement (subject matter of the option) which is
obviously yet to be concluded. If, in fact, the optioner-
offeror withdraws the offer before its acceptance
(exercise of the option) by the optionee-offeree, the latter
may not sue for specific performance on the proposed
contract (“object” of the option) since it has failed to
reach its own stage of perfection. The optioner-offeror,
however, renders himself liable for damages for breach
of the option. In these cases, care should be taken of the
real nature of the consideration given, for if, in fact, it has
been intended to be part of the consideration for the
main contract with a right of withdrawal on the part of the
optionee, the main contract could be deemed perfected;
a similar instance would be an “earnest money” in a
contract of sale that can evidence its perfection (Art.
1482, Civil Code).
In the law on sales, the so-called “right of first refusal” is
an innovative juridical relation. Needless to point out, it
cannot be deemed a perfected contract of sale under
Article 1458 of the Civil Code. Neither can the right of
first refusal, understood in its normal concept, per se be
brought within the purview of an option under the second
paragraph of Article 1479, aforequoted, or possibly of an
offer under Article 13199 of the same Code. An option or
an offer would require, among other things,10 a clear
“Art. 1319. Consent is manifested by the meeting of the
offer and the acceptance upon the thing and the cause
which are to constitute the contract. The offer must be
certain and the acceptance absolute. A qualified
acceptance constitutes a counter-offer.” (Emphasis
supplied.)
10 It is also essential for an option to be binding that
valuable consideration distinct from the price should be
given (see Montilla vs. Court of Appeals, 161 SCRA 167;
Sps. Natino vs. IAC, 197 SCRA 323; Cronico vs. J.M.
Tuason & Co., Inc., 78 SCRA 331). certainty on both the
object and the cause or consideration of the envisioned
contract. In a right of first refusal, while the object might
be made determinate, the exercise of the right, however,
would be dependent not only on the grantor’s eventual
intention to enter into a binding juridical relation with
another but also on terms, including the price, that
obviously are yet to be later firmed up. Prior thereto, it
can at best be so described as merely belonging to a
class of preparatory juridical relations governed not by
contracts (since the essential elements to establish the
vinculum juris would still be indefinite and inconclusive)
but by, among other laws of general application, the
pertinent scattered provisions of the Civil Code on
human conduct.
Even on the premise that such right of first refusal has
been decreed under a final judgment, like here, its
breach cannot justify correspondingly an issuance of a
writ of execution under a judgment that merely
recognizes its existence, nor would it sanction an action
for specific performance without thereby negating the
indispensable element of consensuality in the perfection
of contracts.11 It is not to say, however, that the right of
first refusal would be inconsequential for, such as
already intimated above, an unjustified disregard thereof,
given, for instance, the circumstances expressed in
Article 1912 of the Civil Code, can warrant a recovery for
damages.
The final judgment in Civil Case No. 87-41058, it must be
stressed, has merely accorded a “right of first refusal” in
favor of petitioners. The consequence of such a
declaration entails no more than what has heretofore
been said. In fine, if, as it is here so conveyed to us,
petitioners are aggrieved by the failure of private
respondents to honor the right of first refusal, the remedy
is not a writ of execution on the judgment, since there is
none to execute, but an action for damages in a proper
forum for the purpose.
Furthermore, whether private respondent Buen Realty
Development Corporation, the alleged purchaser of the
property,
12 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
has acted in good faith or bad faith and whether or not it
should, in any case, be considered bound to respect the
registration of the lis pendens in Civil Case No. 87-41058
are matters that must be independently addressed in
appropriate proceedings. Buen Realty, not having been
impleaded in Civil Case No. 87-41058, cannot be held
subject to the writ of execution issued by respondent
Judge, let alone ousted from the ownership and
possession of the property, without first being duly
afforded its day in court.
We are also unable to agree with petitioners that the
Court of Appeals has erred in holding that the writ of
execution varies the terms of the judgment in Civil Case
No. 87-41058, later affirmed in CA-G.R. CV-21123. The
Court of Appeals, in this regard, has observed:
“Finally, the questioned writ of execution is in variance
with the decision of the trial court as modified by this
Court. As already stated, there was nothing in said
decision13 that decreed the execution of a deed of sale
between the Cu Unjiengs and respondent lessees, or the
fixing of the price of the sale, or the cancellation of title in
the name of petitioner (Limpin vs. IAC, 147 SCRA 516;
Pamantasan ng Lungsod ng Maynila
“In resume, there was no meeting of the minds between
the parties concerning the sale of the property. Absent
such requirement, the claim for specific performance will
not lie. Appellants’ demand for actual, moral and
exemplary damages will likewise fail as there exists no
justifiable ground for its award. Summary judgment for
defendants was properly granted. Courts may render
summary judgment when there is no genuine issue as to
any material fact and the moving party is entitled to a
judgment as a matter of law (Garcia vs. Court of
Appeals, 176 SCRA 815). All requisites obtaining, the
decision of the court a quo is legally justifiable.
“WHEREFORE, finding the appeal unmeritorious, the
judgment appealed from is hereby AFFIRMED, but
subject to the following modification: The court a quo in
the aforestated decision, gave the plaintiffs—considering
the mercurial and uncertain forces in our market
economy today. We find no reason not to grant the same
right of first refusal to herein appellants in the event that
the subject property is sold for a price in excess of
Eleven Million pesos. No pronouncement as to costs.”
It is likewise quite obvious to us that the decision in Civil
Case No. 87-41058 could not have decreed at the time
the execution of any deed of sale between the Cu
Unjiengs and petitioners.
WHEREFORE, we UPHOLD the Court of Appeals in
ultimately setting aside the questioned Orders, dated 30
August 1991 and 27 September 1991, of the court a quo.
Costs against petitioners.
SO ORDERED.
Note.—Unilateral cancellation of a contract to sell is
not warranted if the breach is slight or casual. (Siska
Development Corporation vs. Office of the President
of the Philippines, 231 SCRA 674 [1994])
----------------------------------------------------------------------------
--
ANTONIO FRANCISCO, substituted by his heirs:
NELIA E.S. FRANCISCO, EMILIA F. BERTIZ,
REBECCA E.S. FRANCISCO, ANTONIO E.S.
FRANCISCO, JR., SOCORRO F. FONTANILLA, and
JOVITO E.S. FRANCISCO, petitioners, vs. CHEMICAL
BULK CARRIERS, INCORPORATED, respondent.
Words and Phrases; Standard of Conduct; Standard of
conduct is the level of expected conduct that is required
by the nature of the obligation and corresponding to the
circumstances of the person, time and place.—Standard
of conduct is the level of expected conduct that is
required by the nature of the obligation and
corresponding to the circumstances of the person, time
and place. The most common standard of conduct is that
of a good father of a family or that of a reasonably
prudent person. To determine the diligence which must
be required of all persons, we use as basis the abstract
average standard corresponding to a normal orderly
person.
Sales; The general principle is that a seller without title
cannot transfer a better title than he has. Only the owner
of the goods or one authorized by the owner to sell can
transfer title to the buyer.—The general principle is that a
seller without title cannot transfer a better title than he
has. Only the owner of the goods or one authorized by
the owner to sell can transfer title to the buyer.
Therefore, a person can sell only what he owns or is
authorized to sell and the buyer can, as a consequence,
acquire no more than what the seller can legally transfer.
Same; The owner of the goods who has been unlawfully
deprived of it may recover it even from a purchaser in
good faith.—Moreover, the owner of the goods who has
been unlawfully deprived of it may recover it even from a
purchaser in good faith. Thus, the purchaser of property
which has been stolen from the owner has been held to
acquire no title to it even though he purchased for value
and in good faith.
Same; Estoppel; In order that there may be estoppel, the
owner must, by word or conduct, have caused or allowed
it to appear that title or authority to sell is with the seller
and the buyer must have been misled to his damage.—
The exception from the general principle is the doctrine
of estoppel where the owner of the goods is precluded
from denying the seller’s authority to sell. But in order
that there may be estoppel, the owner must, by word or
conduct, have caused or allowed it to appear that title or
authority to sell is with the seller and the buyer must
have been misled to his damage.
PETITION for review on certiorari of the decision and
resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Tagle-Chua, Cruz & Aquino for petitioners.
Virgilio B. Gesmundo for respondent.
The Case
This is a petition for review1 of the 31 May 2010
Decision2 and 31 August 2010 Resolution3 of the Court
of Appeals in CA G.R. CV No. 63591. In its 31 May 2010
Decision, the Court of Appeals set aside the 21 August
1998 Decision4 of the Regional Trial of Pasig City,
Branch 71 (trial court), and ordered petitioner Antonio
Francisco (Francisco) to pay respondent Chemical Bulk
Carriers, Incorporated (CBCI) P1,119,905 as actual
damages. In its 31 August 2010 Resolution, the Court of
Appeals denied Francisco’s motion for reconsideration.
The Facts
Since 1965, Francisco was the owner and manager of a
Caltex station in Teresa, Rizal. Sometime in March 1993,
four persons, including Gregorio Bacsa (Bacsa), came to
Francisco’s Caltex station and introduced themselves as
employees of CBCI. Bacsa offered to sell to Francisco a
certain quantity of CBCI’s diesel fuel.
After checking Bacsa’s identification card, Francisco
agreed to purchase CBCI’s diesel fuel. Francisco
imposed the following conditions for the purchase: (1)
that Petron Corporation (Petron) should deliver the diesel
fuel to Francisco at his business address which should
be properly indicated in Petron’s invoice; (2) that the
delivery tank is sealed; and (3) that Bacsa should issue a
separate receipt to Francisco.
The deliveries started on 5 April 1993 and lasted for ten
months, or up to 25 January 1994.5 There were 17
deliveries to Francisco and all his conditions were
complied with.
In February 1996, CBCI sent a demand letter to
Francisco regarding the diesel fuel delivered to him but
which had been paid for by CBCI.6 CBCI demanded that
Francisco pay CBCI P1,053,527 for the diesel fuel or
CBCI would file a complaint against him in court.
Francisco rejected CBCI’s demand.
On 16 April 1996, CBCI filed a complaint for sum of
money and damages against Francisco and other
unnamed defendants.7 According to CBCI, Petron, on
various dates, sold diesel fuel to CBCI but these were
delivered to and received by Francisco. Francisco then
sold the diesel fuel to third persons from whom he
received payment. CBCI alleged that Francisco acquired
possession of the diesel fuel without authority from CBCI
and deprived CBCI of the use of the diesel fuel it had
paid for. CBCI demanded payment from Francisco but he
refused to pay. CBCI argued that Francisco should have
known that since only Petron, Shell and Caltex are
authorized to sell and distribute petroleum products in
the Philippines, the diesel fuel came from illegitimate, if
not illegal or criminal, acts. CBCI asserted that Francisco
violated Articles 19,8 20,9 21,10 and 2211 of the Civil
Code and that he should be held liable. In the alternative,
CBCI claimed that Francisco, in receiving CBCI’s diesel
fuel, entered into an innominate contract of do ut des (I
give and you give) with CBCI for which Francisco is
obligated to pay CBCI P1,119,905, the value of the
diesel fuel. CBCI also prayed for exemplary damages,
attorney’s fees and other expenses of litigation.
On 20 May 1996, Francisco filed a Motion to Dismiss on
the ground of forum shopping.12 CBCI filed its
Opposition.13 In an Order dated 15 November 1996, the
trial court denied Francisco’s motion.14
Thereafter, Francisco filed his Answer.15 Francisco
explained that he operates the Caltex station with the
help of his family because, in February 1978, he
completely lost his eyesight due to sickness. Francisco
claimed that he asked
8 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.
9 ART. 20. Every person who, contrary to law,
willfully or negligently causes damage to another, shall
indemnify the latter for the same.
10 ART. 21. Any person who willfully causes loss or
injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter
for the damage.
11 ART. 22. Every person who through an act of
performance by another, or any other means, acquires or
comes into possession of something at the expense of
the latter without just or legal ground, shall return the
same to him.
Jovito, his son, to look into and verify the identity of
Bacsa, who introduced himself as a radio operator and
confidential secretary of a certain Mr. Inawat (Inawat),
CBCI’s manager for operations. Francisco said he was
satisfied with the proof presented by Bacsa. When asked
to explain why CBCI was selling its fuel, Bacsa allegedly
replied that CBCI was in immediate need of cash for the
salary of its daily paid workers and for petty cash.
Francisco maintained that Bacsa assured him that the
diesel fuel was not stolen property and that CBCI
enjoyed a big credit line with Petron. Francisco agreed to
purchase the diesel fuel offered by Bacsa on the
following conditions:
1) Defendant [Francisco] will not accept any delivery if
it is not company (Petron) delivered, with his name and
address as shipping point properly printed and indicated
in the invoice of Petron, and that the product on the
delivery tank is sealed; [and]
2) Although the original invoice is sufficient evidence of
delivery and payment, under ordinary course of
business, defendant still required Mr. Bacsa to issue a
separate receipt duly signed by him acknowledging
receipt of the amount stated in the invoice, for and in
behalf of CBCI.16
During the first delivery on 5 April 1993, Francisco asked
one of his sons to verify whether the delivery truck’s tank
was properly sealed and whether Petron issued the
invoice. Francisco said all his conditions were complied
with. There were 17 deliveries made from 5 April 1993 to
25 January 1994 and each delivery was for 10,000 liters
of diesel fuel at P65,865.17 Francisco maintained that he
acquired the diesel fuel in good faith and for value.
Francisco also filed a counterclaim for exemplary
damages, moral damages and attorney’s fees.
In its 21 August 1998 Decision, the trial court ruled in
Francisco’s favor and dismissed CBCI’s complaint. The
dispositive portion of the trial court’s 21 August 1998
Decision reads:
“WHEREFORE, Judgment is hereby rendered:
1. Dismissing the complaint dated March 13, 1996 with
costs.
2. Ordering plaintiff (CBCI), on the counterclaim, to pay
defendant the amount of P100,000.00 as moral damages
and P50,000.00 as and by way of attorney’s fees.
SO ORDERED.”
CBCI appealed to the Court of Appeals.19 CBCI argued
that Francisco acquired the diesel fuel from Petron
without legal ground because Bacsa was not authorized
to deliver and sell CBCI’s diesel fuel. CBCI added that
Francisco acted in bad faith because he should have
inquired further whether Bacsa’s sale of CBCI’s diesel
fuel was legitimate.
In its 31 May 2010 Decision, the Court of Appeals set
aside the trial court’s 21 August 1998 Decision and ruled
in CBCI’s favor. The dispositive portion of the Court of
Appeals’ 31 May 2010 Decision reads:
“IN VIEW OF THE FOREGOING, the assailed decision is
hereby REVERSED and SET ASIDE. Antonio Francisco
is ordered to pay Chemical Bulk Carriers, Incorporated
the amount of P1,119,905.00 as actual damages.
SO ORDERED.”20
On 15 January 2001, Francisco died.21 Francisco’s
heirs, namely: Nelia E.S. Francisco, Emilia F. Bertiz,
Rebecca E.S.
Francisco, Antonio E.S. Francisco, Jr., Socorro F.
Fontanilla, and Jovito E.S. Francisco (heirs of Francisco)
filed a motion for substitution.22 The heirs of Francisco
also filed a motion for reconsideration.23 In its 31 August
2010 Resolution, the Court of Appeals granted the
motion for substitution but denied the motion for
reconsideration.
Hence, this petition.
The Ruling of the Trial Court
The trial court ruled that Francisco was not liable for
damages in favor of CBCI because the 17 deliveries
were covered by original and genuine invoices. The trial
court declared that Bacsa, as confidential secretary of
Inawat, was CBCI’s authorized representative who
received Francisco’s full payment for the diesel fuel. The
trial court stated that if Bacsa was not authorized, CBCI
should have sued Bacsa and not Francisco. The trial
court also considered Francisco a buyer in good faith
who paid in full for the merchandise without notice that
some other person had a right to or interest in such
diesel fuel. The trial court pointed out that good faith
affords protection to a purchaser for value. Finally, since
CBCI was bound by the acts of Bacsa, the trial court
ruled that CBCI is liable to pay damages to Francisco.
The Ruling of the Court of Appeals
The Court of Appeals set aside the trial court’s 21 August
1998 Decision and ruled that Bacsa’s act of selling the
diesel fuel to Francisco was his personal act and, even if
Bacsa connived with Inawat, the sale does not bind
CBCI.
The Court of Appeals declared that since Francisco had
been in the business of selling petroleum products for a
considerable number of years, his blindness was not a
hindrance for him to transact business with other people.
With his condition and experience, Francisco should
have verified whether CBCI was indeed selling diesel
fuel and if it had given Bacsa authority to do so.
Moreover, the Court of Appeals stated that Francisco
cannot feign good faith since he had doubts as to the
authority of Bacsa yet he did not seek confirmation from
CBCI and contented himself with an improvised receipt.
Francisco’s failure to verify Bacsa’s authority showed
that he had an ulterior motive. The receipts issued by
Bacsa also showed his lack of authority because it was
on a plain sheet of bond paper with no letterhead or any
indication that it came from CBCI. The Court of Appeals
ruled that Francisco cannot invoke estoppel because he
was at fault for choosing to ignore the tell-tale signs of
petroleum diversion and for not exercising prudence.
The Court of Appeals also ruled that CBCI was
unlawfully deprived of the diesel fuel which, as indicated
in the invoices, CBCI had already paid for. Therefore,
CBCI had the right to recover the diesel fuel or its value
from Francisco. Since the diesel fuel can no longer be
returned, the Court of Appeals ordered Francisco to give
back the actual amount paid by CBCI for the diesel fuel.
The Issues
The heirs of Francisco raise the following issues:
I. WHETHER THE COURT OF APPEALS ERRED IN
NOT FINDING THAT DEFENDANT ANTONIO
FRANCISCO EXERCISED THE REQUIRED
DILIGENCE OF A BLIND PERSON IN THE CONDUCT
OF HIS BUSINESS; and
II. WHETHER ON THE BASIS OF THE FACTUAL
FINDINGS OF THE COURT OF APPEALS AND THE
TRIAL COURT AND ADMITTED FACTS, IT CAN BE
CON-CLUDED THAT THE PLAINTIFF APPROVED
EXPRESSLY OR TACITLY THE TRANSACTIONS.24
The Ruling of the Court
The petition has no merit.
Required Diligence of a Blind Person
The heirs of Francisco argue that the Court of Appeals
erred when it ruled that Francisco was liable to CBCI
because he failed to exercise the diligence of a good
father of a family when he bought the diesel fuel. They
argue that since Francisco was blind, the standard of
conduct that was required of him was that of a
reasonable person under like disability. Moreover, they
insist that Francisco exercised due care in purchasing
the diesel fuel by doing the following: (1) Francisco
asked his son to check the identity of Bacsa; (2)
Francisco required direct delivery from Petron; (3)
Francisco required that he be named as the consignee in
the invoice; and (4) Francisco required separate receipts
from Bacsa to evidence actual payment.
Standard of conduct is the level of expected conduct that
is required by the nature of the obligation and
corresponding to the circumstances of the person, time
and place.25 The most common standard of conduct is
that of a good father of a family or that of a reasonably
prudent person.26 To determine the diligence which
must be required of all persons, we use as basis the
abstract average standard corresponding to a normal
orderly person.27
However, one who is physically disabled is required to
use the same degree of care that a reasonably careful
person who has the same physical disability would
use.28 Physical handicaps and infirmities, such as
blindness or deafness, are treated as part of the
circumstances under which a reasonable person must
act. Thus, the standard of conduct for a blind person
becomes that of a reasonable person who is blind.
We note that Francisco, despite being blind, had been
managing and operating the Caltex station for 15 years
and this was not a hindrance for him to transact business
until this time. In this instance, however, we rule that
Francisco failed to exercise the standard of conduct
expected of a reasonable person who is blind. First,
Francisco merely relied on the identification card of
Bacsa to determine if he was authorized by CBCI.
Francisco did not do any other background check on the
identity and authority of Bacsa. Second, Francisco
already expressed his misgivings about the diesel fuel,
fearing that they might be stolen property,29 yet he did
not verify with CBCI the authority of Bacsa to sell the
diesel fuel. Third, Francisco relied on the receipts issued
by Bacsa which were typewritten on a half sheet of plain
bond paper.30 If Francisco exercised reasonable
diligence, he should have asked for an official receipt
issued by CBCI. Fourth, the delivery to Francisco, as
indicated in Petron’s invoice, does not show that CBCI
authorized Bacsa to sell the diesel fuel to Francisco.
Clearly, Francisco failed to exercise the standard of
conduct expected of a reasonable person who is blind.
Express or Tacit Approval of the Transaction
The heirs of Francisco argue that CBCI approved
expressly or tacitly the transactions. According to them,
there was apparent authority for Bacsa to enter into the
transactions.
They argue that even if the agent has exceeded his
authority, the principal is solidarily liable with the agent if
the former allowed the later to act as though he had full
powers.31 They insist CBCI was not unlawfully deprived
of its property because Inawat gave Bacsa the authority
to sell the diesel fuel and that CBCI is bound by such
action. Lastly, they argue that CBCI should be
considered in estoppel for failure to act during the ten
month period that deliveries were being made to
Francisco.
The general principle is that a seller without title cannot
transfer a better title than he has.32 Only the owner of
the goods or one authorized by the owner to sell can
transfer title to the buyer.33 Therefore, a person can sell
only what he owns or is authorized to sell and the buyer
can, as a consequence, acquire no more than what the
seller can legally transfer.34
Moreover, the owner of the goods who has been
unlawfully deprived of it may recover it even from a
purchaser in good faith.35 Thus, the purchaser of
property which has been stolen from the owner has been
held to acquire no title to it even though he purchased for
value and in good faith.
The exception from the general principle is the doctrine
of estoppel where the owner of the goods is precluded
from denying the seller’s authority to sell.36 But in order
that there may be estoppel, the owner must, by word or
conduct, have caused or allowed it to appear that title or
authority to sell is with the seller and the buyer must
have been misled to his damage.37
In this case, it is clear that Bacsa was not the owner of
the diesel fuel. Francisco was aware of this but he
claimed that Bacsa was authorized by CBCI to sell the
diesel fuel. However, Francisco’s claim that Bacsa was
authorized is not supported by any evidence except his
self-serving testimony. First, Francisco did not even
confirm with CBCI if it was indeed selling its diesel fuel
since it is not one of the oil companies known in the
market to be selling petroleum products. This fact alone
should have put Francisco on guard. Second, it does not
appear that CBCI, by some direct and equivocal act, has
clothed Bacsa with the indicia of ownership or apparent
authority to sell CBCI’s diesel fuel. Francisco did not
state if the identification card presented by Bacsa
indicated that he was CBCI’s agent or a mere employee.
Third, the receipt issued by Bacsa was typewritten on a
half sheet of plain bond paper. There was no letterhead
or any indication that it came from CBCI. We agree with
the Court of Appeals that this was a personal receipt
issued by Bacsa and not an official receipt issued by
CBCI. Consequently, CBCI is not precluded by its
conduct from denying Bacsa’s authority to sell. CBCI did
not hold out Bacsa or allow Bacsa to appear as the
owner or one with apparent authority to dispose of the
diesel fuel.
Clearly, Bacsa cannot transfer title to Francisco as Bacsa
was not the owner of the diesel fuel nor was he
authorized by CBCI to sell its diesel fuel. CBCI did not
commit any act to clothe Bacsa with apparent authority to
sell the diesel fuel that would have misled Francisco.
Francisco, therefore, did not acquire any title over the
diesel fuel. Since CBCI was unlawfully deprived of its
property, it may recover from Francisco, even if
Francisco pleads good faith.
WHEREFORE, we DENY the petition. We AFFIRM the
31 May 2010 Decision and 31 August 2010 Resolution of
the Court of Appeals.
SO ORDERED.
Petition denied, judgment and resolution affirmed.
Note.—A simulated deed of sale has no legal effect,
and the transfer certificate of title issued in
consequence thereof should be cancelled. Pari
delicto does not apply to simulated sales. (Yu Bun
Guan vs. Ong, 367 SCRA 559 [2001])
G.R. No. 170633 October 17, 2007
MCC INDUSTRIAL SALES CORPORATION, petitioner,
vs.
SSANGYONG CORPORATION, respondents.
DECISION
NACHURA, J.:
Before the Court is a petition for review on certiorari of
the Decision1 of the Court of Appeals in CA-G.R. CV No.
82983 and its Resolution2 denying the motion for
reconsideration thereof.
Petitioner MCC Industrial Sales (MCC), a domestic
corporation with office at Binondo, Manila, is engaged in
the business of importing and wholesaling stainless steel
products.3 One of its suppliers is the Ssangyong
Corporation (Ssangyong),4 an international trading
company5 with head office in Seoul, South Korea and
regional headquarters in Makati City, Philippines.6 The
two corporations conducted business through telephone
calls and facsimile or telecopy
transmissions.7 Ssangyong would send the pro
forma invoices containing the details of the steel product
order to MCC; if the latter conforms thereto, its
representative affixes his signature on the faxed copy
and sends it back to Ssangyong, again by fax.8
On April 13, 2000, Ssangyong Manila Office sent, by fax,
a letter9 addressed to Gregory Chan, MCC Manager
[also the President10 of Sanyo Seiki Stainless Steel
Corporation], to confirm MCC's and Sanyo Seiki's order
of 220 metric tons (MT) of hot rolled stainless steel
under a preferential rate of US$1,860.00 per MT. Chan,
on behalf of the corporations, assented and affixed his
signature on the conforme portion of the letter.11
On April 17, 2000, Ssangyong forwarded to MCC Pro
Forma Invoice No. ST2-POSTSO40112 containing the
terms and conditions of the transaction. MCC sent back
by fax to Ssangyong the invoice bearing the conformity
signature13 of Chan. As stated in the pro forma invoice,
payment for the ordered steel products would be made
through an irrevocable letter of credit (L/C) at sight in
favor of Ssangyong.14 Following their usual practice,
delivery of the goods was to be made after the L/C had
been opened.
In the meantime, because of its confirmed transaction
with MCC, Ssangyong placed the order with its steel
manufacturer, Pohang Iron and Steel Corporation
(POSCO), in South Korea15 and paid the same in full.
Because MCC could open only a partial letter of credit,
the order for 220MT of steel was split into two,16 one
for 110MT covered by Pro Forma Invoice No. ST2-
POSTS0401-117 and another for 110MT covered by ST2-
POSTS0401-2,18 both dated April 17, 2000.
On June 20, 2000, Ssangyong, through its Manila Office,
informed Sanyo Seiki and Chan, by way of a fax
transmittal, that it was ready to ship 193.597MT of
stainless steel from Korea to the Philippines. It requested
that the opening of the L/C be facilitated.19 Chan affixed
his signature on the fax transmittal and returned the
same, by fax, to Ssangyong.20
Two days later, on June 22, 2000, Ssangyong Manila
Office informed Sanyo Seiki, thru Chan, that it was able
to secure a US$30/MT price adjustment on the
contracted price of US$1,860.00/MT for the 200MT
stainless steel, and that the goods were to be shipped in
two tranches, the first 100MT on that day and the second
100MT not later than June 27, 2000. Ssangyong
reiterated its request for the facilitation of the L/C's
opening.21
Ssangyong later, through its Manila Office, sent a letter,
on June 26, 2000, to the Treasury Group of Sanyo Seiki
that it was looking forward to receiving the L/C details
and a cable copy thereof that day.22 Ssangyong sent a
separate letter of the same date to Sanyo Seiki
requesting for the opening of the L/C covering payment
of the first 100MT not later than June 28, 2000.23 Similar
letters were transmitted by Ssangyong Manila Office on
June 27, 2000.24 On June 28, 2000, Ssangyong sent
another facsimile letter to MCC stating that its principal in
Korea was already in a difficult situation25 because of the
failure of Sanyo Seiki and MCC to open the L/C's.
The following day, June 29, 2000, Ssangyong received,
by fax, a letter signed by Chan, requesting an extension
of time to open the L/C because MCC's credit line with
the bank had been fully availed of in connection with
another transaction, and MCC was waiting for an
additional credit line.26 On the same date, Ssangyong
replied, requesting that it be informed of the date when
the L/C would be opened, preferably at the earliest
possible time, since its Steel Team 2 in Korea was
having problems and Ssangyong was incurring
warehousing costs.27 To maintain their good business
relationship and to support MCC in its financial
predicament, Ssangyong offered to negotiate with its
steel manufacturer, POSCO, another US$20/MT
discount on the price of the stainless steel ordered. This
was intimated in Ssangyong's June 30, 2000 letter to
MCC.28 On July 6, 2000, another follow-up letter29 for the
opening of the L/C was sent by Ssangyong to MCC.
However, despite Ssangyong's letters, MCC failed to
open a letter of credit.30 Consequently, on August 15,
2000, Ssangyong, through counsel, wrote Sanyo Seiki
that if the L/C's were not opened, Ssangyong would be
compelled to cancel the contract and hold MCC liable for
damages for breach thereof amounting to US$96,132.18,
inclusive of warehouse expenses, related interests and
charges.31
Later, Pro Forma Invoice Nos. ST2-POSTS080-132 and
ST2-POSTS080-233 dated August 16, 2000 were issued
by Ssangyong and sent via fax to MCC. The invoices
slightly varied the terms of the earlier pro forma invoices
(ST2-POSTSO401, ST2-POSTS0401-1 and ST2-
POSTS0401-2), in that the quantity was now
officially 100MT per invoice and the price was reduced
to US$1,700.00 per MT. As can be gleaned from the
photocopies of the said August 16, 2000 invoices
submitted to the court, they both bear the conformity
signature of MCC Manager Chan.
On August 17, 2000, MCC finally opened an L/C with
PCIBank for US$170,000.00 covering payment for
100MT of stainless steel coil under Pro Forma Invoice
No. ST2-POSTS080-2.34 The goods covered by the said
invoice were then shipped to and received by MCC.35
MCC then faxed to Ssangyong a letter dated August 22,
2000 signed by Chan, requesting for a price adjustment
of the order stated in Pro Forma Invoice No. ST2-
POSTS080-1, considering that the prevailing price of
steel at that time was US$1,500.00/MT, and that MCC
lost a lot of money due to a recent strike.36
Ssangyong rejected the request, and, on August 23,
2000, sent a demand letter37 to Chan for the opening of
the second and last L/C of US$170,000.00 with a
warning that, if the said L/C was not opened by MCC on
August 26, 2000, Ssangyong would be constrained to
cancel the contract and hold MCC liable for
US$64,066.99 (representing cost difference,
warehousing expenses, interests and charges as of
August 15, 2000) and other damages for breach. Chan
failed to reply.
Exasperated, Ssangyong through counsel wrote a letter
to MCC, on September 11, 2000, canceling the sales
contract under ST2-POSTS0401-1 /ST2-POSTS0401-2,
and demanding payment of US$97,317.37 representing
losses, warehousing expenses, interests and charges. 38
Ssangyong then filed, on November 16, 2001, a civil
action for damages due to breach of contract against
defendants MCC, Sanyo Seiki and Gregory Chan before
the Regional Trial Court of Makati City. In its
complaint,39 Ssangyong alleged that defendants
breached their contract when they refused to open the
L/C in the amount of US$170,000.00 for the remaining
100MT of steel under Pro Forma Invoice Nos. ST2-
POSTS0401-1 and ST2-POSTS0401-2.
After Ssangyong rested its case, defendants filed a
Demurrer to Evidence40 alleging that Ssangyong failed to
present the original copies of the pro forma invoices on
which the civil action was based. In an Order dated April
24, 2003, the court denied the demurrer, ruling that the
documentary evidence presented had already been
admitted in the December 16, 2002 Order41 and their
admissibility finds support in Republic Act (R.A.) No.
8792, otherwise known as the Electronic Commerce Act
of 2000. Considering that both testimonial and
documentary evidence tended to substantiate the
material allegations in the complaint, Ssangyong's
evidence sufficed for purposes of a prima facie case.42
After trial on the merits, the RTC rendered its
Decision43 on March 24, 2004, in favor of Ssangyong.
The trial court ruled that when plaintiff agreed to sell and
defendants agreed to buy the 220MT of steel products
for the price of US$1,860 per MT, the contract was
perfected. The subject transaction was evidenced by Pro
Forma Invoice Nos. ST2-POSTS0401-1 and ST2-
POSTS0401-2, which were later amended only in terms
of reduction of volume as well as the price per MT,
following Pro Forma Invoice Nos. ST2-POSTS080-
1 and ST2-POSTS080-2. The RTC, however, excluded
Sanyo Seiki from liability for lack of competent evidence.
The fallo of the decision reads:
WHEREFORE, premises considered, Judgment
is hereby rendered ordering defendants MCC
Industrial Sales Corporation and Gregory Chan,
to pay plaintiff, jointly and severally the following:
1) Actual damages of US$93,493.87
representing the outstanding principal claim plus
interest at the rate of 6% per annum from March
30, 2001.
2) Attorney's fees in the sum of P50,000.00
plus P2,000.00 per counsel's appearance in
court, the same being deemed just and equitable
considering that by reason of defendants' breach
of their obligation under the subject contract,
plaintiff was constrained to litigate to enforce its
rights and recover for the damages it sustained,
and therefore had to engage the services of a
lawyer.
3) Costs of suit.
No award of exemplary damages for lack of
sufficient basis.
SO ORDERED.44
On April 22, 2004, MCC and Chan, through their counsel
of record, Atty. Eladio B. Samson, filed their Notice of
Appeal.45 On June 8, 2004, the law office of Castillo
Zamora & Poblador entered its appearance as their
collaborating counsel.
In their Appeal Brief filed on March 9, 2005, 46 MCC and
Chan raised before the CA the following errors of the
RTC:
I. THE HONORABLE COURT A QUO PLAINLY
ERRED IN FINDING THAT APPELLANTS
VIOLATED THEIR CONTRACT WITH
APPELLEE
A. THE HONORABLE COURT A
QUO PLAINLY ERRED IN FINDING
THAT APPELLANTS AGREED TO
PURCHASE 200 METRIC TONS OF
STEEL PRODUCTS FROM APPELLEE,
INSTEAD OF ONLY 100 METRIC
TONS.
1. THE HONORABLE COURT A
QUO PLAINLY ERRED IN
ADMITTING IN EVIDENCE
THE PRO FORMA INVOICES
WITH REFERENCE NOS. ST2-
POSTS0401-1 AND ST2-
POSTS0401-2.
II. THE HONORABLE COURT A QUO PLAINLY
ERRED IN AWARDING ACTUAL DAMAGES TO
APPELLEE.
III. THE HONORABLE COURT A QUO PLAINLY
ERRED IN AWARDING ATTORNEY'S FEES TO
APPELLEE.
IV. THE HONORABLE COURT A QUO PLAINLY
ERRED IN FINDING APPELLANT GREGORY
CHAN JOINTLY AND SEVERALLY LIABLE
WITH APPELLANT MCC.47
On August 31, 2005, the CA rendered its
Decision48 affirming the ruling of the trial court, but
absolving Chan of any liability. The appellate court ruled,
among others, that Pro Forma Invoice Nos. ST2-
POSTS0401-1 and ST2-POSTS0401-2 (Exhibits "E", "E-
1" and "F") were admissible in evidence, although they
were mere facsimile printouts of MCC's steel
orders.49 The dispositive portion of the appellate court's
decision reads:
WHEREFORE, premises considered, the Court
holds:
(1) The award of actual damages, with interest,
attorney's fees and costs ordered by the lower
court is hereby AFFIRMED.
(2) Appellant Gregory Chan is hereby
ABSOLVED from any liability.
SO ORDERED.50
A copy of the said Decision was received by MCC's and
Chan's principal counsel, Atty. Eladio B. Samson, on
September 14, 2005.51 Their collaborating counsel,
Castillo Zamora & Poblador,52 likewise, received a copy
of the CA decision on September 19, 2005.53
On October 4, 2005, Castillo Zamora & Poblador, on
behalf of MCC, filed a motion for reconsideration of the
said decision.54 Ssangyong opposed the motion
contending that the decision of the CA had become final
and executory on account of the failure of MCC to file the
said motion within the reglementary period. The
appellate court resolved, on November 22, 2005, to deny
the motion on its merits,55 without, however, ruling on the
procedural issue raised.
Aggrieved, MCC filed a petition for review
on certiorari56 before this Court, imputing the following
errors to the Court of Appeals:
THE COURT OF APPEALS DECIDED A LEGAL
QUESTION NOT IN ACCORDANCE WITH
JURISPRUDENCE AND SANCTIONED A
DEPARTURE FROM THE USUAL AND
ACCEPTED COURSE OF JUDICIAL
PROCEEDINGS BY REVERSING THE COURT
A QUO'S DISMISSAL OF THE COMPLAINT IN
CIVIL CASE NO. 02-124 CONSIDERING THAT:
I. THE COURT OF APPEALS ERRED
IN SUSTAINING THE ADMISSIBILITY
IN EVIDENCE OF THE PRO-FORMA
INVOICES WITH REFERENCE NOS.
ST2-POSTSO401-1 AND ST2-
POSTSO401-2, DESPITE THE FACT
THAT THE SAME WERE MERE
PHOTOCOPIES OF FACSIMILE
PRINTOUTS.
II. THE COURT OF APPEALS FAILED
TO APPRECIATE THE OBVIOUS FACT
THAT, EVEN ASSUMING PETITIONER
BREACHED THE SUPPOSED
CONTRACT, THE FACT IS THAT
PETITIONER FAILED TO PROVE THAT
IT SUFFERED ANY DAMAGES AND
THE AMOUNT THEREOF.
III. THE AWARD OF ACTUAL
DAMAGES IN THE AMOUNT OF
US$93,493.87 IS SIMPLY
UNCONSCIONABLE AND SHOULD
HAVE BEEN AT LEAST REDUCED, IF
NOT DELETED BY THE COURT OF
APPEALS.57
In its Comment, Ssangyong sought the dismissal of the
petition, raising the following arguments: that the CA
decision dated 15 August 2005 is already final and
executory, because MCC's motion for reconsideration
was filed beyond the reglementary period of 15 days
from receipt of a copy thereof, and that, in any case, it
was a pro forma motion; that MCC breached the contract
for the purchase of the steel products when it failed to
open the required letter of credit; that the printout copies
and/or photocopies of facsimile or telecopy transmissions
were properly admitted by the trial court because they
are considered original documents under R.A. No. 8792;
and that MCC is liable for actual damages and attorney's
fees because of its breach, thus, compelling Ssangyong
to litigate.
The principal issues that this Court is called upon to
resolve are the following:
I – Whether the CA decision dated 15 August 2005 is
already final and executory;
II – Whether the print-out and/or photocopies of facsimile
transmissions are electronic evidence and admissible as
such;
III – Whether there was a perfected contract of sale
between MCC and Ssangyong, and, if in the affirmative,
whether MCC breached the said contract; and
IV – Whether the award of actual damages and
attorney's fees in favor of Ssangyong is proper and
justified.
-I-
It cannot be gainsaid that in Albano v. Court of
Appeals,58 we held that receipt of a copy of the decision
by one of several counsels on record is notice to all, and
the period to appeal commences on such date even if
the other counsel has not yet received a copy of the
decision. In this case, when Atty. Samson received a
copy of the CA decision on September 14, 2005, MCC
had only fifteen (15) days within which to file a motion for
reconsideration conformably with Section 1, Rule 52 of
the Rules of Court, or to file a petition for review on
certiorari in accordance with Section 2, Rule 45. The
period should not be reckoned from September 29, 2005
(when Castillo Zamora & Poblador received their copy of
the decision) because notice to Atty. Samson is deemed
notice to collaborating counsel.
We note, however, from the records of the CA, that it
was Castillo Zamora & Poblador, not Atty. Samson,
which filed both MCC's and Chan's Brief and Reply Brief.
Apparently, the arrangement between the two counsels
was for the collaborating, not the principal, counsel to file
the appeal brief and subsequent pleadings in the CA.
This explains why it was Castillo Zamora & Poblador
which filed the motion for the reconsideration of the CA
decision, and they did so on October 5, 2005, well within
the 15-day period from September 29, 2005, when they
received their copy of the CA decision. This could also
be the reason why the CA did not find it necessary to
resolve the question of the timeliness of petitioner's
motion for reconsideration, even as the CA denied the
same.
Independent of this consideration though, this Court
assiduously reviewed the records and found that strong
concerns of substantial justice warrant the relaxation of
this rule.
In Philippine Ports Authority v. Sargasso Construction
and Development Corporation,59 we ruled that:
In Orata v. Intermediate Appellate Court, we held
that where strong considerations of substantive
justice are manifest in the petition, this Court
may relax the strict application of the rules of
procedure in the exercise of its legal jurisdiction.
In addition to the basic merits of the main case,
such a petition usually embodies justifying
circumstance which warrants our heeding to the
petitioner's cry for justice in spite of the earlier
negligence of counsel. As we held in Obut v.
Court of Appeals:
[W]e cannot look with favor on a course
of action which would place the
administration of justice in a straight
jacket for then the result would be a poor
kind of justice if there would be justice at
all. Verily, judicial orders, such as the
one subject of this petition, are issued to
be obeyed, nonetheless a non-
compliance is to be dealt with as the
circumstances attending the case may
warrant. What should guide judicial
action is the principle that a party-litigant
is to be given the fullest opportunity to
establish the merits of his complaint or
defense rather than for him to lose life,
liberty, honor or property on
technicalities.
The rules of procedure are used only to secure
and not override or frustrate justice. A six-day
delay in the perfection of the appeal, as in this
case, does not warrant the outright dismissal of
the appeal. In Development Bank of the
Philippines vs. Court of Appeals, we gave due
course to the petitioner's appeal despite the late
filing of its brief in the appellate court because
such appeal involved public interest. We stated
in the said case that the Court may exempt a
particular case from a strict application of the
rules of procedure where the appellant failed to
perfect its appeal within the reglementary period,
resulting in the appellate court's failure to obtain
jurisdiction over the case. In Republic vs.
Imperial, Jr., we also held that there is more
leeway to exempt a case from the strictness of
procedural rules when the appellate court has
already obtained jurisdiction over the appealed
case. We emphasize that:
[T]he rules of procedure are mere tools
intended to facilitate the attainment of
justice, rather than frustrate it. A strict
and rigid application of the rules must
always be eschewed when it would
subvert the rule's primary objective of
enhancing fair trials and expediting
justice. Technicalities should never be
used to defeat the substantive rights of
the other party. Every party-litigant must
be afforded the amplest opportunity for
the proper and just determination of his
cause, free from the constraints of
technicalities.60
Moreover, it should be remembered that the Rules were
promulgated to set guidelines in the orderly
administration of justice, not to shackle the hand that
dispenses it. Otherwise, the courts would be consigned
to being mere slaves to technical rules, deprived of their
judicial discretion. Technicalities must take a backseat to
substantive rights. After all, it is circumspect leniency in
this respect that will give the parties the fullest
opportunity to ventilate the merits of their respective
causes, rather than have them lose life, liberty, honor or
property on sheer technicalities.61
The other technical issue posed by respondent is the
alleged pro forma nature of MCC's motion for
reconsideration, ostensibly because it merely restated
the arguments previously raised and passed upon by the
CA.
In this connection, suffice it to say that the mere
restatement of arguments in a motion for reconsideration
does not per se result in a pro forma motion. In Security
Bank and Trust Company, Inc. v. Cuenca,62 we held that
a motion for reconsideration may not be necessarily pro
forma even if it reiterates the arguments earlier passed
upon and rejected by the appellate court. A movant may
raise the same arguments precisely to convince the court
that its ruling was erroneous. Furthermore, the pro
forma rule will not apply if the arguments were not
sufficiently passed upon and answered in the decision
sought to be reconsidered.
- II -
The second issue poses a novel question that the Court
welcomes. It provides the occasion for this Court to
pronounce a definitive interpretation of the equally
innovative provisions of the Electronic Commerce Act of
2000 (R.A. No. 8792) vis-à-vis the Rules on Electronic
Evidence.
Although the parties did not raise the question whether
the original facsimile transmissions are "electronic data
messages" or "electronic documents" within the context
of the Electronic Commerce Act (the petitioner merely
assails as inadmissible evidence the photocopies of the
said facsimile transmissions), we deem it appropriate to
determine first whether the said fax transmissions are
indeed within the coverage of R.A. No. 8792 before
ruling on whether the photocopies thereof are covered by
the law. In any case, this Court has ample authority to go
beyond the pleadings when, in the interest of justice or
for the promotion of public policy, there is a need to
make its own findings in order to support its
conclusions.63
Petitioner contends that the photocopies of the pro
forma invoices presented by respondent Ssangyong to
prove the perfection of their supposed contract of sale
are inadmissible in evidence and do not fall within the
ambit of R.A. No. 8792, because the law merely admits
as the best evidence the original fax transmittal. On the
other hand, respondent posits that, from a reading of the
law and the Rules on Electronic Evidence, the original
facsimile transmittal of the pro forma invoice is
admissible in evidence since it is an electronic document
and, therefore, the best evidence under the law and the
Rules. Respondent further claims that the photocopies of
these fax transmittals (specifically ST2-POSTS0401-
1 and ST2-POSTS0401-2) are admissible under the
Rules on Evidence because the respondent sufficiently
explained the non-production of the original fax
transmittals.
In resolving this issue, the appellate court ruled as
follows:
Admissibility of Pro Forma
Invoices; Breach of Contract
by Appellants
Turning first to the appellants' argument against
the admissibility of the Pro Forma Invoices with
Reference Nos. ST2-POSTS0401-1 and ST2-
POSTS0401-2 (Exhibits "E", "E-1" and "F", pp.
215-218, Records), appellants argue that the
said documents are inadmissible (sic) being
violative of the best evidence rule.
The argument is untenable.
The copies of the said pro-forma invoices
submitted by the appellee are admissible in
evidence, although they are mere electronic
facsimile printouts of appellant's orders. Such
facsimile printouts are considered Electronic
Documents under the New Rules on Electronic
Evidence, which came into effect on August 1,
2001. (Rule 2, Section 1 [h], A.M. No. 01-7-01-
SC).
"(h) 'Electronic document' refers to
information or the representation of
information, data, figures, symbols or
other modes of written expression,
described or however represented, by
which a right is established or an
obligation extinguished, or by which a
fact may be proved and affirmed, which
is received, recorded, transmitted,
stored, processed, retrieved or produced
electronically. It includes digitally signed
documents and any printout or output,
readable by sight or other means, which
accurately reflects the electronic data
message or electronic document. For
purposes of these Rules, the term
'electronic document' may be used
interchangeably with 'electronic data
message'.
An electronic document shall be regarded as the
equivalent of an original document under the
Best Evidence Rule, as long as it is a printout or
output readable by sight or other means,
showing to reflect the data accurately. (Rule 4,
Section 1, A.M. No. 01-7-01-SC)
The ruling of the Appellate Court is incorrect. R.A. No.
8792,64 otherwise known as the Electronic Commerce
Act of 2000, considers an electronic data message or an
electronic document as the functional equivalent of a
written document for evidentiary purposes.65 The Rules
on Electronic Evidence66 regards an electronic document
as admissible in evidence if it complies with the rules on
admissibility prescribed by the Rules of Court and related
laws, and is authenticated in the manner prescribed by
the said Rules.67 An electronic document is also the
equivalent of an original document under the Best
Evidence Rule, if it is a printout or output readable by
sight or other means, shown to reflect the data
accurately.68
Thus, to be admissible in evidence as an electronic data
message or to be considered as the functional equivalent
of an original document under the Best Evidence Rule,
the writing must foremost be an "electronic data
message" or an "electronic document."
The Electronic Commerce Act of 2000 defines electronic
data message and electronic document as follows:
Sec. 5. Definition of Terms. For the purposes of
this Act, the following terms are defined, as
follows:
xxx
c. "Electronic Data Message" refers to
information generated, sent, received or stored
by electronic, optical or similar means.
xxx
f. "Electronic Document" refers to information or
the representation of information, data, figures,
symbols or other modes of written expression,
described or however represented, by which a
right is established or an obligation extinguished,
or by which a fact may be proved and affirmed,
which is received, recorded, transmitted, stored,
processed, retrieved or produced electronically.
The Implementing Rules and Regulations (IRR) of R.A.
No. 8792,69 which was signed on July 13, 2000 by the
then Secretaries of the Department of Trade and
Industry, the Department of Budget and Management,
and then Governor of the Bangko Sentral ng Pilipinas,
defines the terms as:
Sec. 6. Definition of Terms. For the purposes of
this Act and these Rules, the following terms are
defined, as follows:
xxx
(e) "Electronic Data Message" refers to
information generated, sent, received or stored
by electronic, optical or similar means, but not
limited to, electronic data interchange (EDI),
electronic mail, telegram, telex or telecopy.
Throughout these Rules, the term "electronic
data message" shall be equivalent to and be
used interchangeably with "electronic document."
xxxx
(h) "Electronic Document" refers to information or
the representation of information, data, figures,
symbols or other modes of written expression,
described or however represented, by which a
right is established or an obligation extinguished,
or by which a fact may be proved and affirmed,
which is received, recorded, transmitted, stored,
 processed, retrieved or produced
electronically. Throughout these Rules, the term
"electronic document" shall be equivalent to and
be used interchangeably with "electronic data
message."
The phrase "but not limited to, electronic data
interchange (EDI), electronic mail, telegram, telex or
telecopy" in the IRR's definition of "electronic data
message" is copied from the Model Law on Electronic
Commerce adopted by the United Nations Commission
on International Trade Law (UNCITRAL),70 from which
majority of the provisions of R.A. No. 8792 were
taken.71 While Congress deleted this phrase in the
Electronic Commerce Act of 2000, the drafters of the IRR
reinstated it. The deletion by Congress of the said phrase
is significant and pivotal, as discussed hereunder.
The clause on the interchangeability of the terms
"electronic data message" and "electronic document"
was the result of the Senate of the Philippines' adoption,
in Senate Bill 1902, of the phrase "electronic data
message" and the House of Representative's
employment, in House Bill 9971, of the term "electronic
document."72 In order to expedite the reconciliation of the
two versions, the technical working group of the
Bicameral Conference Committee adopted both terms
and intended them to be the equivalent of each one.73 Be
that as it may, there is a slight difference between the
two terms. While "data message" has reference
to information electronically sent, stored or transmitted, it
does not necessarily mean that it will give rise to a right
or extinguish an obligation,74 unlike an electronic
document. Evident from the law, however, is the
legislative intent to give the two terms the same
construction.
The Rules on Electronic Evidence promulgated by this
Court defines the said terms in the following manner:
SECTION 1. Definition of Terms. – For purposes
of these Rules, the following terms are defined,
as follows:
xxxx
(g) "Electronic data message" refers to
information generated, sent, received or stored
by electronic, optical or similar means.
(h) "Electronic document" refers to information or
the representation of information, data, figures,
symbols or other modes of written expression,
described or however represented, by which a
right is established or an obligation extinguished,
or by which a fact may be proved and affirmed,
which is received, recorded, transmitted, stored,
processed, retrieved or produced
electronically. It includes digitally signed
documents and print-out or output, readable by
sight or other means, which accurately reflects
the electronic data message or electronic
document. For purposes of these Rules, the term
"electronic document" may be used
interchangeably with "electronic data message."
Given these definitions, we go back to the original
question: Is an original printout of a facsimile
transmission an electronic data message or electronic
document?
The definitions under the Electronic Commerce Act of
2000, its IRR and the Rules on Electronic Evidence, at
first glance, convey the impression that facsimile
transmissions are electronic data messages or electronic
documents because they are sent by electronic means.
The expanded definition of an "electronic data message"
under the IRR, consistent with the UNCITRAL Model
Law, further supports this theory considering that the
enumeration "xxx [is] not limited to, electronic data
interchange (EDI), electronic mail, telegram, telex
or telecopy." And to telecopy is to send a document from
one place to another via a fax machine.75
As further guide for the Court in its task of statutory
construction, Section 37 of the Electronic Commerce Act
of 2000 provides that
Unless otherwise expressly provided for, the
interpretation of this Act shall give due regard to
its international origin and the need to promote
uniformity in its application and the observance
of good faith in international trade relations. The
generally accepted principles of international law
and convention on electronic commerce shall
likewise be considered.
Obviously, the "international origin" mentioned in this
section can only refer to the UNCITRAL Model Law, and
the UNCITRAL's definition of "data message":
"Data message" means information generated,
sent, received or stored by electronic, optical or
similar means including, but not limited to,
electronic data interchange (EDI), electronic
mail, telegram, telex or telecopy.76
is substantially the same as the IRR's characterization of
an "electronic data message."
However, Congress deleted the phrase, "but not limited
to, electronic data interchange (EDI), electronic mail,
telegram, telex or telecopy," and replaced the term "data
message" (as found in the UNCITRAL Model Law ) with
"electronic data message." This legislative divergence
from what is assumed as the term's "international origin"
has bred uncertainty and now impels the Court to make
an inquiry into the true intent of the framers of the law.
Indeed, in the construction or interpretation of a
legislative measure, the primary rule is to search for and
determine the intent and spirit of the law.77 A construction
should be rejected that gives to the language used in a
statute a meaning that does not accomplish the purpose
for which the statute was enacted, and that tends to
defeat the ends which are sought to be attained by the
enactment.78
Interestingly, when Senator Ramon B. Magsaysay, Jr.,
the principal author of Senate Bill 1902 (the predecessor
of R.A. No. 8792), sponsored the bill on second reading,
he proposed to adopt the term "data message" as
formulated and defined in the UNCITRAL Model
Law.79 During the period of amendments, however, the
term evolved into "electronic data message," and the
phrase "but not limited to, electronic data interchange
(EDI), electronic mail, telegram, telex or telecopy" in the
UNCITRAL Model Law was deleted. Furthermore, the
term "electronic data message," though maintaining its
description under the UNCITRAL Model Law, except for
the aforesaid deleted phrase, conveyed a different
meaning, as revealed in the following proceedings:
xxxx
Senator Santiago. Yes, Mr. President. I will
furnish a copy together with the explanation of
this proposed amendment.
And then finally, before I leave the Floor, may I
please be allowed to go back to Section 5; the
Definition of Terms. In light of the acceptance by
the good Senator of my proposed amendments,
it will then become necessary to add certain
terms in our list of terms to be defined. I would
like to add a definition on what is "data," what is
"electronic record" and what is an "electronic
record system."
If the gentleman will give me permission, I will
proceed with the proposed amendment on
Definition of Terms, Section 5.
Senator Magsaysay. Please go ahead, Senator
Santiago.
Senator Santiago. We are in Part 1, short title on
the Declaration of Policy, Section 5, Definition of
Terms.
At the appropriate places in the listing of these
terms that have to be defined since these are
arranged alphabetically, Mr. President, I would
like to insert the term DATA and its definition. So,
the amendment will read: "DATA" MEANS
REPRESENTATION, IN ANY FORM, OF
INFORMATION OR CONCEPTS.
The explanation is this: This definition of "data"
or "data" as it is now fashionably pronounced in
America - - the definition of "data" ensures that
our bill applies to any form of information in an
electronic record, whether these are figures,
facts or ideas.
So again, the proposed amendment is this:
"DATA" MEANS REPRESENTATIONS, IN ANY
FORM, OF INFORMATION OR CONCEPTS.
Senator Magsaysay. May I know how will this
affect the definition of "Data Message" which
encompasses electronic records, electronic
writings and electronic documents?
Senator Santiago. These are completely
congruent with each other. These are
compatible. When we define "data," we are
simply reinforcing the definition of what is a data
message.
Senator Magsaysay. It is accepted, Mr.
President.
Senator Santiago. Thank you. The next term is
"ELECTRONIC RECORD." The proposed
amendment is as follows:
"ELECTRONIC RECORD" MEANS DATA THAT
IS RECORDED OR STORED ON ANY MEDIUM
IN OR BY A COMPUTER SYSTEM OR OTHER
SIMILAR DEVICE, THAT CAN BE READ OR
PERCEIVED BY A PERSON OR A COMPUTER
SYSTEM OR OTHER SIMILAR DEVICE. IT
INCLUDES A DISPLAY, PRINTOUT OR OTHER
OUTPUT OF THAT DATA.
The explanation for this term and its definition is
as follows: The term "ELECTRONIC RECORD"
fixes the scope of our bill. The record is the data.
The record may be on any medium. It is
electronic because it is recorded or stored in or
by a computer system or a similar device.
The amendment is intended to apply, for
example, to data on magnetic strips on cards or
in Smart cards. As drafted, it would not apply
to telexes or faxes, except computer-
generated faxes, unlike the United Nations
model law on electronic commerce. It would
also not apply to regular digital telephone
conversations since the information is not
recorded. It would apply to voice mail since the
information has been recorded in or by a device
similar to a computer. Likewise, video records
are not covered. Though when the video is
transferred to a website, it would be covered
because of the involvement of the computer.
Music recorded by a computer system on a
compact disc would be covered.
In short, not all data recorded or stored in digital
form is covered. A computer or a similar device
has to be involved in its creation or storage. The
term "similar device" does not extend to all
devices that create or store data in digital form.
Although things that are not recorded or
preserved by or in a computer system are
omitted from this bill, these may well be
admissible under other rules of law. This
provision focuses on replacing the search for
originality proving the reliability of systems
instead of that of individual records and using
standards to show systems reliability.
Paper records that are produced directly by a
computer system such as printouts are
themselves electronic records being just the
means of intelligible display of the contents of
the record. Photocopies of the printout would be
paper record subject to the usual rules about
copies, but the original printout would be subject
to the rules of admissibility of this bill.
However, printouts that are used only as paper
records and whose computer origin is never
again called on are treated as paper records. In
that case, the reliability of the computer system
that produces the record is irrelevant to its
reliability.
Senator Magsaysay. Mr. President, if my
memory does not fail me, earlier, the lady
Senator accepted that we use the term "Data
Message" rather than "ELECTRONIC RECORD"
in being consistent with the UNCITRAL term of
"Data Message." So with the new amendment of
defining "ELECTRONIC RECORD," will this
affect her accepting of the use of "Data
Message" instead of "ELECTRONIC RECORD"?
Senator Santiago. No, it will not. Thank you for
reminding me. The term I would like to insert is
ELECTRONIC DATA MESSAGE in lieu of
"ELECTRONIC RECORD."
Senator Magsaysay. Then we are, in
effect, amending the term of the definition of
"Data Message" on page 2A, line 31, to which
we have no objection.
Senator Santiago. Thank you, Mr. President.
xxxx
Senator Santiago. Mr. President, I have
proposed all the amendments that I desire to,
including the amendment on the effect of error or
change. I will provide the language of the
amendment together with the explanation
supporting that amendment to the distinguished
sponsor and then he can feel free to take it up in
any session without any further intervention.
Senator Magsaysay. Before we end, Mr.
President, I understand from the proponent of
these amendments that these are based on
the Canadian E-commerce Law of 1998. Is that
not right?
Senator Santiago. That is correct.80
Thus, when the Senate consequently voted to adopt the
term "electronic data message," it was consonant with
the explanation of Senator Miriam Defensor-Santiago
that it would not apply "to telexes or faxes, except
computer-generated faxes, unlike the United Nations
model law on electronic commerce." In explaining the
term "electronic record" patterned after the E-Commerce
Law of Canada, Senator Defensor-Santiago had in mind
the term "electronic data message." This term then, while
maintaining part of the UNCITRAL Model Law's
terminology of "data message," has assumed a different
context, this time, consonant with the term "electronic
record" in the law of Canada. It accounts for the addition
of the word "electronic" and the deletion of the phrase
"but not limited to, electronic data interchange (EDI),
electronic mail, telegram, telex or telecopy." Noteworthy
is that the Uniform Law Conference of Canada, explains
the term "electronic record," as drafted in the Uniform
Electronic Evidence Act, in a manner strikingly similar to
Sen. Santiago's explanation during the Senate
deliberations:
"Electronic record" fixes the scope of the Act.
The record is the data. The record may be any
medium. It is "electronic" because it is recorded
or stored in or by a computer system or similar
device. The Act is intended to apply, for
example, to data on magnetic strips on cards, or
in smart cards. As drafted, it would not apply to
telexes or faxes (except computer-generated
faxes), unlike the United Nations Model Law on
Electronic Commerce. It would also not apply to
regular digital telephone conversations, since the
information is not recorded. It would apply to
voice mail, since the information has been
recorded in or by a device similar to a computer.
Likewise video records are not covered, though
when the video is transferred to a Web site it
would be, because of the involvement of the
computer. Music recorded by a computer system
on a compact disk would be covered.
In short, not all data recorded or stored in
"digital" form is covered. A computer or similar
device has to be involved in its creation or
storage. The term "similar device" does not
extend to all devices that create or store data in
digital form. Although things that are not
recorded or preserved by or in a computer
system are omitted from this Act, they may well
be admissible under other rules of law. This Act
focuses on replacing the search for originality,
proving the reliability of systems instead of that
of individual records, and using standards to
show systems reliability.
Paper records that are produced directly by a
computer system, such as printouts, are
themselves electronic records, being just the
means of intelligible display of the contents of
the record. Photocopies of the printout would be
paper records subject to the usual rules about
copies, but the "original" printout would be
subject to the rules of admissibility of this Act.
However, printouts that are used only as paper
records, and whose computer origin is never
again called on, are treated as paper records.
See subsection 4(2). In this case the reliability of
the computer system that produced the record is
relevant to its reliability.81
There is no question then that when Congress
formulated the term "electronic data message," it
intended the same meaning as the term "electronic
record" in the Canada law. This construction of the term
"electronic data message," which excludes telexes or
faxes, except computer-generated faxes, is in harmony
with the Electronic Commerce Law's focus on
"paperless" communications and the "functional
equivalent approach"82 that it espouses. In fact, the
deliberations of the Legislature are replete with
discussions on paperless and digital transactions.
Facsimile transmissions are not, in this sense,
"paperless," but verily are paper-based.
A facsimile machine, which was first patented in 1843 by
Alexander Bain,83 is a device that can send or receive
pictures and text over a telephone line. It works by
digitizing an image—dividing it into a grid of dots. Each
dot is either on or off, depending on whether it is black or
white. Electronically, each dot is represented by a bit that
has a value of either 0 (off) or 1 (on). In this way, the fax
machine translates a picture into a series of zeros and
ones (called a bit map) that can be transmitted like
normal computer data. On the receiving side, a fax
machine reads the incoming data, translates the zeros
and ones back into dots, and reprints the picture.84 A fax
machine is essentially an image scanner, a modem and
a computer printer combined into a highly specialized
package. The scanner converts the content of a physical
document into a digital image, the modem sends the
image data over a phone line, and the printer at the other
end makes a duplicate of the original document.85 Thus,
in Garvida v. Sales, Jr.,86 where we explained the
unacceptability of filing pleadings through fax machines,
we ruled that:
A facsimile or fax transmission is a process
involving the transmission and reproduction of
printed and graphic matter by scanning an
original copy, one elemental area at a time, and
representing the shade or tone of each area by a
specified amount of electric current. The current
is transmitted as a signal over regular telephone
lines or via microwave relay and is used by the
receiver to reproduce an image of the elemental
area in the proper position and the correct
shade. The receiver is equipped with a stylus or
other device that produces a printed record on
paper referred to as a facsimile.
x x x A facsimile is not a genuine and authentic
pleading. It is, at best, an exact copy preserving
all the marks of an original. Without the original,
there is no way of determining on its face
whether the facsimile pleading is genuine and
authentic and was originally signed by the party
and his counsel. It may, in fact, be a sham
pleading.87
Accordingly, in an ordinary facsimile transmission, there
exists an original paper-based information or data that is
scanned, sent through a phone line, and re-printed at the
receiving end. Be it noted that in enacting the Electronic
Commerce Act of 2000, Congress intended virtual or
paperless writings to be the functional equivalent and to
have the same legal function as paper-based
documents.88 Further, in a virtual or paperless
environment, technically, there is no original copy to
speak of, as all direct printouts of the virtual reality are
the same, in all respects, and are considered as
originals.89 Ineluctably, the law's definition of "electronic
data message," which, as aforesaid, is interchangeable
with "electronic document," could not have
included facsimile transmissions, which have an original
paper-based copy as sent and a paper-based
facsimile copy as received. These two copies are distinct
from each other, and have different legal effects. While
Congress anticipated future developments in
communications and computer technology90 when it
drafted the law, it excluded the early forms of technology,
like telegraph, telex and telecopy (except computer-
generated faxes, which is a newer development as
compared to the ordinary fax machine to fax machine
transmission), when it defined the term "electronic data
message."
Clearly then, the IRR went beyond the parameters of the
law when it adopted verbatim the UNCITRAL Model
Law's definition of "data message," without considering
the intention of Congress when the latter deleted the
phrase "but not limited to, electronic data interchange
(EDI), electronic mail, telegram, telex or telecopy." The
inclusion of this phrase in the IRR offends a basic tenet
in the exercise of the rule-making power of administrative
agencies. After all, the power of administrative officials to
promulgate rules in the implementation of a statute is
necessarily limited to what is found in the legislative preponderance of evidence, that is, evidence that has
enactment itself. The implementing rules and regulations greater weight, or is more convincing than that which is
of a law cannot extend the law or expand its coverage, offered in opposition to it.96
as the power to amend or repeal a statute is vested in
the Legislature.91 Thus, if a discrepancy occurs between In general, contracts are perfected by mere
the basic law and an implementing rule or regulation, it is consent,97 which is manifested by the meeting of the
the former that prevails, because the law cannot be offer and the acceptance upon the thing and the cause
broadened by a mere administrative issuance—an which are to constitute the contract. The offer must be
administrative agency certainly cannot amend an act of certain and the acceptance absolute.98 They are,
Congress.92 Had the Legislature really wanted ordinary moreover, obligatory in whatever form they may have
fax transmissions to be covered by the mantle of the been entered into, provided all the essential requisites for
Electronic Commerce Act of 2000, it could have easily their validity are present.99 Sale, being a consensual
lifted without a bit of tatter the entire wordings of the contract, follows the general rule that it is perfected at the
UNCITRAL Model Law. moment there is a meeting of the minds upon the thing
which is the object of the contract and upon the price.
Incidentally, the National Statistical Coordination Board From that moment, the parties may reciprocally demand
Task Force on the Measurement of E-Commerce,93 on performance, subject to the provisions of the law
November 22, 2006, recommended a working definition governing the form of contracts.100
of "electronic commerce," as "[a]ny commercial
transaction conducted through electronic, optical and The essential elements of a contract of sale are (1)
similar medium, mode, instrumentality and technology. consent or meeting of the minds, that is, to transfer
The transaction includes the sale or purchase of goods ownership in exchange for the price, (2) object certain
and services, between individuals, households, which is the subject matter of the contract, and (3) cause
businesses and governments conducted over computer- of the obligation which is established.101
mediated networks through the Internet, mobile phones,
electronic data interchange (EDI) and other channels
In this case, to establish the existence of a perfected
through open and closed networks." The Task Force's
contract of sale between the parties, respondent
proposed definition is similar to the Organization of
Ssangyong formally offered in evidence the testimonies
Economic Cooperation and Development's (OECD's)
of its witnesses and the following exhibits:
broad definition as it covers transactions made over any
network, and, in addition, it adopted the following
provisions of the OECD definition: (1) for transactions, it Exhibit Description Purp
covers sale or purchase of goods and services; (2) for E Pro forma Invoice dated 17 April To sh
channel/network, it considers any computer-mediated 2000 with Contract No. ST2- plain
network and NOT limited to Internet alone; (3) it excludes POSTS0401-1, photocopy stain
transactions received/placed using fax, telephone or non- of an
interactive mail; (4) it considers payments done online or plain
offline; and (5) it considers delivery made online (like E-1 Pro forma Invoice dated 17 April To sh
downloading of purchased books, music or software 2000 with Contract No. ST2- confi
programs) or offline (deliveries of goods).94 POSTS0401, contained in spec
facsimile/thermal paper faxed by defen
We, therefore, conclude that the terms "electronic data defendants to plaintiff showing irrevo
message" and "electronic document," as defined under the printed transmission details plain
the Electronic Commerce Act of 2000, do not include a on the upper portion of said
facsimile transmission. Accordingly, a facsimile paper as coming from defendant
transmission cannot be considered as electronic MCC on 26 Apr 00 08:41AM
evidence. It is not the functional equivalent of an original E-2 Conforme signature of Mr. To sh
under the Best Evidence Rule and is not admissible Gregory Chan, contained in confi
as electronic evidence. facsimile/thermal paper faxed by total
defendants to plaintiff showing prod
Since a facsimile transmission is not an "electronic data the printed transmission details by w
message" or an "electronic document," and cannot be on the upper portion of said favor
considered as electronic evidence by the Court, with paper as coming from defendant
greater reason is a photocopy of such a fax transmission MCC on 26 Apr 00 08:41AM
not electronic evidence. In the present case, therefore, F Pro forma Invoice dated 17 April To sh
Pro Forma Invoice Nos. ST2-POSTS0401-1 and ST2- 2000 with Contract No. ST2- plain
POSTS0401-2 (Exhibits "E" and "F"), which are mere POSTSO401-2, photocopy stain
photocopies of the original fax transmittals, are not of an
electronic evidence, contrary to the position of both the plain
trial and the appellate courts.
G Letter to defendant SANYO To p
SEIKE dated 20 June of the
- III - 2000, contained in defen
facsimile/thermal paper
Nevertheless, despite the pro forma invoices not being
G-1 Signature of defendant Gregory
electronic evidence, this Court finds that respondent has
Chan, contained in
proven by preponderance of evidence the existence of a
facsimile/thermal paper.
perfected contract of sale.
H Letter to defendants dated 22 To p
June 2000, original of the
In an action for damages due to a breach of a contract, it
secu
is essential that the claimant proves (1) the existence of
were
a perfected contract, (2) the breach thereof by the other
open
contracting party and (3) the damages which he/she
sustained due to such breach. Actori incumbit onus I Letter to defendants dated 26 To p
probandi. The burden of proof rests on the party who June 2000, original requ
advances a proposition affirmatively.95 In other words, a J Letter to defendants dated 26 open
plaintiff in a civil action must establish his case by a June 2000, original defen
K Letter to defendants dated 27 with their obligations and the problems of and p
June 2000, original plaintiff is incurring by reason of tons
L Facsimile message to defendants defendants' failure and refusal to open the US$1
dated 28 June 2000, photocopy L/Cs. and s
was
M Letter from defendants dated 29 To prove that defendants admit of their
and p
June 2000, contained in liabilities to plaintiff, that they requested
facsimile/thermal paper faxed by for "more DDextension" of time Letter from defendant MCC to
for the To p
defendants to plaintiff showing plaintiff
opening of the Letter of Credit, and SSANGYONG dated 22 and p
the printed transmission details August
begging for favorable understanding and 2000, contained in SSAN
on the upper portion of said consideration. facsimile/thermal paper with balan
paper as coming from defendant back-up photocopy other
MCC on 29 June 00 11:12 AM tons
SSAN
M-1 Signature of defendant Gregory
MCC
Chan, contained in
facsimile/thermal paper faxed by DD-1 Ref. No. ST2-POSTS080- To p
defendants to plaintiff showing 1, contained in facsimile/thermal and p
the printed transmission details paper with back-up photocopy SSAN
on the upper portion of said balan
paper as coming from defendant other
MCC on June 00 11:12 AM tons
SSAN
N Letter to defendants dated 29
MCC
June 2000, original
DD-2 Signature of defendant Gregory To p
O Letter to defendants dated 30 To prove that plaintiff reiterated its request
Chan, contained in throu
June 2000, photocopy for defendants to L/C opening after the
facsimile/thermal paper with and p
latter's request for extension of time was
back-up photocopy tons,
granted, defendants' failure and refusal to
shipm
comply therewith extension of time
deliv
notwithstanding.
for b
P Letter to defendants dated 06
July 2000, original
Significantly, among these documentary evidence
Q Demand letter to defendants To prove that
presented plaintiff wasMCC,
by respondent, constrained to
in its petition before this
dated 15 Aug 2000, original engaged
Court, services
assails of a lawyer only
the admissibility for of Pro Forma Invoice
collection
Nos. efforts.
ST2-POSTS0401-1 and ST2-POSTS0401-
R Demand letter to defendants 2To prove that
(Exhibits defendants
"E" and opened
"F"). After siftingthe first the records,
through
dated 23 Aug 2000, original L/CCourt
the in favor
foundof plaintiff,
that theserequested
invoicesfor are mere
further postponement
photocopies of the final
of their original L/C and
fax transmittals. Ssangyong
for minimal
avers that theseamounts, were urged
documents to open after MCC
were prepared
the final
asked for L/C
the on time, of
splitting andthewere informed
original order into two, so
thatthe
that failure
lattertocan
comply
applywill
forcancel
an L/Cthe with greater facility. It,
contract. failed to explain why the originals of these
however,
S Demand letter to defendants documents were not presented.
To show defendants' refusal and failure to
dated 11 Sept 2000, original open the final L/C on time, the
Tocancellation
determine of whether
the contract
these as documents
a are admissible
inconsequence
evidence, wethereof,
apply theand ordinary
final demand
Rules on Evidence,
for
upon
as discussed
defendantsabove to remit
weitscannot
obligations.
apply the Electronic
W Commerce Act of 2000 and
Letter from plaintiff SSANGYONG To prove that there was a perfected salethe Rules on Electronic
Evidence.
to defendant SANYO SEIKI dated and purchase agreement between the
13 April 2000, with fax back from parties for 220 metric tons of steel
defendants SANYO SEIKI/MCC Because productstheseat thedocuments are mere photocopies, they
price of US$1,860/ton.
to plaintiff are simply secondary evidence, admissible only upon
SSANGYONG, contained in compliance with Rule 130, Section 5, which states,
facsimile/thermal paper with "[w]hen the original document has been lost or
back-up photocopy destroyed, or cannot be produced in court, the offeror,
W-1 Conforme signature of defendant upon proofthat
To prove of its execution or
defendants, existence
acting through and the cause of
Gregory Chan, contained in its
Gregory Chan, agreed to the sale and part, may prove
unavailability without bad faith on his
facsimile/thermal paper with its contentsofby220
purchase a copy,
metricortons
by aofrecital
steel of its contents in
back-up photocopy some authentic
products at thedocument, or by the testimony of
price of US$1,860/ton.
witnesses in the order stated." Furthermore, the offeror of
W-2 Name of sender MCC Industrial secondary
To prove that defendants
evidence sent their
must prove the predicates thereof,
Sales Corporation conformity to the sale and purchase
namely: (a) the loss or destruction of the original without
agreement by facsimile transmission.
bad faith on the part of the proponent/offeror which can
X Pro forma Invoice dated 16 beToshown
prove by thatcircumstantial
defendant MCC agreedoftoroutine practices
evidence
August 2000, photocopy adjust and split the confirmed purchase
of destruction of documents; (b) the proponent must
orderby
prove into 2 shipments
a fair at 100 of
preponderance metric tons as to raise a
evidence
each at the discounted price of
reasonable inference of the loss or destruction of the
US$1,700/ton.
original copy; and (c) it must be shown that a diligent
X-1 Notation "1/2", photocopy and
To prove fide
bona thatbut
theunsuccessful
present Pro forma search has been made
for the document
Invoice was the firstin the
of proper place or places. It has
2 pro forma
been held that where the missing document is the
invoices.
X-2 Ref. No. ST2-POSTS080- foundation
To prove that of the
theaction,
presentmore
Pro strictness in proof is
1, photocopy required than
forma Invoice where
was the first of 2 prois only collaterally
the document
involved. 103
forma invoices.
X-3 Conforme signature of defendant To prove that defendant MCC, acting
Gregory Chan, photocopy through Gregory Chan, agreed to the sale
Given these norms, we find that respondent failed to
prove the existence of the original fax transmissions of
Exhibits E and F, and likewise did not sufficiently prove
the loss or destruction of the originals. Thus, Exhibits E
and F cannot be admitted in evidence and accorded
probative weight.
It is observed, however, that respondent Ssangyong did
not rely merely on Exhibits E and F to prove the
perfected contract. It also introduced in evidence a
variety of other documents, as enumerated above,
together with the testimonies of its witnesses. Notable
among them are Pro Forma Invoice Nos. ST2-
POSTS080-1 and ST2-POSTS080-2 which were issued
by Ssangyong and sent via fax to MCC. As already
mentioned, these invoices slightly varied the terms of the
earlier invoices such that the quantity was now
officially 100MT per invoice and the price reduced
to US$1,700.00 per MT. The copies of the said August
16, 2000 invoices submitted to the court bear the
conformity signature of MCC Manager Chan.
Pro Forma Invoice No. ST2-POSTS080-1 (Exhibit "X"),
however, is a mere photocopy of its original. But then
again, petitioner MCC does not assail the admissibility of
this document in the instant petition. Verily, evidence not
objected to is deemed admitted and may be validly
considered by the court in arriving at its
judgment.104 Issues not raised on appeal are deemed
abandoned.
As to Pro Forma Invoice No. ST2-POSTS080-2 (Exhibits
"1-A" and "2-C"), which was certified by PCIBank as a
true copy of its original,105 it was, in fact, petitioner MCC
which introduced this document in evidence. Petitioner
MCC paid for the order stated in this invoice. Its
admissibility, therefore, is not open to question.
These invoices (ST2-POSTS0401, ST2-POSTS080-1
and ST2-POSTS080-2), along with the other
unchallenged documentary evidence of respondent
Ssangyong, preponderate in favor of the claim that a
contract of sale was perfected by the parties.
This Court also finds merit in the following observations
of the trial court:
Defendants presented Letter of Credit (Exhibits
"1", "1-A" to "1-R") referring to Pro Forma Invoice
for Contract No. ST2POSTS080-2, in the amount
of US$170,000.00, and which bears the
signature of Gregory Chan, General Manager of
MCC. Plaintiff, on the other hand, presented Pro
Forma Invoice referring to Contract No. ST2-
POSTS080-1, in the amount of US$170,000.00,
which likewise bears the signature of Gregory
Chan, MCC. Plaintiff accounted for the notation
"1/2" on the right upper portion of the Invoice,
that is, that it was the first of two (2) pro forma
invoices covering the subject contract between
plaintiff and the defendants. Defendants, on the
other hand, failed to account for the notation
"2/2" in its Pro Forma Invoice (Exhibit "1-A").
Observably further, both Pro Forma Invoices
bear the same date and details, which logically
mean that they both apply to one and the same
transaction.106
Indeed, why would petitioner open an L/C for the second
half of the transaction if there was no first half to speak
of?
The logical chain of events, as gleaned from the
evidence of both parties, started with the petitioner and
the respondent agreeing on the sale and purchase of
220MT of stainless steel at US$1,860.00 per MT. This
initial contract was perfected. Later, as petitioner asked
for several extensions to pay, adjustments in the delivery
dates, and discounts in the price as originally agreed, the
parties slightly varied the terms of their contract, without
necessarily novating it, to the effect that the original order
was reduced to 200MT, split into two deliveries, and the
price discounted to US$1,700 per MT. Petitioner,
however, paid only half of its obligation and failed to
open an L/C for the other 100MT. Notably, the conduct of
both parties sufficiently established the existence of a
contract of sale, even if the writings of the parties,
because of their contested admissibility, were not as
explicit in establishing a contract.107 Appropriate conduct
by the parties may be sufficient to establish an
agreement, and while there may be instances where the
exchange of correspondence does not disclose the exact
point at which the deal was closed, the actions of the
parties may indicate that a binding obligation has been
undertaken.108
With our finding that there is a valid contract, it is crystal-
clear that when petitioner did not open the L/C for the
first half of the transaction (100MT), despite numerous
demands from respondent Ssangyong, petitioner
breached its contractual obligation. It is a well-
entrenched rule that the failure of a buyer to furnish an
agreed letter of credit is a breach of the contract between
buyer and seller. Indeed, where the buyer fails to open a
letter of credit as stipulated, the seller or exporter is
entitled to claim damages for such breach. Damages for
failure to open a commercial credit may, in appropriate
cases, include the loss of profit which the seller would
reasonably have made had the transaction been carried
out.109
- IV -
This Court, however, finds that the award of actual
damages is not in accord with the evidence on record. It
is axiomatic that actual or compensatory damages
cannot be presumed, but must be proven with a
reasonable degree of certainty.110 In Villafuerte v. Court
of Appeals,111 we explained that:
Actual or compensatory damages are those
awarded in order to compensate a party for an
injury or loss he suffered. They arise out of a
sense of natural justice and are aimed at
repairing the wrong done. Except as provided by
law or by stipulation, a party is entitled to an
adequate compensation only for such pecuniary
loss as he has duly proven. It is hornbook
doctrine that to be able to recover actual
damages, the claimant bears the onus of
presenting before the court actual proof of the
damages alleged to have been suffered, thus:
A party is entitled to an adequate
compensation for such pecuniary loss
actually suffered by him as he has duly
proved. Such damages, to be
recoverable, must not only be capable of
proof, but must actually be proved with a
reasonable degree of certainty. We have
emphasized that these damages cannot
be presumed and courts, in making an
award must point out specific facts which
could afford a basis for measuring
whatever compensatory or actual
damages are borne.112
In the instant case, the trial court awarded to respondent
Ssangyong US$93,493.87 as actual damages. On
appeal, the same was affirmed by the appellate court.
Noticeably, however, the trial and the appellate courts, in
making the said award, relied on the following the petitioner. Therefore, as the claim for actual damages
documents submitted in evidence by the respondent: (1) was not proven, the Court cannot sanction the award.
Exhibit "U," the Statement of Account dated March 30,
2001; (2) Exhibit "U-1," the details of the said Statement Nonetheless, the Court finds that petitioner knowingly
of Account); (3) Exhibit "V," the contract of the alleged breached its contractual obligation and obstinately
resale of the goods to a Korean corporation; and (4) refused to pay despite repeated demands from
Exhibit "V-1," the authentication of the resale contract respondent. Petitioner even asked for several extensions
from the Korean Embassy and certification from the of time for it to make good its obligation. But in spite of
Philippine Consular Office. respondent's continuous accommodation, petitioner
completely reneged on its contractual duty. For such
The statement of account and the details of the losses inattention and insensitivity, MCC must be held liable for
sustained by respondent due to the said breach are, at nominal damages. "Nominal damages are 'recoverable
best, self-serving. It was respondent Ssangyong itself where a legal right is technically violated and must be
which prepared the said documents. The items therein vindicated against an invasion that has produced no
are not even substantiated by official receipts. In the actual present loss of any kind or where there has been
absence of corroborative evidence, the said statement of a breach of contract and no substantial injury or actual
account is not sufficient basis to award actual damages. damages whatsoever have been or can be
The court cannot simply rely on speculation, conjecture shown.'"117 Accordingly, the Court awards nominal
or guesswork as to the fact and amount of damages, but damages of P200,000.00 to respondent Ssangyong.
must depend on competent proof that the claimant had
suffered, and on evidence of, the actual amount As to the award of attorney's fees, it is well settled that
thereof.113 no premium should be placed on the right to litigate and
not every winning party is entitled to an automatic grant
Furthermore, the sales contract and its authentication of attorney's fees. The party must show that he falls
certificates, Exhibits "V" and "V-1," allegedly evidencing under one of the instances enumerated in Article 2208 of
the resale at a loss of the stainless steel subject of the the Civil Code.118 In the instant case, however, the Court
parties' breached contract, fail to convince this Court of finds the award of attorney's fees proper, considering
the veracity of its contents. The steel items indicated in that petitioner MCC's unjustified refusal to pay has
the sales contract114 with a Korean corporation are compelled respondent Ssangyong to litigate and to incur
different in all respects from the items ordered by expenses to protect its rights.
petitioner MCC, even in size and quantity. We observed
the following discrepancies: WHEREFORE, PREMISES CONSIDERED, the appeal
is PARTIALLY GRANTED. The Decision of the Court of
List of commodities as stated in Exhibit "V": Appeals in CA-G.R. CV No. 82983 is MODIFIED in that
the award of actual damages is DELETED. However,
petitioner
COMMODITY: Stainless Steel HR Sheet in Coil, is ORDERED to pay respondent NOMINAL
Slit Edge
SPEC: SUS304 NO. 1 DAMAGES in the amount of P200,000.00, and
the ATTORNEY'S FEES as awarded by the trial court.
SIZE/Q'TY:
2.8MM X 1,219MM X C 8.193MT SO ORDERED.
3.0MM X 1,219MM X C 7.736MT
3.0MM X 1,219MM X C 7.885MT ----------------------------------------------------------------------------
3.0MM X 1,219MM X C 8.629MT -
4.0MM X 1,219MM X C 7.307MT
G.R. No. 164791. June 29, 2010.*
4.0MM X 1,219MM X C 7.247MT
4.5MM X 1,219MM X C 8.450MT SELWYN F. LAO AND EDGAR MANANSALA,
4.5MM X 1,219MM X C 8.870MT petitioners, vs. SPECIAL PLANS, INC., respondent.
5.0MM X 1,219MM X C 8.391MT
6.0MM X 1,219MM X C 6.589MT
6.0MM X 1,219MM X C 7.878MT Civil Law; Obligations; Compensation; Compensation
shall take place when two persons, in their own right, are
6.0MM X 1,219MM X C 8.397MT
creditors and debtors of each other; Requisites for
TOTAL: 115
95.562MTCompensation to be Proper.—The Civil Code provides
that compensation shall take place when two persons, in
List of commodities as stated in Exhibit "X" (thetheir own right, are creditors and debtors of each other.
invoice that was not paid): In order for compensation to be proper, it is necessary
that: 1. Each one of the obligors be bound principally and
that SUS
DESCRIPTION: Hot Rolled Stainless Steel Coil he be304
at the same time a principal creditor of the
SIZE AND QUANTITY: other; 2. Both debts consist in a sum of money, or if the
2.6 MM X 4' X C things due are consumable, they be of the same kind,
10.0MT
and also of the same quality if the latter has been stated;
3.0 MM X 4' X C 25.0MT
3. The two debts are due: 4. The debts are liquidated
4.0 MM X 4' X C 15.0MT
and demandable; 5. Over neither of them be any
4.5 MM X 4' X C 15.0MT
retention or controversy, commenced by third parties and
5.0 MM X 4' X C communicated in due time to the debtor.
10.0MT
6.0 MM X 4' X C 25.0MT
Same; Same; Same; A claim is liquidated when the
TOTAL: 100MT 116
amount and time of payment is fixed; If acknowledged by
the debtor, although not in writing, the claim must be
From the foregoing, we find merit in the contention of treated as liquidated; Compensation takes place only if
MCC that Ssangyong did not adequately prove that the both obligations are liquidated.—A claim is liquidated
items resold at a loss were the same items ordered by when the amount and time of payment is fixed. If
acknowledged by the debtor, although not in writing, the
claim must be treated as liquidated. When the defendant,
who has an unliquidated claim, sets it up by way of
counterclaim, and a judgment is rendered liquidating
such claim, it can be compensated against the plaintiff’s
claim from the moment it is liquidated by judgment. We
have restated this in Solinap v. Hon. Del Rosario, 123
SCRA 640 (1983), where we held that compensation
takes place only if both obligations are liquidated.
Remedial Law; Appeals; A party who has not appealed
from a decision cannot seek any relief other than what is
provided in the judgment appealed from.—It is well-
settled that a party who has not appealed from a
Decision cannot seek any relief other than what is
provided in the judgment appealed from. SPI did not
appeal, thus it cannot obtain from the appellate court any
affirmative relief other than those granted in the Decision
of the court below. It can only advance any argument
that it may deem necessary to defeat petitioners’ claim or
to uphold the Decision that is being disputed, and it can
assign errors in its brief if such is required to strengthen
the views expressed by the court a quo. These assigned
errors, in turn, may be considered by the appellate court
solely to maintain the appealed decision on other
grounds, but not for the purpose of reversing or
modifying the judgment in SPI’s favor and giving it other
reliefs.
PETITION for review on certiorari of a decision of the
Court of Appeals.
The facts are stated in the opinion of the Court.
Cacho & Chua Law Offices for petitioners.
Ibuyan, Garcia, Ibuyan Law Offices for respondent.
In Roman Law, compensation was the reciprocal
extinction of claims between mutual debtors. In the
earlier stages of that system the practice did not exist as
a matter of right but its application was discretionary with
the judex. Later the praetor applied it by incorporating
into the formula, which he prepared for the judex, an
exception doli, that is, an authorization to take into
account any circumstances which would render
inequitable the enforcement of the claim. The effect was
to cause a dismissal of the claim, however large, if a
counterclaim, however small, was proven and the
indirect result was to compel the actor (plaintiff) to deduct
the counterclaim in advance.[1]
Factual Antecedents
Petitioners Selwyn F. Lao (Lao) and Edgar Manansala
(Manansala), together with Benjamin Jim (Jim), entered
into a Contract of Lease[2] with respondent Special
Plans, Inc. (SPI) for the period January 16, 1993 to
January 15, 1995 over SPI’s building at No. 354 Quezon
Avenue, Quezon City. Petitioners intended to use the
premises for their karaoke and restaurant business
known as “Saporro Restaurant”.
Upon expiration of the lease contract, it was renewed for
a period of eight months at a rental rate of P23,000.00
per month.
On June 3, 1996, SPI sent a Demand Letter[3] to the
petitioners asking for full payment of rentals in arrears.
Receiving no payment, SPI filed on July 23, 1996 a
Complaint[4] for sum of money with the Metropolitan Trial
Court (MeTC) of Quezon City, claiming that Jim and
petitioners have accumulated unpaid rentals of
P118,000.00 covering the period March 16, 1996 to
August 16, 1996.
After service of summons, petitioners filed their Verified
Answer[5] faulting SPI for making them believe that it
owns
the leased property. They likewise asserted that SPI did
not deliver the leased premises in a condition fit for
petitioners’ intended use. Thus, petitioners claimed that
they were constrained to incur expenses for necessary
repairs as well as expenses for the repair of structural
defects, which SPI failed and refused to reimburse.
Petitioners prayed that the complaint be dismissed and
judgment on their counterclaims be rendered ordering
SPI to pay them the sum of P422,920.40 as actual
damages, as well as moral damages, attorney’s fees and
exemplary damages.
After the issues were joined, trial on the merits ensued.
As culled from the MeTC Decision, the following account
was presented by SPI:
“Delfin Cruz, president of Special Plans, Inc. testified that
on January 7, 1993, plaintiff-corporation and herein
defendants entered into a two-year Contract of Lease
(Exhibit “A” inclusive, with sub-markings) starting
January 16, 1993 until January 15, 1995, involving a
portion of said plaintiff-corporation’s office building which
used to be the Bahay Namin Food and Drinks at 354
Quezon Avenue, Quezon City. Defendants used the
leased premises for their karaoke and restaurant
business known as Saporro Restaurant. Upon [expiration
of the lease], defendants, through defendant Lao
requested in writing (Exhibit “B”) for a renewal of the
contract of lease, but plaintiff-corporation agreed only for
an eight-month extension of [the] contract with all its
terms and conditions on a month-to-month basis at a
monthly rental of P23,000.00.
This witness further testified that while defendants paid
the sum of P23,000.00 in August 1996 they nevertheless
failed to pay the agreed rental since March 16, 1996,
thus the accumulated unpaid rentals shot up to
P118,000.00. Plaintiff-corporation demanded upon
defendants payment therefor in a letter dated June 3,
1996 (Exhibit “D” inclusive with sub-markings).
On cross, Delfin Cruz admitted that plaintiff-corporation
did not inform defendants that it was not the owner of the
leased premises during the signing of the contract of
lease and that said defendants did not inform him of the
structural defects of the subject premises, including the
repair works conducted thereon.
Antonio San Mateo, vice-president for legal affairs of
plaintiff-corporation, averred that he made the demand to
pay upon defendants for their failure to settle their
agreed monthly rentals starting March 16, 1996 to
August 15, 1996; and that for the period covering
September 16, 1995 to October 15, 1995, defendants
paid only P20,000.00, hence, the balance of P3,000.00
(Exhibit “E”).”[6]
In their defense, Jim and petitioners proffered the
following:
“Meanwhile, defendant Benjamin Jim testified that he
was one of the signatories [to] the original contract of
lease involving the subject premises whose facilities,
including the roof, were already dilapidated: thus
prompting the group to renovate the same. After a year
of operation, Saporro lost so he decided to back out but
defendant Lao convinced him to stay with the group for
another x x x year. But the business lost even more so
he finally called it quits with the consent of the group. He
pulled out his audio-video equipment, refrigerator, and
air-conditioning unit on January 2, 1995, thirteen (13)
days before the expiration of the contract of lease. He
further denied having signed the request for the
extension of the contract.
On cross, he stated that he did not sign documents for
and in behalf of Saporro; and, that he allowed defendant
Lao and Victor San Luis to sign for the group.
Testifying for defendant Jim, Atty. Maria Rosario
Carmela Nova declared that defendant Jim sought her
services on August 30, 1996 for the recovery of his
money invested at Mount Fuji and Saporro but Atty.
Cesa, who acted as counsel for defendants Lao and
Manansala, refused to return the same in a letter-reply
dated September 23, 1996 (Exhibit “1-Jim” inclusive with
sub-markings).
Defendant Selwyn Lao testified that the group was not
able to inspect the leased premises since Delfin Cruz
had no key thereon during the signing of the contract of
lease on January 7, 1993. He stated that paragraph 6 of
the said contract provides that the LESSEE shall
maintain the leased premises, including the parking lot,
in good, clean and sanitary condition and shall make all
necessary repairs thereon at his own expense except
repairs of structural defects which shall be the
responsibility of the LESSOR (Exhibit “1-Lao and
Manansala”). When the group took possession of the
leased premises on January 16, 1993, the equipment
and furniture, among others, were found to be not in
good condition. The trusses, roof and ceiling of the
premises were already dilapidated. Rain seeped through
the floor. When the group talked with Delfin Cruz about
the condition of the leased property, the latter would just
tell the former not to worry about it.
The group conducted structural and necessary repairs
thereon, thus incurring the sum of P545,000.00 (Exhibit
“2-Lao and Manansala” inclusive, with sub-markings),
P125,000.00 of which was spent on structural defects, as
follows:
Roofing repair P 45,000.00 (Exhibit “2-A”)
Ceiling repair 50,000.00 (Exhibit “2-B”)
Flooring repair 20,000.00 (Exhibit “2-C”)
Waterproofing 10,000.00 (Exhibit “2-D”)
Defendant Lao further testified that Delfin Cruz told him
to proceed with the repair work without informing him
(Lao) that plaintiff-corporation was not the owner of the
leased premises. The witness added that the group paid
the sum of P23,000.00 on July 21, 1996 for the period
March 16, 1996 to April 15, 1996.
On cross, he averred that he sought the expertise of
Gregorio Tamayo to repair the premises for
P545,000.00; and that he had a verbal authority to sign
for and in behalf of defendant Jim who took his audio-
video equipment on January 2, 1996.
Presented at the witness stand to testify for defendant
Lao and Manansala, Gregorio Tamayo admitted that
defendant Lao sought his services to undertake both
structural and finishing works on the subject property at a
cost of P545,00.00.
On cross, he declared that he was the subcontractor of
defendant Lao.”[7]
Ruling of the Metropolitan Trial Court
On December 15, 1999, the MeTC rendered its
Decision[8] finding that the unpaid rentals stood at only
P95,000.00. It also found that SPI is solely responsible
for repairing the structural defects of the leased
premises, for which the petitioners spent P125,000.00. It
held that even assuming that petitioners did not notify
SPI about the structural defects and the urgency to repair
the same, Article 1663 of the Civil Code allows the
lessee to make urgent repairs in order to avoid an
imminent danger at the lessor’s cost. Hence, the MeTC
dismissed the complaint for lack of cause of action. The
dispositive portion of the Decision reads:
“Wherefore, in view of the foregoing considerations, let
this case be, as it is, hereby ordered DISMISSED for lack
of cause of action. No costs.
The counterclaim and cross-claim of the defendants are
likewise DENIED for lack of merit.
SO ORDERED
Ruling of the Regional Trial Court
Aggrieved, SPI filed an appeal before the RTC of
Quezon City. Both parties filed their respective
memoranda.[10] However, on November 24, 2000,
counsel for SPI filed his Withdrawal of Appearance[11]
with the conformity of SPI, through its Vice President
Antonio L. San Mateo.[12] In an Order[13] dated January
5, 2001, the RTC granted the Withdrawal of Appearance
and ordered that all notices, orders and other court
processes in the case be forwarded to SPI at its address
at 354 Quezon Avenue, Quezon City.
On March 12, 2001, the RTC rendered a Decision[14]
affirming with modification the MeTC Decision by
ordering petitioners to pay SPI the amount of P95,000.00
for unpaid rentals.[15] The RTC disagreed with the
MeTC on the aspect of off-setting the amount allegedly
spent by petitioners for the repairs of the structural
defects of subject property with their unpaid rentals. The
dispositive portion of the RTC Decision reads:
“FROM THE GOING MILLIEU, premises considered, the
lower court’s (Branch 38) decision dated December 15,
1999 is modified to the effect that Defendants Selwyn
Lao and Edgar Manansala are ordered to pay to the
plaintiff-corporation the amount of Ninety Five Thousand
(P95,000.00) pesos for unpaid rentals. With respect to
the other aspect of the decision, there being no cogent
reason to disturb the lower court’s ruling, the same
stands.
SO ORDERED.”[16]
Ruling of the Court of Appeals
On April 25, 2003, petitioners Lao and Manansala filed a
Petition for Review with the CA.[17] Jim did not join
them. Hence, the appealed Decision of the RTC had
become final insofar as Jim is concerned.
On June 30, 2003, the CA rendered a Decision[18]
affirming in toto the RTC Decision. Petitioners moved for
reconsideration, but it was denied in a Resolution[19]
dated August 9, 2004.
Issues
Petitioners do not take issue that the unpaid rentals
amount to P95,000.00.[20] Nonetheless, they assert that
the amount of P545,000.00 they spent for repairs,
P125,000.00 of which was spent on structural repairs,
should be judicially compensated against the said unpaid
rentals amounting to P95,000.00.[21] On the other hand,
SPI avers that petitioners have not shown proof that they
spent these amounts.[22]
Our Ruling
The petition is without merit.
The Civil Code provides that compensation shall take
place when two persons, in their own right, are creditors
and debtors of each other.[23] In order for compensation
to be proper, it is necessary that:
1. Each one of the obligors be bound principally and
that he be at the same time a principal creditor of the
other;
2. Both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
3. The two debts are due:
4. The debts are liquidated and demandable;
5. Over neither of them be any retention or
controversy, commenced by third parties and
communicated in due time to the debtor Petitioners failed
to properly discharge their burden to show that the debts
are liquidated and demandable. Consequently, legal
compensation is inapplicable.
A claim is liquidated when the amount and time of
payment is fixed.[25] If acknowledged by the debtor,
although not in writing, the claim must be treated as
liquidated.[26] When the defendant, who has an
unliquidated claim, sets it up by way of counterclaim, and
a judgment is rendered liquidating such claim, it can be
compensated against the plaintiff’s claim from the
moment it is liquidated by judgment.[27] We have
restated this in Solinap v. Hon. Del Rosario[28] where we
held that compensation takes place only if both
obligations are liquidated.
In addition, paragraph 6 of the contract of lease between
the petitioners and the respondent reads:
“The lessee shall maintain the leased premises including
the parking lot in good, clean and sanitary condition and
shall make all the necessary repairs thereon at their own
expense except repairs of the structural defects which
shall be the responsibility of the lessor.
x x x” (Emphasis supplied)
As the contract contrastingly treats necessary repairs,
which are on the account of the lessee, and repairs of
structural defects, which are the responsibility of the
lessor, the onus of the petitioners is two-fold: (1) to
establish the existence, amount and demandability of
their claim; and (2) to show that these expenses were
incurred in the repair of structural defects.
Respecting these issues, petitioner Lao testified as
follows:[29]
Q: When you took possession of the premises on
January 16, 1993, were you able to notice or discover
anything about the structure of the premises, if any?
A: Being an engineer, when I took possession of the
premises I have noticed the structure of the premises
specially the trusses and the roof and the ceiling were
already dilapidated.
Q: What else if any were you able to discover?
A: We discovered that when it is raining, water
[seeped] through the floor and it caused a lot of mess
especially the carpet getting wet.
Q: What did you do next after having discovered the
defects in the premises?
A: I tried to talk to Mr. Cruz regarding our position
because based on our agreement the rental is high
because according to him we can move in immediately
without so much cost to our company that’s why the 3 of
us came up only with P120,000.00 for the immediate
operation of the Karaoke but Mr. Cruz told us never
mind, pag-usapan na natin sa ibang araw yan.
Q: What happened next after you were [able] to talk
to Mr. Cruz?
A: The group decided not to waste time because our
rental expenses are already running so, we decided that
I will [be] the one to shoulder first the construction and
repair of the premises.
Q: How much did you spend and were you able to
repair the defects?
A: I was able to repair the defects but it caused me a
lot of time and money because usually repairs cannot be
controlled and my expenses reached more than
P500,000.00.
Q: I am showing to you a document can you please
go over it and identify it if this is the document?
A: This is the contract signed by me and the sub-
contractor who was assigned to renovate and prepare
the whole structure.
Q: According to this document you submitted a
quotation?
A: Yes, sir.
Q: And whose signature appears above the name
Gregorio Tamayo?
A: The signature of an engineer/contractor, sir.
Q: Among the list of scope of work can you please
specify the repairs done x x x.
A: It was indicated here that the roofing repair works
costs around P45,000.00; the ceiling repair works is
P50,000.00; the floor repair works is P50,000.00; and the
water proofing works is P10,000.00.
Q: And what happened to the repairs?
A: It was completed, sir.
xxxx
Q: All in all how much did it cost you in Exh. “2”?
A: More than P500,000.00 sir.
xxxx
Q: With respect to the roofing repair works, the
ceiling repair works, the flooring repair works and the
water proofing works, all in all how much is total amount
you incurred in these repairs?
A: P 140,000.00 sir
xxxx
Q: And, what happened next after informing the
lessor.
A: He told me that I being an engineer/contractor, just
proceed with the repair works and then he said, saka na
lang pag-usapan yan maliit lang naman na bagay yan.
Q: Were you able to talk to him some other day with
respect to these repairs?
A: Yes, sir.
Q: What happened when you were able to talk to Mr.
Cruz?
A: He is shy on us sometime but don’t talk to us, sir.
On the basis of Lao’s testimony, the MeTC found that
“the group conducted structural and necessary repairs
thereon, incurring the sum of P545,000.00, P125,000.00
of which was spent on structural defects.”
We are not persuaded. The evidence presented by the
petitioners failed to establish by preponderant evidence
that they have indeed spent the amounts they claim.
Based on the arguments presented by both parties, we
agree with the observation of the CA that:
“Petitioners did not present any convincing evidence of
proof which could support their allegation on structural
defects and the subsequent repairs made on the leased
premises, i.e. documentary evidence (receipts of
payments made to subcontractor Tamayo for the repairs
made on the building) except for the self-serving
testimony of petitioner Lao. They (petitioners) merely
submitted an estimated statement of account which did
not show that there were actual expenses made for the
alleged structural defects. Neither were they able to
submit proofs of actual expenses made on the alleged
structural defects. Besides, it is contrary to human
experience that a lessee would continually renew the
lease contract if the subject property were not in good
condition free from structural defects.
Further, the testimony of Tamayo, the alleged
subcontractor who made the repairs on the leased
premises did not convince Us that there were repairs
made thereat since he failed to present any receipts of
acknowledgments of payments which was allegedly
made to him.”[30]
Further manifesting the present appeal’s lack of merit,
petitioner Lao, as shown above in his testimony, did not
define the lessor’s and the lessees’ understanding of the
demarcation between “repairs of structural defects” and
“necessary repairs.” Even petitioners’ second witness,
Gregorio Tamayo, the contractor who supposedly
performed the repair work on the leased premises, did
not credibly and categorically testify on classification of
structural repairs:
Q: Insofar as you are concerned, what do you mean
by structural?
A: Because when I inspect the building…
Q: In this room, what is the structural defect?
A: Rocks on the wall.
Q: It has something to do with the foundation?
A: Maybe, sir.[31] (Emphasis supplied)
The petitioners attempted to prove that they spent for the
repair of the roofing, ceiling and flooring, as well as for
waterproofing. However, they failed to appreciate that, as
per their lease contract, only structural repairs are for the
account of the lessor, herein respondent SPI. In which
case, they overlooked the need to establish that
aforesaid repairs are structural in nature, in the context of
their earlier agreement. It would have been an altogether
different matter if the lessor was informed of the said
structural repairs and he implicitly or expressly
consented and agreed to take responsibility for the said
expenses. Such want of evidence on this respect is fatal
to this appeal. Consequently, their claim remains
unliquidated and, legal compensation is inapplicable.
For failure to timely appeal the RTC Decision before the
CA and subsequently the latter’s Decision before this
Court, SPI can no longer ask for affirmative reliefs.
In its Memorandum, SPI prays that petitioners be
ordered to pay 3% interest monthly as stipulated in the
Contract for Lease, plus attorney’s fees. However, as
SPI did not appeal the RTC Decision before the
appellate court, we cannot act on the same.
It is well-settled that a party who has not appealed from a
Decision cannot seek any relief other than what is
provided in the judgment appealed from.[32] SPI did not
appeal, thus it cannot obtain from the appellate court any
affirmative relief other than those granted in the Decision
of the court below.[33] It can only advance any argument
that it may deem necessary to defeat petitioners’ claim or
to uphold the Decision that is being disputed, and it can
assign errors in its brief if such is required to strengthen
the views expressed by the court a quo.[34] These
assigned errors, in turn, may be considered by the
appellate court solely to maintain the appealed decision
on other grounds, but not for the purpose of reversing or
modifying the judgment in SPI’s favor and giving it other
reliefs.[35]
We find on record that SPI’s counsel, with the
concurrence of its Vice President, withdrew his
appearance on November 24, 2000. The RTC granted
said withdrawal in its Order dated January 5, 2001.
Subsequently, the case was decided by the RTC and
appealed by the petitioners to the CA. In due time, the
CA rendered judgment on the same and petitioners filed
this Petition for Review on Certiorari. SPI did not
interpose an appeal from the RTC Decision nor from the
CA Decision. After more than six years, on September
13, 2007, a new law firm entered its appearance as
counsel of SPI.[36] SPI now claims that it was not able to
appeal the Decision of the RTC and subsequently of the
CA which failed to impose 3% monthly interest as
provided in the Contract of Lease because it never
received said Decisions, considering that its counsel has
migrated to another country and that petitioners misled
the courts about SPI’s address.[37]
We are not persuaded. SPI failed to exercise due
diligence in keeping itself updated on the developments
of the case. That its erstwhile counsel has not
communicated for a long period of time and has migrated
abroad, should have cautioned it that something was
amiss with the case. By that time, SPI should have
initiated moves to locate its counsel or to inquire from the
court on the progress of the case. It should have ensured
that its address on record with the court is updated and
current. Thus, it has been equally stressed that litigants
represented by counsel should not expect that all they
need to do is sit back, relax and await the outcome of the
case.[38] Instead, they should give the necessary
assistance to their counsel and exercise due diligence to
monitor the status of the case for what is at stake is
ultimately their interest.
WHEREFORE, the instant petition is DENIED. The June
30, 2003 Decision of the Court of Appeals in CA-G.R. SP
No. 76631 ordering the petitioners to pay P95,000.00 as
unpaid rentals and the August 9, 2004 Resolution
denying the motion for reconsideration are AFFIRMED.
SO ORDERED.
Petition denied, judgment affirmed.
Note.—For compensation to apply, among other
requisites, the two debts must be liquidated and
demandable already. (Premiere Development Bank vs.
Flores, 574 SCRA 66 [2008]) Lao vs. Special Plans, Inc.,
622 SCRA 27, G.R. No. 164791 June 29, 2010
----------------------------------------------------------------------------
---
G.R. No. 183774. November 14, 2012.*
PHILIPPINE BANKING CORPORATION, petitioner, vs.
ARTURO DY, BERNARDO DY, JOSE DELGADO and
CIPRIANA DELGADO, respondent.
Civil Law; Contracts; The subsequent nullification of title
to a property is not a ground to annul the contractual
right which may have been derived by a purchaser,
mortgagee or other transferee who acted in good faith.—
While it is settled that a simulated deed of sale is null and
void and therefore, does not convey any right that could
ripen into a valid title, it has been equally ruled that, for
reasons of public policy, the subsequent nullification of
title to a property is not a ground to annul the contractual
right which may have been derived by a purchaser,
mortgagee or other transferee who acted in good faith.
Same; Loans; Banks and Banking; Extraordinary
Diligence; In the case of banks and other financial
institutions, greater care and due diligence are required
since they are imbued with public interest, failing which
renders the mortgagees in bad faith. Thus, before
approving a loan application, it is a standard operating
practice for these institutions to conduct an ocular
inspection of the property offered for mortgage and to
verify the genuineness of the title to determine the real
owner(s) thereof.—Primarily, it bears noting that the
doctrine of “mortgagee in good faith” is based on the rule
that all persons dealing with property covered by a
Torrens Certificate of Title are not required to go beyond
what appears on the face of the title. This is in deference
to the public interest in upholding the indefeasibility of a
certificate of title as evidence of lawful ownership of the
land or of any encumbrance thereon. In the case of
banks and other financial institutions, however, greater
care and due diligence are required since they are
imbued with public interest, failing which renders the
mortgagees in bad faith. Thus, before approving a loan
application, it is a standard operating practice for these
institutions to conduct an ocular inspection of the
property offered for mortgage and to verify the
genuineness of the title to determine the real owner(s)
thereof. The apparent purpose of an ocular inspection is
to protect the “true owner” of the property as well as
innocent third parties with a right, interest or claim
thereon from a usurper who may have acquired a
fraudulent certificate of title thereto.
Same; Same; Same; Same; Nothing short of
extraordinary diligence is required of banks whose
business is impressed with public interest.—A finding of
negligence must always be contextualized in line with the
attendant circumstances of a particular case. As aptly
held in Philippine National Bank v. Heirs of Estanislao
Militar, 494 SCRA 308 (2006), “the diligence with which
the law requires the individual or a corporation at all
times to govern a particular conduct varies with the
nature of the situation in which one is placed, and the
importance of the act which is to be performed.” Thus,
without diminishing the time-honored principle that
nothing short of extraordinary diligence is required of
banks whose business is impressed with public interest,
Philbank’s inconsequential oversight should not and
cannot serve as a bastion for fraud and deceit.
Same; Fraud; Words and Phrases; Fraud comprises
“anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal
duty or equitable duty, trust, or confidence justly reposed,
resulting in damage to another, or by which an undue
and unconscientious advantage is taken of another.”—To
be sure, fraud comprises “anything calculated to deceive,
including all acts, omissions, and concealment involving
a breach of legal duty or equitable duty, trust, or
confidence justly reposed, resulting in damage to
another, or by which an undue and unconscientious
advantage is taken of another.” In this light, the Dys’ and
Sps. Delgado’s deliberate simulation of the sale intended
to obtain loan proceeds from and to prejudice Philbank
clearly constitutes fraudulent conduct. As such, Sps.
Delgado cannot now be allowed to deny the validity of
the mortgage executed by the Dys in favor of Philbank as
to hold otherwise would effectively sanction their blatant
bad faith to Philbank’s detriment.
PETITION for review on certiorari of a decision of the
Court of Appeals.
The facts are stated in the opinion of the Court.
E.F. Rosello & Associates Law Offices for petitioner.
Mario Ortiz for respondents Delgado.
Alentajan Law Office for respondents Dy.
PERLAS-BERNABE, J.:
This Petition for Review on Certiorari assails the January
30, 2008 Decision1 of the Court of Appeals (CA) in CA-
GR. CV No. 51672, which set aside the October 5, 1994
Dccision2 of the Regional Trial Court of Cebu City,
Branch 22 (RTC) and directed the Register of Deeds of
Cebu City to cancel Transfer Certificate of Title (TCT)
Nos. 517683 and 519014 in the names of respondents
Arturo Dy and Bernardo Dy (Dys) and to issue the
corresponding TCTs in the name of respondent Cipriana
Delgado (Cipriana).
The Factual Antecedents
Cipriana was the registered owner of a 58,129-square
meter (sq.m.) lot, denominated as Lot No. 6966, situated
in Barrio Tongkil, Minglanilla, Cebu, covered by TCT No.
18568. She and her husband, respondent Jose Delgado
(Jose), entered into an agreement with a certain Cecilia
Tan (buyer) for the sale of the said property for a
consideration of P10.00/sq.m. It was agreed that the
buyer shall make partial payments from time to time and
pay the balance when Cipriana and Jose (Sps. Delgado)
are ready to execute the deed of sale and transfer the
title to her.
At the time of sale, the buyer was already occupying a
portion of the property where she operates a noodle
(bihon) factory while the rest was occupied by tenants
which Sps. Delgado undertook to clear prior to full
payment. After paying the total sum of P147,000.00 and
being then ready to pay the balance, the buyer
demanded the execution of the deed, which was refused.
Eventually, the buyer learned of the sale of the property
to the Dys and its subsequent mortgage to petitioner
Philippine Banking Corporation (Philbank), prompting the
filing of the Complaint5 for annulment of certificate of
title, specific performance and/or reconveyance with
damages against Sps. Delgado, the Dys and Philbank.
In their Answer, Sps. Delgado, while admitting receipt of
the partial payments made by the buyer, claimed that
there was no perfected sale because the latter was not
willing to pay their asking price of P17.00/sq.m. They
also interposed a cross-claim against the Dys averring
that the deeds of absolute sale in their favor dated June
28, 19826 and June 30, 19827 covering Lot No. 6966
and the adjoining Lot No. 4100-A (on which Sps.
Delgado’s house stands), were fictitious and merely
intended to enable them (the Dys) to use the said
properties as collateral for their loan application with
Philbank and thereafter, pay the true consideration of
P17.00/sq.m. for Lot No. 6966. However, after receiving
the loan proceeds, the Dys reneged on their agreement,
prompting Sps. Delgado to cause the annotation of an
adverse claim on the Dys’ titles and to inform Philbank of
the simulation of the sale. Sps. Delgado, thus, prayed for
the dismissal of the complaint, with a counterclaim for
damages and a cross-claim against the Dys for the
payment of the balance of the purchase price plus
damages.
For their part, the Dys denied knowledge of the alleged
transaction between cross-claimants Sps. Delgado and
buyer. They claimed to have validly acquired the subject
property from Sps. Delgado and paid the full
consideration therefor as the latter even withdrew their
adverse claim and never demanded for the payment of
any unpaid balance.
On the other hand, Philbank filed its Answer8 asserting
that it is an innocent mortgagee for value without notice
of the defect in the title of the Dys. It filed a cross-claim
against Sps. Delgado and the Dys for all the damages
that may be adjudged against it in the event they are
declared seller and purchaser in bad faith, respectively.
In answer to the cross-claim, Sps. Delgado insisted that
Philbank was not a mortgagee in good faith for having
granted the loan and accepted the mortgage despite
knowledge of the simulation of the sale to the Dys and
for failure to verify the nature of the buyer’s physical
possession of a portion of Lot No. 6966. They thereby
prayed for the cancellation of the mortgage in Philbank’s
favor.
Subsequently, Sps. Delgado amended their cross-claim
against the Dys to include a prayer for the nullification of
the deeds of absolute sale in the latter’s favor and the
corresponding certificates of title, and for the consequent
reinstatement of Cipriana’s title.
The complaints against the Dys and Philbank were
subsequently withdrawn. On the other hand, both the
buyer and Sps. Delgado never presented any evidence
in support of their respective claims. Hence, the RTC
limited itself to the resolution of the claims of Sps.
Delgado, Philbank and the Dys against one another.
The RTC Ruling
In the Decision10 dated October 5, 1994, the RTC
dismissed the cross-claims of Sps. Delgado against the
Dys and Philbank. It noted that other than Sps.
Delgado’s bare allegation of the Dys’ supposed non-
payment of the full consideration for Lot Nos. 6966 and
4100-A, they failed to adduce competent evidence to
support their claim. On the other hand, the Dys
presented a cash voucher11 dated April 6, 1983 duly
signed by Sps. Delgado acknowledging receipt of the
total consideration for the two lots.
The RTC also observed that Sps. Delgado notified
Philbank of the purported simulation of the sale to the
Dys only after the execution of the loan and mortgage
documents and the release of the loan proceeds to the
latter, negating their claim of bad faith. Moreover, they
subsequently notified the bank of the Dys’ full payment
for the two lots mortgaged to it.
The CA Ruling
However, on appeal, the CA set aside12 the RTC’s
decision and ordered the cancellation of the Dys’
certificates of title and the reinstatement of Cipriana’s
title. It ruled that there were no perfected contracts of
sale between Sps. Delgado and the Dys in view of the
latter’s admission that the deeds of sale were purposely
executed to facilitate the latter’s loan application with
Philbank and that the prices indicated therein were not
the true consideration. Being merely simulated, the
contracts of sale were, thus, null and void, rendering the
subsequent mortgage of the lots likewise void.
The CA also declared Philbank not to be a mortgagee in
good faith for its failure to ascertain how the Dys
acquired the properties and to exercise greater care
when it conducted an ocular inspection thereof. It thereby
canceled the mortgage over the two lots.
The Petition
In the present petition, Philbank insists that it is a
mortgagee in good faith. It further contends that Sps.
Delgado are estopped from denying the validity of the
mortgage constituted over the two lots since they
participated in inducing Philbank to grant a loan to the
Dys.
On the other hand, Sps. Delgado maintain that Philbank
was not an innocent mortgagee for value for failure to
exercise due diligence in transacting with the Dys and
may not invoke the equitable doctrine of estoppel to
conceal its own lack of diligence.
For his part, Arturo Dy filed a Petition-in-Intervention13
arguing that while the deeds of absolute sale over the
two properties were admittedly simulated, the simulation
was only a relative one involving a false statement of the
price. Hence, the parties are still bound by their true
agreement. The same was opposed/objected to by both
Philbank14 and Sps. Delgado15 as improper,
considering that the CA judgment had long become final
and executory as to the Dys who neither moved for
reconsideration nor appealed the CA Decision.
The Ruling of the Court
The petition is meritorious.
At the outset, the Court takes note of the fact that the CA
Decision nullifying the questioned contracts of sale
between Sps. Delgado and the Dys had become final
and executory. Accordingly, the Petition-in-Intervention
filed by Arturo Dy, which seeks to maintain the subject
contracts’ validity, can no longer be entertained. The
cancellation of the Dys’ certificates of title over the
disputed properties and the issuance of new TCTs in
favor of Cipriana must therefore be upheld.
However, Philbank’s mortgage rights over the subject
properties shall be maintained. While it is settled that a
simulated deed of sale is null and void and therefore,
does not convey any right that could ripen into a valid
title,16 it has been equally ruled that, for reasons of
public policy,17 the subsequent nullification of title to a
property is not a ground to annul the contractual right
which may have been derived by a purchaser,
mortgagee or other transferee who acted in good faith.18
The ascertainment of good faith or lack of it, and the
determination of whether due diligence and prudence
were exercised or not, are questions of fact19 which are
generally improper in a petition for review on certiorari
under Rule 45 of the Rules of Court (Rules) where only
questions of law may be raised. A recognized exception
to the rule is when there are conflicting findings of fact by
the CA and the RTC,20 as in this case.
Primarily, it bears noting that the doctrine of “mortgagee
in good faith” is based on the rule that all persons dealing
with property covered by a Torrens Certificate of Title are
not required to go beyond what appears on the face of
the title. This is in deference to the public interest in
upholding the indefeasibility of a certificate of title as
evidence of lawful ownership of the land or of any
encumbrance thereon.21 In the case of banks and other
financial institutions, however, greater care and due
diligence are required since they are imbued with public
interest, failing which renders the mortgagees in bad
faith. Thus, before approving a loan application, it is a
standard operating practice for these institutions to
conduct an ocular inspection of the property offered for
mortgage and to verify the genuineness of the title to
determine the real owner(s) thereof.22 The apparent
purpose of an ocular inspection is to protect the “true
owner” of the property as well as innocent third parties
with a right, interest or claim thereon from a usurper who
may have acquired a fraudulent certificate of title
thereto.23
In this case, while Philbank failed to exercise greater
care in conducting the ocular inspection of the properties
offered for mortgage,24 its omission did not prejudice
any innocent
The fact that petitioners were able to secure titles in their
names did not operate to vest upon them ownership over
the subject properties. Registration under the Torrens
system does not create or vest title, but only confirms
and records title already existing and vested. It does not
protect a usurper from the true owner, and cannot be a
shield for the commission of fraud. See Campos v.
Pastrana, G.R. No. 175994, December 8, 2009, 608
SCRA 55, 68. third parties. In particular, the buyer did
not pursue her cause and abandoned her claim on the
property. On the other hand, Sps. Delgado were parties
to the simulated sale in favor of the Dys which was
intended to mislead Philbank into granting the loan
application. Thus, no amount of diligence in the conduct
of the ocular inspection could have led to the discovery
of the complicity between the ostensible mortgagors (the
Dys) and the true owners (Sps. Delgado). In fine,
Philbank can hardly be deemed negligent under the
premises since the ultimate cause of the mortgagors’
(the Dys’) defective title was the simulated sale to which
Sps. Delgado were privies.
Indeed, a finding of negligence must always be
contextualized in line with the attendant circumstances of
a particular case. As aptly held in Philippine National
Bank v. Heirs of Estanislao Militar,25 “the diligence with
which the law requires the individual or a corporation at
all times to govern a particular conduct varies with the
nature of the situation in which one is placed, and the
importance of the act which is to be performed.”26 Thus,
without diminishing the time-honored principle that
nothing short of extraordinary diligence is required of
banks whose business is impressed with public interest,
Philbank’s inconsequential oversight should not and
cannot serve as a bastion for fraud and deceit.
To be sure, fraud comprises “anything calculated to
deceive, including all acts, omissions, and concealment
involving a breach of legal duty or equitable duty, trust, or
confidence justly reposed, resulting in damage to
another, or by which an undue and unconscientious
advantage is taken of another.”27 In this light, the Dys’
and Sps. Delgado’s deliberate simulation of the sale
intended to obtain loan proceeds from and to prejudice
Philbank clearly constitutes fraudulent conduct. As such,
Sps. Delgado cannot now be allowed to deny the validity
of the mortgage executed by the Dys in favor of Philbank
as to hold otherwise would effectively sanction their
blatant bad faith to Philbank’s detriment.
Accordingly, in the interest of public policy, fair dealing,
good faith and justice, the Court accords Philbank the
rights of a mortgagee in good faith whose lien to the
securities posted must be respected and protected. In
this regard, Philbank is entitled to have its mortgage
carried over or annotated on the titles of Cipriana
Delgado over the said properties.
WHEREFORE, the assailed January 30, 2008 Decision
of the Court of Appeals in CA-GR. CV No. 51672 is
hereby AFFIRMED with MODIFICATION upholding the
mortgage rights of petitioner Philippine Banking
Corporation over the subject properties.
SO ORDERED.
Judgment affirmed with modification.
Notes.—It is settled that banks, their business being
impressed with public interest, are expected to
exercise more care and prudence than private
individuals in their dealings, even those involving
registered lands; The rule that persons dealing with
registered lands can rely solely on the certificate of
title does not apply to banks. (Philippine Trust
Company vs. Court of Appeals, 635 SCRA 518 [2010])
Banks are expected to exercise greater care and
prudence than others in their dealings because their
business is impressed with public interest.
(Metropolitan Bank & Trust Co. [Metrobank] vs.
Tobias III, 664 SCRA 165 [2012]
----------------------------------------------------------------------------
-
G.R. No. 175863. February 18, 2015.*
NATIONAL POWER CORPORATION, petitioner, vs.
LUCMAN M. IBRAHIM, ATTY. OMAR G. MARUHOM,
ELIAS G. MARUHOM, BUCAY G. MARUHOM, MAMOD
G. MARUHOM, FAROUK G. MARUHOM, HIDJARA G.
MARUHOM, ROCANIA G. MARUHOM, POTRISAM G.
MARUHOM, LUMBA G. MARUHOM, SINAB G.
MARUHOM, ACMAD G. MARUHOM, SOLAYMAN G.
MARUHOM, MOHAMAD M. IBRAHIM, CAIRONESA M.
 IBRAHIM and MACAPANTON K. MANGONDATO,
respondents.
Civil Law; Bad Faith; A finding of bad faith usually
assumes the presence of two (2) elements: first, that the
actor knew or should have known that a particular course
of action is wrong or illegal, and second, that despite
such actual or imputable knowledge, the actor,
voluntarily, consciously and out of his own free will,
proceeds with such course of action.—Verily, the clear
denominator in all of the foregoing judicial
pronouncements is that the essence of bad faith consists
in the deliberate commission of a wrong. Indeed, the
concept has often been equated with malicious or
fraudulent motives, yet distinguished from the mere
unintentional wrongs resulting from mere simple
negligence or oversight. A finding of bad faith, thus,
usually assumes the presence of two (2) elements: first,
that the actor knew or should have known that a
particular course of action is wrong or illegal, and
second, that despite such actual or imputable
knowledge, the actor, voluntarily, consciously and out of
his own free will, proceeds with such course of action.
Only with the concurrence of these two elements can we
begin to consider that the wrong committed had been
done deliberately and, thus, in bad faith.
Same; Payment; Possessor of Credit; The law considers
the payment to the “possessor of credit” as valid even as
against the real creditor taking into account the good
faith of the debtor.—Should the Ibrahims and Maruhoms
turn out to be the real owners of the subject land,
petitioner’s previous payment to Mangondato pursuant to
Civil Case No. 605-92 and Civil Case No. 610-92 —
given the absence of bad faith on petitioner’s part as
previously discussed — may nonetheless be considered
as akin to a payment made in “good faith” to a person in
“possession of credit” per Article 1242 of the Civil Code
that, just the same, extinguishes its obligation to pay for
the rental fees and expropriation indemnity due for the
subject land. Article 1242 of the Civil Code reads:
“Payment made in good faith to any person in
possession of the credit shall release the debtor.” Article
1242 of the Civil Code is an exception to the rule that a
valid payment of an obligation can only be made to the
person to whom such obligation is rightfully owed. It
contemplates a situation where a debtor pays a
“possessor of credit” i.e., someone who is not the real
creditor but appears, under the circumstances, to be the
real creditor. In such scenario, the law considers the
payment to the “possessor of credit” as valid even as
against the real creditor taking into account the good
faith of the debtor.
PETITION for review on certiorari of the decision and
resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
The Solicitor General for petitioner.
Romero A. Boniel and Dipatuan P. Umpa for the heirs
of respondent Lucman Ibrahim.
Dimnatang Saro for respondents O. Maruhom, et al.
Nasser A. Marohomsalic for the heirs of respondent
Macapanton Mangondato.
Luzviminda R. Zuñiga for the heirs of respondent Berua
Ibrahim.
At bench is a petition for review on certiorari1 assailing
the Decision2 dated 24 June 2005 and Resolution3
dated 5 December 2006 of the Court of Appeals in C.A.-
G.R. CV No. 68061.
The facts:
The Subject Land
In 1978, petitioner took possession of a 21,995-square-
meter parcel of land in Marawi City (subject land) for the
purpose of building thereon a hydroelectric power plant
pursuant to its Agus 1 project. The subject land, while in
truth a portion of a private estate registered under
Transfer Certificate of Title (TCT) No. 378-A4 in the
name of herein respondent Macapanton K. Mangondato
(Mangondato),5 was occupied by petitioner under the
mistaken belief that such land is The resolution was
penned by Associate Justice Edgardo A. Camello for the
Special Former Twenty-Third Division of the Court of
Appeals, with Associate Justices Teresita Dy-Liacco
Flores and Romulo V. Borja, concurring; id., at pp. 49-51.
part of the vast tract of public land reserved for its use by
the government under Proclamation No. 1354, S. 1974.6
Mangondato first discovered petitioner’s occupation of
the subject land in 1979 — the year that petitioner
started its construction of the Agus 1 plant. Shortly after
such discovery, Mangondato began demanding
compensation for the subject land from petitioner.
In support of his demand for compensation, Mangondato
sent to petitioner a letter7 dated 28 September 1981
wherein the former detailed the origins of his ownership
over the lands covered by TCT No. 378-A, including the
subject land. The relevant portions of the letter read:
Now let me trace the basis of the title to the land
adverted to for particularity. The land titled in my name
was originally consisting of seven (7) hectares. This
piece of land was particularly set aside by the Patriarch
Maruhom, a fact recognized by all royal datus of Guimba,
to belong to his eldest son, Datu Magayo-ong Maruhom.
This is the very foundation of the right and ownership
over the land in question which was titled in my name
because as the son-in-law of Hadji Ali Maruhom the
eldest son of, and only lawyer among the descendants of
Datu Magayo-ong Maruhom, the authority and right to
apply for the title to the land was given to me by said
heirs after mutual agreement among themselves besides
the fact that I have already bought a substantial portion
of the original seven (7) hectares.
The original title of this seven (7) hectares has been
subdivided into several TCTs for the other children of
Datu Magayo-ong Maruhom with whom I have executed
a quitclaim. Presently, only three (3) hectares is left to
me out
of the original seven (7) hectares representing those
portion [sic] belonging to my wife and those I have
bought previously from other heirs. This is now the
subject of this case.8
Petitioner, at first, rejected Mangondato’s claim of
ownership over the subject land; the former then
adamant in its belief that the said land is public land
covered by Proclamation No. 1354, S. 1974. But, after
more than a decade, petitioner finally acquiesced to the
fact that the subject land is private land covered by TCT
No. 378-A and consequently acknowledged
Mangondato’s right, as registered owner, to receive
compensation therefor.
Thus, during the early 1990s, petitioner and Mangondato
partook in a series of communications aimed at settling
the amount of compensation that the former ought to pay
the latter in exchange for the subject land. Ultimately,
however, the communications failed to yield a genuine
consensus between petitioner and Mangondato as to the
fair market value of the subject land.
Civil Case No. 605-92 and Civil Case No. 610-92
With an agreement basically out of reach, Mangondato
filed a complaint for reconveyance against petitioner
before the Regional Trial Court (RTC) of Marawi City in
July 1992. In his complaint, Mangondato asked for,
among others, the recovery of the subject land and the
payment by petitioner of a monthly rental from 1978 until
the return of such land. Mangondato’s complaint was
docketed as Civil Case No. 605-92.
For its part, petitioner filed an expropriation complaint9
before the RTC on 27 July 1992. Petitioner’s complaint
was docketed as Civil Case No. 610-92.
Later, Civil Case No. 605-92 and Civil Case No. 610-92
were consolidated before Branch 8 of the Marawi City
RTC.
On 21 August 1992, Branch 8 of the Marawi City RTC
rendered a Decision10 in Civil Case No. 605-92 and Civil
Case No. 610-92. The decision upheld petitioner’s right
to expropriate the subject land: it denied Mangondato’s
claim for reconveyance and decreed the subject land
condemned in favor of the petitioner, effective July of
1992, subject to payment by the latter of just
compensation in the amount of P21,995,000.00. Anent
petitioner’s occupation of the subject land from 1978 to
July of 1992, on the other hand, the decision required the
former to pay rentals therefor at the rate of P15,000.00
per month with 12% interest per annum. The decision’s
fallo reads:
WHEREFORE, the prayer in the recovery case for
[petitioner’s] surrender of the property is denied but
[petitioner] is ordered to pay monthly rentals in the
amount of P15,000.00 from 1978 up to July 1992 with
12% interest per annum x x x and the property is
condemned in favor of [petitioner] effective July 1992
upon payment of the fair market value of the property at
One Thousand (P1,000.00) Pesos per square meter or a
total of Twenty-One Million Nine Hundred Ninety-Five
Thousand (P21,995,000.00) [P]esos.11
Disagreeing with the amount of just compensation that it
was adjudged to pay under the said decision, petitioner
filed an appeal with the Court of Appeals. This appeal
was docketed in the Court of Appeals as C.A.-G.R. CV
No. 39353.
During the pendency of C.A.-G.R. CV No. 39353, or on
29 March 1993, herein respondents the Ibrahims and
Maruhoms12 filed before the RTC of Marawi City a
complaint13 against Mangondato and petitioner. This
complaint was docketed as Civil Case No. 967-93 and
was raffled to Branch 10 of the Marawi City RTC.
In their complaint, the Ibrahims and Maruhoms disputed
Mangondato’s ownership of the lands covered by TCT
No. 378-A, including the subject land. The Ibrahims and
Maruhoms asseverate that they are the real owners of
the lands covered by TCT No. 378-A; they being the
lawful heirs of the late Datu Magayo-ong Maruhom, who
was the original proprietor of the said lands.14 They also
claimed that Mangondato actually holds no claim or right
over the lands covered by TCT No. 378-A except that of
a trustee who merely holds the said lands in trust for
them.15
The Ibrahims and Maruhoms submit that since they are
the real owners of the lands covered by TCT No. 378-A,
they should be the ones entitled to any rental fees or
expropriation indemnity that may be found due for the
subject land.
Hence, the Ibrahims and Maruhoms prayed for the
following reliefs in their complaint:
1. That Mangondato be ordered to execute a Deed of
Conveyance transferring to them the ownership of the
lands covered by TCT No. 378-A;
2. That petitioner be ordered to pay to them whatever
indemnity for the subject land it is later on adjudged to
pay in Civil Case No. 605-92 and Civil Case No. 610-92;
3. That Mangondato be ordered to pay to them any
amount that the former may have received from the
petitioner by way of indemnity for the subject land; and
4. That petitioner and Mangondato be ordered jointly and
severally liable to pay attorney’s fees in the sum of
P200,000.00.
In the same complaint, the Ibrahims and Maruhoms also
prayed for the issuance of a temporary restraining order
(TRO) and a writ of preliminary injunction to enjoin
petitioner, during the pendency of the suit, from making
any payments to Mangondato concerning expropriation
indemnity for the subject land.17
On 30 March 1993, Branch 10 of the Marawi City RTC
granted the prayer of the Ibrahims and Maruhoms for the
issuance of a TRO.18 On 29 May 1993, after conducting
an appropriate hearing for the purpose, the same court
likewise granted the prayer for the issuance of a writ of
preliminary injunction.19
In due course, trial then ensued in Civil Case No. 967-93.
The Decision of the Court of Appeals in C.A.-G.R. CV
No. 39353 and the Decision of this Court in G.R. No.
113194
On 21 December 1993, the Court of Appeals rendered a
Decision in C.A.-G.R. CV No. 39353 denying the appeal
of petitioner and affirming in toto the 21 August 1992
Decision in Civil Case No. 605-92 and Civil Case No.
610-92. Undeterred, petitioner next filed a petition for
review on certiorari with this Court that was docketed
herein as G.R. No. 113194.20
On 11 March 1996, we rendered our Decision in G.R.
No. 113194 wherein we upheld the Court of Appeals’
denial of petitioner’s appeal.21 In the same decision, we
likewise sustained the appellate court’s affirmance of the
decision in Civil Case No. 605-92 and Civil Case No.
610-92 subject only to a reduction of the rate of interest
on the monthly rental fees from 12% to 6% per annum.22
Our decision in G.R. No. 113194 eventually became final
and executory on 13 May 1996.23
Execution of the 21 August 1992 Decision in Civil Case
No. 605-92 and Civil Case No. 610-92, as Modified
In view of the finality of this Court’s decision in G.R. No.
113194, Mangondato filed a motion for execution of the
decision in Civil Case No. 605-92 and Civil Case No.
610-92.24 Against this motion, however, petitioner filed
an opposition.25
In its opposition, petitioner adverted to the existence of
the writ of preliminary injunction earlier issued in Civil
Case No. 967-93 that enjoins it from making any
payment of expropriation indemnity over the subject land
in favor of Mangondato.26 Petitioner, in sum, posits that
such writ of preliminary injunction constitutes a legal
impediment that effectively bars any meaningful
execution of the decision in Civil Case No. 605-92 and
Civil Case No. 610-92.
Finding no merit in petitioner’s opposition, however,
Branch 8 of the Marawi City RTC rendered a
Resolution27 dated 4 June 1996 ordering the issuance of
a writ of execution in favor of Mangondato in Civil Case
No. 605-92 and Civil Case No. 610-92. Likewise, in the
same resolution, the trial court ordered the issuance of a
notice of garnishment against several of petitioner’s bank
accounts28 for the amount of P21,801,951.00 — the
figure representing the total amount of judgment debt
due from petitioner in Civil Case No. 605-92 and Civil
Case No. 610-92 less the amount then already settled by
the latter. The dispositive portion of the resolution reads:
WHEREFORE, let a Writ of Execution and the
corresponding order or notice of garnishment be
immediately issued against [petitioner] and in favor of
[Mangondato] for the amount of Twenty-One Million Eight
Hundred One Thousand and Nine Hundred Fifty-One
(P21,801,951.00) Pesos.
Pursuant to the above resolution, a notice of
garnishment30 dated 5 June 1996 for the amount of
P21,801,951.00 was promptly served upon the Philippine
National Bank (PNB) — the authorized depositary of
petitioner. Consequently, the amount thereby garnished
was paid to Mangondato in full satisfaction of petitioner’s
judgment debt in Civil Case No. 605-92 and Civil Case
No. 610-92.
Upon the other hand, on 16 April 1998, Branch 10 of the
Marawi City RTC decided Civil Case No. 967-93.31 In its
decision, Branch 10 of the Marawi City RTC made the
following relevant findings:32
1. The Ibrahims and Maruhoms — not Mangondato —
are the true owners of the lands covered by TCT No.
378-A, which includes the subject land.
2. The subject land, however, could no longer be
reconveyed to the Ibrahims and Maruhoms since the
same was already expropriated and paid for by the
petitioner under Civil Case No. 605-92 and Civil Case
No. 610-92.
3. Be that as it may, the Ibrahims and Maruhoms, as true
owners of the subject land, are the rightful recipients of
whatever rental fees and indemnity that may be due for
the subject land as a result of its expropriation.
Consistent with the foregoing findings, Branch 10 of the
Marawi City RTC thus required payment of all the rental
fees and expropriation indemnity due for the subject
land, as previously adjudged in Civil Case No. 605-92
and Civil Case No. 610-92, to the Ibrahims and
Maruhoms.
Notable in the trial court’s decision, however, was that it
held both Mangondato and the petitioner solidarily liable
to the Ibrahims and Maruhoms for the rental fees and
expropriation indemnity adjudged in Civil Case No. 605-
92 and Civil Case No. 610-92.33
In addition, Mangondato and petitioner were also
decreed solidarily liable to the Ibrahims and Maruhoms
for attorney’s fees in the amount of P200,000.00.34
The pertinent dispositions in the decision read:
WHEREFORE, premises considered, judgment is hereby
rendered in favor of [the Ibrahims and Maruhoms] and
against [Mangondato and petitioner] as follows:
1. x x x
2. Ordering [Mangondato and petitioner] to pay jointly
and severally [the Ibrahims and Maruhoms] all forms of
expropriation indemnity as adjudged for [the subject land]
consisting of 21,995 square meters in the amount of
P21,801,051.00 plus other forms of indemnity such as
rentals and interests;
3. Ordering [Mangondato and petitioner] to pay [the
Ibrahims and Maruhoms] jointly and severally the sum of
P200,000.00 as attorney’s fees;
SO ORDERED.35
Petitioner’s Appeal to the Court of Appeals and the
Execution Pending Appeal of the Decision in Civil Case
No. 967-93
Petitioner appealed the decision in Civil Case No. 967-93
with the Court of Appeals: contesting mainly the holding
in the said decision that it ought to be solidarily liable with
Mangondato to pay to the Ibrahims and Maruhoms the
rental fees and expropriation indemnity adjudged due for
the subject land. This appeal was docketed as C.A.-G.R.
CV No. 68061.
While the foregoing appeal was still pending decision by
the Court of Appeals, however, the Ibrahims and
Maruhoms were able to secure with the court a quo a
writ of execution pending appeal36 of the decision in
Civil Case No. 967-93. The enforcement of such writ led
to the garnishment of Mangondato’s moneys in the
possession of the Social Security System (SSS) in the
amount of P2,700,000.00 on 18 September 1998.37
Eventually, the amount thereby garnished was paid to
the Ibrahims and Mangondato in partial satisfaction of
the decision in Civil Case No. 967-93.
On 24 June 2005, the Court of Appeals rendered its
Decision38 in C.A.-G.R. CV No. 68061 denying
petitioner’s appeal. The appellate court denied
petitioner’s appeal and affirmed the decision in Civil
Case No. 967-93, subject to the right of petitioner to
deduct the amount of P2,700,000.00 from its liability as a
consequence of the partial execution of the decision in
Civil Case No. 967-93.39
Hence, the present appeal by petitioner.
The Present Appeal
The present appeal poses the question of whether it is
correct, in view of the facts and circumstances in this
case, to hold petitioner liable in favor of the Ibrahims and
Maruhoms for the rental fees and expropriation indemnity
adjudged due for the subject land.
In their respective decisions, both Branch 10 of the
Marawi City RTC and the Court of Appeals had
answered the foregoing question in the affirmative. The
two tribunals postulated that, notwithstanding petitioner’s
previous payment to Mangondato of the rental fees and
expropriation indemnity as a consequence of the
execution of the decision in Civil Case No. 605-92 and
610-92, petitioner may still be held liable to the Ibrahims
and Maruhoms for such fees and indemnity because its
previous payment to Mangondato was tainted with “bad
faith.”40 As proof of such bad faith, both courts cite the
following considerations:41
1. Petitioner “allowed” payment to Mangondato despite
its prior knowledge, which dates back as early as 28
September 1981, by virtue of Mangondato’s letter of
even date, that the subject land was owned by a certain
Datu Magayo-ong Maruhom and not by Mangondato;
and
2. Petitioner “allowed” such payment despite the
issuance of a TRO and a writ of preliminary injunction in
Civil Case No. 967-93 that precisely enjoins it from doing
so.
For the two tribunals, the bad faith on the part of
petitioner rendered its previous payment to Mangondato
invalid insofar as the Ibrahims and Maruhoms are
concerned. Hence, both courts concluded that petitioner
may still be held liable to the Ibrahims and Maruhoms for
the rental fees and expropriation indemnity previously
paid to Mangondato.42
Petitioner, however, argues otherwise. It submits that a
finding of bad faith against it would have no basis in fact
and law, given that it merely complied with the final and
executory decision in Civil Case No. 605-92 and Civil
Case No. 610-92 when it paid the rental fees and
expropriation indemnity due the subject to
Mangondato.43 Petitioner thus insists that it should be
absolved from any liability to pay the rental fees and
expropriation indemnity to the Ibrahims and Maruhoms
and prays for the dismissal of Civil Case No. 967-93
against it.
Our Ruling
We grant the appeal. No Bad Faith on the Partof
Petitioner
Petitioner is correct. No “bad faith” may be taken against
it in paying Mangondato the rental fees and expropriation
indemnity due the subject land.
Our case law is not new to the concept of bad faith.
Decisions of this Court, both old and new, had been
teeming with various pronouncements that illuminate the
concept amidst differing legal contexts. In any attempt to
understand the basics of bad faith, it is mandatory to take
a look at some of these pronouncements:
In Lopez, et al. v. Pan American World Airways,44 a
1966 landmark tort case, we defined the concept of bad
faith as:
“…a breach of a known duty through some motive of
interest or ill will.”45
Just months after the promulgation of Lopez, however,
came the case of Air France v. Carrascoso, et al.,46 In
Air France, we expounded on Lopez’s definition by
describing bad faith as:
“x x x a state of mind affirmatively operating with furtive
design or with some motive of self-interest or will or for
ulterior purpose.”47
Air France’s articulation of the meaning of bad faith was,
in turn, echoed in a number subsequent cases,48 one of
which, is the 2009 case of Balbuena, et al. v. Sabay, et
al.49
In the 1967 case of Board of Liquidators v. Heirs of M.
Kalaw,50 on the other hand, we enunciated one of the
more oft-repeated formulations of bad faith in our case
law:
“x x x bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of wrong. It means
breach of a known duty thru some motive or interest of ill
will; it partakes of the nature of fraud.”51
As a testament to its enduring quality, the foregoing
pronouncement in Board of Liquidators had been
reiterated in a slew of later cases,52 more recently, in the
2009 case of Nazareno, et al. v. City of Dumaguete53
and the 2012 case of Aliling v. Feliciano.54
Still, in 1995, the case of Far East Bank and Trust
Company v. Court of Appeals55 contributed the following
description of bad faith in our jurisprudence:
“Malice or bad faith implies a conscious and intentional
design to do a wrongful act for a dishonest purpose or
moral obliquity; x x x.”56
The description of bad faith in Far East Bank and Trust
Company then went on to be repeated in subsequent
cases such as 1995’s Ortega v. Court of Appeals,57
1997’s Laureano Investment and Development
Corporation v. Court of Appeals,58 2010’s Lambert
Pawnbrokers v. Binamira59 and 2013’s California
Clothing, Inc., v. Quiñones,60 to name a few.
Verily, the clear denominator in all of the foregoing
judicial pronouncements is that the essence of bad faith
consists in the deliberate commission of a wrong.
Indeed, the concept has often been equated with
malicious or fraudulent motives, yet distinguished from
the mere unintentional wrongs resulting from mere
simple negligence or oversight.61
A finding of bad faith, thus, usually assumes the
presence of two (2) elements: first, that the actor knew or
should have known that a particular course of action is
wrong or illegal, and second, that despite such actual or
imputable knowledge, the actor, voluntarily, consciously
and out of his own free will, proceeds with such course of
action. Only with the concurrence of these two elements
can we begin to consider that the wrong committed had
been done deliberately and, thus, in bad faith.
In this case, both Branch 10 of the Marawi City RTC and
the Court of Appeals held that petitioner was in bad faith
when it paid to Mangondato the rental fees and
expropriation indemnity due the subject land. The two
tribunals, in substance, fault petitioner when it “allowed”
such payment to take place despite the latter’s alleged
knowledge of the existing claim of the Ibrahims and
Maruhoms upon the subject land and the issuance of a
TRO in Civil Case No. 967-93. Hence, the two tribunals
claim that petitioner’s payment to Mangondato is
ineffective as to the Ibrahims and Maruhoms, whom they
found to be the real owners of the subject land.
We do not agree.
Branch 10 of the Marawi City RTC and the Court of
Appeals erred in their finding of bad faith because they
have overlooked the utter significance of one important
fact: that petitioner’s payment to Mangondato of the
rental fees and expropriation indemnity adjudged due for
the subject land in Civil Case No. 605-92 and Civil Case
No. 610-92, was required by the final and executory
decision in the said two cases and was compelled thru a
writ of garnishment issued by the court that rendered
such decision. In other words, the payment to
Mangondato was not a product of a deliberate choice on
the part of the petitioner but was made only in
compliance to the lawful orders of a court with
jurisdiction.
Contrary then to the view of Branch 10 of the Marawi City
RTC and of the Court of Appeals, it was not the petitioner
that “allowed” the payment of the rental fees and
expropriation indemnity to Mangondato. Indeed, given
the circumstances, the more accurate rumination would
be that it was the trial court in Civil Case No. 605-92 and
Civil Case No. 610-92 that ordered or allowed the
payment to Mangondato and that petitioner merely
complied with the order or allowance by the trial court.
Since petitioner was only acting under the lawful orders
of a court in paying Mangondato, we find that no bad
faith can be taken against it, even assuming that
petitioner may have had prior knowledge about the
claims of the Ibrahims and Maruhoms upon the subject
land and the TRO issued in Civil Case No. 967-93.
Sans Bad Faith, Petitioner cannot be held Liable to the
Ibrahims and Maruhoms Without the existence of bad
faith, the ruling of the RTC and of the Court of Appeals
apropos petitioner’s remaining liability to the Ibrahims
and Maruhoms becomes devoid of legal basis. In fact,
petitioner’s previous payment to Mangondato of the
rental fees and expropriation indemnity due the subject
land pursuant to the final judgment in Civil Case No. 605-
92 and Civil Case No. 610-92 may be considered to have
extinguished the former’s obligation regardless of who
between Mangondato, on one hand, and the Ibrahims
and Maruhoms, on the other, turns out to be the real
owner of the subject land.62 Either way, petitioner
cannot be made liable to the Ibrahims and Maruhoms:
First. If Mangondato is the real owner of the subject land,
then the obligation by petitioner to pay for the rental fees
and expropriation indemnity due the subject land is
already deemed extinguished by the latter’s previous
payment under the final judgment in Civil Case No. 605-
92 and Civil Case No. 610-92. This would be a simple
case of an obligation being extinguished through
payment by the debtor to its creditor.63 Under this
scenario, the Ibrahims and Maruhoms would not even be
entitled to receive anything from anyone for the sub- It
may be stressed at this point that the present appeal
does not deal with the issue of who is the rightful owner
of the subject land. Rather, the issue in this appeal is
limited only to the subsisting liability of petitioner to the
Ibrahims and Maruhoms, if any.ject land. Hence,
petitioner cannot be held liable to the Ibrahims and
Maruhoms.
Second. We, however, can reach the same conclusion
even if the Ibrahims and Maruhoms turn out to be the
real owners of the subject land.
Should the Ibrahims and Maruhoms turn out to be the
real owners of the subject land, petitioner’s previous
payment to Mangondato pursuant to Civil Case No. 605-
92 and Civil Case No. 610-92 — given the absence of
bad faith on petitioner’s part as previously discussed —
may nonetheless be considered as akin to a payment
made in “good faith” to a person in “possession of credit”
per Article 1242 of the Civil Code that, just the same,
extinguishes its obligation to pay for the rental fees and
expropriation indemnity due for the subject land. Article
1242 of the Civil Code reads:
“Payment made in good faith to any person in
possession of the credit shall release the debtor.”
Article 1242 of the Civil Code is an exception to the rule
that a valid payment of an obligation can only be made to
the person to whom such obligation is rightfully owed.64
It contemplates a situation where a debtor pays a
“possessor of credit” i.e., someone who is not the real
creditor but appears, under the circumstances, to be the
real creditor.65 In such scenario, the law considers the
payment to the “possessor of credit” as valid even as
against the real creditor taking into account the good
faith of the debtor.
Borrowing the principles behind Article 1242 of the Civil
Code, we find that Mangondato — being the judgment
creditor in Civil Case No. 605-92 and Civil Case No. 610-
92 as well as the registered owner of the subject land at
the time66 — may be considered as a “possessor of
credit” with respect to the rental fees and expropriation
indemnity adjudged due for the subject land in the two
cases, if the Ibrahims and Maruhoms turn out to be the
real owners of the subject land. Hence, petitioner’s
payment to Mangondato of the fees and indemnity due
for the subject land as a consequence of the execution of
Civil Case No. 605-92 and Civil Case No. 610-92 could
still validly extinguish its obligation to pay for the same
even as against the Ibrahims and Maruhoms.
Effect of Extinguishment of Petitioner’s Obligation
The extinguishment of petitioner’s obligation to pay for
the rental fees and expropriation indemnity due the
subject land carries with it certain legal effects:
First. If Mangondato turns out to be the real owner of the
subject land, the Ibrahims and Maruhoms would not be
entitled to recover anything from anyone for the subject
land. Consequently, the partial execution of the decision
in Civil Case No. 967-93 that had led to the garnishment
of Mangondato’s moneys in the possession of the Social
Security System (SSS) in the amount of P2,700,000.00
in favor of the Ibrahims and Maruhoms, becomes
improper and unjustified. In this event, therefore, the
Ibrahims and Maruhoms may be ordered to return the
amount so garnished to Mangondato.
Otherwise, i.e., if the Ibrahims and Maruhoms really are
the true owners of the subject land, they may only
recover the rental fees and expropriation indemnity due
the subject land against Mangondato but only up to
whatever payments the latter had previously received
from petitioner pursuant to Civil Case No. 605-92 and
Civil Case No. 610-
Second. At any rate, the extinguishment of petitioner’s
obligation to pay for the rental fees and expropriation
indemnity due the subject land negates whatever cause
of action the Ibrahims and Maruhoms might have had
against the former in Civil Case No. 967-93. Hence,
regardless of who between Mangondato, on one hand,
and the Ibrahims and Maruhoms, on the other, turns out
to be the real owner of the subject land, the dismissal of
Civil Case No. 967-93 insofar as petitioner is concerned
is called for.
Re: Attorney’s Fees
The dismissal of Civil Case No. 967-93 as against
petitioner necessarily absolves the latter from paying
attorney’s fees to the Ibrahims and Maruhoms arising
from that case.
WHEREFORE, premises considered, the instant petition
is GRANTED. The Decision dated 24 June 2005 and
Resolution dated 5 December 2006 of the Court of
Appeals in C.A.-G.R. CV No. 68061 is hereby SET
ASIDE. The Decision dated 16 April 1998 of the Regional
Trial Court in Civil Case No. 967-93 is MODIFIED in that
petitioner is absolved from any liability in that case in
favor of the respondents Lucman M. Ibrahim, Atty. Omar
G. Maruhom, Elias G. Maruhom, Bucay G. Maruhom,
Mamod G. Maruhom, Farouk G. Maruhom, Hidjara G.
Maruhom, Rocania G. Maruhom, Potrisam G. Maruhom,
Lumba G. Maruhom, Sinab G. Maruhom, Acmad G.
Maruhom, Solayman G. Maruhom, Mohamad M. Ibrahim
and Caironesa M. Ibrahim. Civil Case No. 967-93 is
DISMISSED as against petitioner.No costs.
SO ORDERED.
Petition granted, judgment and resolution set aside.
Notes.—Bad faith cannot be presumed. “It is a
question of fact that must be proven” by clear and
convincing evidence. (Vilbar vs. Opinion, 713 SCRA
428 [2014])
The existence of bad faith is a question of fact and is
evidentiary. (Tabangao Shell Refinery Employees
Association vs. Pilipinas Shell Petroleum
Corporation, 720 SCRA 631 [2014])
----------------------------------------------------------------------------
---
NATIONAL POWER CORPORATION, petitioner, vs.
LUCMAN M. IBRAHIM, ATTY. OMAR G. MARUHOM,
ELIAS G. MARUHOM, BUCAY G. MARUHOM, MAMOD
G. MARUHOM, FAROUK G. MARUHOM, HIDJARA G.
MARUHOM, ROCANIA G. MARUHOM, POTRISAM G.
MARUHOM, LUMBA G. MARUHOM, SINAB G.
MARUHOM, ACMAD G. MARUHOM, SOLAYMAN G.
MARUHOM, MOHAMAD M. IBRAHIM, CAIRONESA M.
IBRAHIM and MACAPANTON K. MANGONDATO,
respondents.
Civil Law; Bad Faith; A finding of bad faith usually
assumes the presence of two (2) elements: first, that the
actor knew or should have known that a particular course
of action is wrong or illegal, and second, that despite
such actual or imputable knowledge, the actor,
voluntarily, consciously and out of his own free will,
proceeds with such course of action.—Verily, the clear
denominator in all of the foregoing judicial
pronouncements is that the essence of bad faith consists
in the deliberate commission of a wrong. Indeed, the
concept has often been equated with malicious or
fraudulent motives, yet distinguished from the mere
unintentional wrongs resulting from mere simple
negligence or oversight. A finding of bad faith, thus,
usually assumes the presence of two (2) elements: first,
that the actor knew or should have known that a
particular course of action is wrong or illegal, and
second, that despite such actual or imputable
knowledge, the actor, voluntarily, consciously and out of
his own free will, proceeds with such course of action.
Only with the concurrence of these two elements can we
begin to consider that the wrong committed had been
done deliberately and, thus, in bad faith.
Same; Payment; Possessor of Credit; The law considers
the payment to the “possessor of credit” as valid even as
against the real creditor taking into account the good
faith of the debtor.—Should the Ibrahims and Maruhoms
turn out to be the real owners of the subject land,
petitioner’s previous payment to Mangondato pursuant to
Civil Case No. 605-92 and Civil Case No. 610-92 —
given the absence of bad faith on petitioner’s part as
previously discussed — may nonetheless be considered
as akin to a payment made in “good faith” to a person in
“possession of credit” per Article 1242 of the Civil Code
that, just the same, extinguishes its obligation to pay for
the rental fees and expropriation indemnity due for the
subject land. Article 1242 of the Civil Code reads:
“Payment made in good faith to any person in
possession of the credit shall release the debtor.” Article
1242 of the Civil Code is an exception to the rule that a
valid payment of an obligation can only be made to the
person to whom such obligation is rightfully owed. It
contemplates a situation where a debtor pays a
“possessor of credit” i.e., someone who is not the real
creditor but appears, under the circumstances, to be the
real creditor. In such scenario, the law considers the
payment to the “possessor of credit” as valid even as
against the real creditor taking into account the good
faith of the debtor.
PETITION for review on certiorari of the decision and
resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
The Solicitor General for petitioner.
Romero A. Boniel and Dipatuan P. Umpa for the heirs
of respondent Lucman Ibrahim.
Dimnatang Saro for respondents O. Maruhom, et al.
Nasser A. Marohomsalic for the heirs of respondent
Macapanton Mangondato.
Luzviminda R. Zuñiga for the heirs of respondent Berua
Ibrahim.
PEREZ, J.:
At bench is a petition for review on certiorari1 assailing
the Decision2 dated 24 June 2005 and Resolution3
dated 5 December 2006 of the Court of Appeals in C.A.-
G.R. CV No. 68061.
The facts:
The Subject Land
In 1978, petitioner took possession of a 21,995-square-
meter parcel of land in Marawi City (subject land) for the
purpose of building thereon a hydroelectric power plant
pursuant to its Agus 1 project. The subject land, while in
truth a portion of a private estate registered under
Transfer Certificate of Title (TCT) No. 378-A4 in the
name of herein respondent Macapanton K. Mangondato
(Mangondato),5 was occupied by petitioner under the
mistaken belief that such land is part of the vast tract of
public land reserved for its use by the government under
Proclamation No. 1354, S. 1974.6
Mangondato first discovered petitioner’s occupation of
the subject land in 1979 — the year that petitioner
started its construction of the Agus 1 plant. Shortly after
such discovery, Mangondato began demanding
compensation for the subject land from petitioner.
In support of his demand for compensation, Mangondato
sent to petitioner a letter7 dated 28 September 1981
wherein the former detailed the origins of his ownership
over the lands covered by TCT No. 378-A, including the
subject land. The relevant portions of the letter read:
Now let me trace the basis of the title to the land
adverted to for particularity. The land titled in my name
was originally consisting of seven (7) hectares. This
piece of land was particularly set aside by the Patriarch
Maruhom, a fact recognized by all royal datus of Guimba,
to belong to his eldest son, Datu Magayo-ong Maruhom.
This is the very foundation of the right and ownership
over the land in question which was titled in my name
because as the son-in-law of Hadji Ali Maruhom the
eldest son of, and only lawyer among the descendants of
Datu Magayo-ong Maruhom, the authority and right to
apply for the title to the land was given to me by said
heirs after mutual agreement among themselves besides
the fact that I have already bought a substantial portion
of the original seven (7) hectares.
The original title of this seven (7) hectares has been
subdivided into several TCTs for the other children of
Datu Magayo-ong Maruhom with whom I have executed
a quitclaim. Presently, only three (3) hectares is left to
me out of the original seven (7) hectares representing
those portion [sic] belonging to my wife and those I have
bought previously from other heirs. This is now the
subject of this case.8
Petitioner, at first, rejected Mangondato’s claim of
ownership over the subject land; the former then
adamant in its belief that the said land is public land
covered by Proclamation No. 1354, S. 1974. But, after
more than a decade, petitioner finally acquiesced to the
fact that the subject land is private land covered by TCT
No. 378-A and consequently acknowledged
Mangondato’s right, as registered owner, to receive
compensation therefor.
Thus, during the early 1990s, petitioner and Mangondato
partook in a series of communications aimed at settling
the amount of compensation that the former ought to pay
the latter in exchange for the subject land. Ultimately,
however, the communications failed to yield a genuine
consensus between petitioner and Mangondato as to the
fair market value of the subject land.
With an agreement basically out of reach, Mangondato
filed a complaint for reconveyance against petitioner
before the Regional Trial Court (RTC) of Marawi City in
July 1992. In his complaint, Mangondato asked for,
among others, the recovery of the subject land and the
payment by petitioner of a monthly rental from 1978 until
the return of such land. Mangondato’s complaint was
docketed as Civil Case No. 605-92.
For its part, petitioner filed an expropriation complaint9
before the RTC on 27 July 1992. Petitioner’s complaint
was docketed as Civil Case No. 610-92.
Later, Civil Case No. 605-92 and Civil Case No. 610-92
were consolidated before Branch 8 of the Marawi City
RTC.
On 21 August 1992, Branch 8 of the Marawi City RTC
rendered a Decision10 in Civil Case No. 605-92 and Civil
Case No. 610-92. The decision upheld petitioner’s right
to expropriate the subject land: it denied Mangondato’s
claim for reconveyance and decreed the subject land
condemned in favor of the petitioner, effective July of
1992, subject to payment by the latter of just
compensation in the amount of P21,995,000.00. Anent
petitioner’s occupation of the subject land from 1978 to
July of 1992, on the other hand, the decision required the
former to pay rentals therefor at the rate of P15,000.00
per month with 12% interest per annum. The decision’s
fallo reads:
WHEREFORE, the prayer in the recovery case for
[petitioner’s] surrender of the property is denied but
[petitioner] is ordered to pay monthly rentals in the
amount of P15,000.00 from 1978 up to July 1992 with
12% interest per annum x x x and the property is
condemned in favor of [petitioner] effective July 1992
upon payment of the fair market value of the property at
One Thousand (P1,000.00) Pesos per square meter or a
total of Twenty-One Million Nine Hundred Ninety-Five
Thousand (P21,995,000.00) [P]esos.11
Disagreeing with the amount of just compensation that it
was adjudged to pay under the said decision, petitioner
filed an appeal with the Court of Appeals. This appeal
was docketed in the Court of Appeals as C.A.-G.R. CV
No. 39353.
During the pendency of C.A.-G.R. CV No. 39353, or on
29 March 1993, herein respondents the Ibrahims and
Maruhoms12 filed before the RTC of Marawi City a
complaint13 against Mangondato and petitioner. This
complaint was docketed as Civil Case No. 967-93 and
was raffled to Branch 10 of the Marawi City RTC.
In their complaint, the Ibrahims and Maruhoms disputed
Mangondato’s ownership of the lands covered by TCT
No. 378-A, including the subject land. The Ibrahims and
Maruhoms asseverate that they are the real owners of
the lands covered by TCT No. 378-A; they being the
lawful heirs of the late Datu Magayo-ong Maruhom, who
was the original proprietor of the said lands.14 They also
claimed that Mangondato actually holds no claim or right
over the lands covered by TCT No. 378-A except that of
a trustee who merely holds the said lands in trust for
them.
The Ibrahims and Maruhoms submit that since they are
the real owners of the lands covered by TCT No. 378-A,
they should be the ones entitled to any rental fees or
expropriation indemnity that may be found due for the
subject land.
Hence, the Ibrahims and Maruhoms prayed for the
following reliefs in their complaint:16
1. That Mangondato be ordered to execute a Deed of
Conveyance transferring to them the ownership of the
lands covered by TCT No. 378-A;
2. That petitioner be ordered to pay to them whatever
indemnity for the subject land it is later on adjudged
3. That Mangondato be ordered to pay to them any
amount that the former may have received from the
petitioner by way of indemnity for the subject land; and
4. That petitioner and Mangondato be ordered jointly and
severally liable to pay attorney’s fees in the sum of
P200,000.00.
In the same complaint, the Ibrahims and Maruhoms also
prayed for the issuance of a temporary restraining order
(TRO) and a writ of preliminary injunction to enjoin
petitioner, during the pendency of the suit, from making
any payments to Mangondato concerning expropriation
indemnity for the subject land.17
On 30 March 1993, Branch 10 of the Marawi City RTC
granted the prayer of the Ibrahims and Maruhoms for the
issuance of a TRO.18 On 29 May 1993, after conducting
an appropriate hearing for the purpose, the same court
likewise granted the prayer for the issuance of a writ of
preliminary injunction.19
In due course, trial then ensued in Civil Case No. 967-93.
The Decision of the Court of Appeals in C.A.-G.R. CV
No. 39353 and the Decision of this Court in G.R. No.
113194
On 21 December 1993, the Court of Appeals rendered a
Decision in C.A.-G.R. CV No. 39353 denying the appeal
of petitioner and affirming in toto the 21 August 1992
Decision in Civil Case No. 605-92 and Civil Case No.
610-92. Undeterred, petitioner next filed a petition for
review on certiorari with this Court that was docketed
herein as G.R. No. 113194.20
On 11 March 1996, we rendered our Decision in G.R.
No. 113194 wherein we upheld the Court of Appeals’
denial of petitioner’s appeal.21 In the same decision, we
likewise sustained the appellate court’s affirmance of the
decision in Civil Case No. 605-92 and Civil Case No.
610-92 subject only to a reduction of the rate of interest
on the monthly rental fees from 12% to 6% per annum.22
Our decision in G.R. No. 113194 eventually became final
and executory on 13 May 1996.23 Execution of the 21
August 1992 Decision in Civil Case No. 605-92 and Civil
Case No. 610-92, as Modified
In view of the finality of this Court’s decision in G.R. No.
113194, Mangondato filed a motion for execution of the
decision in Civil Case No. 605-92 and Civil Case No.
610-92.24 Against this motion, however, petitioner filed
an opposition.25
In its opposition, petitioner adverted to the existence of
the writ of preliminary injunction earlier issued in Civil
Case No. 967-93 that enjoins it from making any
payment of expropriation indemnity over the subject land
in favor of Mangondato.26 Petitioner, in sum, posits that
such writ of preliminary injunction constitutes a legal
impediment that effectively bars any meaningful
execution of the decision in Civil Case No. 605-92 and
Civil Case No. 610-92.
Finding no merit in petitioner’s opposition, however,
Branch 8 of the Marawi City RTC rendered a
Resolution27 dated 4 June 1996 ordering the issuance of
a writ of execution in favor of Mangondato in Civil Case
No. 605-92 and Civil Case No. 610-92. Likewise, in the
same resolution, the trial court ordered the issuance of a
notice of garnishment against several of petitioner’s bank
accounts28 for the amount of P21,801,951.00 — the
figure representing the total amount of judgment debt
due from petitioner in Civil Case No. 605-92 and Civil
Case No. 610-92 less the amount then already settled by
the latter. The dispositive portion of the resolution reads:
WHEREFORE, let a Writ of Execution and the
corresponding order or notice of garnishment be
immediately issued against [petitioner] and in favor of
[Mangondato] for the amount of Twenty-One Million Eight
Hundred One Thousand and Nine Hundred Fifty-One
(P21,801,951.00) Pesos.
Pursuant to the above resolution, a notice of
garnishment30 dated 5 June 1996 for the amount of
P21,801,951.00 was promptly served upon the Philippine
National Bank (PNB) — the authorized depositary of
petitioner. Consequently, the amount thereby garnished
was paid to Mangondato in full satisfaction of petitioner’s
judgment debt in Civil Case No. 605-92 and Civil Case
No. 610-92.
Upon the other hand, on 16 April 1998, Branch 10 of the
Marawi City RTC decided Civil Case No. 967-93.31 In its
decision, Branch 10 of the Marawi City RTC made the
following relevant findings:32
1. The Ibrahims and Maruhoms — not Mangondato —
are the true owners of the lands covered by TCT No.
378-A, which includes the subject land.
2. The subject land, however, could no longer be
reconveyed to the Ibrahims and Maruhoms since the
same was already expropriated and paid for by the
petitioner under Civil Case No. 605-92 and Civil Case
No. 610-92.
3. Be that as it may, the Ibrahims and Maruhoms, as true
owners of the subject land, are the rightful recipients of
whatever rental fees and indemnity that may be due for
the subject land as a result of its expropriation.
Consistent with the foregoing findings, Branch 10 of the
Marawi City RTC thus required payment of all the rental
fees and expropriation indemnity due for the subject
land, as previously adjudged in Civil Case No. 605-92
and Civil Case No. 610-92, to the Ibrahims and
Maruhoms.
Notable in the trial court’s decision, however, was that it
held both Mangondato and the petitioner solidarily liable
to the Ibrahims and Maruhoms for the rental fees and
expropriation indemnity adjudged in Civil Case No. 605-
92 and Civil Case No. 610-92.33
In addition, Mangondato and petitioner were also
decreed solidarily liable to the Ibrahims and Maruhoms
for attorney’s fees in the amount of P200,000.00.34
The pertinent dispositions in the decision read:
WHEREFORE, premises considered, judgment is hereby
rendered in favor of [the Ibrahims and Maruhoms] and
against [Mangondato and petitioner] as follows:
2. Ordering [Mangondato and petitioner] to pay jointly
and severally [the Ibrahims and Maruhoms] all forms of
expropriation indemnity as adjudged for [the subject land]
consisting of 21,995 square meters in the amount of
P21,801,051.00 plus other forms of indemnity such as
rentals and interests;
3. Ordering [Mangondato and petitioner] to pay [the
Ibrahims and Maruhoms] jointly and severally the sum of
P200,000.00 as attorney’s fees;
Petitioner’s Appeal to the Court of Appeals and the
Execution Pending Appeal of the Decision in Civil Case
No. 967-93
Petitioner appealed the decision in Civil Case No. 967-93
with the Court of Appeals: contesting mainly the holding
in the said decision that it ought to be solidarily liable with
Mangondato to pay to the Ibrahims and Maruhoms the
rental fees and expropriation indemnity adjudged due for
the subject land. This appeal was docketed as C.A.-G.R.
CV No. 68061.
While the foregoing appeal was still pending decision by
the Court of Appeals, however, the Ibrahims and
Maruhoms were able to secure with the court a quo a
writ of execution pending appeal36 of the decision in
Civil Case No. 967-93. The enforcement of such writ led
to the garnishment of Mangondato’s moneys in the
possession of the Social Security System (SSS) in the
amount of P2,700,000.00 on 18 September 1998.37
Eventually, the amount thereby garnished was paid to
the Ibrahims and Mangondato in partial satisfaction of
the decision in Civil Case No. 967-93.
On 24 June 2005, the Court of Appeals rendered its
Decision38 in C.A.-G.R. CV No. 68061 denying
petitioner’s appeal. The appellate court denied
petitioner’s appeal and affirmed the decision in Civil
Case No. 967-93, subject to the right of petitioner to
deduct the amount of P2,700,000.00 from its liability as a
consequence of the partial execution of the decision in
Civil Case No. 967-93.39
Hence, the present appeal by petitioner.
The Present Appeal
The present appeal poses the question of whether it is
correct, in view of the facts and circumstances in this
case, to hold petitioner liable in favor of the Ibrahims and
Maruhoms for the rental fees and expropriation indemnity
adjudged due for the subject land.
In their respective decisions, both Branch 10 of the
Marawi City RTC and the Court of Appeals had
answered the foregoing question in the affirmative. The
two tribunals postulated that, notwithstanding petitioner’s
previous payment to Mangondato of the rental fees and
expropriation indemnity as a consequence of the
execution of the decision in Civil Case No. 605-92 and
610-92, petitioner may still be held liable to the Ibrahims
and Maruhoms for such fees and indemnity because its
previous payment to Mangondato was tainted with “bad
faith.”40 As proof of such bad faith, both courts cite the
following considerations:41
1. Petitioner “allowed” payment to Mangondato despite
its prior knowledge, which dates back as early as 28
September 1981, by virtue of Mangondato’s letter of
even date, that the subject land was owned by a certain
Datu Magayo-ong Maruhom and not by Mangondato;
and
2. Petitioner “allowed” such payment despite the
issuance of a TRO and a writ of preliminary injunction in
Civil Case No. 967-93 that precisely enjoins it from doing
so.
For the two tribunals, the bad faith on the part of
petitioner rendered its previous payment to Mangondato
invalid insofar as the Ibrahims and Maruhoms are
concerned. Hence, both courts concluded that petitioner
may still be held liable to the Ibrahims and Maruhoms for
the rental fees and expropriation indemnity previously
paid to Mangondato.42
Petitioner, however, argues otherwise. It submits that a
finding of bad faith against it would have no basis in fact
and law, given that it merely complied with the final and
executory decision in Civil Case No. 605-92 and Civil
Case No. 610-92 when it paid the rental fees and
expropriation indemnity due the subject to
Mangondato.43 Petitioner thus insists that it should be
absolved from any liability to pay the rental fees and
expropriation indemnity to the Ibrahims and Maruhoms
and prays for the dismissal of Civil Case No. 967-93
against it.
Our Ruling
We grant the appeal. No Bad Faith on the Part of
Petitioner
Petitioner is correct. No “bad faith” may be taken against
it in paying Mangondato the rental fees and expropriation
indemnity due the subject land.
Our case law is not new to the concept of bad faith.
Decisions of this Court, both old and new, had been
teeming with various pronouncements that illuminate the
concept amidst differing legal contexts. In any attempt to
understand the basics of bad faith, it is mandatory to take
a look at some of these pronouncements:
In Lopez, et al. v. Pan American World Airways,44 a
1966 landmark tort case, we defined the concept of bad
faith as:
“…a breach of a known duty through some motive of
interest or ill will.”45
Just months after the promulgation of Lopez, however,
came the case of Air France v. Carrascoso, et al.,46 In
Air France, we expounded on Lopez’s definition by
describing bad faith as:
“x x x a state of mind affirmatively operating with furtive
design or with some motive of self-interest or will or for
ulterior purpose.”47
Air France’s articulation of the meaning of bad faith was,
in turn, echoed in a number subsequent cases,48 one of
which, is the 2009 case of Balbuena, et al. v. Sabay, et
al.49
In the 1967 case of Board of Liquidators v. Heirs of M.
Kalaw,50 on the other hand, we enunciated one of the
more oft-repeated formulations of bad faith in our case
law:
“x x x bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of wrong. It means
breach of a known duty thru some motive or interest of ill
will; it partakes of the nature of fraud.”51
As a testament to its enduring quality, the foregoing
pronouncement in Board of Liquidators had been
reiterated in a slew of later cases,52 more recently, in the
2009 case of Nazareno, et al. v. City of Dumaguete53
and the 2012 case of Aliling v. Feliciano.
Still, in 1995, the case of Far East Bank and Trust
Company v. Court of Appeals55 contributed the following
description of bad faith in our jurisprudence:
“Malice or bad faith implies a conscious and intentional
design to do a wrongful act for a dishonest purpose or
moral obliquity; x x x.”56
The description of bad faith in Far East Bank and Trust
Company then went on to be repeated in subsequent
cases such as 1995’s Ortega v. Court of Appeals,57
1997’s Laureano Investment and Development
Corporation v. Court of Appeals,58 2010’s Lambert
Pawnbrokers v. Binamira59 and 2013’s California
Clothing, Inc., v. Quiñones,60 to name a few.
Verily, the clear denominator in all of the foregoing
judicial pronouncements is that the essence of bad faith
consists in the deliberate commission of a wrong.
Indeed, the concept has often been equated with
malicious or fraudulent motives, yet distinguished from
the mere unintentional wrongs resulting from mere
simple negligence or oversight.61
A finding of bad faith, thus, usually assumes the
presence of two (2) elements: first, that the actor knew or
should have known that a particular course of action is
wrong or illegal, and second, that despite such actual or
imputable knowledge, the actor, voluntarily, consciously
and out of his own free will, proceeds with such course of
action. Only with the concurrence of these two elements
can we begin to consider that the wrong committed had
been done deliberately and, thus, in bad faith.
In this case, both Branch 10 of the Marawi City RTC and
the Court of Appeals held that petitioner was in bad faith
when it paid to Mangondato the rental fees and
expropriation indemnity due the subject land. The two
tribunals, in substance, fault petitioner when it “allowed”
such payment to take place despite the latter’s alleged
knowledge of the existing claim of the Ibrahims and
Maruhoms upon the subject land and the issuance of a
TRO in Civil Case No. 967-93. Hence, the two tribunals
claim that petitioner’s payment to Mangondato is
ineffective as to the Ibrahims and Maruhoms, whom they
found to be the real owners of the subject land.
We do not agree.
Branch 10 of the Marawi City RTC and the Court of
Appeals erred in their finding of bad faith because they
have overlooked the utter significance of one important
fact: that petitioner’s payment to Mangondato of the
rental fees and expropriation indemnity adjudged due for
the subject land in Civil Case No. 605-92 and Civil Case
No. 610-92, was required by the final and executory
decision in the said two cases and was compelled thru a
writ of garnishment issued by the court that rendered
such decision. In other words, the payment to
Mangondato was not a product of a deliberate choice on
the part of the petitioner but was made only in
compliance to the lawful orders of a court with
jurisdiction.
Contrary then to the view of Branch 10 of the Marawi City
RTC and of the Court of Appeals, it was not the petitioner
that “allowed” the payment of the rental fees and
expropriation indemnity to Mangondato. Indeed, given
the circumstances, the more accurate rumination would
be that it was the trial court in Civil Case No. 605-92 and
Civil Case No. 610-92 that ordered or allowed the
payment to Mangondato and that petitioner merely
complied with the order or allowance by the trial court.
Since petitioner was only acting under the lawful orders
of a court in paying Mangondato, we find that no bad
faith can be taken against it, even assuming that
petitioner may have had prior knowledge about the
claims of the Ibrahims and Maruhoms upon the subject
land and the TRO issued in Civil Case No. 967-93.
Sans Bad Faith, Petitioner cannot be held Liable to the
Ibrahims and Maruhoms
Without the existence of bad faith, the ruling of the RTC
and of the Court of Appeals apropos petitioner’s
remaining liability to the Ibrahims and Maruhoms
becomes devoid of legal basis. In fact, petitioner’s
previous payment to Mangondato of the rental fees and
expropriation indemnity due the subject land pursuant to
the final judgment in Civil Case No. 605-92 and Civil
Case No. 610-92 may be considered to have
extinguished the former’s obligation regardless of who
between Mangondato, on one hand, and the Ibrahims
and Maruhoms, on the other, turns out to be the real
owner of the subject land.62 Either way, petitioner
cannot be made liable to the Ibrahims and Maruhoms:
First. If Mangondato is the real owner of the subject land,
then the obligation by petitioner to pay for the rental fees
and expropriation indemnity due the subject land is
already deemed extinguished by the latter’s previous
payment under the final judgment in Civil Case No. 605-
92 and Civil Case No. 610-92. This would be a simple
case of an obligation being extinguished through
payment by the debtor to its creditor.63 Under this
scenario, the Ibrahims and Maruhoms would not even be
entitled to receive anything from anyone for the subject
land. Hence, petitioner cannot be held liable to the
Ibrahims and Maruhoms.
Second. We, however, can reach the same conclusion
even if the Ibrahims and Maruhoms turn out to be the
real owners of the subject land.
Should the Ibrahims and Maruhoms turn out to be the
real owners of the subject land, petitioner’s previous
payment to Mangondato pursuant to Civil Case No. 605-
92 and Civil Case No. 610-92 — given the absence of
bad faith on petitioner’s part as previously discussed —
may nonetheless be considered as akin to a payment
made in “good faith” to a person in “possession of credit”
per Article 1242 of the Civil Code that, just the same,
extinguishes its obligation to pay for the rental fees and
expropriation indemnity due for the subject land. Article
1242 of the Civil Code reads:
“Payment made in good faith to any person in
possession of the credit shall release the debtor.”
Article 1242 of the Civil Code is an exception to the rule
that a valid payment of an obligation can only be made to
the person to whom such obligation is rightfully owed.64
It contemplates a situation where a debtor pays a
“possessor of credit” i.e., someone who is not the real
creditor but appears, under the circumstances, to be the
real creditor.65 In such scenario, the law considers the
payment to the “possessor of credit” as valid even as
against the real creditor taking into account the good
faith of the debtor.
Borrowing the principles behind Article 1242 of the Civil
Code, we find that Mangondato — being the judgment
creditor in Civil Case No. 605-92 and Civil Case No. 610-
92 as well as the registered owner of the subject land at
the time66 — may be considered as a “possessor of
credit” with respect to the rental fees and expropriation
indemnity adjudged due for the subject land in the two
cases, if the Ibrahims and Maruhoms turn out to be the
real owners of the subject land. Hence, petitioner’s
payment to Mangondato of the fees and indemnity due
for the subject land as a consequence of the execution of
Civil Case No. 605-92 and Civil Case No. 610-92 could
still validly extinguish its obligation to pay for the same
even as against the Ibrahims and Maruhoms.
Effect of Extinguishment of
Petitioner’s Obligation
The extinguishment of petitioner’s obligation to pay for
the rental fees and expropriation indemnity due the
subject land carries with it certain legal effects:
First. If Mangondato turns out to be the real owner of the
subject land, the Ibrahims and Maruhoms would not be
entitled to recover anything from anyone for the subject
land. Consequently, the partial execution of the decision
in Civil Case No. 967-93 that had led to the garnishment
of Mangondato’s moneys in the possession of the Social
Security System (SSS) in the amount of P2,700,000.00
in favor of the Ibrahims and Maruhoms, becomes
improper and unjustified. In this event, therefore, the
Ibrahims and Maruhoms may be ordered to return the
amount so garnished to Mangondato.
Otherwise, i.e., if the Ibrahims and Maruhoms really are
the true owners of the subject land, they may only
recover the rental fees and expropriation indemnity due
the subject land against Mangondato but only up to
whatever payments the latter had previously received
from petitioner pursuant to Civil Case No. 605-92 and
Civil Case No. 610-92.
Second. At any rate, the extinguishment of petitioner’s
obligation to pay for the rental fees and expropriation
indemnity due the subject land negates whatever cause
of action the Ibrahims and Maruhoms might have had
against the former in Civil Case No. 967-93. Hence,
regardless of who between Mangondato, on one hand,
and the Ibrahims and Maruhoms, on the other, turns out
to be the real owner of the subject land, the dismissal of
Civil Case No. 967-93 insofar as petitioner is concerned
is called for.
Re: Attorney’s Fees
The dismissal of Civil Case No. 967-93 as against
petitioner necessarily absolves the latter from paying
attorney’s fees to the Ibrahims and Maruhoms arising
from that case.
WHEREFORE, premises considered, the instant petition
is GRANTED. The Decision dated 24 June 2005 and
Resolution dated 5 December 2006 of the Court of
Appeals in C.A.-G.R. CV No. 68061 is hereby SET
ASIDE. The Decision dated 16 April 1998 of the Regional
Trial Court in Civil Case No. 967-93 is MODIFIED in that
petitioner is absolved from any liability in that case in
favor of the respondents Lucman M. Ibrahim, Atty. Omar
G. Maruhom, Elias G. Maruhom, Bucay G. Maruhom,
Mamod G. Maruhom, Farouk G. Maruhom, Hidjara G.
Maruhom, Rocania G. Maruhom, Potrisam G. Maruhom,
Lumba G. Maruhom, Sinab G. Maruhom, Acmad G.
Maruhom, Solayman G. Maruhom, Mohamad M. Ibrahim
and Caironesa M. Ibrahim. Civil Case No. 967-93 is
DISMISSED as against petitioner.
Notes.—Bad faith cannot be presumed. “It is a
question of fact that must be proven” by clear and
convincing evidence. (Vilbar vs. Opinion, 713 SCRA
428 [2014])
The existence of bad faith is a question of fact and is
evidentiary. (Tabangao Shell Refinery Employees
Association vs. Pilipinas Shell Petroleum
Corporation, 720 SCRA 631 [2014])
----------------------------------------------------------------------------
---
G.R. No. 107631. February 26, 1996.*
NATIONAL POWER CORPORATION, petitioner, vs.
HON. COURT OF APPEALS and PECORP, INC.
(Formerly Pacific Equipment Corp.), respondents.
Civil Law; Arbitration; Trial court’s short raison d’etre for
its order as merely prayed for by PECORP in its
complaint, suffices in resolving the immediate conflict
between National Power Corporation and PECORP.—
The trial court’s short raison d’etre for its order that all
four (4) claims of PECORP against NPC be arbitrated
upon by the arbitration board constituted by them, as
merely prayed for by PECORP in its complaint, suffices
in resolving the immediate conflict between NPC and
PECORP. Indeed, PECORP’s two subject claims (1 and
2), together with the other two undisputed claims (3 and
4), directly and exclusively emanate from what PECORP
firmly believes as contractually due it under the NPC-
PECORP “Cost-Plus a Percentage” contract. Conversely
therefore, had there been no NPC-PECORP contract,
there would have been no dispute between NPC and
PECORP that precipitated the suit for arbitration, as
PECORP’s claims for fees, in such instance, would be
inexistent in the first place.
Same; Same; Court likewise accords the same approval
to respondent Court of Appeals’ brief and straight to the
point disquisitions on why National Power Corporation
cannot validly invoke Article 1725 of the Civil Code.—
The Court likewise accords the same approval to
respondent CA’s brief and straight to the point
disquisitions (as quoted earlier) on why NPC cannot
validly invoke Article 1725 of the Civil Code to prevent
PECORP from collecting fees for drilling and grouting
work conducted by GROGUN under the NPC-GROGUN
contract, and why PECORP cannot be deemed to have
abandoned or withdrawn its claim for fees on the
minimum guaranteed equipment rental against NPC.
Said judgment deserves full affirmance without further
elaboration.
PETITION for review of a decision of the Court of
Appeals.
The facts are stated in the opinion of the Court.
The Solicitor General for petitioner.
Arturo D. Valar for private respondent.
FRANCISCO, J.:
The sole query here is whether or not the following two
(2) claims
1.Fee on the cost of drilling and grouting which is ten
percent (10%) of the Actual Final Cost of
P6,962,519.50—P696,251.95
2.Fee on the minimum guaranteed equipment rental
which is ten percent (10%) of the Actual Final Cost of
P1.67 million—P167,000.00
from a total of four (4) presented by herein private
respondent PECORP, INC. (PECORP for brevity), can
be brought for arbitration expressly provided for in the
contract it entered into with herein petitioner National
Power Corporation (NPC).
That contract forged between the government through
the NPC and PECORP as party-CONTRACTOR on June
27, 1974 was for the construction of the Mariveles Dam
No. 1 and appurtenant structures of the water supply
system of the Bataan Export Processing Zone at
Mariveles, Bataan.
It was agreed upon that the contract is of a “Cost-Plus a
Percentage” type—meaning, PECORP will be paid a
certain percentage as fee based on the “Actual Final
Cost” of the work. And what constitutes “Actual Final
Cost” has been aptly simplified by the trial court as “the
total cost to the defendant (NPC) of all the work
performed by the plaintiff (PECORP) which includes cost
of materials and supplies, structures, furnitures, charges,
etc. and all other expenses as are inherent in a Cost-
Plus and Percentage Contract and necessary for the
prosecution of the work that are approved by the
defendant x x x.”
The rift arose when NPC, in a letter dated July 11, 1974,
communicated to PECORP that it was inclined to
contract directly and separately with Philippine Grouting
and Guniting Co., Inc. (GROGUN) for the drilling and
grouting work on the construction project and
consequently, PECORP will not be entitled to any fees
for said task.
Contending that such NPC-GROGUN arrangement will
violate its rights under the NPC-PECORP contract,
PECORP made known to NPC its desire to bring the
matter to arbitration, under Article VI of their contract,
which reads:
“Should there occur any dispute, controversy, or
differences between the parties arising out of this
contract that cannot be resolved by them to their mutual
satisfaction, the matter shall be submitted to arbitration at
the choice of either party upon written demand to the
other party. When formal arbitration is requested, an
Arbitration Board shall be formed in the following
manner: CORPORATION and CONTRACTOR shall
each appoint one (1) member of this board and these
members shall appoint a third member who shall act as
chairman.”
The NPC-GROGUN drilling and grouting contract,
nonetheless, pushed through on August 23, 1974. NPC
tendered the following justifications for its execution:
1.The drilling and grouting work equipment were not
included in the equipment availability schedules made
jointly by NPC and PECORP at the start of the work.
2.PECORP failed to provide and/or rent equipment for
the work and NPC could not immediately provide the
equipments.
3.GROGUN had all the equipments and personnel
required for the work.
4.The work could not suffer any further delay,
considering that from the execution of the NPC-PECORP
contract on June 27, 1974 up to the date of NPC’s letter
to PECORP which was July 11, 1974, PECORP had not
performed any drilling and grouting work.
5.NPC was availing of its alleged statutory right under
Article 1725 of the Civil Code in removing the drilling and
grouting work from the scope of its contract with
PECORP (NPC-PECORP contract). Article 1725 reads:
“The owner may withdraw at will from the construction of
the work, although it may have been commenced,
indemnifying the contractor for all the latter’s expenses,
work, and the usefulness which the owner may obtain
therefrom, and damages.”
As a result of such purported “withdrawal,” the drilling
and grouting work ceased to be a part of the NPC-
PECORP contract and therefore,
a)is not an arbitrable matter thereunder, and
b)precludes NPC from collecting fees for said work.
Besides, the cost of drilling and grouting work under the
NPC-GROGUN contract is a direct cost to NPC and thus
cannot be included in the “Actual Final Cost” under the
NPC-PECORP contract on which PECORP’s fees are
based.
PECORP’s objection to the NPC-GROGUN contract
insofar as it deprives PECORP of fees on drilling and
grouting is essentially anchored on the following:
1)Drilling and grouting work is but a part of its over-all
contractual duty, as expressed in Article II of the NPC-
PECORP contract, to undertake the construction,
complete, of the Mariveles Dam No. 1.
2)PECORP was expressly allowed under the NPC-
PECORP contract to sub-contract labor, supplies and/or
services, apparently in order to discharge fully its
contractual duty. PECORP in fact intended to do just
that, when even prior to the NPC’s letter of July 11, 1974,
PECORP sought authorization from NPC to sub-contract
the very same drilling and grouting work to the very same
GROGUN in the proposedNPC-GROGUN contract. And
even if the proposed PECORP-GROGUN sub-contract
was turned down by NPC, PECORP isstill entitled to the
fees considering that the NPC-GROGUNcontract would
involve identical undertaking and party asthat in the
rejected sub-contract, not to mention that it wasPECORP
which actually supervised the drilling and groutingwork
conducted by GROGUN.
Roughly five (5) years after, PECORP on June 14, 1979
presented to NPC four (4) claims—two of which are the
subject claims mentioned at the beginning of this opinion
and the other two are:
3.Fee on the inventory of unused stocks and POL—
P155,844.95
4.Reimbursement of Medical Hospital expenses re: TK-
001 Accident case—P50,085.93,
coupled with a request for arbitration.
A board of arbitrators was thereafter convened. But after
a series of written communications among the board,
NPC and PECORP, it appeared that NPC was willing to
arbitrate on claims (3) and (4) only. NPC resisted claim
(1) (fee for drilling and grouting work) on grounds
previously discussed. As to claim (2) (fee on the
minimum guaranteed equipment rental), NPC argued
that PECORP withdrew this claim from arbitration, as per
PECORP’s letter to NPC dated May 19, 1980 which
reads in full:
“We confirm our agreement earlier pertaining to our claim
for payment for contractor’s fee in connection with the
construction of the EPZA Dam No. 1 Project, whereby
we are withdrawing our claim for fee on the guaranteed
equipment rental hours for P167,000.00 in as much as
this is an imputed cost and not direct cost as the rest of
the claims. We understand however that the rest of the
claims, in the sum of P902,182.58 shall be favorably
adjudicated and endorsed.”
As NPC was uncompromising, PECORP filed an action
in the Regional Trial Court of Manila to compel NPC to
submit/confirm/certify all the four (4) claims for
arbitration, where judgment was thereafter rendered in
favor of PECORP, the dispositive portion of which reads:
“IN VIEW OF ALL THE FOREGOING, judgment is
hereby rendered in favor of the plaintiff PECORP, INC.
and against National Power Corporation, ordering:
1.The Board of Administrators (sic) to reconvene and to
arbitrate, the four (4) claims of the plaintiff against the
defendant;
2.The defendant to submit and/or confirm and certify the
four (4) claims for arbitration;
3.The parties to shoulder equally the expenses for
arbitration;
4.The defendant to pay the plaintiff the amount of
P10,000.00 as and for attorney’s fees;
5.The defendant to pay the costs of suit; and
6.The counterclaim is hereby dismissed for lack of merit.”
After the trial court denied NPC’s motion for
reconsideration of its decision, respondent Court of
Appeals, on appeal, affirmed the same but deleted the
award of attorney’s fees. However, in affirming said
decision which merely ordered NPC and PECORP to
arbitrate on all four (4) claims, respondent CA went
further in disposing of issues which could have been
appropriately ventilated and passed upon in the
arbitration proceedings—a course of action apparently
prompted by PECORP’s request as contained in its
“Motion For Early Resolution” and reiterated in a
“Reiteration Motion For Early Resolution,” that
respondent CA make:
1.a definitive ruling on whether or not the withdrawal by
NPC from PECORP of the drilling and grouting work in
favor of GROGUN is a valid withdrawal of work under
Article 1725 of the Civil Code, and
2.an outright resolution of PECORP’s claims against
NPC, in order to obviate further prolonged proceedings
or multiplicity of suits.
Thus, in its now-assailed judgment, respondent CA
resolved PECORP’s claims for fees for drilling and
grouting work (claim No. 1) and on the minimum
guaranteed equipment rental hours (claim No. 2) in this
wise:
As to claim No. 1:
“Art. II of the contract executed between appellee and
appellant provides:
‘SCOPE OF WORK AND COMPLETION, DELAYS AND
EXTENSION OF TIME.—For and in consideration of the
payment or payments to be made by CORPORATION in
accordance with the provisions of this contract,
CONTRACTOR shall fully and faithfully furnish all labor,
plant and materials and construct, complete, all works
required for the Project, in accordance with the terms
and conditions of all the documents mentioned under Art.
I above.’
“Under the above-quoted provision, the NPC-Pecorp
Contract is for the construction, complete, of the
Mariveles Dam No. 1. Drilling and grouting work is just a
part of the complete construction of the total project,
hence, covered by and within the scope of the NPC-
Pecorp Contract.
“The word ‘Project’ is defined in the contract to mean the
Dam and Appurtenant Structures. Drilling and Grouting is
part of the dam or appurtenant structures, and therefore
a part of PECORP’s scope of work.
“Appellant invokes Art. 1725 of the Civil Code to justify its
claim that drilling and grouting is not included within the
scope of the NPC-Grogun Contract with appellee.
“Art. 1725 reads:
‘The owner may withdraw at will from the construction of
the work, although it may have been commenced,
indemnifying the contractor for all the latter’s expenses,
work and the usefulness which the owner may obtain
therefrom, and damages.’
“Art. 1725 of the Civil Code is not applicable in the
instant case, for the following reasons:
a)there was actually no withdrawal from the ‘construction
of the work,’ but only a transfer of a part of the
construction, which is the drilling and grouting work;
b)said drilling and grouting still forms part of the project
as a mere NPC-Grogun sub-contract.
“Since the NPC-Grogun Contract did not amend nor
nullify the ‘cost plus’ provision of the NPC-Pecorp
Contract, therefor, appellee Pecorp is still entitled to the
said 10% fee.”
As to claim No. 2:
“x x x, appellant contends that since plaintiff-appellee
had previously withdrawn (through its letter dated May
19, 1980), the claim for the minimum guaranteed
equipment rental hours for P167,000.00, the same is not
covered by arbitration.
“The contention is likewise without merit.
“The letter dated May 19, 1980 (Annex “2”), written by
appellee to appellant partly reads:
‘We confirm our agreement earlier pertaining to our claim
for payment of contractor’s fees in connection with the
construction of the EPZA Dam No. 1 Project, whereby
we are withdrawing our claim for fee on the minimum
guaranteed equipment rental hours of P167,000.00,
inasmuch as this is an imputed cost and not a direct cost
of the rest of the claims. We understand however, that
the rest of the claims, in the sum of P902,182.56 shall be
favorably adjudicated and endorsed.’
“The above-quoted letter states that appellee was
withdrawing its claim for fees in the minimum guaranteed
equipment rental hours for P167,000.00, only upon the
condition that NPC will favorably adjudicate and endorse
the three other PECORP claims, amounting to
P902,182.58.
“Thus, it is clear that withdrawal is only a proposal
conditioned upon NPC’s adjudication, endorsement and
approval of all the three (3) other claims. However, as
the record shows, NPC refused to certify for arbitration
all the said three (3) other claims, hence, the withdrawal
was rendered null and void.”
And from this second adverse judgment, NPC filed the
instant petition raising the following errors:
I
Respondent Court of Appeals gravely erred in affirming
the trial court’s judgment with respect to the issue of
private respondent’s right to claim percentage fee from
the NPC-GROGUN Contract for Drilling and Grouting
Work.
II
Respondent Court of Appeals erred in not holding that
private respondent’s claim for a fee on the minimum
guaranteed equipment rental hours in the amount of
P167,000.00 is not subject to arbitration since said claim
had been previously withdrawn from arbitration by private
respondent.
The petition must fail.
The trial court’s short raison d’etre for its order that all
four (4) claims of PECORP against NPC be arbitrated
upon by the arbitration board constituted by them, as
merely prayed for by PECORP in its complaint, suffices
in resolving the immediate conflict between NPC and
PECORP. Indeed, PECORP’s two subject claims (1 and
2), together with the other two undisputed claims (3 and
4), directly and exclusively emanate from what PECORP
firmly believes as contractually due it under the NPC-
PECORP “Cost-Plus a Percentage” contract. Conversely
therefore, had there been no NPC-PECORP contract,
there would have been no dispute between NPC and
PECORP that precipitated the suit for arbitration, as
PECORP’s claims for fees, in such instance, would be
inexistent in the first place. We thus quote with approval
the trial court’s findings and conclusion, that:
“The contract between the parties specifically provides
as follows:
‘ARTICLE VI
ARBITRATION
Should there occur any dispute, controversy, or
differences between the parties arising out of this
contract that cannot be resolved by them to their mutual
satisfaction, the matter shall be submitted for arbitration
at the choice of either party upon written demand to the
other party. When formal arbitration is requested, an
Arbitration Board shall be formed in the following
manner: CORPORATION and CONTRACTOR shall
each appoint one (1) member of this Board and these
members shall appoint a third member who shall act as
Chairman. x x x (Italics supplied for emphasis).’
“It will be noted that the above-quoted provision
mentions any dispute, controversy and differences
between the parties and without qualification as to the
nature of the dispute or controversy or differences. Thus,
having arisen from the contract, the four (4) claims are,
therefore, arbitrable.
“Philippine Law and Jurisprudence recognize arbitration
agreements as valid, binding, enforceable and not
contrary to public policy, thus—
‘Any stipulation that the arbitrators’ award or decision
shall be final is valid, without prejudice to Articles 2036,
2039 and 2040 (Art. 200044, Now Civil Codes [sic]).’
‘An agreement to arbitrate is a contract, the relation of
the parties is contractual and the rights and liabilities of
the parties are controlled by the law of contracts. (5 AM.
JUR. 2d 11).’ ”
The Court likewise accords the same approval to
respondent CA’s brief and straight to the point
disquisitions (as quoted earlier) on why NPC cannot
validly invoke Article 1725 of the Civil Code to prevent
PECORP from collecting fees for drilling and grouting
work conducted by GROGUN under the NPC-GROGUN
contract, and why PECORP cannot be deemed to have
abandoned or withdrawn its claim for fees on the
minimum guaranteed equipment rental against NPC.
Said judgment deserves full affirmance without further
elaboration.
WHEREFORE, the petition for review is hereby DENIED,
and respondent CA’s assailed decision is AFFIRMED.
Note.—That a party was disadvantaged by the
decision of the Arbitration Committee does not prove
evident partiality. (Adamson vs. Court of Appeals,
232 SCRA 602 [1994])
----------------------------------------------------------------------------
-
G.R. No. 183794. June 13, 2016.*
SPOUSES JAIME and MATILDE POON, petitioners,
vs. PRIME SAVINGS BANK represented by the
PHILIPPINE DEPOSIT INSURANCE CORPORATION
as Statutory Liquidator, respondent.
Civil Law; Contracts; Rescission; The Civil Code uses
rescission in two (2) different contexts, namely: (1)
rescission on account of breach of contract under Article
1191; and (2) rescission by reason of lesion or economic
prejudice under Article 1381.—The legal remedy of
rescission, however, is by no means limited to the
situations covered by the above provisions. The Civil
Code uses rescission in two different contexts, namely:
(1) rescission on account of breach of contract under
Article 1191; and (2) rescission by reason of lesion or
economic prejudice under Article 1381. While the term
“rescission” is used in Article 1191, “resolution” was the
original term used in the old Civil Code, on which the
article was based. Resolution is a principal action based
on a breach by a party, while rescission under Article
1383 is a subsidiary action limited to cases of rescission
for lesion under Article 1381 of the New Civil Code.
Mercantile Law; Insolvency; The period during which the
bank cannot do business due to insolvency is not a
fortuitous event, unless it is shown that the government’s
action to place a bank under receivership or liquidation
proceedings is tainted with arbitrariness, or that the
regulatory body has acted without jurisdiction.—There is
no indication or allegation that the BSP’s action in this
case was tainted with arbitrariness or bad faith. Instead,
its decision to place respondent under receivership and
liquidation proceedings was pursuant to Section 30 of
Republic Act No. 7653. Moreover, respondent was partly
accountable for the closure of its banking business. It
cannot be said, then, that the closure of its business was
independent of its will as in the case of Provident
Savings Bank. The legal effect is analogous to that
created by contributory negligence in quasi-delict
actions. The period during which the bank cannot do
business due to insolvency is not a fortuitous event,
unless it is shown that the government’s action to place a
bank under receivership or liquidation proceedings is
tainted with arbitrariness, or that the regulatory body has
acted without jurisdiction.
International Law; Rebus Sic Stantibus; Article 1267 is
not an absolute application of the principle of rebus sic
stantibus, otherwise, it would endanger the security of
contractual relations. After all, parties to a contract are
presumed to have assumed the risks of unfavorable
developments. It is only in absolutely exceptional
changes of circumstance, therefore, that equity demands
assistance for the debtor.—As an alternative justification
for its premature termination of the Contract, respondent
lessee invokes the doctrine of unforeseen event under
Article 1267 of the Civil Code, which provides: Art. 1267.
When the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the
obligor may also be released therefrom, in whole or in
part. The theory of rebus sic stantibus in public
international law is often cited as the basis of the above
article. Under this theory, the parties stipulate in light of
certain prevailing conditions, and the theory can be made
to apply when these conditions cease to exist. The Court,
however, has once cautioned that Article 1267 is not an
absolute application of the principle of rebus sic
stantibus, otherwise, it would endanger the security of
contractual relations. After all, parties to a contract are
presumed to have assumed the risks of unfavorable
developments. It is only in absolutely exceptional
changes of circumstance, therefore, that equity demands
assistance for the debtor.
Civil Law; Obligations; It is settled that a provision is a
penal clause if it calls for the forfeiture of any remaining
deposit still in the possession of the lessor, without
prejudice to any other obligation still owing, in the event
of the termination or cancellation of the agreement by
reason of the lessee’s violation of any of the terms and
conditions thereof.—It is settled that a provision is a
penal clause if it calls for the forfeiture of any remaining
deposit still in the possession of the lessor, without
prejudice to any other obligation still owing, in the event
of the termination or cancellation of the agreement by
reason of the lessee’s violation of any of the terms and
conditions thereof. This kind of agreement may be validly
entered into by the parties. The clause is an accessory
obligation meant to ensure the performance of the
principal obligation by imposing on the debtor a special
prestation in case of nonperformance or inadequate
performance of the principal obligation.
Same; Same; The general rule is that courts have no
power to ease the burden of obligations voluntarily
assumed by parties, just because things did not turn out
as expected at the inception of the contract.—We have
no reason to doubt that the forfeiture provisions of the
Contract were deliberately and intelligently crafted.
Under Article 1196 of the Civil Code, the period of the
lease contract is deemed to have been set for the benefit
of both parties. Its continuance, effectivity or fulfillment
cannot be made to depend exclusively upon the free and
uncontrolled choice of just one party. Petitioners and
respondent freely and knowingly committed themselves
to respecting the lease period, such that a breach by
either party would result in the forfeiture of the remaining
advance rentals in favor of the aggrieved party. If this
were an ordinary contest of rights of private contracting
parties, respondent lessee would be obligated to abide
by its commitment to petitioners. The general rule is that
courts have no power to ease the burden of obligations
voluntarily assumed by parties, just because things did
not turn out as expected at the inception of the contract.
PETITION for review on certiorari of the decision and
resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Avelino V. Sales, Jr. for petitioners.
Office of the General Counsel for respondent.
Before this Court is a Petition for Review on Certiorari1
assailing the Court of Appeals’ (CA) Decision2 which
affirmed the Decision3 issued by Branch 21, Regional
Trial Court (RTC) of Naga City.
The RTC ordered the partial rescission of the penal
clause in the lease contract over the commercial building
of Spouses Jaime and Matilde Poon (petitioners). It
directed petitioners to return to Prime Savings Bank
(respondent) the sum of P1,740,000, representing one-
half of the unused portion of its advance rentals, in view
of the closure of respondent’s business upon order by
the Bangko Sentral ng Pilipinas (BSP).
Antecedent Facts
The facts are undisputed.
Petitioners owned a commercial building in Naga City,
which they used for their bakery business. On 3
November 2006, Matilde Poon and respondent executed
a 10-year Contract of Lease4 (Contract) over the building
for the latter’s use as its branch office in Naga City. They
agreed to a fixed monthly rental of P60,000, with an
advance payment of the rentals for the first 100 months
in the amount of P6,000,000. As agreed, the advance
payment was to be applied immediately, while the rentals
for the remaining period of the Contract were to be paid
on a monthly basis.5
In addition, paragraph 24 of the Contract provides:
24. Should the lease[d] premises be closed, deserted
or vacated by the LESSEE, the LESSOR shall have the
right to terminate the lease without the necessity of
serving a court order and to immediately repossess the
leased premises. Thereafter the LESSOR shall open and
enter the leased premises in the presence of a
representative of the LESSEE (or of the proper
authorities) for the purpose of taking a complete
inventory of all furniture, fixtures, equipment and/or other
materials or property found within the leased premises.
The LESSOR shall thereupon have the right to enter into
a new contract with another party. All advanced rentals
shall be forfeited in favor of the LESSOR.6
Barely three years later, however, the BSP placed
respondent under the receivership of the Philippine
Deposit Insurance Corporation (PDIC) by virtue of BSP
Monetary Board Resolution No. 22,7 which reads:
On the basis of the report of Mr. Candon B. Guerrero,
Director of Thrift Banks and Non-Bank Financial
Institutions (DTB-NBFI), in his memorandum dated
January 3, 2000, which report showed that the Prime
Savings Bank, Inc. (a) is unable to pay its liabilities as
they became due in the ordinary course of business; (b)
has insufficient realizable assets as determined by the
Bangko Sentral ng Pilipinas to meet its liabilities; (c)
cannot continue in business without involving probable
losses to its depositors and creditors; and (d) has wilfully
violated cease and desist orders under Section 37 that
has become final, involving acts or transactions which
amount to fraud or a dissipation of the assets of the
institution; x x x.8 (Emphasis supplied)
The BSP eventually ordered respondent’s liquidation
under Monetary Board Resolution No. 664.9
On 12 May 2000, respondent vacated the leased
premises and surrendered them to petitioners.10
Subsequently, the PDIC issued petitioners a demand
letter11 asking for the return of the unused advance
rental amounting to P3,480,000 on the ground that
paragraph 24 of the lease agreement had become
inoperative, because respondent’s closure constituted
force majeure. The PDIC likewise invoked the principle of
rebus sic stantibus under Article 1267 of Republic Act
No. 386 (Civil Code) as alternative legal basis for
demanding the refund.
Petitioners, however, refused the PDIC’s demand.12
They maintained that they were entitled to retain the
remainder of the advance rentals following paragraph 24
of their Contract.
Consequently, respondent sued petitioners before the
RTC of Naga City for a partial rescission of contract
and/or recovery of a sum of money.
The RTC’s Ruling
After trial, the RTC ordered the partial rescission of the
lease agreement, disposing as follows:
WHEREFORE, judgment is hereby entered ordering the
partial rescission of the Contract of Lease dated
November 3, 1996 particularly the second paragraph of
par. 24 thereof and directing the defendant-spouses
Jaime and Matilde Poon to return or refund to the Plaintiff
the sum of One Million Seven Hundred Forty Thousand
Pesos (P1,740,000) representing one-half of the unused
portion of the advance rentals.
Parties’ respective claims for damages and attorney’s
fees are dismissed.
The trial court ruled that the second clause in paragraph
24 of the Contract was penal in nature, and that the
clause was a valid contractual agreement.14 Citing
Provident Savings Bank v. CA15 as legal precedent, it
ruled that the premature termination of the lease due to
the BSP’s closure of respondent’s business was actually
involuntary. Consequently, it would be iniquitous for
petitioners to forfeit the entire amount of P3,480,000.16
Invoking its equity jurisdiction under Article 1229 of the
Civil Code,17 the trial court limited the forfeiture to only
one-half of that amount to answer for respondent’s
unpaid utility bills and E-VAT, as well as petitioner’s lost
business opportunity from its former bakery business.
The CA’s Ruling
On appeal, the CA affirmed the RTC Decision,19 but had
a different rationale for applying Article 1229. The
appellate court ruled that the closure of respondent’s
business was not a fortuitous event. Unlike Provident
Savings Bank,20 the instant case was one in which
respondent was found to have committed fraudulent acts
and transactions. Lacking, therefore, was the first
requisite of a fortuitous event, i.e., that the cause of the
breach of obligation must be independent of the will of
the debtor.21
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.
Still, the CA sustained the trial court’s interpretation of
the proviso on the forfeiture of advance rentals as a
penal clause and the consequent application of Article
1229. The appellate court found that the forfeiture clause
in the Contract was intended to prevent respondent from
defaulting on the latter’s obligation to finish the term of
the lease. It further found that respondent had partially
performed that obligation and, therefore, the reduction of
the penalty was only proper. Similarly, it ruled that the
RTC had properly denied petitioners’ claims for actual
and moral damages for lack of basis.22
On 10 July 2008,23 the CA denied petitioners’ Motion for
Reconsideration. Hence, this Petition.
Issues
The issues to be resolved are whether (1) respondent
may be released from its contractual obligations to
petitioners on grounds of fortuitous event under Article
1174 of the Civil Code and unforeseen event under
Article 1267 of the Civil Code; (2) the proviso in the
parties’ Contract allowing the forfeiture of advance
rentals was a penal clause; and (3) the penalty agreed
upon by the parties may be equitably reduced under
Article 1229 of the Civil Code.
Court’s Ruling
We DENY the Petition.
Preliminarily, we address petitioners’ claim that
respondent had no cause of action for rescission,
because this case does not fall under any of the
circumstances enumerated in Articles 138124 and
138225 of the Civil Code.
The legal remedy of rescission, however, is by no means
limited to the situations covered by the above provisions.
The Civil Code uses rescission in two different contexts,
namely: (1) rescission on account of breach of contract
under Article 1191; and (2) rescission by reason of lesion
or economic prejudice under Article 1381.26 While the
term “rescission” is used in Article 1191, “resolution” was
the original term used in the old Civil Code, on which the
article was based. Resolution is a principal action based
on a breach by a party, while rescission under Article
1383 is a subsidiary action limited to cases of rescission
for lesion under Article 1381 of the New Civil Code.27
It is clear from the allegations in paragraphs 12 and 13 of
the Complaint28 that respondent’s right of action rested
on the
(1) Those which are entered into by guardians
whenever the wards whom they represent suffer lesion
by more than one-fourth of the value of the things which
are the object thereof;
(2) Those agreed upon in representation of absentees,
if the latter suffer the lesion stated in the preceding
number;
(3) Those undertaken in fraud of creditors when the
latter cannot in any other mannr collect the claims due
them;
(4) Those which refer to things under litigation if they
have been entered into by the defendant without the
knowledge and approval of the litigants or of competent
judicial authority;
(5) All other contracts specially declared by law to be
subject to rescission. (1291a)
25 Art. 1382. Payments made in a state of insolvency
for obligations to whose fulfillment the debtor could not
be compelled at the time they were effected, are also
rescissible. (1292
12) The refusal of defendant to return the unused
portion of advance rental is a manifest abuse of right
which contravenes Art. 19 of the Civil Code, which
provides that:
alleged abuse by petitioners of their right under
paragraph 24 of the Contract. Respondent’s theory
before the trial court was that the tenacious enforcement
by petitioners of their right to forfeit the advance rentals
was tainted with bad faith, because they knew that
respondent was already insolvent. In other words, the
action instituted by respondent was for the rescission of
reciprocal obligations under Article 1191. The lower
courts, therefore, correctly ruled that Articles 1381 and
1382 were inapposite.
We now resolve the main issues.
 “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.”
13) The Lease Contract, particularly Sec. 24, par. 2
thereof, which is being invoked by the defendant in
refusing to return the unused portion of the advance
rental, was executed during the time the bank was still of
sound financial standing and profitably operating. In
insisting that the terms of the provision of the contract be
applied at this time, when the bank is already closed due
to illiquidity, the defendant is manifestly taking undue
advantage of the plaintiff’s predicament. In order to
protect the plaintiff from such abuse of the defendant, the
provision of Article 24 of the Civil Code is invoked, as
follows:
“Art. 24. In all contractual, property or other relations,
when one of the parties is at a disadvantage on account
of his moral dependence, ignorance, indigence, mental
weak-ness, tender age or other handicap, the courts
must be vigilant for his protection.”
The closure of respondent’s business was neither a
fortuitous nor an unforeseen event that rendered the
lease agreement functus officio.
Respondent posits that it should be released from its
contract with petitioners, because the closure of its
business upon the BSP’s order constituted a fortuitous
event as the Court held in Provident Savings Bank.29
The cited case, however, must always be read in the
context of the earlier Decision in Central Bank v. Court of
Appeals.30 The Court ruled in that case that the
Monetary Board had acted arbitrarily and in bad faith in
ordering the closure of Provident Savings Bank.
Accordingly, in the subsequent case of Provident
Savings Bank it was held that fuerza mayor had
interrupted the prescriptive period to file an action for the
foreclosure of the subject mortgage.31
In contrast, there is no indication or allegation that the
BSP’s action in this case was tainted with arbitrariness or
bad faith. Instead, its decision to place respondent under
receivership and liquidation proceedings was pursuant to
Section 30 of Republic Act No. 7653.32 Moreover,
respondent was partly accountable for the closure of its
banking business. It cannot be said, then, that the
closure of its business was independent of its will as in
the case of Provident Savings Bank. The legal effect is
analogous to that created by contributory negligence in
quasi-delict actions.
The period during which the bank cannot do business
due to insolvency is not a fortuitous event,33 unless it is
shown that the government’s action to place a bank
under receivership or liquidation proceedings is tainted
with arbitrariness, or that the regulatory body has acted
without jurisdiction.34
As an alternative justification for its premature
termination of the Contract, respondent lessee invokes
the doctrine of unforeseen event under Article 1267 of
the Civil Code, which provides:
Art. 1267. When the service has become so difficult as
to be manifestly beyond the contemplation of the parties,
the obligor may also be released therefrom, in whole or
in part.
The theory of rebus sic stantibus in public international
law is often cited as the basis of the above article. Under
this theory, the parties stipulate in light of certain
prevailing conditions, and the theory can be made to
apply when these conditions cease to exist.35 The Court,
however, has once cautioned that Article 1267 is not an
absolute application of the principle of rebus sic
stantibus, otherwise, it would endanger the security of
contractual relations. After all, parties to a contract are
presumed to have assumed the risks of unfavorable
developments. It is only in absolutely exceptional
changes of circumstance, therefore, that equity demands
assistance for the debtor.36
Tagaytay Realty Co., Inc. v. Gacutan37 lays down the
requisites for the application of Article 1267, as follows:
1. The event or change in circumstance could not have
been foreseen at the time of the execution of the
contract.
2. It makes the performance of the contract extremely
difficult but not impossible.
3. It must not be due to the act of any of the parties.
4. The contract is for a future prestation.38
The difficulty of performance should be such that the
party seeking to be released from a contractual
obligation would be placed at a disadvantage by the
unforeseen event. Mere inconvenience, unexpected
impediments, increased expenses,39 or even pecuniary
inability to fulfil an engagement,40 will not relieve the
obligor from an undertaking that it has knowingly and
freely contracted.
The law speaks of “service.” This term should be
understood as referring to the performance of an
obligation or a prestation.41 A prestation is the object of
the contract, i.e., it is the conduct (to give, to do or not to
do) required of the parties.42 In a reciprocal contract
such as the lease in this case, one obligation of
respondent as the lessee was to pay the agreed rents for
the whole contract period.43 It would be hard-pressed to
complete the lease term since it was already out of
business only three and a half years into the 10-year
contract period. Without a doubt, the second and the
fourth requisites mentioned above are present in this
case.
The first and the third requisites, however, are lacking. It
must be noted that the lease agreement was for 10
years. As shown by the unrebutted testimony of Jaime
Poon during trial, the parties had actually considered the
possibility of a deterioration or loss of respondent’s
business within that period:
ATTY. SALES
Q. Now to the offer of that real estate broker for possible
lease of your property at No. 38 General Luna Street,
Naga City which was then the Madam Poon Bakery,
what did you tell your real estate broker?
WITNESS (JAIME POON)
A. When Mrs. Lauang approached me, she told me that
she has a client who wants to lease a property in Naga
City.
Q. Did she disclose to you the identity of her client?
A. Yes, Sir.
Q. What was the name of her client?
A. That is the Prime Savings Bank.
Q. After you have known that it was the Prime Savings
Bank that [wanted] to lease your property located at No.
38 General Luna St., Naga City, what did you tell Mrs.
Lauang[?]
A. I told her that if the price is good, I am willing to give
up the place where this bakery of mine is situated.
Q. So, did Mrs. Lauang give you the quotation as to the
price?
A. Yes, Sir.
Q. What was the amount?
A. She asked first if how much I demand for the price.
Q. What did you tell her?
A. I told her, if they can give me P100,000.00 for the
rental, I will give up the place.
Q. What do you mean P100,000.00 rental?
A. That is only for the establishment [concerned].
Q. What was the period to be covered by the
P100,000.00 rental?
A. That is monthly basis.
Q. So after telling Mrs. Lauang that you can be amenable
to lease the place for P100,000.00 monthly, what if any,
did Mrs. Lauang tell you?
A. She told me it is very high. And then she asked me if it
is still negotiable, I answered, yes.
Q. So, what happened after your clarified to her that [it is]
still negotiable?
A. She asked me if there is other condition, and I
answered her, yes, if your client can give me advances I
can lease my property.
xxx
Q. So what is your answer when you were asked for the
amount of the advances?
A. I told her I need 7 million pesos because I need to pay
my debts.
xxxx
Q. Who was with her when she came over?
A. A certain guy name Ricci and said that he is the
assistant manager of the Prime Savings Bank.
Q. What did you and Mr. Ricci talk about?
A. I told him the same story as I talked with Mrs. Lauang.
Q. Was the agreement finally reached between you and
Mr. Ricci?
A. Not yet, Sir.
Q. What happened after that?
A. He said that he [will discuss] the matter with his higher
officer, the branch manager in the person of Henry Lee.
Q. Were you able to meet this Henry Lee?
A. After a week later.
Q. Who was with Henry Lee?
A. Mrs. Lauang.
Q. Was there a final agreement on the day when you and
Henry Lee met?
A. Not yet, he offered to reduce the rental and also the
advances. Finally I gave way after 2 or 3 negotiations.
Q. What happened after 2 or 3 negotiations?
A. We arrived at P60,000.00 for monthly rentals and
P6,000,000.00 advances for 100 months.
Q. Was the agreement between you and the
representative of the Prime Savings Bank reduced into
writing?
A. Yes, Sir.
xxxx
Q. Now, Mr. Poon, I would like to direct your attention to
paragraphs 4 and 5 of the contract of lease which I read:
Inasmuch as the leased property is presently mortgaged
with the PCI Bank, the Lessor and the Lessee hereby
agree that another property with a clean title shall serve
as security for herein Lessee; Provided that the
mortgaged property with PCI Bank is cancelled, the
Lessee agrees that the above mentioned property shall
be released to herein Lessor; paragraph 5 says: It is
hereby stipulated that should the leased property be
foreclosed by the PCI Bank or any other banking or
financial institution, all unused rentals shall be returned
by the Lessor to the Lessee. Now, my question is: Who
asked or requested that paragraphs 4 and 5 be
incorporated in the contract of lease?
A. Mr. Lee himself.
Q. The representative of the plaintiff?
A. Yes, Sir.
Q. For what purpose did Mr. Lee ask these matters to be
incorporated?
A. Because they are worried that my building might be
foreclosed because it is under [mortgage] with the PCI
Bank, that is why I gave them protection of a clean title.
But I also asked them, what will happen to me, in case
your bank will be closed?
Q. When you asked that question, what did Mr. Lee tell
you?
A. He told me that I don’t have to worry I will have
P6,000,000 advances.
Q. What was your protection as to the 6 million payment
made by the plaintiff?
A. That is the protection for me because during that time
I have my bakery and I myself [spent] 2 million for the
improvement of that bakery and I have sacrificed that for
the sake of the offer of lease.
Q. In what manner that you are being protected for that 6
million pesos?
A. They said that if in case the bank will be closed that
advance of 6 million pesos will be forfeited in my favor.
Q. And that is what is found in paragraph 24 of the
Contract of Lease which I asked you to read?
A. That is true.44
Clearly, the closure of respondent’s business was not an
unforeseen event. As the lease was long-term, it was not
lost on the parties that such an eventuality might occur,
as it was in fact covered by the terms of their Contract.
Besides, as We have previously discussed, the event
was not independent of respondent’s will.
The forfeiture clause in the Contract is penal in nature.
Petitioners claim that paragraph 24 was not intended as
a penal clause. They add that respondent has not even
presented any proof of that intent. It was, therefore, a
reversible error on the part of the CA to construe its
forfeiture provision of the Contract as penal in nature.
It is settled that a provision is a penal clause if it calls for
the forfeiture of any remaining deposit still in the
possession of the lessor, without prejudice to any other
obligation still owing, in the event of the termination or
cancellation of the agreement by reason of the lessee’s
violation of any of the terms and conditions thereof. This
kind of agreement may be validly entered into by the
parties. The clause is an accessory obligation meant to
ensure the performance of the principal obligation by
imposing on the debtor a special prestation in case of
nonperformance or inadequate performance of the
principal obligation.45
It is evident from the above quoted testimony of Jaime
Poon that the stipulation on the forfeiture of advance
rentals under paragraph 24 is a penal clause in the
sense that it provides for liquidated damages.
Notably, paragraph 5 of the Contract also provides:
5. It is hereby stipulated that should the leased property
be foreclosed by PCI Bank or any other banking or
financial institution, all unused rentals shall be returned
by the LESSOR to the LESSEE; x x x.46
In effect, the penalty for the premature termination of the
Contract works both ways. As the CA correctly found, the
penalty was to compel respondent to complete the 10-
year term of the lease. Petitioners, too, were similarly
obliged to ensure the peaceful use of their building by
respondent for the entire duration of the lease under pain
of losing the remaining advance rentals paid by the latter.
The forfeiture clauses of the Contract, therefore, served
the two functions of a penal clause, i.e., (1) to provide for
liquidated damages and (2) to strengthen the coercive
force of the obligation by the threat of greater
responsibility in case of breach.47 As the CA correctly
found, the prestation secured by those clauses was the
parties’ mutual obligation to observe the fixed term of the
lease. For this reason, We sustain the lower courts’
finding that the forfeiture clause in paragraph 24 is a
penal clause, even if it is not expressly labelled as such.
A reduction of the penalty agreed upon by the parties is
warranted under Article 1129 of the Civil Code.
We have no reason to doubt that the forfeiture provisions
of the Contract were deliberately and intelligently crafted.
Under Article 1196 of the Civil Code,48 the period of the
lease contract is deemed to have been set for the benefit
of both parties. Its continuance, effectivity or fulfillment
cannot be made to depend exclusively upon the free and
uncontrolled choice of just one party.49 Petitioners and
respondent freely and knowingly committed themselves
to respecting the lease period, such that a breach by
either party would result in the forfeiture of the remaining
advance rentals in favor of the aggrieved party.
If this were an ordinary contest of rights of private
contracting parties, respondent lessee would be
obligated to abide by its commitment to petitioners. The
general rule is that courts have no power to ease the
burden of obligations voluntarily assumed by parties, just
because things did not turn out as expected at the
inception of the contract.50
It must be noted, however, that this case was initiated by
the PDIC in furtherance of its statutory role as the
fiduciary of Prime Savings Bank.51 As the state-
appointed receiver and
SECTION 30. Proceedings in Receivership and
Liquidation.—Whenever, upon report of the head of the
supervising or examining department, the Monetary
Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they become due to
the ordinary course of business: Provided, That this shall
not include inability to pay caused by extraordinary
demands induced by financial panic in the banking
community;
(b) has insufficient realizable assets, as determined by
the Bangko Sentral, to meet its liabilities;
(c) cannot continue in business without involving
probable losses to its depositors or creditors; or
(d) has willfully violated a cease and desist order under
Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation of the
assets of the institution; in which cases, the Monetary
Board may summarily and without need for prior hearing
forbid the institution from doing business in the
Philippines and designate the Philippine Deposit
Insurance Corporation as receiver of the banking
institution.
xxxx
The receiver shall immediately gather and take charge of
all the assets and liabilities of the institution, administer
the same for the benefit of its creditors, and exercise the
general powers of a receiver under the Revised Rules of
Court but shall not, with the exception of administrative
expenditures, pay or commit any act that will involve the
transfer or disposition of any asset of the institution:
Provided, That the receiver may deposit or place the
funds of the institution in nonspeculative investments.
The receiver shall determine as soon as possible, but not
later than ninety (90) days from takeover, whether the
institution may be rehabilitated or otherwise placed in
such a condition so that it may be permitted to resume
business with safety to its depositors and creditors and
the general public: Provided, That any determination for
the resumption of business of the institution shall be
subject to prior approval of the Monetary Board.
If the receiver determines that the institution cannot be
rehabilitated or permitted to resume business in
accordance with the next preceding paragraph, the
Monetary Board shall notify in writing the board of
directors of its findings and direct the receiver to proceed
with the liquidation of the institution. The receiver shall:
xxxx
(2) convert the assets of the institution to money,
dispose of the same to creditors and other parties, for the
purpose of paying the debts of such institution in
accordance with the rules on concurrence and
preference of credit under the Civil Code of the
Philippines and he may, in the name of the institution,
and with the assistance of counsel as he may retain,
institute such actions as may be necessary to collect and
recover accounts and assets of, or defend any action
against, the institution. The assets of an institution under
receivership or liquidation shall be deemed in custodia
legis in the hands of the receiver and shall, from the
moment the institution was placed under such
receivership or liquidation, be exempt from any order of
garnishment, levy, attachment, or execution. (Emphasis
supplied) liquidator, the PDIC is mandated to recover
and conserve the assets of the foreclosed bank on behalf
of the latter’s depositors and creditors.52 In other words,
at stake in this case are not just the rights of petitioners
and the correlative liabilities of respondent lessee. Over
and above those rights and liabilities is the interest of
innocent debtors and creditors of a delinquent bank
establishment. These overriding considerations justify
the 50% reduction of the penalty agreed upon by
petitioners and respondent lessee in keeping with Article
1229 of the Civil Code, which provides:
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.
The reasonableness of a penalty depends on the
circumstances in each case, because what is iniquitous
and unconscionable in one may be totally just and
equitable in another.53 In resolving this issue, courts
may consider factors including but not limited to the type,
extent and purpose of the penalty; the nature of the
obligation; the mode of the breach and its consequences;
the supervening realities; and the standing and
relationship of the parties.54
Under the circumstances, it is neither fair nor reasonable
to deprive depositors and creditors of what could be their
last chance to recoup whatever bank assets or
receivables the PDIC can still legally recover. Besides,
nothing has prevented petitioners from putting their
building to other profitable uses, since respondent
surrendered the premises immediately after the closure
of its business. Strict adherence to the doctrine of
freedom of contracts, at the expense of the rights of
innocent creditors and investors, will only work injustice
rather than promote justice in this case.55 Such
adherence may even be misconstrued as condoning
profligate bank operations. We cannot allow this to
happen. We are a Court of both law and equity; We
cannot sanction grossly unfair results without doing
violence to Our solemn obligation to administer justice
fairly and equally to all who might be affected by our
decisions.56
Neither do We find any error in the trial court’s denial of
the damages and attorney’s fees claimed by petitioners.
No proof of the supposed expenses they have incurred
for the improvement of the leased premises and the
payment of respondent’s unpaid utility bills can be found
in the records. Actual and compensatory damages must
be duly proven with a reasonable degree of certainty.57
To recover moral and exemplary damages where there is
a breach of contract, the breach must be palpably
wanton, reckless, malicious, in bad faith, oppressive, or
abusive. Attorney’s fees are not awarded even if a
claimant is compelled to litigate or to incur expenses
where no sufficient showing of bad faith exists.58 None
of these circumstances have been shown in this case.
Finally, in line with prevailing jurisprudence,59 legal
interest at the rate of 6% per annum is imposed on the
monetary award computed from the finality of this
Decision until full payment.
WHEREFORE, premises considered, the Petition for
Review on Certiorari is DENIED. The Court of Appeals’
Decision dated 29 November 2007 and its Resolution
dated 10 July 2008 in C.A.-G.R. CV No. 75349 are
hereby MODIFIED in that legal interest at the rate of 6%
per annum is imposed on the monetary award computed
from the finality of this Decision until full payment.
No costs.SO ORDERED.
Petition denied, judgment and resolution modified.
Notes.—Rescission under Article 1191 of the Civil
Code is proper if one of the parties to the contract
commits a substantial breach of its provisions. (ASB
Realty Corporation vs. Ortigas & Company Limited
Partnership, 777 SCRA 284 [2015])
More accurately referred to as resolution, the right of
rescission under Article 1191 is predicated on a
breach of faith that violates the reciprocity between
the parties to the contract. (Nolasco vs. Cuerpo, 777
SCRA 447 [2015])
----------------------------------------------------------------------------
---
G.R. No. 216023. October 5, 2016.*
DR. RESTITUTO C. BUENVIAJE, petitioner, vs.
SPOUSES JOVITO R. and LYDIA B. SALONGA,
JEBSON HOLDINGS CORPORATION and
FERDINAND JUAT BAÑEZ, respondents.
Civil Law; Obligations; Reciprocal Obligations; Specific
performance and “rescission” (more accurately referred
to as resolution) are alternative remedies available to a
party who is aggrieved by a counterparty’s breach of a
reciprocal obligation.—Specific performance and
“rescission” (more accurately referred to as resolution)
are alternative remedies available to a party who is
aggrieved by a counterparty’s breach of a reciprocal
obligation. This is provided for in Article 1191 of the Civil
Code, which partly reads: Art. 1191. The power to
rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is
incumbent upon him. The injured party may choose
between the fulfillment and the rescission of the
obligation, with the payment of damages in either case.
He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
Same; Same; Specific Performance; Words and
Phrases; Specific performance is defined as “[t]he
remedy of requiring exact performance of a contract in
the specific form in which it was made, or according to
the precise terms agreed upon.”—Specific performance
is defined as “[t]he remedy of requiring exact
performance of a contract in the specific form in which it
was made, or according to the precise terms agreed
upon.” It pertains to “[t]he actual accomplishment of a
contract by a party bound to fulfill it.”
Same; Same; Rescission; Resolution under Article 1191
of the Civil Code will not be permitted for a slight or
casual breach, but only for such substantial and
fundamental violations as would defeat the very object of
the parties in making the agreement.—Resolution is
defined as the “unmaking of a contract for a legally
sufficient reason x x x.” “[Resolution] does not merely
terminate the contract and release the parties from
further obligations to each other, but abrogates the
contract from its inception and restores the parties to
their original positions as if no contract has been made.
Consequently, mutual restitution, which entails the return
of the benefits that each party may have received as a
result of the contract, is thus required.” Notably,
resolution under Article 1191 of the Civil Code “will not
be permitted for a slight or casual breach, but only for
such substantial and fundamental violations as would
defeat the very object of the parties in making the
agreement. Ultimately, the question of whether a breach
of contract is substantial depends upon the attending
circumstances.”
Same; Contracts; Principle of Relativity of Contracts;
Under Article 1311 of the Civil Code, it is a basic
principle in civil law on relativity of contracts, that
contracts can only bind the parties who had entered into
it and it cannot favor or prejudice third persons.—In this
case, it is undisputed that Sps. Salonga were not parties
to the above mentioned contract. Under Article 1311 of
the Civil Code, it is a basic principle in civil law on
relativity of contracts, that contracts can only bind the
parties who had entered into it and it cannot favor or
prejudice third persons. Contracts take effect only
between the parties, their successors in interest, heirs
and assigns. Thus, absent any privity of contract as to
them, there is no basis to hold Sps. Salonga liable for
any of the obligations stated under the said contract to
sell. At this juncture, it should be further made clear that
the imputation of joint or solidary liability against a
particular person — such as that insistently claimed
against Sps. Salonga by Buenviaje — first presupposes
the existence of that person’s obligation. On the active
side, the joint or solidary nature of an obligation is an
aspect of demandability; it pertains to the extent of a
creditor’s entitlement to demand fulfillment against any or
all of his debtors under one particular obligation. Based
on case law, a solidary obligation is one in which each of
the debtors is liable for the entire obligation, and each of
the creditors is entitled to demand the satisfaction of the
whole obligation from any or all of the debtors. On the
other hand, a joint obligation is one in which each
debtors is liable only for a proportionate part of the debt,
and the creditor is entitled to demand only a
proportionate part of the credit from each debtor.
Same; Partnership; Articles 1822 and 1824 of the Civil
Code pertain to the obligations of a copartner in the
event that the partnership to which he belongs is held
liable.—There is no perceptible legal basis to hold them
solidarily liable under Articles 1822 and 1824 of the Civil
Code. These provisions, which are found under Section
3, Chapter 2, Title IX, Book IV of the Civil Code on
Partnership, respectively state: Article 1822. Where, by
any wrongful act or omission of any partner acting in the
ordinary course of the business of the partnership or with
the authority of his copartners, loss or injury is caused to
any person, not being a partner in the partnership, or any
penalty is incurred, the partnership is liable therefor to
the same extent as the partner so acting or omitting to
act. x x x x Article 1824. All partners are liable solidarily
with the partnership for everything chargeable to the
partnership under Articles 1822 and 1823. Evidently, the
foregoing legal provisions pertain to the obligations of a
copartner in the event that the partnership to which he
belongs is held liable. In this case, Buenviaje never dealt
with any partnership constituted by and between Jebson
and Sps. Salonga. As previously mentioned, the subject
CTS, which was the source of the obligations relative to
the completion and delivery of Unit 5, solely devolved
upon the person of Jebson. As there was no partnership
privy to any obligation to which Buenviaje is a creditor,
Articles 1822 and 1824 of the Civil Code do not apply.
Same; Contracts; Rescission; Words and Phrases;
Rescission (as contemplated in Articles 1380 to 1389 of
the Civil Code) is a remedy granted by law to the
contracting parties and even to third persons, to secure
the reparation of damages caused to them by a contract,
even if this should be valid, by restoration of things to
their condition at the moment prior to the celebration of
the contract. It implies a contract, which even if initially
valid, produces a lesion or a pecuniary damage to
someone.—Pursuant to Articles 1177 and 1313 of the
Civil Code, creditors are given remedies whenever their
debtors perform acts or omissions or enter into contracts
that tend to defraud the former of what is due them. Such
remedy comes in the form of rescission under Articles
1381(3) in relation to Articles 1383 and 1384 of the Civil
Code. Rescission (as contemplated in Articles 1380 to
1389 of the Civil Code) is a remedy granted by law to the
contracting parties and even to third persons, to secure
the reparation of damages caused to them by a contract,
even if this should be valid, by restoration of things to
their condition at the moment prior to the celebration of
the contract. It implies a contract, which even if initially
valid, produces a lesion or a pecuniary damage to
someone. In the rescission by reason of lesion or
economic prejudice, the cause of action is subordinated
to the existence of that prejudice, because it is the raison
d’être as well as the measure of the right to rescind.
Hence, where the defendant makes good the damages
caused, the action cannot be maintained or continued, as
expressly provided in Articles 1383 and 1384.
Same; Damages; Moral Damages; In order that moral
damages under Article 2219 of the Civil Code may be
awarded, there must be pleading and proof of moral
suffering, mental anguish, fright and the like.—In order
that moral damages under Article 2219 of the Civil Code
may be awarded, there must be pleading and proof of
moral suffering, mental anguish, fright and the like. In
Mahinay v. Velas-quez, Jr., 419 SCRA 118 (2004), the
Court explained: While no proof of pecuniary loss is
necessary in order that moral damages may be awarded,
the amount of indemnity being left to the discretion of the
court, it is nevertheless essential that the claimant should
satisfactorily show the existence of the factual basis of
damages and its causal connection to defendant’s acts.
This is so because moral damages, though incapable of
pecuniary estimation, 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.
In Francisco v. GSIS, the Court held that there must be
clear testimony on the anguish and other forms of mental
suffering. Thus, if the plaintiff fails to take the witness
stand and testify as to his/her social humiliation,
wounded feelings and anxiety, moral damages cannot be
awarded. In Cocoland Development Corporation v.
National Labor Relations Commission, the Court held
that “additional facts must be pleaded and proven to
warrant the grant of moral damages under the Civil
Code, these being, x x x social humiliation, wounded
feelings, grave anxiety, etc., that resulted therefrom.”
Same; Same; Attorney’s Fees; Even when a 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 an erroneous conviction of the righteousness of his
cause.—As to attorney’s fees, the general rule is that the
same cannot be recovered as part of damages because
of the policy that no premium should be placed on the
right to litigate. 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 of the Civil Code
demands factual, legal, and equitable justification. Even
when a 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 an erroneous conviction
of the righteousness of his cause.
PETITION for review on certiorari of the decision and
resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Quisumbing, Fernando & Javellana Law Office for
petitioner
Emilio C. Capulong, Jr. for respondents Sps. Jovito
and Lydia Salonga.
Cortel Law Office for respondents Jebson Holdings
Corp. and Ferdinand Juat Bañez.
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the
Decision2 dated November 29, 2013 and the
Resolution3 dated December 15, 2014 of the Court of
Appeals (CA) in C.A.-G.R. S.P. No. 93422, essentially
upholding the Decision4 dated September 16, 2004 and
the Resolution5 dated January 25, 2005 of the Housing
and Land Use Regulatory Board (HLURB)-Board of
Commissioners (HLURB-BOC) which, inter alia: (a)
ordered respondent Jebson Holdings Corporation
(Jebson) to comply with its obligations under the
Contract to Sell it entered into with petitioner Dr.
Restituto C. Buenviaje (Buenviaje); (b) declared
respondents Spouses Jovito R. Salonga and Lydia B.
Salonga (Sps. Salonga) not solidarily liable with Jebson
and respondent Ferdinand Juat Bañez (Bañez) with
regard to such Contract to Sell; (c) rescinded the
“swapping arrangement” entered into by Buenviaje,
Jebson, and Bañez with regard to the Contract to Sell;
and (d) ordered Buenviaje to pay Sps. Salonga moral
damages and attorney’s fees in the amounts of
P50,000.00 and P25,000.00, respectively.
The Facts
On May 29, 1997, Jebson, an entity engaged in the real
estate business, through its Executive Vice President,
Bañez, entered into a Joint Venture Agreement6 (JVA)
with Sps. Salonga. Under the JVA, Sps. Salonga, who
owned three (3) parcels of land with an area of 2,935
square meters situated in Tagaytay City, and covered by
Transfer Certificate of Title (TCT) No. T-9000, agreed for
Jebson to construct thereon ten (10) high-end single
detached residential units, to be known as Brentwoods
Tagaytay Villas (Brentwoods).7 They likewise assumed
to subdivide the property into individual titles upon which
Jebson shall assume the liability to pay their mortgage
loan with the Metropolitan Bank and Trust Company.8
On the other hand, Jebson undertook to construct the
units at its own expense, secure the building and
development permits, and the license to sell from the
HLURB, as well as the other permits required. Out of the
ten (10) units, seven (7) units,
the remaining three (3) units, i.e., Units 1, 2, and 7, will
correspond to Sps. Salonga’s share.9 The units allocated
to Sps. Salonga were to be delivered within six (6)
months after Jebson’s receipt of the down payment for
the units allocated to it.10 Jebson was also allowed to
sell its allocated units under such terms as it may deem
fit, subject to the condition that the price agreed upon
was with the conformity of Sps. Salonga.11
On June 9, 1997, Jebson entered into a Contract to
Sell12 (subject CTS) with Buenviaje over Unit 5 for a
total consideration of P10,500,000.00, without the
conformity of Sps. Salonga.13 Out of the purchase price,
P7,800,000.00 was paid through a “swapping
arrangement,” whereby Buenviaje conveyed to Jebson a
house and lot located in Garden Villas, Tagaytay valued
at P5,800,000.00 (house and lot) and Tagaytay
Highlands Golf share No. 0722 (golf share) worth
P2,000,000.00 on July 1, 1997, while the remaining
balance was paid periodically. An additional sum of
P125,000.00 for the retaining wall (P70,000.00) and air-
conditioning system (P55,000.00) was likewise paid for
by Buenviaje.14
However, despite full payment of the contract price,
Jebson was unable to complete Unit 5 in violation of its
contractual stipulation to finish the same within twelve
(12) months from the date of issuance of the building
permit. Thus, in April 1999, Buenviaje formally
demanded the immediate completion and delivery of Unit
5, to which Jebson cited the 1997 financial crisis as the
reason for the delay. Accordingly, Jebson asked to be
given until the early part of the year 2000 to complete the
same but still failed to do so.15
On May 27, 2002, Buenviaje filed before the HLURB
Regional Field Office IV (HLURB-RIV) a Complaint for
Specific Performance with Damages and Attorney’s
Fees, against Jebson, Bañez, and Sps. Salonga
(respondents), praying for the (a) completion of Unit 5,
(b) partition and subdivision of the property, (c) delivery
of the title to Unit 5, and (d) payment of damages and
attorney’s fees. In the alternative, he prayed for the
rescission of the subject CTS, and the return of all
payments made thereunder, with interest at 24% per
annum (p.a.), as well as the house and lot, and golf
share pursuant to the “swapping arrangement.”16
The complaint was consolidated with those filed by other
parties, i.e., Beliz Realty and Development Corporation
(Beliz Realty) and Spouses George and Valentina Co
(Sps. Co; collectively, complainants), who similarly
entered into contracts to sell with Jebson, and sought the
completion of the units they purchased.17
In their defense, Jebson and Bañez claimed that they
were ready to comply with all their contractual obligations
but were not able to secure the necessary government
permits because Sps. Salonga stubbornly refused to
cause the consolidation of the parcels of land covered by
TCT No. T-9000, and their partition into ten (10)
individual lots.18
For their part, Sps. Salonga averred that they were not
liable to the complainants since there was no privity of
contract between them, adding that the contracts to sell
were unenforceable against them as they were entered
into by Jebson without their conformity, in violation of the
JVA. They maintained that they were ready to cause the
subdivision and individual titling of the subject property.
They also filed a cross-claim against Jebson for the
latter’s failure to complete and deliver to them the three
(3) units corresponding to their share in Brentwoods, and
for representing to the buyers that it owned the land
where Brentwoods was located.19
The HLURB-RIV’s Ruling
In a Decision20 dated December 5, 2002, the HLURB-
RIV: (a) rescinded the respective contracts to sell
entered into by Jebson with the complainants; (b) found
respondents solidarily liable for (i) the return of the
payments made by the complainants, with interest of
12% per annum (p.a.), and (ii) the payment of moral and
exemplary damages, attorney’s fees, and litigation
expenses; and (c) ordered respondents to (i) return to
Buenviaje and Beliz Realty the properties conveyed to
Jebson through their respective “swapping
arrangements,” and (ii) pay an administrative fine of
P30,000.00 for violation of Sections 4, 5, 20, and 25 of
Presidential Decree No. (PD) 957.21
The HLURB-RIV found that respondents were not legally
authorized to sell Brentwoods as they have not secured
the necessary Registration Certificate and License to
Sell. Furthermore, they failed to complete the
construction of the units as well as to deliver the units to
the complainants on time, entitling the latter to the refund
of their payments, including interests. It further found
Sps. Salonga solidarily liable with Jebson and Bañez as
joint venture partners liable to the general buying
public.22
Aggrieved, Sps. Salonga appealed to the HLURB-
BOC.23
The HLURB-BOC’s Ruling
In a Decision24 dated September 16, 2004, the HLURB-
BOC reversed and set aside the HLURB-RIV’s ruling,
and (a) upheld the validity of the respective contracts to
sell of Jebson with Buenviaje25 and Beliz Realty; (b)
rescinded the “swapping arrangements” under the said
CTS, and ordered Jebson and Bañez, jointly and
severally, to return the properties received thereunder to
Buenviaje and Beliz Realty, who shall, in turn, pay the
cash values thereof; (c) fixing a period of six (6) months
for the completion of the construction of Units 3, 5, 6 and
7; and (d) ordered the complainants to pay respondents
Sps. Salonga moral damages and attorney’s fees.26
The HLURB-BOC held that there was no substantial
breach but only a slight or casual one, which did not
justify a rescission of the contracts to sell, especially in
view of the fact that the residential units covered by the
said contracts were already at their finishing stages.
Considering the accomplishment level of the work done
on the said units, and further noting that the primary relief
sought in the complaints of Buenviaje and Beliz Realty
was specific performance, the HLURB-BOC ruled that
the proper remedy, instead, was to fix the period for
completion of the concerned units.27
Nonetheless, it invalidated the “swapping arrangements”
in the respective contracts to sell of Jebson with
Buenviaje and Beliz Realty, which allowed the use of
noncash assets as substantial down payment, leaving
Jebson with insufficient funds to complete their units, and
to construct and deliver the units allocated to Sps.
Salonga who were prejudiced thereby.28
It also found no basis to hold Sps. Salonga solidarily
liable with Jebson and Bañez under the subject CTS,
considering that: (a) the JVA does not provide for
solidarity for any act or omission of either party and, in
fact, expressly provides that Sps. Salonga shall be free
of any liability from any third party as regards
noncompliance with HLURB Rules and Regulations;29
(b) the legal obligation to procure the required
development, permit, license to sell, and certificate of
registration from the HLURB devolved entirely and
exclusively on Jebson and Bañez;30 (c) Sps. Salonga
were not the ones in control of the project, but Bañez;31
and (d) even assuming Sps. Salonga directly or indirectly
controlled Jebson, Section 40 of PD 957 exempts from
its rule of solidary liability one who has acted in good
faith and did not directly or indirectly induce the act or
acts constituting the violation or cause of action.32
Buenviaje and complainants moved for reconsideration
but the same were denied in a Resolution33 dated
January 25, 2005. Dissatisfied, Buenviaje elevated the
matter to the Office of the President (OP).34
The OP’s Ruling
In a Decision35 dated November 30, 2005, the OP
affirmed the ruling of the HLURB-BOC, finding: (a) no
factual basis to hold Sps. Salonga solidarily liable with
Jebson, pointing out that under the JVA, Jebson, as the
developer, holds Sps. Salonga free from liability to third
parties for noncompliance with HLURB rules and
regulations;36 (b) the contracts to sell between Jebson
and the complainants to be unenforceable against Sps.
Salonga whose conformity thereto was not secured in
violation of the JVA;37 (c) the rescission of the contracts
to sell was not the most economical solution to the
problem confronting the parties considering that the units
have already reached the finishing stage;38 and (d) the
rescission of the “swapping arrangements” entered into
by Jebson and the buyers to be proper.39
Complainants separately moved for reconsideration, all
of which were denied in an Order40 dated January 31,
2006. Unperturbed, Buenviaje and Beliz Realty filed a
petition for review before the CA.41 However, in the
course of the proceedings, Beliz Realty withdrew all its
claims against Sps. Salonga.42
The CA’s Ruling
In a Decision43 dated November 29, 2013, the CA
affirmed the OP ruling. It found that Jebson violated the
terms of the JVA when it failed to secure the pertinent
government permits for the development of Brentwoods,
and sold its allocated units without the conformity of Sps.
Salonga.44 Considering that the primary prayer of
Buenviaje and Beliz Realty was for specific performance,
i.e., the completion of the construction of their units,
which are almost finished, it ruled that the OP correctly
(a) sustained the HLURB Decision holding the rescission
of the contracts to sell to be impractical; and (b) ordered
that the said units be finished and delivered to Buenviaje
and Beliz Realty, rescinding only the “swapping
arrangement” in their respective contracts to sell with
Jebson.45 Anent Buenviaje’s liability for moral damages
and attorney’s fees to Sps. Salonga, the CA opined that
the OP’s in toto affirmation of the HLURB-BOC ruling is
equivalent to an affirmation of the ratio of said finding of
liability, i.e., that Buenviaje connived with Jebson in
diluting the cash portion of its payments to the prejudice
of the spouses.46
Buenviaje, Jebson, and Bañez, respectively filed their
motions for reconsideration, but the same were denied
by the CA in a Resolution47 dated December 15, 2014;
hence, the present petition filed by Buenviaje.48
The Issues Before the Court
The essential issues for the Court’s resolution are
whether or not the CA correctly ruled that: (a) the grant of
the remedy of specific performance in Buenviaje’s favor
was proper under the prevailing circumstances of the
case; (b) Sps. Salonga are not solidarily liable with
Jebson and Bañez to Buenviaje for the completion of the
construction and delivery of the unit; (c) the “swapping
arrangement” was invalid; and (d) Buenviaje is liable to
Sps. Salonga for moral damages and attorney’s fees.
The Court’s Ruling
The petition is partly meritorious.
Specific performance and “rescission” (more accurately
referred to as resolution) are alternative remedies
available to a party who is aggrieved by a counterparty’s
breach of a reciprocal obligation. This is provided for in
Article 1191 of the Civil Code, which partly reads:
Art. 1191. The power to rescind obligations is implied
in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and
the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should
become impossible.
x x x x (Emphasis supplied)
Specific performance is defined as “[t]he remedy of
requiring exact performance of a contract in the specific
form in which it was made, or according to the precise
terms agreed upon.”49 It pertains to “[t]he actual
accomplishment of a contract by a party bound to fulfill
it.”50
On the other hand, resolution is defined as the
“unmaking of a contract for a legally sufficient reason
x x x.”51 “[Resolution] does not merely terminate the
contract and release the parties from further obligations
to each other, but abrogates the contract from its
inception and restores the parties to their original
positions as if no contract has been made.
Consequently, mutual restitution, which entails the return
of the benefits that each party may have received as a
result of the contract, is thus required.”52 Notably,
resolution under Article 1191 of the Civil Code “will not
be permitted for a slight or casual breach, but only for
such substantial and fundamental violations as would
defeat the very object of the parties in making the
agreement. Ultimately, the question of whether a breach
of contract is substantial depends upon the attending
circumstances.”53
In this case, the HLURB-BOC, the OP, and the CA all
pointed out that Buenviaje primarily prayed for the
remedy of specific performance — i.e., the completion of
Unit 5, the subdivision of Sps. Salonga’s property into
individual lots per unit, and the turnover of Unit 5 as well
as the subdivided lot portion allocated to such unit to him
— and only prayed for the remedy of rescission as an
alternative remedy.54 Thus, it remains apparent that as
between the two remedies made available to him,
Buenviaje, had, in fact, chosen the remedy of specific
performance and therefore, ought to be bound by the
choice he had made. To add, “[t]he fundamental rule is
that reliefs granted a litigant are limited to those
specifically prayed for in the complaint; other reliefs
prayed for may be granted only when related to the
specific prayer(s) in the pleadings and supported by the
evidence on record.”55 Hence, based on this postulate,
the lower tribunals could hardly be faulted for granting
the proper relief in accordance with what Buenviaje
himself had claimed.
Relatedly, it is observed that Buenviaje’s alternative
prayer for resolution is textually consistent with that
portion of Article 1191 of the Civil Code which states that
an injured party “may also seek rescission, even after he
has chosen fulfillment, if the latter should become
impossible.” Nevertheless, the impossibility of fulfillment
was not sufficiently demonstrated in the proceedings
conducted in this case. As the HLURB BOC pointed out,
“[t]here is no finding that specific performance has
become impossible or that there are insuperable legal
obstacles to the completion of the constructed units so
as to justify [resolution].”56 In fact, as the CA contrarily
remarked, Buenviaje’s “main prayer [for specific
performance] x x x appears to be the more plausible
course of action”57 “[s]ince the units covered by the
disputed Contracts To Sell are almost finished, and
[have] most likely [been] complete[d].”58
With these in mind, the CA therefore correctly upheld the
directive for Jebson to comply with its obligations under
the subject CTS with Buenviaje as prayed for by the
latter. Failing to show any cogent reason to hold
otherwise, Buenviaje can no longer recant his primary
choice of relief. His prayer for resolution in the instant
petition must perforce fail.
II.
With the propriety of specific performance having been
decreed, Buenviaje’s claim to be restituted the alleged
purchase price of P10,625,000.00 — for which Sps.
Salonga were claimed to be solidarily liable — thus,
holds no basis. As above intimated, mutual restitution is
the proper consequence of the remedy of resolution. It
cannot arise — as it is, in fact, theoretically incompatible
— with the remedy of specific performance, which is the
relief prayed for and consequently, granted to the injured
party herein.
In this relation, it is fitting to clarify that the obligations to
be fulfilled, i.e., the completion of Unit 5, the subdivision
of Sps. Salonga’s property into individual lots per unit,
and the turnover of Unit 5, as well as the subdivided lot
portion allocated to such unit, are obligations of Jebson
to Buenviaje under the subject CTS dated June 1997.
These obligations are subsumed in the general
provisions of Articles 3 and 4, which respectively read:
ARTICLE 3. POSSESSION
3.1. Upon execution of this contract and the payment of
the amounts stated in Article 1.2 are in good standing
and the housing unit is completed hereof, the BUYER
may take possession of the subject house and lot of this
contract, in the concept of a lessee or tenant until such
time as the housing unit have been fully paid. BUYER’s
right of possession shall continue so long as he complies
with all the terms and conditions hereof.
ARTICLE 4. TRANSFER OF OWNERSHIP
4.1 It is hereby agreed and understood that title to the
above described lot subject of this contract shall remain
with the SELLER and shall pass to and be transferred to
the BUYER only upon complete payment by the BUYER
of all his obligations herein stipulated, at which time the
SELLER agrees to execute a final Deed of Absolute Sale
in favor of the BUYER.59
In this case, it is undisputed that Sps. Salonga were not
parties to the above mentioned contract. Under Article
131160 of the Civil Code, it is a basic principle in civil law
on relativity of contracts, that contracts can only bind the
parties who had entered into it and it cannot favor or
prejudice third persons. Contracts take effect only
between the parties, their successors in interest, heirs
and assigns. Thus, absent any privity of contract as to
them, there is no basis to hold Sps. Salonga liable for
any of the obligations stated under the said contract to
sell.
At this juncture, it should be further made clear that the
imputation of joint or solidary liability against a particular
person — such as that insistently claimed against Sps.
Salonga by Buenviaje first presupposes the existence of
that person’s obligation. On the active side, the joint or
solidary nature of an obligation is an aspect of
demandability; it pertains to the extent of a creditor’s
entitlement to demand fulfillment against any or all of his
debtors under one particular obligation. Based on case
law, a solidary obligation is one in which each of the
debtors is liable for the entire obligation, and each of the
creditors is entitled to demand the satisfaction of the
whole obligation from any or all of the debtors. On the
other hand, a joint obligation is one in which each
debtors is liable only for a proportionate part of the debt,
and the creditor is entitled to demand only a
proportionate part of the credit from each debtor.61
As already mentioned, no source of obligation under the
subject CTS can be traced to Sps. Salonga as they were
clearly nonparties thereto. Therefore, without such extant
obligation, the possibility of holding them liable in solidum
with Jebson under the said contract is out of the
question.
Neither has Buenviaje persuasively argued that Sps.
Salonga may be held solidarily liable pursuant to law,
which is a distinct source of obligation.62 More
particularly, Buenviaje attempts to establish that Section
40 of PD 957 as well as Articles 1822 and 1824 of the
Civil Code, are legal provisions which render Sps.
Salonga solidarity liable together with Jebson:
Section 40 of PD 957 reads:
Section 40. Liability of controlling persons.—Every
person who directly or indirectly controls any person
liable under any provision of this Decree or of any rule or
regulation issued thereunder shall be liable jointly and
severally with and to the same extent as such controlled
person unless the controlling person acted in good faith
and did not directly or indirectly induce the act or acts
constituting the violation or cause of action.
In this case, records are bereft of any showing that Sps.
Salonga had direct or indirect control over Jebson
throughout the course of the entire Brentwoods Project.
In fact, even if it is assumed that they had some sort of
control over Jebson, it was not shown that they acted in
bad faith and had a hand in inducing Jebson’s acts from
which Buenviaje’s cause of action arose. As such, the
foregoing provision cannot be invoked to hold Sps.
Salonga solidarily liable with Jebson.
Similarly, there is no perceptible legal basis to hold them
solidarily liable under Articles 1822 and 1824 of the Civil
Code. These provisions, which are found under Section
3, Chapter 2, Title IX, Book IV of the Civil Code on
Partnership, respectively state:
Article 1822. Where, by any wrongful act or omission
of any partner acting in the ordinary course of the
business of the partnership or with the authority of his
copartners, loss or injury is caused to any person, not
being a partner in the partnership, or any penalty is
incurred, the partnership is liable therefor to the same
extent as the partner so acting or omitting to act.
xxxx
Article 1824. All partners are liable solidarily with the
partnership for everything chargeable to the partnership
under Articles 1822 and 1823.
Evidently, the foregoing legal provisions pertain to the
obligations of a copartner in the event that the
partnership to which he belongs is held liable. In this
case, Buenviaje never dealt with any partnership
constituted by and between Jebson and Sps. Salonga.
As previously mentioned, the subject CTS, which was
the source of the obligations relative to the completion
and delivery of Unit 5, solely devolved upon the person
of Jebson. As there was no partnership privy to any
obligation to which Buenviaje is a creditor, Articles 1822
and 1824 of the Civil Code do not apply.
While Jebson, as developer, and Sps. Salonga, as land
owner, entered into a joint venture, which — based on
case law — may be considered as a form of
partnership,63 the fact remains that their joint venture
was never privy to any obligation with Buenviaje; hence,
liability cannot be imputed against the joint venture
based on the same principle of relativity as above
mentioned. Besides, it should be pointed out that the
JVA64 between Jebson and Sps. Salonga was limited to
the construction of the residential units under the
Brentwoods Project and that Jebson had the sole hand in
marketing the units allocated to it to third persons, such
as Buenviaje. In fact, under the express terms of the
JVA, Jebson, as the developer, had even stipulated to
hold Sps. Salonga free from any liability to third parties
for noncompliance with HLURB rules and regulations. As
things stand, only Jebson should be held liable for its
obligations to Buenviaje under the subject CTS.
III.
Pursuant to Articles 117765 and 131366 of the Civil
Code, creditors are given remedies whenever their
debtors perform acts or omissions or enter into contracts
that tend to defraud the former of what is due them. Such
remedy comes in the form of rescission under Articles
1381(3)67 in relation to Articles 138368 and 138469 of
the Civil Code. Rescission (as contemplated in Articles
1380 to 1389 of the Civil Code) is a remedy granted by
law to the contracting parties and even to third persons,
to secure the reparation of damages caused to them
Article 1177. The creditors, after having pursued the
property in possession of the debtor to satisfy their
claims, may exercise all the rights and bring all the
actions of the latter for the same purpose, save those
which are inherent in his person; they may also impugn
the acts which the debtor may have done to defraud
them.
Article 1313. Creditors are protected in cases of
contracts intended to defraud them.
Article 1381. The following contracts are rescissible:
xxxx
(3) Those undertaken in fraud of creditors when the
latter cannot in any other manner collect the claims due
them. x x x x
Article 1383. The action for rescission is subsidiary; it
cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation
for the same.
Article 1384. Rescission shall be only to the extent
necessary to cover the damages caused.
by a contract, even if this should be valid, by restoration
of things to their condition at the moment prior to the
celebration of the contract. It implies a contract, which
even if initially valid, produces a lesion or a pecuniary
damage to someone.70 In the rescission by reason of
lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because
it is the raison d’être as well as the measure of the right
to rescind. Hence, where the defendant makes good the
damages caused, the action cannot be maintained or
continued, as expressly provided in Articles 1383 and
1384.71
In this case, it must be recapitulated that under the JVA,
Sps. Salonga are supposed to receive a total of three (3)
Brentwoods residential units from Jebson, who in turn, is
obligated to construct these units at its own expense.
Jebson bound itself to deliver the same within six (6)
months after receipt of the down payment for the units
allocated to it. Meanwhile, Jebson through Bañez —
entered into “swapping arrangements” with its buyers
(among others, Buenviaje), whereby it accepted various
noncash assets as suitable payments for the said units.
Sps. Salonga assailed the property swaps as they
purportedly deprived the funding for the Brentwoods
project to the tune of P13,000,000.00. Specifically, they
asked that the swapped properties be ordered returned
to the buyers concerned and that their values be paid in
cash by the latter to be utilized for the completion of the
corresponding units.72 The HLURB-BOC, which was
later affirmed by the OP and then by the CA, found Sps.
Salonga’s supplication to be meritorious, holding that the
latter were prejudiced by the property swaps inasmuch
as these arrangements ate up more than 80% of the
down payments which would have been utilized to
complete the units. Moreover, it was observed that the
said arrangements were done without the conformity of
Sps. Salonga as required in their JVA with Jebson, and
thus, were entered into to defraud them.73 As a result,
the HLURB-BOC ordered the rescission of the “swapping
arrangement” entered into by Jebson with Buenviaje and
instead, ordered him to pay in cash the sum of
P7,200,000.00 as part of his down payment under the
subject CTS.
After a careful study of this case, the Court, however,
finds no basis to rescind the aforesaid “swapping
arrangement.” Although the same was admittedly
entered into by Jebson with Buenviaje without the
conformity of Sps. Salonga, the records do not support
the HLURB-BOC’s finding that this separate
arrangement was entered into in order to defraud
Jebson’s creditor under the JVA, i.e., Sps. Salonga, and
hence, should not be rescinded. As aptly observed by
Justice Alfredo Benjamin S. Caguioa during the
deliberations on this case, the act of Jebson in accepting
noncash assets as suitable payments was a business
decision made by it. While such may have been the
cause of Jebson’s inability to timely complete the
Brentwoods project (possibly due to the lack of
immediate access to liquid capital at that time), the
soundness or unsoundness of that business decision is
not enough for the Court to conclude that the said swaps
were entered into to defraud Sps. Salonga,
notwithstanding the resulting “economic prejudice” to
them. As the records show, Jebson was, in fact, able to
receive both cash and noncash asset payments made by
Buenviaje,74 and hence, could have properly managed
the same to meet its obligations in light of its financial
position. In Union Bank of the Philippines v. Sps. Ong,75
the Court explained the requirement of fraud relative to
rescissible contracts under Article 1381 of the Civil Code:
Essentially, petitioner anchors its case on Article 1381 of
the Civil Code which lists as among the rescissible
contracts “[T]hose undertaken in fraud of creditors when
the latter cannot in any other manner collect the claim
due them.”
Contracts in fraud of creditors are those executed with
the intention to prejudice the rights of creditors. They
should not be confused with those entered into without
such mal-intent, even if, as a direct consequence thereof,
the creditor may suffer some damage. In determining
whether or not a certain conveying contract is fraudulent,
what comes to mind first is the question of whether the
conveyance was a bona fide transaction or a trick and
contrivance to defeat creditors. To creditors seeking
contract rescission on the ground of fraudulent
conveyance rest the onus of proving by competent
evidence the existence of such fraudulent intent on the
part of the debtor, albeit they may fall back on the
disputable presumptions, if proper, established under
Article 1387 of the Code.76 (Emphases supplied)
Here, the onus of proving that the “swapping
arrangement” was a fraudulent conveyance, or a trick
and contrivance to defeat creditor rights, was not
sufficiently discharged by Sps. Salonga. Thus, absent
such proof of fraud, the Court concludes that the
“swapping arrangement” was a bona fide tran­saction
freely entered into between Jebson and Buenviaje, and
therefore, valid and binding. As such, the HLURB-BOC’s
directive to rescind the “swapping arrangement” entered
into by Jebson with Buenviaje and the consequent order
for the latter to pay Jebson the sum of P7,200,000.00 in
cash as part of his down payment under the subject
CTS, is hereby reversed. If at all, Sps. Salonga’s remedy
is to compel Jebson to honor its obligations under its
contract with them, and not the rescission of the
aforediscussed property swap, which is part and parcel
of the consideration underlying the subject CTS between
Jebson and Buenviaje, a distinct and independent
contract from the JVA altogether.
IV.
In order that moral damages under Article 221977 of the
Civil Code may be awarded, there must be pleading and
proof of moral suffering, mental anguish, fright and the
like.78 In Mahinay v. Velasquez, Jr.,79 the Court
explained:
While no proof of pecuniary loss is necessary in order
that moral damages may be awarded, the amount of
indemnity being left to the discretion of the court, it is
nevertheless essential that the claimant should
satisfactorily show the existence of the factual basis of
damages and its causal connection to defendant’s acts.
This is so because moral damages, though incapable of
pecuniary estimation, 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.
In Francisco v. GSIS, the Court held that there must be
clear testimony on the anguish and other forms of mental
suffering. Thus, if the plaintiff fails to take the witness
stand and testify as to his/her social humiliation,
wounded feelings and anxiety, moral damages cannot be
awarded. In Cocoland Development Corporation v.
National Labor Relations Commission, the Court held
that “additional facts must be pleaded and proven to
warrant the grant of moral damages under the Civil
Code, these being, x x x social humiliation, wounded
feelings, grave anxiety, etc., that resulted therefrom.”80
(Emphases and underscoring supplied)
As to attorney’s fees, the general rule is that the same
cannot be recovered as part of damages because of the
policy that no premium should be placed on the right to
litigate. 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 220881 of the Civil Code demands
factual, legal, and equitable justification. Even when a
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 an erroneous conviction of the righteousness
of his cause.82
In this case, the tribunals a quo grounded Buenviaje’s
liability for moral damages and attorney’s fees to Sps.
Salonga on his alleged connivance with Jebson and
Bañez in diluting the cash portion of his down payments
to the prejudice of Sps. Salonga. However, a judicious
perusal of the record reveals that aside from Buenviaje’s
actual payment of noncash assets as part of the
purchase price of Unit 5, no other evidence shows that
such connivance exists. In the absence of such proof, it
cannot be concluded that Buenviaje had some ulterior
purpose in paying noncash assets as part of the
consideration. As the Court views it, Buenviaje honestly
thought that he could partially pay the purchase price of
Unit 5 with the said noncash assets amounting to
P7,200,000.00 as anyway Jebson and Bañez accepted
the offer. “Good faith is always presumed, and upon him
who alleges bad faith rests the burden of proof,”83 which
was not overcome in this case.
Thus, there was no factual basis to declare Buenviaje
liable to Sps. Salonga for moral damages and attorney’s
fees; consequently, such awards must be deleted. While
factual findings of quasi-judicial agencies, especially
when affirmed by the CA, are binding on the Court, such
findings may be overturned when, inter alia, they are
grounded on mere speculation,84 as in this instance.
WHEREFORE, the petition is PARTLY GRANTED. The
Decision dated November 29, 2013 and the Resolution
dated December 15, 2014 of the Court of Appeals (CA)
in C.A.-G.R. S.P. No. 93422 are hereby AFFIRMED with
MODIFICATION, DELETING the following directives: (a)
the rescission of the “swapping arrangement” entered
into by respondent Jebson Holdings Corporation
(Jebson) with petitioner Dr. Restituto C. Buenviaje
(Buenviaje) and the consequent order for the latter to pay
Jebson the sum of P7,200,000.00 in cash as part of his
down payment under their Contract to Sell; and (b) the
order for Buenviaje to pay respondents Spouses Jovito
R. Salonga and Lydia B. Salonga moral damages and
attorney’s fees in the amounts of P50,000.00 and
P25,000.00, respectively. The rest of the CA Decision
STANDS.
SO ORDERED.
Petition partly granted, judgment and resolution affirmed
with modification.
Notes.—Reciprocal obligations are those which arise
from the same cause, in which each party is a debtor
and a creditor of the other, such that the obligation
of one is dependent on the obligation of the other.
(Fong vs. Dueñas, 757 SCRA 412 [2015])
The right of rescission of a party to an obligation
under Article 1191 of the Civil Code is predicated on
a breach of faith by the other party who violates the
reciprocity between them. (Games and Garments
Developers, Inc. vs. Allied Banking Corporation, 762
SCRA 447 [2015])
----------------------------------------------------------------------------
---
G.R. No. 141851. January 16, 2002.*
DIRECT FUNDERS HOLDINGS CORPORATION,
petitioner, vs. JUDGE CELSO D. LAVIÑA, PRESIDING
JUDGE OF RTC-PASIG CITY, BRANCH 71 and
KAMBIAK Y. CHAN, JR., respondents.
Civil Law; Obligations; Contracts; It is a fundamental
axiom in the law of contracts that a person not a party to
an agreement cannot be affected thereby.—To
emphasize, the mortgagee (United Savings Bank) did not
give its consent to the change of debtor. It is a
fundamental axiom in the law on contracts that a person
not a party to an agreement cannot be affected thereby.
Worse, not only was the conditional sale agreement
executed without the consent of the mortgagee-creditor,
United Savings Bank, the same was also a material
breach of the stipulations of the real estate mortgage
over the subject property.
Same; Same; Same; In conditional obligations, the
acquisition of rights, as well as the extinguishment or
loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition.—
The conditions of the conditional sale agreement were
not fulfilled, hence, respondent’s claim to the subject
property was as heretofore stated ineffectual. Article
1181 of the Civil Code reads: “Art. 1181. In conditional
obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall
depend upon the happening of the event which
constitutes the condition.”
Same; Same; Same; A promise to buy and sell a
determinate thing for a price certain is binding upon the
promisor if the promise is supported by a consideration
distinct from the price.—In Soriano v. Bautista, the Deed
of Real Estate Mortgage dated May 30, 1956 executed
by the mortgagors contained a stipulation giving the
mortgagee the option to purchase the land subject of the
mortgage on any date within the 2-year period of the
mortgage. The mortgagee subsequently decided to buy
the land pursuant to this stipulation. We ruled:
“Appellants contend that, being mortgagors, they cannot
be deprived of the right to redeem the mortgaged
property, because such right is inherent in and
inseparable from this kind of contract. The premise of the
contention is not entirely accurate. While the transaction
is undoubtedly a mortgage and contains the customary
stipulation concerning redemption, it carries the added
special provision aforequoted, which renders the
mortgagors’ right to redeem defeasible at the election of
the mortgages. There is nothing illegal or immoral in this.
It is simply an option to buy, sanctioned by Article 1479
of the Civil Code, which states: “A promise to buy and
sell a determinate thing for a price certain is binding upon
the promisor if the promise is supported by a
consideration distinct from the price.”
PETITION for review on certiorari of a decision of the
Court of Appeals.
The facts are stated in the opinion of the Court.
Pedro N. Tanchuling for petitioner.
Romulo, Mabanta, Buenaventura, Sayoc & Delos
Angeles and Ermitaño, Sangco, Manzano & Associates
collaborating counsels for petitioner.
Decano Law Offices for private respondent.
PARDO, J.:
The Case
The petition at bar1 seeks to review the decision2 of the
Court of Appeals3 dismissing the petition assailing the
ruling of the trial court issuing a writ of preliminary
injunction that restrained a writ of possession issued by a
coordinate court.4
The Facts
The facts, as found by the Court of Appeals, are as
follows:
“It is alleged by the petitioner that the respondent Judge
issued the writ of preliminary injunction, despite clear and
express prayer in the Amended Complaint (Rollo, p. 23)
that private respondent Kambiak Y. Chan, Jr. sought the
issuance of a writ of preliminary mandatory injunction.
This is again despite the fact this error was brought to
respondent Judge’s attention denied the Motion for
Reconsideration on May 29, 1998 justifying the issuance
thereof due to petitioner’s alleged misappreciation of
facts and reliefs sought for.
“Culled from the records of the case, the action a quo is
for annulment of documents, reconveyance, recovery of
possession, damages with application for the issuance of
a writ of preliminary mandatory injunction and temporary
restraining order. “During the hearing for the issuance of
temporary restraining order, it was made clear to the
respondent Judge that the property in question was
occupied by the petitioner by virtue of a writ of
possession issued by the Regional Trial Court of Pasig,
Branch 157 in LRC Case No. R-5475 in a petition for the
issuance of writ of possession thereof way back on
October 23, 1997 (Rollo, p. 22). Despite the lawful order
of a coordinate and co-equal court, the respondent
Judge, presiding Regional Trial Court of Pasig, Branch
71, issued the questioned orders to restore possession
to private respondent Chan, alleging an obviously grave
abuse of discretion, tantamount to lack of jurisdiction
(Rollo, p. 38).
“On the same date on December 8, 1997, the temporary
restraining order (TRO) was issued, the Court Sheriff IV
Cresencio Rabello, Jr. implemented the TRO and
submitted the Return on December 9, 1997 (Rollo, p.
39).
“Then, on January 21, 1998, the respondent Judge
issued the questioned order granting the issuance of a
writ of preliminary injunction (Rollo, p. 14) who
subsequently denied the petitioner’s motion to dismiss
and supplemental motion to dismiss and the very urgent
motion for reconsideration on February 16, 1998.
“On May 29, 1998, the motion for inhibition and the
motion to dissolve the writ of preliminary injunction were
also denied (Rollo, p. 18).”5
On August 5, 1998, petitioner filed with the Court of
Appeals a petition for certiorari and prohibition assailing
the trial court’s issuance of a writ of preliminary
injunction.6
On September 28, 1999, the Court of Appeals
promulgated a decision dismissing the petition ruling that
the trial court had jurisdiction to issue the injunction that
did not interfere with the writ of possession of a
coordinate court.7
On October 19, 1999, petitioner filed with the Court of
Appeals a motion for reconsideration of the decision.8
On February 2, 2000, the Court of Appeals denied
petitioner’s motion stating that the arguments advanced
were “mere reiteration and restatements of those
contained in their pleadings x x x.”9 Hence, this
appeal.10
The Issue
The issue raised is whether the Court of Appeals erred in
affirming the trial court’s ruling issuing a writ of injunction
restraining a writ of possession in another case to place
respondent back in possession of the subject property.
In other words, the issue is who between petitioner and
respondent Kambiak Y. Chan, Jr. has a better right to the
possession of the subject property?
The Court’s Ruling
We resolve the issue in favor of petitioner.
The conditional sale agreement was the only document
that the respondent presented during the summary
hearing of the application for a temporary restraining
order before the Regional Trial Court, Branch 71, Pasig
City.11
We find that the conditional sale agreement is officious
and ineffectual. First, it was not consummated. Second, it
was not registered and duly annotated on the Transfer
Certificate of Title (No. 12357) covering the subject
property. Third, it was executed about eight (8) years
after the execution of the real estate mortgage over the
subject property.
To emphasize, the mortgagee (United Savings Bank) did
not give its consent to the change of debtor. It is a
fundamental axiom in the law on contracts that a person
not a party to an agreement cannot be affected thereby.
Worse, not only was the conditional sale agreement
executed without the consent of the mortgagee-creditor,
United Savings Bank, the same was also a material
breach of the stipulations of the real estate mortgage
over the subject property. The real estate mortgage, in
part, provides:
“(j) The MORTGAGOR shall neither lease the mortgaged
property/ies, nor sell or dispose of the same in any
manner, without the written consent of the
MORTGAGEE. However, if notwithstanding this
stipulation and during the existence of this mortgage, the
property/ies herein mortgaged, or any portion thereof,
is/are leased or sold, x x x. It shall also be incumbent
upon the MORTGAGOR to make it a condition of the
sale or alienation that the vendee, or any other party in
whose favor the alienation is made, shall recognize as
first lien the existing mortgage or encumbrance in favor
of the MORTGAGEE, as well as any new modified
mortgage covering the same properties to be executed
by said MORTGAGOR in favor of the MORTGAGEE,
and shall thereafter agree, promise and bind himself to
recognize and respect any extension of the terms of the
original mortgage granted by the MORTGAGEE in favor
of the MORTGAGOR and such extended mortgage shall
be considered as prior to such encumbrance as the
original mortgage. It is also further understood that
should the MORTGAGOR sell, transfer or in any manner
alienate or encumber the mortgaged property/ies in
violation of this agreement, he/she shall be liable for
damages to the MORTGAGEE.”12
The conditions of the conditional sale agreement were
not fulfilled, hence, respondent’s claim to the subject
property was as heretofore stated ineffectual. Article
1181 of the Civil Code reads:
“Art. 1181. In conditional obligations, the acquisition of
rights, as well as the extinguishments or loss of those
already acquired, shall depend upon the happening of
the event which constitutes the condition.”
On the other hand, petitioner’s right to the subject
property is based on the following:
1.The real estate mortgage constituted by the Sps.
Espino duly registered and annotated on TCT No. 12357
covering the subject property.
2.The Deed of Assignment dated 15 January 1997
executed by UCPB Savings Bank (formerly United
Savings Bank) whereby it conveyed its rights as
mortgagee in favor of the petitioner.
3.The Deed of Assignment of Right of Redemption dated
15 January 1997, executed by the Sps. Espino wherein
they assigned their right of redemption over the subject
property to UCPB Savings Bank and the latter’s
successors-in-interest.
4.The Certificate of Sale dated 29 May 1997 executed by
the sheriff, the affidavit of consolidation of ownership
dated July 1997 (denominated as Doc. No. 490; Page
No. 99. Book No. CLVII, Series of 1997 in the Notarial
Books of Erlinda B. Espejo, Notary Public for Quezon
City) and TCT No. 8559-R subsequently issued to
Petitioner.
5.The Order dated 23 October 1997 of Branch 157, RTC,
Pasig City (LRC No. R-5475) and the Turn-over/Delivery
of Possession of the sheriff in the said LRC case.
In Soriano v. Bautista,13 the Deed of Real Estate
Mortgage dated May 30, 1956 executed by the
mortgagors contained a stipulation giving the mortgagee
the option to purchase the land subject of the mortgage
on any date within the 2-year period of the mortgage.
The mortgagee subsequently decided to buy the land
pursuant to this stipulation. We ruled:
“Appellants contend that, being mortgagors, they cannot
be deprived of the right to redeem the mortgaged
property, because such right is inherent in and
inseparable from this kind of contract. The premise of the
contention is not entirely accurate. While the transaction
is undoubtedly a mortgage and contains the customary
stipulation concerning redemption, it carries the added
special provision aforequoted, which renders the
mortgagors’ right to redeem defeasible at the election of
the mortgagee. There is nothing illegal or immoral in this.
It is simply an option to buy, sanctioned by Article 1479
of the Civil Code, which states: “A promise to buy and
sell a determinate thing for a price certain is binding upon
the promisor if the promise is supported by a
consideration distinct from the price.”
In view of all of the foregoing, it is inexorable to conclude
that petitioner, not the respondent, has a better right to
the possession of subject property.
The Judgment
WHEREFORE, the Court hereby REVERSES the
decision of the Court of Appeals15 and the order denying
reconsideration. In lieu thereof, the Court renders
judgment dismissing the case below, Civil Case No.
66554 of the Regional Trial Court, Branch 71, Pasig City,
including the counterclaims. No costs.
SO ORDERED. Judgment reversed.
Note.—Petitioner’s obligation to purchase the land is
a conditional one and is governed by Article 1181 of
the Civil Code. (Gonzales vs. Heirs of Thomas and
Paula Cruz, 314 SCRA 585 [1999])
----------------------------------------------------------------------------
-
G.R. No. 119679. May 18, 2001.*
SPS. ALFREDO AND SUSANA BUOT, petitioners, vs.
COURT OF APPEALS, ENCARNACION DIAZ VDA. DE
RESTON, ET AL., respondents.
Civil Law; Contracts; Sale; An option is a contract
granting a privilege to buy or sell at a determined price
within an agreed time; In a contract to sell, the title over
the subject property is transferred to the vendee only
upon the full payment of the stipulated consideration.—
An examination of said Memorandum of Agreement
shows that it is neither a contract of sale nor an option to
purchase, but it is a contract to sell. An option is a
contract granting a privilege to buy or sell at a
determined price within an agreed time, the specific
length or duration of which is not present in the
Memorandum of Agreement. In a contract to sell, the title
over the subject property is transferred to the vendee
only upon the full payment of the stipulated
consideration. Unlike in a contract of sale, the title in a
contract to sell does not pass to the vendee upon the
execution of the agreement or the Delivery of the thing
sold.
Same; Same; Same; Such full payment being a positive
suspensive condition, the failure of which is not
considered a breach, casual or serious, but simply an
event which prevented the obligation from acquiring
obligatory force.—From the foregoing, it appears that the
agreement was in the nature of a contract to sell as the
vendor, Encarnacion Diaz Vda. de Reston, clearly
reserved to herself ownership and possession of the
property until full payment of the purchase price by the
vendees, such payment being a positive suspensive
condition, the failure of which is not considered a breach,
casual or serious, but simply an event which prevented
the obligation from acquiring obligatory force.
Remedial Law; Appeals; A party who has not appealed
from a decision cannot seek any relief other than what is
provided to the judgment appealed from.—In Quezon
Development Bank vs. Court of Appeals, we ruled that a
party who has not appealed from a decision cannot seek
any relief other than what is provided in the judgment
appealed from, and cited Lumibao vs. Intermediate
Appellate Court, thus: It is well-settled in this jurisdiction
that whenever an appeal is taken in a civil case, an
appellee who has not himself appealed may not obtain
from the appellate court any affirmative relief other than
the ones granted in the decision of the court below. The
appellee can only advance any argument that he may
deem necessary to defeat the appellant’s claim or to
uphold the decision that is being disputed, and he can
assign errors in his brief if such is required to strengthen
the views expressed by the court a quo. These assigned
errors in turn may be considered by the appellate court
solely to maintain the appealed decision on other
grounds, but not for the purpose of reversing or
modifying the judgment in the appellee’s favor and giving
him other reliefs.
PETITION for review on certiorari of a decision of the
Court of Appeals.
The facts are stated in the opinion of the Court.
Diores Law Offices for petitioners.
 Wilfredo M. Sentillas for respondents.
Benitez, Parlade, Africa, Herrera, Parlade & Panga
Law Offices for private respondents Mariano and Sotera
del Rosario.
Piramide & Partners co-counsels for respondent M.
del Rosario.
DE LEON, JR., J.:
This is an appeal from the Decision1 of the Court of
Appeals2 promulgated on March 9, 1995 setting aside
the Amended Decision/Order3 dated December 5, 1990
of the Regional Trial Court, Branch 17, Cebu City, and
reinstating the latter’s Decision dated July 30, 19904
dismissing petitioners’ action for recovery of property,
cancellation of original certificate of title and damages
against private respondents, the heirs of Encarnacion
Diaz Vda. de Reston and spouses Mariano Del Rosario
and Sotera Dejan.
The facts are as follows:
Plaintiffs-spouses Alfredo and Susana Buot (petitioners
herein), alleged in their second amended complaint5 that
on December 6, 1974 defendant Encarnacion Diaz Vda.
de Reston (private respondent herein), sold to them the
eastern portion of her property covered by Tax
Declaration No. 14887 (1967), with an area of 19,042
square meters situated at Tulay (previously known as
Tungkop), Minglanilla, Cebu, as evidenced by a
Memorandum of Agreement.6
The Memorandum of Agreement stated that the
purchase price of P19,042.00 shall be paid as follows:
(a) the amount of one thousand pesos (P1,000.00) in the
concept of earnest money, upon the execution of the
said instrument; and (b) the balance thereof, in the
amount of eighteen thousand forty-two pesos
(P18,042.00), within six (6) months from the date the
vendees are notified by the vendor of the fact that the
Certificate of Title to the eastern portion of the vendor’s
lot is ready for transfer in the names of the vendees. It
was also agreed that title to, ownership, possession and
enjoyment of the portion sold shall remain with the
vendor until the full consideration of the sale shall have
been received by her and acknowledged in a document
duly executed for said purpose. Expenses for the
registration of the lot under the Torrens system, with a
view to securing a certificate of title for the same, as well
as for the portion sold, shall be borne by the parties
share and share alike. However, it shall be the vendor
who must initiate the filing of the necessary petition in the
proper court.7
The Buot spouses, as vendees, paid Encarnacion Diaz
Vda. de Reston the earnest money of P1,000.00. From
April 1975 to March 1977, Encarnacion asked Alfredo
Buot for additional sums of money totalling P2,774.00,
duly receipted8 as part payment of the subject lot.9 As
the land was not titled, Alfredo Buot protected his interest
by informing the Provincial Assessor of Cebu in a letter
dated October 23, 1974 that he had acquired “certain
rights” on said parcel of land covered by Tax Declaration
No. 14887 (old) or 004970 (new) and requested that his
said rights be annotated on the face of said tax
declaration.10 He also wrote a similar letter dated
November 4, 1974 to the Municipal Assessor of
Minglanilla, Cebu.11 The Provincial Assessor annotated
his said right on Tax Declaration No. 00684712 effective
in 1975, instead of Tax Declaration No. 004970 as
requested, effective in 1974.13
On May 18, 1977, Alfredo Buot received a subpoena
from the Philippine Constabulary, signed by Lt. Col.
Rueb Yap, requiring him to appear on May 20, 1977. On
said date, they had a confrontation with Encarnacion
Diaz Vda. de Reston.14
On June 14, 1977, Encarnacion Diaz Vda. de Reston
filed Case No. K-10474 before the then Court of First
Instance of Cebu for the registration of title to land
consisting of 29,532 square meters situated in Tulay,
Minglanilla, Cebu, including the portion sold to the
plaintiffs.15
The plaintiffs (petitioners) alleged that on August 5, 1977,
Encarnacion Diaz Vda. de Reston maliciously executed a
Deed of Absolute Sale for the whole parcel of land
(29,532 square meters) described under Tax Declaration
No. 14887 (1967), which included the portion (19,042
square meters) already sold to them, to defendants-
spouses Mariano Del Rosario and Sotera Dejan, who
had previous knowledge of the sale to them.16 Alfredo
Buot said that he met Mariano Del Rosario in April 1977
as he came with Encarnacion and Judge Pedro Godinez
to his house.17
The plaintiffs also alleged that on December 27, 1977,
the spouses Del Rosario, by means of fraud were able to
secure a Free Patent Title to the entire property,
including the eastern portion previously sold to them.
Notwithstanding the separate application by Encarnacion
Diaz Vda. de Reston for a free patent on May 26,1965,
the Bureau of Lands accepted the free patent application
of the Del Rosario spouses, which was approved on
December 27, 1977. They never received a notice of the
Free Patent Application of the Del Rosario spouses
although they are the adjacent owners of the property
applied for, and the previous protestant of Encarnacion’s
first application for a free patent.18
Plaintiffs prayed for the cancellation of the title of
Mariano Del Rosario, the reconveyance of the eastern
portion of the property to them, and damages.19
In her Answer, defendant (private respondent)
Encarnacion Diaz Vda. de Reston stated that in the latter
part of 1973, the plaintiffs offered to purchase the land in
question. They agreed that the plaintiffs would be given
an option to buy the land “if he could furnish amounts in
order to have the land registered under the Torrens
system.” As a result of the negotiation, they executed a
Memorandum of Agreement. The amount of P1,000.00
that was given by the plaintiffs was only earnest money
for the option to buy the land. It was agreed that any
consummated sale of the property would be reflected in
another instrument. Plaintiffs knew that at that time she
was badly in need of money and that the expenses for
registration should initially be shouldered by them, which
would thereafter be applied as part payment of the
purchase price, in case the sale would be
consummated.20
Encarnacion said that she exerted effort to register the
property. While plaintiffs advanced several amounts on
several occasions, they were in small amounts
insufficient to pay for the registration expenses.21
It later became apparent that the plaintiffs had no
intention to buy the property and were only interested in
dealing with other interested buyers to make a profit.22
Encarnacion alleged that she pleaded with plaintiffs
several times that they purchase the property as there
were other interested buyers, and she was badly in need
of money. She even sought the help of the Philippine
Constabulary so that plaintiffs would exercise their
option.23
In financial distress, she informed plaintiffs that she could
no longer wait for them to exercise the option, and
offered to reimburse the amounts which they have
advanced, including the earnest money. Plaintiffs refused
reimbursement, although they were not willing to
consummate the sale. Plaintiffs, therefore, have no
cause of action, and their action is barred by laches.24
Encarnacion reserved her right to file a cross-claim
against her co-defendants spouses Mariano Del Rosario
and Sotera Dejan. She asked the trial court for the
dismissal of the complaint, and that she be awarded
damages.25
On April 6, 1979, Encarnacion filed a cross-party claim
against her co-defendants spouses Mariano Del Rosario
and Sotera Dejan and prayed for the annulment of the
Deed of Sale dated August 5, 1977 for non-payment of
the long overdue balance of P80,000.00, and
damages.26
Joaquin Reston testified that petitioner Encarnacion Diaz
Vda. de Reston was his mother, and that she died on
June 2, 1979. He, together with his brothers and sisters,
namely, Venancio Reston, Erlinda Reston, Hayde
Angeles Reston, Yolanda Reston and Valdemar Reston
substituted their mother in this case. He knows Mariano
Del Rosario as the vendee of their land, which has not
yet been fully paid as shown in the affidavit27 of Mariano
Del Rosario and the contract of sale.28 The affidavit
stated that the correct consideration of the deed of sale
was P100,000.00 and of this amount, only P20,000.00
was actually paid. Mariano Del Rosario promised to pay
the balance of P80,000.00 in the following manner:
P15,000.00 would be paid to Encarnacion Diaz Vda. de
Reston upon the first release of any bank loan;
P10,000.00 would be paid on the second release;
P10,000.00 on the third release; and another P10,000.00
on the fourth release. The balance of P80,000.00,
however, remains unpaid.29
On the other hand, defendant Mariano Del Rosario
testified that Encarnacion Diaz Vda. de Reston
mortgaged a parcel of land to him with an area of about
29,532 square meters evidenced by a deed of real estate
mortgage executed on May 17, 1977.30 As mortgagee,
he was given an option to purchase the property. About
three months later, he purchased the property for
P40,000.00 as evidenced by a Deed of Sale dated
August 5, 1977.31 On the same date, an affidavit was
also executed by the Del Rosario spouses stating that
the correct consideration of the aforementioned Deed of
Sale was P100,000.00, and that the Del Rosarios have
paid Encarnacion Diaz Vda. de Reston P20,000.00,
leaving a balance of P80,000.00.32
Mariano Del Rosario averred that before said mortgage
and sale, Encarnacion Diaz Vda. de Reston represented
to him that she was the absolute owner of the property
and showed him her tax declarations and tax receipts.
She assured him that the land was to be titled soon as
she had filed an application for registration of title to the
property with the Court of First Instance, Branch II,
Province of Cebu, in the sala of Judge Francisco Burgos.
He talked with the Branch Clerk of Court, Atty. Amparo
Gomez, who gave him the impression that the
application might be disapproved because the property
was public land. Thereafter, he approached the Special
Attorney of the Solicitor General assigned at the Bureau
of Lands and found out that there was an Opposition33
by the Solicitor General to said application. He showed
the Special Attorney the Deed of Sale in his favor and
was told that the document was null and void because
the property involved was public land. The Special
Attorney advised him to apply for a free patent.34
Mariano Del Rosario said that he filed an application for
free patent to the land in Cebu. He told Encarnacion Diaz
Vda. de Reston about the verification he made in Manila,
and that they had to help each other. Encarnacion
agreed to cooperate and she appeared and manifested
during the investigation at the Bureau of Lands that she
waived her right over the land in his favor. He was relying
on Encarnacion’s right of possession in his application.
His application for free patent was approved on
December 27, 1977,35 and thereafter Original Certificate
of Title No. 0-15255 was issued in his name.36
After acquiring the property by free patent title, Mariano
Del Rosario started clearing the property and constructed
separate fishponds. He spent about P300,000.00. He
developed only 60 to 70 per cent of the property,
because he ran short of money.37
Mariano Del Rosario declared that at the time he applied
for free patent, he did not know of any transaction
between Encarnacion and the Buot spouses. At the time
he filed his application for free patent, no opposition was
filed by the Buot spouses. He first came to know Alfredo
Buot at the time the latter filed the instant case against
Encarnacion.38
He also stated that before he executed the mortgage
contract, he did not check whether Encarnacion was the
owner of the property mortgaged, but he merely relied on
the representation of Encarnacion. Prior to the sale,
Encarnacion did not inform him that there was a
transaction between her and the Buot spouses. On the
basis of the documents presented to him, it did not
appear that there was a transaction between
Encarnacion and the Buots. He did not check with the
Office of the Provincial Assessor whether there was an
annotation on the tax declaration of the property owned
by Encarnacion.39
Mariano Del Rosario prayed for the dismissal of the
complaint and damages.40
On July 30, 1990, the trial court dismissed the complaint
for lack of cause of action and ordered defendant
Mariano Del Rosario to pay the heirs of Encarnacion
Diaz Vda. de Reston the sum of eighty thousand
(P80,000.00) pesos, representing the balance of the
purchase price of the property in question, with interest
of twelve (12%) per cent per annum from the time of the
filing of the cross-claim. Plaintiffs and cross-claim
defendants spouses Mariano Del Rosario and Sotera
Dejan were also jointly and severally ordered to pay the
costs.41
Plaintiffs and defendants-heirs of Encarnacion Diaz Vda.
de Reston filed their respective motion for
reconsideration. On December 5, 1990, the trial court
reconsidered and set aside its decision dated July 30,
1990, and modified the dispositive portion, thus:
WHEREFORE, premises considered, judgment is hereby
rendered:
Declaring plaintiffs Alfredo A. Buot, Sr. and Susana Buot
the absolute owners of the eastern portion of the
property of Encarnacion Vda. de Reston situated at
Tungkop, but more known as Tulay, Minglanilla, Cebu
described under the Memorandum of Agreement (Exhibit
“A”) containing an area of Nineteen Thousand Forty Two
(19,042) square meters; ordering defendants Mariano
Del Rosario and his spouse to convey in favor of the
plaintiffs the eastern portion of the aforementioned
property, now covered under Free Patent FPA No. F-
VTI-17483 issued on December 28, 1977 (Exhibit “4” Del
Rosario) and described under OCT No. 15255 upon
payment by plaintiffs the balance of Fifteen Thousand
Two Hundred Sixtyeight (P15, 268.00) pesos to the heirs
of Encarnacion Diaz Vda. de Reston the substituting
defendants; ordering defendant Mariano Del Rosario and
his spouse to reconvey in favor of the heirs of
Encarnacion Diaz Vda. de Reston the remaining portion
of Free Patent No. F-VII-17483 (OCT No. 15255) issued
in his name and comply with the provisions of paragraph
5 in his affidavit (Exhibit “1”-Reston); ordering the
defendants to jointly and severally pay plaintiffs the sum
of Three Thousand (P3,000.00) pesos for actual or
compensatory damages, Three Thousand (P3,000.00)
pesos for attorney’s fees and costs of this action.
Should defendant Del Rosario refuse or fail to execute
the deeds of conveyance and reconveyance in favor of
the plaintiffs and his co-defendants, respectively, the
Deputy sheriff of this Court is ordered to execute the
same with equal effect or validity as if they were
executed by the aforementioned defendants.SO
ORDERED.42
Only defendant Mariano Del Rosario seasonably filed a
motion for reconsideration to the amended decision,
which was denied in an Order dated March 12, 1991.43
Defendants spouses Mariano Del Rosario and the heirs
of Encarnacion Diaz Vda. de Reston appealed to the
Court of Appeals. In its Decision promulgated on March
9, 1995, the Court of Appeals found that the
Memorandum of Agreement between Encarnacion and
the Buot spouses was merely an option to purchase;
there was no perfected contract of sale. Moreover, the
appellate court found that the allegation that Mariano Del
Rosario obtained the free patent title through fraud was
not supported by clear and sufficient evidence. The
appellate court, thus, rendered judgment, the dispositive
portion of which reads:
THE FOREGOING CONSIDERED, the appealed
Decision dated December 5, 1990, is hereby
REVERSED and SET ASIDE; instead, the Decision
dated July 30, 1990 is reinstated. SO ORDERED.44
Hence, this petition for review on certiorari was filed by
the Buot spouses.
The main issue in the case at bar is whether or not
petitioners are entitled to recover the property in question
which hinges on the resolution of whether or not the
Memorandum of Agreement they entered into with
Encarnacion Diaz Vda. de Reston is a contract of sale.
Petitioners submit the following:
1)That contrary to the holding of the Court of Appeals,
the Memorandum of Agreement (Exh. 1-Buot-Annex “D”)
was not an option to purchase but a valid and partially
executed contract of sale;
2)That as a result of such contract, subject property
could not anymore be the valid subject of another sales
contract in favor of Mariano regardless of Mariano’s
alleged good faith;
3)That considering that Mariano did not have any right
over the land, he was not qualified to apply for a patent;
and
4)That since the land properly belongs to petitioner
Alfredo Buot, Mariano should be considered a trustee of
the land for the benefit of Alfredo Buot under an implied
trust.45
Petitioners assert that contrary to the ruling of the Court
of Appeals, the Memorandum of Agreement was a
contract of sale. The sale was perfected from the
moment the parties agreed on the object of the contract
and the price. The downpayment of P1,000.00 was proof
that the contract had been perfected.
We disagree. An examination of said Memorandum of
Agreement shows that it is neither a contract of sale nor
an option to purchase, but it is a contract to sell. An
option is a contract granting a privilege to buy or sell at a
determined price within an agreed time,46 the specific
length or duration of which is not present in the
Memorandum of Agreement. In a contract to sell, the title
over the subject property is transferred to the vendee
only upon the full payment of the stipulated
consideration.47 Unlike in a contract of sale, the title in a
contract to sell does not pass to the vendee upon the
execution of the agreement or the Delivery of the thing
sold.48 The Memorandum of Agreement reads in part:
WHEREFORE, the parties agree as follows: THAT—
1.For and in consideration of the amount of NINETEEN
THOUSAND FORTY TWO PESOS (P19,042.00),
Philippine currency, payable in the manner specified
hereunder, the VENDOR hereby sells, transfers and
conveys all the attributes of her ownership over that
eastern portion of the parcel of land aforedescribed,
containing an area of NINETEEN THOUSAND FORTY
TWO SQUARE METERS, the technical description of
which is mention in Annex “A” hereof, together with the
improvements included therein, consisting of coconut
trees.
2.The aforesaid purchase price of P19,042.00 shall be
paid as follows:
a.The amount of one thousand pesos (P 1,000.00) in
concept of earnest money, upon the execution of this
instrument; receipt of which amount is hereby
acknowledged;
b.The balance thereof, in the amount of eighteen
thousand forty two pesos (P18,042.00), within six months
from the date VENDEES are notified by the VENDOR of
the fact that the Certificate of Title to the eastern portion
of VENDOR’S lot, which eastern portion is herein sold
and described in Annex “A” hereof, is ready for transfer
to the names of herein VENDEES;
3.Title to, ownership, possession and enjoyment of that
portion herein sold, shall, remain with the VENDOR until
the full consideration of the sale thereof shall have been
received by VENDOR and duly acknowledged by her in a
document duly executed for said purpose. VENDEES
may introduce improvements there on subject to the
rights of a usufructuary.49
From the foregoing, it appears that the agreement was in
the nature of a contract to sell as the vendor,
Encarnacion Diaz Vda. de Reston, clearly reserved to
herself ownership and possession of the property until
full payment of the purchase price by the vendees,50
such payment being a positive suspensive condition, the
failure of which is not considered a breach, casual or
serious, but simply an event which prevented the
obligation from acquiring obligatory force.51
Petitioners, however, argue that their obligation to pay
the balance of the purchase price had not arisen as the
Memorandum of Agreement stipulated that the balance
of P18,042.00 was payable within six (6) months from
the date the vendor would notify them that the certificate
of title of the property could already be transferred in
their names. Said argument, however, does not change
the nature of the contract they entered into, being a
contract to sell, so that there was no actual sale until full
payment was made by the vendees, and that on the part
of the vendees, no full payment would be made until a
certificate of title was ready for transfer in their names.52
In her Answer, Encarnacion even stated that it was
agreed that any consummated sale of the property would
be necessarily reflected in another instrument.53 Thus,
petitioners clearly had no right to ask for reconveyance of
the property on the ground of fraud as there was no
perfected contract of sale between them and the late
Encarnacion Diaz Vda. de Reston. The Court of Appeals
also correctly stated thus:
Only the person who has been deprived of his property
through fraud, either actual or constructive and who was
not at fault, may file a personal action for reconveyance.
The pretension that there was fraud when Mariano was
able to obtain a Free Patent Title, is not supported by
evidence. On the contrary, fraud cannot be presumed
and must be established by clear and sufficient evidence
(Carreon vs. Agcaoili, L-11156, February 23, 1961, 1
SCRA 521; Gutierrez vs. Villegas, L-17117, July 31,
1963, 8 SCRA 527; Santos vs. Buenaventura, L-22797,
September 22, 1966, 18 SCRA 47; Republic vs. Ker &
Company, Ltd., L-21609, September 29, 1966, 18 SCRA
207; Commissioner of Internal Revenue vs. Gonzales, L-
19495, November 24, 1966, 18 SCRA 757; Heng Tong
Textiles Company, Inc. vs. Commissioner of Internal
Revenue, L-19737, August 26, 1968, 24 SCRA 767).54
However, under the second paragraph of Article 118855
of the New Civil Code, even if the Buot spouses did not
mistakenly make partial payments, inasmuch as the
suspensive condition was not fulfilled, it is only fair and
just that the Buot spouses be allowed to recover what
they had paid in expectancy that the condition would
happen; otherwise, there would be unjust enrichment on
the part of Encarnacion Diaz Vda. de Reston, now
substituted by her heirs.56 Hence, the heirs of
Encarnacion Diaz Vda. de Reston should return the sum
of P3,774.00 received from the Buot spouses with
interest at twelve (12) per cent per annum from the time
the Regional Trial Court rendered its original decision on
June 20, 1977.57
On the other hand, private respondent Mariano Del
Rosario held a contract of sale evidenced by the Deed of
Definite Sale58 covering the said entire property of
Encarnacion Diaz Vda. de Reston, and he was given
possession of the land. By that contract of sale,
Encarnacion transferred to Mariano Del Rosario her
rights, interests and participation as claimant of said
public land as shown by her application for free patent in
1965 and her application for registration of title to the
property under Act 496 in 1977.59 Such rights could be
waived, transferred or alienated.60 Supported by the
contract of sale, Mariano Del Rosario filed an application
for free patent to the land, which was approved by the
Bureau of Lands on December 27, 1977,61 and
thereafter the corresponding free patent was issued,
followed by the issuance of the Original Certificate of
Title No. 0-15255 in his name. Confirming the transfer of
her rights over the property to Mariano Del Rosario by
sale, Encarnacion filed a petition62 dated March 3, 1978
to withdraw her application for registration of title to the
land, which was granted by the Court of First Instance of
Cebu,63 in an Order dated March 15, 1978.64
Hence, the Court of Appeals did not err in reinstating the
Decision of the Regional Trial Court dated July 30, 1990
thus:
WHEREFORE, PREMISES CONSIDERED, judgment is
hereby rendered for defendants heirs of Encarnacion
Diaz Vda. de Reston and against plaintiffs Alfredo A.
Buot and Susana L. Buot and third party defendant
Mariano Del Rosario for which plaintiffs’ complaint is
DISMISSED for lack of cause of action and defendant
Mariano Del Rosario is ordered to pay the heirs of
Encarnacion Diaz Vda. de Reston, namely, Joaquin
Venancio Reston, Erlinda Reston, Hayde Angeles
Reston, Yolanda Reston and Valdemar Reston the sum
of Eighty Thousand (P80,000.00) Pesos, representing
the balance of the purchase price of the property in
question with an interest of twelve (12%) per cent per
annum from the time of the filing of the cross-claim.
Plaintiff and cross-claim defendants Mariano Del Rosario
and Sotera Dejan are jointly and severally ordered to pay
the costs.65
In their brief,66 private respondents-heirs of Encarnacion
Diaz Vda. de Reston prayed for the reversal of the
decision of the Court of Appeals by awarding the entire
property to them, although they did not appeal from said
decision. In Quezon Development Bank vs. Court of
Appeals,67 we ruled that a party who has not appealed
from a decision cannot seek any relief other than what is
provided in the judgment appealed from, and cited
Lumibao vs. Intermediate Appellate Court,68 thus:
It is well-settled in this jurisdiction that whenever an
appeal is taken in a civil case, an appellee who has not
himself appealed may not obtain from the appellate court
any affirmative relief other than the ones granted in the
decision of the court below. The appellee can only
advance any argument that he may deem necessary to
defeat the appellant’s claim or to uphold the decision that
is being disputed, and he can assign errors in his brief if
such is required to strengthen the views expressed by
the court a quo. These assigned errors in turn may be
considered by the appellate court solely to maintain the
appealed decision on other grounds, but not for the
purpose of reversing or modifying the judgment in the
appellee’s favor and giving him other reliefs.
WHEREFORE, the petition is dismissed, and the
assailed decision of the Court of Appeals is hereby
AFFIRMED with the modification that the heirs of
Encarnacion Diaz Vda. de Reston are ordered to return
the partial payments in the total amount of P3,774.00
received from petitioners-spouses Alfredo and Susana
Buot with interest at twelve (12) per cent per annum from
the time the Regional Trial Court rendered its decision on
July 30, 1990. SO ORDERED.
Note.—It is a contract to sell, not a contract of sale,
that parties enter into where they stipulate that the
deed of sale and corresponding certificate of title
would be issued after full payment. (David vs.
Tiongson, 313 SCRA 63 [1999])
----------------------------------------------------------------------------
--
G.R. No. 158361. April 10, 2013.*
INTERNATIONAL HOTEL CORPORATION, petitioner,
vs. FRANCISCO B. JOAQUIN, JR. and RAFAEL
SUAREZ, respondents.
Remedial Law; Appeals; Question of Law; A question of
law exists when there is doubt as to what the law is on a
certain state of facts, but, in contrast, a question of fact
exists when the doubt arises as to the truth or falsity of
the facts alleged.—A question of law exists when there is
doubt as to what the law is on a certain state of facts,
but, in contrast, a question of fact exists when the doubt
arises as to the truth or falsity of the facts alleged. A
question of law does not involve an examination of the
probative value of the evidence presented by the litigants
or by any of them; the resolution of the issue must rest
solely on what the law provides on the given set of
circumstances. When there is no dispute as to the facts,
the question of whether or not the conclusion drawn from
the facts is correct is a question of law.
Civil Law; Obligations; Suspensive Condition; Article
1186 of the Civil Code refers to the constructive
fulfillment of a suspensive condition, whose application
calls for two requisites, namely: (a) the intent of the
obligor to prevent the fulfillment of the condition, and (b)
the actual prevention of the fulfillment.—Article 1186 of
the Civil Code reads: Article 1186. The condition shall be
deemed fulfilled when the obligor voluntarily prevents its
fulfillment. This provision refers to the constructive
fulfillment of a suspensive condition, whose application
calls for two requisites, namely: (a) the intent of the
obligor to prevent the fulfillment of the condition, and (b)
the actual prevention of the fulfillment. Mere intention of
the debtor to prevent the happening of the condition, or
to place ineffective obstacles to its compliance, without
actually preventing the fulfillment, is insufficient.
Same; Contracts; Breach of Contract; It is well to note
that Article 1234 applies only when an obligor admits
breaching the contract after honestly and faithfully
performing all the material elements thereof except for
some technical aspects that cause no serious harm to
the obligee.—The CA applied Article 1234 of the Civil
Code, which states: Article 1234. If the obligation has
been substantially performed in good faith, the obligor
may recover as though there had been a strict and
complete fulfillment, less damages suffered by the
obligee. It is well to note that Article 1234 applies only
when an obligor admits breaching the contract after
honestly and faithfully performing all the material
elements thereof except for some technical aspects that
cause no serious harm to the obligee. IHC correctly
submits that the provision refers to an omission or
deviation that is slight, or technical and unimportant, and
does not affect the real purpose of the contract.
Same; Obligations; Conditional Obligations; The existing
rule in a mixed conditional obligation is that when the
condition was not fulfilled but the obligor did all in his
power to comply with the obligation, the condition should
be deemed satisfied.—To secure a DBP-guaranteed
foreign loan did not solely depend on the diligence or the
sole will of the respondents because it required the
action and discretion of third persons―an able and
willing foreign financial institution to provide the needed
funds, and the DBP Board of Governors to guarantee the
loan. Such third persons could not be legally compelled
to act in a manner favorable to IHC. There is no question
that when the fulfillment of a condition is dependent
partly on the will of one of the contracting parties, or of
the obligor, and partly on chance, hazard or the will of a
third person, the obligation is mixed. The existing rule in
a mixed conditional obligation is that when the condition
was not fulfilled but the obligor did all in his power to
comply with the obligation, the condition should be
deemed satisfied.
Same; Same; Quantum Meruit; Considering the absence
of an agreement, and in view of respondents’
constructive fulfillment of their obligation, the Court has
to apply the principle of quantum meruit in determining
how much was still due and owing to respondents. Under
the principle of quantum meruit, a contractor is allowed to
recover the reasonable value of the services rendered
despite the lack of a written contract.—It is notable that
the confusion on the amounts of compensation arose
from the parties’ inability to agree on the fees that
respondents should receive. Considering the absence of
an agreement, and in view of respondents’ constructive
fulfillment of their obligation, the Court has to apply the
principle of quantum meruit in determining how much
was still due and owing to respondents. Under the
principle of quantum meruit, a contractor is allowed to
recover the reasonable value of the services rendered
despite the lack of a written contract. The measure of
recovery under the principle should relate to the
reasonable value of the services performed. The
principle prevents undue enrichment based on the
equitable postulate that it is unjust for a person to retain
any benefit without paying for it. Being predicated on
equity, the principle should only be applied if no express
contract was entered into, and no specific statutory
provision was applicable.
PETITION for review on certiorari of a decision of the
Court of Appeals.
The facts are stated in the opinion of the Court.
Ortega, Del Castillo, Baccoro, Odulio, Calma &
Carbonell for petitioner.
Joaquin, Adarlo & Caoile Law Offices for respondent F.
Joaquin, Jr.
BERSAMIN, J.:
To avoid unjust enrichment to a party from resulting out
of a substantially performed contract, the principle of
quantum meruit may be used to determine his
compensation in the absence of a written agreement for
that purpose. The principle of quantum meruit justifies
the payment of the reasonable value of the services
rendered by him.
The Case
Under review is the decision the Court of Appeals (CA)
promulgated on November 8, 2002,1 disposing:
WHEREFORE, premises considered, the decision dated
August 26, 1993 of the Regional Trial Court, Branch 13,
Manila in Civil Case No. R-82-2434 is AFFIRMED with
Modification as to the amounts awarded as follows:
defendant-appellant IHC is ordered to pay plaintiff-
appellant Joaquin P700,000.00 and plaintiff-appellant
Suarez P200,000.00, both to be paid in cash.
SO ORDERED.
Antecedents
On February 1, 1969, respondent Francisco B. Joaquin,
Jr. submitted a proposal to the Board of Directors of the
International Hotel Corporation (IHC) for him to render
technical assistance in securing a foreign loan for the
construction of a hotel, to be guaranteed by the
Development Bank of the Philippines (DBP).2 The
proposal encompassed nine phases, namely: (1) the
preparation of a new project study; (2) the settlement of
the unregistered mortgage prior to the submission of the
application for guaranty for processing by DBP; (3) the
preparation of papers necessary to the application for
guaranty; (4) the securing of a foreign financier for the
project; (5) the securing of the approval of the DBP
Board of Governors; (6) the actual follow up of the
application with DBP3; (7) the overall coordination in
implementing the projections of the project study; (8) the
preparation of the staff for actual hotel operations; and
(9) the actual hotel operations.4
The IHC Board of Directors approved phase one to
phase six of the proposal during the special board
meeting on February 11, 1969, and earmarked
P2,000,000.00 for the project.5 Anent the financing, IHC
applied with DBP for a foreign loan guaranty. DBP
processed the application,6 and approved it on October
24, 1969 subject to several conditions.7
On July 11, 1969, shortly after submitting the application
to DBP, Joaquin wrote to IHC to request the payment of
his fees in the amount of P500,000.00 for the services
that he had provided and would be providing to IHC in
relation to the hotel project that were outside the scope
of the technical proposal. Joaquin intimated his
amenability to receive shares of stock instead of cash in
view of IHC’s financial situation.8
On July 11, 1969, the stockholders of IHC met and
granted Joaquin’s request, allowing the payment for both
Joaquin and Rafael Suarez for their services in
implementing the proposal.9
On June 20, 1970, Joaquin presented to the IHC Board
of Directors the results of his negotiations with potential
foreign financiers. He narrowed the financiers to Roger
Dunn & Company and Materials Handling Corporation.
He recommended that the Board of Directors consider
Materials Handling Corporation based on the more
beneficial terms it had offered. His recommendation was
accepted.10
Negotiations with Materials Handling Corporation and,
later on, with its principal, Barnes International (Barnes),
ensued. While the negotiations with Barnes were
ongoing, Joaquin and Jose Valero, the Executive
Director of IHC, met with another financier, the Weston
International Corporation (Weston), to explore possible
financing.11 When Barnes failed to deliver the needed
loan, IHC informed DBP that it would submit Weston for
DBP’s consideration.12 As a result, DBP cancelled its
previous guaranty through a letter dated December 6,
1971.13
On December 13, 1971, IHC entered into an agreement
with Weston, and communicated this development to
DBP on June 26, 1972. However, DBP denied the
application for guaranty for failure to comply with the
conditions contained in its November 12, 1971 letter.14
Due to Joaquin’s failure to secure the needed loan, IHC,
through its President Bautista, canceled the 17,000
shares of stock previously issued to Joaquin and Suarez
as payment for their services. The latter requested a
reconsideration of the cancellation, but their request was
rejected.
Consequently, Joaquin and Suarez commenced this
action for specific performance, annulment, damages
and injunction by a complaint dated December 6, 1973 in
the Regional Trial Court in Manila (RTC), impleading IHC
and the members of its Board of Directors, namely, Felix
Angelo Bautista, Sergio O. Rustia, Ephraim G.
Gochangco, Mario B. Julian, Benjamin J. Bautista,
Basilio L. Lirag, Danilo R. Lacerna and Hermenegildo R.
Reyes.15 The complaint alleged that the cancellation of
the shares had been illegal, and had deprived them of
their right to participate in the meetings and elections
held by IHC; that Barnes had been recommended by IHC
President Bautista, not by Joaquin; that they had failed to
meet their obligation because President Bautista and his
son had intervened and negotiated with Barnes instead
of Weston; that DBP had canceled the guaranty because
Barnes had failed to release the loan; and that IHC had
agreed to compensate their services with 17,000 shares
of the common stock plus cash of P1,000,000.00.16
IHC, together with Felix Angelo Bautista, Sergio O.
Rustia, Mario B. Julian and Benjamin J. Bautista, filed an
answer claiming that the shares issued to Joaquin and
Suarez as compensation for their “past and future
services” had been issued in violation of Section 16 of
the Corporation Code; that Joaquin and Suarez had not
provided a foreign financier acceptable to DBP; and that
they had already received P96,350.00 as payment for
their services.17
On their part, Lirag and Lacerna denied any knowledge
of or participation in the cancellation of the shares.18
Similarly, Gochangco and Reyes denied any knowledge
of or participation in the cancellation of the shares, and
clarified that they were not directors of IHC.19 In the
course of the proceedings, Reyes died and was
substituted by Consorcia P. Reyes, the administratrix of
his estate.20
Ruling of the RTC
Under its decision rendered on August 26, 1993, the
RTC held IHC liable pursuant to the second paragraph of
Article 1284 of the Civil Code, disposing thusly:
WHEREFORE, in the light of the above facts, law and
jurisprudence, the Court hereby orders the defendant
International Hotel Corporation to pay plaintiff Francisco
B. Joaquin, the amount of Two Hundred Thousand
Pesos (P200,000.00) and to pay plaintiff Rafael Suarez
the amount of Fifty Thousand Pesos (P50,000.00); that
the said defendant IHC likewise pay the co-plaintiffs,
attorney’s fees of P20,000.00, and costs of suit. IT IS SO
ORDERED.21
The RTC found that Joaquin and Suarez had failed to
meet their obligations when IHC had chosen to negotiate
with Barnes rather than with Weston, the financier that
Joaquin had recommended; and that the cancellation of
the shares of stock had been proper under Section 68 of
the Corporation Code, which allowed such transfer of
shares to compensate only past services, not future
ones.
Ruling of the CA
Both parties appealed.22
Joaquin and Suarez assigned the following errors, to wit:
DESPITE HAVING CORRECTLY ACKNOWLEDGED
THAT PLAINTIFFS-APPELLANTS FULLY
PERFORMED ALL THAT WAS INCUMBENT UPON
THEM, THE HONORABLE JUDGE ERRED IN NOT
ORDERING THAT:
A. DEFENDANTS WERE UNJUSTIFIED IN
CANCELLING THE SHARES OF STOCK PREVIOUSLY
ISSUED TO PLAINTIFFS-APPELLANTS; AND
B. DEFENDANTS PAY PLAINTIFFS-APPELLANTS
TWO MILLION SEVEN HUNDRED PESOS (sic)
(P2,700,000.00), INCLUDING INTEREST THEREON
FROM 1973, REPRESENTING THE TOTAL
OBLIGATION DUE PLAINTIFFS-APPELLANTS.23
On the other hand, IHC attributed errors to the RTC, as
follows:
[I.]
THE LOWER COURT ERRED IN HOLDING THAT
PLAINTIFFS-APPELLANTS HAVE NOT BEEN
COMPLETELY PAID FOR THEIR SERVICES, AND IN
ORDERING THE DEFENDANT-APPELLANT TO PAY
TWO HUNDRED THOUSAND PESOS (P200,000.00)
AND FIFTY THOUSAND PESOS (P50,000.00) TO
PLAINTIFFS-APPELLANTS FRANCISCO B. JOAQUIN
AND RAFAEL SUAREZ, RESPECTIVELY.
[II.]
THE LOWER COURT ERRED IN AWARDING
PLAINTIFFS-APPELLANTS ATTORNEY’S FEES AND
COSTS OF SUIT.24
In its questioned decision promulgated on November 8,
2002, the CA concurred with the RTC, upholding IHC’s
liability under Article 1186 of the Civil Code. It ruled that
in the context of Article 1234 of the Civil Code, Joaquin
had substantially performed his obligations and had
become entitled to be paid for his services; and that the
issuance of the shares of stock was ultra vires for having
been issued as consideration for future services.
Anent how much was due to Joaquin and Suarez, the CA
explained thusly:
This Court does not subscribe to plaintiffs-appellants’
view that defendant-appellant IHC agreed to pay them
P2,000,000.00. Plaintiff-appellant Joaquin’s letter to
defendant-appellee F.A. Bautista, quoting defendant-
appellant IHC’s board resolutions which supposedly
authorized the payment of such amount cannot be
sustained. The resolutions are quite clear and when
taken together show that said amount was only the
“estimated maximum expenses” which defendant-
appellant IHC expected to incur in accomplishing phases
1 to 6, not exclusively to plaintiffs-appellants’
compensation. This conclusion finds support in an
unnumbered board resolution of defendant-appellant IHC
dated July 11, 1969:
“Incidentally, it was also taken up the necessity of giving
the Technical Group a portion of the compensation that
was authorized by this corporation in its Resolution of
February 11, 1969 considering that the assistance so far
given the corporation by said Technical Group in
continuing our project with the DBP and its request for
guaranty for a foreign loan is 70% completed leaving
only some details which are now being processed. It is
estimated that P400,000.00 worth of Common Stock
would be reasonable for the present accomplishments
and to this effect, the President is authorized to issue the
same in the name of the Technical Group, as follows:
P200,000.00 in common stock to Rafael Suarez, as
associate in the Technical Group, and P200,000.00 in
common stock to Francisco G. Joaquin, Jr., also a
member of the Technical Group.
It is apparent that not all of the P2,000,000.00 was
allocated exclusively to compensate plaintiffs-appellants.
Rather, it was intended to fund the whole undertaking
including their compensation. On the same date,
defendant-appellant IHC also authorized its president to
pay plaintiff-appellant Joaquin P500,000.00 either in
cash or in stock or both.
The amount awarded by the lower court was therefore
less than what defendant-appellant IHC agreed to pay
plaintiffs-appellants. While this Court cannot decree that
the cancelled shares be restored, for they are without a
doubt null and void, still and all, defendant-appellant IHC
cannot now put up its own ultra vires act as an excuse to
escape obligation to plaintiffs-appellants. Instead of
shares of stock, defendant-appellant IHC is ordered to
pay plaintiff-appellant Joaquin a total of P700,000.00 and
plaintiff-appellant Suarez P200,000.00, both to be paid in
cash.
Although the lower court failed to explain why it was
granting the attorney’s fees, this Court nonetheless finds
its award proper given defendant-appellant IHC’s
actions.25
Issues
In this appeal, the IHC raises as issues for our
consideration and resolution the following:
I
WHETHER OR NOT THE COURT OF APPEALS IS
CORRECT IN AWARDING COMPENSATION AND
EVEN MODIFYING THE PAYMENT TO HEREIN
RESPONDENTS DESPITE NONFULFILLMENT OF
THEIR OBLIGATION TO HEREIN PETITIONER
II
WHETHER OR NOT THE COURT OF APPEALS IS
CORRECT IN AWARDING ATTORNEY’S FEES TO
RESPONDENTS26
IHC maintains that Article 1186 of the Civil Code was
erroneously applied; that it had no intention of preventing
Joaquin from complying with his obligations when it
adopted his recommendation to negotiate with Barnes;
that Article 1234 of the Civil Code applied only if there
was a merely slight deviation from the obligation, and the
omission or defect was technical and unimportant; that
substantial compliance was unacceptable because the
foreign loan was material and was, in fact, the ultimate
goal of its contract with Joaquin and Suarez; that
because the obligation was indivisible and subject to a
suspensive condition, Article 1181 of the Civil Code27
applied, under which a partial performance was
equivalent to nonperformance; and that the award of
attorney’s fees should be deleted for lack of legal and
factual bases.
On the part of respondents, only Joaquin filed a
comment,28 arguing that the petition was fatally
defective for raising questions of fact; that the obligation
was divisible and capable of partial performance; and
that the suspensive condition was deemed fulfilled
through IHC’s own actions.29
Ruling
We deny the petition for review on certiorari subject to
the ensuing disquisitions.
1.IHC raises questions of law
We first consider and resolve whether IHC’s petition
improperly raised questions of fact.
A question of law exists when there is doubt as to what
the law is on a certain state of facts, but, in contrast, a
question of fact exists when the doubt arises as to the
truth or falsity of the facts alleged. A question of law does
not involve an examination of the probative value of the
evidence presented by the litigants or by any of them; the
resolution of the issue must rest solely on what the law
provides on the given set of circumstances.30 When
there is no dispute as to the facts, the question of
whether or not the conclusion drawn from the facts is
correct is a question of law.31
Considering that what IHC seeks to review is the CA’s
application of the law on the facts presented therein,
there is no doubt that IHC raises questions of law. The
basic issue posed here is whether the conclusions drawn
by the CA were correct under the pertinent laws.
2. Article 1186 and Article 1234 of the Civil Code cannot
be the source of IHC’s obligation to pay respondents IHC
argues that it should not be held liable because: (a) it
was Joaquin who had recommended Barnes; and (b)
IHC’s negotiation with Barnes had been neither
intentional nor willfully intended to prevent Joaquin from
complying with his obligations.
IHC’s argument is meritorious.
Article 1186 of the Civil Code reads:
Article 1186. The condition shall be deemed fulfilled
when the obligor voluntarily prevents its fulfillment.
This provision refers to the constructive fulfillment of a
suspensive condition,32 whose application calls for two
requisites, namely: (a) the intent of the obligor to prevent
the fulfillment of the condition, and (b) the actual
prevention of the fulfillment. Mere intention of the debtor
to prevent the happening of the condition, or to place
ineffective obstacles to its compliance, without actually
preventing the fulfillment, is insufficient.33
The error lies in the CA’s failure to determine IHC’s intent
to preempt Joaquin from meeting his obligations. The
June 20, 1970 minutes of IHC’s special board meeting
discloses that Joaquin impressed upon the members of
the Board that Materials Handling was offering more
favorable terms for IHC, to wit:
xxxx
At the meeting all the members of the Board of Directors
of the International Hotel Corporation were present with
the exception of Directors Benjamin J. Bautista and
Sergio O. Rustia who asked to be excused because of
previous engagements. In that meeting, the President
called on Mr. Francisco G. Joaquin, Jr. to explain the
different negotiations he had conducted relative to
obtaining the needed financing for the hotel project in
keeping with the authority given to him in a resolution
approved by the Board of Directors.
Mr. Joaquin presently explained that he contacted
several local and foreign financiers through different
brokers and after examining the different offers he
narrowed down his choice to two (2), to wit: the foreign
financier recommended by George Wright of the Roger
Dunn & Company and the offer made by the Materials
Handling Corporation.
After explaining the advantages and disadvantages to
our corporation of the two (2) offers specifically with
regard to the terms and repayment of the loan and the
rate of interest requested by them, he concluded that the
offer made by the Materials Handling Corporation is
much more advantageous because the terms and
conditions of payment as well as the rate of interest are
much more reasonable and would be much less onerous
to our corporation. However, he explained that the
corporation accepted, in principle, the offer of Roger
Dunn, per the corporation’s telegrams to Mr. Rudolph
Meir of the Private Bank of Zurich, Switzerland, and until
such time as the corporation’s negotiations with Roger
Dunn is terminated, we are committed, on one way or the
other, to their financing.
It was decided by the Directors that, should the
negotiations with Roger Dunn materialize, at the same
time as the offer of Materials Handling Corporation, that
the funds committed by Roger Dunn may be diverted to
other borrowers of the Development Bank of the
Philippines. With this condition, Director Joaquin showed
the advantages of the offer of Materials Handling
Corporation. Mr. Joaquin also informed the corporation
that, as of this date, the bank confirmation of Roger Dunn
& Company has not been received. In view of the fact
that the corporation is racing against time in securing its
financing, he recommended that the corporation
entertain other offers.
After a brief exchange of views on the part of the
Directors present and after hearing the clarification and
explanation made by Mr. C. M. Javier who was present
and who represented the Materials Handling
Corporation, the Directors present approved
unanimously the recommendation of Mr. Joaquin to
entertain the offer of Materials Handling Corporation.34
Evidently, IHC only relied on the opinion of its consultant
in deciding to transact with Materials Handling and, later
on, with Barnes. In negotiating with Barnes, IHC had no
intention, willful or otherwise, to prevent Joaquin and
Suarez from meeting their undertaking. Such absence of
any intention negated the basis for the CA’s reliance on
Article 1186 of the Civil Code.
Nor do we agree with the CA’s upholding of IHC’s liability
by virtue of Joaquin and Suarez’s substantial
performance. In so ruling, the CA applied Article 1234 of
the Civil Code, which states:
Article 1234. If the obligation has been substantially
performed in good faith, the obligor may recover as
though there had been a strict and complete fulfillment,
less damages suffered by the obligee.
It is well to note that Article 1234 applies only when an
obligor admits breaching the contract35 after honestly
and faithfully performing all the material elements thereof
except for some technical aspects that cause no serious
harm to the obligee.36 IHC correctly submits that the
provision refers to an omission or deviation that is slight,
or technical and unimportant, and does not affect the real
purpose of the contract.
Tolentino explains the character of the obligor’s breach
under Article 1234 in the following manner, to wit:
In order that there may be substantial performance of an
obligation, there must have been an attempt in good faith
to perform, without any willful or intentional departure
therefrom. The deviation from the obligation must be
slight, and the omission or defect must be technical and
unimportant, and must not pervade the whole or be so
material that the object which the parties intended to
accomplish in a particular manner is not attained. The
non-performance of a material part of a contract will
prevent the performance from amounting to a substantial
compliance.
The party claiming substantial performance must show
that he has attempted in good faith to perform his
contract, but has through oversight, misunderstanding or
any excusable neglect failed to completely perform in
certain negligible respects, for which the other party may
be adequately indemnified by an allowance and
deduction from the contract price or by an award of
damages. But a party who knowingly and wilfully fails to
perform his contract in any respect, or omits to perform a
material part of it, cannot be permitted, under the
protection of this rule, to compel the other party, and the
trend of the more recent decisions is to hold that the
percentage of omitted or irregular performance may in
and of itself be sufficient to show that there had not been
a substantial performance.37
By reason of the inconsequential nature of the breach or
omission, the law deems the performance as substantial,
making it the obligee’s duty to pay.38 The compulsion of
payment is predicated on the substantial benefit derived
by the obligee from the partial performance. Although
compelled to pay, the obligee is nonetheless entitled to
an allowance for the sum required to remedy omissions
or defects and to complete the work agreed upon.39
Conversely, the principle of substantial performance is
inappropriate when the incomplete performance
constitutes a material breach of the contract. A
contractual breach is material if it will adversely affect the
nature of the obligation that the obligor promised to
deliver, the benefits that the obligee expects to receive
after full compliance, and the extent that the
nonperformance defeated the purposes of the
contract.40 Accordingly, for the principle embodied in
Article 1234 to apply, the failure of Joaquin and Suarez
to comply with their commitment should not defeat the
ultimate purpose of the contract. The primary objective of
the parties in entering into the services agreement was to
obtain a foreign loan to finance the construction of IHC’s
hotel project.
This objective could be inferred from IHC’s approval of
phase 1 to phase 6 of the proposal. Phase 1 and phase
2, respectively the preparation of a new project study and
the settlement of the unregistered mortgage, would pave
the way for Joaquin and Suarez to render assistance to
IHC in applying for the DBP guaranty and thereafter to
look for an able and willing foreign financial institution
acceptable to DBP. All the steps that Joaquin and
Suarez undertook to accomplish had a single
objective―to secure a loan to fund the construction and
eventual operations of the hotel of IHC. In that regard,
Joaquin himself admitted that his assistance was
specifically sought to seek financing for IHC’s hotel
project.41
Needless to say, finding the foreign financier that DBP
would guarantee was the essence of the parties’
contract, so that the failure to completely satisfy such
obligation could not be characterized as slight and
unimportant as to have resulted in Joaquin and Suarez’s
substantial performance that consequentially benefitted
IHC. Whatever benefits IHC gained from their services
could only be minimal, and were even probably
outweighed by whatever losses IHC suffered from the
delayed construction of its hotel. Consequently, Article
1234 did not apply.
3. IHC is nonetheless liable to pay under the rule on
constructive fulfillment of a mixed conditional obligation
Notwithstanding the inapplicability of Article 1186 and
Article 1234 of the Civil Code, IHC was liable based on
the nature of the obligation.
Considering that the agreement between the parties was
not circumscribed by a definite period, its termination
was subject to a condition―the happening of a future
and uncertain event.42 The prevailing rule in conditional
obligations is that the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall
depend upon the happening of the event that constitutes
the condition.43
To recall, both the RTC and the CA held that Joaquin
and Suarez’s obligation was subject to the suspensive
condition of successfully securing a foreign loan
guaranteed by DBP. IHC agrees with both lower courts,
and even argues that the obligation with a suspensive
condition did not arise when the event or occurrence did
not happen. In that instance, partial performance of the
contract subject to the suspensive condition was
tantamount to no performance at all. As such, the
respondents were not entitled to any compensation.
We have to disagree with IHC’s argument.
To secure a DBP-guaranteed foreign loan did not solely
depend on the diligence or the sole will of the
respondents because it required the action and
discretion of third persons―an able and willing foreign
financial institution to provide the needed funds, and the
DBP Board of Governors to guarantee the loan. Such
third persons could not be legally compelled to act in a
manner favorable to IHC. There is no question that when
the fulfillment of a condition is dependent partly on the
will of one of the contracting parties,44 or of the obligor,
and partly on chance, hazard or the will of a third person,
the obligation is mixed.45 The existing rule in a mixed
conditional obligation is that when the condition was not
fulfilled but the obligor did all in his power to comply with
the obligation, the condition should be deemed
satisfied.46
Considering that the respondents were able to secure an
agreement with Weston, and subsequently tried to
reverse the prior cancellation of the guaranty by DBP, we
rule that they thereby constructively fulfilled their
obligation.
4.Quantum meruit should apply in the absence of an
express agreement on the fees. The next issue to
resolve is the amount of the fees that IHC should pay to
Joaquin and Suarez.
Joaquin claimed that aside from the approved
P2,000,000.00 fee to implement phase 1 to phase 6, the
IHC Board of Directors had approved an additional
P500,000.00 as payment for his services. The RTC
declared that he and Suarez were entitled to
P200,000.00 each, but the CA revised the amounts to
P700,000.00 for Joaquin and P200,000.00 for Suarez.
Anent the P2,000,000.00, the CA rightly concluded that
the full amount of P2,000,000.00 could not be awarded
to respondents because such amount was not allocated
exclusively to compensate respondents, but was
intended to be the estimated maximum to fund the
expenses in undertaking phase 6 of the scope of
services. Its conclusion was unquestionably borne out by
the minutes of the February 11, 1969 meeting, viz.:
 xxx
II
The [p]reparation of the necessary papers for the DBP
including the preparation of the application, the
presentation of the mechanics of financing, the actual
follow up with the different departments of the DBP which
includes the explanation of the feasibility studies up to
the approval of the loan, conditioned on the DBP’s
acceptance of the project as feasible. The estimated
expenses for this particular phase would be contingent,
i.e. upon DBP’s approval of the plan now being studied
and prepared, is somewhere around P2,000,000.00.
After a brief discussion on the matter, the Board on
motion duly made and seconded, unanimously adopted a
resolution of the following tenor:
“RESOLVED, as it is hereby RESOLVED, that if the
Reparations allocation and the plan being negotiated
with the DBP is realized the estimated maximum
expenses of P2,000,000.00 for this phase is hereby
authorized subject to the sound discretion of the
committee composed of Justice Felix Angelo Bautista,
Jose N. Valero and Ephraim G. Gochangco.”47
(Emphasis supplied)
Joaquin’s claim for the additional sum of P500,000.00
was similarly without factual and legal bases. He had
requested the payment of that amount to cover services
rendered and still to be rendered to IHC separately from
those covered by the first six phases of the scope of
work. However, there is no reason to hold IHC liable for
that amount due to his failure to present sufficient proof
of the services rendered towards that end. Furthermore,
his July 11, 1969 letter revealed that the additional
services that he had supposedly rendered were identical
to those enumerated in the technical proposal, thus:
The Board of Directors
International Hotel Corporation
Thru: Justice Felix Angelo Bautista
President & Chairman of the Board
Gentlemen:
I have the honor to request this Body for its deliberation
and action on the fees for my services rendered and to
be rendered to the hotel project and to the corporation.
These fees are separate from the fees you have
approved in your previous Board Resolution, since my
fees are separate. I realize the position of the corporation
at present, in that it is not in a financial position to pay my
services in cash, therefore, I am requesting this Body to
consider payment of my fees even in the form of shares
of stock, as you have done to the other technical men
and for other services rendered to the corporation by
other people.
Inasmuch as my fees are contingent on the successful
implementation of this project, I request that my fees be
based on a percentage of the total project cost. The fees
which I consider reasonable for the services that I have
rendered to the project up to the completion of its
construction is P500,000.00. I believe said amount is
reasonable since this is approximately only ¾ of 1% of
the total project cost.
So far, I have accomplished Phases 1-5 of my report
dated February 1, 1969 and which you authorized us to
do under Board Resolution of February 11, 1969. It is
only Phase 6 which now remains to be implemented. For
my appointment as Consultant dated May 12, 1969 and
the Board Resolution dated June 23, 1969 wherein I was
appointed to the Technical Committee, it now follows that
I have been also authorized to implement part of Phases
7 & 8. A brief summary of my accomplished work has
been as follows:
1. I have revised and made the new Project Study of
your hotel project, making it bankable and feasible.
2. I have reduced the total cost of your project by
approximately P24,735,000.00.
3. I have seen to it that a registered mortgage with the
Reparations Commission did not affect the application
with the IBP for approval to processing.
4. I have prepared the application papers acceptable to
the DBP by means of an advance analysis and the
presentation of the financial mechanics, which was
accepted by the DBP.
5. I have presented the financial mechanics of the loan
wherein the requirement of the DBP for an additional
P19,000,000.00 in equity from the corporation became
unnecessary.
6. The explanation of the financial mechanics and the
justification of this project was instrumental in changing
the original recommendation of the Investment Banking
Department of the DBP, which recommended
disapproval of this application, to the present
recommendation of the Real Estate Department which is
for the approval of this project for proceeding.
7. I have submittted to you several offers already of
foreign financiers which are in your files. We are
presently arranging the said financiers to confirm their
funds to the DBP for our project.
8. We have secured the approval of the DBP to
process the loan application of this corporation as per its
letter July 2, 1969.
9. We have performed other services for the
corporation which led to the cooperation and
understanding of the different factions of this corporation.
I have rendered services to your corporation for the past
6 months with no clear understanding as to the
compensation of my services. All I have drawn from the
corporation is the amount of P500.00 dated May 12,
1969 and personal payment advanced by Justice Felix
Angelo Bautista in the amount of P1,000.00.
I am, therefore, requesting this Body for their approval of
my fees. I have shown my good faith and willingness to
render services to your corporation which is evidenced
by my continued services in the past 6 months as well as
the accomplishments above mentioned. I believe that the
final completion of this hotel, at least for the processing
of the DBP up to the completion of the construction, will
take approximately another 2 ½ years. In view of the
above, I again reiterate my request for your approval of
my fees. When the corporation is in a better financial
position, I will request for a withdrawal of a monthly
allowance, said amount to be determined by this Body.
Very truly yours,
(Sgd.)
Francisco G., Joaquin, Jr.48
(Emphasis supplied)
Joaquin could not even rest his claim on the approval by
IHC’s Board of Directors. The approval apparently arose
from the confusion between the supposedly separate
services that Joaquin had rendered and those to be done
under the technical proposal. The minutes of the July 11,
1969 board meeting (when the Board of Directors
allowed the payment for Joaquin’s past services and for
the 70% project completion by the technical group)
showed as follows:
III
The Third order of business is the compensation of Mr.
Francisco G. Joaquin, Jr. for his services in the
corporation.
After a brief discussion that ensued, upon motion duly
made and seconded, the stockholders unanimously
approved a resolution of the following tenor:
RESOLUTION NO. ___
(Series of 1969)
“RESOLVED that Mr. Francisco G. Joaquin, Jr. be
granted a compensation in the amount of Five Hundred
Thousand (P500,000.00) Pesos for his past services and
services still to be rendered in the future to the
corporation up to the completion of the Project. The
President is given full discretion to discuss with Mr.
Joaquin the manner of payment of said compensation,
authorizing him to pay part in stock and part in cash.”
Incidentally, it was also taken up the necessity of giving
the Technical Group a portion of the compensation that
was authorised by this corporation in its Resolution of
February 11, 1969 considering that the assistance so far
given the corporation by said Technical Group in
continuing our project with the DBP and its request for
guaranty for a foreign loan is 70% completed leaving
only some details which are now being processed. It is
estimated that P400,000.00 worth of Common Stock
would be reasonable for the present accomplishments
and to this effect, the President is authorized to issue the
same in the name of the Technical Group, as follows:
P200,000.00 in Common Stock to Rafael Suarez, an
associate in the Technical Group, and P200,000.00 in
Common stock to Francisco G. Joaquin, Jr., also a
member of the Technical Group.49
Lastly, the amount purportedly included services still to
be rendered that supposedly extended until the
completion of the construction of the hotel. It is basic,
however, that in obligations to do, there can be no
payment unless the obligation has been completely
rendered.50
It is notable that the confusion on the amounts of
compensation arose from the parties’ inability to agree
on the fees that respondents should receive. Considering
the absence of an agreement, and in view of
respondents’ constructive fulfillment of their obligation,
the Court has to apply the principle of quantum meruit in
determining how much was still due and owing to
respondents. Under the principle of quantum meruit, a
contractor is allowed to recover the reasonable value of
the services rendered despite the lack of a written
contract.51 The measure of recovery under the principle
should relate to the reasonable value of the services
performed.52 The principle prevents undue enrichment
based on the equitable postulate that it is unjust for a
person to retain any benefit without paying for it. Being
predicated on equity, the principle should only be applied
if no express contract was entered into, and no specific
statutory provision was applicable.53
Under the established circumstances, we deem the total
amount of P200,000.00 to be reasonable compensation
for respondents’ services under the principle of quantum
meruit.
Finally, we sustain IHC’s position that the grant of
attorney’s fees lacked factual or legal basis. 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. There should be factual or legal
support in the records before the award of such fees is
sustained. It is not enough justification for the award
simply because respondents were compelled to protect
their rights.54
ACCORDINGLY, the Court DENIES the petition for
review on certiorari; and AFFIRMS the decision of the
Court of Appeals promulgated on November 8, 2002 in
C.A.-G.R. No. 47094 subject to the MODIFICATIONS
that: (a) International Hotel Corporation is ordered to pay
Francisco G. Joaquin, Jr. and Rafael Suarez
P100,000.00 each as compensation for their services,
and (b) the award of P20,000.00 as attorney’s fees is
deleted. No costs of suit.
SO ORDERED. Petition denied, judgment affirmed.
Notes.―Quantum Meruit is a device to prevent
undue enrichment based on the equitable postulate
that it is unjust of a person to retain benefit without
paying for it. (Orocio vs. Anguluan, 577 SCRA 531
[2009])
The doctrine of quantum meruit (as much as one
deserves) prevents undue enrichment based on the
equitable postulate that it is unjust for a person to
retain benefit without paying for it. (Sazon vs.
Vasquez-Menancio, 666 SCRA 707 [2012])
----------------------------------------------------------------------------
-
G.R. No. 130403. July 30, 2007.*
FRANCISCO GONZALES, petitioner, vs. SEVERINO
C. LIM and TOYOTA SHAW, INC., respondents.
Obligations and Contracts; If the condition was imposed
on an obligation of a party which was not complied with,
the other party may either (1) refuse to proceed with the
agreement or (2) waive the fulfillment of the condition.—
Petitioner’s undertaking set forth in the “Agreement” may
be deemed a “condition,” a future and uncertain event
upon which the existence of an obligation is made to
depend or that which subordinates the existence of a
liability under a contract to a certain future event. It was a
condition that was imposed on an obligation after the
consummation of the contract of sale, not a condition on
the perfection of the contract itself (non-fulfillment of
which could have prevented the juridical relation from
coming into existence). Article 1545 of the Civil Code is
pertinent: Art.1545.Where the obligation of either party to
a contract of sale is subject to any condition which is not
performed, such party may refuse to proceed with the
contract or he may waive performance of the condition. If
the other party has promised that the condition should
happen or be performed, such first mentioned party may
also treat the nonperformance of the condition as a
breach of warranty. (emphasis supplied) x x x x x x x x x
These options were echoed in Romero v. CA, 250 SCRA
223 (1995), where we declared that if the condition was
imposed on an obligation of a party which was not
complied with, the other party may either (1) refuse to
proceed with the agreement or (2) waive the fulfillment of
the condition.
Same; Where a party’s conduct showed that they did not
only disregard the condition but also placed the other
party in a position that his compliance was no longer
necessary, the former is deemed to have effectively
waived compliance with the condition.—Respondents’
contention that the condition did not preclude them from
dealing with Tanglaw or that they were “to refrain from
negotiating directly” can only mean that they did not
really expect petitioner to comply strictly and absolutely
with it. Respondents’ conduct showed that they did not
only disregard the condition but also placed petitioner in
a position that his compliance was no longer necessary.
We are thus constrained to rule that they had effectively
waived compliance with the condition.
PETITION for review on certiorari of the decision and
resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Quiason, Makalintal, Barot, Torres and Ibarra for
petitioner.
Jimenez, Gonzales, Liwanag, Bello, Valdez, Caluya
and Fernandez for respondents.
CORONA, J.:
At bar is an appeal by certiorari under Rule 45 of the
Rules of Court questioning the decision1 and resolution2
of the Court of Appeals (CA) in CA-G.R. CV No. 41716
entitled Severino C. Lim and Toyota Shaw, Inc. v.
Francisco Gonzales and Carmen Gonzales.
The facts follow.
Petitioner Francisco Gonzales, Roque Ma. Gonzales and
Carmen Gonzales (Gonzaleses) were the owners of
Motown Vehicles, Inc. (Motown). Motown was the
licensed distributor of Ford vehicles in the country. Its
assets included two buildings standing on a 4,944 sq. m.
lot leased from Tanglaw Realty Inc. (Tanglaw).
In 1988, when Ford Philippines ceased operations, the
Gonzaleses sold Motown’s shares of stocks to
respondents Severino C. Lim and Toyota Shaw, Inc.
which was then putting up a Toyota car dealership. The
“Agreement” signed by the parties stated that the sale
included Motown’s two lease contracts with Tanglaw. It
read:
“WHEREAS, Motown, which owns these fixed and
moveable improvements and equipments…does not own
the land on which these improvements and equipments
are located, but merely leases the bare land… from
Tanglaw Realty Corp. under 2 Lease Contracts both
dated June 17, 1978 both commencing Nov. 15, 1977
and expiring Nov. 14, 2002.
xxx xxx xxx
4.PAYMENT—The aforementioned price amounting to
P6,746,000.00 shall be paid by [respondents] to the
[Gonzaleses] in two (2) installments payable
simultaneous to the occurrence of the following events:
1.P6,246,000 – [u]pon signing of this contract x x x
2.P500,000 – [u]pon receipt of official communication
from Tanglaw Realty Corporation to the effect that
Motown can have continuing and unhampered use of the
pieces of [the leased] land…covered by the 2 Lease
Contracts…[I]t is understood that the continuation of the
lease at a reasonable rate for the original term of the 2
lease agreements is a central, indivisible and very basic
part of this agreement, since the [bases] for the valuation
of Motown by [respondents are] its location and the
improvements and equipments contained therein.3
xxx xxx x x x”
After paying the initial installment of P6,246,000 to the
Gonzaleses, respondents claimed they discovered that
one of Motown’s lease contracts had already been
terminated prior to the sale. As a result, they were
allegedly constrained to negotiate with Tanglaw for a
new lease contract (with a higher rental).
Subsequently, respondents filed a case in the Regional
Trial Court (RTC), Branch 65 of Makati,4 for declaratory
relief with damages against the Gonzaleses, seeking
release from their obligation to pay the P500,000
balance.
During the trial, respondents (as then plaintiffs) accused
the Gonzaleses of falsely representing to them that the
latter’s two lease contracts were still subsisting at the
time of the sale. They maintained that the Gonzaleses
guaranteed a “continuing and unhampered use” of the
premises but Tanglaw had nonetheless threatened to
evict them from one of the leased portions.
To support their claim, they presented in court a copy of
the “Agreement” indicating the Gonzaleses’ alleged
warranty that the two lease contracts with Tanglaw were
still good.
Petitioner (with his then co-defendants) countered that
respondents were well aware of the termination of one of
the two lease contracts at the time of sale. He denied
giving a warranty on both contracts and explained that he
only signed the “Agreement” (showing Motown’s two
lease contracts with Tanglaw) on prodding by
respondents that they needed it to convince Toyota
Philippines they were ready with their dealership site.
According to petitioner, respondents told him it was only
“for show” and amendments thereto would be made later
on.
Petitioner added that his only undertaking was to help
respondents negotiate a new lease contract that would
have similar terms as his. As a counterclaim, petitioner
asked for the payment of respondents’ P500,000
balance.
After trial, the RTC dismissed respondents’ case but
granted petitioner’s counterclaim of P500,000. The court
a quo’s decision read:
“...[T]he court finds that [petitioner] did not warrant the
existence of the lease on one of the premises. The court
believes that even before the [“Agreement”] has been
executed[,] [respondents were] already aware that one of
the leases has been terminated…[I]f [petitioner]
warranted anything at all, it was only that he will help
[respondents] procure a new lease contract under the old
term.
xxx xxx xxx
…In view of the foregoing, the complaint is
DISMISSED[.] On the counterclaim, [respondents] are
ordered to pay [petitioner] P500,000, representing the
outstanding balance for the sale of Motown shares of
stocks plus legal interest from October 10, 1989, the date
of the lease between Tanglaw Realty and Toyota Shaw,
Inc., when [petitioner] was deemed to have fulfilled his
promise.
xxx xxx xxx
SO ORDERED.”
Respondents appealed to the CA which affirmed with
modification the trial court’s decision. It agreed with the
RTC that respondents could not feign ignorance of
Motown’s terminated lease contract; however, it deleted
the order directing respondents to pay petitioner
P500,000. The CA ruled that the payment was not due
since petitioner failed to obtain the required official
communication from Tanglaw. The CA decision read:“
xxx xxx xxx
x x x. The phrase “continuation of the lease contract at a
reasonable rate” proves that [respondents] did not
contemplate stepping into the shoes of Motown as
lessee of the parcels of land because if what they truly
expected was to continue exactly the same lease
agreement between [Tanglaw] and Motown, there would
have been no need to include [said] phrase… Clearly,
[respondents] anticipated nay expected that if they
continue the lease, it would not be under the same terms
and conditions as the original contract, but rather at a
new, reasonable rate. Therefore, there was no warranty
from [petitioner]…
…[W]ith regard to the question of whether [respondents]
are now obliged to pay [petitioner] the P500,000.00…,
the Court finds that [petitioner had] not been able to fulfill
[his] obligation to submit the required official
communication from Tanglaw Realty Corporation. Thus,
[respondents] are…freed from their obligation to pay the
final installment of P500,000.00.
xxx xxx xxx
WHEREFORE, judgment is hereby rendered
MODIFYING the lower court’s decision by deleting the
portion ordering [respondents] to pay [petitioner]
P500,000 plus legal interest. Instead, the Court hereby
declares [petitioner’s] counterclaim DISMISSED.”6
Petitioner filed a motion for reconsideration (MR),
contending that the payment of the P500,000 balance
was already due because respondents themselves had
prevented him from fulfilling his undertaking in the
“Agreement.” Petitioner insisted that since respondents
negotiated directly with Tanglaw for a new lease
contract, petitioner’s obligation should be deemed
fulfilled.
The CA denied the MR.7 Hence, this petition.8
In this petition, the lone issue for resolution is whether
petitioner was still entitled to the payment of P500,000
despite failure to comply with the provision in the
“Agreement” requiring him to obtain an official
communication from Tanglaw regarding the continuation
of Motown’s lease contract.
At the outset, petitioner’s undertaking set forth in the
“Agreement” may be deemed a “condition,” a future and
uncertain event upon which the existence of an
obligation is made to depend or that which subordinates
the existence of a liability under a contract to a certain
future event.9 It was a condition that was imposed on an
obligation after the consummation of the contract of sale,
not a condition on the perfection of the contract itself
(non-fulfillment of which could have prevented the
juridical relation from coming into existence).
Article 1545 of the Civil Code is pertinent:
“Art. 1545.Where the obligation of either party to a
contract of sale is subject to any condition which is not
performed, such party may refuse to proceed with the
contract or he may waive performance of the condition. If
the other party has promised that the condition should
happen or be performed, such first mentioned party may
also treat the nonperformance of the condition as a
breach of warranty. (emphasis supplied)
xxx xxx x x x”
These options were echoed in Romero v. CA,10wherewe
declared that if the condition was imposed on an
obligation of a party which was not complied with, the
other party may either (1) refuse to proceed with the
agreement or (2) waive the fulfillment of the condition.
In the case at bar, respondents obviously did not choose
the first option as they proceeded with their contract with
petitioner despite the latter’s non-fulfillment of the
condition in the agreement. In fact, in their comment,
they stated that they “took possession of the properties
and caused extensive improvement and installed
facilities and equipment” thereon.11
Did respondents, however, waive fulfillment of the
condition? Yes.
The records reveal that respondents negotiated directly
with Tanglaw for a new lease contract even without the
required official communication that petitioner was
supposed to obtain for them, a condition in the
“Agreement” which they themselves imposed on the
latter. Although they had the right to require his
compliance with the condition or compel his performance
of the undertaking, they opted otherwise
Respondents’ assertion that they were merely forced to
deal directly with Tanglaw because the latter had
threatened to evict them has no merit. As the RTC and
the CA both held, respondents, at the time of the sale,
already knew that one of Motown’s two lease contracts
with Tanglaw had been terminated. This being a finding
of fact, we shall not look into it, absent any compelling
reason to do so.12 Respondents therefore cannot invoke
this argument to justify their actions and evade their
liability to petitioner.
Moreover, respondents’ contention that the condition did
not preclude them from dealing with Tanglaw or that they
were “to refrain from negotiating directly”13 can only
mean that they did not really expect petitioner to comply
strictly and absolutely with it. Respondents’ conduct
showed that they did not only disregard the condition but
also placed petitioner in a position that his compliance
was no longer necessary. We are thus constrained to
rule that they had effectively waived compliance with the
condition.
Finally, the condition was deemed waived when
respondents forged their new lease contract with
Tanglaw.14
WHEREFORE, the petition is hereby GRANTED. The
assailed decision and resolution of the Court of Appeals
in CA-G.R. CV No. 41716 are hereby SET ASIDE and
the decision of the Regional Trial Court REINSTATED.
SO ORDERED.
Notes.—Obligations under an option to buy are
reciprocal obligations—the performance of one
obligation is conditioned on the simultaneous
fulfillment of the other obligation. (Heirs of Luis
Bacus vs. Court of Appeals, 371 SCRA 295 [2001])
Courts have no power to relieve parties from
obligations voluntarily assumed, simply because
their contracts turned out to be disastrous or unwise
investments. (Lim vs. Queensland Tokyo
Commodities, Inc., 373 SCRA 31 [2002])
----------------------------------------------------------------------------
---
G.R. No. 133632. February 15, 2002.*
BPI INVESTMENT CORPORATION, petitioner, vs.
HON. COURT OF APPEALS and ALS MANAGEMENT
& DEVELOPMENT CORPORATION, respondents.
Obligations and Contracts; Loans; A loan contract is not
a consensual contract but a real contract, perfected only
upon the delivery of the object of the contract.—We
agree with private respondents. A loan contract is not a
consensual contract but a real contract. It is perfected
only upon the delivery of the object of the contract.
Petitioner misapplied Bonnevie. The contract in Bonnevie
declared by this Court as a perfected consensual
contract falls under the first clause of Article 1934, Civil
Code. It is an accepted promise to deliver something by
way of simple loan.
Same; Same; While a perfected loan contract can give
rise to an action for damages, said contract does not
constitute the real contract of loan which requires the
delivery of the object of the contract for its perfection and
which gives rise to obligations only on the part of the
borrower.—In Saura Import and Export Co. Inc. vs.
Development Bank of the Philippines, 44 SCRA 445,
petitioner applied for a loan of P500,000 with respondent
bank. The latter approved the application through a
board resolution. Thereafter, the corresponding
mortgage was executed and registered. However,
because of acts attributable to petitioner, the loan was
not released. Later, petitioner instituted an action for
damages. We recognized in this case, a perfected
consensual contract which under normal circumstances
could have made the bank liable for not releasing the
loan. However, since the fault was attributable to
petitioner therein, the court did not award it damages. A
perfected consensual contract, as shown above, can
give rise to an action for damages. However, said
contract does not constitute the real contract of loan
which requires the delivery of the object of the contract
for its perfection and which gives rise to obligations only
on the part of the borrower.
Same; Same; A contract of loan involves a reciprocal
obligation, wherein the obligation or promise of each
party is the consideration for that of the other; It is a
basic principle in reciprocal obligations that neither party
incurs in delay, if the other does not comply or is not
ready to comply in a proper manner with what is
incumbent upon him.—We also agree with private
respondents that a contract of loan involves a reciprocal
obligation, wherein the obligation or promise of each
party is the consideration for that of the other. As averred
by private respondents, the promise of BPIIC to extend
and deliver the loan is upon the consideration that ALS
and Litonjua shall pay the monthly amortization
commencing on May 1, 1981, one month after the
supposed release of the loan. It is a basic principle in
reciprocal obligations that neither party incurs in delay, if
the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. Only
when a party has performed his part of the contract can
he demand that the other party also fulfills his own
obligation and if the latter fails, default sets in.
Consequently, petitioner could only demand for the
payment of the monthly amortization after September 13,
1982 for it was only then when it complied with its
obligation under the loan contract. Therefore, in
computing the amount due as of the date when BPIIC
extrajudicially caused the foreclosure of the mortgage,
the starting date is October 13, 1982 and not May 1,
1981.
Same; Same; Foreclosure of Mortgage; Damages;
Where the borrower was irregular in the payment of its
monthly amortization, it may not claim moral and
exemplary damages due to the erroneous foreclosure
proceedings initiated by the creditor-mortgagor.—Private
respondents counter that BPIIC was guilty of bad faith
and should be liable for said damages because it insisted
on the payment of amortization on the loan even before it
was released. Further, it did not make the corresponding
deduction in the monthly amortization to conform to the
actual amount of loan released, and it immediately
initiated foreclosure proceedings when private
respondents failed to make timely payment. But as
admitted by private respondents themselves, they were
irregular in their payment of monthly amortization.
Conformably with our ruling in SSS, we can not properly
declare BPIIC in bad faith. Consequently, we should rule
out the award of moral and exemplary damages.
Same; Same; Same; Same; The negligence of the
creditor-mortgagor in relying merely on the entries found
in the deed of mortgage, without checking and
correspondingly adjusting its records on the amount
actually released to the borrower and the date when it
was released, which negligence resulted in damages to
the latter, entitles the borrower to an award of nominal
damages in recognition of its rights which were
violated.—In our view, BPIIC was negligent in relying
merely on the entries found in the deed of mortgage,
without checking and correspondingly adjusting its
records on the amount actually released to private
respondents and the date when it was released. Such
negligence resulted in damage to private respondents,
for which an award of nominal damages should be given
in recognition of their rights which were violated by
BPIIC. For this purpose, the amount of P25,000 is
sufficient.
Same; Same; Same; Same; Attorney’s Fees; An award
of attorney’s fees is warranted where a party was
compelled to litigate.—As in SSS where we awarded
attorney’s fees because private respondents were
compelled to litigate, we sustain the award of P50,000 in
favor of private respondents as attorney’s fees.
PETITION for review on certiorari of a decision and
resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Benedicto, Tale, Versoza & Associates for petitioner.
Vicente B. Chuidian for private respondent.
QUISUMBING, J.:
This petition for certiorari assails the decision dated
February 28, 1997, of the Court of Appeals and its
resolution dated April 21, 1998, in CA-G.R. CV No.
38887. The appellate court affirmed the judgment of the
Regional Trial Court of Pasig City, Branch 151, in (a)
Civil Case No. 11831, for foreclosure of mortgage by
petitioner BPI Investment Corporation (BPIIC for brevity)
against private respondents ALS Management and
Development Corporation and Antonio K. Litonjua,1
consolidated with (b) Civil Case No. 52093, for damages
with prayer for the issuance of a writ of preliminary
injunction by the private respondents against said
petitioner.
The trial court had held that private respondents were not
in default in the payment of their monthly amortization,
hence, the extrajudicial foreclosure conducted by BPIIC
was premature and made in bad faith. It awarded private
respondents the amount of P300,000 for moral damages,
P50,000 for exemplary damages, and P50,000 for
attorney’s fees and expenses for litigation. It likewise
dismissed the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4%
per annum from Ayala Investment and Development
Corporation (AIDC), the predecessor of petitioner BPIIC,
for the construction of a house on his lot in New Alabang
Village, Muntinlupa. Said house and lot were mortgaged
to AIDC to secure the loan. Sometime in 1980, Roa sold
the house and lot to private respondents ALS and
Antonio Litonjua for P850,000. They paid P350,000 in
cash and assumed the P500,000 balance of Roa’s
indebtedness with AIDC. The latter, however, was not
willing to extend the old interest rate to private
respondents and proposed to grant them a new loan of
P500,000 to be applied to Roa’s debt and secured by the
same property, at an interest rate of 20% per annum and
service fee of 1% per annum on the outstanding principal
balance payable within ten years in equal monthly
amortization of P9,996.58 and penalty interest at the rate
of 21% per annum per day from the date the amortization
became due and payable.
Consequently, in March 1981, private respondents
executed a mortgage deed containing the above
stipulations with the provision that payment of the
monthly amortization shall commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roa’s
arrearages by paying BPIIC the sum of P190,601.35.
This reduced Roa’s principal balance to P457,204.90
which, in turn, was liquidated when BPIIC applied thereto
the proceeds of private respondents’ loan of P500,000.
On September 13, 1982, BPIIC released to private
respondents P7,146.87, purporting to be what was left of
their loan after full payment of Roa’s loan.
In June 1984, BPIIC instituted foreclosure proceedings
against private respondents on the ground that they
failed to pay the mortgage indebtedness which from May
1, 1981 to June 30, 1984, amounted to Four Hundred
Seventy Five Thousand Five Hundred Eighty Five and
31/100 Pesos (P475,585.31). A notice of sheriff ’s sale
was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case
No. 52093 against BPIIC. They alleged, among others,
that they were not in arrears in their payment, but in fact
made an overpayment as of June 30, 1984. They
maintained that they should not be made to pay
amortization before the actual release of the P500,000
loan in August and September 1982. Further, out of the
P500,000 loan, only the total amount of P464,351.77
was released to private respondents. Hence, applying
the effects of legal compensation, the balance of
P35,648.23 should be applied to the initial monthly
amortization for the loan.
On August 31, 1988, the trial court rendered its judgment
in Civil Case Nos. 11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of
ALS Management and Development Corporation and
Antonio K. Litonjua and against BPI Investment
Corporation, holding that the amount of loan granted by
BPI to ALS and Litonjua was only in the principal sum of
P464,351.77, with interest at 20% plus service charge of
1% per annum, payable on equal monthly and
successive amortizations at P9,283.83 for ten (10) years
or one hundred twenty (120) months. The amortization
schedule attached as Annex “A” to the “Deed of
Mortgage” is correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered
compensable damages when BPI caused their
publication in a newspaper of general circulation as
defaulting debtors, and therefore orders BPI to pay ALS
and Litonjua the following sums:
a)P300,000.00 for and as moral damages;
b)P50,000.00 as and for exemplary damages;
c)P50,000.00 as and for attorney’s fees and expenses of
litigation.
The foreclosure suit (Civil Case No. 11831) is hereby
DISMISSED for being premature.Costs against BPI. SO
ORDERED.2
Both parties appealed to the Court of Appeals. However,
private respondents’ appeal was dismissed for non-
payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated
its decision, the dispositive portion reads:
WHEREFORE, finding no error in the appealed decision
the same is hereby AFFIRMED in toto. SO ORDERED.3
In its decision, the Court of Appeals reasoned that a
simple loan is perfected only upon the delivery of the
object of the contract. The contract of loan between
BPIIC and ALS & Litonjua was perfected only on
September 13, 1982, the date when BPIIC released the
purported balance of the P500,000 loan after deducting
therefrom the value of Roa’s indebtedness. Thus,
payment of the monthly amortization should commence
only a month after the said date, as can be inferred from
the stipulations in the contract. This, despite the express
agreement of the parties that payment shall commence
on May 1, 1981. From October 1982 to June 1984, the
total amortization due was only P194,960.43. Evidence
showed that private respondents had an overpayment,
because as of June 1984, they already paid a total
amount of P201,791.96. Therefore, there was no basis
for BPIIC to extrajudicially foreclose the mortgage and
cause the publication in newspapers concerning private
respondents’ delinquency in the payment of their loan.
This fact constituted sufficient ground for moral damages
in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC
was likewise denied, hence this petition, where BPIIC
submits for resolution the following issues:
I.WHETHER OR NOT A CONTRACT OF LOAN IS A
CONSENSUAL CONTRACT IN THE LIGHT OF THE
RULE LAID DOWN IN BONNEVIE VS. COURT OF
APPEALS, 125 SCRA 122.
II.WHETHER OR NOT BPI SHOULD BE HELD LIABLE
FOR MORAL AND EXEMPLARY DAMAGES AND
ATTORNEY’S FEES IN THE FACE OF IRREGULAR
PAYMENTS MADE BY ALS AND OPPOSED TO THE
RULE LAID DOWN IN SOCIAL SECURITY SYSTEM
VS. COURT OF APPEALS, 120 SCRA 707.
On the first issue, petitioner contends that the Court of
Appeals erred in ruling that because a simple loan is
perfected upon the delivery of the object of the contract,
the loan contract in this case was perfected only on
September 13, 1982. Petitioner claims that a contract of
loan is a consensual contract, and a loan contract is
perfected at the time the contract of mortgage is
executed con-formably with our ruling in Bonnevie v.
Court of Appeals, 125 SCRA 122. In the present case,
the loan contract was perfected on March 31, 1981, the
date when the mortgage deed was executed, hence, the
amortization and interests on the loan should be
computed from said date.
Petitioner also argues that while the documents showed
that the loan was released only on August 1982, the loan
was actually released on March 31, 1981, when BPIIC
issued a cancellation of mortgage of Frank Roa’s loan.
This finds support in the registration on March 31, 1981
of the Deed of Absolute Sale executed by Roa in favor of
ALS, transferring the title of the property to ALS, and
ALS executing the Mortgage Deed in favor of BPIIC.
Moreover, petitioner claims, the delay in the release of
the loan should be attributed to private respondents. As
BPIIC only agreed to extend a P500,000 loan, private
respondents were required to reduce Frank Roa’s loan
below said amount. According to petitioner, private
respondents were only able to do so in August 1982.
In their comment, private respondents assert that based
on Article 1934 of the Civil Code,4 a simple loan is
perfected upon the delivery of the object of the contract,
hence a real contract. In this case, even though the loan
contract was signed on March 31, 1981, it was perfected
only on September 13, 1982, when the full loan was
released to private respondents. They submit that
petitioner misread Bonnevie. To give meaning to Article
1934, according to private respondents, Bonnevie must
be construed to mean that the contract to extend the loan
was perfected on March 31, 1981 but the contract of loan
itself was only perfected upon the delivery of the full loan
to private respondents on September 13, 1982.
Private respondents further maintain that even granting,
arguendo, that the loan contract was perfected on March
31, 1981, and their payment did not start a month
thereafter, still no default took place. According to private
respondents, a perfected loan agreement imposes
reciprocal obligations, where the obligation or promise of
each party is the consideration of the other party. In this
case, the consideration for BPIIC in entering into the loan
contract is the promise of private respondents to pay the
monthly amortization. For the latter, it is the promise of
BPIIC to deliver the money. In reciprocal obligations,
neither party incurs in delay if the other does not comply
or is not ready to comply in a proper manner with what is
incumbent upon him. Therefore, private respondents
conclude, they did not incur in delay when they did not
commence paying the monthly amortization on May 1,
1981, as it was only on September 13, 1982 when
petitioner fully complied with its obligation under the loan
contract.
We agree with private respondents. A loan contract is not
a consensual contract but a real contract. It is perfected
only upon the delivery of the object of the contract.5
Petitioner misapplied Bonnevie. The contract in Bonnevie
declared by this Court as a perfected consensual
contract falls under the first clause of Article 1934, Civil
Code. It is an accepted promise to deliver something by
way of simple loan.
In Saura Import and Export Co. Inc. vs. Development
Bank of the Philippines, 44 SCRA 445, petitioner applied
for a loan of P500,000 with respondent bank. The latter
approved the application through a board resolution.
Thereafter, the corresponding mortgage was executed
and registered. However, because of acts attributable to
petitioner, the loan was not released. Later, petitioner
instituted an action for damages. We recognized in this
case, a perfected consensual contract which under
normal circumstances could have made the bank liable
for not releasing the loan. However, since the fault was
attributable to petitioner therein, the court did not award it
damages.
A perfected consensual contract, as shown above, can
give rise to an action for damages. However, said
contract does not constitute the real contract of loan
which requires the delivery of the object of the contract
for its perfection and which gives rise to obligations only
on the part of the borrower.6
In the present case, the loan contract between BPI, on
the one hand, and ALS and Litonjua, on the other, was
perfected only on September 13, 1982, the date of the
second release of the loan. Following the intentions of
the parties on the commencement of the monthly
amortization, as found by the Court of Appeals, private
respondents’ obligation to pay commenced only on
October 13, 1982, a month after the perfection of the
contract.7
We also agree with private respondents that a contract of
loan involves a reciprocal obligation, wherein the
obligation or promise of each party is the consideration
for that of the other.8 As averred by private respondents,
the promise of BPIIC to extend and deliver the loan is
upon the consideration that ALS and Litonjua shall pay
the monthly amortization commencing on May 1, 1981,
one month after the supposed release of the loan. It is a
basic principle in reciprocal obligations that neither party
incurs in delay, if the other does not comply or is not
ready to comply in a proper manner with what is
incumbent upon him.9 Only when a party has performed
his part of the contract can he demand that the other
party also fulfills his own obligation and if the latter fails,
default sets in. Consequently, petitioner could only
demand for the payment of the monthly amortization
after September 13, 1982 for it was only then when it
complied with its obligation under the loan contract.
Therefore, in computing the amount due as of the date
when BPIIC extrajudicially caused the foreclosure of the
mortgage, the starting date is October 13, 1982 and not
May 1, 1981.
Other points raised by petitioner in connection with the
first issue, such as the date of actual release of the loan
and whether private respondents were the cause of the
delay in the release of the loan, are factual. Since
petitioner has not shown that the instant case is one of
the exceptions to the basic rule that only questions of law
can be raised in a petition for review under Rule 45 of the
Rules of Court,10 factual matters need not tarry us now.
On these points we are bound by the findings of the
appellate and trial courts.
On the second issue, petitioner claims that it should not
be held liable for moral and exemplary damages for it did
not act maliciously when it initiated the foreclosure
proceedings. It merely exercised its right under the
mortgage contract because private respondents were
irregular in their monthly amortization. It invoked our
ruling in Social Security System vs. Court of Appeals,
120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate
damages. As concluded by the Court of Appeals “the
negligence of the appellant is not so gross as to warrant
moral and temperate damages,” except that, said Court
reduced those damages by only P5,000.00 instead of the guaranty. (Security Bank and Trust Company,
eliminating them. Neither can we agree with the findings Inc. vs. Cuenca, 341 SCRA 781 [2000])
of both the Trial Court and respondent Court that the
SSS had acted maliciously or in bad faith. The SSS was ——o0o——
of the belief that it was acting in the legitimate exercise of
its right under the mortgage contract in the face of
irregular payments made by private respondents and
placed reliance on the automatic acceleration clause in
the contract. The filing alone of the foreclosure
application should not be a ground for an award of moral
damages in the same way that a clearly unfounded civil
action is not among the grounds for moral damages.

Private respondents counter that BPIIC was guilty of bad

faith and should be liable for said damages because it
insisted on the payment of amortization on the loan even
before it was released. Further, it did not make the
corresponding deduction in the monthly amortization to
conform to the actual amount of loan released, and it
immediately initiated foreclosure proceedings when
private respondents failed to make timely payment.

But as admitted by private respondents themselves, they

were irregular in their payment of monthly amortization.
Conformably with our ruling in SSS, we can not properly
declare BPIIC in bad faith. Consequently, we should rule
out the award of moral and exemplary damages.11

However, in our view, BPIIC was negligent in relying

merely on the entries found in the deed of mortgage,
without checking and correspondingly adjusting its
records on the amount actually released to private
respondents and the date when it was released. Such
negligence resulted in damage to private respondents,
for which an award of nominal damages should be given
in recognition of their rights which were violated by
BPIIC.12 For this purpose, the amount of P25,000 is
sufficient.

Lastly, as in SSS where we awarded attorney’s fees

because private respondents were compelled to litigate,
we sustain the award of P50,000 in favor of private
respondents as attorney’s fees.

WHEREFORE, the decision dated February 28, 1997, of

the Court of Appeals and its resolution dated April 21,
1998, are AFFIRMED WITH MODIFICATION as to the
award of damages. The award of moral and exemplary
damages in favor of private respondents is DELETED,
but the award to them of attorney’s fees in the amount of
P50,000 is UPHELD. Additionally, petitioner is
ORDERED to pay private respondents P25,000 as
nominal damages. Costs against petitioner. SO
ORDERED.

Judgment affirmed with modification.

Notes.—Creditors do not have material interest to

sue for rescission of a contract of sale—theirs is
only a personal right to receive payment for the loan,
not a real right over the property subject of the deed
of sale. (Adorable vs. Court of Appeals, 319 SCRA
200 [1999])

The practice of banks of making borrowers sign trust

receipts to facilitate collection of loans and place
them under the threats of criminal prosecution
should they be unable to pay it may be unjust and
inequitable, if not reprehensible. (Colinares vs. Court
of Appeals, 339 SCRA 609 [2000])

An extension granted to the debtor by the creditor

without the consent of the guarantor extinguishes