[GR No.

77647, Aug 07, 1989 ]

CETUS DEVELOPMENT v. CA 257 Phil. 73

MEDIALDEA, J.:
This is a petition for review on certiorari of the decision dated January 30, 1987 of the Court of Appeals in
CA-GR Nos. SP-07945-50 entitled, "Cetus Development, Inc., Petitioner vs. Hon. Conrado T. Limcaoco,
Presiding Judge, Regional Trial Court of Manila, Branch XI, Ederlina Navalta, et. al., respondents."

The following facts appear in the records:

The private respondents, Ederlina Navalta, Ong Teng, Jose Liwanag, Leandro Canlas,
Victoria Sudario, and Flora Nagbuya were the lessees of the premises located at No.
512 Quezon Boulevard, Quiapo, Manila, originally owned by the Susana Realty. These individual verbal
leases were on a month-to-month basis at the following rates: Ederlina Navalta at the rate of
P80.50; Ong Teng at the rate of P96.10; Jose Liwanag at the rate of P40.35; Leandro Canlas at the rate of
P80.55; Victoria Sudario at the rate of P50.45 and Flora Nagbuya at the rate of P80.55. The payments of
the rentals were paid by the lessees to a collector of the Susana Realty who went to the premises monthly.
Sometime in March, 1984, the Susana Realty sold the leased premises to the petitioner, Cetus Development,
Inc., a corporation duly organized and existing under the laws of the Philippines. From April to June, 1984,
the private respondents continued to pay their monthly rentals to a collector sent by the petitioner. In the
succeeding months of July, August and September 1984, the respondents failed to pay their
monthly individual rentals as no collector came.
On October 9, 1984, the petitioner sent a letter to each of the private respondents demanding that
they vacate the subject premises and to pay the back rentals for the months of July, August and September,
1984, within fifteen (15) days from the receipt thereof. Immediately upon the receipt of the said demand
letters on October 10, 1984, the private respondents paid their respective arrearages in rent which were
accepted by the petitioner subject to the unilateral condition that the acceptance was without prejudice to the
filing of an ejectment suit. Subsequent monthly rental payments were likewise accepted by the petitioner
under the same condition.
For failure of the private respondents to vacate the premises as demanded in the letter dated
October 9, 1984, the petitioner filed with the Metropolitan Trial Court of Manila complaints
for ejectment against the former, as follows: (1) 105972-CV, against Ederlina Navalta; (2) 105973-CV,
against Jose Liwanag; (3) 105974-CV, against Flora Nagbuya; (4) 105975-CV, against Leandro Canlas; (5)
105976-CV, against Victoria Sudario and (6) 105977-CV, against Ong Teng.
In their respective answers, the six (6) private respondents interposed a common defense. They claimed
that since the occupancy of the premises they paid their monthly rental regularly through a collector of
the lessor; that their non-payment of the rentals for the months of July, August and September, 1984, was
due to the failure of the petitioner (as the new owner) to send its collector; that they were at a loss as to where
they should pay their rentals; that sometime later, one of the respondents called the office of the petitioner to
inquire as to where they would make such payments and he was told that a collector would be sent to receive
the same; that no collector was ever sent by the petitioner; and that instead they received a uniform demand
letter dated October 9, 1984.
The private respondents, thru counsel, later filed a motion for consolidation of the six cases and as
a result thereof, the said cases were consolidated in the Metropolitan Trial Court of Manila, Branch XII,
presided over by Judge Eduardo S. Quintos, Jr. On June 4, 1985, the trial court rendered its decision
dismissing the six cases, a pertinent portion of which reads, as follows:
"The records of this case show that at the time of the filing of this complaint, the rentals had all been
paid. Hence, the plaintiff cannot eject the defendants from the leased premises, because at the time these
cases were instituted, there are no rentals in arrears.
"The acceptance of the back rental by the plaintiff before the filing of the complaint, as in these case, the
alleged rental arrearages were paid immediately after receipt of the demand letter, removes its cause of
action in an unlawful detainer case, even if the acceptance was without prejudice.
"x x x.
"Furthermore, the court has observed that the account involved which constitutes the rentals of the tenants
are relatively small to which the ejectment may not lie on grounds of equity and for humanitarian reasons.
"Defendants' counterclaim for litigation expenses has no legal and factual basis for assessing the same
against plaintiff.
"WHEREFORE, judgment is hereby rendered dismissing these cases, without pronouncement as to costs.
"Defendants' counterclaim is likewise dismissed.
"SO ORDERED." (pp. 32-33, Rollo, G.R. No. 77647)

Not satisfied with the decision of the Metropolitan Trial Court, the petitioner appealed to the Regional Trial
Court of Manila and the same was assigned to Branch IX thereof presided over by
Judge Conrado T. Limcaoco (now Associate Justice of the Court of Appeals). In its decision
dated November 19, 1985, the Regional Trial Court dismissed the appeal for lack of merit.
In due time, a petition for review of the decision of the Regional Trial Court was filed by the petitioner with
the Court of Appeals. Said petition was dismissed on January 30, 1987, for lack of merit.
Aggrieved by the decision of the Court of Appeals, petitioner now comes to Us in this petition, assigning
the following errors:
ASSIGNMENT OF ERRORS
"I" RESPONDENT COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION, AMOUNTING
TO LACK OF JURISDICTION, WHEN IT ERRED IN HOLDING THAT THE CAUSE OF ACTION FOR
UNLAWFUL DETAINER IN THESE CASES DID NOT EXIST WHEN THE COMPLAINTS WERE FILED
BECAUSE PRIVATE RESPONDENTS TENDERED, AND PETITIONER ACCEPTED, THE
PAYMENT OF THE THREE (3) MONTHS RENTAL IN ARREARS WITHIN THE FIFTEEN (15) DAY
PERIOD FROM PRIVATE RESPONDENTS' RECEIPT OF PETITIONER'S DEMAND
LETTERS TO VACATE THE SUBJECT PREMISES AND TO PAY THE RENTALS IN ARREARS.
"II" RESPONDENT COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION, AMOUNTING
TO LACK OF JURISDICTION, WHEN IT ERRED IN AFFIRMING THE DISMISSAL OF THE COMPLAINTS
IN THESE CASES NOTWITHSTANDING THE EXISTENCE OF VALID GROUNDS FOR THE JUDICIAL
EJECTMENT OF PRIVATE RESPONDENT.
"III" RESPONDENT COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION,
AMOUNTING TO LACK OF JURISDICTION, WHEN IT ERRED IN HOLDING THAT THESE CASES ARE
CLASSIC EXAMPLES TO CIRCUMVENT THE RENT CONTROL LAW." (pp. 164-165, Rollo, G.R. No.
77647)
The Court of Appeals defined the basic issue in this case as follows: whether or not there exists a
cause of action when the complaints for unlawful detainer were filed considering the fact that upon demand
by petitioner from private respondents for payment of their back rentals, the latter immediately tendered
payment which was accepted by petitioner.
In holding that there was no cause of action, the respondent Court relied on Section 2, Rule 70 of the Rules
of Court, which provides:
"Sec. 2 - Landlord to proceed against tenant only after demand. - No landlord or his legal representative or
assign, shall bring such action against a tenant for failure to pay rent due or to comply with the conditions of
his lease, unless the tenant shall have failed to pay such rent or comply with such conditions for a period of
fifteen (15) days or five (5) days in case of building, after demand therefor, made upon him personally, or by
serving written notice of such demand upon the person found on the premises, or by posting such notice on
the premises if no persons be found thereon."
It interpreted the said provision as follows:
"x x x the right to bring an action of ejectment or unlawful detainer must be counted from the time the
defendants failed to pay rent after the demand therefor. It is not the failure per se to pay rent as agreed in
the contract, but the failure to pay the rent after a demand therefor is made, that entitles the lessor to bring
an action for unlawful detainer. In other words, the demand contemplated by the above-quoted provision is
not a demand to vacate, but a demand made by the landlord upon his tenant for the latter to pay the rent
due. If the tenant fails to comply with the said demand within the period provided, his possession becomes
unlawful and the landlord may then bring the action for ejectment." (p. 28, Rollo, G.R. No. 77647)
We hold that the demand required and contemplated in Section 2, aforequoted, is a jurisdictional requirement
for the purpose of bringing an unlawful detainer suit for failure to pay rent or comply with the conditions of
lease. It partakes of an extrajudicial remedy that must be pursued before resorting to judicial action so
much so that when there is full compliance with the demand, there arises no necessity for court action.
As to whether this demand is merely a demand to pay rent or comply with the conditions of the lease or also
a demand to vacate, the answer can be gleaned from said Section 2. This section presupposes the existence
of a cause of action for unlawful detainer as it speaks of "failure to pay rent due or comply with the conditions
of the lease." The existence of said cause of action gives the lessor the right under Article 1659 of the New
Civil Code to ask for the rescission of the contract of lease and indemnification for damages, or only the latter,
allowing the contract to remain in force. Accordingly, if the option chosen is for specific performance, then
the demand referred to is obviously to pay rent or to comply with the conditions of the lease
violated. However, if rescission is the option chosen, the demand must be for the lessee to pay rents or to
comply with the conditions of the lease and to vacate. Accordingly, the rule that has been followed in our
jurisprudence where rescission is clearly the option taken, is that both demands to pay rent and to vacate are
necessary to make a lessee a deforciant in order that an ejectment suit may be filed (Casilan, et al.
vs. Tomassi, L-16574, February 28, 1964, 10 SCRA 261; Rickards vs. Gonzales, 109 Phil.
423; Dikit vs. Icasiano, 89 Phil. 44).
 Thus, for the purpose of bringing an ejectment suit, two requisites must concur, namely: (1) there
must be failure to pay rent or comply with the conditions of the lease and (2) there must be demand both to
pay or to comply and vacate within the periods specified in Section 2, Rule 70, namely 15 days in case of
lands and 5 days in case of buildings. The first requisite refers to the existence of the cause of action for
unlawful detainer while the second refers to the jurisdictional requirement of demand in order that said cause
of action may be pursued.
It is very clear that in the case at bar, no cause of action for ejectment has accrued. There was no
failure yet on the part of private respondents to pay rents for three consecutive months. As the terms of the
individual verbal leases which were on a month-to-month basis were not alleged and proved, the general rule
on necessity of demand applies, to wit: there is default in the fulfillment of an obligation when the creditor
demands payment at the maturity of the obligation or at anytime thereafter. This is explicit in Article 1169,
New Civil Code which provides that "(t)hose obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their obligation." Petitioner has
not shown that its case falls on any of the following exceptions where demand is not required: (a) when the
obligation or the law so declares; (b) when from the nature and circumstances of the obligation it can be
inferred that time is of the essence of the contract; and (c) when demand would be useless, as when the
obligor has rendered it beyond his power to perform.
The demand required in Article 1169 of the Civil Code may be in any form, provided that it can be
proved. The proof of this demand lies upon the creditor. Without such demand, oral or written, the effects
of default do not arise. This demand is different from the demand required under Section 2, Rule 70, which
is merely a jurisdictional requirement before an existing cause of action may be pursued.
The facts on record fail to show proof that petitioner demanded the payment of the rentals when the obligation
matured. Coupled with the fact that no collector was sent as previously done in the past, the private
respondents cannot be held guilty of mora solvendi or delay in the payment of rentals. Thus, when petitioner
first demanded the payment of the 3-month arrearages and private respondents lost no time in making tender
and payment, which petitioner accepted, no cause of action for ejectment accrued. Hence, its demand to
vacate was premature as it was an exercise of a non-existing right to rescind.
In contradistinction, where the right of rescission exists, payment of the arrearages in rental after the
demand to pay and to vacate under Section 2, Rule 70 does not extinguish the cause of action
for ejectment as the lessor is not only entitled to recover the unpaid rents but also to eject the lessee.
Petitioner correctly argues that acceptance of tendered payment does not constitute a waiver of the cause of
action for ejectment especially when accepted with the written condition that it was "without prejudice to the
filing of an ejectment suit". Indeed, it is illogical or ridiculous not to accept the tender of payment of rentals
merely to preserve the right to file an action for unlawful detainer. However, this line of argument
presupposes that a cause of action for ejectment has already accrued, which is not true in the instant case.
Petitioner likewise claims that its failure to send a collector to collect the rentals cannot be considered a valid
defense for the reason that sending a collector is not one of the obligations of
the lessor under Article 1654. While it is true that a lessor is not obligated to send a collector, it has
been duly established that it has been customary for private respondents to pay the rentals through a
collector. Besides Article 1257, New Civil Code provides that where no agreement has been designated for
the payment of the rentals, the place of payment is at the domicile of the defendants. Hence, it could not be
said that they were in default in the payment of their rentals as the delay in paying the same was not imputable
to them. Rather, it was attributable to petitioner's omission or neglect to collect.
Petitioner also argues that neither is its refusal to accept the rentals a defense for non-payment as Article
1256 provides that "[i]f the creditor to whom the tender of payment has been made refuses without just cause
to accept it, the debtor shall be released from responsibility by the consignation of the thing due." It bears
emphasis that in this case there was no unjustified refusal on the part of petitioner or non-acceptance without
reason that would constitute mora accipiendi and warrant consignation. There was simply lack of demand
for payment of the rentals.
In sum, We hold that respondent Court of Appeals did not commit grave abuse of discretion amounting to
lack of jurisdiction in its conclusion affirming the trial court's decision dismissing petitioner's complaint for lack
of cause of action. We do not agree, however, with the reasons relied upon.
ACCORDINGLY, the petition for review on certiorari is hereby DENIED for lack of merit and the decision
dated January 30, 1987 of respondent Court of Appeals is hereby AFFIRMED.
SO ORDERED.

G.R. No. 103577 October 7, 1996

ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE A. CORONEL, ANNABELLE C.

GONZALES (for herself and on behalf of Florida C. Tupper, as attorney-in-fact), CIELITO A.
CORONEL, FLORAIDA A. ALMONTE, and CATALINA BALAIS MABANAG, petitioners,
vs.
THE COURT OF APPEALS, CONCEPCION D. ALCARAZ, and RAMONA PATRICIA ALCARAZ,
assisted by GLORIA F. NOEL as attorney-in-fact, respondents.

MELO, J.:p

The petition before us has its roots in a complaint for specific performance to compel herein petitioners
(except the last named, Catalina Balais Mabanag) to consummate the sale of a parcel of land with its
improvements located along Roosevelt Avenue in Quezon City entered into by the parties sometime in
January 1985 for the price of P1,240,000.00.

The undisputed facts of the case were summarized by respondent court in this wise:

On January 19, 1985, defendants-appellants Romulo Coronel, et al. (hereinafter referred to as Coronels)
executed a document entitled "Receipt of Down Payment" (Exh. "A") in favor of plaintiff Ramona Patricia
Alcaraz (hereinafter referred to as Ramona) which is reproduced hereunder:

RECEIPT OF DOWN PAYMENT

P1,240,000.00 — Total amount

 50,000 — Down payment
———————————
P1,190,000.00 — Balance

Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty Thousand Pesos
purchase price of our inherited house and lot, covered by TCT No. 119627 of the Registry of Deeds of
Quezon City, in the total amount of P1,240,000.00.

We bind ourselves to effect the transfer in our names from our deceased father, Constancio P. Coronel, the
transfer certificate of title immediately upon receipt of the down payment above-stated.

On our presentation of the TCT already in or name, We will immediately execute the deed of absolute sale
of said property and Miss Ramona Patricia Alcaraz shall immediately pay the balance of the
P1,190,000.00.

Clearly, the conditions appurtenant to the sale are the following:

1. Ramona will make a down payment of Fifty Thousand (P50,000.00) Pesos upon execution of the
document aforestated;

2. The Coronels will cause the transfer in their names of the title of the property registered in the name of
their deceased father upon receipt of the Fifty Thousand (P50,000.00) Pesos down payment;

3. Upon the transfer in their names of the subject property, the Coronels will execute the deed of absolute
sale in favor of Ramona and the latter will pay the former the whole balance of One Million One Hundred
Ninety Thousand (P1,190,000.00) Pesos.

On the same date (January 15, 1985), plaintiff-appellee Concepcion D. Alcaraz (hereinafter referred to as
Concepcion), mother of Ramona, paid the down payment of Fifty Thousand (P50,000.00) Pesos (Exh. "B",
Exh. "2").

On February 6, 1985, the property originally registered in the name of the Coronels' father was transferred
in their names under TCT
No. 327043 (Exh. "D"; Exh. "4")

On February 18, 1985, the Coronels sold the property covered by TCT No. 327043 to intervenor-appellant
Catalina B. Mabanag (hereinafter referred to as Catalina) for One Million Five Hundred Eighty Thousand
(P1,580,000.00) Pesos after the latter has paid Three Hundred Thousand (P300,000.00) Pesos (Exhs. "F-
3"; Exh. "6-C")

For this reason, Coronels canceled and rescinded the contract (Exh. "A") with Ramona by depositing the
down payment paid by Concepcion in the bank in trust for Ramona Patricia Alcaraz.

On February 22, 1985, Concepcion, et al., filed a complaint for specific performance against the Coronels
and caused the annotation of a notice of lis pendens at the back of TCT No. 327403 (Exh. "E"; Exh. "5").
On April 2, 1985, Catalina caused the annotation of a notice of adverse claim covering the same property
with the Registry of Deeds of Quezon City (Exh. "F"; Exh. "6").

On April 25, 1985, the Coronels executed a Deed of Absolute Sale over the subject property in favor of
Catalina (Exh. "G"; Exh. "7").

On June 5, 1985, a new title over the subject property was issued in the name of Catalina under TCT No.
351582 (Exh. "H"; Exh. "8").

(Rollo, pp. 134-136)

In the course of the proceedings before the trial court (Branch 83, RTC, Quezon City) the parties agreed to
submit the case for decision solely on the basis of documentary exhibits. Thus, plaintiffs therein (now
private respondents) proffered their documentary evidence accordingly marked as Exhibits "A" through "J",
inclusive of their corresponding submarkings. Adopting these same exhibits as their own, then defendants
(now petitioners) accordingly offered and marked them as Exhibits "1" through "10", likewise inclusive of
their corresponding submarkings. Upon motion of the parties, the trial court gave them thirty (30) days
within which to simultaneously submit their respective memoranda, and an additional 15 days within which
to submit their corresponding comment or reply thereof, after which, the case would be deemed submitted
for resolution.

On April 14, 1988, the case was submitted for resolution before Judge Reynaldo Roura, who was then
temporarily detailed to preside over Branch 82 of the RTC of Quezon City. On March 1, 1989, judgment
was handed down by Judge Roura from his regular bench at Macabebe, Pampanga for the Quezon City
branch, disposing as follows:

WHEREFORE, judgment for specific performance is hereby rendered ordering defendant to execute in
favor of plaintiffs a deed of absolute sale covering that parcel of land embraced in and covered by Transfer
Certificate of Title No. 327403 (now TCT No. 331582) of the Registry of Deeds for Quezon City, together
with all the improvements existing thereon free from all liens and encumbrances, and once accomplished,
to immediately deliver the said document of sale to plaintiffs and upon receipt thereof, the said document of
sale to plaintiffs and upon receipt thereof, the plaintiffs are ordered to pay defendants the whole balance of
the purchase price amounting to P1,190,000.00 in cash. Transfer Certificate of Title No. 331582 of the
Registry of Deeds for Quezon City in the name of intervenor is hereby canceled and declared to be without
force and effect. Defendants and intervenor and all other persons claiming under them are hereby ordered
to vacate the subject property and deliver possession thereof to plaintiffs. Plaintiffs' claim for damages and
attorney's fees, as well as the counterclaims of defendants and intervenors are hereby dismissed.

No pronouncement as to costs. So Ordered.

Macabebe, Pampanga for Quezon City, March 1, 1989.

(Rollo, p. 106)

A motion for reconsideration was filed by petitioner before the new presiding judge of the Quezon City RTC
but the same was denied by Judge Estrella T. Estrada, thusly:
The prayer contained in the instant motion, i.e., to annul the decision and to render anew decision by the
undersigned Presiding Judge should be denied for the following reasons: (1) The instant case became
submitted for decision as of April 14, 1988 when the parties terminated the presentation of their respective
documentary evidence and when the Presiding Judge at that time was Judge Reynaldo Roura. The fact
that they were allowed to file memoranda at some future date did not change the fact that the hearing of the
case was terminated before Judge Roura and therefore the same should be submitted to him for decision;
(2) When the defendants and intervenor did not object to the authority of Judge Reynaldo Roura to decide
the case prior to the rendition of the decision, when they met for the first time before the undersigned
Presiding Judge at the hearing of a pending incident in Civil Case No. Q-46145 on November 11, 1988,
they were deemed to have acquiesced thereto and they are now estopped from questioning said authority
of Judge Roura after they received the decision in question which happens to be adverse to them; (3) While
it is true that Judge Reynaldo Roura was merely a Judge-on-detail at this Branch of the Court, he was in all
respects the Presiding Judge with full authority to act on any pending incident submitted before this Court
during his incumbency. When he returned to his Official Station at Macabebe, Pampanga, he did not lose
his authority to decide or resolve such cases submitted to him for decision or resolution because he
continued as Judge of the Regional Trial Court and is of co-equal rank with the undersigned Presiding
Judge. The standing rule and supported by jurisprudence is that a Judge to whom a case is submitted for
decision has the authority to decide the case notwithstanding his transfer to another branch or region of the
same court (Sec. 9, Rule 135, Rule of Court).

Coming now to the twin prayer for reconsideration of the Decision dated March 1, 1989 rendered in the
instant case, resolution of which now pertains to the undersigned Presiding Judge, after a meticulous
examination of the documentary evidence presented by the parties, she is convinced that the Decision of
March 1, 1989 is supported by evidence and, therefore, should not be disturbed.

IN VIEW OF THE FOREGOING, the "Motion for Reconsideration and/or to Annul Decision and Render
Anew Decision by the Incumbent Presiding Judge" dated March 20, 1989 is hereby DENIED. SO
ORDERED.

Quezon City, Philippines, July 12, 1989.

(Rollo, pp. 108-109)

Petitioners thereupon interposed an appeal, but on December 16, 1991, the Court of Appeals (Buena,
Gonzaga-Reyes, Abad Santos (P), JJ.) rendered its decision fully agreeing with the trial court.

Hence, the instant petition which was filed on March 5, 1992. The last pleading, private respondents' Reply
Memorandum, was filed on September 15, 1993. The case was, however, re-raffled to
undersigned ponente only on August 28, 1996, due to the voluntary inhibition of the Justice to whom the
case was last assigned.

While we deem it necessary to introduce certain refinements in the disquisition of respondent court in the
affirmance of the trial court's decision, we definitely find the instant petition bereft of merit.

The heart of the controversy which is the ultimate key in the resolution of the other issues in the case at bar
is the precise determination of the legal significance of the document entitled "Receipt of Down Payment"
which was offered in evidence by both parties. There is no dispute as to the fact that said document
embodied the binding contract between Ramona Patricia Alcaraz on the one hand, and the heirs of
Constancio P. Coronel on the other, pertaining to a particular house and lot covered by TCT No. 119627,
as defined in Article 1305 of the Civil Code of the Philippines which reads as follows:

Art. 1305. A contract 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.

While, it is the position of private respondents that the "Receipt of Down Payment" embodied a perfected
contract of sale, which perforce, they seek to enforce by means of an action for specific performance,
petitioners on their part insist that what the document signified was a mere executory contract to sell,
subject to certain suspensive conditions, and because of the absence of Ramona P. Alcaraz, who left for
the United States of America, said contract could not possibly ripen into a contract absolute sale.

Plainly, such variance in the contending parties' contentions is brought about by the way each interprets the
terms and/or conditions set forth in said private instrument. Withal, based on whatever relevant and
admissible evidence may be available on record, this, Court, as were the courts below, is now called upon
to adjudge what the real intent of the parties was at the time the said document was executed.

The Civil Code defines a contract of sale, thus:

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.

Sale, by its very nature, is a consensual contract because it is perfected by mere consent. The essential
elements of a contract of sale are the following:

a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange for the price;

b) Determinate subject matter; and

c) Price certain in money or its equivalent.

Under this definition, a Contract to Sell may not be considered as a Contract of Sale because the first
essential element is lacking. In a contract to sell, the prospective seller explicity reserves the transfer of title
to the prospective buyer, meaning, the prospective seller does not as yet agree or consent to transfer
ownership of the property subject of the contract to sell until the happening of an event, which for present
purposes we shall take as the full payment of the purchase price. What the seller agrees or obliges himself
to do is to fulfill is promise to sell the subject property when the entire amount of the purchase price is
delivered to him. In other words the full payment of the purchase price partakes of a suspensive condition,
the non-fulfillment of which prevents the obligation to sell from arising and thus, ownership is retained by
the prospective seller without further remedies by the prospective buyer. In Roque vs. Lapuz (96 SCRA 741
[1980]), this Court had occasion to rule:
Hence, We hold that the contract between the petitioner and the respondent was a contract to sell where
the ownership or title is retained by the seller and is not to pass until the full payment of the price, such
payment being a positive suspensive condition and failure of which is not a breach, casual or serious, but
simply an event that prevented the obligation of the vendor to convey title from acquiring binding force.

Stated positively, upon the fulfillment of the suspensive condition which is the full payment of the purchase
price, the prospective seller's obligation to sell the subject property by entering into a contract of sale with
the prospective buyer becomes demandable as provided in Article 1479 of the Civil Code which states:

Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

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.

A contract to sell may thus be defined as a bilateral contract whereby the prospective seller, while
expressly reserving the ownership of the subject property despite delivery thereof to the prospective buyer,
binds himself to sell the said property exclusively to the prospective buyer upon fulfillment of the condition
agreed upon, that is, full payment of the purchase price.

A contract to sell as defined hereinabove, may not even be considered as a conditional contract of sale
where the seller may likewise reserve title to the property subject of the sale until the fulfillment of a
suspensive condition, because in a conditional contract of sale, the first element of consent is present,
although it is conditioned upon the happening of a contingent event which may or may not occur. If the
suspensive condition is not fulfilled, the perfection of the contract of sale is completely abated (cf. Homesite
and housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984]). However, if the suspensive condition is
fulfilled, the contract of sale is thereby perfected, such that if there had already been previous delivery of
the property subject of the sale to the buyer, ownership thereto automatically transfers to the buyer by
operation of law without any further act having to be performed by the seller.

In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment of the
purchase price, ownership will not automatically transfer to the buyer although the property may have been
previously delivered to him. The prospective seller still has to convey title to the prospective buyer by
entering into a contract of absolute sale.

It is essential to distinguish between a contract to sell and a conditional contract of sale specially in cases
where the subject property is sold by the owner not to the party the seller contracted with, but to a third
person, as in the case at bench. In a contract to sell, there being no previous sale of the property, a third
person buying such property despite the fulfillment of the suspensive condition such as the full payment of
the purchase price, for instance, cannot be deemed a buyer in bad faith and the prospective buyer cannot
seek the relief of reconveyance of the property. There is no double sale in such case. Title to the property
will transfer to the buyer after registration because there is no defect in the owner-seller's title per se, but
the latter, of course, may be used for damages by the intending buyer.

In a conditional contract of sale, however, upon the fulfillment of the suspensive condition, the sale
becomes absolute and this will definitely affect the seller's title thereto. In fact, if there had been previous
delivery of the subject property, the seller's ownership or title to the property is automatically transferred to
the buyer such that, the seller will no longer have any title to transfer to any third person. Applying Article
1544 of the Civil Code, such second buyer of the property who may have had actual or constructive
knowledge of such defect in the seller's title, or at least was charged with the obligation to discover such
defect, cannot be a registrant in good faith. Such second buyer cannot defeat the first buyer's title. In case
a title is issued to the second buyer, the first buyer may seek reconveyance of the property subject of the
sale.

With the above postulates as guidelines, we now proceed to the task of deciphering the real nature of the
contract entered into by petitioners and private respondents.

It is a canon in the interpretation of contracts that the words used therein should be given their natural and
ordinary meaning unless a technical meaning was intended (Tan vs. Court of Appeals, 212 SCRA 586
[1992]). Thus, when petitioners declared in the said "Receipt of Down Payment" that they —

Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty Thousand
Pesos purchase price of our inherited house and lot, covered by TCT No. 1199627 of the Registry of Deeds
of Quezon City, in the total amount of P1,240,000.00 without any reservation of title until full payment of the
entire purchase price, the natural and ordinary idea conveyed is that they sold their property.

When the "Receipt of Down Payment" is considered in its entirety, it becomes more manifest that there was
a clear intent on the part of petitioners to transfer title to the buyer, but since the transfer certificate of title
was still in the name of petitioner's father, they could not fully effect such transfer although the buyer was
then willing and able to immediately pay the purchase price. Therefore, petitioners-sellers undertook upon
receipt of the down payment from private respondent Ramona P. Alcaraz, to cause the issuance of a new
certificate of title in their names from that of their father, after which, they promised to present said title, now
in their names, to the latter and to execute the deed of absolute sale whereupon, the latter shall, in turn,
pay the entire balance of the purchase price.

The agreement could not have been a contract to sell because the sellers herein made no express
reservation of ownership or title to the subject parcel of land. Furthermore, the circumstance which
prevented the parties from entering into an absolute contract of sale pertained to the sellers themselves
(the certificate of title was not in their names) and not the full payment of the purchase price. Under the
established facts and circumstances of the case, the Court may safely presume that, had the certificate of
title been in the names of petitioners-sellers at that time, there would have been no reason why an absolute
contract of sale could not have been executed and consummated right there and then.

Moreover, unlike in a contract to sell, petitioners in the case at bar did not merely promise to sell the
properly to private respondent upon the fulfillment of the suspensive condition. On the contrary, having
already agreed to sell the subject property, they undertook to have the certificate of title changed to their
names and immediately thereafter, to execute the written deed of absolute sale.

Thus, the parties did not merely enter into a contract to sell where the sellers, after compliance by the buyer
with certain terms and conditions, promised to sell the property to the latter. What may be perceived from
the respective undertakings of the parties to the contract is that petitioners had already agreed to sell the
house and lot they inherited from their father, completely willing to transfer full ownership of the subject
house and lot to the buyer if the documents were then in order. It just happened, however, that the transfer
certificate of title was then still in the name of their father. It was more expedient to first effect the change in
the certificate of title so as to bear their names. That is why they undertook to cause the issuance of a new
transfer of the certificate of title in their names upon receipt of the down payment in the amount of
P50,000.00. As soon as the new certificate of title is issued in their names, petitioners were committed to
immediately execute the deed of absolute sale. Only then will the obligation of the buyer to pay the
remainder of the purchase price arise.

There is no doubt that unlike in a contract to sell which is most commonly entered into so as to protect the
seller against a buyer who intends to buy the property in installment by withholding ownership over the
property until the buyer effects full payment therefor, in the contract entered into in the case at bar, the
sellers were the one who were unable to enter into a contract of absolute sale by reason of the fact that the
certificate of title to the property was still in the name of their father. It was the sellers in this case who, as it
were, had the impediment which prevented, so to speak, the execution of an contract of absolute sale.

What is clearly established by the plain language of the subject document is that when the said "Receipt of
Down Payment" was prepared and signed by petitioners Romeo A. Coronel, et al., the parties had agreed
to a conditional contract of sale, consummation of which is subject only to the successful transfer of the
certificate of title from the name of petitioners' father, Constancio P. Coronel, to their names.

The Court significantly notes this suspensive condition was, in fact, fulfilled on February 6, 1985 (Exh. "D";
Exh. "4"). Thus, on said date, the conditional contract of sale between petitioners and private respondent
Ramona P. Alcaraz became obligatory, the only act required for the consummation thereof being the
delivery of the property by means of the execution of the deed of absolute sale in a public instrument, which
petitioners unequivocally committed themselves to do as evidenced by the "Receipt of Down Payment."

Article 1475, in correlation with Article 1181, both of the Civil Code, plainly applies to the case at bench.
Thus,

Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which
is the object of the contract and upon the price.

From the moment, the parties may reciprocally demand performance, subject to the provisions of the law
governing the form of contracts.

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.

Since the condition contemplated by the parties which is the issuance of a certificate of title in petitioners'
names was fulfilled on February 6, 1985, the respective obligations of the parties under the contract of sale
became mutually demandable, that is, petitioners, as sellers, were obliged to present the transfer certificate
of title already in their names to private respondent Ramona P. Alcaraz, the buyer, and to immediately
execute the deed of absolute sale, while the buyer on her part, was obliged to forthwith pay the balance of
the purchase price amounting to P1,190,000.00.

It is also significant to note that in the first paragraph in page 9 of their petition, petitioners conclusively
admitted that:
3. The petitioners-sellers Coronel bound themselves "to effect the transfer in our names from our deceased
father Constancio P. Coronel, the transfer certificate of title immediately upon receipt of the downpayment
above-stated". The sale was still subject to this suspensive condition. (Emphasis supplied.)

(Rollo, p. 16)

Petitioners themselves recognized that they entered into a contract of sale subject to a suspensive
condition. Only, they contend, continuing in the same paragraph, that:

. . . Had petitioners-sellers not complied with this condition of first transferring the title to the property under
their names, there could be no perfected contract of sale. (Emphasis supplied.)

(Ibid.)

not aware that they set their own trap for themselves, for Article 1186 of the Civil Code expressly provides
that:

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.

Besides, it should be stressed and emphasized that what is more controlling than these mere hypothetical
arguments is the fact that the condition herein referred to was actually and indisputably fulfilled on February
6, 1985, when a new title was issued in the names of petitioners as evidenced by TCT No. 327403 (Exh.
"D"; Exh. "4").

The inevitable conclusion is that on January 19, 1985, as evidenced by the document denominated as
"Receipt of Down Payment" (Exh. "A"; Exh. "1"), the parties entered into a contract of sale subject only to
the suspensive condition that the sellers shall effect the issuance of new certificate title from that of their
father's name to their names and that, on February 6, 1985, this condition was fulfilled (Exh. "D"; Exh. "4").

We, therefore, hold that, in accordance with Article 1187 which pertinently provides —

Art. 1187. The effects of conditional obligation to give, once the condition has been fulfilled, shall retroact to
the day of the constitution of the obligation . . .

In obligation to do or not to do, the courts shall determine, in each case, the retroactive effect of the
condition that has been complied with.

the rights and obligations of the parties with respect to the perfected contract of sale became mutually due
and demandable as of the time of fulfillment or occurrence of the suspensive condition on February 6,
1985. As of that point in time, reciprocal obligations of both seller and buyer arose.

Petitioners also argue there could been no perfected contract on January 19, 1985 because they were then
not yet the absolute owners of the inherited property.

We cannot sustain this argument.

Article 774 of the Civil Code defines Succession as a mode of transferring ownership as follows:

Art. 774. Succession is a mode of acquisition by virtue of which the property, rights and obligations to be
extent and value of the inheritance of a person are transmitted through his death to another or others by his
will or by operation of law.

Petitioners-sellers in the case at bar being the sons and daughters of the decedent Constancio P. Coronel
are compulsory heirs who were called to succession by operation of law. Thus, at the point their father drew
his last breath, petitioners stepped into his shoes insofar as the subject property is concerned, such that
any rights or obligations pertaining thereto became binding and enforceable upon them. It is expressly
provided that rights to the succession are transmitted from the moment of death of the decedent (Article
777, Civil Code; Cuison vs. Villanueva, 90 Phil. 850 [1952]).

Be it also noted that petitioners' claim that succession may not be declared unless the creditors have been
paid is rendered moot by the fact that they were able to effect the transfer of the title to the property from
the decedent's name to their names on February 6, 1985.

Aside from this, petitioners are precluded from raising their supposed lack of capacity to enter into an
agreement at that time and they cannot be allowed to now take a posture contrary to that which they took
when they entered into the agreement with private respondent Ramona P. Alcaraz. The Civil Code
expressly states that:

Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person relying thereon.

Having represented themselves as the true owners of the subject property at the time of sale, petitioners
cannot claim now that they were not yet the absolute owners thereof at that time.

Petitioners also contend that although there was in fact a perfected contract of sale between them and
Ramona P. Alcaraz, the latter breached her reciprocal obligation when she rendered impossible the
consummation thereof by going to the United States of America, without leaving her address, telephone
number, and Special Power of Attorney (Paragraphs 14 and 15, Answer with Compulsory Counterclaim to
the Amended Complaint, p. 2; Rollo, p. 43), for which reason, so petitioners conclude, they were correct in
unilaterally rescinding rescinding the contract of sale.

We do not agree with petitioners that there was a valid rescission of the contract of sale in the instant case.
We note that these supposed grounds for petitioners' rescission, are mere allegations found only in their
responsive pleadings, which by express provision of the rules, are deemed controverted even if no reply is
filed by the plaintiffs (Sec. 11, Rule 6, Revised Rules of Court). The records are absolutely bereft of any
supporting evidence to substantiate petitioners' allegations. We have stressed time and again that
allegations must be proven by sufficient evidence (Ng Cho Cio vs. Ng Diong, 110 Phil. 882 [1961]; Recaro
vs. Embisan, 2 SCRA 598 [1961]. Mere allegation is not an evidence (Lagasca vs. De Vera, 79 Phil. 376
[1947]).

Even assuming arguendo that Ramona P. Alcaraz was in the United States of America on February 6,
1985, we cannot justify petitioner-sellers' act of unilaterally and extradicially rescinding the contract of sale,
there being no express stipulation authorizing the sellers to extarjudicially rescind the contract of sale. (cf.
Dignos vs. CA, 158 SCRA 375 [1988]; Taguba vs. Vda. de Leon, 132 SCRA 722 [1984])

Moreover, petitioners are estopped from raising the alleged absence of Ramona P. Alcaraz because
although the evidence on record shows that the sale was in the name of Ramona P. Alcaraz as the buyer,
the sellers had been dealing with Concepcion D. Alcaraz, Ramona's mother, who had acted for and in
behalf of her daughter, if not also in her own behalf. Indeed, the down payment was made by Concepcion
D. Alcaraz with her own personal check (Exh. "B"; Exh. "2") for and in behalf of Ramona P. Alcaraz. There
is no evidence showing that petitioners ever questioned Concepcion's authority to represent Ramona P.
Alcaraz when they accepted her personal check. Neither did they raise any objection as regards payment
being effected by a third person. Accordingly, as far as petitioners are concerned, the physical absence of
Ramona P. Alcaraz is not a ground to rescind the contract of sale.

Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar as her obligation to pay the
full purchase price is concerned. Petitioners who are precluded from setting up the defense of the physical
absence of Ramona P. Alcaraz as above-explained offered no proof whatsoever to show that they actually
presented the new transfer certificate of title in their names and signified their willingness and readiness to
execute the deed of absolute sale in accordance with their agreement. Ramona's corresponding obligation
to pay the balance of the purchase price in the amount of P1,190,000.00 (as buyer) never became due and
demandable and, therefore, she cannot be deemed to have been in default.

Article 1169 of the Civil Code defines when a party in a contract involving reciprocal obligations may be
considered in default, to wit:

Art. 1169. Those obliged to deliver or to do something, incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.

xxx xxx xxx

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. From the moment one of the parties fulfill his
obligation, delay by the other begins. (Emphasis supplied.)

There is thus neither factual nor legal basis to rescind the contract of sale between petitioners and
respondents.

With the foregoing conclusions, the sale to the other petitioner, Catalina B. Mabanag, gave rise to a case of
double sale where Article 1544 of the Civil Code will apply, to wit:

Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred
to the person who may have first taken possession thereof in good faith, if it should be movable property.

Should if be immovable property, the ownership shall belong to the person acquiring it who in good faith
first recorded it in Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the
possession; and, in the absence thereof to the person who presents the oldest title, provided there is good
faith.

The record of the case shows that the Deed of Absolute Sale dated April 25, 1985 as proof of the second
contract of sale was registered with the Registry of Deeds of Quezon City giving rise to the issuance of a
new certificate of title in the name of Catalina B. Mabanag on June 5, 1985. Thus, the second paragraph of
Article 1544 shall apply.

The above-cited provision on double sale presumes title or ownership to pass to the first buyer, the
exceptions being: (a) when the second buyer, in good faith, registers the sale ahead of the first buyer, and
(b) should there be no inscription by either of the two buyers, when the second buyer, in good faith,
acquires possession of the property ahead of the first buyer. Unless, the second buyer satisfies these
requirements, title or ownership will not transfer to him to the prejudice of the first buyer.

In his commentaries on the Civil Code, an accepted authority on the subject, now a distinguished member
of the Court, Justice Jose C. Vitug, explains:

The governing principle is prius tempore, potior jure (first in time, stronger in right). Knowledge by the first
buyer of the second sale cannot defeat the first buyer's rights except when the second buyer first registers
in good faith the second sale (Olivares vs. Gonzales, 159 SCRA 33). Conversely, knowledge gained by the
second buyer of the first sale defeats his rights even if he is first to register, since knowledge taints his
registration with bad faith (see also Astorga vs. Court of Appeals, G.R. No. 58530, 26 December 1984).
In Cruz vs. Cabana (G.R. No. 56232, 22 June 1984, 129 SCRA 656), it has held that it is essential, to merit
the protection of Art. 1544, second paragraph, that the second realty buyer must act in good faith in
registering his deed of sale (citing Carbonell vs. Court of Appeals, 69 SCRA 99, Crisostomo vs. CA, G.R.
No. 95843, 02 September 1992).
(J. Vitug Compendium of Civil Law and Jurisprudence, 1993 Edition, p. 604).

Petitioner point out that the notice of lis pendens in the case at bar was annoted on the title of the subject
property only on February 22, 1985, whereas, the second sale between petitioners Coronels and petitioner
Mabanag was supposedly perfected prior thereto or on February 18, 1985. The idea conveyed is that at the
time petitioner Mabanag, the second buyer, bought the property under a clean title, she was unaware of
any adverse claim or previous sale, for which reason she is buyer in good faith.

We are not persuaded by such argument.

In a case of double sale, what finds relevance and materiality is not whether or not the second buyer was a
buyer in good faith but whether or not said second buyer registers such second sale in good faith, that is,
without knowledge of any defect in the title of the property sold.

As clearly borne out by the evidence in this case, petitioner Mabanag could not have in good faith,
registered the sale entered into on February 18, 1985 because as early as February 22, 1985, a notice
of lis pendens had been annotated on the transfer certificate of title in the names of petitioners, whereas
petitioner Mabanag registered the said sale sometime in April, 1985. At the time of registration, therefore,
petitioner Mabanag knew that the same property had already been previously sold to private respondents,
or, at least, she was charged with knowledge that a previous buyer is claiming title to the same property.
Petitioner Mabanag cannot close her eyes to the defect in petitioners' title to the property at the time of the
registration of the property.

This Court had occasions to rule that: If a vendee in a double sale registers that sale after he has acquired
knowledge that there was a previous sale of the same property to a third party or that another person
claims said property in a pervious sale, the registration will constitute a registration in bad faith and will not
confer upon him any right. (Salvoro vs. Tanega, 87 SCRA 349 [1978]; citing Palarca vs. Director of Land,
43 Phil. 146; Cagaoan vs. Cagaoan, 43 Phil. 554; Fernandez vs. Mercader, 43 Phil. 581.)

Thus, the sale of the subject parcel of land between petitioners and Ramona P. Alcaraz, perfected on
February 6, 1985, prior to that between petitioners and Catalina B. Mabanag on February 18, 1985, was
correctly upheld by both the courts below.

Although there may be ample indications that there was in fact an agency between Ramona as principal
and Concepcion, her mother, as agent insofar as the subject contract of sale is concerned, the issue of
whether or not Concepcion was also acting in her own behalf as a co-buyer is not squarely raised in the
instant petition, nor in such assumption disputed between mother and daughter. Thus, We will not touch
this issue and no longer disturb the lower courts' ruling on this point.

WHEREFORE, premises considered, the instant petition is hereby DISMISSED and the appealed judgment
AFFIRMED. SO ORDERED.

G.R. No. 108129 September 23, 1999

AEROSPACE CHEMICAL INDUSTRIES, INC., petitioner,

vs.
COURT OF APPEALS, PHILIPPINE PHOSPHATE FERTILIZER, CORP., respondents.

QUISUMBING, J.:

This petition for review assails the Decision 1 dated August 19, 1992, of the Court of Appeals, which set
aside the judgment of the Regional Trial Court of Pasig, Branch 151. The case stemmed from a complaint
filed by the buyer (herein petitioner) against the seller (private respondent) for alleged breach of contract.
Although petitioner prevailed in the trial court, the appellate court reversed and instead found petitioner
guilty of delay and therefore liable for damages, as follows:

WHEREFORE, the Decision of the court a quo is SET ASIDE and a new one rendered, dismissing the
complaint with costs against the plaintiff (herein petitioner) and, on the counterclaim, ordering the plaintiff
Aerospace Chemical Industries, Inc. to pay the defendant, Philippine Phosphate Fertilizer Corporation the
sum of P324,516.63 representing the balance of the maintenance cost and tank rental charges incurred by
the defendant for the failure of the plaintiff to haul the rest of the rest of the sulfuric acid on the designated
date. Costs against plaintiff-appellee. 2

As gleaned from the records, the following are the antecedents:

On June 27, 1986, petitioner Aerospace Industries, Inc. (Aerospace) purchased five hundred (500) metric
tons of sulfuric acid from private respondent Philippine Phosphate Fertilizer Corporation (Philphos). The
contract 3 was in letter-form as follows:

27 June 1986

AEROSPACE INDUSTRIES INC.

203 E. Fernandez St.
San Juan, Metro Manila
Attention: Mr. Melecio Hernandez

Manager

Subject : Sulfuric Acid Shipment

Gentlemen:

This is to confirm our agreement to supply your Sulfuric Acid requirement under the following terms and
conditions:

A. Commodity : Sulfuric Acid in Bulk

B. Concentration : 98-99% H2SO4

C. Quantity : 500 MT-100 MT Ex-Basay

400 MT Ex-Sangi

D. Price : US$ 50.00/MT-FOB Cotcot,

Basay, Negros Or.

US$ 54.00/MT-FOB Sangi, Cebu

E. Payment : Cash in Philippine currency

payable to Philippine Phosphate

Fertilizer Corp. (MAKATI) at

PCIB selling rate at the time of

payment at least five (5) days prior

to shipment date.
F. Shipping Conditions

1. Laycan : July

2. Load port : Cotcot, Basay, Negros Or. and

Atlas Pier, Sangi, Cebu

xxx xxx xxx

11. Other terms and Conditions: To be mutually agreed upon.

Very truly yours,

Philippine Phosphate Fertilizer Corp.
Signed: Herman J. Rustia
Sr. Manager, Materials & Logistics

CONFORME:

AEROSPACE INDUSTRIES, INC.

Signed: Mr. Melecio Hernandez
Manager

Initially set beginning July 1986, the agreement provided that the buyer shall pay its purchases in
equivalent Philippine currency value, five days prior to the shipment date. Petitioner as buyer committed to
secure the means of transport to pick-up the purchases from private respondent's loadports. Per
agreement, one hundred metric tons (100 MT) of sulfuric acid should be taken from Basay, Negros Oriental
storage tank, while the remaining four hundred metric tons (400 MT) should be retrieved from Sangi, Cebu.

On August 6, 1986, private respondent sent an advisory letter 4 to petitioner to withdraw the sulfuric acid
purchased at Basay because private respondent had been incurring incremental expense of two thousand
(P2,000.00) pesos for each day of delay in shipment.

On October 3, 1986, petitioner paid five hundred fifty-three thousand, two hundred eighty (P553,280.00)
pesos for 500 MT of sulfuric acid.

On November 19, 1986, petitioner chartered M/T Sultan Kayumanggi, owned by Ace Bulk Head Services.
The vessel was assigned to carry the agreed volumes of freight from designated loading areas. M/T
Kayumanggi withdrew only 70.009 MT of sulfuric acid from Basay because said vessel heavily tilted on its
port side. Consequently, the master of the ship stopped further loading. Thereafter, the vessel underwent
repairs.

In a demand letter 5 dated December 12, 1986, private respondent asked petitioner to retrieve the
remaining sulfuric acid in Basay tanks so that said tanks could be emptied on or before December 15,
1986. Private respondent said that it would charge petitioner the storage and consequential costs for the
Basay tanks, including all other incremental expenses due to loading delay, if petitioner failed to comply.

On December 18, 1986, M/T Sultan Kayumanggi docked at Sangi, Cebu, but withdrew only 157.51 MT of
sulfuric acid. Again, the vessel tilted. Further loading was aborted. Two survey reports conducted by the
Societe Generale de Surveillance (SGS) Far East Limited, dated December 17, 1986 and January 2, 1987,
attested to these occurrences.

Later, on a date not specified in the record, M/T Sultan Kayumanggi sank with a total of 227.51 MT of
sulfuric acid on board.1âwphi1.nêt

Petitioner chartered another vessel, M/T Don Victor, with a capacity of approximately 500 MT. 6 On January
26 and March 20, 1987, Melecio Hernandez, acting for the petitioner, addressed letters to private
respondent, concerning additional orders of sulfuric acid to replace its sunken purchases, which letters are
hereunder excerpted:

January 26, 1987

xxx xxx xxx

We recently charter another vessel M/T DON VICTOR who will be authorized by us to lift the balance
approximately 272.49 MT.

We request your goodselves to grant us for another Purchase Order with quantity of 227.51 MT and we are
willing to pay the additional order at the prevailing market price, provided the lifting of the total 500 MT be
centered/confined to only one safe berth which is Atlas Pier, Sangi, Cebu. 7

March 20, 1987

This refers to the remaining balance of the above product quantity which were not loaded to the authorized
cargo vessel, M/T Sultan Kayumanggi at your load port — Sangi, Toledo City.

Please be advised that we will be getting the above product quantity within the month of April 1987 and we
are arranging for a 500 MT Sulfuric Acid inclusive of which the remaining balance: 272.49 MT an additional
product quantity thereof of 227.51 MT. 8

Petitioner's letter 9 dated May 15, 1987, reiterated the same request to private respondent.

On January 25, 1988, petitioner's counsel, Atty. Pedro T. Santos, Jr., sent a demand letter 10 to private
respondent for the delivery of the 272.49 MT of sulfuric acid paid by his client, or the return of the purchase
price of three hundred seven thousand five hundred thirty (P307,530.00) pesos. Private respondent in
reply, 11 on March 8, 1988, instructed petitioner to lift the remaining 30 MT of sulfuric acid from Basay, or
pay maintenance and storage expenses commencing August 1, 1986.
On July 6, 1988, petitioner wrote another letter, insisting on picking up its purchases consisting of 272.49
MT and an additional of 227.51 MT of sulfuric acid. According to petitioner it had paid the chartered vessel
for the full capacity of 500 MT, stating that:

With regard to our balance of sulfuric acid — product at your shore tank/plant for 272.49 metric ton that was
left by M/T Sultana Kayumanggi due to her sinking, we request for an additional quantity of 227.51 metric
ton of sulfuric acid, 98% concentration.

The additional quantity is requested in order to complete the shipment, as the chartered vessel schedule to
lift the high grade sulfuric acid product is contracted for her full capacity/load which is 500 metric tons more
or less.

We are willing to pay the additional quantity — 227.51 metric tons high grade sulfuric acid in the prevailing
price of the said product. 12

xxx xxx xxx

By telephone, petitioner requested private respondent's Shipping Manager, Gil Belen, to get its additional
order of 227.51 MT of sulfuric acid at Isabel, Leyte. 13 Belen relayed the information to his associate,
Herman Rustia, the Senior Manager for Imports and International Sales of private respondent. In a letter
dated July 22, 1988, Rustia replied:

Subject: Sulfuric Acid Ex-Isabel

Gentlemen:

Confirming earlier telcon with our Mr. G.B. Belen, we regret to inform you that we cannot accommodate
your request to lift Sulfuric Acid ex-Isabel due to Pyrite limitation and delayed arrival of imported Sulfuric
Acid from Japan. 14

On July 25, 1988, petitioner's counsel wrote to private respondent another demand letter for the delivery of
the purchases remaining, or suffer tedious legal action his client would commence.

On May 4, 1989, petitioner filed a complaint for specific performance and/or damages before the Regional
Trial Court of Pasig, Branch 151. Private respondent filed its answer with counterclaim, stating that it was
the petitioner who was remiss in the performance of its obligation in arranging the shipping requirements of
its purchases and, as a consequence, should pay damages as computed below:

Advanced Payment by Aerospace (Oct. 3, 1986) P553,280.00

Less Shipments

70.009 MT sulfuric acid P72,830.36

151.51 MT sulfuric acid 176,966.27 (249,796.63)

—————— ——————

Balance P303,483.37

Less Charges

Basay Maintenance Expense

from Aug. 15 to Dec. 15, 1986

(P2,000.00/day x 122 days) P244,000.00

Sangi — Tank Rental

from Aug. 15, 1986 to Aug. 15, 1987

(P32,000.00/mo. x 12 mos.) 384,000.00 (628,000.00)

—————— ——————

Receivable/Counterclaim (P324,516.63)

===========

Trial ensued and after due proceedings, judgment was rendered by the trial court in petitioner's favor,
disposing as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, directing the latter
to pay the former the following sums:

1. P306,060.77 — representing the value of the undelivered 272.49 metric tons of sulfuric acid plaintiff paid
to defendant;

2. P91,818.23 — representing unrealized profits, both items with 12% interest per annum from May 4,
1989, when the complaint was filed until fully paid;

3. P30,000.00 — as exemplary damages; and

4. P30,000.00 — as attorney's fees and litigation expenses, both last items also with 12% interest per
annum from date hereof until fully paid.

Defendant's counterclaims are hereby dismissed for lack of merit. Costs against defendant. 15

In finding for the petitioner, the trial court held that the petitioner was absolved in its obligation to pick-up
the remaining sulfuric acid because its failure was due to force majeure. According to the trial court, it was
private respondent who committed a breach of contract when it failed to accommodate the additional order
of the petitioner, to replace those that sank in the sea, thus:

To begin with, even if we assume that it is incumbent upon the plaintiff to "lift" the sulfuric acid it ordered
from defendant, the fact that force majeure intervened when the vessel which was previouly (sic) listing, but
which the parties, including a representative of the defendant, did not mind, sunk, has the effect of
absolving plaintiff from "lifting" the sulfuric acid at the designated load port. But even assuming the plaintiff
cannot be held entirely blameless, the allegation that plaintiff agreed to a payment of a 2,000-peso
incremental expenses per day to defendant for delayed "lifting has not been proven." . . .

Also, if it were true that plaintiff is indebted to defendant, why did defendant accept a second additional
order after the transaction in litigation? Why also, did defendant not send plaintiff statements of account
until after 3 years?

All these convince the Court that indeed, defendant must return what plaintiff has paid it for the goods
which the latter did not actually receive. 16

On appeal by private respondent, the Court of Appeals reversed the decision of the trial court, as follows:

Based on the facts of this case as hereinabove set forth, it is clear that the plaintiff had the obligation to
withdraw the full amount of 500 MT of sulfuric acid from the defendant's loadport at Basay and Sangi on or
before August 15, 1986. As early as August 6, 1986 it had been accordingly warned by the defendant that
any delay in the hauling of the commodity would mean expenses on the part of the defendant amounting to
P2,000.00 a day. The plaintiff sent its vessel, the "M/T Sultan Kayumanggi", only on November 19, 1987.
The vessel, however; was not capable of loading the entire 500 MT and in fact, with its load of only 227.519
MT, it sank.

Contrary to the position of the trial court, the sinking of the "M/T Sultan Kayumanggi" did not absolve the
plaintiff from its obligation to lift the rest of the 272.481 MT of sulfuric acid at the agreed time. It was the
plaintiff's duty to charter another vessel for the purpose. It did contract for the services of a new vessel, the
"M/T Don Victor", but did not want to lift the balance of 272.481 MT only but insisted that its additional order
of 227.51 MT be also given by the defendant to complete 500 MT. apparently so that the vessel may be
availed of in its full capacity.

xxx xxx xxx

We find no basis for the decision of the trial court to make the defendant liable to the plaintiff not only for
the cost of the sulfuric acid, which the plaintiff itself failed to haul, but also for unrealized profits as well as
exemplary damages and attorney's fees. 17

Respondent Court of Appeals found the petitioner guilty of delay and negligence in the performance of its
obligation. It dismissed the complaint of petitioner and ordered it to pay damages representing the
counterclaim of private respondent.

The motion for reconsideration filed by petitioner was denied by respondent court in its Resolution dated
December 21, 1992, for lack of merit.
Petitioner now comes before us, assigning the following errors:

I. RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT TO HAVE

COMMITTED A BREACH OF CONTRACT WHEN IT IS NOT DISPUTED THAT PETITIONER PAID IN FULL
THE VALUE OF 500 MT OF SULFURIC ACID TO PRIVATE RESPONDENT BUT THE LATTER WAS ABLE
TO DELIVER TO PETITIONER ONLY 227.51 M.T.

II. RESPONDENT COURT OF APPEALS GRAVELY ERRED IN HOLDING PETITIONER LIABLE FOR
DAMAGES TO PRIVATE RESPONDENT ON THE BASIS OF A XEROX COPY OF AN ALLEGED
AGREEMENT TO HOLD PETITIONER LIABLE FOR DAMAGES FOR THE DELAY WHEN PRIVATE
RESPONDENT FAILED TO PRODUCE THE ORIGINAL IN CONTRAVENTION OF THE RULES ON
EVIDENCE.

III. RESPONDENT COURT OF APPEALS ERRED IN FAILING TO CONSIDER THE UNDISPUTED FACTS
THAT PETITIONER'S PAYMENT FOR THE GOODS WAS RECEIVED BY PRIVATE RESPONDENT
WITHOUT ANY QUALIFICATION AND THAT PRIVATE RESPONDENT ENTERED INTO ANOTHER
CONTRACT TO SUPPLY PETITIONER 227.519 MT OF SULFURIC ACID IN ADDITION TO THE
UNDELIVERED BALANCE AS PROOF THAT ANY DELAY OF PETITIONER WAS DEEMED WAIVED BY
SAID ACTS OF RESPONDENT.

IV. RESPONDENT COURT OF APPEALS ERRED IN NOT CONSIDERING THE LAW THAT WHEN THE
SALE INVOLVES FUNGIBLE GOODS AS IN THIS CASE THE EXPENSES FOR STORAGE AND
MAINTENANCE ARE FOR THE ACCOUNT OF THE SELLER (ARTICLE 1504 CIVIL CODE).

V. RESPONDENT COURT OF APPEALS ERRED IN FAILING TO RENDER JUDGMENT FOR PETITIONER

AFFIRMING THE DECISION OF THE TRIAL COURT.

From the assigned errors, we synthesize the pertinent issues raised by the petitioner as follows:

1. Did the respondent court err in holding that the petitioner committed breach of contract, considering that:

a) the petitioner allegedly paid the full value of its purchases, yet received only a portion of said purchases?

b) petitioner and private respondent allegedly had also agreed for the purchase and supply of an additional
227.519 MT of sulfuric acid, hence prior delay, if any, had been waived?

2. Did the respondent court err in awarding damages to private respondent?

3. Should expenses for the storage and preservation of the purchased fungible goods, namely sulfuric acid,
be on seller's account pursuant to Article 1504 of the Civil Code?

To resolve these issues, petitioner urges us to review factual findings of respondent court and its
conclusion that the petitioner was guilty of delay in the performance of its obligation. According to petitioner,
that conclusion is contrary to the factual evidence. It adds that respondent court disregarded the rule that
findings of the trial court are given weight, with the highest degree of respect. Claiming that respondent
court's findings conflict with those of the trial court, petitioner prays that the trial court's findings be upheld
over those of the appellate court.

Petitioner argues that it paid the purchase price of sulfuric acid, five (5) days prior to the withdrawal thereof,
or on October 3, 1986, hence, it had complied with the primary condition set in the sales contract. Petitioner
claims its failure to pick-up the remaining purchases on time was due to a storm, a force majeure, which
sank the vessel. It thus claims exemption from liability to pay damages. Petitioner also contends that it was
actually the private respondent's shipping officer, who advised petitioner to buy the additional 227.51 MT of
sulfuric acid, so as to fully utilize the capacity of the vessel it chartered. Petitioner insists that when its ship
was ready to pick-up the remaining balance of 272.49 MT of sulfuric acid, private respondent could not
comply with the contract commitment due to "pyrite limitation."

While we agree with petitioner that when the findings of the Court of Appeals are contrary to those of the
trial court, 18 this Court may review those findings, we find the appellate court's conclusion that petitioner
violated the subject contract amply supported by preponderant evidence. Petitioner's claim was predicated
merely on the allegations of its employee, Melecio Hernandez, that the storm or force majeure caused the
petitioner's delay and failure to lift the cargo of sulfuric acid at the designated loadports. In contrast, the
appellate court discounted Hernandez' assertions. For on record, the storm was not the proximate cause of
petitioner's failure to transport its purchases on time. The survey report submitted by a third party surveyor,
SGS Far East Limited, revealed that the vessel, which was unstable, was incapable of carrying the full load
of sulfuric acid. Note that there was a premature termination of loading in Basay, Negros Oriental. The
vessel had to undergo several repairs before continuing its voyage to pick-up the balance of cargo at
Sangi, Cebu. Despite repairs, the vessel still failed to carry the whole lot of 500 MT of sulfuric acid due to
ship defects like listing to one side. Its unfortunate sinking was not due to force majeure. It sunk because it
was, based on SGS survey report, unstable and unseaworthy.

Witness surveyor Eugenio Rabe's incident report, dated December 13, 1986 in Basay, Negros Oriental,
elucidated this point:

Loading was started at 1500hrs. November 19. At 1600Hrs. November 20, loading operation was
temporarily stopped by the vessel's master due to ships stability was heavily tilted to port side, ship's had
tried to transfer the loaded acid to stbdside but failed to do so, due to their auxiliary pump on board does
not work out for acid.

xxx xxx xxx

Note. Attending surveyor arrived BMC Basay on November 22, due to delayed advice of said vessel
Declared quantity loaded onboard based on data's provided by PHILPHOS representative.

On November 26, two representative of shipping company arrived Basay to assist the situation, at 1300Hrs
repairing and/or welding of tank number 5 started at 1000Hrs November 27, repairing and/or welding was
suspended due to the explosion of tank no. 5. Explosion ripped about two feet of the double bottom tank.

November 27 up to date no progress of said vessel. 19

While at Sangi, Cebu, the vessel's condition (listing) did not improve as the survey report therein noted:
Declared quantity loaded on board was based on shore tank withdrawal due to ship's incomplete tank
calibration table. Barge displacement cannot be applied due to ship was listing to Stboard side which has
been loaded with rocks to control her stability. 20

These two vital pieces of information were totally ignored by trial court. The appellate court correctly took
these into account, significantly. As to the weather condition in Basay, the appellate court accepted
surveyor Rabe's testimony, thus:

Q. Now, Mr. Witness, what was the weather condition then at Basay, Negros Oriental during the loading
operation of sulfuric acid on board the Sultana Kayumanggi?

A. Fair, sir. 21

Since the third party surveyor was neither petitioner's nor private respondent's employee, his professional
report should carry more weight than that of Melecio Hernandez, an employee of petitioner. Petitioner, as
the buyer, was obligated under the contract to undertake the shipping requirements of the cargo from the
private respondent's loadports to the petitioner's designated warehouse. It was petitioner which chartered
M/T Sultan Kayumanggi. The vessel was petitioner's agent. When it failed to comply with the necessary
loading conditions of sulfuric acid, it was incumbent upon petitioner to immediately replace M/T Sultan
Kayumanggi with another seaworthy vessel. However, despite repeated demands, petitioner did not comply
seasonably.

Additionally, petitioner claims that private respondent's employee, Gil Belen, had recommended to
petitioner to fully utilize the vessel, hence petitioner's request for additional order to complete the vessel's
500 MT capacity. This claim has no probative pertinence nor solid basis. A party who asserts that a
contract of sale has been changed or modified has the burden of proving the change or modification by
clear and convincing evidence. 22 Repeated requests and additional orders were contained in petitioner's
letters to private respondent. In contrast, Belen's alleged action was only verbal; it was not substantiated at
all during the trial. Note that, using the vessel to full capacity could redound to petitioner's advantage, not
the other party's. If additional orders were at the instance of private respondent, the same must be properly
proved together with its relevance to the question of delay. Settled is the principle in law that proof of verbal
agreements offered to vary the terms of written agreements is inadmissible, under the parol evidence
rule. 23 Belen's purported recommendation could not be taken at face value and, obviously, cannot excuse
petitioner's default.

Respondent court found petitioner's default unjustified, and on this conclusion we agree:

It is not true that the defendant was not in a position to deliver the 272.481 MT which was the balance of
the original 500 MT purchased by the plaintiff. The whole lot of 500 MT was ready for lifting as early as
August 15, 1986. What the defendant could not sell to the plaintiff was the additional 227.51 MT which said
plaintiff was ordering, for the reason that the defendant was short of the supply needed. The defendant,
however, had no obligation to agree to this additional order and may not be faulted for its inability to meet
the said additional requirements of the plaintiff. And the defendant's incapacity to agree to the delivery of
another 227.51 MT is not a legal justification for the plaintiffs refusal to lift the remaining 272.481.
It is clear from the plaintiff's letters to the defendant that it wanted to send the "M/T Don Victor" only if the
defendant would confirm that it was ready to deliver 500 MT. Because the defendant could not sell another
227.51 MT to the plaintiff, the latter did not send a new vessel to pick up the balance of the 500 MT
originally contracted for by the parties. This, inspite the representations made by the defendant for the
hauling thereof as scheduled and its reminders that any expenses for the delay would be for the account of
the plaintiff. 24

We are therefore constrained to declare that the respondent court did not err when it absolved private
respondent from any breach of contract.

Our next inquiry is whether damages have been properly awarded against petitioner for its unjustified delay
in the performance of its obligation under the contract. Where there has been breach of contract by the
buyer, the seller has a right of action for damages. Following this rule, a cause of action of the seller for
damages may arise where the buyer refuses to remove the goods, such that buyer has to remove
them. 25 Article 1170 of the Civil Code provides:

Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those who in
any manner contravene the tenor thereof, are liable for damages.

Delay begins from the time the obligee judicially or extrajudicially demands from the obligor the
performance of the obligation. 26 Art. 1169 states:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.

In order that the debtor may be in default, it is necessary that the following requisites be present: (1) that
the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that
the creditor requires the performance judicially or extrajudicially. 27

In the present case, private respondent required petitioner to ship out or lift the sulfuric acid as agreed,
otherwise petitioner would be charged for the consequential damages owing to any delay. As stated in
private respondent's letter to petitioner, dated December 12, 1986:

Subject: M/T "KAYUMANGGI"

Gentlemen:

This is to reiterate our telephone advice and our letter HJR-8612-031 dated 2 December 1986 regarding
your sulfuric acid vessel, M/T "KAYUMANGGI".

As we have, in various instances, advised you, our Basay wharf will have to be vacated 15th December
1986 as we are expecting the arrival of our chartered vessel purportedly to haul our equipments and all
other remaining assets in Basay. This includes our sulfuric acid tanks. We regret, therefore, that if these
tanks are not emptied on or before the 15th of December, we either have to charge you for the tanks
waiting time at Basay and its consequential costs (i.e. chartering of another vessel for its second pick-up at
Basay, handling, etc.) as well as all other incremental costs on account of the protracted loading
delay. 28 (Emphasis supplied)

Indeed the above demand, which was unheeded, justifies the finding of delay. But when did such delay
begin? The above letter constitutes private respondent's extrajudicial demand for the petitioner to fulfill its
obligation, and its dateline is significant. Given its date, however, we cannot sustain the finding of the
respondent court that petitioner's delay started on August 6, 1986. The Court of Appeals had relied on
private respondent's earlier letter to petitioner of that date for computing the commencement of delay. But
as averred by petitioner, said letter of August 6th is not a categorical demand. What it showed was a mere
statement of fact, that "[F]for your information any delay in Sulfuric Acid withdrawal shall cost us
incremental expenses of P2,000.00 per day." Noteworthy, private respondent accepted the full payment by
petitioner for purchases on October 3, 1986, without qualification, long after the August 6th letter. In
contrast to the August 6th letter, that of December 12th was a categorical demand.

Records reveal that a tanker ship had to pick-up sulfuric acid in Basay, then proceed to get the remaining
stocks in Sangi, Cebu. A period of three days appears to us reasonable for a vessel to travel between
Basay and Sangi. Logically, the computation of damages arising from the shipping delay would then have
to be from December 15, 1986, given said reasonable period after the December 12th letter. More
important, private respondent was forced to vacate Basay wharf only on December 15th. Its Basay
expenses incurred before December 15, 1986, were necessary and regular business expenses for which
the petitioner should not be obliged to pay.

Note that private respondent extended its lease agreement for Sangi, Cebu storage tank until August 31,
1987, solely for petitioner's sulfuric acid. It stands to reason that petitioner should reimburse private
respondent's rental expenses of P32,000 monthly, commencing December 15, 1986, up to August 31,
1987, the period of the extended lease. Note further that there is nothing on record refuting the amount of
expenses abovecited. Private respondent presented in court two supporting documents: first, the lease
agreement pertaining to the equipment, and second a letter dated June 15, 1987, sent by Atlas Fertilizer
Corporation to private respondent representing the rental charges incurred. Private respondent is entitled to
recover the payment for these charges. It should be reimbursed the amount of two hundred seventy two
thousand
(P272,000.00) 29 pesos, corresponding to the total amount of rentals from December 15, 1986 to August
31, 1987 of the Sangi, Cebu storage tank.

Finally, we note also that petitioner tries to exempt itself from paying rental expenses and other damages
by arguing that expenses for the preservation of fungible goods must be assumed by the seller. Rental
expenses of storing sulfuric acid should be at private respondent's account until ownership is transferred,
according to petitioner. However, the general rule that before delivery, the risk of loss is borne by the seller
who is still the owner, is not applicable in this case because petitioner had incurred delay in the
performance of its obligation. Article 1504 of the Civil Code clearly states:

Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is transferred to
the buyer, but when the ownership therein is transferred to the buyer the goods are at the buyer's risk
whether actual delivery has been made or not, except that:

xxx xxx xxx

(2) Where actual delivery has been delayed through the fault of either the buyer or seller the goods are at
the risk of the party at fault. (emphasis supplied)

On this score, we quote with approval the findings of the appellate court, thus:

. . . The defendant [herein private respondent] was not remiss in reminding the plaintiff that it would have to
bear the said expenses for failure to lift the commodity for an unreasonable length of time.

But even assuming that the plaintiff did not consent to be so bound, the provisions of Civil Code come in to
make it liable for the damages sought by the defendant.

Art. 1170 of the Civil Code provides: Those who in the performance of their obligations are guilty of fraud,
negligence, or delay and those who in any manner contravene the tenor thereof, are liable for damages.

Certainly, the plaintiff [herein petitioner] was guilty of negligence and delay in the performance of its
obligation to lift the sulfuric acid on August 15, 1986 and had contravened the tenor of its letter-contract
with the defendant. 30

As pointed out earlier, petitioner is guilty of delay, after private respondent made the necessary extrajudicial
demand by requiring petitioner to lift the cargo at its designated loadports. When petitioner failed to comply
with its obligations under the contract it became liable for its shortcomings. Petitioner is indubitably liable for
proven damages.

Considering, however, that petitioner made an advance payment for the unlifted sulfuric acid in the amount
of three hundred three thousand, four hundred eighty three pesos and thirty seven centavos (P303,483.37),
it is proper to set-off this amount against the rental expenses initially paid by private respondent. It is worth
noting that the adjustment and allowance of private respondent's counterclaim or set-off in the present
action, rather than by another independent action, is encouraged by the law. Such practice serves to avoid
circuitry of action, multiplicity of suits, inconvenience, expense, and unwarranted consumption of the court's
time. 31 The trend of judicial decisions is toward a liberal extension of the right to avail of counterclaims or
set-offs. 32 The rules on counterclaims are designed to achieve the disposition of a whole controversy
involving the conflicting claims of interested parties at one time and in one action, provided all parties can
be brought before the court and the matter decided without prejudicing the right of any party. 33 Set-off in
this case is proper and reasonable. It involves deducting P272,000.00 (rentals) from P303,483.37 (advance
payment), which will leave the amount of P31,483.37 refundable to petitioner.

WHEREFORE, the petition is hereby DENIED. The assailed decision of the Court of Appeals in CA G.R.
CV No. 33802 is AFFIRMED, with MODIFICATION that the amount of damages awarded in favor of private
respondent is REDUCED to Two hundred seventy two thousand pesos (P272,000.00). It is also ORDERED
that said amount of damages be OFFSET against petitioner's advance payment of Three hundred three
thousand four hundred eighty three pesos and thirty-seven centavos (P303,483.37) representing the price
of the 272.481 MT of sulfuric acid not lifted. Lastly, it is ORDERED that the excess amount of thirty one
thousand, four hundred eighty three pesos and thirty seven centavos (P31,483.37) be RETURNED soonest
by private respondent to herein petitioner. Costs against the petitioner. SO ORDERED.

G.R. No. 154017 December 8, 2003

DESAMPARADOS M. SOLIVA, Substituted by Sole Heir PERLITA SOLIVA GALDO, petitioner,
vs.
The INTESTATE ESTATE of MARCELO M. VILLALBA and VALENTA BALICUA
VILLALBA, respondents.

DECISION

PANGANIBAN, J.:

There is a valid sale even though the purchase price is not paid in full. The unpaid seller’s remedy is an
action to collect the balance or to rescind the contract within the time allowed by law. In this case, laches
barring the claim of petitioner to recover the property has already set in. However, in the interest of
substantial justice, and pursuant to the equitable principle proscribing unjust enrichment, she is entitled to
receive the unpaid balance of the purchase price plus legal interest thereon.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to nullify the November 9,
2001 Decision2 and the May 23, 20023 Resolution of the Court of Appeals (CA) in CA-GR CV No. 42024.
The assailed Decision disposed as follows:

"WHEREFORE, the Decision appealed from is AFFIRMED."4

The assailed Resolution denied petitioner’s Motion for Reconsideration.

The Facts

The facts are narrated by the CA, as follows:

"On May 5, 1982, [Petitioner] Desamparados M. Soliva filed a complaint for recovery of ownership,
possession and damages against [Respondent] Valenta Balicua Villalba x x x alleging that she is the owner
of a parcel of agricultural land situated at Hinaplanan, Claveria, Misamis Oriental, containing an area of
16,542 square meters and covered by Original Certificate of Title No. 8581; that on January 4, 1966, the
late Capt. Marcelo Villalba asked her permission to occupy her house on said land, promised to buy the
house and lot upon receipt of his money from Manila and gave her ₱600.00 for the occupation of the
house; that Capt. Villalba died in 1978 without having paid the consideration for the house and lot; and that
after [the] death of Capt. Villalba, his widow, [Respondent Valenta], refused to vacate the house and lot
despite demands, destroyed the house thereon and constructed a new one.

"For failure to file an answer, [Respondent Valenta] was declared in default and [petitioner] was allowed to
present her evidence ex-parte.

"On March 26, 1984, the court a quo rendered judgment restoring to [petitioner] her right of ownership and
possession of the property and ordering [Respondent Valenta] to pay [her] ₱25,000.00 as actual damages
and ₱5,000.00 as attorney’s fees. Said decision became final and [petitioner] was placed in possession of
the subject property.
"A petition for relief from judgment was filed by [Respondent Valenta] on June 5, 1984 alleging that her
failure to file an answer to the complaint was caused by her confusion as to whether the property formed
part of the estate of her late husband, Marcelo Villalba; that she referred the matter to Atty. Eleno Kabanlit,
the administrator of the estate, but the latter informed her that the property was not included in the
inventory of the estate; and that she has a meritorious defense as her late husband had already paid the
amount of ₱2,250.00 out of the purchase price of ₱3,500.00 for the house and lot.

"The petition for relief was denied by the court a quo in an Order dated September 3, 1984 on the grounds
that the failure of [Respondent Valenta] to file an answer was not due to excusable negligence and that she
does not seem to have a valid and meritorious defense.

"[Respondent Valenta] appealed to [the CA], which rendered a Decision on February 21, 1990 finding that
the failure of [Respondent Valenta] to file an answer to the complaint was due to excusable negligence; that
she has a meritorious defense, and that the complaint should have been filed not against her but against
the administrator of the estate of deceased Marcelo Villalba. The dispositive portion of said Decision reads:

‘WHEREFORE, the order appealed from is hereby REVERSED; the judgment by default in Civil Case No.
8515, subject matter of the petition for relief, is SET ASIDE; the trial court is ORDERED to continue with the
proceedings in said case; and [Petitioner] Desamparados M. Soliva x x x is ORDERED to amend [her]
complaint by substituting the administrator of the intestate testate (sic) of the late Marcelo M. Villalba for
Valenta Baricua-Villalba [respondent] as defendant in said amended complaint. No pronouncement as to
costs. ‘SO ORDERED.’

"Consequently, an amended complaint was filed in Civil Case No. 8515 by substituting the Intestate Estate
of Marcelo M. Villalba, represented by its Administrator, Atty. Eleno M. Kabanlit, for [Respondent Valenta],
as defendant therein.

"Answering the complaint, the Administrator alleged that the house and lot were sold to the late Marcelo
Villalba by Magdaleno Soliva, the late husband of [petitioner], on December 18, 1965 for ₱3,500.00 on
installment basis and that Marcelo Villalba had paid the total amount of ₱2,250.00; that no demands were
made on [Respondent Valenta] to vacate the property prior to the filing of the original complaint in 1982;
and that [Respondent Valenta] has been in continuous, public and uninterrupted possession of the property
for seventeen (17) years, i.e., from 1965 to 1982, so that [petitioner’s] claim of ownership has already
prescribed.

"An answer-in-intervention was filed by [Respondent Valenta] alleging that the original transaction between
her late husband and the late husband of [petitioner] covered seventy [two] (72) hectares of land, twenty-
nine (29) heads of cattle and the subject house and lot; that [petitioner] and her husband delivered to them
only twenty-seven (27) hectares and twelve (12) heads of cattle and they had to pay separately for the
house and lot; and that she renovated the house and lot at a cost of not less than ₱30,000.00 and planted
numerous fruit trees and permanent crops, all valued at not less than ₱50,000.00.

"On March 11, 1993, the court a quo rendered a Decision, the dispositive portion of which reads:
‘WHEREFORE, judgment is hereby rendered dismissing the complaint and the counterclaims without
special pronouncement as to costs, and ordering the reconveyance of subject lot to [respondent] and
intervenor.’"5

Ruling of the Court of Appeals

Affirming the RTC, the CA held that laches had already set in. The inaction of petitioner for almost 16 years
had barred her action to recover the disputed property from the Villalbas. The appellate court found that 1)
until the death of Marcelo Villalba in 1978, his payment of the full purchase price of the disputed house and
lot was never demanded; 2) no evidence was presented to show when petitioner had made a verbal
demand on Valenta Villalba to vacate the premises; and 3) the complaint for recovery of ownership and
possession was filed only on May 5, 1982 -- 16 years after the former’s cause of action had accrued.

Hence, this Petition.6

Issues

Petitioner submits the following issues for our consideration:

"1. Whether or not Capt. Marcelo M. Villalba who died in 1978 after declaring that he would not pay
anymore the full consideration of the price of the house and lot and after exhausting extrajudicial remedies
would bar Desamparados M. Soliva or her successor-in-interest from asserting her claim over her titled
property.

"2. Whether or not the Decision of the Court of Appeals affirming the Decision of the Regional Trial Court
ordering the reconveyance of the subject lot to defendant and intervenor although Capt. Marcelo Villalba
nor his wife Valenta Balicua Villalba had not yet paid the full consideration of the price of the house and lot
would unjustly enrich spouses Marcelo and Valenta Villalba at the expense of Desamparados M. Soliva." 7

Simply put, the issues boil down to the following: (1) whether petitioner is barred from recovering the
disputed property; and (2) whether the conveyance ordered by the court a quo would unjustly enrich
respondents at her expense.

The Court’s Ruling

The Petition is partly meritorious.

First Issue:

Petitioner’s Claim Already Barred

Petitioner contests the appellate court’s finding that she slept on her rights for 16 years and thereby allowed
prescription and laches to set in and bar her claim. She avers that she undertook extrajudicial measures to
collect the unpaid balance of the purchase price from the Villalbas. She also emphasizes that as a result of
her original action, the trial court restored her to the possession of the disputed house and lot on March 26,
1984.
It is readily apparent that petitioner is raising issues of fact that have amply been ruled upon by the
appellate court. The CA’s findings of fact are generally binding upon this Court and will not be disturbed on
appeal -- especially when, as in this case, they are the same as those of the trial court.8 Petitioner has
failed to show sufficient reason for us to depart from this rule. Accordingly, we shall review only questions
of law that have been distinctly set forth.9

No Invalidation of Sale Due

to Nonpayment of Full Price

Petitioner argues that the transaction between the parties was a contract to sell rather than a contract of
sale. This argument was properly brushed aside by the appellate court, which held that she was bound by
her admission in her Complaint10 and during the hearings11 that she had sold the property to the Villalbas.

Petitioner further contends that the oral contract of sale between the parties was invalid, because the late
Captain Marcelo Villalba and his wife had failed to comply with their obligation to pay in full the purchase
price of the house and lot. She is mistaken.

Under Article 1318 of the Civil Code, the following are the essential requisites of a valid contract: 1) the
consent of the contracting parties, 2) the object certain which is the subject matter of the contract, and 3)
the cause of the obligation which is established. When all the essential requisites are present, a contract is
obligatory in whatever form it may have been entered into, save in cases where the law requires that it be
in a specific form to be valid and enforceable.12

With respect to real property, Article 1358(1) of the Civil Code specifically requires that a contract of sale
thereof be in a public document. However, an otherwise unenforceable oral contract of sale of realty under
Article 1403(2) of the Civil Code may be ratified by the failure to object to the presentation of oral evidence
to prove it or by the acceptance of benefits granted by it.13

All the essential elements of a valid contract are present in this case. No issue was raised by petitioner on
this point. Moreover, while the contract between the parties might have been unenforceable under Article
1403(2) of the Civil Code, the admission14 by petitioner that she had accepted payments under the oral
contract of sale took the case out of the scope of the Statute of Frauds.15 The ratification of the contract
rendered it valid and enforceable.

Furthermore, contrary to petitioner’s submission, the nonpayment of the full consideration did not invalidate
the contract of sale. Under settled doctrine, nonpayment is a resolutory condition that extinguishes the
transaction existing for a time and discharges the obligations created thereunder.16 The remedy of the
unpaid seller is to sue for collection17 or, in case of a substantial breach, to rescind the contract.18 These
alternative remedies of specific performance and rescission are provided under Article 1191 of the Civil
Code as follows:

"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 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.

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

"x x x xxx x x x."

The rescission of a sale of immovables, on the other hand, is governed by Article 1592 of the Civil Code as
follows:

"Article 1592. In the sale of immovable property, even though it may have been stipulated that upon failure
to pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee
may pay, even after the expiration of the period, as long as no demand for rescission of the contract has
been made upon him either judicially or extrajudicially or by a notarial act. After the demand, the court may
not grant him a new term."

Upon the facts found by the trial and the appellate courts, petitioner did not exercise her right either to seek
specific performance or to rescind the verbal contract of sale until May 1982, when she filed her complaint
for recovery of ownership and possession of the property. This factual finding brings to the fore the
question of whether by 1982, she was already barred from recovering the property due to laches and
prescription.

Action Barred by Laches

In general, laches is the failure or neglect, for an unreasonable and unexplained length of time, to do that
which -- by the exercise of due diligence -- could or should have been done earlier.19 It is the negligence or
omission to assert a right within a reasonable period, warranting the presumption that the party entitled to
assert it has either abandoned or declined to assert it.20

Under this time-honored doctrine, relief has been denied to litigants who, by sleeping on their rights for an
unreasonable length of time -- either by negligence, folly or inattention -- have allowed their claims to
become stale.21 Vigilantibus, sed non dormientibus, jura subveniunt. The laws aid the vigilant, not those
who slumber on their rights.22

The following are the essential elements of laches:

(1) Conduct on the part of the defendant that gave rise to the situation complained of; or the conduct of
another which the defendant claims gave rise to the same;

(2) Delay by the complainant in asserting his right after he has had knowledge of the defendant’s conduct
and after he has had an opportunity to sue;

(3) Lack of knowledge by or notice to the defendant that the complainant will assert the right on which he
bases his suit; and
(4) Injury or prejudice to the defendant in the event relief is accorded to the complainant. 23

Petitioner complied with her obligation to deliver the property in 1966.24 However, respondent’s husband
failed to comply with his reciprocal obligation to pay, when the money he had been expecting from Manila
never materialized.25 He also failed to make further installments after May 13, 1966.26 As early as 1966,
therefore, petitioner already had the right to compel payment or to ask for rescission, pursuant to Article
1169 of the Civil Code, which reads:

"Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.

"However, the demand by the creditor shall not be necessary in order that delay may exist:

xxx xxx xxx

"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. From the moment one of the parties fulfills his
obligation, delay by the other begins." (Italics supplied)

Nonetheless, petitioner failed to sue for collection or rescission. Due to insufficiency of evidence, the lower
courts brushed aside her assertions that she had availed herself of extrajudicial remedies to collect the
balance or to serve an extrajudicial demand on Villalba, prior to her legal action in 1982. Meanwhile,
respondent had spent a considerable sum in renovating the house and introducing improvements on the
premises.27

In view thereof, the appellate court aptly ruled that petitioner’s claim was already barred by laches. It has
been consistently held that laches does not concern itself with the character of the defendant’s title, but
only with the issue of whether or not the plaintiff -- by reason of long inaction or inexcusable neglect --
should be barred entirely from asserting the claim, because to allow such action would be inequitable and
unjust to the defendant.28

Likewise, it must be stressed that unlike prescription, laches is not concerned merely with the fact of delay,
but even more with the effect of unreasonable delay.29 In Vda. de Cabrera v. CA,30 we explained:

"In our jurisdiction, it is an enshrined rule that even a registered owner of property may be barred from
recovering possession of property by virtue of laches. Under the Land Registration Act (now the Property
Registration Decree), no title to registered land in derogation to that of the registered owner shall be
acquired by prescription or adverse possession. The same is not true with regard to laches. As we have
stated earlier in Mejia de Lucas vs. Gamponia, while the defendant may not be considered as having
acquired title by virtue of his and his predecessor’s long continued possession (37 years) the original
owner’s right to recover x x x the possession of the property and the title thereto from the defendant has, by
the latter’s long period of possession and by patentee’s inaction and neglect, been converted into a stale
demand."31

The contention of petitioner that her right to recover is imprescriptible because the property was registered
under the Torrens system32 also fails to convince us. It was the finding of the trial court that the property
was not yet covered by a free patent on January 4, 1966, when Captain Villalba acquired possession
thereof. Indeed, the evidence shows that as of that date, the documents relating to the property were still in
the name of Pilar Castrence, from whom petitioner purchased the property on April 27, 1966; 33 that she
applied for a free patent therefor between January 4 and April 27, 1966; 34 and that the original certificate of
title over the lot was issued to her under Free Patent No. (x-1) 3732 only on August 16, 1974.35

It is apparent, then, that petitioner sold the house and lot to respondent on January 4, 1966, before she had
even acquired the title to convey it. Moreover, she applied for a free patent after she lost, by operation of
law,36 the title she had belatedly acquired from Castrence. These circumstances raise serious questions
over the former’s good faith in delaying the assertion of her rights to the property. They bar her from
seeking relief under the principle that "one who comes to court must come with clean hands."37

Action Barred by Prescription

Moreover, we find that the RTC and the CA correctly appreciated the operation of ordinary acquisitive
prescription in respondent’s favor.1âwphi1 To acquire ownership and other real rights over immovables
under Article 1134 of the Civil Code, possession must be for 10 years. It must also be in good faith and with
just title.38

Good faith consists of the reasonable belief that the person from whom the possessor received the thing
was its owner, but could not transmit the ownership thereof.39 On the other hand, there is just title when the
adverse claimant came into possession of the property through one of the modes recognized by law for the
acquisition of ownership or other real rights, but the grantor was not the owner or could not transmit any
right.40

The RTC and the CA held that the Villalbas’ had continuously possessed the property from January 4, 1966
until May 5, 198241 or for a total of 16 years. Capt. Villalba came into possession through a sale by
petitioner, whom he believed was the owner, though -- at the time of the sale -- she was not. Clearly, all the
elements of ordinary acquisitive prescription were present.

Petitioner is thus precluded from invoking the 30-year prescriptive period for commencing real action over
immovables. Prescription of the action is without prejudice to acquisitive prescription, according to Article
1141 of the Civil Code, which we quote:

"Art. 1141. Real actions over immovables prescribe after thirty years.

"This provision is without prejudice to what is established for the acquisition of ownership and other real
rights by prescription." (Italics supplied)

Second Issue:

Unjust Enrichment

While petitioner is now barred from recovering the subject property, all is not lost for her. By Respondent
Villalba’s own admission,42 a balance of ₱1,250 of the total purchase price remains unpaid. Reason and
fairness suggest that petitioner be allowed to collect this sum. It is a basic rule in law that no one shall
unjustly enrich oneself at the expense of another. Niguno non deue enriquecerse tortizamente condaño de
otro. For indeed, to allow respondent to keep the property without paying fully for it amounts to unjust
enrichment on her part.

Since the obligation consists of the payment of a sum of money, and Respondent Villalba has incurred
delay in satisfying that obligation, legal interest at six percent (6%) per annum43 is hereby imposed on the
balance of ₱1,250, to be computed starting May 5, 1982 -- when the claim was made judicially -- until the
finality of this Court’s judgment. Following our ruling in Eastern Shipping Lines, Inc. v. CA, 44 the sum so
awarded shall likewise bear interest at the rate of 12 percent per annum from the time this judgment
becomes final and executory until its satisfaction.

WHEREFORE, the Petition is partly GRANTED. The Decision of the Court of Appeals is AFFIRMED, with
the MODIFICATION that respondent is ordered to pay the balance of the purchase price of ₱1,250 plus 6
percent interest per annum, from May 5, 1982 until the finality of this judgment. Thereafter, interest of 12
percent per year shall then be imposed on that amount upon the finality of this Decision until the payment
thereof. No costs. SO ORDERED.

G.R. No. 174269 August 25, 2010

POLO S. PANTALEON, Petitioner,

vs.
AMERICAN EXPRESS INTERNATIONAL, INC., Respondent.

RESOLUTION

BRION, J.:

We resolve the motion for reconsideration filed by respondent American Express International, Inc. (AMEX)
dated June 8, 2009,1 seeking to reverse our Decision dated May 8, 2009 where we ruled that AMEX was
guilty of culpable delay in fulfilling its obligation to its cardholder –petitioner Polo Pantaleon. Based on this
conclusion, we held AMEX liable for moral and exemplary damages, as well as attorney’s fees and costs of
litigation.2

FACTUAL ANTECEDENTS

The established antecedents of the case are narrated below.

AMEX is a resident foreign corporation engaged in the business of providing credit services through the
operation of a charge card system. Pantaleon has been an AMEX cardholder since 1980. 3

In October 1991, Pantaleon, together with his wife (Julialinda), daughter (Regina), and son (Adrian
Roberto), went on a guided European tour. On October 25, 1991, the tour group arrived in Amsterdam. Due
to their late arrival, they postponed the tour of the city for the following day.4
The next day, the group began their sightseeing at around 8:50 a.m. with a trip to the Coster Diamond
House (Coster). To have enough time for take a guided city tour of Amsterdam before their departure
scheduled on that day, the tour group planned to leave Coster by 9:30 a.m. at the latest.

While at Coster, Mrs. Pantaleon decided to purchase some diamond pieces worth a total of US$13,826.00.
Pantaleon presented his American Express credit card to the sales clerk to pay for this purchase. He did
this at around 9:15 a.m. The sales clerk swiped the credit card and asked Pantaleon to sign the charge slip,
which was then electronically referred to AMEX’s Amsterdam office at 9:20 a.m.5

At around 9:40 a.m., Coster had not received approval from AMEX for the purchase so Pantaleon asked
the store clerk to cancel the sale. The store manager, however, convinced Pantaleon to wait a few more
minutes. Subsequently, the store manager informed Pantaleon that AMEX was asking for bank references;
Pantaleon responded by giving the names of his Philippine depository banks.

At around 10 a.m., or 45 minutes after Pantaleon presented his credit card, AMEX still had not approved
the purchase. Since the city tour could not begin until the Pantaleons were onboard the tour bus, Coster
decided to release at around 10:05 a.m. the purchased items to Pantaleon even without AMEX’s approval.

When the Pantaleons finally returned to the tour bus, they found their travel companions visibly irritated.
This irritation intensified when the tour guide announced that they would have to cancel the tour because of
lack of time as they all had to be in Calais, Belgium by 3 p.m. to catch the ferry to London.6

From the records, it appears that after Pantaleon’s purchase was transmitted for approval to AMEX’s
Amsterdam office at 9:20 a.m.; was referred to AMEX’s Manila office at 9:33 a.m.; and was approved by
the Manila office at 10:19 a.m. At 10:38 a.m., AMEX’s Manila office finally transmitted the Approval Code to
AMEX’s Amsterdam office. In all, it took AMEX a total of 78 minutes to approve Pantaleon’s purchase and
to transmit the approval to the jewelry store.7

After the trip to Europe, the Pantaleon family proceeded to the United States. Again, Pantaleon
experienced delay in securing approval for purchases using his American Express credit card on two
separate occasions. He experienced the first delay when he wanted to purchase golf equipment in the
amount of US$1,475.00 at the Richard Metz Golf Studio in New York on October 30, 1991. Another delay
occurred when he wanted to purchase children’s shoes worth US$87.00 at the Quiency Market in Boston
on November 3, 1991.

Upon return to Manila, Pantaleon sent AMEX a letter demanding an apology for the humiliation and
inconvenience he and his family experienced due to the delays in obtaining approval for his credit card
purchases. AMEX responded by explaining that the delay in Amsterdam was due to the amount involved –
the charged purchase of US$13,826.00 deviated from Pantaleon’s established charge purchase pattern.
Dissatisfied with this explanation, Pantaleon filed an action for damages against the credit card company
with the Makati City Regional Trial Court (RTC).

On August 5, 1996, the RTC found AMEX guilty of delay, and awarded Pantaleon ₱500,000.00 as moral
damages, ₱300,000.00 as exemplary damages, ₱100,000.00 as attorney’s fees, and ₱85,233.01 as
litigation expenses.
On appeal, the CA reversed the awards.8 While the CA recognized that delay in the nature of mora
accipiendi or creditor’s default attended AMEX’s approval of Pantaleon’s purchases, it disagreed with the
RTC’s finding that AMEX had breached its contract, noting that the delay was not attended by bad faith,
malice or gross negligence. The appellate court found that AMEX exercised diligent efforts to effect the
approval of Pantaleon’s purchases; the purchase at Coster posed particularly a problem because it was at
variance with Pantaleon’s established charge pattern. As there was no proof that AMEX breached its
contract, or that it acted in a wanton, fraudulent or malevolent manner, the appellate court ruled that AMEX
could not be held liable for any form of damages.

Pantaleon questioned this decision via a petition for review on certiorari with this Court.

In our May 8, 2009 decision, we reversed the appellate court’s decision and held that AMEX was guilty of
mora solvendi, or debtor’s default. AMEX, as debtor, had an obligation as the credit provider to act on
Pantaleon’s purchase requests, whether to approve or disapprove them, with "timely dispatch." Based on
the evidence on record, we found that AMEX failed to timely act on Pantaleon’s purchases.

Based one ly, tual obligations. 271,ct; moral damages le. uitable that attorney'workers;plaitniff' the
testimony of AMEX’s credit authorizer Edgardo Jaurique, the approval time for credit card charges would
be three to four seconds under regular circumstances. In Pantaleon’s case, it took AMEX 78 minutes to
approve the Amsterdam purchase. We attributed this delay to AMEX’s Manila credit authorizer, Edgardo
Jaurique, who had to go over Pantaleon’s past credit history, his payment record and his credit and bank
references before he approved the purchase. Finding this delay unwarranted, we reinstated the RTC
decision and awarded Pantaleon moral and exemplary damages, as well as attorney’s fees and costs of
litigation.

THE MOTION FOR RECONSIDERATION

In its motion for reconsideration, AMEX argues that this Court erred when it found AMEX guilty of culpable
delay in complying with its obligation to act with timely dispatch on Pantaleon’s purchases. While AMEX
admits that it normally takes seconds to approve charge purchases, it emphasizes that Pantaleon
experienced delay in Amsterdam because his transaction was not a normal one. To recall, Pantaleon
sought to charge in a single transaction jewelry items purchased from Coster in the total amount of
US$13,826.00 or ₱383,746.16. While the total amount of Pantaleon’s previous purchases using his AMEX
credit card did exceed US$13,826.00, AMEX points out that these purchases were made in a span of more
than 10 years, not in a single transaction.

Because this was the biggest single transaction that Pantaleon ever made using his AMEX credit card,
AMEX argues that the transaction necessarily required the credit authorizer to carefully review Pantaleon’s
credit history and bank references. AMEX maintains that it did this not only to ensure Pantaleon’s
protection (to minimize the possibility that a third party was fraudulently using his credit card), but also to
protect itself from the risk that Pantaleon might not be able to pay for his purchases on credit. This careful
review, according to AMEX, is also in keeping with the extraordinary degree of diligence required of banks
in handling its transactions. AMEX concluded that in these lights, the thorough review of Pantaleon’s credit
record was motivated by legitimate concerns and could not be evidence of any ill will, fraud, or negligence
by AMEX.
AMEX further points out that the proximate cause of Pantaleon’s humiliation and embarrassment was his
own decision to proceed with the purchase despite his awareness that the tour group was waiting for him
and his wife. Pantaleon could have prevented the humiliation had he cancelled the sale when he noticed
that the credit approval for the Coster purchase was unusually delayed.

In his Comment dated February 24, 2010, Pantaleon maintains that AMEX was guilty of mora solvendi, or
delay on the part of the debtor, in complying with its obligation to him. Based on jurisprudence, a just cause
for delay does not relieve the debtor in delay from the consequences of delay; thus, even if AMEX had a
justifiable reason for the delay, this reason would not relieve it from the liability arising from its failure to
timely act on Pantaleon’s purchase.

In response to AMEX’s assertion that the delay was in keeping with its duty to perform its obligation with
extraordinary diligence, Pantaleon claims that this duty includes the timely or prompt performance of its
obligation.

As to AMEX’s contention that moral or exemplary damages cannot be awarded absent a finding of malice,
Pantaleon argues that evil motive or design is not always necessary to support a finding of bad faith; gross
negligence or wanton disregard of contractual obligations is sufficient basis for the award of moral and
exemplary damages.

OUR RULING: We GRANT the motion for reconsideration.

Brief historical background

A credit card is defined as "any card, plate, coupon book, or other credit device existing for the purpose of
obtaining money, goods, property, labor or services or anything of value on credit."9 It traces its roots to the
charge card first introduced by the Diners Club in New York City in 1950.10 American Express followed suit
by introducing its own charge card to the American market in 1958.11

In the Philippines, the now defunct Pacific Bank was responsible for bringing the first credit card into the
country in the 1970s.12 However, it was only in the early 2000s that credit card use gained wide acceptance
in the country, as evidenced by the surge in the number of credit card holders then. 13

Nature of Credit Card Transactions

To better understand the dynamics involved in credit card transactions, we turn to the United States case of
Harris Trust & Savings Bank v. McCray14 which explains:

The bank credit card system involves a tripartite relationship between the issuer bank, the cardholder, and
merchants participating in the system. The issuer bank establishes an account on behalf of the person to
whom the card is issued, and the two parties enter into an agreement which governs their relationship. This
agreement provides that the bank will pay for cardholder’s account the amount of merchandise or services
purchased through the use of the credit card and will also make cash loans available to the cardholder. It
also states that the cardholder shall be liable to the bank for advances and payments made by the bank
and that the cardholder’s obligation to pay the bank shall not be affected or impaired by any dispute, claim,
or demand by the cardholder with respect to any merchandise or service purchased.
The merchants participating in the system agree to honor the bank’s credit cards. The bank irrevocably
agrees to honor and pay the sales slips presented by the merchant if the merchant performs his
undertakings such as checking the list of revoked cards before accepting the card. x x x.

These slips are forwarded to the member bank which originally issued the card. The cardholder receives a
statement from the bank periodically and may then decide whether to make payment to the bank in full
within a specified period, free of interest, or to defer payment and ultimately incur an interest charge.

We adopted a similar view in CIR v. American Express International, Inc. (Philippine branch), 15 where we
also recognized that credit card issuers are not limited to banks. We said:

Under RA 8484, the credit card that is issued by banks in general, or by non-banks in particular, refers to
"any card x x x or other credit device existing for the purpose of obtaining x x x goods x x x or services x x x
on credit;" and is being used "usually on a revolving basis." This means that the consumer-credit
arrangement that exists between the issuer and the holder of the credit card enables the latter to procure
goods or services "on a continuing basis as long as the outstanding balance does not exceed a specified
limit." The card holder is, therefore, given "the power to obtain present control of goods or service on a
promise to pay for them in the future."

Business establishments may extend credit sales through the use of the credit card facilities of a non-bank
credit card company to avoid the risk of uncollectible accounts from their customers. Under this system, the
establishments do not deposit in their bank accounts the credit card drafts that arise from the credit sales.
Instead, they merely record their receivables from the credit card company and periodically send the drafts
evidencing those receivables to the latter.

The credit card company, in turn, sends checks as payment to these business establishments, but it does
not redeem the drafts at full price. The agreement between them usually provides for discounts to be taken
by the company upon its redemption of the drafts. At the end of each month, it then bills its credit card
holders for their respective drafts redeemed during the previous month. If the holders fail to pay the
amounts owed, the company sustains the loss.

Simply put, every credit card transaction involves three contracts, namely: (a) the sales contract between
the credit card holder and the merchant or the business establishment which accepted the credit card; (b)
the loan agreement between the credit card issuer and the credit card holder; and lastly, (c) the promise to
pay between the credit card issuer and the merchant or business establishment. 16

Credit card issuer – cardholder relationship

When a credit card company gives the holder the privilege of charging items at establishments associated
with the issuer,17 a necessary question in a legal analysis is – when does this relationship begin? There are
two diverging views on the matter. In City Stores Co. v. Henderson,18 another U.S. decision, held that:

The issuance of a credit card is but an offer to extend a line of open account credit. It is unilateral and
supported by no consideration. The offer may be withdrawn at any time, without prior notice, for any reason
or, indeed, for no reason at all, and its withdrawal breaches no duty – for there is no duty to continue it –
and violates no rights.
Thus, under this view, each credit card transaction is considered a separate offer and acceptance.

Novack v. Cities Service Oil Co.19 echoed this view, with the court ruling that the mere issuance of a credit
card did not create a contractual relationship with the cardholder.

On the other end of the spectrum is Gray v. American Express Company20 which recognized the card
membership agreement itself as a binding contract between the credit card issuer and the card holder.
Unlike in the Novack and the City Stores cases, however, the cardholder in Gray paid an annual fee for the
privilege of being an American Express cardholder.

In our jurisdiction, we generally adhere to the Gray ruling, recognizing the relationship between the credit
card issuer and the credit card holder as a contractual one that is governed by the terms and conditions
found in the card membership agreement.21 This contract provides the rights and liabilities of a credit card
company to its cardholders and vice versa.

We note that a card membership agreement is a contract of adhesion as its terms are prepared solely by
the credit card issuer, with the cardholder merely affixing his signature signifying his adhesion to these
terms.22 This circumstance, however, does not render the agreement void; we have uniformly held that
contracts of adhesion are "as binding as ordinary contracts, the reason being that the party who adheres to
the contract is free to reject it entirely."23 The only effect is that the terms of the contract are construed
strictly against the party who drafted it.24

On AMEX’s obligations to Pantaleon

We begin by identifying the two privileges that Pantaleon assumes he is entitled to with the issuance of his
AMEX credit card, and on which he anchors his claims. First, Pantaleon presumes that since his credit card
has no pre-set spending limit, AMEX has the obligation to approve all his charge requests. Conversely,
even if AMEX has no such obligation, at the very least it is obliged to act on his charge requests within a
specific period of time.

i. Use of credit card a mere offer to enter into loan agreements

Although we recognize the existence of a relationship between the credit card issuer and the credit card
holder upon the acceptance by the cardholder of the terms of the card membership agreement (customarily
signified by the act of the cardholder in signing the back of the credit card), we have to distinguish this
contractual relationship from the creditor-debtor relationship which only arises after the credit card issuer
has approved the cardholder’s purchase request. The first relates merely to an agreement providing for
credit facility to the cardholder. The latter involves the actual credit on loan agreement involving three
contracts, namely: the sales contract between the credit card holder and the merchant or the business
establishment which accepted the credit card; the loan agreement between the credit card issuer and the
credit card holder; and the promise to pay between the credit card issuer and the merchant or business
establishment.

From the loan agreement perspective, the contractual relationship begins to exist only upon the meeting of
the offer25 and acceptance of the parties involved. In more concrete terms, when cardholders use their
credit cards to pay for their purchases, they merely offer to enter into loan agreements with the credit card
company. Only after the latter approves the purchase requests that the parties enter into binding loan
contracts, in keeping with Article 1319 of the Civil Code, which provides:

Article 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.

This view finds support in the reservation found in the card membership agreement itself, particularly
paragraph 10, which clearly states that AMEX "reserve[s] the right to deny authorization for any
requested Charge." By so providing, AMEX made its position clear that it has no obligation to approve any
and all charge requests made by its card holders.

ii. AMEX not guilty of culpable delay

Since AMEX has no obligation to approve the purchase requests of its credit cardholders, Pantaleon
cannot claim that AMEX defaulted in its obligation. Article 1169 of the Civil Code, which provides the
requisites to hold a debtor guilty of culpable delay, states:

Article 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially
or extrajudicially demands from them the fulfillment of their obligation. x x x.

The three requisites for a finding of default are: (a) that the obligation is demandable and liquidated; (b) the
debtor delays performance; and (c) the creditor judicially or extrajudicially requires the debtor’s
performance.26

Based on the above, the first requisite is no longer met because AMEX, by the express terms of the credit
card agreement, is not obligated to approve Pantaleon’s purchase request. Without a demandable
obligation, there can be no finding of default.

Apart from the lack of any demandable obligation, we also find that Pantaleon failed to make the demand
required by Article 1169 of the Civil Code.

As previously established, the use of a credit card to pay for a purchase is only an offer to the credit card
company to enter a loan agreement with the credit card holder. Before the credit card issuer accepts
this offer, no obligation relating to the loan agreement exists between them. On the other hand, a
demand is defined as the "assertion of a legal right; xxx an asking with authority, claiming or challenging as
due."27 A demand presupposes the existence of an obligation between the parties.

Thus, every time that Pantaleon used his AMEX credit card to pay for his purchases, what the stores
transmitted to AMEX were his offers to execute loan contracts. These obviously could not be classified as
the demand required by law to make the debtor in default, given that no obligation could arise on the part of
AMEX until after AMEX transmitted its acceptance of Pantaleon’s offers. Pantaleon’s act of "insisting on
and waiting for the charge purchases to be approved by AMEX"28 is not the demand contemplated by
Article 1169 of the Civil Code.
For failing to comply with the requisites of Article 1169, Pantaleon’s charge that AMEX is guilty of culpable
delay in approving his purchase requests must fail.

iii. On AMEX’s obligation to act on the offer within a specific period of time

Even assuming that AMEX had the right to review his credit card history before it approved his purchase
requests, Pantaleon insists that AMEX had an obligation to act on his purchase requests, either to approve
or deny, in "a matter of seconds" or "in timely dispatch." Pantaleon impresses upon us the existence of this
obligation by emphasizing two points: (a) his card has no pre-set spending limit; and (b) in his twelve years
of using his AMEX card, AMEX had always approved his charges in a matter of seconds.

Pantaleon’s assertions fail to convince us.

We originally held that AMEX was in culpable delay when it acted on the Coster transaction, as well as the
two other transactions in the United States which took AMEX approximately 15 to 20 minutes to approve.
This conclusion appears valid and reasonable at first glance, comparing the time it took to finally get the
Coster purchase approved (a total of 78 minutes), to AMEX’s "normal" approval time of three to four
seconds (based on the testimony of Edgardo Jaurigue, as well as Pantaleon’s previous experience). We
come to a different result, however, after a closer look at the factual and legal circumstances of the case.

AMEX’s credit authorizer, Edgardo Jaurigue, explained that having no pre-set spending limit in a credit card
simply means that the charges made by the cardholder are approved based on his ability to pay, as
demonstrated by his past spending, payment patterns, and personal resources.29 Nevertheless, every time
Pantaleon charges a purchase on his credit card, the credit card company still has to determine
whether it will allow this charge, based on his past credit history. This right to review a card holder’s
credit history, although not specifically set out in the card membership agreement, is a necessary
implication of AMEX’s right to deny authorization for any requested charge.

As for Pantaleon’s previous experiences with AMEX (i.e., that in the past 12 years, AMEX has always
approved his charge requests in three or four seconds), this record does not establish that Pantaleon had a
legally enforceable obligation to expect AMEX to act on his charge requests within a matter of seconds. For
one, Pantaleon failed to present any evidence to support his assertion that AMEX acted on purchase
requests in a matter of three or four seconds as an established practice. More importantly, even if
Pantaleon did prove that AMEX, as a matter of practice or custom, acted on its customers’ purchase
requests in a matter of seconds, this would still not be enough to establish a legally demandable right; as a
general rule, a practice or custom is not a source of a legally demandable or enforceable right. 30

We next examine the credit card membership agreement, the contract that primarily governs the
relationship between AMEX and Pantaleon. Significantly, there is no provision in this agreement that
obligates AMEX to act on all cardholder purchase requests within a specifically defined period of
time. Thus, regardless of whether the obligation is worded was to "act in a matter of seconds" or to "act in
timely dispatch," the fact remains that no obligation exists on the part of AMEX to act within a specific
period of time. Even Pantaleon admits in his testimony that he could not recall any provision in the
Agreement that guaranteed AMEX’s approval of his charge requests within a matter of minutes. 31
Nor can Pantaleon look to the law or government issuances as the source of AMEX’s alleged obligation to
act upon his credit card purchases within a matter of seconds. As the following survey of Philippine law on
credit card transactions demonstrates, the State does not require credit card companies to act upon its
cardholders’ purchase requests within a specific period of time.

Republic Act No. 8484 (RA 8484), or the Access Devices Regulation Act of 1998, approved on February
11, 1998, is the controlling legislation that regulates the issuance and use of access devices,32 including
credit cards. The more salient portions of this law include the imposition of the obligation on a credit card
company to disclose certain important financial information33 to credit card applicants, as well as a
definition of the acts that constitute access device fraud.

As financial institutions engaged in the business of providing credit, credit card companies fall under the
supervisory powers of the Bangko Sentral ng Pilipinas (BSP).34 BSP Circular No. 398 dated August 21,
2003 embodies the BSP’s policy when it comes to credit cards –

The Bangko Sentral ng Pilipinas (BSP) shall foster the development of consumer credit through innovative
products such as credit cards under conditions of fair and sound consumer credit practices. The BSP
likewise encourages competition and transparency to ensure more efficient delivery of services and fair
dealings with customers. (Emphasis supplied)

Based on this Circular, "x x x [b]efore issuing credit cards, banks and/or their subsidiary credit card
companies must exercise proper diligence by ascertaining that applicants possess good credit standing
and are financially capable of fulfilling their credit commitments."35 As the above-quoted policy expressly
states, the general intent is to foster "fair and sound consumer credit practices."

Other than BSP Circular No. 398, a related circular is BSP Circular No. 454, issued on September 24,
2004, but this circular merely enumerates the unfair collection practices of credit card companies – a matter
not relevant to the issue at hand.

In light of the foregoing, we find and so hold that AMEX is neither contractually bound nor legally obligated
to act on its cardholders’ purchase requests within any specific period of time, much less a period of a
"matter of seconds" that Pantaleon uses as his standard. The standard therefore is implicit and, as in all
contracts, must be based on fairness and reasonableness, read in relation to the Civil Code provisions on
human relations, as will be discussed below.

AMEX acted with good faith

Thus far, we have already established that: (a) AMEX had neither a contractual nor a legal obligation to act
upon Pantaleon’s purchases within a specific period of time; and (b) AMEX has a right to review a
cardholder’s credit card history. Our recognition of these entitlements, however, does not give AMEX
an unlimited right to put off action on cardholders’ purchase requests for indefinite periods of time.
In acting on cardholders’ purchase requests, AMEX must take care not to abuse its rights and cause injury
to its clients and/or third persons. We cite in this regard Article 19, in conjunction with Article 21, of the Civil
Code, which provide:
Article 19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due and observe honesty and good faith.

Article 21. Any person who 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.

Article 19 pervades the entire legal system and ensures that a person suffering damage in the course of
another’s exercise of right or performance of duty, should find himself without relief. 36 It sets the standard
for the conduct of all persons, whether artificial or natural, and requires that everyone, in the exercise of
rights and the performance of obligations, must: (a) act with justice, (b) give everyone his due, and (c)
observe honesty and good faith. It is not because a person invokes his rights that he can do anything, even
to the prejudice and disadvantage of another.37

While Article 19 enumerates the standards of conduct, Article 21 provides the remedy for the person injured
by the willful act, an action for damages. We explained how these two provisions correlate with each other
in GF Equity, Inc. v. Valenzona:38

[Article 19], known to contain what is commonly referred to as the principle of abuse of rights, sets certain
standards which must be observed not only in the exercise of one's rights but also in the performance of
one's duties. These standards are the following: to act with justice; to give everyone his due; and to
observe honesty and good faith. The law, therefore, recognizes a primordial limitation on all rights; that in
their exercise, the norms of human conduct set forth in Article 19 must be observed. A right, though by
itself legal because recognized or granted by law as such, may nevertheless become the source of
some illegality. When a right is exercised in a manner which does not conform with the norms
enshrined in Article 19 and results in damage to another, a legal wrong is thereby committed for
which the wrongdoer must be held responsible. But while Article 19 lays down a rule of conduct for the
government of human relations and for the maintenance of social order, it does not provide a remedy for its
violation. Generally, an action for damages under either Article 20 or Article 21 would be proper.

In the context of a credit card relationship, although there is neither a contractual stipulation nor a specific
law requiring the credit card issuer to act on the credit card holder’s offer within a definite period of time,
these principles provide the standard by which to judge AMEX’s actions.

According to Pantaleon, even if AMEX did have a right to review his charge purchases, it abused this right
when it unreasonably delayed the processing of the Coster charge purchase, as well as his purchase
requests at the Richard Metz’ Golf Studio and Kids’ Unlimited Store; AMEX should have known that its
failure to act immediately on charge referrals would entail inconvenience and result in humiliation,
embarrassment, anxiety and distress to its cardholders who would be required to wait before closing their
transactions.39

It is an elementary rule in our jurisdiction that good faith is presumed and that the burden of proving bad
faith rests upon the party alleging it.40 Although it took AMEX some time before it approved Pantaleon’s
three charge requests, we find no evidence to suggest that it acted with deliberate intent to cause
Pantaleon any loss or injury, or acted in a manner that was contrary to morals, good customs or public
policy. We give credence to AMEX’s claim that its review procedure was done to ensure Pantaleon’s own
protection as a cardholder and to prevent the possibility that the credit card was being fraudulently used by
a third person.

Pantaleon countered that this review procedure is primarily intended to protect AMEX’s interests, to make
sure that the cardholder making the purchase has enough means to pay for the credit extended. Even if
this were the case, however, we do not find any taint of bad faith in such motive. It is but natural for AMEX
to want to ensure that it will extend credit only to people who will have sufficient means to pay for their
purchases. AMEX, after all, is running a business, not a charity, and it would simply be ludicrous to suggest
that it would not want to earn profit for its services. Thus, so long as AMEX exercises its rights, performs its
obligations, and generally acts with good faith, with no intent to cause harm, even if it may occasionally
inconvenience others, it cannot be held liable for damages.

We also cannot turn a blind eye to the circumstances surrounding the Coster transaction which, in our
opinion, justified the wait. In Edgardo Jaurigue’s own words:

Q 21: With reference to the transaction at the Coster Diamond House covered by Exhibit H, also Exhibit 4
for the defendant, the approval came at 2:19 a.m. after the request was relayed at 1:33 a.m., can you
explain why the approval came after about 46 minutes, more or less?

A21: Because we have to make certain considerations and evaluations of [Pantaleon’s] past spending
pattern with [AMEX] at that time before approving plaintiff’s request because [Pantaleon] was at that time
making his very first single charge purchase of US$13,826 [this is below the US$16,112.58 actually
billed and paid for by the plaintiff because the difference was already automatically approved by [AMEX]
office in Netherland[s] and the record of [Pantaleon’s] past spending with [AMEX] at that time does
not favorably support his ability to pay for such purchase. In fact, if the foregoing internal policy of
[AMEX] had been strictly followed, the transaction would not have been approved at all considering that the
past spending pattern of the plaintiff with [AMEX] at that time does not support his ability to pay for such
purchase.41

xxxx

Q: Why did it take so long?

A: It took time to review the account on credit, so, if there is any delinquencies [sic] of the cardmember.
There are factors on deciding the charge itself which are standard measures in approving the authorization.
Now in the case of Mr. Pantaleon although his account is single charge purchase of US$13,826. [sic] this is
below the US$16,000. plus actually billed x x x we would have already declined the charge outright and
asked him his bank account to support his charge. But due to the length of his membership as cardholder
we had to make a decision on hand.42

As Edgardo Jaurigue clarified, the reason why Pantaleon had to wait for AMEX’s approval was because he
had to go over Pantaleon’s credit card history for the past twelve months.43 It would certainly be unjust for
us to penalize AMEX for merely exercising its right to review Pantaleon’s credit history meticulously.

Finally, we said in Garciano v. Court of Appeals that "the right to recover [moral damages] under Article 21
is based on equity, and he who comes to court to demand equity, must come with clean hands. Article 21
should be construed as granting the right to recover damages to injured persons who are not themselves at
fault."44 As will be discussed below, Pantaleon is not a blameless party in all this.

Pantaleon’s action was the proximate cause for his injury

Pantaleon mainly anchors his claim for moral and exemplary damages on the embarrassment and
humiliation that he felt when the European tour group had to wait for him and his wife for approximately 35
minutes, and eventually had to cancel the Amsterdam city tour. After thoroughly reviewing the records of
this case, we have come to the conclusion that Pantaleon is the proximate cause for this embarrassment
and humiliation.

As borne by the records, Pantaleon knew even before entering Coster that the tour group would have to
leave the store by 9:30 a.m. to have enough time to take the city tour of Amsterdam before they left the
country. After 9:30 a.m., Pantaleon’s son, who had boarded the bus ahead of his family, returned to the
store to inform his family that they were the only ones not on the bus and that the entire tour group was
waiting for them. Significantly, Pantaleon tried to cancel the sale at 9:40 a.m. because he did not want to
cause any inconvenience to the tour group. However, when Coster’s sale manager asked him to wait a few
more minutes for the credit card approval, he agreed, despite the knowledge that he had already caused a
10-minute delay and that the city tour could not start without him.

In Nikko Hotel Manila Garden v. Reyes,45 we ruled that a person who knowingly and voluntarily exposes
himself to danger cannot claim damages for the resulting injury:

The doctrine of volenti non fit injuria ("to which a person assents is not esteemed in law as injury") refers to
self-inflicted injury or to the consent to injury which precludes the recovery of damages by one who has
knowingly and voluntarily exposed himself to danger, even if he is not negligent in doing so.

This doctrine, in our view, is wholly applicable to this case. Pantaleon himself testified that the most basic
rule when travelling in a tour group is that you must never be a cause of any delay because the schedule is
very strict.46 When Pantaleon made up his mind to push through with his purchase, he must have known
that the group would become annoyed and irritated with him. This was the natural, foreseeable
consequence of his decision to make them all wait.

We do not discount the fact that Pantaleon and his family did feel humiliated and embarrassed when they
had to wait for AMEX to approve the Coster purchase in Amsterdam. We have to acknowledge, however,
that Pantaleon was not a helpless victim in this scenario – at any time, he could have cancelled the sale so
that the group could go on with the city tour. But he did not.

More importantly, AMEX did not violate any legal duty to Pantaleon under the circumstances under the
principle of damnum absque injuria, or damages without legal wrong, loss without injury. 47 As we held in
BPI Express Card v. CA:48

We do not dispute the findings of the lower court that private respondent suffered damages as a result of
the cancellation of his credit card. However, there is a material distinction between damages and injury.
Injury is the illegal invasion of a legal right; damage is the loss, hurt, or harm which results from the injury;
and damages are the recompense or compensation awarded for the damage suffered. Thus, there can be
damage without injury in those instances in which the loss or harm was not the result of a violation of a
legal duty. In such cases, the consequences must be borne by the injured person alone, the law affords no
remedy for damages resulting from an act which does not amount to a legal injury or wrong. These
situations are often called damnum absque injuria.

In other words, in order that a plaintiff may maintain an action for the injuries of which he complains, he
must establish that such injuries resulted from a breach of duty which the defendant owed to the plaintiff - a
concurrence of injury to the plaintiff and legal responsibility by the person causing it. The underlying basis
for the award of tort damages is the premise that an individual was injured in contemplation of law. Thus,
there must first be a breach of some duty and the imposition of liability for that breach before damages may
be awarded; and the breach of such duty should be the proximate cause of the injury.

Pantaleon is not entitled to damages

Because AMEX neither breached its contract with Pantaleon, nor acted with culpable delay or the willful
intent to cause harm, we find the award of moral damages to Pantaleon unwarranted.

Similarly, we find no basis to award exemplary damages. In contracts, exemplary damages can only be
awarded if a defendant acted "in a wanton, fraudulent, reckless, oppressive or malevolent manner." 49 The
plaintiff must also show that he is entitled to moral, temperate, or compensatory damages before the court
may consider the question of whether or not exemplary damages should be awarded.50

As previously discussed, it took AMEX some time to approve Pantaleon’s purchase requests because it
had legitimate concerns on the amount being charged; no malicious intent was ever established here. In
the absence of any other damages, the award of exemplary damages clearly lacks legal basis.1avvphi1

Neither do we find any basis for the award of attorney’s fees and costs of litigation. No premium should be
placed on the right to litigate and not every winning party is entitled to an automatic grant of attorney's
fees.51 To be entitled to attorney’s fees and litigation costs, a party must show that he falls under one of the
instances enumerated in Article 2208 of the Civil Code.52 This, Pantaleon failed to do. Since we eliminated
the award of moral and exemplary damages, so must we delete the award for attorney's fees and litigation
expenses.

Lastly, although we affirm the result of the CA decision, we do so for the reasons stated in this Resolution
and not for those found in the CA decision.

WHEREFORE, premises considered, we SET ASIDE our May 8, 2009 Decision and GRANT the present
motion for reconsideration. The Court of Appeals Decision dated August 18, 2006 is
hereby AFFIRMED. No costs. SO ORDERED.

G.R. No. 199650 June 26, 2013

J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner,
vs.
UTILITY ASSURANCE CORPORATION, Respondent.

DECISION

VILLARAMA, JR., J.:

Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, assailing the Decision1 dated January 27,2011 and Resolution2 dated December 8, 2011 of the
Court of Appeals (CA) in CA-G.R. SP No. 112808.

The Facts

On December 24, 2007, petitioner J Plus Asia Development Corporation represented by its Chairman, Joo
Han Lee, and Martin E. Mabunay, doing business under the name and style of Seven Shades of Blue
Trading and Services, entered into a Construction Agreement3 whereby the latter undertook to build the
former's 72-room condominium/hotel (Condotel Building 25) located at the Fairways & Bluewaters Golf &
Resort in Boracay Island, Malay, Aklan. The project, costing ₱42,000,000.00, was to be completed within
one year or 365 days reckoned from the first calendar day after signing of the Notice of Award and Notice
to Proceed and receipt of down payment (20% of contract price). The ₱8,400,000.00 down payment was
fully paid on January 14, 2008.4 Payment of the balance of the contract price will be based on actual work
finished within 15 days from receipt of the monthly progress billings. Per the agreed work schedule, the
completion date of the project was December 2008.5 Mabuhay also submitted the required Performance
Bond6 issued by respondent Utility Assurance Corporation (UTASSCO) in the amount equivalent to 20%
down payment or ₱8.4 million.

Mabunay commenced work at the project site on January 7, 2008. Petitioner paid up to the 7th monthly
progress billing sent by Mabunay. As of September 16, 2008, petitioner had paid the total amount of
₱15,979,472.03 inclusive of the 20% down payment. However, as of said date, Mabunay had
accomplished only 27.5% of the project.7

In the Joint Construction Evaluation Result and Status Report8 signed by Mabunay assisted by Arch. Elwin
Olavario, and Joo Han Lee assisted by Roy V. Movido, the following findings were accepted as true,
accurate and correct:

III STATUS OF PROJECT AS OF 14 NOVEMBER 2008

1) After conducting a joint inspection and evaluation of the project to determine the actual percentage of
accomplishment, the contracting parties, assisted by their respective technical groups, SSB assisted by
Arch. Elwin Olavario and JPLUS assisted by Engrs. Joey Rojas and Shiela Botardo, concluded and agreed
that as of 14 November 2008, the project is only Thirty One point Thirty Nine Percent (31.39%) complete.

2) Furthermore, the value of construction materials allocated for the completion of the project and currently
on site has been determined and agreed to be ONE MILLION FORTY NINE THOUSAND THREE
HUNDRED SIXTY FOUR PESOS AND FORTY FIVE CENTAVOS (₱1,049,364.45)
3) The additional accomplishment of SSB, reflected in its reconciled and consolidated 8th and 9th billings,
is Three point Eighty Five Percent (3.85%) with a gross value of ₱1,563,553.34 amount creditable to SSB
after deducting the withholding tax is ₱1,538,424.84

4) The unrecouped amount of the down payment is ₱2,379,441.53 after deducting the cost of materials on
site and the net billable amount reflected in the reconciled and consolidated 8th and 9th billings. The
uncompleted portion of the project is 68.61% with an estimated value per construction agreement signed is
₱27,880,419.52.9 (Emphasis supplied.)

On November 19, 2008, petitioner terminated the contract and sent demand letters to Mabunay and
respondent surety. As its demands went unheeded, petitioner filed a Request for Arbitration10 before the
Construction Industry Arbitration Commission (CIAC). Petitioner prayed that Mabunay and respondent be
ordered to pay the sums of ₱8,980,575.89 as liquidated damages and ₱2,379,441.53 corresponding to the
unrecouped down payment or overpayment petitioner made to Mabunay.11

In his Answer,12 Mabunay claimed that the delay was caused by retrofitting and other revision works
ordered by Joo Han Lee. He asserted that he actually had until April 30, 2009 to finish the project since the
365 days period of completion started only on May 2, 2008 after clearing the retrofitted old structure.
Hence, the termination of the contract by petitioner was premature and the filing of the complaint against
him was baseless, malicious and in bad faith.

Respondent, on the other hand, filed a motion to dismiss on the ground that petitioner has no cause of
action and the complaint states no cause of action against it. The CIAC denied the motion to dismiss.
Respondent’s motion for reconsideration was likewise denied.13

In its Answer Ex Abundante Ad Cautelam With Compulsory Counterclaims and Cross-claims,14 respondent
argued that the performance bond merely guaranteed the 20% down payment and not the entire obligation
of Mabunay under the Construction Agreement. Since the value of the project’s accomplishment already
exceeded the said amount, respondent’s obligation under the performance bond had been fully
extinguished. As to the claim for alleged overpayment to Mabunay, respondent contended that it should not
be credited against the 20% down payment which was already exhausted and such application by
petitioner is tantamount to reviving an obligation that had been legally extinguished by payment.
Respondent also set up a cross-claim against Mabunay who executed in its favor an Indemnity Agreement
whereby Mabunay undertook to indemnify respondent for whatever amounts it may be adjudged liable to
pay petitioner under the surety bond.

Both petitioner and respondent submitted their respective documentary and testimonial evidence. Mabunay
failed to appear in the scheduled hearings and to present his evidence despite due notice to his counsel of
record. The CIAC thus declared that Mabunay is deemed to have waived his right to present evidence.15

On February 2, 2010, the CIAC rendered its Decision16 and made the following award:

Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders
and directs:

1. Respondents Mabunay and Utassco to jointly and severally pay claimant the following:
a) ₱4,469,969.90, as liquidated damages, plus legal interest thereon at the rate of 6% per annum
computed from the date of this decision up to the time this decision becomes final, and 12% per annum
computed from the date this decision becomes final until fully paid, and

b) ₱2,379,441.53 as unrecouped down payment plus interest thereon at the rate of 6% per annum
computed from the date of this decision up to the time this decision becomes final, and 12% per annum
computed from the date this decision becomes final until fully paid.

It being understood that respondent Utassco’s liability shall in no case exceed ₱8.4 million.

2. Respondent Mabunay to pay to claimant the amount of ₱98,435.89, which is respondent Mabunay’s
share in the arbitration cost claimant had advanced, with legal interest thereon from January 8, 2010 until
fully paid.

3. Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have
paid to claimant under this decision, plus interest thereon at the rate of 12% per annum computed from the
date he is notified of such payment made by respondent Utassco to claimant until fully paid, and to pay
Utassco ₱100,000.00 as attorney’s fees. SO ORDERED.17

Dissatisfied, respondent filed in the CA a petition for review under Rule 43 of the 1997 Rules of Civil
Procedure, as amended.

In the assailed decision, the CA agreed with the CIAC that the specific condition in the Performance Bond
did not clearly state the limitation of the surety’s liability. Pursuant to Article 137718 of the Civil Code, the CA
said that the provision should be construed in favor of petitioner considering that the obscurely phrased
provision was drawn up by respondent and Mabunay. Further, the appellate court stated that respondent
could not possibly guarantee the down payment because it is not Mabunay who owed the down payment to
petitioner but the other way around. Consequently, the completion by Mabunay of 31.39% of the
construction would not lead to the extinguishment of respondent’s liability. The ₱8.4 million was a limit on
the amount of respondent’s liability and not a limitation as to the obligation or undertaking it guaranteed.

However, the CA reversed the CIAC’s ruling that Mabunay had incurred delay which entitled petitioner to
the stipulated liquidated damages and unrecouped down payment. Citing Aerospace Chemical Industries,
Inc. v. Court of Appeals,19 the appellate court said that not all requisites in order to consider the obligor or
debtor in default were present in this case. It held that it is only from December 24, 2008 (completion date)
that we should reckon default because the Construction Agreement provided only for delay in the
completion of the project and not delay on a monthly basis using the work schedule approved by petitioner
as the reference point. Hence, petitioner’s termination of the contract was premature since the delay in this
case was merely speculative; the obligation was not yet demandable.

The dispositive portion of the CA Decision reads:

WHEREFORE, premises considered, the instant petition for review is GRANTED. The assailed Decision
dated 13 January 2010 rendered by the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby
REVERSED and SET ASIDE. Accordingly, the Writ of Execution dated 24 November 2010 issued by the
same tribunal is hereby ANNULLED and SET ASIDE. SO ORDERED.
Petitioner moved for reconsideration of the CA decision while respondent filed a motion for partial
reconsideration. Both motions were denied.

The Issues

Before this Court petitioner seeks to reverse the CA insofar as it denied petitioner’s claims under the
Performance Bond and to reinstate in its entirety the February 2, 2010 CIAC Decision. Specifically,
petitioner alleged that –

A. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT HOLDING THAT THE ALTERNATIVE
DISPUTE RESOLUTION ACT AND THE SPECIAL RULES ON ALTERNATIVE DISPUTE RESOLUTION
HAVE STRIPPED THE COURT OF APPEALS OF JURISDICTION TO REVIEW ARBITRAL AWARDS.

B. THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING THE ARBITRAL AWARD ON AN

ISSUE THAT WAS NOT RAISED IN THE ANSWER. NOT IDENTIFIED IN THE TERMS OF REFERENCE,
NOT ASSIGNED AS ANERROR, AND NOT ARGUED IN ANY OF THE PLEADINGS FILED BEFORE THE
COURT.

C. THE COURT OF APPEALS SERIOUSLY ERRED IN RELYING ON THE CASE OF AEROSPACE

CHEMICAL INDUSTRIES, INC. v. COURT OF APPEALS, 315 SCRA 94, WHICH HAS NOTHING TO DO
WITH CONSTRUCTION AGREEMENTS.21

Our Ruling

On the procedural issues raised, we find no merit in petitioner’s contention that with the institutionalization
of alternative dispute resolution under Republic Act (R.A.) No. 9285,22 otherwise known as the Alternative
Dispute Resolution Act of 2004, the CA was divested of jurisdiction to review the decisions or awards of the
CIAC. Petitioner erroneously relied on the provision in said law allowing any party to a domestic arbitration
to file in the Regional Trial Court (RTC) a petition either to confirm, correct or vacate a domestic arbitral
award.

We hold that R.A. No. 9285 did not confer on regional trial courts jurisdiction to review awards or decisions
of the CIAC in construction disputes. On the contrary, Section 40 thereof expressly declares that
confirmation by the RTC is not required, thus:

SEC. 40. Confirmation of Award. – The confirmation of a domestic arbitral award shall be governed by
Section 23 of R.A. 876.

A domestic arbitral award when confirmed shall be enforced in the same manner as final and executory
decisions of the Regional Trial Court.

The confirmation of a domestic award shall be made by the regional trial court in accordance with the Rules
of Procedure to be promulgated by the Supreme Court.

A CIAC arbitral award need not be confirmed by the regional trial court to be executory as provided under
E.O. No. 1008. (Emphasis supplied.)
Executive Order (EO) No. 1008 vests upon the CIAC original and exclusive jurisdiction over disputes
arising from, or connected with, contracts entered into by parties involved in construction in the Philippines,
whether the dispute arises before or after the completion of the contract, or after the abandonment or
breach thereof. By express provision of Section 19 thereof, the arbitral award of the CIAC is final and
unappealable, except on questions of law, which are appealable to the Supreme Court. With the
amendments introduced by R.A. No. 7902 and promulgation of the 1997 Rules of Civil Procedure, as
amended, the CIAC was included in the enumeration of quasijudicial agencies whose decisions or awards
may be appealed to the CA in a petition for review under Rule 43. Such review of the CIAC award may
involve either questions of fact, of law, or of fact and law.23

Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR Rules) promulgated by this Court
and which took effect on October 30, 2009. Since R.A. No. 9285 explicitly excluded CIAC awards from
domestic arbitration awards that need to be confirmed to be executory, said awards are therefore not
covered by Rule 11 of the Special ADR Rules,24 as they continue to be governed by EO No. 1008, as
amended and the rules of procedure of the CIAC. The CIAC Revised Rules of Procedure Governing
Construction Arbitration25 provide for the manner and mode of appeal from CIAC decisions or awards in
Section 18 thereof, which reads:

SECTION 18.2 Petition for review. – A petition for review from a final award may be taken by any of the
parties within fifteen (15) days from receipt thereof in accordance with the provisions of Rule 43 of the
Rules of Court.

As to the alleged error committed by the CA in deciding the case upon an issue not raised or litigated
before the CIAC, this assertion has no basis. Whether or not Mabunay had incurred delay in the
performance of his obligations under the Construction Agreement was the very first issue stipulated in the
Terms of Reference26 (TOR), which is distinct from the issue of the extent of respondent’s liability under the
Performance Bond.

Indeed, resolution of the issue of delay was crucial upon which depends petitioner’s right to the liquidated
damages pursuant to the Construction Agreement. Contrary to the CIAC’s findings, the CA opined that
delay should be reckoned only after the lapse of the one-year contract period, and consequently Mabunay’s
liability for liquidated damages arises only upon the happening of such condition.

We reverse the CA.

Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause
imputable to the former. It is the non-fulfillment of an obligation with respect to time.27

Article 1169 of the Civil Code provides:

ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.

xxxx
It is a general rule that one who contracts to complete certain work within a certain time is liable for the
damage for not completing it within such time, unless the delay is excused or waived. 28

The Construction Agreement provides in Article 10 thereof the following conditions as to completion time for
the project

1. The CONTRACTOR shall complete the works called for under this Agreement within ONE (1) YEAR or
365 Days reckoned from the 1st calendar day after signing of the Notice of Award and Notice to Proceed
and receipt of down payment.

2. In this regard the CONTRACTOR shall submit a detailed work schedule for approval by OWNER within
Seven (7) days after signing of this Agreement and full payment of 20% of the agreed contract price. Said
detailed work schedule shall follow the general schedule of activities and shall serve as basis for the
evaluation of the progress of work by CONTRACTOR.29

In this jurisdiction, the following requisites must be present in order that the debtor may be in default: (1)
that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3)
that the creditor requires the performance judicially or extrajudicially.30

In holding that Mabunay has not at all incurred delay, the CA pointed out that the obligation to perform or
complete the project was not yet demandable as of November 19, 2008 when petitioner terminated the
contract, because the agreed completion date was still more than one month away (December 24, 2008).
Since the parties contemplated delay in the completion of the entire project, the CA concluded that the
failure of the contractor to catch up with schedule of work activities did not constitute delay giving rise to the
contractor’s liability for damages.

We cannot sustain the appellate court’s interpretation as it is inconsistent with the terms of the Construction
Agreement. Article 1374 of the Civil Code requires that the various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense which may result from all of them taken
jointly. Here, the work schedule approved by petitioner was intended, not only to serve as its basis for the
payment of monthly progress billings, but also for evaluation of the progress of work by the contractor.
Article 13.01 (g) (iii) of the Construction Agreement provides that the contractor shall be deemed in default
if, among others, it had delayed without justifiable cause the completion of the project "by more than thirty
(30) calendar days based on official work schedule duly approved by the OWNER."31

Records showed that as early as April 2008, or within four months after Mabunay commenced work
activities, the project was already behind schedule for reasons not attributable to petitioner. In the
succeeding months, Mabunay was still unable to catch up with his accomplishment even as petitioner
constantly advised him of the delays, as can be gleaned from the following notices of delay sent by
petitioner’s engineer and construction manager, Engr. Sheila N. Botardo:

April 30, 2008

Seven Shades of Blue

Boracay Island
Malay, Aklan
1âwphi1

Attention : Mr. Martin Mabunay

General Manager
Thru : Engr. Reynaldo Gapasin
Project : Villa Beatriz
Subject : Notice of Delay

Dear Mr. Mabunay:

This is to formalize our discussion with your Engineers during our meeting last April 23, 2008 regarding the
delay in the implementation of major activities based on your submitted construction schedule. Substantial
delay was noted in concreting works that affects your roof framing that should have been 40% completed
as of this date. This delay will create major impact on your over-all schedule as the finishing works will all
be dependent on the enclosure of the building.

In this regard, we recommend that you prepare a catch-up schedule and expedite the delivery of critical
materials on site. We would highly appreciate if you could attend our next regular meeting so we could
immediately address this matter. Thank you.

Very truly yours,

Engr. Sheila N. Botardo

Construction Manager – LMI/FEPI32

XXXX

October 15, 2008

Dear Mr. Mabunay,

We have noticed continuous absence of all the Engineers that you have assigned on-site to administer and
supervise your contracted work. For the past two (2) weeks, your company does not have a Technical
Representative manning the jobsite considering the critical activities that are in progress and the delays in
schedule that you have already incurred. In this regard, we would highly recommend the immediate
replacement of your Project Engineer within the week.

We would highly appreciate your usual attention on this matter.

x x x x33

November 5, 2008

Dear Mr. Mabunay,

This is in reference to your discussion during the meeting with Mr. Joohan Lee last October 30, 2008
regarding the construction of the Field Office and Stock Room for Materials intended for Villa Beatriz use
only. We understand that you have committed to complete it November 5, 2008 but as of this date there is
no improvement or any ongoing construction activity on the said field office and stockroom.

We are expecting deliveries of Owner Supplied Materials very soon, therefore, this stockroom is badly
needed. We will highly appreciate if this matter will be given your immediate attention.

Thank you.

x x x x34

November 6, 2008

Dear Mr. Mabunay,

We would like to call your attention regarding the decrease in your manpower assigned on site. We have
observed that for the past three (3) weeks instead of increasing your manpower to catch up with the delay it
was reduced to only 8 workers today from an average of 35 workers in the previous months.

Please note that based on your submitted revised schedule you are already delayed by approximately 57%
and this will worsen should you not address this matter properly.

We are looking forward for [sic] your cooperation and continuous commitment in delivering this project as
per contract agreement.

x x x x35

Subsequently, a joint inspection and evaluation was conducted with the assistance of the architects and
engineers of petitioner and Mabunay and it was found that as of November 14, 2008, the project was only
31.39% complete and that the uncompleted portion was 68.61% with an estimated value per Construction
Agreement as ₱27,880,419.52. Instead of doubling his efforts as the scheduled completion date
approached, Mabunay did nothing to remedy the delays and even reduced the deployment of workers at
the project site. Neither did Mabunay, at anytime, ask for an extension to complete the project. Thus, on
November 19, 2008, petitioner advised Mabunay of its decision to terminate the contract on account of the
tremendous delay the latter incurred. This was followed by the claim against the Performance Bond upon
the respondent on December 18, 2008.

Petitioner’s claim against the Performance Bond included the liquidated damages provided in the
Construction Agreement, as follows:

ARTICLE 12 – LIQUIDATED DAMAGES:

12.01 Time is of the essence in this Agreement. Should the CONTRACTOR fail to complete the PROJECT
within the period stipulated herein or within the period of extension granted by the OWNER, plus One (1)
Week grace period, without any justifiable reason, the CONTRACTOR hereby agrees –
a. The CONTRACTOR shall pay the OWNER liquidated damages equivalent to One Tenth of One Percent
(1/10 of 1%) of the Contract Amount for each day of delay after any and all extensions and the One (1)
week Grace Period until completed by the CONTRACTOR.

b. The CONTRACTOR, even after paying for the liquidated damages due to unexecuted works and/or
delays shall not relieve it of the obligation to complete and finish the construction.

Any sum which maybe payable to the OWNER for such loss may be deducted from the amounts retained
under Article 9 or retained by the OWNER when the works called for under this Agreement have been
finished and completed.

Liquidated Damage[s] payable to the OWNER shall be automatically deducted from the contractors
collectibles without prior consent and concurrence by the CONTRACTOR.

12.02 To give full force and effect to the foregoing, the CONTRACTOR hereby, without necessity of any
further act and deed, authorizes the OWNER to deduct any amount that may be due under Item (a) above,
from any and all money or amounts due or which will become due to the CONTRACTOR by virtue of this
Agreement and/or to collect such amounts from the Performance Bond filed by the CONTRACTOR in this
Agreement.36 (Emphasis supplied.)

Liability for liquidated damages is governed by Articles 2226 to 2228 of the Civil Code, which provide:

ART. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of
breach thereof.

ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced
if they are iniquitous or unconscionable.

ART. 2228. When the breach of the contract committed by the defendant is not the one contemplated by
the parties in agreeing upon the liquidated damages, the law shall determine the measure of damages, and
not the stipulation.

A stipulation for liquidated damages is attached to an obligation in order to ensure performance and has a
double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the
obligation by the threat of greater responsibility in the event of breach.37 The amount agreed upon answers
for damages suffered by the owner due to delays in the completion of the project.38 As a precondition to
such award, however, there must be proof of the fact of delay in the performance of the obligation.39

Concededly, Article 12.01 of the Construction Agreement mentioned only the failure of the contractor to
complete the project within the stipulated period or the extension granted by the owner. However, this will
not defeat petitioner’s claim for damages nor respondent’s liability under the Performance Bond. Mabunay
was clearly in default considering the dismal percentage of his accomplishment (32.38%) of the work he
contracted on account of delays in executing the scheduled work activities and repeated failure to provide
sufficient manpower to expedite construction works. The events of default and remedies of the Owner are
set forth in Article 13, which reads:
ARTICLE 13 – DEFAULT OF CONTRACTOR:

13.01 Any of the following shall constitute an Event of Default on the part of the CONTRACTOR.

xxxx

g. In case the CONTRACTOR has done any of the following:

(i.) has abandoned the Project

(ii.) without reasonable cause, has failed to commence the construction or has suspended the progress of
the Project for twenty-eight days

(iii.) without justifiable cause, has delayed the completion of the Project by more than thirty (30) calendar
days based on official work schedule duly approved by the OWNER

(iv.) despite previous written warning by the OWNER, is not executing the construction works in
accordance with the Agreement or is persistently or flagrantly neglecting to carry out its obligations under
the Agreement.

(v.) has, to the detriment of good workmanship or in defiance of the Owner’s instructions to the contrary,
sublet any part of the Agreement.

13.02 If the CONTRACTOR has committed any of the above reasons cited in Item 13.01, the OWNER may
after giving fourteen (14) calendar days notice in writing to the CONTRACTOR, enter upon the site and
expel the CONTRACTOR therefrom without voiding this Agreement, or releasing the CONTRACTOR from
any of its obligations, and liabilities under this Agreement. Also without diminishing or affecting the rights
and powers conferred on the OWNER by this Agreement and the OWNER may himself complete the work
or may employ any other contractor to complete the work. If the OWNER shall enter and expel the
CONTRACTOR under this clause, the OWNER shall be entitled to confiscate the performance bond of the
CONTRACTOR to compensate for all kinds of damages the OWNER may suffer. All expenses incurred to
finish the Project shall be charged to the CONTRACTOR and/or his bond. Further, the OWNER shall not be
liable to pay the CONTRACTOR until the cost of execution, damages for the delay in the completion, if any,
and all; other expenses incurred by the OWNER have been ascertained which amount shall be deducted
from any money due to the CONTRACTOR on account of this Agreement. The CONTRACTOR will not be
compensated for any loss of profit, loss of goodwill, loss of use of any equipment or property, loss of
business opportunity, additional financing cost or overhead or opportunity losses related to the
unaccomplished portions of the work.40 (Emphasis supplied.)

As already demonstrated, the contractor’s default in this case pertains to his failure to substantially perform
the work on account of tremendous delays in executing the scheduled work activities. Where a party to a
building construction contract fails to comply with the duty imposed by the terms of the contract, a breach
results for which an action may be maintained to recover the damages sustained thereby, and of course, a
breach occurs where the contractor inexcusably fails to perform substantially in accordance with the terms
of the contract.41
The plain and unambiguous terms of the Construction Agreement authorize petitioner to confiscate the
Performance Bond to answer for all kinds of damages it may suffer as a result of the contractor’s failure to
complete the building. Having elected to terminate the contract and expel the contractor from the project
site under Article 13 of the said Agreement, petitioner is clearly entitled to the proceeds of the bond as
indemnification for damages it sustained due to the breach committed by Mabunay. Such stipulation
allowing the confiscation of the contractor’s performance bond partakes of the nature of a penalty clause.

A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability on
the part of the obligor in case of breach of an obligation. It functions to strengthen the coercive force of
obligation and to provide, in effect, for what could be the liquidated damages resulting from such a breach.
The obligor would then be bound to pay the stipulated indemnity without the necessity of proof on the
existence and on the measure of damages caused by the breach. It is well-settled that so long as such
stipulation does not contravene law, morals, or public order, it is strictly binding upon the obligor. 42

Respondent, however, insists that it is not liable for the breach committed by Mabunay because by the
terms of the surety bond it issued, its liability is limited to the performance by said contractor to the extent
equivalent to 20% of the down payment. It stresses that with the 32.38% completion of the project by
Mabunay, its liability was extinguished because the value of such accomplishment already exceeded the
sum equivalent to 20% down payment (₱8.4 million).

The appellate court correctly rejected this theory of respondent when it ruled that the Performance Bond
guaranteed the full and faithful compliance of Mabunay’s obligations under the Construction Agreement,
and that nowhere in law or jurisprudence does it state that the obligation or undertaking by a surety may be
apportioned.

The pertinent portions of the Performance Bond provide:

The conditions of this obligation are as follows:

Whereas the JPLUS ASIA, requires the principal SEVEN SHADES OF BLUE CONSTRUCTION AND
DEVELOPMENT, INC. to post a bond of the abovestated sum to guarantee 20% down payment for the
construction of Building 25 (Villa Beatriz) 72-Room Condotel, The Lodgings inside Fairways and Bluewater,
Boracay Island, Malay, Aklan.

Whereas, said contract required said Principal to give a good and sufficient bond in the above-stated sum
to secure the full and faithful performance on his part of said contract.

It is a special provision of this undertaking that the liability of the surety under this bond shall in no case
exceed the sum of ₱8,400,000.00 Philippine Currency.

Now, Therefore, if the Principal shall well and truly perform and fulfill all the undertakings, covenants, terms,
conditions and agreements stipulated in said contract, then this obligation shall be null and void; otherwise
to remain in full force and effect.43 (Emphasis supplied.)

While the above condition or specific guarantee is unclear, the rest of the recitals in the bond unequivocally
declare that it secures the full and faithful performance of Mabunay’s obligations under the Construction
Agreement with petitioner. By its nature, a performance bond guarantees that the contractor will perform
the contract, and usually provides that if the contractor defaults and fails to complete the contract, the
surety can itself complete the contract or pay damages up to the limit of the bond.44 Moreover, the rule is
that if the language of the bond is ambiguous or uncertain, it will be construed most strongly against a
compensated surety and in favor of the obligees or beneficiaries under the bond, in this case petitioner as
the Project Owner, for whose benefit it was ostensibly executed.45

The imposition of interest on the claims of petitioner is likewise in order. As we held in Commonwealth
Insurance Corporation v. Court of Appeals46

Petitioner argues that it should not be made to pay interest because its issuance of the surety bonds was
made on the condition that its liability shall in no case exceed the amount of the said bonds.

We are not persuaded. Petitioner’s argument is misplaced.

Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co. and
reiterated in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., and more recently,
in Republic vs. Court of Appeals and R & B Surety and Insurance Company, Inc., we have sustained the
principle that if a surety upon demand fails to pay, he can be held liable for interest, even if in thus paying,
its liability becomes more than the principal obligation. The increased liability is not because of the contract
but because of the default and the necessity of judicial collection.

Petitioner’s liability under the suretyship contract is different from its liability under the law.1âwphi1 There is
no question that as a surety, petitioner should not be made to pay more than its assumed obligation under
the surety bonds. However, it is clear from the above-cited jurisprudence that petitioner’s liability for the
payment of interest is not by reason of the suretyship agreement itself but because of the delay in the
payment of its obligation under the said agreement.47 (Emphasis supplied; citations omitted.)

WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated January 27, 2011 and
Resolution dated December 8, 2011 of the Court of Appeals in CA-G.R. SP No. 112808 are hereby
REVERSED and SET ASIDE.

The Award made in the Decision dated February 2, 2010 of the Construction Industry Arbitration
Commission Is hereby REINSTATED with the following MODIFICATIONS:

"Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders
and directs:

1) Respondent Utassco to pay to petitioner J Plus Asia Development Corporation the full amount of the
Performance Bond, ₱8,400,000.00, pursuant to Art. 13 of the Construction Agreement dated December 24,
2007, with interest at the rate of 6% per annum computed from the date of the filing of the complaint until
the finality of this decision, and 12% per annum computed from the date this decision becomes final until
fully paid; and

2) Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have
paid to claimant under this decision, plus interest thereon at the rate of 12% per annum computed from the
date he is notified of such payment made by respondent Utassco to claimant until fully paid, and to pay
Utassco ₱100,000.00 as attorney's fees.

SO ORDERED.

With the above modifications, the Writ of Execution dated November 24, 2010 issued by the CIAC Arbitral
Tribunal in CIAC Case No. 03-2009 is hereby REINSTATED and UPHELD.

No pronouncement as to costs. SO ORDERED.

G.R. No. 174433 February 24, 2014

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
SPOUSES ENRIQUE MANALO & ROSALINDA JACINTO, ARNOLD J. MANALO, ARNEL J. MANALO,
and ARMA J. MANALO, Respondents.

DECISION

BERSAMIN, J.:

Although banks are free to determine the rate of interest they could impose on their borrowers, they can do
so only reasonably, not arbitrarily. They may not take advantage of the ordinary borrowers' lack of
familiarity with banking procedures and jargon. Hence, any stipulation on interest unilaterally imposed and
increased by them shall be struck down as violative of the principle of mutuality of contracts.

Antecedents

Respondent Spouses Enrique Manalo and Rosalinda Jacinto (Spouses Manalo) applied for an All-Purpose
Credit Facility in the amount of ₱1,000,000.00 with Philippine National Bank (PNB) to finance the
construction of their house. After PNB granted their application, they executed a Real Estate Mortgage on
November 3, 1993 in favor of PNB over their property covered by Transfer Certificate of Title No. S- 23191
as security for the loan.1 The credit facility was renewed and increased several times over the years. On
September 20, 1996, the credit facility was again renewed for ₱7,000,000.00. As a consequence, the
parties executed a Supplement to and Amendment of Existing Real Estate Mortgage whereby the property
covered by TCT No. 171859 was added as security for the loan.

The additional security was registered in the names of respondents Arnold, Arnel, Anthony, and Arma, all
surnamed Manalo, who were their children.2

It was agreed upon that the Spouses Manalo would make monthly payments on the interest. However,
PNB claimed that their last recorded payment was made on December, 1997. Thus, PNB sent a demand
letter to them on their overdue account and required them to settle the account. PNB sent another demand
letter because they failed to heed the first demand.3
After the Spouses Manalo still failed to settle their unpaid account despite the two demand letters, PNB
foreclose the mortgage. During the foreclosure sale, PNB was the highest bidder for ₱15,127,000.00 of the
mortgaged properties of the Spouses Manalo. The sheriff issued to PNB the Certificate of Sale dated
November 13, 2000.4

After more than a year after the Certificate of Sale had been issued to PNB, the Spouses Manalo instituted
this action for the nullification of the foreclosure proceedings and damages. They alleged that they had
obtained a loan for ₱1,000,000.00 from a certain Benito Tan upon arrangements made by Antoninus
Yuvienco, then the General Manager of PNB’s Bangkal Branch where they had transacted; that they had
been made to understand and had been assured that the ₱1,000,000.00 would be used to update their
account, and that their loan would be restructured and converted into a long-term loan;5 that they had been
surprised to learn, therefore, that had been declared in default of their obligations, and that the mortgage on
their property had been foreclosed and their property had been sold; and that PNB did not comply with
Section 3 of Act No. 3135, as amended.6

PNB and Antoninus Yuvienco countered that the ₱1,000,000.00 loan obtained by the Spouses Manalo
from Benito Tan had been credited to their account; that they did not make any assurances on the
restructuring and conversion of the Spouses Manalo’s loan into a long-term one;7 that PNB’s right to
foreclose the mortgage had been clear especially because the Spouses Manalo had not assailed the
validity of the loans and of the mortgage; and that the Spouses Manalo did not allege having fully paid their
indebtedness.8

Ruling of the RTC

After trial, the RTC rendered its decision in favor of PNB, holding thusly:

In resolving this present case, one of the most significant matters the court has noted is that while during
the pre-trial held on 8 September 2003, plaintiff-spouses Manalo with the assistance counsel had agreed to
stipulate that defendants had the right to foreclose upon the subject properties and that the plaintiffs[‘] main
thrust was to prove that the foreclosure proceedings were invalid, in the course of the presentation of their
evidence, they modified their position and claimed [that] the loan document executed were contracts of
adhesion which were null and void because they were prepared entirely under the defendant bank’s
supervision. They also questioned the interest rates and penalty charges imposed arguing that these were
iniquitous, unconscionable and therefore likewise void.

Not having raised the foregoing matters as issues during the pre-trial, plaintiff-spouses are presumably
estopped from allowing these matters to serve as part of their evidence, more so because at the pre-trial
they expressly recognized the defendant bank’s right to foreclose upon the subject property (See Order, pp.
193-195).

However, considering that the defendant bank did not interpose any objection to these matters being made
part of plaintiff’s evidence so much so that their memorandum contained discussions rebutting plaintiff
spouses arguments on these issues, the court must necessarily include these matters in the resolution of
the present case.9
The RTC held, however, that the Spouses Manalo’s "contract of adhesion" argument was unfounded
because they had still accepted the terms and conditions of their credit agreement with PNB and had
exerted efforts to pay their obligation;10 that the Spouses Manalo were now estopped from questioning the
interest rates unilaterally imposed by PNB because they had paid at those rates for three years without
protest;11 and that their allegation about PNB violating the notice and publication requirements during the
foreclosure proceedings was untenable because personal notice to the mortgagee was not required under
Act No. 3135.12

The Spouses Manalo appealed to the CA by assigning a singular error, as follows:

THE COURT A QUO SERIOUSLY ERRED IN DISMISSING PLAINTIFF-APPELLANTS’ COMPLAINT FOR

BEING (sic) LACK OF MERIT NOTWITHSTANDING THE FACT THAT IT WAS CLEARLY SHOWN THAT
THE FORECLOSURE PROCEEDINGS WAS INVALID AND ILLEGAL.13

The Spouses Manalo reiterated their arguments, insisting that: (1) the credit agreements they entered into
with PNB were contracts of adhesion;14 (2) no interest was due from them because their credit agreements
with PNB did not specify the interest rate, and PNB could not unilaterally increase the interest rate without
first informing them;15 and (3) PNB did not comply with the notice and publication requirements under
Section 3 of Act 3135.16 On the other hand, PNB and Yuvienco did not file their briefs despite notice.17

Ruling ofthe CA

In its decision promulgated on March 28, 2006,18 the CA affirmed the decision of the RTC insofar as it
upheld the validity of the foreclosure proceedings initiated by PNB, but modified the Spouses Manalo’s
liability for interest. It directed the RTC to see to the recomputation of their indebtedness, and ordered that
should the recomputed amount be less than the winning bid in the foreclosure sale, the difference should
be immediately returned to the Spouses Manalo.

The CA found it necessary to pass upon the issues of PNB’s failure to specify the applicable interest and
the lack of mutuality in the execution of the credit agreements considering the earlier cited observation
made by the trial court in its decision. Applying Article 1956 of the Civil Code, the CA held that PNB’s failure
to indicate the rate of interest in the credit agreements would not excuse the Spouses Manalo from their
contractual obligation to pay interest to PNB because of the express agreement to pay interest in the credit
agreements. Nevertheless, the CA ruled that PNB’s inadvertence to specify the interest rate should be
construed against it because the credit agreements were clearly contracts of adhesion due to their having
been prepared solely by PNB.

The CA further held that PNB could not unilaterally increase the rate of interest considering that the credit
agreements specifically provided that prior notice was required before an increase in interest rate could be
effected. It found that PNB did not adduce proof showing that the Spouses Manalo had been notified before
the increased interest rates were imposed; and that PNB’s unilateral imposition of the increased interest
rate was null and void for being violative of the principle of mutuality of contracts enshrined in Article 1308
of the Civil Code. Reinforcing its "contract of adhesion" conclusion, it added that the Spouses Manalo’s
being in dire need of money rendered them to be not on an equal footing with PNB. Consequently, the CA,
relying on Eastern Shipping Lines, v. Court of Appeals,19 fixed the interest rate to be paid by the Spouses
Manalo at 12% per annum, computed from their default.
The CA deemed to be untenable the Spouses Manalo’s allegation that PNB had failed to comply with the
requirements for notice and posting under Section 3 of Act 3135. The CA stated that Sheriff Norberto
Magsajo’s testimony was sufficient proof of his posting of the required Notice of Sheriff’s Sale in three
public places; that the notarized Affidavit of Publication presented by Sheriff Magsajo was prima facie proof
of the publication of the notice; and that the Affidavit of Publication enjoyed the presumption of regularity,
such that the Spouses Manalo’s bare allegation of non-publication without other proof did not overcome the
presumption.

On August 29, 2006, the CA denied the Spouses Manalo’s Motion for Reconsideration and PNB’s Partial
Motion for Reconsideration.20

Issues

In its Memorandum,21 PNB raises the following issues:

I. WHETHER OR NOT THE COURT OF APPEALS WAS CORRECT IN NULLIFYING THE INTEREST
RATES IMPOSED ON RESPONDENT SPOUSES’ LOAN AND IN FIXING THE SAME AT TWELVE
PERCENT (12%) FROM DEFAULT, DESPITE THE FACT THAT (i) THE SAME WAS RAISED BY THE
RESPONDENTS ONLY FOR THE FIRST TIME ON APPEAL (ii) IT WAS NEVER PART OF THEIR
COMPLAINT (iii) WAS EXLUDED AS AN ISSUE DURING PRE-TRIAL, AND WORSE, (iv) THERE WAS
NO FORMALLY OFFERED PERTAINING TO THE SAME DURING TRIAL.
II. WHETHER OR NOT THE COURT OF APPEALS CORRECTLY RULED THAT THERE WAS NO
MUTUALITY OF CONSENT IN THE IMPOSITION OF INTEREST RATES ON THE RESPONDENT
SPOUSES’ LOAN DESPITE THE EXISTENCE OF FACTS AND CIRCUMSTANCES CLEARLY
SHOWING RESPONDENTS’ ASSENT TO THE RATES OF INTEREST SO IMPOSED BY PNB ON
THE LOAN.

Anent the first issue, PNB argues that by passing upon the issue of the validity of the interest rates, and in
nullifying the rates imposed on the Spouses Manalo, the CA decided the case in a manner not in accord
with Section 15, Rule 44 of the Rules of Court, which states that only questions of law or fact raised in the
trial court could be assigned as errors on appeal; that to allow the Spouses Manalo to raise an issue for the
first time on appeal would "offend the basic rules of fair play, justice and due process;" 22 that the resolution
of the CA was limited to the issues agreed upon by the parties during pre-trial;23 that the CA erred in
passing upon the validity of the interest rates inasmuch as the Spouses Manalo did not present evidence
thereon; and that the Judicial Affidavit of Enrique Manalo, on which the CA relied for its finding, was not
offered to prove the invalidity of the interest rates and was, therefore, inadmissible for that purpose.24

As to the substantive issues, PNB claims that the Spouses Manalo’s continuous payment of interest without
protest indicated their assent to the interest rates imposed, as well as to the subsequent increases of the
rates; and that the CA erred in declaring that the interest rates and subsequent increases were invalid for
lack of mutuality between the contracting parties.

Ruling: The appeal lacks merit.

1. Procedural Issue
Contrary to PNB’s argument, the validity of the interest rates and of the increases, and on the lack of
mutuality between the parties were not raised by the Spouses Manalo’s for the first time on appeal. Rather,
the issues were impliedly raised during the trial itself, and PNB’s lack of vigilance in voicing out a timely
objection made that possible.

It appears that Enrique Manalo’s Judicial Affidavit introduced the issues of the validity of the interest rates
and the increases, and the lack of mutuality between the parties in the following manner, to wit:

5. True to his words, defendant Yuvienco, after several days, sent us a document through a personnel of
defendant PNB, Bangkal, Makati City Branch, who required me and my wife to affix our signature on the
said document;

6. When the document was handed over me, I was able to know that it was a Promissory Note which was
in ready made form and prepared solely by the defendant PNB;

xxxx

21. As above-noted, the rates of interest imposed by the defendant bank were never the subject of any
stipulation between us mortgagors and the defendant PNB as mortgagee;

22. The truth of the matter is that defendant bank imposed rate of interest which ranges from 19% to as
high as 28% and which changes from time to time;

23. The irregularity, much less the invalidity of the imposition of iniquitous rates of interest was aggravated
by the fact that we were not informed, notified, nor the same had our prior consent and acquiescence
therefor. x x x25

PNB cross-examined Enrique Manalo upon his Judicial Affidavit. There is no showing that PNB raised any
objection in the course of the cross examination.26 Consequently, the RTC rightly passed upon such issues
in deciding the case, and its having done so was in total accord with Section 5, Rule 10 of the Rules of
Court, which states:

Section 5. Amendment to conform to or authorize presentation of evidence. – When issues not raised by
the pleadings are tried with the express or implied consent of the parties, they shall be treated in all
respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to raise these issues may be made upon motion
of any party at any time, even after judgment; but failure to amend does not affect the result of the trial of
these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the
pleadings, the court may allow the pleadings to be amended and shall do so with liberality if the
presentation of the merits of the action and the ends of substantial justice will be subserved thereby. The
court may grant a continuance to enable the amendment to be made.

In Bernardo Sr. v. Court of Appeals,27 we held that:

It is settled that even if the complaint be defective, but the parties go to trial thereon, and the plaintiff,
without objection, introduces sufficient evidence to constitute the particular cause of action which it
intended to allege in the original complaint, and the defendant voluntarily produces witnesses to meet the
cause of action thus established, an issue is joined as fully and as effectively as if it had been previously
joined by the most perfect pleadings. Likewise, when issues not raised by the pleadings are tried by
express or implied consent of the parties, they shall be treated in all respects as if they had been raised in
the pleadings.

The RTC did not need to direct the amendment of the complaint by the Spouses Manalo. Section 5, Rule
10 of the Rules of Court specifically declares that the "failure to amend does not affect the result of the trial
of these issues." According to Talisay-Silay Milling Co., Inc. v. Asociacion de Agricultores de Talisay-Silay,
Inc.:28

The failure of a party to amend a pleading to conform to the evidence adduced during trial does not
preclude an adjudication by the court on the basis of such evidence which may embody new issues not
raised in the pleadings, or serve as a basis for a higher award of damages. Although the pleading may not
have been amended to conform to the evidence submitted during trial, judgment may nonetheless be
rendered, not simply on the basis of the issues alleged but also on the basis of issues discussed and the
assertions of fact proved in the course of trial.1âwphi1 The court may treat the pleading as if it had been
amended to conform to the evidence, although it had not been actually so amended. Former Chief Justice
Moran put the matter in this way:

When evidence is presented by one party, with the expressed or implied consent of the adverse party, as to
issues not alleged in the pleadings, judgment may be rendered validly as regards those issues, which shall
be considered as if they have been raised in the pleadings. There is implied, consent to the evidence thus
presented when the adverse party fails to object thereto." (Emphasis supplied)

Clearly, a court may rule and render judgment on the basis of the evidence before it even though the
relevant pleading had not been previously amended, so long as no surprise or prejudice is thereby caused
to the adverse party. Put a little differently, so long as the basic requirements of fair play had been met, as
where litigants were given full opportunity to support their respective contentions and to object to or refute
each other's evidence, the court may validly treat the pleadings as if they had been amended to conform to
the evidence and proceed to adjudicate on the basis of all the evidence before it.

There is also no merit in PNB’s contention that the CA should not have considered and ruled on the issue
of the validity of the interest rates because the Judicial Affidavit of Enrique Manalo had not been offered to
prove the same but only "for the purpose of identifying his affidavit."29 As such, the affidavit was
inadmissible to prove the nullity of the interest rates.

We do not agree.

Section 5, Rule 10 of the Rules of Court is applicable in two situations.1âwphi1 The first is when evidence
is introduced on an issue not alleged in the pleadings and no objection is interposed by the adverse party.
The second is when evidence is offered on an issue not alleged in the pleadings but an objection is raised
against the offer.30 This case comes under the first situation. Enrique Manalo’s Judicial Affidavit would
introduce the very issues that PNB is now assailing. The question of whether the evidence on such issues
was admissible to prove the nullity of the interest rates is an entirely different matter. The RTC accorded
credence to PNB’s evidence showing that the Spouses Manalo had been paying the interest imposed upon
them without protest. On the other hand, the CA’s nullification of the interest rates was based on the credit
agreements that the Spouses Manalo and PNB had themselves submitted.

Based on the foregoing, the validity of the interest rates and their increases, and the lack of mutuality
between the parties were issues validly raised in the RTC, giving the Spouses Manalo every right to raise
them in their appeal to the CA. PNB’s contention was based on its wrong appreciation of what transpired
during the trial. It is also interesting to note that PNB did not itself assail the RTC’s ruling on the issues
obviously because the RTC had decided in its favor. In fact, PNB did not even submit its appellee’s brief
despite notice from the CA.

2.
Substantive Issue

The credit agreement executed succinctly stipulated that the loan would be subjected to interest at a rate
"determined by the Bank to be its prime rate plus applicable spread, prevailing at the current month." 31 This
stipulation was carried over to or adopted by the subsequent renewals of the credit agreement. PNB
thereby arrogated unto itself the sole prerogative to determine and increase the interest rates imposed on
the Spouses Manalo. Such a unilateral determination of the interest rates contravened the principle of
mutuality of contracts embodied in Article 1308 of the Civil Code.32

The Court has declared that a contract where there is no mutuality between the parties partakes of the
nature of a contract of adhesion,33 and any obscurity will be construed against the party who prepared the
contract, the latter being presumed the stronger party to the agreement, and who caused the
obscurity.34 PNB should then suffer the consequences of its failure to specifically indicate the rates of
interest in the credit agreement. We spoke clearly on this in Philippine Savings Bank v. Castillo, 35 to wit:

The unilateral determination and imposition of the increased rates is violative of the principle of mutuality of
contracts under Article 1308 of the Civil Code, which provides that ‘[t]he contract must bind both contracting
parties; its validity or compliance cannot be left to the will of one of them.’ A perusal of the Promissory Note
will readily show that the increase or decrease of interest rates hinges solely on the discretion of petitioner.
It does not require the conformity of the maker before a new interest rate could be enforced. Any contract
which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable
result, thus partaking of the nature of a contract of adhesion, is void. Any stipulation regarding the validity or
compliance of the contract left solely to the will of one of the parties is likewise invalid. (Emphasis supplied)

PNB could not also justify the increases it had effected on the interest rates by citing the fact that the
Spouses Manalo had paid the interests without protest, and had renewed the loan several times. We rule
that the CA, citing Philippine National Bank v. Court of Appeals,36 rightly concluded that "a borrower is not
estopped from assailing the unilateral increase in the interest made by the lender since no one who
receives a proposal to change a contract, to which he is a party, is obliged to answer the same and said
party’s silence cannot be construed as an acceptance thereof."37

Lastly, the CA observed, and properly so, that the credit agreements had explicitly provided that prior notice
would be necessary before PNB could increase the interest rates. In failing to notify the Spouses Manalo
before imposing the increased rates of interest, therefore, PNB violated the stipulations of the very contract
that it had prepared. Hence, the varying interest rates imposed by PNB have to be vacated and declared
null and void, and in their place an interest rate of 12% per annum computed from their default is fixed
pursuant to the ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.38

The CA’s directive to PNB (a) to recompute the Spouses Manalo’s indebtedness under the oversight of the
RTC; and (b) to refund to them any excess of the winning bid submitted during the foreclosure sale over
their recomputed indebtedness was warranted and equitable. Equally warranted and equitable was to make
the amount to be refunded, if any, bear legal interest, to be reckoned from the promulgation of the CA’s
decision on March 28, 2006.39 Indeed, the Court said in Eastern Shipping Lines, Inc. v. Court of
Appeals40 that interest should be computed from the time of the judicial or extrajudicial demand. However,
this case presents a peculiar situation, the peculiarity being that the Spouses Manalo did not demand
interest either judicially or extrajudicially. In the RTC, they specifically sought as the main reliefs the
nullification of the foreclosure proceedings brought by PNB, accounting of the payments they had made to
PNB, and the conversion of their loan into a long term one.41 In its judgment, the RTC even upheld the
validity of the interest rates imposed by PNB.42 In their appellant’s brief, the Spouses Manalo again sought
the nullification of the foreclosure proceedings as the main relief.43 It is evident, therefore, that the Spouses
Manalo made no judicial or extrajudicial demand from which to reckon the interest on any amount to be
refunded to them. Such demand could only be reckoned from the promulgation of the CA’s decision
because it was there that the right to the refund was first judicially recognized. Nevertheless, pursuant to
Eastern Shipping Lines, Inc. v. Court of Appeals,44 the amount to be refunded and the interest thereon
should earn interest to be computed from the finality of the judgment until the full refund has been made.

Anent the correct rates of interest to be applied on the amount to be refunded by PNB, the Court, in Nacar
v. Gallery Frames45 and S.C. Megaworld Construction v. Parada,46 already applied Monetary Board
Circular No. 799 by reducing the interest rates allowed in judgments from 12% per annum to 6% per
annum.47 According to Nacar v. Gallery Frames, MB Circular No. 799 is applied prospectively, and
judgments that became final and executory prior to its effectivity on July 1, 2013 are not to be disturbed but
continue to be implemented applying the old legal rate of 12% per annum. Hence, the old legal rate of 12%
per annum applied to judgments becoming final and executory prior to July 1, 2013, but the new rate of 6%
per annum applies to judgments becoming final and executory after said dater.

Conformably with Nacar v. Gallery Frames and S.C. Megaworld Construction v. Parada, therefore, the
proper interest rates to be imposed in the present case are as follows:

1. Any amount to be refunded to the Spouses Manalo shall bear interest of 12% per annum computed from
March 28, 2006, the date of the promulgation of the CA decision, until June 30, 2013; and 6% per annum
computed from July 1, 2013 until finality of this decision; and

2. The amount to be refunded and its accrued interest shall earn interest of 6% per annum until full refund.

WHEREFORE, the Court AFFIRMS the decision promulgated by the Court of Appeals on March 28, 2006
in CA-G.R. CV No. 84396, subject to the MODIFICATION that any amount to be refunded to the
respondents shall bear interest of 12% per annum computed from March 28, 2006 until June 30, 2013, and
6% per annum computed from July 1, 2013 until finality hereof; that the amount to be refunded and its
accrued interest shall earn interest at 6o/o per annum until full refund; and DIRECTS the petitioner to pay
the costs of suit. SO ORDERED.