FIRST DIVISION
Jakarta incident was already behind her, her superiors
G.R. No. 122191 October 8, 1998
SAUDI ARABIAN AIRLINES, Petitioner, vs. COURT OF
APPEALS, MILAGROS P. MORADA and HON.
RODOLFO A. ORTIZ, in his capacity as Presiding Judge
of Branch 89, Regional Trial Court of Quezon
City, Respondents.
QUISUMBING, J.:
This petition for certiorari pursuant to Rule 45 of the Rules of
Court seeks to annul and set aside the Resolution  1 dated
September 27, 1995 and the Decision  2 dated April 10, 1996 of
the Court of Appeals 3 in CA-G.R. SP No. 36533, 4 and the
Orders 5 dated August 29, 1994 6 and February 2, 1995 7 that
were issued by the trial court in Civil Case No. Q-93-18394. 8
The pertinent antecedent facts which gave rise to the instant
petition, as stated in the questioned Decision 9, are as follows:
On January 21, 1988 defendant SAUDIA hired plaintiff as a
Flight Attendant for its airlines based in Jeddah, Saudi Arabia.
...
On April 27, 1990, while on a lay-over in Jakarta, Indonesia,
plaintiff went to a disco dance with fellow crew members
Thamer Al-Gazzawi and Allah Al-Gazzawi, both Saudi
nationals. Because it was almost morning when they returned
to their hotels, they agreed to have breakfast together at the
room of Thamer. When they were in te (sic) room, Allah left
on some pretext. Shortly after he did, Thamer attempted to
rape plaintiff. Fortunately, a roomboy and several security
personnel heard her cries for help and rescued her. Later, the
Indonesian police came and arrested Thamer and Allah Al-
Gazzawi, the latter as an accomplice.
When plaintiff returned to Jeddah a few days later, several
SAUDIA officials interrogated her about the Jakarta incident.
They then requested her to go back to Jakarta to help arrange
the release of Thamer and Allah. In Jakarta, SAUDIA Legal
Officer Sirah Akkad and base manager Baharini negotiated
with the police for the immediate release of the detained crew
members but did not succeed because plaintiff refused to
cooperate. She was afraid that she might be tricked into
something she did not want because of her inability to
understand the local dialect. She also declined to sign a blank
paper and a document written in the local dialect. Eventually,
SAUDIA allowed plaintiff to return to Jeddah but barred her
from the Jakarta flights.
Plaintiff learned that, through the intercession of the Saudi
Arabian government, the Indonesian authorities agreed to
deport Thamer and Allah after two weeks of detention.
Eventually, they were again put in service by defendant
SAUDI (sic). In September 1990, defendant SAUDIA
transferred plaintiff to Manila.
On January 14, 1992, just when plaintiff thought that the
requested her to see Mr. Ali Meniewy, Chief Legal Officer of
SAUDIA, in Jeddah, Saudi Arabia. When she saw him, he
brought her to the police station where the police took her
passport and questioned her about the Jakarta incident.
Miniewy simply stood by as the police put pressure on her to
make a statement dropping the case against Thamer and Allah.
Not until she agreed to do so did the police return her passport
and allowed her to catch the afternoon flight out of Jeddah.
One year and a half later or on lune 16, 1993, in Riyadh, Saudi
Arabia, a few minutes before the departure of her flight to
Manila, plaintiff was not allowed to board the plane and
instead ordered to take a later flight to Jeddah to see Mr.
Miniewy, the Chief Legal Officer of SAUDIA. When she did,
a certain Khalid of the SAUDIA office brought her to a Saudi
court where she was asked to sign a document written in
Arabic. They told her that this was necessary to close the case
against Thamer and Allah. As it turned out, plaintiff signed a
notice to her to appear before the court on June 27, 1993.
Plaintiff then returned to Manila.
Shortly afterwards, defendant SAUDIA summoned plaintiff to
report to Jeddah once again and see Miniewy on June 27, 1993
for further investigation. Plaintiff did so after receiving
assurance from SAUDIA's Manila manager, Aslam Saleemi,
that the investigation was routinary and that it posed no danger
to her.
In Jeddah, a SAUDIA legal officer brought plaintiff to the
same Saudi court on June 27, 1993. Nothing happened then
but on June 28, 1993, a Saudi judge interrogated plaintiff
through an interpreter about the Jakarta incident. After one
hour of interrogation, they let her go. At the airport, however,
just as her plane was about to take off, a SAUDIA officer told
her that the airline had forbidden her to take flight. At the
Inflight Service Office where she was told to go, the secretary
of Mr. Yahya Saddick took away her passport and told her to
remain in Jeddah, at the crew quarters, until further orders.
On July 3, 1993 a SAUDIA legal officer again escorted
plaintiff to the same court where the judge, to her
astonishment and shock, rendered a decision, translated to her
in English, sentencing her to five months imprisonment and to
286 lashes. Only then did she realize that the Saudi court had
tried her, together with Thamer and Allah, for what happened
in Jakarta. The court found plaintiff guilty of (1) adultery; (2)
going to a disco, dancing and listening to the music in
violation of Islamic laws; and (3) socializing with the male
crew, in contravention of Islamic tradition. 10
Facing conviction, private respondent sought the help of her
employer, petitioner SAUDIA. Unfortunately, she was denied
any assistance. She then asked the Philippine Embassy in
Jeddah to help her while her case is on appeal. Meanwhile, to
pay for her upkeep, she worked on the domestic flight of
SAUDIA, while Thamer and Allah continued to serve in the
international
flights. 11
Because she was wrongfully convicted, the Prince of Makkah
dismissed the case against her and allowed her to leave Saudi
Arabia. Shortly before her return to Manila, 12 she was
terminated from the service by SAUDIA, without her being
informed of the cause.
On November 23, 1993, Morada filed a Complaint 13 for
damages against SAUDIA, and Khaled Al-Balawi ("Al-
Balawi"), its country manager.
On January 19, 1994, SAUDIA filed an Omnibus Motion To
Dismiss 14 which raised the following grounds, to wit: (1) that
the Complaint states no cause of action against Saudia; (2) that
defendant Al-Balawi is not a real party in interest; (3) that the
claim or demand set forth in the Complaint has been waived,
abandoned or otherwise extinguished; and (4) that the trial
court has no jurisdiction to try the case.
On February 10, 1994, Morada filed her Opposition (To
Motion to Dismiss) 15. Saudia filed a reply 16 thereto on March
3, 1994.
On June 23, 1994, Morada filed an Amended
Complaint 17 wherein Al-Balawi was dropped as party
defendant. On August 11, 1994, Saudia filed its Manifestation
and Motion to Dismiss Amended Complaint 18.
The trial court issued an Order 19 dated August 29, 1994
denying the Motion to Dismiss Amended Complaint filed by
Saudia.
From the Order of respondent Judge 20 denying the Motion to
Dismiss, SAUDIA filed on September 20, 1994, its Motion for
Reconsideration 21 of the Order dated August 29, 1994. It
alleged that the trial court has no jurisdiction to hear and try
the case on the basis of Article 21 of the Civil Code, since the
proper law applicable is the law of the Kingdom of Saudi
Arabia. On October 14, 1994, Morada filed her
Opposition 22 (To Defendant's Motion for Reconsideration).
In the Reply 23 filed with the trial court on October 24, 1994,
SAUDIA alleged that since its Motion for Reconsideration
raised lack of jurisdiction as its cause of action, the Omnibus
Motion Rule does not apply, even if that ground is raised for
the first time on appeal. Additionally, SAUDIA alleged that
the Philippines does not have any substantial interest in the
prosecution of the instant case, and hence, without jurisdiction
to adjudicate the same.
Respondent Judge subsequently issued another Order 24 dated
February 2, 1995, denying SAUDIA's Motion for
Reconsideration. The pertinent portion of the assailed Order
reads as follows:
Acting on the Motion for Reconsideration of defendant Saudi
Arabian Airlines filed, thru counsel, on September 20, 1994,
and the Opposition thereto of the plaintiff filed, thru counsel,
on October 14, 1994, as well as the Reply therewith of
defendant Saudi Arabian Airlines filed, thru counsel, on
October 24, 1994, considering that a perusal of the plaintiffs
Amended Complaint, which is one for the recovery of actual,
moral and exemplary damages plus attorney's fees, upon the
basis of the applicable Philippine law, Article 21 of the New
Civil Code of the Philippines, is, clearly, within the
jurisdiction of this Court as regards the subject matter, and
there being nothing new of substance which might cause the
reversal or modification of the order sought to be
reconsidered, the motion for reconsideration of the defendant,
is DENIED.
SO ORDERED. 25
Consequently, on February 20, 1995, SAUDIA filed its
Petition for Certiorari and Prohibition with Prayer for
Issuance of Writ of Preliminary Injunction and/or Temporary
Restraining Order 26 with the Court of Appeals.
Respondent Court of Appeals promulgated a Resolution with
Temporary Restraining Order 27 dated February 23, 1995,
prohibiting the respondent Judge from further conducting any
proceeding, unless otherwise directed, in the interim.
In another Resolution 28 promulgated on September 27, 1995,
now assailed, the appellate court denied SAUDIA's Petition
for the Issuance of a Writ of Preliminary Injunction dated
February 18, 1995, to wit:
The Petition for the Issuance of a Writ of Preliminary
Injunction is hereby DENIED, after considering the Answer,
with Prayer to Deny Writ of Preliminary Injunction (Rollo, p.
135) the Reply and Rejoinder, it appearing that herein
petitioner is not clearly entitled thereto (Unciano Paramedical
College, et. Al., v. Court of Appeals, et. Al., 100335, April 7,
1993, Second Division).
SO ORDERED.
On October 20, 1995, SAUDIA filed with this Honorable
Court the instant Petition 29 for Review with Prayer for
Temporary Restraining Order dated October 13, 1995.
However, during the pendency of the instant Petition,
respondent Court of Appeals rendered the Decision 30 dated
April 10, 1996, now also assailed. It ruled that the Philippines
is an appropriate forum considering that the Amended
Complaint's basis for recovery of damages is Article 21 of the
Civil Code, and thus, clearly within the jurisdiction of
respondent Court. It further held that certiorari is not the
proper remedy in a denial of a Motion to Dismiss, inasmuch as
the petitioner should have proceeded to trial, and in case of an
adverse ruling, find recourse in an appeal.
On May 7, 1996, SAUDIA filed its Supplemental Petition for
Review with Prayer for Temporary Restraining Order 31 dated
April 30, 1996, given due course by this Court. After both
parties submitted their Memoranda, 32 the instant case is now
deemed submitted for decision.
Petitioner SAUDIA raised the following issues:
I On the other hand, private respondent contends that since her
The trial court has no jurisdiction to hear and try Civil Case
No. Q-93-18394 based on Article 21 of the New Civil Code
since the proper law applicable is the law of the Kingdom of
Saudi Arabia inasmuch as this case involves what is known in
private international law as a "conflicts problem". Otherwise,
the Republic of the Philippines will sit in judgment of the acts
done by another sovereign state which is abhorred.
II
Leave of court before filing a supplemental pleading is not a
jurisdictional requirement. Besides, the matter as to absence of
leave of court is now moot and academic when this Honorable
Court required the respondents to comment on petitioner's
April 30, 1996 Supplemental Petition For Review With Prayer
For A Temporary Restraining Order Within Ten (10) Days
From Notice Thereof. Further, the Revised Rules of Court
should be construed with liberality pursuant to Section 2, Rule
1 thereof.
III
Petitioner received on April 22, 1996 the April 10, 1996
decision in CA-G.R. SP NO. 36533 entitled "Saudi Arabian
Airlines v. Hon. Rodolfo A. Ortiz, et al." and filed its April
30, 1996 Supplemental Petition For Review With Prayer For
A Temporary Restraining Order on May 7, 1996 at 10:29 a.m.
or within the 15-day reglementary period as provided for
under Section 1, Rule 45 of the Revised Rules of Court.
Therefore, the decision in CA-G.R. SP NO. 36533 has not yet
become final and executory and this Honorable Court can take
cognizance of this case. 33
From the foregoing factual and procedural antecedents, the
following issues emerge for our resolution:
I.
WHETHER RESPONDENT APPELLATE COURT ERRED
IN HOLDING THAT THE REGIONAL TRIAL COURT OF
QUEZON CITY HAS JURISDICTION TO HEAR AND TRY
CIVIL CASE NO. Q-93-18394 ENTITLED "MILAGROS P.
MORADA V. SAUDI ARABIAN AIRLINES".
II.
WHETHER RESPONDENT APPELLATE COURT ERRED
IN RULING THAT IN THIS CASE PHILIPPINE LAW
SHOULD GOVERN.
Petitioner SAUDIA claims that before us is a conflict of laws
that must be settled at the outset. It maintains that private
respondent's claim for alleged abuse of rights occurred in the
Kingdom of Saudi Arabia. It alleges that the existence of a
foreign element qualifies the instant case for the application of
the law of the Kingdom of Saudi Arabia, by virtue of the lex
loci delicti commissi rule. 34
Amended Complaint is based on Articles 19 35 and 21 36 of the
Civil Code, then the instant case is properly a matter of
domestic law. 37
Under the factual antecedents obtaining in this case, there is
no dispute that the interplay of events occurred in two states,
the Philippines and Saudi Arabia.
As stated by private respondent in her Amended
Complaint 38 dated June 23, 1994:
2. Defendant SAUDI ARABIAN AIRLINES or SAUDIA is a
foreign airlines corporation doing business in the Philippines.
It may be served with summons and other court processes at
Travel Wide Associated Sales (Phils.). Inc., 3rd Floor, Cougar
Building, 114 Valero St., Salcedo Village, Makati, Metro
Manila.
xxx xxx xxx
6. Plaintiff learned that, through the intercession of the Saudi
Arabian government, the Indonesian authorities agreed to
deport Thamer and Allah after two weeks of detention.
Eventually, they were again put in service by defendant
SAUDIA. In September 1990, defendant SAUDIA transferred
plaintiff to Manila.
7. On January 14, 1992, just when plaintiff thought that the
Jakarta incident was already behind her, her superiors
reauested her to see MR. Ali Meniewy, Chief Legal Officer of
SAUDIA in Jeddah, Saudi Arabia. When she saw him, he
brought her to the police station where the police took her
passport and questioned her about the Jakarta incident.
Miniewy simply stood by as the police put pressure on her to
make a statement dropping the case against Thamer and Allah.
Not until she agreed to do so did the police return her passport
and allowed her to catch the afternoon flight out of Jeddah.
8. One year and a half later or on June 16, 1993, in Riyadh,
Saudi Arabia, a few minutes before the departure of her flight
to Manila, plaintiff was not allowed to board the plane and
instead ordered to take a later flight to Jeddah to see Mr.
Meniewy, the Chief Legal Officer of SAUDIA. When she did,
a certain Khalid of the SAUDIA office brought her to a Saudi
court where she was asked to sigh a document written in
Arabic. They told her that this was necessary to close the case
against Thamer and Allah. As it turned out, plaintiff signed a
notice to her to appear before the court on June 27,
1993. Plaintiff then returned to Manila.
9. Shortly afterwards, defendant SAUDIA summoned plaintiff
to report to Jeddah once again and see Miniewy on June 27,
1993 for further investigation. Plaintiff did so after receiving
assurance from SAUDIA's Manila manger, Aslam Saleemi,
that the investigation was routinary and that it posed no
danger to her.
10. In Jeddah, a SAUDIA legal officer brought plaintiff to the
same Saudi court on June 27, 1993. Nothing happened then
but on June 28, 1993, a Saudi judge interrogated plaintiff
through an interpreter about the Jakarta incident. After one
hour of interrogation, they let her go. At the airport, however,
just as her plane was about to take off, a SAUDIA officer told
her that the airline had forbidden her to take that flight. At the
Inflight Service Office where she was told to go, the secretary
of Mr. Yahya Saddick took away her passport and told her to
remain in Jeddah, at the crew quarters, until further orders.
11. On July 3, 1993 a SAUDIA legal officer again escorted
plaintiff to the same court where the judge, to her
astonishment and shock, rendered a decision, translated to her
in English, sentencing her to five months imprisonment and to
286 lashes. Only then did she realize that the Saudi court had
tried her, together with Thamer and Allah, for what happened
in Jakarta. The court found plaintiff guilty of (1) adultery; (2)
going to a disco, dancing, and listening to the music in
violation of Islamic laws; (3) socializing with the male crew,
in contravention of Islamic tradition.
12. Because SAUDIA refused to lend her a hand in the case,
plaintiff sought the help of the Philippines Embassy in Jeddah.
The latter helped her pursue an appeal from the decision of the
court. To pay for her upkeep, she worked on the domestic
flights of defendant SAUDIA while, ironically, Thamer and
Allah freely served the international flights. 39
Where the factual antecedents satisfactorily establish the
existence of a foreign element, we agree with petitioner that
the problem herein could present a "conflicts" case.
A factual situation that cuts across territorial lines and is
affected by the diverse laws of two or more states is said to
contain a "foreign element". The presence of a foreign element
is inevitable since social and economic affairs of individuals
and associations are rarely confined to the geographic limits of
their birth or conception. 40
The forms in which this foreign element may appear are
many. 41 The foreign element may simply consist in the fact
that one of the parties to a contract is an alien or has a foreign
domicile, or that a contract between nationals of one State
involves properties situated in another State. In other cases,
the foreign element may assume a complex form. 42
In the instant case, the foreign element consisted in the fact
that private respondent Morada is a resident Philippine
national, and that petitioner SAUDIA is a resident foreign
corporation. Also, by virtue of the employment of Morada
with the petitioner Saudia as a flight stewardess, events did
transpire during her many occasions of travel across national
borders, particularly from Manila, Philippines to Jeddah,
Saudi Arabia, and vice versa, that caused a "conflicts"
situation to arise.
We thus find private respondent's assertion that the case is
purely domestic, imprecise. A conflicts problem presents itself
here, and the question of jurisdiction 43 confronts the court a
quo.
After a careful study of the private respondent's Amended
Complaint, 44 and the Comment thereon, we note that she aptly
predicated her cause of action on Articles 19 and 21 of the
New Civil Code.
On one hand, Article 19 of the New Civil Code provides:
Art. 19. Every person must, in the exercise of his rights and in
the performance of his duties, act with justice give everyone
his due and observe honesty and good faith.
On the other hand, Article 21 of the New Civil Code provides:
Art. 21. Any person who willfully causes loss or injury to
another in a manner that is contrary to morals, good customs
or public policy shall compensate the latter for damages.
Thus, in Philippine National Bank (PNB) vs. Court of
Appeals, 45 this Court held that:
The aforecited provisions on human relations were intended to
expand the concept of torts in this jurisdiction by granting
adequate legal remedy for the untold number of moral wrongs
which is impossible for human foresight to specifically
provide in the statutes.
Although Article 19 merely declares a principle of law, Article
21 gives flesh to its provisions. Thus, we agree with private
respondent's assertion that violations of Articles 19 and 21 are
actionable, with judicially enforceable remedies in the
municipal forum.
Based on the allegations 46 in the Amended Complaint, read in
the light of the Rules of Court on jurisdiction 47 we find that
the Regional Trial Court (RTC) of Quezon City possesses
jurisdiction over the subject matter of the suit. 48 Its authority
to try and hear the case is provided for under Section 1 of
Republic Act No. 7691, to wit:
Sec. 1. Section 19 of Batas Pambansa Blg. 129, otherwise
known as the "Judiciary Reorganization Act of 1980", is
hereby amended to read as follows:
Sec. 19. Jurisdiction in Civil Cases. - Regional Trial Courts
shall exercise exclusive jurisdiction:
xxx xxx xxx
(8) In all other cases in which demand, exclusive of interest,
damages of whatever kind, attorney's fees, litigation expenses,
and cots or the value of the property in controversy exceeds
One hundred thousand pesos (P100,000.00) or, in such other
cases in Metro Manila, where the demand, exclusive of the
above-mentioned items exceeds Two hundred Thousand pesos
(P200,000.00). (Emphasis ours)
xxx xxx xxx
And following Section 2 (b), Rule 4 of the Revised Rules of
Court - the venue, Quezon City, is appropriate:
Sec. 2 Venue in Courts of First Instance. - [Now Regional
Trial Court]
(a) xxx xxx xxx
(b) Personal actions. - All other actions may be commenced
and tried where the defendant or any of the defendants resides
or may be found, or where the plaintiff or any of the plaintiff
resides, at the election of the plaintiff.
Pragmatic considerations, including the convenience of the
parties, also weigh heavily in favor of the RTC Quezon City
assuming jurisdiction. Paramount is the private interest of the
litigant. Enforceability of a judgment if one is obtained is quite
obvious. Relative advantages and obstacles to a fair trial are
equally important. Plaintiff may not, by choice of an
inconvenient forum, "vex", "harass", or "oppress" the
defendant, e.g. by inflicting upon him needless expense or
disturbance. But unless the balance is strongly in favor of the
defendant, the plaintiffs choice of forum should rarely be
disturbed. 49
Weighing the relative claims of the parties, the court a
quo found it best to hear the case in the Philippines. Had it
refused to take cognizance of the case, it would be forcing
plaintiff (private respondent now) to seek remedial action
elsewhere, i.e. in the Kingdom of Saudi Arabia where she no
longer maintains substantial connections. That would have
caused a fundamental unfairness to her.
Moreover, by hearing the case in the Philippines no
unnecessary difficulties and inconvenience have been shown
by either of the parties. The choice of forum of the plaintiff
(now private respondent) should be upheld.
Similarly, the trial court also possesses jurisdiction over the
persons of the parties herein. By filing her Complaint and
Amended Complaint with the trial court, private respondent
has voluntary submitted herself to the jurisdiction of the court.
The records show that petitioner SAUDIA has filed several
motions 50 praying for the dismissal of Morada's Amended
Complaint. SAUDIA also filed an Answer In Ex Abundante
Cautelam dated February 20, 1995. What is very patent and
explicit from the motions filed, is that SAUDIA prayed for
other reliefs under the premises. Undeniably, petitioner
SAUDIA has effectively submitted to the trial court's
jurisdiction by praying for the dismissal of the Amended
Complaint on grounds other than lack of jurisdiction.
As held by this Court in Republic vs. Ker and Company,
Ltd.: 51
We observe that the motion to dismiss filed on April 14, 1962,
aside from disputing the lower court's jurisdiction over
defendant's person, prayed for dismissal of the complaint on
the ground that plaintiff's cause of action has prescribed. By
interposing such second ground in its motion to dismiss, Ker
and Co., Ltd. availed of an affirmative defense on the basis of
which it prayed the court to resolve controversy in its favor.
For the court to validly decide the said plea of defendant Ker
& Co., Ltd., it necessarily had to acquire jurisdiction upon the
latter's person, who, being the proponent of the affirmative
defense, should be deemed to have abandoned its special
appearance and voluntarily submitted itself to the jurisdiction
of the court.
Similarly, the case of De Midgely vs. Ferandos, held that;
When the appearance is by motion for the purpose of
objecting to the jurisdiction of the court over the person, it
must be for the sole and separate purpose of objecting to the
jurisdiction of the court. If his motion is for any other purpose
than to object to the jurisdiction of the court over his person,
he thereby submits himself to the jurisdiction of the court. A
special appearance by motion made for the purpose of
objecting to the jurisdiction of the court over the person will
be held to be a general appearance, if the party in said motion
should, for example, ask for a dismissal of the action upon the
further ground that the court had no jurisdiction over the
subject matter. 52
Clearly, petitioner had submitted to the jurisdiction of the
Regional Trial Court of Quezon City. Thus, we find that the
trial court has jurisdiction over the case and that its exercise
thereof, justified.
As to the choice of applicable law, we note that choice-of-law
problems seek to answer two important questions: (1) What
legal system should control a given situation where some of
the significant facts occurred in two or more states; and (2) to
what extent should the chosen legal system regulate the
situation. 53
Several theories have been propounded in order to identify the
legal system that should ultimately control. Although ideally,
all choice-of-law theories should intrinsically advance both
notions of justice and predictability, they do not always do so.
The forum is then faced with the problem of deciding which of
these two important values should be stressed. 54
Before a choice can be made, it is necessary for us to
determine under what category a certain set of facts or rules
fall. This process is known as "characterization", or the
"doctrine of qualification". It is the "process of deciding
whether or not the facts relate to the kind of question specified
in a conflicts rule." 55 The purpose of "characterization" is to
enable the forum to select the proper law. 56
Our starting point of analysis here is not a legal relation, but a
factual situation, event, or operative fact. 57 An essential
element of conflict rules is the indication of a "test" or
"connecting factor" or "point of contact". Choice-of-law rules
invariably consist of a factual relationship (such as property
right, contract claim) and a connecting factor or point of
contact, such as the situs of the res, the place of celebration,
the place of performance, or the place of wrongdoing. 58
Note that one or more circumstances may be present to serve
as the possible test for the determination of the applicable
law. 59 These "test factors" or "points of contact" or
"connecting factors" could be any of the following:
(1) The nationality of a person, his domicile, his residence, his
place of sojourn, or his origin;
(2) the seat of a legal or juridical person, such as a
corporation;
(3) the situs of a thing, that is, the place where a thing is, or is
deemed to be situated. In particular, the lex situs is decisive
when real rights are involved;
(4) the place where an act has been done, the locus actus,
such as the place where a contract has been made, a marriage
celebrated, a will signed or a tort committed. The lex loci
actus is particularly important in contracts and torts;
(5) the place where an act is intended to come into effect, e.g.,
the place of performance of contractual duties, or the place
where a power of attorney is to be exercised;
(6) the intention of the contracting parties as to the law that
should govern their agreement, the lex loci intentionis;
(7) the place where judicial or administrative proceedings are
instituted or done. The lex fori - the law of the forum - is
particularly important because, as we have seen earlier,
matters of "procedure" not going to the substance of the claim
involved are governed by it; and because the lex fori applies
whenever the content of the otherwise applicable foreign law
is excluded from application in a given case for the reason that
it falls under one of the exceptions to the applications of
foreign law; and
(8) the flag of a ship, which in many cases is decisive of
practically all legal relationships of the ship and of its master
or owner as such. It also covers contractual relationships
particularly contracts of affreightment. 60 (Emphasis ours.)
After a careful study of the pleadings on record, including
allegations in the Amended Complaint deemed admitted for
purposes of the motion to dismiss, we are convinced that there
is reasonable basis for private respondent's assertion that
although she was already working in Manila, petitioner
brought her to Jeddah on the pretense that she would merely
testify in an investigation of the charges she made against the
two SAUDIA crew members for the attack on her person
while they were in Jakarta. As it turned out, she was the one
made to face trial for very serious charges, including adultery
and violation of Islamic laws and tradition.
There is likewise logical basis on record for the claim that the
"handing over" or "turning over" of the person of private
respondent to Jeddah officials, petitioner may have acted
beyond its duties as employer. Petitioner's purported act
contributed to and amplified or even proximately caused
additional humiliation, misery and suffering of private
respondent. Petitioner thereby allegedly facilitated the arrest,
detention and prosecution of private respondent under the
guise of petitioner's authority as employer, taking advantage
of the trust, confidence and faith she reposed upon it. As
purportedly found by the Prince of Makkah, the alleged
conviction and imprisonment of private respondent was
wrongful. But these capped the injury or harm allegedly
inflicted upon her person and reputation, for which petitioner
could be liable as claimed, to provide compensation or redress
for the wrongs done, once duly proven.
Considering that the complaint in the court a quo is one
involving torts, the "connecting factor" or "point of contact"
could be the place or places where the tortious conduct or lex
loci actus occurred. And applying the torts principle in a
conflicts case, we find that the Philippines could be said as a
situs of the tort (the place where the alleged tortious conduct
took place). This is because it is in the Philippines where
petitioner allegedly deceived private respondent, a Filipina
residing and working here. According to her, she had honestly
believed that petitioner would, in the exercise of its rights and
in the performance of its duties, "act with justice, give her due
and observe honesty and good faith." Instead, petitioner failed
to protect her, she claimed. That certain acts or parts of the
injury allegedly occurred in another country is of no moment.
For in our view what is important here is the place where the
over-all harm or the totality of the alleged injury to the person,
reputation, social standing and human rights of complainant,
had lodged, according to the plaintiff below (herein private
respondent). All told, it is not without basis to identify the
Philippines as the situs of the alleged tort.
Moreover, with the widespread criticism of the traditional rule
of lex loci delicti commissi, modern theories and rules on tort
liability 61 have been advanced to offer fresh judicial
approaches to arrive at just results. In keeping abreast with the
modern theories on tort liability, we find here an occasion to
apply the "State of the most significant relationship" rule,
which in our view should be appropriate to apply now, given
the factual context of this case.
In applying said principle to determine the State which has the
most significant relationship, the following contacts are to be
taken into account and evaluated according to their relative
importance with respect to the particular issue: (a) the place
where the injury occurred; (b) the place where the conduct
causing the injury occurred; (c) the domicile, residence,
nationality, place of incorporation and place of business of the
parties, and (d) the place where the relationship, if any,
between the parties is centered. 62
As already discussed, there is basis for the claim that over-all
injury occurred and lodged in the Philippines. There is
likewise no question that private respondent is a resident
Filipina national, working with petitioner, a resident foreign
corporation engaged here in the business of international air
carriage. Thus, the "relationship" between the parties was
centered here, although it should be stressed that this suit is
not based on mere labor law violations. From the record, the
claim that the Philippines has the most significant contact with
the matter in this dispute, 63 raised by private respondent as
plaintiff below against defendant (herein petitioner), in our
view, has been properly established.

Prescinding from this premise that the Philippines is the situs

of the tort complained of and the place "having the most
interest in the problem", we find, by way of recapitulation,
that the Philippine law on tort liability should have paramount
application to and control in the resolution of the legal issues
arising out of this case. Further, we hold that the respondent
Regional Trial Court has jurisdiction over the parties and the
subject matter of the complaint; the appropriate venue is in
Quezon City, which could properly apply Philippine law.
Moreover, we find untenable petitioner's insistence that
"[s]ince private respondent instituted this suit, she has the
burden of pleading and proving the applicable Saudi law on
the matter." 64 As aptly said by private respondent, she has "no
obligation to plead and prove the law of the Kingdom of Saudi
Arabia since her cause of action is based on Articles 19 and
21" of the Civil Code of the Philippines. In her Amended
Complaint and subsequent pleadings, she never alleged that
Saudi law should govern this case. 65 And as correctly held by
the respondent appellate court, "considering that it was the
petitioner who was invoking the applicability of the law of
Saudi Arabia, then the burden was on it [petitioner] to plead
and to establish what the law of Saudi Arabia is". 66

Lastly, no error could be imputed to the respondent appellate

court in upholding the trial court's denial of defendant's
(herein petitioner's) motion to dismiss the case. Not only was
jurisdiction in order and venue properly laid, but appeal after
trial was obviously available, and expeditious trial itself
indicated by the nature of the case at hand. Indubitably, the
Philippines is the state intimately concerned with the ultimate
outcome of the case below, not just for the benefit of all the
litigants, but also for the vindication of the country's system of
law and justice in a transnational setting. With these
guidelines in mind, the trial court must proceed to try and
adjudge the case in the light of relevant Philippine law, with
due consideration of the foreign element or elements involved.
Nothing said herein, of course, should be construed as
prejudging the results of the case in any manner whatsoever.

WHEREFORE, the instant petition for certiorari is hereby

DISMISSED. Civil Case No. Q-93-18394 entitled "Milagros
P. Morada vs. Saudi Arabia Airlines" is hereby REMANDED
to Regional Trial Court of Quezon City, Branch 89 for further
proceedings.

SO ORDERED.

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 143581             January 7, 2008
KOREA TECHNOLOGIES CO., LTD., petitioner,
vs.
HON. ALBERTO A. LERMA, in his capacity as Presiding
Judge of Branch 256 of Regional Trial Court of
Muntinlupa City, and PACIFIC GENERAL STEEL
MANUFACTURING CORPORATION, respondents.
DECISION
VELASCO, JR., J.:
In our jurisdiction, the policy is to favor alternative methods of
resolving disputes, particularly in civil and commercial
disputes. Arbitration along with mediation, conciliation, and
negotiation, being inexpensive, speedy and less hostile
methods have long been favored by this Court. The petition
before us puts at issue an arbitration clause in a contract
mutually agreed upon by the parties stipulating that they
would submit themselves to arbitration in a foreign country.
Regrettably, instead of hastening the resolution of their
dispute, the parties wittingly or unwittingly prolonged the
controversy.
Petitioner Korea Technologies Co., Ltd. (KOGIES) is a
Korean corporation which is engaged in the supply and
installation of Liquefied Petroleum Gas (LPG) Cylinder
manufacturing plants, while private respondent Pacific
General Steel Manufacturing Corp. (PGSMC) is a domestic
corporation.
On March 5, 1997, PGSMC and KOGIES executed a
Contract1 whereby KOGIES would set up an LPG Cylinder
Manufacturing Plant in Carmona, Cavite. The contract was
executed in the Philippines. On April 7, 1997, the parties
executed, in Korea, an Amendment for Contract No. KLP-
970301 dated March 5, 19972 amending the terms of payment.
The contract and its amendment stipulated that KOGIES will
ship the machinery and facilities necessary for manufacturing
LPG cylinders for which PGSMC would pay USD 1,224,000.
KOGIES would install and initiate the operation of the plant
for which PGSMC bound itself to pay USD 306,000 upon the
plant’s production of the 11-kg. LPG cylinder samples. Thus,
the total contract price amounted to USD 1,530,000.
On October 14, 1997, PGSMC entered into a Contract of
Lease3 with Worth Properties, Inc. (Worth) for use of Worth’s
5,079-square meter property with a 4,032-square meter
warehouse building to house the LPG manufacturing plant.
The monthly rental was PhP 322,560 commencing on January
1, 1998 with a 10% annual increment clause. Subsequently,
the machineries, equipment, and facilities for the manufacture
of LPG cylinders were shipped, delivered, and installed in the
Carmona plant. PGSMC paid KOGIES USD 1,224,000.
However, gleaned from the Certificate 4 executed by the parties
on January 22, 1998, after the installation of the plant, the
initial operation could not be conducted as PGSMC
encountered financial difficulties affecting the supply of
materials, thus forcing the parties to agree that KOGIES
would be deemed to have completely complied with the terms
and conditions of the March 5, 1997 contract.
For the remaining balance of USD306,000 for the installation
and initial operation of the plant, PGSMC issued two
postdated checks: (1) BPI Check No. 0316412 dated January
30, 1998 for PhP 4,500,000; and (2) BPI Check No. 0316413
dated March 30, 1998 for PhP 4,500,000.5
When KOGIES deposited the checks, these were dishonored
for the reason "PAYMENT STOPPED." Thus, on May 8,
1998, KOGIES sent a demand letter6 to PGSMC threatening
criminal action for violation of Batas Pambansa Blg. 22 in
case of nonpayment. On the same date, the wife of PGSMC’s
President faxed a letter dated May 7, 1998 to KOGIES’
President who was then staying at a Makati City hotel. She
complained that not only did KOGIES deliver a different
brand of hydraulic press from that agreed upon but it had not
delivered several equipment parts already paid for.
On May 14, 1998, PGSMC replied that the two checks it
issued KOGIES were fully funded but the payments were
stopped for reasons previously made known to KOGIES.7
On June 1, 1998, PGSMC informed KOGIES that PGSMC
was canceling their Contract dated March 5, 1997 on the
ground that KOGIES had altered the quantity and lowered the
quality of the machineries and equipment it delivered to
PGSMC, and that PGSMC would dismantle and transfer the
machineries, equipment, and facilities installed in the
Carmona plant. Five days later, PGSMC filed before the
Office of the Public Prosecutor an Affidavit-Complaint
for Estafa docketed as I.S. No. 98-03813 against Mr. Dae
Hyun Kang, President of KOGIES.
On June 15, 1998, KOGIES wrote PGSMC informing the
latter that PGSMC could not unilaterally rescind their contract
nor dismantle and transfer the machineries and equipment on
mere imagined violations by KOGIES. It also insisted that
their disputes should be settled by arbitration as agreed upon
in Article 15, the arbitration clause of their contract.
On June 23, 1998, PGSMC again wrote KOGIES reiterating
the contents of its June 1, 1998 letter threatening that the
machineries, equipment, and facilities installed in the plant
would be dismantled and transferred on July 4, 1998. Thus, on
July 1, 1998, KOGIES instituted an Application for
Arbitration before the Korean Commercial Arbitration Board
(KCAB) in Seoul, Korea pursuant to Art. 15 of the Contract as
amended.
On July 3, 1998, KOGIES filed a Complaint for Specific
Performance, docketed as Civil Case No. 98-117 8 against
PGSMC before the Muntinlupa City Regional Trial Court
(RTC). The RTC granted a temporary restraining order (TRO)
on July 4, 1998, which was subsequently extended until July
22, 1998. In its complaint, KOGIES alleged that PGSMC had
initially admitted that the checks that were stopped were not
funded but later on claimed that it stopped payment of the
checks for the reason that "their value was not received" as the
former allegedly breached their contract by "altering the
quantity and lowering the quality of the machinery and
equipment" installed in the plant and failed to make the plant
operational although it earlier certified to the contrary as
shown in a January 22, 1998 Certificate. Likewise, KOGIES
averred that PGSMC violated Art. 15 of their Contract, as
amended, by unilaterally rescinding the contract without
resorting to arbitration. KOGIES also asked that PGSMC be
restrained from dismantling and transferring the machinery
and equipment installed in the plant which the latter threatened
to do on July 4, 1998.
On July 9, 1998, PGSMC filed an opposition to the TRO
arguing that KOGIES was not entitled to the TRO since Art.
15, the arbitration clause, was null and void for being against
public policy as it ousts the local courts of jurisdiction over the
instant controversy.
On July 17, 1998, PGSMC filed its Answer with Compulsory
Counterclaim9 asserting that it had the full right to dismantle
and transfer the machineries and equipment because it had
paid for them in full as stipulated in the contract; that KOGIES
was not entitled to the PhP 9,000,000 covered by the checks
for failing to completely install and make the plant
operational; and that KOGIES was liable for damages
amounting to PhP 4,500,000 for altering the quantity and
lowering the quality of the machineries and equipment.
Moreover, PGSMC averred that it has already paid PhP
2,257,920 in rent (covering January to July 1998) to Worth
and it was not willing to further shoulder the cost of renting
the premises of the plant considering that the LPG cylinder
manufacturing plant never became operational.
After the parties submitted their Memoranda, on July 23,
1998, the RTC issued an Order denying the application for a
writ of preliminary injunction, reasoning that PGSMC had
paid KOGIES USD 1,224,000, the value of the machineries
and equipment as shown in the contract such that KOGIES no
longer had proprietary rights over them. And finally, the RTC
held that Art. 15 of the Contract as amended was invalid as it
tended to oust the trial court or any other court jurisdiction
over any dispute that may arise between the parties. KOGIES’
prayer for an injunctive writ was denied. 10 The dispositive
portion of the Order stated:
WHEREFORE, in view of the foregoing
consideration, this Court believes and so holds that
no cogent reason exists for this Court to grant the
writ of preliminary injunction to restrain and refrain
defendant from dismantling the machineries and
facilities at the lot and building of Worth Properties,
Incorporated at Carmona, Cavite and transfer the
same to another site: and therefore denies plaintiff’s
application for a writ of preliminary injunction.
On July 29, 1998, KOGIES filed its Reply to Answer and
Answer to Counterclaim.11 KOGIES denied it had altered the
quantity and lowered the quality of the machinery, equipment,
and facilities it delivered to the plant. It claimed that it had
performed all the undertakings under the contract and had
already produced certified samples of LPG cylinders. It
averred that whatever was unfinished was PGSMC’s fault
since it failed to procure raw materials due to lack of funds.
KOGIES, relying on Chung Fu Industries (Phils.), Inc. v.
Court of Appeals,12 insisted that the arbitration clause was
without question valid.
After KOGIES filed a Supplemental Memorandum with
Motion to Dismiss13 answering PGSMC’s memorandum of
July 22, 1998 and seeking dismissal of PGSMC’s
counterclaims, KOGIES, on August 4, 1998, filed its Motion
for Reconsideration14 of the July 23, 1998 Order denying its
application for an injunctive writ claiming that the contract
was not merely for machinery and facilities worth USD
1,224,000 but was for the sale of an "LPG manufacturing
plant" consisting of "supply of all the machinery and facilities"
and "transfer of technology" for a total contract price of USD
1,530,000 such that the dismantling and transfer of the
machinery and facilities would result in the dismantling and
transfer of the very plant itself to the great prejudice of
KOGIES as the still unpaid owner/seller of the plant.
Moreover, KOGIES points out that the arbitration clause
under Art. 15 of the Contract as amended was a valid
arbitration stipulation under Art. 2044 of the Civil Code and as
held by this Court in Chung Fu Industries (Phils.), Inc.15
In the meantime, PGSMC filed a Motion for Inspection of
Things16 to determine whether there was indeed alteration of
the quantity and lowering of quality of the machineries and
equipment, and whether these were properly installed.
KOGIES opposed the motion positing that the queries and
issues raised in the motion for inspection fell under the
coverage of the arbitration clause in their contract.
On September 21, 1998, the trial court issued an Order (1)
granting PGSMC’s motion for inspection; (2) denying
KOGIES’ motion for reconsideration of the July 23, 1998
RTC Order; and (3) denying KOGIES’ motion to dismiss
PGSMC’s compulsory counterclaims as these counterclaims
fell within the requisites of compulsory counterclaims.
On October 2, 1998, KOGIES filed an Urgent Motion for
Reconsideration17 of the September 21, 1998 RTC Order
granting inspection of the plant and denying dismissal of
PGSMC’s compulsory counterclaims.
Ten days after, on October 12, 1998, without waiting for the
resolution of its October 2, 1998 urgent motion for
reconsideration, KOGIES filed before the Court of Appeals
(CA) a petition for certiorari 18 docketed as CA-G.R. SP No. September 21, 1998 RTC Order which was the plain, speedy,
49249, seeking annulment of the July 23, 1998 and September and adequate remedy available. According to the CA, the RTC
21, 1998 RTC Orders and praying for the issuance of writs of must be given the opportunity to correct any alleged error it
prohibition, mandamus, and preliminary injunction to enjoin has committed, and that since the assailed orders were
the RTC and PGSMC from inspecting, dismantling, and interlocutory, these cannot be the subject of a petition for
transferring the machineries and equipment in the Carmona certiorari.
plant, and to direct the RTC to enforce the specific agreement
on arbitration to resolve the dispute. Hence, we have this Petition for Review on Certiorari under
Rule 45.
In the meantime, on October 19, 1998, the RTC denied
KOGIES’ urgent motion for reconsideration and directed the The Issues
Branch Sheriff to proceed with the inspection of the
machineries and equipment in the plant on October 28, 1998.19 Petitioner posits that the appellate court committed the
following errors:
Thereafter, KOGIES filed a Supplement to the Petition 20 in
CA-G.R. SP No. 49249 informing the CA about the October a. PRONOUNCING THE QUESTION OF
19, 1998 RTC Order. It also reiterated its prayer for the OWNERSHIP OVER THE MACHINERY AND
issuance of the writs of prohibition, mandamus and FACILITIES AS "A QUESTION OF FACT"
preliminary injunction which was not acted upon by the CA. "BEYOND THE AMBIT OF A PETITION FOR
KOGIES asserted that the Branch Sheriff did not have the CERTIORARI" INTENDED ONLY FOR
technical expertise to ascertain whether or not the machineries CORRECTION OF ERRORS OF JURISDICTION
and equipment conformed to the specifications in the contract OR GRAVE ABUSE OF DISCRETION
and were properly installed. AMOUNTING TO LACK OF (SIC) EXCESS OF
JURISDICTION, AND CONCLUDING THAT THE
On November 11, 1998, the Branch Sheriff filed his Sheriff’s TRIAL COURT’S FINDING ON THE SAME
Report21 finding that the enumerated machineries and QUESTION WAS IMPROPERLY RAISED IN THE
equipment were not fully and properly installed. PETITION BELOW;

The Court of Appeals affirmed the trial court and declared b. DECLARING AS NULL AND VOID THE
the arbitration clause against public policy ARBITRATION CLAUSE IN ARTICLE 15 OF
THE CONTRACT BETWEEN THE PARTIES FOR
On May 30, 2000, the CA rendered the assailed BEING "CONTRARY TO PUBLIC POLICY" AND
Decision22 affirming the RTC Orders and dismissing the FOR OUSTING THE COURTS OF
petition for certiorari filed by KOGIES. The CA found that the JURISDICTION;
RTC did not gravely abuse its discretion in issuing the assailed
July 23, 1998 and September 21, 1998 Orders. Moreover, the c. DECREEING PRIVATE RESPONDENT’S
CA reasoned that KOGIES’ contention that the total contract COUNTERCLAIMS TO BE ALL COMPULSORY
price for USD 1,530,000 was for the whole plant and had not NOT NECESSITATING PAYMENT OF DOCKET
been fully paid was contrary to the finding of the RTC that FEES AND CERTIFICATION OF NON-FORUM
PGSMC fully paid the price of USD 1,224,000, which was for SHOPPING;
all the machineries and equipment. According to the CA, this
determination by the RTC was a factual finding beyond the d. RULING THAT THE PETITION WAS FILED
ambit of a petition for certiorari. PREMATURELY WITHOUT WAITING FOR THE
RESOLUTION OF THE MOTION FOR
On the issue of the validity of the arbitration clause, the CA RECONSIDERATION OF THE ORDER DATED
agreed with the lower court that an arbitration clause which SEPTEMBER 21, 1998 OR WITHOUT GIVING
provided for a final determination of the legal rights of the THE TRIAL COURT AN OPPORTUNITY TO
parties to the contract by arbitration was against public policy. CORRECT ITSELF;

On the issue of nonpayment of docket fees and non- e. PROCLAIMING THE TWO ORDERS DATED
attachment of a certificate of non-forum shopping by PGSMC, JULY 23 AND SEPTEMBER 21, 1998 NOT TO BE
the CA held that the counterclaims of PGSMC were PROPER SUBJECTS OF CERTIORARI AND
compulsory ones and payment of docket fees was not required PROHIBITION FOR BEING "INTERLOCUTORY
since the Answer with counterclaim was not an initiatory IN NATURE;"
pleading. For the same reason, the CA said a certificate of
non-forum shopping was also not required. f. NOT GRANTING THE RELIEFS AND
REMEDIES PRAYED FOR IN HE (SIC) PETITION
Furthermore, the CA held that the petition for certiorari had AND, INSTEAD, DISMISSING THE SAME FOR
been filed prematurely since KOGIES did not wait for the ALLEGEDLY "WITHOUT MERIT."23
resolution of its urgent motion for reconsideration of the
The Court’s Ruling
The petition is partly meritorious.
Before we delve into the substantive issues, we shall first
tackle the procedural issues.
The rules on the payment of docket fees for counterclaims
and cross claims were amended effective August 16, 2004
KOGIES strongly argues that when PGSMC filed the
counterclaims, it should have paid docket fees and filed a
certificate of non-forum shopping, and that its failure to do so
was a fatal defect.
We disagree with KOGIES.
As aptly ruled by the CA, the counterclaims of PGSMC were
incorporated in its Answer with Compulsory Counterclaim
dated July 17, 1998 in accordance with Section 8 of Rule 11,
1997 Revised Rules of Civil Procedure, the rule that was
effective at the time the Answer with Counterclaim was filed.
Sec. 8 on existing counterclaim or cross-claim states, "A
compulsory counterclaim or a cross-claim that a defending
party has at the time he files his answer shall be contained
therein."
On July 17, 1998, at the time PGSMC filed its Answer
incorporating its counterclaims against KOGIES, it was not
liable to pay filing fees for said counterclaims being
compulsory in nature. We stress, however, that effective
August 16, 2004 under Sec. 7, Rule 141, as amended by A.M.
No. 04-2-04-SC, docket fees are now required to be paid in
compulsory counterclaim or cross-claims.
As to the failure to submit a certificate of forum shopping,
PGSMC’s Answer is not an initiatory pleading which requires
a certification against forum shopping under Sec. 524 of Rule
7, 1997 Revised Rules of Civil Procedure. It is a responsive
pleading, hence, the courts a quo did not commit reversible
error in denying KOGIES’ motion to dismiss PGSMC’s
compulsory counterclaims.
Interlocutory orders proper subject of certiorari
Citing Gamboa v. Cruz,25 the CA also pronounced that
"certiorari and Prohibition are neither the remedies to question
the propriety of an interlocutory order of the trial court." 26 The
CA erred on its reliance on Gamboa. Gamboa involved the
denial of a motion to acquit in a criminal case which was not
assailable in an action for certiorari since the denial of a
motion to quash required the accused to plead and to continue
with the trial, and whatever objections the accused had in his
motion to quash can then be used as part of his defense and
subsequently can be raised as errors on his appeal if the
judgment of the trial court is adverse to him. The general rule
is that interlocutory orders cannot be challenged by an
appeal.27 Thus, in Yamaoka v. Pescarich Manufacturing
Corporation, we held:
The proper remedy in such cases is an ordinary
appeal from an adverse judgment on the merits,
incorporating in said appeal the grounds for assailing
the interlocutory orders. Allowing appeals from
interlocutory orders would result in the ‘sorry
spectacle’ of a case being subject of a
counterproductive ping-pong to and from the
appellate court as often as a trial court is perceived to
have made an error in any of its interlocutory rulings.
However, where the assailed interlocutory order was
issued with grave abuse of discretion or patently
erroneous and the remedy of appeal would not afford
adequate and expeditious relief, the Court allows
certiorari as a mode of redress.28
Also, appeals from interlocutory orders would open the
floodgates to endless occasions for dilatory motions. Thus,
where the interlocutory order was issued without or in excess
of jurisdiction or with grave abuse of discretion, the remedy is
certiorari.29
The alleged grave abuse of discretion of the respondent court
equivalent to lack of jurisdiction in the issuance of the two
assailed orders coupled with the fact that there is no plain,
speedy, and adequate remedy in the ordinary course of law
amply provides the basis for allowing the resort to a petition
for certiorari under Rule 65.
Prematurity of the petition before the CA
Neither do we think that KOGIES was guilty of forum
shopping in filing the petition for certiorari. Note that
KOGIES’ motion for reconsideration of the July 23, 1998
RTC Order which denied the issuance of the injunctive writ
had already been denied. Thus, KOGIES’ only remedy was to
assail the RTC’s interlocutory order via a petition for certiorari
under Rule 65.
While the October 2, 1998 motion for reconsideration of
KOGIES of the September 21, 1998 RTC Order relating to the
inspection of things, and the allowance of the compulsory
counterclaims has not yet been resolved, the circumstances in
this case would allow an exception to the rule that before
certiorari may be availed of, the petitioner must have filed a
motion for reconsideration and said motion should have been
first resolved by the court a quo. The reason behind the rule is
"to enable the lower court, in the first instance, to pass upon
and correct its mistakes without the intervention of the higher
court."30
The September 21, 1998 RTC Order directing the branch
sheriff to inspect the plant, equipment, and facilities when he
is not competent and knowledgeable on said matters is
evidently flawed and devoid of any legal support. Moreover,
there is an urgent necessity to resolve the issue on the
dismantling of the facilities and any further delay would
prejudice the interests of KOGIES. Indeed, there is real and
imminent threat of irreparable destruction or substantial
damage to KOGIES’ equipment and machineries. We find the
resort to certiorari based on the gravely abusive orders of the
trial court sans the ruling on the October 2, 1998 motion for
reconsideration to be proper.
The Core Issue: Article 15 of the Contract
We now go to the core issue of the validity of Art. 15 of the
Contract, the arbitration clause. It provides:
Article 15. Arbitration.—All disputes, controversies,
or differences which may arise between the parties,
out of or in relation to or in connection with this
Contract or for the breach thereof, shall finally be
settled by arbitration in Seoul, Korea in accordance
with the Commercial Arbitration Rules of the Korean
Commercial Arbitration Board. The award
rendered by the arbitration(s) shall be final and
binding upon both parties concerned. (Emphasis
supplied.)
Petitioner claims the RTC and the CA erred in ruling that the
arbitration clause is null and void.
Petitioner is correct.
Established in this jurisdiction is the rule that the law of the
place where the contract is made governs. Lex loci contractus.
The contract in this case was perfected here in the Philippines.
Therefore, our laws ought to govern. Nonetheless, Art. 2044
of the Civil Code sanctions the validity of mutually agreed
arbitral clause or the finality and binding effect of an arbitral
award. Art. 2044 provides, "Any stipulation that the
arbitrators’ award or decision shall be final, is valid,
without prejudice to Articles 2038, 2039 and 2040."
(Emphasis supplied.)
Arts. 2038,31 2039,32 and 204033 abovecited refer to instances
where a compromise or an arbitral award, as applied to Art.
2044 pursuant to Art. 2043,34 may be voided, rescinded, or
annulled, but these would not denigrate the finality of the
arbitral award.
The arbitration clause was mutually and voluntarily agreed
upon by the parties. It has not been shown to be contrary to
any law, or against morals, good customs, public order, or
public policy. There has been no showing that the parties have
not dealt with each other on equal footing. We find no reason
why the arbitration clause should not be respected and
complied with by both parties. In Gonzales v. Climax Mining
Ltd.,35 we held that submission to arbitration is a contract and
that a clause in a contract providing that all matters in dispute
between the parties shall be referred to arbitration is a
contract.36 Again in Del Monte Corporation-USA v. Court of
Appeals, we likewise ruled that "[t]he provision to submit to
arbitration any dispute arising therefrom and the relationship
of the parties is part of that contract and is itself a contract." 37
Arbitration clause not contrary to public policy
The arbitration clause which stipulates that the arbitration
must be done in Seoul, Korea in accordance with the
Commercial Arbitration Rules of the KCAB, and that the
arbitral award is final and binding, is not contrary to public
policy. This Court has sanctioned the validity of arbitration
clauses in a catena of cases. In the 1957 case of Eastboard
Navigation Ltd. v. Juan Ysmael and Co., Inc.,38 this Court had
occasion to rule that an arbitration clause to resolve
differences and breaches of mutually agreed contractual terms
is valid. In BF Corporation v. Court of Appeals, we held that
"[i]n this jurisdiction, arbitration has been held valid and
constitutional. Even before the approval on June 19, 1953 of
Republic Act No. 876, this Court has countenanced the
settlement of disputes through arbitration. Republic Act No.
876 was adopted to supplement the New Civil Code’s
provisions on arbitration."39 And in LM Power Engineering
Corporation v. Capitol Industrial Construction Groups, Inc.,
we declared that:
Being an inexpensive, speedy and amicable method
of settling disputes, arbitration––along with
mediation, conciliation and negotiation––is
encouraged by the Supreme Court. Aside from
unclogging judicial dockets, arbitration also hastens
the resolution of disputes, especially of the
commercial kind. It is thus regarded as the "wave of
the future" in international civil and commercial
disputes. Brushing aside a contractual agreement
calling for arbitration between the parties would be a
step backward.
Consistent with the above-mentioned policy of
encouraging alternative dispute resolution methods,
courts should liberally construe arbitration clauses.
Provided such clause is susceptible of an
interpretation that covers the asserted dispute, an
order to arbitrate should be granted. Any doubt
should be resolved in favor of arbitration.40
Having said that the instant arbitration clause is not against
public policy, we come to the question on what governs an
arbitration clause specifying that in case of any dispute arising
from the contract, an arbitral panel will be constituted in a
foreign country and the arbitration rules of the foreign country
would govern and its award shall be final and binding.
RA 9285 incorporated the UNCITRAL Model law
to which we are a signatory
For domestic arbitration proceedings, we have particular
agencies to arbitrate disputes arising from contractual
relations. In case a foreign arbitral body is chosen by the
parties, the arbitration rules of our domestic arbitration bodies
would not be applied. As signatory to the Arbitration Rules of
the UNCITRAL Model Law on International Commercial
Arbitration41 of the United Nations Commission on
International Trade Law (UNCITRAL) in the New York
Convention on June 21, 1985, the Philippines committed itself
to be bound by the Model Law. We have even incorporated
the Model Law in Republic Act No. (RA) 9285, otherwise
known as the Alternative Dispute Resolution Act of 2004
entitled An Act to Institutionalize the Use of an Alternative
Dispute Resolution System in the Philippines and to Establish
the Office for Alternative Dispute Resolution, and for Other
Purposes, promulgated on April 2, 2004. Secs. 19 and 20 of
Chapter 4 of the Model Law are the pertinent provisions:
CHAPTER 4 - INTERNATIONAL COMMERCIAL
ARBITRATION
SEC. 19. Adoption of the Model Law on
International Commercial Arbitration.––International
commercial arbitration shall be governed by the
Model Law on International Commercial Arbitration
(the "Model Law") adopted by the United Nations
Commission on International Trade Law on June 21,
1985 (United Nations Document A/40/17) and
recommended for enactment by the General
Assembly in Resolution No. 40/72 approved on
December 11, 1985, copy of which is hereto attached
as Appendix "A".
SEC. 20. Interpretation of Model Law.––In
interpreting the Model Law, regard shall be had to its
international origin and to the need for uniformity in
its interpretation and resort may be made to
the travaux preparatories and the report of the
Secretary General of the United Nations Commission
on International Trade Law dated March 25, 1985
entitled, "International Commercial Arbitration:
Analytical Commentary on Draft Trade identified by
reference number A/CN. 9/264."
While RA 9285 was passed only in 2004, it nonetheless
applies in the instant case since it is a procedural law which
has a retroactive effect. Likewise, KOGIES filed its
application for arbitration before the KCAB on July 1, 1998
and it is still pending because no arbitral award has yet been
rendered. Thus, RA 9285 is applicable to the instant case.
Well-settled is the rule that procedural laws are construed to
be applicable to actions pending and undetermined at the time
of their passage, and are deemed retroactive in that sense and
to that extent. As a general rule, the retroactive application of
procedural laws does not violate any personal rights because
no vested right has yet attached nor arisen from them.42
Among the pertinent features of RA 9285 applying and
incorporating the UNCITRAL Model Law are the following:
(1) The RTC must refer to arbitration in proper cases
Under Sec. 24, the RTC does not have jurisdiction over
disputes that are properly the subject of arbitration pursuant to
an arbitration clause, and mandates the referral to arbitration
in such cases, thus:
SEC. 24. Referral to Arbitration.––A court before
which an action is brought in a matter which is the
subject matter of an arbitration agreement shall, if at
least one party so requests not later than the pre-trial
conference, or upon the request of both parties
thereafter, refer the parties to arbitration unless it
finds that the arbitration agreement is null and void,
inoperative or incapable of being performed.
(2) Foreign arbitral awards must be confirmed by the RTC
Foreign arbitral awards while mutually stipulated by the
parties in the arbitration clause to be final and binding are not
immediately enforceable or cannot be implemented
immediately. Sec. 3543 of the UNCITRAL Model Law
stipulates the requirement for the arbitral award to be
recognized by a competent court for enforcement, which court
under Sec. 36 of the UNCITRAL Model Law may refuse
recognition or enforcement on the grounds provided for. RA
9285 incorporated these provisos to Secs. 42, 43, and 44
relative to Secs. 47 and 48, thus:
SEC. 42. Application of the New York Convention.––
The New York Convention shall govern the
recognition and enforcement of arbitral awards
covered by said Convention.
The recognition and enforcement of such arbitral
awards shall be filed with the Regional Trial
Court in accordance with the rules of procedure to be
promulgated by the Supreme Court. Said procedural
rules shall provide that the party relying on the award
or applying for its enforcement shall file with the
court the original or authenticated copy of the award
and the arbitration agreement. If the award or
agreement is not made in any of the official
languages, the party shall supply a duly certified
translation thereof into any of such languages.
The applicant shall establish that the country in
which foreign arbitration award was made in party to
the New York Convention.
xxxx
SEC. 43. Recognition and Enforcement of Foreign
Arbitral Awards Not Covered by the New York
Convention.––The recognition and enforcement of
foreign arbitral awards not covered by the New York
Convention shall be done in accordance with
procedural rules to be promulgated by the Supreme
Court. The Court may, on grounds of comity and
reciprocity, recognize and enforce a non-convention
award as a convention award.
SEC. 44. Foreign Arbitral Award Not Foreign
Judgment.––A foreign arbitral award when
confirmed by a court of a foreign country, shall be
recognized and enforced as a foreign arbitral award
and not as a judgment of a foreign court.
A foreign arbitral award, when confirmed by the
Regional Trial Court, shall be enforced in the same
manner as final and executory decisions of courts of
law of the Philippines
 xxxx
SEC. 47. Venue and Jurisdiction.––Proceedings for
recognition and enforcement of an arbitration
agreement or for vacations, setting aside, correction
or modification of an arbitral award, and any
application with a court for arbitration assistance and
supervision shall be deemed as special proceedings
and shall be filed with the Regional Trial Court (i)
where arbitration proceedings are conducted; (ii)
where the asset to be attached or levied upon, or the
act to be enjoined is located; (iii) where any of the
parties to the dispute resides or has his place of
business; or (iv) in the National Judicial Capital
Region, at the option of the applicant.
SEC. 48. Notice of Proceeding to Parties.––In a
special proceeding for recognition and enforcement
of an arbitral award, the Court shall send notice to the
parties at their address of record in the arbitration, or
if any part cannot be served notice at such address, at
such party’s last known address. The notice shall be
sent al least fifteen (15) days before the date set for
the initial hearing of the application.
It is now clear that foreign arbitral awards when confirmed by
the RTC are deemed not as a judgment of a foreign court but
as a foreign arbitral award, and when confirmed, are enforced
as final and executory decisions of our courts of law.
Thus, it can be gleaned that the concept of a final and binding
arbitral award is similar to judgments or awards given by
some of our quasi-judicial bodies, like the National Labor
Relations Commission and Mines Adjudication Board, whose
final judgments are stipulated to be final and binding, but not
immediately executory in the sense that they may still be
judicially reviewed, upon the instance of any party. Therefore,
the final foreign arbitral awards are similarly situated in that
they need first to be confirmed by the RTC.
(3) The RTC has jurisdiction to review foreign arbitral
awards
Sec. 42 in relation to Sec. 45 of RA 9285 designated and
vested the RTC with specific authority and jurisdiction to set
aside, reject, or vacate a foreign arbitral award on grounds
provided under Art. 34(2) of the UNCITRAL Model Law.
Secs. 42 and 45 provide:
SEC. 42. Application of the New York Convention.––
The New York Convention shall govern the
recognition and enforcement of arbitral awards
covered by said Convention.
The recognition and enforcement of such arbitral
awards shall be filed with the Regional Trial
Court in accordance with the rules of procedure to be
promulgated by the Supreme Court. Said procedural
rules shall provide that the party relying on the award
or applying for its enforcement shall file with the
court the original or authenticated copy of the award
and the arbitration agreement. If the award or
agreement is not made in any of the official
languages, the party shall supply a duly certified
translation thereof into any of such languages.
The applicant shall establish that the country in
which foreign arbitration award was made is party to
the New York Convention.
If the application for rejection or suspension of
enforcement of an award has been made, the
Regional Trial Court may, if it considers it proper,
vacate its decision and may also, on the application
of the party claiming recognition or enforcement of
the award, order the party to provide appropriate
security.
xxxx
SEC. 45. Rejection of a Foreign Arbitral Award.––A
party to a foreign arbitration proceeding may oppose
an application for recognition and enforcement of the
arbitral award in accordance with the procedures and
rules to be promulgated by the Supreme Court only
on those grounds enumerated under Article V of the
New York Convention. Any other ground raised shall
be disregarded by the Regional Trial Court.
Thus, while the RTC does not have jurisdiction over disputes
governed by arbitration mutually agreed upon by the parties,
still the foreign arbitral award is subject to judicial review by
the RTC which can set aside, reject, or vacate it. In this sense,
what this Court held in Chung Fu Industries (Phils.), Inc.
relied upon by KOGIES is applicable insofar as the foreign
arbitral awards, while final and binding, do not oust courts of
jurisdiction since these arbitral awards are not absolute and
without exceptions as they are still judicially reviewable.
Chapter 7 of RA 9285 has made it clear that all arbitral
awards, whether domestic or foreign, are subject to judicial
review on specific grounds provided for.
(4) Grounds for judicial review different in domestic and
foreign arbitral awards
The differences between a final arbitral award from an
international or foreign arbitral tribunal and an award given by
a local arbitral tribunal are the specific grounds or conditions
that vest jurisdiction over our courts to review the awards.
For foreign or international arbitral awards which must first be
confirmed by the RTC, the grounds for setting aside, rejecting
or vacating the award by the RTC are provided under Art.
34(2) of the UNCITRAL Model Law.
For final domestic arbitral awards, which also need
confirmation by the RTC pursuant to Sec. 23 of RA 876 44 and
shall be recognized as final and executory decisions of the
RTC,45 they may only be assailed before the RTC and vacated
on the grounds provided under Sec. 25 of RA 876.46
(5) RTC decision of assailed foreign arbitral award
appealable
Sec. 46 of RA 9285 provides for an appeal before the CA as
the remedy of an aggrieved party in cases where the RTC sets
aside, rejects, vacates, modifies, or corrects an arbitral award,
thus:
SEC. 46. Appeal from Court Decision or Arbitral
Awards.—A decision of the Regional Trial Court
confirming, vacating, setting aside, modifying or
correcting an arbitral award may be appealed to the
Court of Appeals in accordance with the rules and
procedure to be promulgated by the Supreme Court.
The losing party who appeals from the judgment of
the court confirming an arbitral award shall be
required by the appellate court to post a counterbond
executed in favor of the prevailing party equal to the
amount of the award in accordance with the rules to
be promulgated by the Supreme Court.
Thereafter, the CA decision may further be appealed or
reviewed before this Court through a petition for review under
Rule 45 of the Rules of Court.
PGSMC has remedies to protect its interests
Thus, based on the foregoing features of RA 9285, PGSMC
must submit to the foreign arbitration as it bound itself
through the subject contract. While it may have misgivings on
the foreign arbitration done in Korea by the KCAB, it has
available remedies under RA 9285. Its interests are duly
protected by the law which requires that the arbitral award that
may be rendered by KCAB must be confirmed here by the
RTC before it can be enforced.
With our disquisition above, petitioner is correct in its
contention that an arbitration clause, stipulating that the
arbitral award is final and binding, does not oust our courts of
jurisdiction as the international arbitral award, the award of
which is not absolute and without exceptions, is still judicially
reviewable under certain conditions provided for by the
UNCITRAL Model Law on ICA as applied and incorporated
in RA 9285.
Finally, it must be noted that there is nothing in the subject
Contract which provides that the parties may dispense with the
arbitration clause.
Unilateral rescission improper and illegal
Having ruled that the arbitration clause of the subject contract
is valid and binding on the parties, and not contrary to public
policy; consequently, being bound to the contract of
arbitration, a party may not unilaterally rescind or terminate
the contract for whatever cause without first resorting to
arbitration.
What this Court held in University of the Philippines v. De
Los Angeles47 and reiterated in succeeding cases, 48 that the act
of treating a contract as rescinded on account of infractions by
the other contracting party is valid albeit provisional as it can
be judicially assailed, is not applicable to the instant case on
account of a valid stipulation on arbitration. Where an
arbitration clause in a contract is availing, neither of the
parties can unilaterally treat the contract as rescinded since
whatever infractions or breaches by a party or differences
arising from the contract must be brought first and resolved by
arbitration, and not through an extrajudicial rescission or
judicial action.
The issues arising from the contract between PGSMC and
KOGIES on whether the equipment and machineries delivered
and installed were properly installed and operational in the
plant in Carmona, Cavite; the ownership of equipment and
payment of the contract price; and whether there was
substantial compliance by KOGIES in the production of the
samples, given the alleged fact that PGSMC could not supply
the raw materials required to produce the sample LPG
cylinders, are matters proper for arbitration. Indeed, we note
that on July 1, 1998, KOGIES instituted an Application for
Arbitration before the KCAB in Seoul, Korea pursuant to Art.
15 of the Contract as amended. Thus, it is incumbent upon
PGSMC to abide by its commitment to arbitrate.
Corollarily, the trial court gravely abused its discretion in
granting PGSMC’s Motion for Inspection of Things on
September 21, 1998, as the subject matter of the motion is
under the primary jurisdiction of the mutually agreed arbitral
body, the KCAB in Korea.
In addition, whatever findings and conclusions made by the
RTC Branch Sheriff from the inspection made on October 28,
1998, as ordered by the trial court on October 19, 1998, is of
no worth as said Sheriff is not technically competent to
ascertain the actual status of the equipment and machineries as
installed in the plant.
For these reasons, the September 21, 1998 and October 19,
1998 RTC Orders pertaining to the grant of the inspection of
the equipment and machineries have to be recalled and
nullified.
Issue on ownership of plant proper for arbitration
Petitioner assails the CA ruling that the issue petitioner raised
on whether the total contract price of USD 1,530,000 was for
the whole plant and its installation is beyond the ambit of a
Petition for Certiorari.
Petitioner’s position is untenable.
It is settled that questions of fact cannot be raised in an
original action for certiorari.49 Whether or not there was full
payment for the machineries and equipment and installation is
indeed a factual issue prohibited by Rule 65.
However, what appears to constitute a grave abuse of
discretion is the order of the RTC in resolving the issue on the
ownership of the plant when it is the arbitral body (KCAB)
and not the RTC which has jurisdiction and authority over the
said issue. The RTC’s determination of such factual issue
constitutes grave abuse of discretion and must be reversed and
set aside.
RTC has interim jurisdiction to protect the rights of the
parties
Anent the July 23, 1998 Order denying the issuance of the
injunctive writ paving the way for PGSMC to dismantle and
transfer the equipment and machineries, we find it to be in
order considering the factual milieu of the instant case.
Firstly, while the issue of the proper installation of the
equipment and machineries might well be under the primary
jurisdiction of the arbitral body to decide, yet the RTC under
Sec. 28 of RA 9285 has jurisdiction to hear and grant interim
measures to protect vested rights of the parties. Sec. 28
pertinently provides:
SEC. 28. Grant of interim Measure of Protection.—
(a) It is not incompatible with an arbitration
agreement for a party to request, before
constitution of the tribunal, from a Court to grant
such measure. After constitution of the arbitral
tribunal and during arbitral proceedings, a request for
an interim measure of protection, or modification
thereof, may be made with the arbitral or to the
extent that the arbitral tribunal has no power to
act or is unable to act effectivity, the request may
be made with the Court. The arbitral tribunal is
deemed constituted when the sole arbitrator or the
third arbitrator, who has been nominated, has
accepted the nomination and written communication
of said nomination and acceptance has been received
by the party making the request.
(b) The following rules on interim or provisional
relief shall be observed:
Any party may request that provisional relief be
granted against the adverse party.
Such relief may be granted:
(i) to prevent irreparable loss or injury;
(ii) to provide security for the performance
of any obligation;
(iii) to produce or preserve any evidence; or
(iv) to compel any other appropriate act or
omission.
(c) The order granting provisional relief may be
conditioned upon the provision of security or any act
or omission specified in the order.
(d) Interim or provisional relief is requested by
written application transmitted by reasonable means
to the Court or arbitral tribunal as the case may be
and the party against whom the relief is sought,
describing in appropriate detail the precise relief, the
party against whom the relief is requested, the
grounds for the relief, and the evidence supporting
the request.
(e) The order shall be binding upon the parties.
(f) Either party may apply with the Court for
assistance in implementing or enforcing an interim
measure ordered by an arbitral tribunal.
(g) A party who does not comply with the order shall
be liable for all damages resulting from
noncompliance, including all expenses, and
reasonable attorney's fees, paid in obtaining the
order’s judicial enforcement. (Emphasis ours.)
Art. 17(2) of the UNCITRAL Model Law on ICA defines an
"interim measure" of protection as:
Article 17. Power of arbitral tribunal to order
interim measures
xxx xxx xxx
(2) An interim measure is any temporary measure,
whether in the form of an award or in another form,
by which, at any time prior to the issuance of the
award by which the dispute is finally decided, the
arbitral tribunal orders a party to:
(a) Maintain or restore the status quo pending
determination of the dispute;
(b) Take action that would prevent, or refrain from
taking action that is likely to cause, current or
imminent harm or prejudice to the arbitral process
itself;
(c) Provide a means of preserving assets out of which
a subsequent award may be satisfied; or
(d) Preserve evidence that may be relevant and
material to the resolution of the dispute.
Art. 17 J of UNCITRAL Model Law on ICA also grants
courts power and jurisdiction to issue interim measures:
Article 17 J. Court-ordered interim measures
 A court shall have the same power of issuing an
interim measure in relation to arbitration proceedings,
irrespective of whether their place is in the territory
of this State, as it has in relation to proceedings in
courts. The court shall exercise such power in
accordance with its own procedures in consideration
of the specific features of international arbitration.
In the recent 2006 case of Transfield Philippines, Inc. v.
Luzon Hydro Corporation, we were explicit that even "the
pendency of an arbitral proceeding does not foreclose resort to
the courts for provisional reliefs." We explicated this way:
As a fundamental point, the pendency of arbitral
proceedings does not foreclose resort to the courts for
provisional reliefs. The Rules of the ICC, which
governs the parties’ arbitral dispute, allows the
application of a party to a judicial authority for
interim or conservatory measures. Likewise, Section
14 of Republic Act (R.A.) No. 876 (The Arbitration
Law) recognizes the rights of any party to petition the
court to take measures to safeguard and/or conserve
any matter which is the subject of the dispute in
arbitration. In addition, R.A. 9285, otherwise known
as the "Alternative Dispute Resolution Act of 2004,"
allows the filing of provisional or interim measures
with the regular courts whenever the arbitral tribunal
has no power to act or to act effectively.50
It is thus beyond cavil that the RTC has authority and
jurisdiction to grant interim measures of protection.
Secondly, considering that the equipment and machineries are
in the possession of PGSMC, it has the right to protect and
preserve the equipment and machineries in the best way it can.
Considering that the LPG plant was non-operational, PGSMC
has the right to dismantle and transfer the equipment and
machineries either for their protection and preservation or for
the better way to make good use of them which is ineluctably
within the management discretion of PGSMC.
Thirdly, and of greater import is the reason that maintaining
the equipment and machineries in Worth’s property is not to
the best interest of PGSMC due to the prohibitive rent while
the LPG plant as set-up is not operational. PGSMC was losing
PhP322,560 as monthly rentals or PhP3.87M for 1998 alone
without considering the 10% annual rent increment in
maintaining the plant.
Moreover, KOGIES is amply protected by the arbitral action it
has instituted before the KCAB, the award of which can be
enforced in our jurisdiction through the RTC. Besides, by our
decision, PGSMC is compelled to submit to arbitration
pursuant to the valid arbitration clause of its contract with
KOGIES.
PGSMC to preserve the subject equipment and
machineries
Finally, while PGSMC may have been granted the right to
dismantle and transfer the subject equipment and machineries,
it does not have the right to convey or dispose of the same
considering the pending arbitral proceedings to settle the
differences of the parties. PGSMC therefore must preserve and
maintain the subject equipment and machineries with the
diligence of a good father of a family51 until final resolution of
the arbitral proceedings and enforcement of the award, if any.
WHEREFORE, this petition is PARTLY GRANTED, in
that:
(1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249
is REVERSED and SET ASIDE;
(2) The September 21, 1998 and October 19, 1998 RTC
Orders in Civil Case No. 98-117 are REVERSED and SET
ASIDE;
(3) The parties are hereby ORDERED to submit themselves
to the arbitration of their dispute and differences arising from
the subject Contract before the KCAB; and
(4) PGSMC is hereby ALLOWED to dismantle and transfer
the equipment and machineries, if it had not done so,
and ORDERED to preserve and maintain them until the
finality of whatever arbitral award is given in the arbitration
proceedings.
No pronouncement as to costs.
SO ORDERED.

Fourthly, and corollarily, while the KCAB can rule on motions

or petitions relating to the preservation or transfer of the
equipment and machineries as an interim measure, yet on
hindsight, the July 23, 1998 Order of the RTC allowing the
transfer of the equipment and machineries given the non-
recognition by the lower courts of the arbitral clause, has
accorded an interim measure of protection to PGSMC which
would otherwise been irreparably damaged.

Fifth, KOGIES is not unjustly prejudiced as it has already

been paid a substantial amount based on the contract.
 Center, Phase II, in Baghdad, Iraq, at a time when the Iran-
Iraq war was ongoing.

In a complaint filed with the Regional Trial Court of Makati

City, docketed as Civil Case No. 91-1906 and assigned to
Branch 58, petitioner Philippine Export and Foreign Loan
Guarantee Corporation1 (hereinafter Philguarantee) sought
reimbursement from the respondents of the sum of money it
paid to Al Ahli Bank of Kuwait pursuant to a guarantee it
issued for respondent V.P. Eusebio Construction, Inc.
(VPECI).

The factual and procedural antecedents in this case are as

follows:

On 8 November 1980, the State Organization of Buildings

(SOB), Ministry of Housing and Construction, Baghdad, Iraq,
awarded the construction of the Institute of Physical Therapy–
Medical Rehabilitation Center, Phase II, in Baghdad, Iraq,
(hereinafter the Project) to Ajyal Trading and Contracting
Company (hereinafter Ajyal), a firm duly licensed with the
Kuwait Chamber of Commerce for a total contract price of
ID5,416,089/046 (or about US$18,739,668).2

On 7 March 1981, respondent spouses Eduardo and Iluminada

Santos, in behalf of respondent 3-Plex International, Inc.
(hereinafter 3-Plex), a local contractor engaged in construction
business, entered into a joint venture agreement with Ajyal
wherein the former undertook the execution of the entire
Project, while the latter would be entitled to a commission of
4% of the contract price. 3 Later, or on 8 April 1981,
respondent 3-Plex, not being accredited by or registered with
FIRST DIVISION the Philippine Overseas Construction Board (POCB), assigned
and transferred all its rights and interests under the joint
venture agreement to VPECI, a construction and engineering
G.R. No. 140047             July 13, 2004
firm duly registered with the POCB. 4 However, on 2 May
1981, 3-Plex and VPECI entered into an agreement that the
PHILIPPINE EXPORT AND FOREIGN LOAN execution of the Project would be under their joint
GUARANTEE CORPORATION, petitioner, management.5
vs.
V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX
The SOB required the contractors to submit (1) a performance
INTERNATIONAL, INC.; VICENTE P. EUSEBIO;
bond of ID271,808/610 representing 5% of the total contract
SOLEDAD C. EUSEBIO; EDUARDO E. SANTOS;
price and (2) an advance payment bond of ID541,608/901
ILUMINADA SANTOS; AND FIRST INTEGRATED
representing 10% of the advance payment to be released upon
BONDING AND INSURANCE COMPANY,
signing of the contract. 6 To comply with these requirements,
INC., respondents.
respondents 3-Plex and VPECI applied for the issuance of a
guarantee with petitioner Philguarantee, a government
financial institution empowered to issue guarantees for
qualified Filipino contractors to secure the performance of
approved service contracts abroad.7
DECISION
Petitioner Philguarantee approved respondents' application.
Subsequently, letters of guarantee 8 were issued by
Philguarantee to the Rafidain Bank of Baghdad covering
100% of the performance and advance payment bonds, but
they were not accepted by SOB. What SOB required was a
DAVIDE, JR., C.J.:
letter-guarantee from Rafidain Bank, the government bank of
Iraq. Rafidain Bank then issued a performance bond in favor
This case is an offshoot of a service contract entered into by a of SOB on the condition that another foreign bank, not
Filipino construction firm with the Iraqi Government for the Philguarantee, would issue a counter-guarantee to cover its
construction of the Institute of Physical Therapy-Medical exposure. Al Ahli Bank of Kuwait was, therefore, engaged to
provide a counter-guarantee to Rafidain Bank, but it required a
similar counter-guarantee in its favor from the petitioner.
Thus, three layers of guarantees had to be arranged.9
Upon the application of respondents 3-Plex and VPECI,
petitioner Philguarantee issued in favor of Al Ahli Bank of
Kuwait Letter of Guarantee No. 81-194-F 10 (Performance
Bond Guarantee) in the amount of ID271,808/610 and Letter
of Guarantee No. 81-195-F11 (Advance Payment Guarantee) in
the amount of ID541,608/901, both for a term of eighteen
months from 25 May 1981. These letters of guarantee were
secured by (1) a Deed of Undertaking 12 executed by
respondents VPECI, Spouses Vicente P. Eusebio and Soledad
C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos and
Iluminada Santos; and (2) a surety bond13 issued by respondent
First Integrated Bonding and Insurance Company, Inc.
(FIBICI). The Surety Bond was later amended on 23 June
1981 to increase the amount of coverage from P6.4 million
to P6.967 million and to change the bank in whose favor the
petitioner's guarantee was issued, from Rafidain Bank to Al
Ahli Bank of Kuwait.14
On 11 June 1981, SOB and the joint venture VPECI and Ajyal
executed the service contract 15 for the construction of the
Institute of Physical Therapy – Medical Rehabilitation Center,
Phase II, in Baghdad, Iraq, wherein the joint venture
contractor undertook to complete the Project within a period
of 547 days or 18 months. Under the Contract, the Joint
Venture would supply manpower and materials, and SOB
would refund to the former 25% of the project cost in Iraqi
Dinar and the 75% in US dollars at the exchange rate of 1
Dinar to 3.37777 US Dollars.16
The construction, which was supposed to start on 2 June 1981,
commenced only on the last week of August 1981. Because of
this delay and the slow progress of the construction work due
to some setbacks and difficulties, the Project was not
completed on 15 November 1982 as scheduled. But in October
1982, upon foreseeing the impossibility of meeting the
deadline and upon the request of Al Ahli Bank, the joint
venture contractor worked for the renewal or extension of the
Performance Bond and Advance Payment Guarantee.
Petitioner's Letters of Guarantee Nos. 81-194-F (Performance
Bond) and 81-195-F (Advance Payment Bond) with expiry
date of 25 November 1982 were then renewed or extended to
9 February 1983 and 9 March 1983, respectively.17 The surety
bond was also extended for another period of one year, from
12 May 1982 to 12 May 1983.18 The Performance Bond was
further extended twelve times with validity of up to 8
December 1986,19 while the Advance Payment Guarantee was
extended three times more up to 24 May 1984 when the latter
was cancelled after full refund or reimbursement by the joint
venture contractor.20 The surety bond was likewise extended to
8 May 1987.21
As of March 1986, the status of the Project was 51%
accomplished, meaning the structures were already finished.
The remaining 47% consisted in electro-mechanical works and
the 2%, sanitary works, which both required importation of
equipment and materials.22
On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call
to the petitioner demanding full payment of its performance
bond counter-guarantee.
Upon receiving a copy of that telex message on 27 October
1986, respondent VPECI requested Iraq Trade and Economic
Development Minister Mohammad Fadhi Hussein to recall the
telex call on the performance guarantee for being a drastic
action in contravention of its mutual agreement with the latter
that (1) the imposition of penalty would be held in abeyance
until the completion of the project; and (2) the time extension
would be open, depending on the developments on the
negotiations for a foreign loan to finance the completion of the
project.23 It also wrote SOB protesting the call for lack of
factual or legal basis, since the failure to complete the Project
was due to (1) the Iraqi government's lack of foreign exchange
with which to pay its (VPECI's) accomplishments and (2)
SOB's noncompliance for the past several years with the
provision in the contract that 75% of the billings would be
paid in US dollars.24 Subsequently, or on 19 November 1986,
respondent VPECI advised the petitioner not to pay yet Al
Ahli Bank because efforts were being exerted for the amicable
settlement of the Project.25
On 14 April 1987, the petitioner received another telex
message from Al Ahli Bank stating that it had already paid to
Rafidain Bank the sum of US$876,564 under its letter of
guarantee, and demanding reimbursement by the petitioner of
what it paid to the latter bank plus interest thereon and related
expenses.26
Both petitioner Philguarantee and respondent VPECI sought
the assistance of some government agencies of the Philippines.
On 10 August 1987, VPECI requested the Central Bank to
hold in abeyance the payment by the petitioner "to allow the
diplomatic machinery to take its course, for otherwise, the
Philippine government , through the Philguarantee and the
Central Bank, would become instruments of the Iraqi
Government in consummating a clear act of injustice and
inequity committed against a Filipino contractor."27
On 27 August 1987, the Central Bank authorized the
remittance for its account of the amount of US$876,564
(equivalent to ID271, 808/610) to Al Ahli Bank representing
full payment of the performance counter-guarantee for
VPECI's project in Iraq. 28
On 6 November 1987, Philguarantee informed VPECI that it
would remit US$876,564 to Al Ahli Bank, and reiterated the
joint and solidary obligation of the respondents to reimburse
the petitioner for the advances made on its counter-
guarantee.29
The petitioner thus paid the amount of US$876,564 to Al Ahli
Bank of Kuwait on 21 January 1988. 30 Then, on 6 May 1988,
the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83
representing interest and penalty charges demanded by the
latter bank.31
On 19 June 1991, the petitioner sent to the respondents
separate letters demanding full payment of the amount
of P47,872,373.98 plus accruing interest, penalty charges, and
10% attorney's fees pursuant to their joint and solidary
obligations under the deed of undertaking and surety
bond.32 When the respondents failed to pay, the petitioner filed
on 9 July 1991 a civil case for collection of a sum of money
against the respondents before the RTC of Makati City.
After due trial, the trial court ruled against Philguarantee and
held that the latter had no valid cause of action against the
respondents. It opined that at the time the call was made on the
guarantee which was executed for a specific period, the
guarantee had already lapsed or expired. There was no valid
renewal or extension of the guarantee for failure of the
petitioner to secure respondents' express consent thereto. The
trial court also found that the joint venture contractor incurred
no delay in the execution of the Project. Considering the
Project owner's violations of the contract which rendered
impossible the joint venture contractor's performance of its
undertaking, no valid call on the guarantee could be made.
Furthermore, the trial court held that no valid notice was first
made by the Project owner SOB to the joint venture contractor
before the call on the guarantee. Accordingly, it dismissed the
complaint, as well as the counterclaims and cross-claim, and
ordered the petitioner to pay attorney's fees of P100,000 to
respondents VPECI and Eusebio Spouses and P100,000 to 3-
Plex and the Santos Spouses, plus costs. 33
In its 14 June 1999 Decision, 34 the Court of Appeals affirmed
the trial court's decision, ratiocinating as follows:
First, appellant cannot deny the fact that it was fully
aware of the status of project implementation as well
as the problems besetting the contractors, between
1982 to 1985, having sent some of its people to
Baghdad during that period. The successive
renewals/extensions of the guarantees in fact, was
prompted by delays, not solely attributable to the
contractors, and such extension understandably
allowed by the SOB (project owner) which had not
anyway complied with its contractual commitment to
tender 75% of payment in US Dollars, and which still
retained overdue amounts collectible by VPECI.
… deed of undertaking and surety bond from the respondents.
Second, appellant was very much aware of the
violations committed by the SOB of its contractual
undertakings with VPECI, principally, the payment
of foreign currency (US$) for 75% of the total
contract price, as well as of the complications and
injustice that will result from its payment of the full
amount of the performance guarantee, as evident in
PHILGUARANTEE's letter dated 13 May 1987 ….
… case the latter should fail to do so. If a person binds himself
Third, appellant was fully aware that SOB was in fact
still obligated to the Joint Venture and there was still
an amount collectible from and still being retained by
the project owner, which amount can be set-off with
the sum covered by the performance guarantee.
…
Fourth, well-apprised of the above conditions
obtaining at the Project site and cognizant of the war
situation at the time in Iraq, appellant, though earlier
has made representations with the SOB regarding a
possible amicable termination of the Project as
suggested by VPECI, made a complete turn-around
and insisted on acting in favor of the unjustified
"call" by the foreign banks.35
The petitioner then came to this Court via Rule 45 of the Rules
of Court claiming that the Court of Appeals erred in affirming
the trial court's ruling that
I
…RESPONDENTS ARE NOT LIABLE UNDER
THE DEED OF UNDERTAKING THEY
EXECUTED IN FAVOR OF PETITIONER IN
CONSIDERATION FOR THE ISSUANCE OF ITS
COUNTER-GUARANTEE AND THAT
PETITIONER CANNOT PASS ON TO
RESPONDENTS WHAT IT HAD PAID UNDER
THE SAID COUNTER-GUARANTEE.
II
…PETITIONER CANNOT CLAIM
SUBROGATION.
III
…IT IS INIQUITOUS AND UNJUST FOR
PETITIONER TO HOLD RESPONDENTS LIABLE
UNDER THEIR DEED OF UNDERTAKING.36
The main issue in this case is whether the petitioner is entitled
to reimbursement of what it paid under Letter of Guarantee
No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the
The petitioner asserts that since the guarantee it issued was
absolute, unconditional, and irrevocable the nature and extent
of its liability are analogous to those of suretyship. Its liability
accrued upon the failure of the respondents to finish the
construction of the Institute of Physical Therapy Buildings in
Baghdad.
By guaranty a person, called the guarantor, binds himself to
the creditor to fulfill the obligation of the principal debtor in
solidarily with the principal debtor, the contract is called
suretyship. 37
Strictly speaking, guaranty and surety are nearly related, and
many of the principles are common to both. In both contracts,
there is a promise to answer for the debt or default of another.
However, in this jurisdiction, they may be distinguished thus:
1. A surety is usually bound with his principal by the
same instrument executed at the same time and on the
same consideration. On the other hand, the contract
of guaranty is the guarantor's own separate
undertaking often supported by a consideration
separate from that supporting the contract of the
principal; the original contract of his principal is not
his contract.
2. A surety assumes liability as a regular party to the
undertaking; while the liability of a guarantor is
conditional depending on the failure of the primary
debtor to pay the obligation.
3. The obligation of a surety is primary, while that of
a guarantor is secondary.
4. A surety is an original promissor and debtor from
the beginning, while a guarantor is charged on his
own undertaking.
5. A surety is, ordinarily, held to know every default
of his principal; whereas a guarantor is not bound to
take notice of the non-performance of his principal.
6. Usually, a surety will not be discharged either by
the mere indulgence of the creditor to the principal or
by want of notice of the default of the principal, no
matter how much he may be injured thereby. A
guarantor is often discharged by the mere indulgence
of the creditor to the principal, and is usually not
liable unless notified of the default of the principal. 38
In determining petitioner's status, it is necessary to read Letter
of Guarantee No. 81-194-F, which provides in part as follows:
In consideration of your issuing the above
performance guarantee/counter-guarantee, we hereby
unconditionally and irrevocably guarantee, under our
Ref. No. LG-81-194 F to pay you on your first
written or telex demand Iraq Dinars Two Hundred
Seventy One Thousand Eight Hundred Eight and fils
six hundred ten (ID271,808/610) representing 100%
of the performance bond required of V.P. EUSEBIO
for the construction of the Physical Therapy Institute,
Phase II, Baghdad, Iraq, plus interest and other
incidental expenses related thereto.
In the event of default by V.P. EUSEBIO, we shall
pay you 100% of the obligation unpaid but in no
case shall such amount exceed Iraq Dinars (ID)
271,808/610 plus interest and other incidental
expenses…. (Emphasis supplied)39
Guided by the abovementioned distinctions between a surety
and a guaranty, as well as the factual milieu of this case, we
find that the Court of Appeals and the trial court were correct
in ruling that the petitioner is a guarantor and not a surety.
That the guarantee issued by the petitioner is unconditional
and irrevocable does not make the petitioner a surety. As a
guaranty, it is still characterized by its subsidiary and
conditional quality because it does not take effect until the
fulfillment of the condition, namely, that the principal obligor
should fail in his obligation at the time and in the form he
bound himself.40 In other words, an unconditional guarantee is
still subject to the condition that the principal debtor should
default in his obligation first before resort to the guarantor
could be had. A conditional guaranty, as opposed to an
unconditional guaranty, is one which depends upon some
extraneous event, beyond the mere default of the principal,
and generally upon notice of the principal's default and
reasonable diligence in exhausting proper remedies against the
principal.41
It appearing that Letter of Guarantee No. 81-194-F merely
stated that in the event of default by respondent VPECI the
petitioner shall pay, the obligation assumed by the petitioner
was simply that of an unconditional guaranty, not conditional
guaranty. But as earlier ruled the fact that petitioner's guaranty
is unconditional does not make it a surety. Besides, surety is
never presumed. A party should not be considered a surety
where the contract itself stipulates that he is acting only as a
guarantor. It is only when the guarantor binds himself
solidarily with the principal debtor that the contract becomes
one of suretyship.42
Having determined petitioner's liability as guarantor, the next
question we have to grapple with is whether the respondent
contractor has defaulted in its obligations that would justify
resort to the guaranty. This is a mixed question of fact and law
that is better addressed by the lower courts, since this Court is
not a trier of facts.
It is a fundamental and settled rule that the findings of fact of
the trial court and the Court of Appeals are binding or
conclusive upon this Court unless they are not supported by
the evidence or unless strong and cogent reasons dictate
otherwise.43 The factual findings of the Court of Appeals are
normally not reviewable by us under Rule 45 of the Rules of
Court except when they are at variance with those of the trial
court. 44 The trial court and the Court of Appeals were in
unison that the respondent contractor cannot be considered to
have defaulted in its obligations because the cause of the delay
was not primarily attributable to it.
A corollary issue is what law should be applied in determining
whether the respondent contractor has defaulted in the
performance of its obligations under the service contract. The
question of whether there is a breach of an agreement, which
includes default or mora,45 pertains to the essential or intrinsic
validity of a contract. 46
No conflicts rule on essential validity of contracts is expressly
provided for in our laws. The rule followed by most legal
systems, however, is that the intrinsic validity of a contract
must be governed by the lex contractus or "proper law of the
contract." This is the law voluntarily agreed upon by the
parties (the lex loci voluntatis) or the law intended by them
either expressly or implicitly (the lex loci intentionis). The law
selected may be implied from such factors as substantial
connection with the transaction, or the nationality or domicile
of the parties.47 Philippine courts would do well to adopt the
first and most basic rule in most legal systems, namely, to
allow the parties to select the law applicable to their contract,
subject to the limitation that it is not against the law, morals,
or public policy of the forum and that the chosen law must
bear a substantive relationship to the transaction. 48
It must be noted that the service contract between SOB and
VPECI contains no express choice of the law that would
govern it. In the United States and Europe, the two rules that
now seem to have emerged as "kings of the hill" are (1) the
parties may choose the governing law; and (2) in the absence
of such a choice, the applicable law is that of the State that
"has the most significant relationship to the transaction and the
parties."49 Another authority proposed that all matters relating
to the time, place, and manner of performance and valid
excuses for non-performance are determined by the law of the
place of performance or lex loci solutionis, which is useful
because it is undoubtedly always connected to the contract in a
significant way.50
In this case, the laws of Iraq bear substantial connection to the
transaction, since one of the parties is the Iraqi Government
and the place of performance is in Iraq. Hence, the issue of
whether respondent VPECI defaulted in its obligations may be
determined by the laws of Iraq. However, since that foreign
law was not properly pleaded or proved, the presumption of
identity or similarity, otherwise known as the processual
presumption, comes into play. Where foreign law is not
pleaded or, even if pleaded, is not proved, the presumption is
that foreign law is the same as ours.51
Our law, specifically Article 1169, last paragraph, of the Civil
Code, provides: "In reciprocal obligations, neither party incurs
in delay if the other party does not comply or is not ready to
comply in a proper manner with what is incumbent upon him."
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. 52 It is the non-fulfillment of an obligation with
respect to time.53
It is undisputed that only 51.7% of the total work had been
accomplished. The 48.3% unfinished portion consisted in the
purchase and installation of electro-mechanical equipment and
materials, which were available from foreign suppliers, thus
requiring US Dollars for their importation. The monthly
billings and payments made by SOB 54 reveal that the
agreement between the parties was a periodic payment by the
Project owner to the contractor depending on the percentage of
accomplishment within the period. 55 The payments were, in
turn, to be used by the contractor to finance the subsequent
phase of the work. 56 However, as explained by VPECI in its
letter to the Department of Foreign Affairs (DFA), the
payment by SOB purely in Dinars adversely affected the
completion of the project; thus:
4. Despite protests from the plaintiff, SOB continued
paying the accomplishment billings of the Contractor
purely in Iraqi Dinars and which payment came only
after some delays.
5. SOB is fully aware of the following:
…
5.2 That Plaintiff is a foreign contractor in Iraq and as
such, would need foreign currency (US$), to finance
the purchase of various equipment, materials,
supplies, tools and to pay for the cost of project
management, supervision and skilled labor not
available in Iraq and therefore have to be imported
and or obtained from the Philippines and other
sources outside Iraq.
5.3 That the Ministry of Labor and Employment of
the Philippines requires the remittance into the
Philippines of 70% of the salaries of Filipino workers
working abroad in US Dollars;
…
5.5 That the Iraqi Dinar is not a freely convertible
currency such that the same cannot be used to
purchase equipment, materials, supplies, etc. outside
of Iraq;
5.6 That most of the materials specified by SOB in
the CONTRACT are not available in Iraq and
therefore have to be imported;
5.7 That the government of Iraq prohibits the
bringing of local currency (Iraqui Dinars) out of Iraq
and hence, imported materials, equipment, etc.,
cannot be purchased or obtained using Iraqui Dinars
as medium of acquisition.
…
8. Following the approved construction program of
the CONTRACT, upon completion of the civil works
portion of the installation of equipment for the
building, should immediately follow, however, the
CONTRACT specified that these equipment which
are to be installed and to form part of the PROJECT
have to be procured outside Iraq since these are not
being locally manufactured. Copy f the relevant
portion of the Technical Specification is hereto
attached as Annex "C" and made an integral part
hereof;
…
 10. Due to the lack of Foreign currency in Iraq for
this purpose, and if only to assist the Iraqi
government in completing the PROJECT, the
Contractor without any obligation on its part to do so
but with the knowledge and consent of SOB and the
Ministry of Housing & Construction of Iraq, offered
to arrange on behalf of SOB, a foreign currency loan,
through the facilities of Circle International S.A., the
Contractor's Sub-contractor and SACE MEDIO
CREDITO which will act as the guarantor for this
foreign currency loan.
Arrangements were first made with Banco di Roma.
Negotiation started in June 1985. SOB is informed of
the developments of this negotiation, attached is a
copy of the draft of the loan Agreement between
SOB as the Borrower and Agent. The Several Banks,
as Lender, and counter-guaranteed by Istituto
Centrale Per II Credito A Medio Termine
(Mediocredito) Sezione Speciale Per L'Assicurazione
Del Credito All'Exportazione (Sace). Negotiations
went on and continued until it suddenly collapsed due
to the reported default by Iraq in the payment of its
obligations with Italian government, copy of the
news clipping dated June 18, 1986 is hereto attached
as Annex "D" to form an integral part hereof;
15. On September 15, 1986, Contractor received
information from Circle International S.A. that
because of the news report that Iraq defaulted in its
obligations with European banks, the approval by
Banco di Roma of the loan to SOB shall be deferred
indefinitely, a copy of the letter of Circle
International together with the news clippings are
hereto attached as Annexes "F" and "F-1",
respectively.57
As found by both the Court of Appeals and the trial court, the
delay or the non-completion of the Project was caused by
factors not imputable to the respondent contractor. It was
rather due mainly to the persistent violations by SOB of the
terms and conditions of the contract, particularly its failure to
pay 75% of the accomplished work in US Dollars. Indeed,
where one of the parties to a contract does not perform in a
proper manner the prestation which he is bound to perform
under the contract, he is not entitled to demand the
performance of the other party. A party does not incur in delay
if the other party fails to perform the obligation incumbent
upon him.
The petitioner, however, maintains that the payments by SOB
of the monthly billings in purely Iraqi Dinars did not render
impossible the performance of the Project by VPECI. Such
posture is quite contrary to its previous representations. In his
26 March 1987 letter to the Office of the Middle Eastern and
African Affairs (OMEAA), DFA, Manila, petitioner's
Executive Vice-President Jesus M. Tañedo stated that while
VPECI had taken every possible measure to complete the
Project, the war situation in Iraq, particularly the lack of
foreign exchange, was proving to be a great obstacle; thus:
VPECI has taken every possible measure for the
completion of the project but the war situation in Iraq
particularly the lack of foreign exchange is proving to
be a great obstacle. Our performance
counterguarantee was called last 26 October 1986
when the negotiations for a foreign currency loan
with the Italian government through Banco de Roma
bogged down following news report that Iraq has
defaulted in its obligation with major European
banks. Unless the situation in Iraq is improved as to
allay the bank's apprehension, there is no assurance
that the project will ever be completed. 58
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 because it must appear that the tolerance or
benevolence of the creditor must have ended. 59
As stated earlier, SOB cannot yet demand complete
performance from VPECI because it has not yet itself
performed its obligation in a proper manner, particularly the
payment of the 75% of the cost of the Project in US Dollars.
The VPECI cannot yet be said to have incurred in delay. Even
assuming that there was delay and that the delay was
attributable to VPECI, still the effects of that delay ceased
upon the renunciation by the creditor, SOB, which could be
implied when the latter granted several extensions of time to
the former. 60 Besides, no demand has yet been made by SOB
against the respondent contractor. Demand is generally
necessary even if a period has been fixed in the obligation.
And default generally begins from the moment the creditor
demands judicially or extra-judicially the performance of the
obligation. Without such demand, the effects of default will
not arise.61
Moreover, the petitioner as a guarantor is entitled to the
benefit of excussion, that is, it cannot be compelled to pay the
creditor SOB unless the property of the debtor VPECI has
been exhausted and all legal remedies against the said debtor
have been resorted to by the creditor. 62 It could also set up
compensation as regards what the creditor SOB may owe the
principal debtor VPECI.63 In this case, however, the petitioner
has clearly waived these rights and remedies by making the
payment of an obligation that was yet to be shown to be
rightfully due the creditor and demandable of the principal
debtor.
As found by the Court of Appeals, the petitioner fully knew
that the joint venture contractor had collectibles from SOB
which could be set off with the amount covered by the
performance guarantee. In February 1987, the OMEAA
transmitted to the petitioner a copy of a telex dated 10
February 1987 of the Philippine Ambassador in Baghdad,
Iraq, informing it of the note verbale sent by the Iraqi Ministry
of Foreign Affairs stating that the past due obligations of the
joint venture contractor from the petitioner would "be
deducted from the dues of the two contractors."64
Also, in the project situationer attached to the letter to the
OMEAA dated 26 March 1987, the petitioner raised as among
the arguments to be presented in support of the cancellation of
the counter-guarantee the fact that the amount of
ID281,414/066 retained by SOB from the Project was more
than enough to cover the counter-guarantee of ID271,808/610;
thus:
6.1 Present the following arguments in cancelling the
counterguarantee:
· The Iraqi Government does not have the
foreign exchange to fulfill its contractual
obligations of paying 75% of progress
billings in US dollars.
… it is clear that the payment made by the petitioner guarantor
· It could also be argued that the amount of
ID281,414/066 retained by SOB from the
proposed project is more than the amount of
the outstanding counterguarantee.65
In a nutshell, since the petitioner was aware of the contractor's
outstanding receivables from SOB, it should have set up
compensation as was proposed in its project situationer.
Moreover, the petitioner was very much aware of the
predicament of the respondents. In fact, in its 13 May 1987
letter to the OMEAA, DFA, Manila, it stated:
VPECI also maintains that the delay in the
completion of the project was mainly due to SOB's
violation of contract terms and as such, call on the
guarantee has no basis.
While PHILGUARANTEE is prepared to honor its
commitment under the guarantee,
PHILGUARANTEE does not want to be an
instrument in any case of inequity committed against
a Filipino contractor. It is for this reason that we are
constrained to seek your assistance not only in
ascertaining the veracity of Al Ahli Bank's claim that
it has paid Rafidain Bank but possibly averting such
an event. As any payment effected by the banks will
complicate matters, we cannot help underscore the
urgency of VPECI's bid for government intervention
for the amicable termination of the contract and
release of the performance guarantee. 66
But surprisingly, though fully cognizant of SOB's violations of
the service contract and VPECI's outstanding receivables from
SOB, as well as the situation obtaining in the Project site
compounded by the Iran-Iraq war, the petitioner opted to pay
the second layer guarantor not only the full amount of the
performance bond counter-guarantee but also interests and
penalty charges.
This brings us to the next question: May the petitioner as a
guarantor secure reimbursement from the respondents for what
it has paid under Letter of Guarantee No. 81-194-F?
As a rule, a guarantor who pays for a debtor should be
indemnified by the latter 67 and would be legally subrogated to
the rights which the creditor has against the debtor. 68 However,
a person who makes payment without the knowledge or
against the will of the debtor has the right to recover only
insofar as the payment has been beneficial to the debtor. 69 If
the obligation was subject to defenses on the part of the
debtor, the same defenses which could have been set up
against the creditor can be set up against the paying
guarantor.70
From the findings of the Court of Appeals and the trial court,
did not in any way benefit the principal debtor, given the
project status and the conditions obtaining at the Project site at
that time. Moreover, the respondent contractor was found to
have valid defenses against SOB, which are fully supported by
evidence and which have been meritoriously set up against the
paying guarantor, the petitioner in this case. And even if the
deed of undertaking and the surety bond secured petitioner's
guaranty, the petitioner is precluded from enforcing the same
by reason of the petitioner's undue payment on the guaranty.
Rights under the deed of undertaking and the surety bond do
not arise because these contracts depend on the validity of the
enforcement of the guaranty.
The petitioner guarantor should have waited for the natural
course of guaranty: the debtor VPECI should have, in the first
place, defaulted in its obligation and that the creditor SOB
should have first made a demand from the principal debtor. It
is only when the debtor does not or cannot pay, in whole or in
part, that the guarantor should pay. 71 When the petitioner
guarantor in this case paid against the will of the debtor
VPECI, the debtor VPECI may set up against it defenses
available against the creditor SOB at the time of payment.
This is the hard lesson that the petitioner must learn.
As the government arm in pursuing its objective of providing
"the necessary support and assistance in order to enable …
[Filipino exporters and contractors to operate viably under the
prevailing economic and business conditions,"72 the petitioner
should have exercised prudence and caution under the
circumstances. As aptly put by the Court of Appeals, it would
be the height of inequity to allow the petitioner to pass on its
losses to the Filipino contractor VPECI which had sternly
warned against paying the Al Ahli Bank and constantly
apprised it of the developments in the Project implementation.
WHEREFORE, the petition for review on certiorari is
hereby DENIED for lack of merit, and the decision of the
Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
FIRST DIVISION

[G.R. No. 124110. April 20, 2001.]

UNITED AIRLINES, INC., Petitioner, v. COURT OF

APPEALS, ANICETO FONTANILLA in his personal
capacity and in behalf of his minor son MYCHAL
ANDREW FONTANILLA, Respondents.

DECISION

KAPUNAN, J.:

On March 1, 1989, private respondent Aniceto Fontanilla

purchased from petitioner United Airlines, through the
Philippine Travel Bureau in Manila, three (3) "Visit the
U.S.A." tickets for himself, his wife and his minor son Mychal
for the following routes:chanrob1es virtua1 1aw 1ibrary

(a) San Francisco to Washington (15 April 1989);

(b) Washington to Chicago (25 April 1989);

(c) Chicago to Los Angeles (29 April 1989);

(d) Los Angeles to San Francisco (01 May 1989 for

petitioner’s wife and 05 May 1989 for petitioner and his son).
1

All flights had been confirmed previously by United Airlines.

2

The Fontanillas proceeded to the United States as planned,

where they used the first coupon from San Francisco to
Washington. On April 24, 1989, Aniceto Fontanilla bought
two (2) additional coupons each for himself, his wife and his
son from petitioner at its office in Washington Dulles Airport.
After paying the penalty for rewriting their tickets, the
Fontanillas were issued tickets with corresponding boarding
passes with the words "CHECK-IN REQUIRED," for United
Airlines Flight No. 1108, set to leave from Los Angeles to San
Francisco at 10:30 a m. on May 5, 1989. 3

The cause of the non-boarding of the Fontanillas on United

Airlines Flight No. 1108 makes up the bone of contention of
this controversy.

Private respondents’ version is as follows:chanrob1es virtual

1aw library

Aniceto Fontanilla and his son Mychal claim that on May 5,

1989, upon their arrival at the Los Angeles Airport for their
flight, they proceeded to United Airlines counter where they
were attended by an employee wearing a nameplate bearing
the name "LINDA." Linda examined their tickets, punched
something into her computer and then told them that boarding
would be in fifteen minutes. 4
 boarding compensation. Allen vehemently denies uttering the
When the flight was called, the Fontanillas proceeded to the derogatory and racist words attributed to her by the
plane. To their surprise, the stewardess at the gate did not Fontanillas. 14
allow them to board the plane, as they had no assigned seat
numbers. They were then directed to go back to the "check-in" The incident prompted the Fontanillas to file Civil Case No.
counter where Linda subsequently informed them that the 89-4268 for damages before the Regional Trial Court of
flight had been overbooked and asked them to wait. 5 Makati. After trial on the merits, the trial court rendered a
decision, the dispositive portion of which reads as
The Fontanillas tried to explain to Linda the special follows:cralaw : red
circumstances of their visit. However, Linda told them in
arrogant manner, "So what, I can not do anything about it." 6 WHEREFORE, judgment is rendered dismissing the
complaint. The counterclaim is likewise dismissed as it
Subsequently, three other passengers with Caun features were appears that plaintiffs were not actuated by legal malice when
graciously allowed to board, after the Fontanillas were told they filed the instant complaint. 15
that the flight had been overbooked. 7
On appeal, the Court of Appeals ruled in favor of the
The plane then took off with the Fontanillas’ baggage in tow, Fontanillas. The appellate court found that there was an
leaving them behind. 8 admission on the part of United Airlines that the Fontanillas
did in fact observe the check-in requirement. It ruled further
The Fontanillas then complained to Linda, who in turn gave that even assuming there was a failure to observe the check-in
them an ugly stare and rudely uttered, "It’s not my fault. It’s requirement, United Airlines failed to comply with the
the fault of the company. Just sit down and wait." 9 When Mr. procedure laid down in cases where a passenger is denied
Fontanilla reminded Linda of the inconvenience being caused boarding. The appellate court likewise gave credence to the
to them, she bluntly retorted, "Who do you think you are? You claim of Aniceto Fontanilla that the employees of United
lousy Flips are good for nothing beggars. You always ask for Airlines were discourteous and arbitrary and, worse,
American aid." After which she remarked "Don’ t worry about discriminatory. In light of such treatment, the Fontanillas were
your baggage. Anyway there is nothing in there. What are you entitled to moral damages. The dispositive portion of the
doing here anyway? I will report you to immigration. You decision of the respondent Court of Appeals dated 29
Filipinos should go home." 10 Such rude statements were September 1995, states as follows:chanrob1es virtual 1aw
made in front of other people in the airport causing the library
Fontanillas to suffer shame, humiliation and embarrassment.
The chastening situation even caused the younger Fontanilla WHEREFORE; in view of the foregoing, judgment appealed
to break into tears. 11 herefrom is hereby REVERSED and SET ASIDE, and a new
judgment is entered ordering defendant-appellee to pay
After some time, Linda, without any explanation, offered the plaintiff-appellant the following:chanrob1es virtual 1aw
Fontanillas $50.00 each. She simply said "Take it or leave it." library
This, the Fontanillas declined. 12
a) P200,000.00 as moral damages;
The Fontanillas then proceeded to the United Airlines
customer service counter to plead their case. The male b) P200,000.00 as exemplary damages;
employee at the counter reacted by shouting that he was ready
for it and left without saying anything. 13 c) P50, 000.00 as attorney’s fees.

The Fontanillas were not booked on the next flight, which No pronouncement as to costs.
departed for San Francisco at 11:00 am It was only at 12:00
noon that they were able to leave Los Angeles on United SO ORDERED. 16
Airlines Flight No. 803.
Petitioner United Airlines now comes to this Court raising the
Petitioner United Airlines has a different version of what following assignment of errors:chanrob1es virtual 1aw library
occurred at the Los Angeles Airport on May 5, 1989.
I
According to United Airlines, the Fontanillas did not initially
go to the check-in counter to get their seat assignments for UA
Flight 1108. They instead proceeded to join the queue RESPONDENT COURT OF APPEALS GRAVELY ERRED
boarding the aircraft without first securing their seat IN RULING THAT THE TRIAL COURT WAS WRONG IN
assignments as required in their ticket and boarding passes. FAILING TO CONSIDER THE ALLEGED ADMISSION
Having no seat assignments, the stewardess at the door of the THAT PRIVATE RESPONDENT OBSERVED THE
plane instructed them to go to the check-in counter. When the CHECK-IN REQUIREMENT.
Fontanillas proceeded to the check-in counter, Linda Allen,
the United Airlines Customer Representative at the counter II
informed them that the flight was overbooked. She booked
them on the next available flight and offered them denied
RESPONDENT COURT OF APPEALS GRAVELY ERRED
IN RULING THAT PRIVATE RESPONDENT’S FAILURE
TO CHECK-IN WILL NOT DEFEAT HIS CLAIMS
BECAUSE THE DENIED BOARDING RULES WERE NOT
COMPLIED WITH
III
RESPONDENT COURT OF APPEALS GRAVELY ERRED
IN RULING THAT PRIVATE RESPONDENT IS
ENTITLED TO MORAL DAMAGES OF P200, 000.
IV
RESPONDENT COURT OF APPEALS GRAVELY ERRED
IN RULING THAT PRIVATE RESPONDENT IS
ENTITLED TO EXEMPLARY DAMAGES OF P200, 000.
V
RESPONDENT COURT OF APPEALS GRAVELY ERRED
IN RULING THAT PRIVATE RESPONDENT IS
ENTITLED TO ATTORNEY’S FEES OF P50, 000. 17
On the first issue raised by the petitioner, the respondent Court
of Appeals ruled that when Rule 9, Section 1 of the Rules of
Court, 18 there was an implied admission in petitioner’s
answer in the allegations in the complaint that private
respondent and his son observed the "check-in requirement at
the Los Angeles Airport." Thus:chanrob1es virtual 1aw library
A perusal of the above pleadings filed before the trial court
disclosed that there exists a blatant admission on the part of
the defendant-appellee that the plaintiffs-appellants indeed
observed the "check-in" requirement at the Los Angeles
Airport on May 5, 1989. In view of defendant-appellee’s
admission of plaintiffs-appellants’ material averment in the
complaint, We find no reason why the trial court should rule
against such admission. 19
We disagree with the above conclusion reached by respondent
Court of Appeals. Paragraph 7 of private respondents’
complaint states:chanrob1es virtual 1aw library
7. On May 5, 1989 at 9:45 am., plaintiff and his son checked
in at defendant’s designated counter at the airport in Los
Angeles for their scheduled flight to San Francisco on
defendant’s Flight No. 1108. 20
Responding to the above allegations, petitioner averred in
paragraph 4 of its answer, thus:chanrob1es virtua1 1aw
1ibrary
4. Admits the allegation set forth in paragraph 7 of the
complaint except to deny that plaintiff and his son checked in
at 9:45 am., for lack of knowledge or information at this point
in time as to the truth thereof. 21
The rule authorizing an answer that the defendant has no
knowledge or information sufficient to form a belief as to the
truth of an averment and giving such answer the effect of a
denial, does not apply where the fact as to which want of
knowledge is asserted is so plainly and necessarily within the
defendant’s knowledge that his averment of ignorance must be
palpably untrue. 22 Whether or not private respondents
checked in at petitioner’s designated counter at the airport at
9:45 a.m. on May 5, 1989 must necessarily be within
petitioner’s knowledge.
While there was no specific denial as to the fact of compliance
with the "check-in" requirement by private respondents,
petitioner presented evidence to support its contention that
there indeed was no compliance.
Private respondents then are said to have waived the rule on
admission. It not only presented evidence to support its
contention that there was compliance with the check-in
requirement even allowed petitioner to present rebuttal
evidence. In the case of Yu Chuck v. "Kong Li Po," we ruled
that:chanrob1es virtual 1aw library
The object of the rule is to relieve a party of the trouble and
expense in proving in the first instance an alleged fact, the
existence or non-existence of which is necessarily within the
knowledge of the adverse party, and of the necessity (to his
opponent’s case) of establishing which such adverse party is
notified by his opponent’s pleadings.
The plaintiff may, of course, waive the rule and that is what
must be considered to have done (sic) by introducing evidence
as to the execution of the document and failing to object to the
defendant’s evidence in refutation; all this evidence is now
competent and the case must be decided thereupon. 23
The determination of the other issues raised is dependent on
whether or not there was a breach of contract in bad faith on
the part of the petitioner in not allowing the Fontanillas to
board United Airlines Flight 1108.
It must be remembered that the general rule in civil cases is
that the party having the burden of proof of an essential fact
must produce a preponderance of evidence thereon. 24
Although the evidence adduced by the plaintiff is stronger
than that presented by the defendant, a judgment cannot be
entered in favor of the former, if his evidence is not sufficient
to sustain his cause of action. The plaintiff must rely on the
strength of his own evidence and not upon the weakness of the
defendant’s. 25 Proceeding from this, and considering the
contradictory findings of facts by the Regional Trial Court and
the Court of Appeals, the question before this Court is whether
or not private respondents were able to prove with adequate
evidence his allegations of breach of contract in bad faith.
We rule in the negative.
Time and again, the Court has pronounced that appellate
courts should not, unless for strong and cogent reasons,
reverse the findings of facts of trial courts. This is so because
trial judges are in a better position to examine real evidence
and at a vantage point to observe the actuation and the
demeanor of the witnesses. 26 While not the sole indicator of
the credibility of a witness, it is of such weight that it has been
said to be the touchstone of credibility. 27
Aniceto Fontanilla’s assertion that upon arrival at the airport at
9:45 a.m., he immediately proceeded to the check-in counter,
and that Linda Allen punched in something into the computer
is specious and not supported by the evidence on record. In
support of their allegations, private respondents submitted a
copy of the boarding pass. Explicitly printed on the boarding
pass are the words "Check-In Required." Curiously, the said
pass did not indicate any seat number. If indeed the
Fontanillas checked in at the designated time as they claimed,
why then were they not assigned seat numbers? Absent any
showing that Linda was so motivated, we do not buy into
private respondents’ claim that Linda intentionally deceived
him, and made him the laughing stock among the passengers.
28 Hence, as correctly observed by the trial court:chanrob1es
virtual 1aw library
Plaintiffs fail to realize that their failure to check in, as
expressly required in their boarding passes, is the very reason
why they were not given their respective seat numbers, which
resulted in their being denied boarding. 29
Neither do we agree with the conclusion reached by the
appellate court that private respondents’ failure to comply
with the check-in requirement will not defeat his claim as the
denied boarding rules were not complied with. Notably, the
appellate court relied on the Code of Federal Regulation Part
on Oversales, which states:chanrob1es virtua1 1aw 1ibrary
250.6 Exceptions to eligibility for denied boarding
compensation.
A passenger denied board involuntarily from an oversold
flight shall not be eligible for denied board compensation
if:chanrob1es virtual 1aw library
(a) The passenger does not comply with the carrier’s contract
of carriage or tariff provisions regarding ticketing,
reconfirmation, check-in, and acceptability for transformation.
The appellate court, however, erred in applying the laws of the
United States as, in the case at bar, Philippine law is the
applicable law. Although, the contract of carriage was to be
performed in the United States, the tickets were purchased
through petitioner’s agent in Manila. It is true that the tickets
were "rewritten" in Washington, D.C. However, such fact did
not change the nature of the original contract of carriage
entered into by the parties in Manila.
In the case of Zalamea v. Court of Appeals, 30 this Court
applied the doctrine of lex loci contractus. According to the
doctrine, as a general rule, the law of the place where a
contract is made or entered into governs with respect to its
nature and validity, obligation and interpretation. This has
been said to be the rule even though the place where the
contract was made is different from the place where it is to be
performed, and particularly so, if the place of the making and
the place of performance are the same. Hence, the court
should apply the law of the place where the airline ticket was
issued, when the passengers are residents and nationals of the
forum and the ticket is issued in such State by the defendant
airline.
The law of the forum on the subject matter is Economic
Regulations No. 7 as amended by Boarding Priority and
Denied Boarding Compensation of the Civil Aeronautics
Board, which provides that the check-in requirement be
complied with before a passenger may claim against a carrier
for being denied boarding:chanrob1es virtual 1aw library
SECTION 5. Amount of Denied Boarding Compensation —
Subject to the exceptions provided hereinafter under Section 6,
carriers shall pay to passengers holding confirmed reserved
space and who have presented themselves at the proper place
and time and fully complied with the carrier’s check-in and
reconfirmation procedures and who are acceptable for carriage
under the Carrier’s tariffs but who have been denied boarding
for lack of space, a compensation at the rate of: . .
Private respondents’ narration that they were subjected to
harsh and derogatory remarks seems incredulous. However,
this Court will not attempt to surmise what really happened.
Suffice to say, private respondent was not able to prove his
cause of action, for as the trial court correctly
observed:chanrob1es virtual 1aw library
. . . plaintiffs claim to have been discriminated against and
insulted in the presence of several people. Unfortunately
plaintiffs limited their evidence to the testimony [of] Aniceto
Fontanilla, without any corroboration by the people who saw
or heard the discriminatory remarks and insults; while such
limited testimony could possibly be true, it does not enable the
Court to reach the conclusion that plaintiffs have, by a
preponderance of evidence, proven that they are entitled to
P1,650,000.00 damages from defendant. 31
As to the award of moral and exemplary damages, we find
error in the award of such by the Court of Appeals. For the
plaintiff to be entitled to an award of moral damages arising
from a breach of contract of carriage, the carrier must have
acted with fraud or bad faith. The appellate court predicated its
award on our pronouncement in the case of Zalamea v. Court
of Appeals, supra, where we stated:chanrob1es virtual 1aw
library
Existing jurisprudence explicitly states that overbooking
amounts to bad faith, entitling passengers concerned to an
award of moral damages. In Alitalia Airways v. Court of
Appeals, where passengers with confirmed booking were
refused carriage on the last minute, this Court held that when
an airline issues a ticket to a passenger confirmed on a
particular flight, on a certain date, a contract of carriage arises,
and the passenger has every right to expect that he would fly
on that flight and on that date. If he does not, then the carrier
opens itself to a suit for breach of contract of carriage. Where
an airline had deliberately overbooked, it took the risk of
having to deprive some passengers of their seats in case all of
them would show up for check in. For the indignity and
inconvenience of being refused a confirmed seat on the last
minute, said passenger is entitled to moral damages.
(Emphasis supplied.)
However, the Court’s ruling in said case should be read in
consonance with existing laws, particularly, Economic
Regulations No. 7, as amended, of the Civil Aeronautics
Board:chanrob1es virtual 1aw library

SECTION 3. Scope. — This regulation shall apply to every

Philippine and foreign air carrier with respect to its operation
of flights or portions of flights originating from or terminating
at, or serving a point within the territory of the Republic of the
Philippines insofar as it denies boarding to a passenger on a
flight, or portion of a flight inside or outside the Philippines,
for which he holds confirmed reserved space. Furthermore,
this Regulation is designed to cover only honest mistakes on THIRD DIVISION
the part of the carriers and excludes deliberate and willful acts
of non-accommodation. Provided, however, that overbooking G.R. No. 147369 : October 23, 2003
not exceeding 10% of the seating capacity of the aircraft shall
not be considered as a deliberate and willful act of non- Spouses PATRICK JOSE and RAFAELA
accommodation.chanrobles.com : virtuallawlibrary JOSE, Petitioners, v. Spouses HELEN BOYON and ROMEO
BOYON, Respondents.
What this Court considers as bad faith is the willful and
deliberate overbooking on the part of the airline carrier. The DECISION
above-mentioned law clearly states that when the overbooking
does not exceed ten percent (10%), it is not considered as
PANGANIBAN, J.:
deliberate and therefore does not amount to bad faith. While
there may have been overbooking in this case, private
respondents were not able to prove that the overbooking on In general, substituted service can be availed of only after a
United Airlines Flight 1108 exceeded ten percent. clear showing that personal service of summons was not
legally possible. Also, service by publication is applicable in
As earlier stated, the Court is of the opinion that the private actions in rem and quasi in rem, but not in personal suits such
respondents were not able to prove that they were subjected to as the present one which is for specific performance.
coarse and harsh treatment by the ground crew of United
Airlines. Neither were they able to show that there was bad The Case
faith on part of the carrier airline. Hence, the award of moral
and exemplary damages by the Court of Appeals is improper. Before the Court is a Petition for Review on Certiorari1 under
Corollarily, the award of attorney’s fees is, likewise, denied Rule 45 of the Rules of Court, assailing the February 26, 2001
for lack of any legal and factual basis. Decision2 of the Court of Appeals (CA) in CA-GR SP No.
60888. The dispositive portion of the CA Decision is worded
WHEREFORE, the petition is GRANTED. The decision of as follows:
the Court of Appeals in CA-G.R. CV No. 37044 is hereby
REVERSED and SET ASIDE. The decision of the Regional WHEREFORE, on the basis of what prescinds, the assailed
Trial Court of Makati City in Civil Case No. 89-4268 dated resolution and orders issued by the public respondent are
April 8, 1991 is hereby REINSTATED. perforce ANNULLED and SET ASIDE. This pronouncement
is nonetheless rendered without prejudice to the refiling of the
SO ORDERED. same case by the private respondents with the court a quo.3

The Facts

The factual antecedents of the case are narrated by the CA in

this wise:

On July 2, 1998, [petitioners] Patrick and Rafaela Jose lodged

a complaint for specific performance against [respondents]
Helen and Romeo Boyon to compel them to facilitate the
transfer of ownership of a parcel of land subject of a
controverted sale. The action was lodged before the Regional
Trial Court of Muntinlupa which is presided by herein public
respondent Judge N.C. Perello. On July 21, 1998, respondent
judge, through the acting Branch Clerk of Court of Branch 276
of the RTC of Muntinlupa City, issued summons to the
[respondents]. As per return of the summons, substituted
service was resorted to by the process server allegedly because
efforts to serve the summons personally to the [respondents]
failed. On December 9, 1998, [petitioners] filed before the
trial court an Ex-parte Motion for Leave of Court to Effect
Summons by Publication. On December 28, 1998, public
respondent issued an Order granting the Ex-parte Motion for
Leave of Court to Effect Summons by Publication. On July
30, 1999, the respondent judge, sans a written motion, issued
an Order declaring herein [respondents] in default for failure
to file their respective answers. As a consequence of the
declaration of default, [petitioners] were allowed to submit
their evidence ex-parte. Ultimately, on December 7, 1999,
respondent judge issued the assailed resolution, the dispositive
portion of which reads as follows:
x x x Therefore, Spouses Helen and Romeo Boyon are
directed to execute the necessary document with the effect of
withdrawing the Affidavit of Loss they filed and annotated
with the Register of Deeds of Makati City so that title to the
parcel of land subject of the Deed of Absolute Sale in favor of
the Plaintiffs be transferred in their names. Thereafter the
Register of Deeds of Makati City or Muntinlupa City may
cancel Transfer of Certificate of Title No. 149635 of the
Defendants and issue another to Plaintiff under the deed of
sale, clean and free of any reported encumbrance.
Defendants are also directed to pay Plaintiffs actual expenses
in the amount of P20,000 and attorneys fees of P20,000
including costs of this suit.
xxx
On January 5, 2000, [respondent] Helen Boyon, who was then
residing in the United States of America, was surprised to
learn from her sister Elizabeth Boyon, of the resolution issued
by the respondent court. On January 18, 2000, [respondents]
filed an Ad Cautelam motion questioning, among others, the
validity of the service of summons effected by the court a
quo. On March 17, 2000, the public respondent issued an
Order denying the said motion on the basis of the defaulted
[respondents] supposed loss of standing in court. On March
29, 2000, the [respondents] once again raised the issue of
jurisdiction of the trial court via a motion for reconsideration.
On June 22, 2000, however, an Order was issued by the public
respondent denying the said motion. The [petitioners] moved
for the execution of the controverted judgment which the
respondent judge ultimately granted.4cräläwvirtualibräry
Thereafter, respondents filed before the CA a Petition for
certiorari under Rule 65 of the Revised Rules of Civil
Procedure, questioning the jurisdiction of the regional trial
court (RTC).
Ruling of the Court of Appeals
The CA held that the trial court had no authority to issue the
questioned Resolution and Orders. According to the appellate
court, the RTC never acquired jurisdiction over respondents
because of the invalid service of summons upon them. First,
the sheriff failed to comply with the requirements of
substituted service of summons, because he did not specify in
the Return of Summons the prior efforts he had made to locate
them and the impossibility of promptly serving the summons
upon them by personal service. Second, the subsequent
summons by publication was equally infirm, because the
Complaint was a suit for specific performance and therefore
an action in personam. Consequently, the Resolution and the
Orders were null and void, since the RTC had never acquired
jurisdiction over respondents.
Hence, this Petition.5
Issues
In their Memorandum, petitioners raise the following issues
for our consideration:
A. The Honorable Court of Appeals erred in not holding that
the assailed Resolution dated December 7, 1999 was already
final and executory
B. The Honorable Court of Appeals erred in giving due course
to the Petition for Certiorari of private respondents despite the
pendency of an appeal earlier filed
C. The Honorable Court erred in not holding that the Petition
for Certiorari was time barred
D. The Honorable Court of Appeals erred in holding that the
proceedings in the lower court are null and void due to invalid
and defective service of summons and the court did not
acquire jurisdiction over the person of the
respondents.6cräläwvirtualibräry
In sum, the main issue revolves around the validity of the
service of summons on respondents.
The Courts Ruling
The Petition has no merit.
Main Issue:
Validity of the Service of Summons
Petitioners aver that the CA erred in ruling that the service of
summons on respondents was invalid. They submit that
although the case filed before the trial court was denominated
as an action for specific performance, it was actually an
action quasi in rem, because it involved a piece of real
property located in the Philippines. They further argue that in
actions quasi in rem involving ownership of a parcel of land,
it is sufficient that the trial court acquire jurisdiction over
the res. Thus, the summons by publication, which they
effected subsequent to the substituted service of summons,
was allegedly sufficient.
On the other hand, respondents maintain that the proceedings
in the trial court were null and void because of the invalid and
defective service of summons. According to them, the Return
of Summons issued by the process server of the RTC failed to
state that he had exerted earnest efforts to effect the service of
summons. He allegedly tried to serve it personally on them
on July 22, 1998 at No. 32 Ariza Drive, Camella Homes,
Alabang. He, however, resorted to substituted service on that
same day, supposedly because he could not find respondents
in the above address. They further allege that the person to
whom he gave the summons was not even a resident of that
address.
Respondents contend that when summons is served by
substituted service, the return must show that it was
impossible to serve the summons personally, and that efforts
had been exerted toward that end. They add that
noncompliance with the rule on substituted service renders
invalid all proceedings relative thereto.
As to the summons by publication subsequently effected by
petitioners, respondents argue that the case filed before the
trial court was an action for specific performance and,
therefore, an action in personam. As such, the summons by
publication was insufficient to enable the trial court to acquire
jurisdiction over the persons of respondents.
Respondents conclude that even granting that the service of
summons by publication was permissible under the
circumstances, it would still be defective and invalid because
of the failure of petitioners to observe the requirements of law,
like an Affidavit attesting that the latter deposited in the post
office a copy of the summons and of the order of publication,
paid the postage, and sent the documents by registered mail to
the formers last known address.
We agree with respondents. In general, trial courts acquire
jurisdiction over the person of the defendant by the service of
summons. Where the action is in personam and the defendant
is in the Philippines, such service may be done by personal or
substituted service, following the procedures laid out in
Sections 6 and 7 of Rule 14 of the Revised Rules of Court,
which read:
Section 6. Service in person on defendant. - Whenever
practicable, the summons shall be served by handing a copy
thereof to the defendant in person, or, if he refuses to receive
and sign for it, by tendering it to him.
Section 7. Substituted service. - If, for justifiable causes, the
defendant cannot be served within a reasonable time as
provided in the preceding section, service may be effected (a)
by leaving copies of the summons at the defendant's residence
with some person of suitable age and discretion then residing
therein, or (b) by leaving the copies at defendants office or
regular place of business with some competent person in
charge thereof.
As can be gleaned from the above-quoted Sections, personal
service of summons is preferred to substituted service. Only if
the former cannot be made promptly can the process server
resort to the latter. Moreover, the proof of service of summons
must (a) indicate the impossibility of service of summons
within a reasonable time; (b) specify the efforts exerted to
locate the defendant; and (c) state that the summons was
served upon a person of sufficient age and discretion who is
residing in the address, or who is in charge of the office or
regular place of business, of the defendant. 7 It is likewise
required that the pertinent facts proving these circumstances
be stated in the proof of service or in the officers return. The
failure to comply faithfully, strictly and fully with all the
foregoing requirements of substituted service renders the
service of summons ineffective.8
Defective Personal
Service of Summons
In the instant case, it appears that the process server hastily
and capriciously resorted to substituted service of summons
without actually exerting any genuine effort to locate
respondents. A review of the records 9 reveals that the only
effort he exerted was to go to No. 32 Ariza Drive, Camella
Homes, Alabang on July 22, 1998, to try to serve the
summons personally on respondents. While the Return of
Summons states that efforts to do so were ineffectual and
unavailing because Helen Boyon was in the United States and
Romeo Boyon was in Bicol, it did not mention exactly what
efforts -- if any -- were undertaken to find respondents.
Furthermore, it did not specify where or from whom the
process server obtained the information on their whereabouts.
The pertinent portion of the Return of Summons is reproduced
as follows:
That efforts to serve the said Summons personally upon
defendants Sps. Helen and Romeo Boyon were made but the
same were ineffectual and unavailing for the reason that
defendant Helen Boyon is somewhere in the United States of
America and defendant Romeo Boyon is in Bicol thus
substituted service was made in accordance with Section 7,
Rule 14, of the Revised Rules of Court.10cräläwvirtualibräry
The Return of Summons shows that no effort was actually
exerted and no positive step taken by either the process server
or petitioners to locate and serve the summons personally on
respondents. At best, the Return merely states the alleged
whereabouts of respondents without indicating that such
information was verified from a person who had knowledge
thereof. Certainly, without specifying the details of the
attendant circumstances or of the efforts exerted to serve the
summons, a general statement that such efforts were made will
not suffice for purposes of complying with the rules of
substituted service of summons.
The necessity of stating in the process servers Return or Proof
of Service the material facts and circumstances sustaining the
validity of substituted service was explained by this Court
in Hamilton v. Levy,11 from which we quote:
x x x The pertinent facts and circumstances attendant to the
service of summons must be stated in the proof of service or
Officers Return; otherwise, any substituted service made in
lieu of personal service cannot be upheld. This is necessary
because substituted service is in derogation of the usual
method of service. It is a method extraordinary in character
and hence may be used only as prescribed and in the
circumstances authorized by statute. Here, no such explanation
was made. Failure to faithfully, strictly, and fully comply with
the requirements of substituted service renders said service
ineffective.12cräläwvirtualibräry

Moreover, the requirements of substituted service of summons

and the effect of noncompliance with the subsequent
proceedings therefor were discussed in Madrigal v. Court of
Appeals13 as follows:

In a long line of cases, this Court held that the impossibility of

personal service justifying availment of substituted service
should be explained in the proof of service; why efforts
exerted towards personal service failed. The pertinent facts
and circumstances attendant to the service of summons must FIRST DIVISION
be stated in the proof of service or Officers Return; otherwise,
the substituted service cannot be upheld. It bears stressing that G.R. No. L-82330 May 31, 1988
since service of summons, especially for actions in personam,
is essential for the acquisition of jurisdiction over the person
of the defendant, the resort to a substituted service must be THE DIAL CORPORATION, C & T REFINERY INC.,
duly justified. Failure to do so would invalidate all subsequent NALIN Sdn. Bhb. BERISFORD COMMODITIES, LTD.,
proceedings on jurisdictional grounds.14 and PACIFIC MOLASSES COMPANY, petitioners,
vs.
THE HON. CLEMENTE M. SORIANO, Presiding Judge,
Summons by Regional Trial Court, Branch 3, MANILA PUBLIC
Publication Improper
RESPONDENT and IMPERIAL VEGETABLE OIL
COMPANY, INC., respondents.
It must be noted that extraterritorial service of summons or
summons by publication applies only when the action is in
Guerrero & Torres Law Office for petitioners.
rem or quasi in rem. The first is an action against the thing
itself instead of against the defendants person; in the latter, an
individual is named as defendant, and the purpose is to subject Abad & Associates for respondents.
that individuals interest in a piece of property to the obligation
or loan burdening it.15

In the instant case, what was filed before the trial court was an
action for specific performance directed against respondents.
While the suit incidentally involved a piece of land, the
ownership or possession thereof was not put in issue, since
they did not assert any interest or right over it. Moreover, this
Court has consistently declared that an action for specific
performance is an action in personam.16cräläwvirtualibräry
Having failed to serve the summons on respondents properly,
the RTC did not validly acquire jurisdiction over their persons.
Consequently, due process demands that all the proceedings
conducted subsequent thereto should be deemed null and
void.17cräläwvirtualibräry
WHEREFORE, the Petition is DENIED and the assailed
Decision and Resolution AFFIRMED. Costs against
petitioners.
SO ORDERED.
GRIÑO-AQUINO, J.:
The petitioners are foreign corporations organized and existing
under the laws of the United States, the United Kingdom, and
Malaysia, are not domiciled in the Philippines, nor do they
have officers or agents, place of business, or property in the
Philippines; they are not licensed to engage, and are not
engaged, in business here. The respondent Imperial Vegetable
Oil Company, Inc. (or "IVO" for brevity) is a Philippine
corporation which through its president, Dominador
Monteverde, had entered into several contracts for the delivery
of coconut oil to the petitioners. Those contracts stipulate that
any dispute between the parties will be settled through
arbitration under the rules of either the Federation of Oils
Seeds and Fats Association (FOSFA) or the National Institute
of Oil Seed Products (NIOP). Because IVO defaulted under
the contracts, the petitioners and 15 others, initiated arbitration
proceedings abroad, and some have already obtained
arbitration awards against IVO.
On April 8, 1987, IVO filed a complaint for injunction and
damages against nineteen (19) foreign coconut oil buyers
including the petitioners, with whom its president, Dominador
Monteverde, had entered into contracts for the delivery of
coconut oil (Civil Case No. 87-40166, RTC Manila entitled
"Imperial Vegetable Oil Co., Inc. vs. Dial Corporation et al.").
IVO repudiated Monteverde's contracts on the grounds that
they were mere "paper trading in futures" as no actual delivery
of the coconut oil was allegedly intended by the parties; that
the Board of Directors of IVO convened in a special meeting
on March 21, 1987 and removed Dominador Monteverde from
his position as president of the corporation, named in his
place, Rodrigo Monteverde, and disowned Dominador
Monteverde's allegedly illegal and unauthorized acts; that the
defendants have allegedly "harassed" IVO to comply with
Dominador's contracts and to come to a settlement with them.
IVO prayed for the issuance of a temporary restraining order
or writ of preliminary injunction to stop the defendants from
harassing IVO with their insistent demands to recognize the
contracts entered into by Dominador Monteverde and from
portraying the IVO as one that defaults on its contracts and
obligations and has fallen into bad times and from interfering
with IVO's normal conduct of business. IVO also prayed that
the defendants pay it moral damages of P5 million, actual
damages of P10 million, exemplary damages of P5 million,
attorney's fees of P1 million, P3,000 per appearance of
counsel, and litigation expenses.
On motion of IVO, respondent Judge authorized it to effect
extraterritorial service of summons to all the defendants
through DHL Philippines corporation (Annex B). Pursuant to
that order, the petitioners were served with summons and copy
of the complaint by DHL courier service.
On April 25, 1987, without submitting to the court's
jurisdiction and only for the purpose of objecting to said
jurisdiction over their persons, the petitioners filed motions to
dismiss the complaint against them on the ground that the
extraterritorial service of summons to them was improper and
that hence the court did not acquire jurisdiction over them. On
December 15, 1987, the court denied their motions to dismiss
and upheld the validity of the extraterritorial service of
summons to them on the ground that "the present action
relates to property rights which lie in contracts within the
Philippines, or which defendants claim liens or interests,
actual or inchoate, legal or equitable (par. 2, complaint). And
one of the reliefs demanded consists, wholly or in part, in
excluding the defendants from any interest in such property
for the reason that their transactions with plaintiff's former
president are ultra vires." Furthermore, "as foreign
corporations doing business in the Philippines without a
license, they opened themselves to suit before Philippine
courts, pursuant to Sec. 133 of the Corporation Code of the
Philippines." (Annex H) The petitioners' motions for
reconsideration of that order were also denied by the court
(Annex M), hence this petition for certiorari with a prayer for
the issuance of a temporary retraining order which We
granted.
The petition is meritorious.
Section 17, Rule 14 of the Rules of Court provides:
Section 17. Extraterritorial service. —
When the defendant does not reside and is
not found in the Philippines and the action
affects the personal status of the plaintiff or
relates to, or the subject of which is,
property within the Philippines, in which the
defendant has or claims a lien or interest,
actual or contingent, or in which the relief
demanded consists, wholly or in part, in
excluding the defendant from any interest
therein, or the property of the defendant has
been attached within the Philippines, service
may, by leave of court, be effected out of the
Philippines by personal service as under
section 7; or by publication in a newspaper
of general circulation in such places and for
such time as the court may order, in which
case a copy of the summons and order of the
court shall be sent by registered mail to the
last known address of the defendant, or in
any other manner the court may deem
sufficient. Any order granting such leave
shall specify a reasonable time, which shag
not be less than sixty (60) days after notice,
within which the defendant must answer.
Only in four (4) instances is extraterritorial service of
summons proper, namely: "(1) when the action affects the
personal status of the plaintiffs; (2) when the action relates to,
or the subject of which is, property within the Philippines, in
which the defendant has or claims a lien or interest, actual or
contingent; (3) when the relief demanded in such action
consists, wholly or in part, in excluding the defendant from
any interest in property located in the Philippines; and (4)
when the defendant non-resident's property has been attached
within the Philippines" (De Midgely vs. Fernandos, 64 SCRA
23).
The complaint in this case does not involve the personal status
of the plaintiff, nor any property in the Philippines in which
the defendants have or claim an interest, or which the plaintiff
has attached. The action is purely an action for injunction to
restrain the defendants from enforcing against IVO ("abusing
and harassing") its contracts for the delivery of coconut oil to
the defendants, and to recover from the defendants P21
million in damages for such "harassment." It is clearly a
personal action as well as an action in personam, not an action
in rem or quasi in rem. "An action in personam is an action
against a person on the basis of his personal liability, while
an action in remedies is an action against the thing itself,
instead of against the person." (Hernandez vs. Rural Bank of
Lucena, Inc., 76 SCRA 85). A personal action is one brought
for the recovery of personal property, for the enforcement of
some contract or recovery of damages for its breach, or for the
recovery of damages for the commission of an injury to the
person or property (Hernandez vs. Development Bank of the
Philippines, 71 SCRA 292).<äre||anº•1àw>
As Civil Case No. 87-40166 is a personal action, personal or
substituted service of summons on the defendants, not
extraterritorial service, is necessary to confer jurisdiction on
the court. The rule is explained in Moran's Comments on the
Rules of Court thus:
 As a general rule, when the defendant is not
residing and is not found in the Philippines,
the Philippine courts cannot try any case
against him because of the impossibility of
acquiring jurisdiction over his person unless
he voluntarily appears in court. But, when
the action affects the personal status of the
plaintiff residing in the Philippines, or is
intended to seize or dispose of any property,
real or personal, of the defendant located in
the Philippines, it may be validly tried by
the Philippine courts, for then, they have
jurisdiction over the res, i.e., the personal
status of the plaintiff or the property of the
defendant and their jurisdiction over the
person of the non-resident defendant is not
essential. Venue in such cases may be laid in
the province where the property of the
defendant or a part thereof involved in the
litigation is located. (5 Moran's Comments
on the Rules of Court, 2nd Ed., p. 105.)
In an action for injunction, extraterritorial service of summons
and complaint upon the non-resident defendants cannot
subject them to the processes of the regional trial courts which
are powerless to reach them outside the region over which
they exercise their authority (Sec. 3-a, Interim Rules of Court;
Sec. 21, subpar. 1, B.P. Blg. 129). Extraterritorial service of
summons will not confer on the court jurisdiction or power to
compel them to obey its orders.
Neither may the court by extraterritorial service of summons
acquire jurisdiction to render and enforce a money judgment
against a non-resident defendant who has no property in the
Philippines for "the fundamental rule is that jurisdiction in
personam over non-residents, so as to sustain a money
judgment, must be based upon personal service within the
state which renders the judgment "(Boudard vs. Tait, 67 Phil.
170, 174).
Respondents' contention that "the action below is related to
property within the Philippines, specifically contractual rights
that petitioners are enforcing against IVO" is specious for the
"contractual rights" of the petitioners are not property found in
the Philippines for the petitioners have not filed an action in
the local courts to enforce said rights. They have not submitted
to the jurisdiction of our courts.
The lower court invoked Section 33 of the Corporation Code
which provides that a "foreign corporation transacting
business in the Philippines without a license may be sued or
proceeded against before Philippine courts or administrative
tribunal on any valid cause of action recognized under
Philippine laws." It assumed that the defendants (herein
petitioners) are doing business in the Philippines, which
allegation the latter denied. Even if they can be considered as
such, the Corporation Code did not repeal the rules requiring
proper service of summons to such corporations as provided in
Rule 14 of the Rules of Court and Section 128 of the
Corporation Code.
The respondent court's finding that, by filing motions to
dismiss, the petitioners hypothetically admitted the allegations
of the complaint that they are doing business in the Philippines
without any license, and that they may be served with
summons and other court processes through their agents or
representatives enumerated in paragraph 2 of the complaint, is
contradicted by its order authorizing IVO to summon them by
extraterritorial service, a mode of service which is resorted to
when the defendant is not found in the Philippines, does not
transact business here, and has no resident agent on whom the
summons may be served.
WHEREFORE, We hold that the extraterritorial service of
summons on the petitioners was improper, hence null and
void. The petition for certiorari is granted.The orders dated
April 24, 1987 (Annex B) and December 15, 1987 (Annex H)
of the respondent Judge are hereby set aside. The complaint in
Civil Case No. 87-40166 is hereby dismissed as against the
petitioners for failure of the court to acquire jurisdiction over
them.
FIRST DIVISION
G.R. No. L-68741 January 28, 1988
NATIONAL GRAINS AUTHORITY, plaintiff-appellee,
vs.
INTERMEDIATE APPELLATE COURT, MELECIO
MAGCAMIT, NENA COSICO and EMELITA
MAGCAMIT, defendants-appellants.
PARAS, J.:
This is a petition for review of the decision of the then
Intermediate Appellate Court * (now Court of Appeals) dated
January 31, 1984, reversing the decision of the Court of First
Instance of Laguna and San Pablo City, 8th Judicial District,
Branch III, and of the resolution dated August 28, 1984
denying the motion for reconsideration filed thereof.
The undisputed facts of this case as found by the Trial Court
and the Intermediate Appellate Court are as follows:
On December 2,1971, the spouses Paulino Vivas and Engracia
Lizards, as owners of a parcel of land situated in Bo. San
Francisco, Victoria, Laguna, comprising more or less 105,710
square meters, sold for P30,000.00 said property in favor of
spouses Melencio Magcamit and Nena Cosico, and Amelita
Magcamit (herein private respondents) as evidenced by
"Kasulatan Ng Bilihang Mabiling Muli." This sale with right
to repurchase was recorded in the Office of the Register of
Deeds of Laguna on December 6,1971 under Act No. 3344.
On January 31,1972 the sale was made absolute by the
spouses Vivas and Lizardo in favor of the private respondents
for the sum of P90,000.00; P50,000.00 of which was paid
upon the execution of the instrument, entitled "Kasulatan Ng
Bilihan Tuluyan," after being credited with the P30,000.00
consideration of the "Kasulatan Ng Mabibiling Muli," and the
balance of P40,000.00 was to be paid the moment that the
certificate of title is issued. From the execution of said
Kasulatan, private respondent have remained in peaceful,
adverse and open possession of subject property.
On February 26, 1975, an Original Certificate of Title No. T-
1728 covering the property in question was issued to and in
the name of the spouses Vivas and Lizardo without the
knowledge of the private respondents and on April 30, 1975,
said Spouses executed a Special Power of Attorney in favor of
Irenea Ramirez authorizing the latter to mortgage the property
with the petitioner, National Grains Authority.
On May 2, 1974, the counsel for the petitioner wrote the
Provincial Sheriff in Sta. Cruz, Laguna, requesting for the
extrajudicial foreclosure of the mortgage executed by Irenea
Ramirez on May 18, 1975, covering, among others, the
property involved in this case covered by OCT No. T-1728,
for unpaid indebtedness in the amount of P63,948.80 in favor
of the petitioner.
On May 31, 1974, the Provincial Sheriff caused the issuance
of the notice of sale of the property in question, scheduling the
public auction sale on June 28, 1974. The petitioner was the
highest and successful bidder so that a Certificate of Sale was
issued in its favor on the same date by the Provincial Sheriff.
On July 10, 1974, the petitioner in its capacity as attorney-in-
fact of the mortgagor sold the subject real property in favor of
itself. By virtue of the deed of absolute sale, TCT No. T-
75171 of the Register of Deeds for the Province of Laguna
was issued in the name of the petitioner on July 16, 1974. It
was only in July 1974, that private respondents learned that a
title in the name of the Vivas spouses had been issued
covering the property in question and that the same property
had been mortgaged in favor of the petitioner. Private
respondent Nena Magcamit offered to pay the petitioner NGA
the amount of P40,000.00 which is the balance of the amount
due the Vivas spouses under the terms of the absolute deed of
sale but the petitioner refused to accept the payment. On July
31, 1974, counsel for private respondents made a formal
demand on the spouses Vivas and Lizardo to comply with
their obligation under the terms of the absolute deed of sale;
and soon after reiterated to the NGA, the offer to pay the
balance of P40,000.00 due under the absolute deed of sale. On
August 13, 1974 petitioner in its reply informed counsel of
private respondents that petitioner is now the owner of the
property in question and has no intention of disposing of the
same.
The private respondents, who as previously stated, are in
possession of subject property were asked by petitioner to
vacate it but the former refused. Petitioner filed a suit for
ejectment against private respondents in the Municipal Court
of Victoria, Laguna, but the case was dismissed.
On June 4, 1975, private respondents filed a complaint before
the then Court of First Instance of Laguna and San Pablo City,
Branch III, San Pablo City, against the petitioner and the
spouses Vivas and Lizardo, praying, among others, that they
be declared the owners of the property in question and entitled
to continue in possession of the same, and if the petitioner is
declared the owner of the said property, then, to order it to
reconvey or transfer the ownership to them under such terms
and conditions as the court may find just, fair and equitable
under the premises. (Record on Appeal, pp. 2-11).
In its answer to the complaint, the petitioner (defendant
therein) maintained that it was never a privy to any transaction
between the private respondents (plaintiffs therein) and the
spouses Paulino Vivas and Engracia Lizardo that it is a
purchaser in good faith and for value of the property formerly
covered by OCT No. 1728; and that the title is now
indefeasible, hence, private respondents' cause of action has'
already prescribed. (Record on Appeal, pp. 16-22).
After due hearing, the trial court ** rendered its decision on
March 17, 1981, in favor of the petitioner, the dispositive
portion of said judgment reading as follows:
WHEREFORE, judgment is hereby
rendered as follows:
(1) declaring defendant National Grains
Authority the lawful owner of the property
in question by virtue of its indefeasible title
to the same;
(2) ordering plaintiffs to turn over
possession of the land to defendant National
Grains Authority;
(3) ordering defendants-spouses Paulino
Vivas and Engracia Lizardo to pay plaintiffs
the sum of P56,000.00 representing the
amount paid pursuant to the Kasulatan Ng
Bilihang Tuluyan marked Exhibit "3", with
legal interest thereon from January 31, 1972
until the amount is paid, to pay an additional
amount of P5,000.00 for and as attorney's
fees, an additional amount of Pl0,000.00 as
moral damages, another amount of
P5,000.00 by way of exemplary damages
and to pay the costs of this suit. (Rollo, P.
35).
The private respondents interposed an appeal from the
decision of the trial court to the Intermediate Appellate Court.
After proper proceedings, the appellate court rendered its
decision on January 31, 1984, reversing and setting aside the
decision of the trial court as follows:
WHEREFORE, the decision of the lower
court is hereby reversed and set aside and
another one is rendered ordering the
National Grains Authority to execute a deed
of reconveyance sufficient in law for
purposes of registration and cancellation of
transfer Certificate of Title No. T-75171 and
the issuance of another title in the names of
 plaintiff-appellants, and ordering
defendants-appellees Paulino Vivas and
Engracia Lizardo to pay the National Grains
Authority the sum of P78,375.00 (Exh. 3)
within thirty (30) days from the receipts of
the writ of execution. No damages and costs.
(Rollo, p. 19).
The petitioner filed a motion for reconsideration of the said
decision but the same was denied. (Rollo, p. 26).
Hence, this petition.
In the resolution of May 20, 1985, the petition was given due
course and the parties were required to submit simultaneous
memoranda (Rollo, p. 128). The memorandum for the
petitioner was filed on July 3, 1985 (Rollo, p. 129) while the
memorandum for the private respondents was filed on August
26, 1985 1 Rollo p. 192).
The main issue in this case is whether or not violation of the
terms of the agreement between the spouses Vivas and
Lizardo, the sellers, and private respondents, the buyers, to
deliver the certificate of title to the latter, upon its issuance,
constitutes a breach of trust sufficient to defeat the title and
right acquired by petitioner NGA, an innocent purchaser for
value.
It is undisputed that: (1) there are two deeds of sale of the
same land in favor of private respondents, namely: (a) the
conditional sale with right to repurchase or the 'Kasulatan Ng
Bilihang Mabibiling Muli" which was registered under Act
3344 and (b) the deed of absolute sale or "Kasulatan ng
Bilihang Tuluyan" which was not registered; (2) the condition
that the Certificate of Title will be delivered to the buyers
upon its issuance and upon payment of the balance of
P40,000.00 is contained in the deed of absolute sale; and (3)
the land in question at the time of the execution of both sales
was not yet covered by the Torrens System of registration.
It is axiomatic, that while the registration of the conditional
sale with right of repurchase may be binding on third persons,
it is by provision of law "understood to be without prejudice to
third party who has better right" (Section 194 of the
Administrative Code, as amended by Act No. 3344). In this
case, it will be noted that the third party NGA, is a registered
owner under the Torrens System and has obviously a better
right than private respondents and that the deed of absolute
sale with the suspensive condition is not registered and is
necessarily binding only on the spouses Vivas and Lizardo and
private respondents.
In their complaint at the Regional Trial Court, private
respondents prayed among others, for two alternative reliefs,
such as: (a) to be declared the owners of the property in
question or (b) to order the declared owner to reconvey or
transfer the ownership of the property in their favor.
Private respondents claim a better right to the property in
question by virtue of the Conditional Sale, later changed to a
deed of Absolute Sale which although unregistered under the
Torrens System allegedly transferred to them the ownership
and the possession of the property in question. In fact, they
argue that they have been and are still in possession of the
same openly, continuously, publicly under a claim of
ownership adverse to all other claims since the purchase on
December 2, 1971 (Rollo, p. 165). It is stressed that not until
the month of July, 1974 did the plaintiff learn that a title had
been issued covering the property in question (Rollo, p. 15).
Time and time again, this Court has ruled that the proceedings
for the registration of title to land under the Torrens System is
an action in rem not in personam, hence, personal notice to all
claimants of the res is not necessary in order that the court
may have jurisdiction to deal with and dispose of the res.
Neither may lack of such personal notice vitiate or invalidate
the decree or title issued in a registration proceeding, for the
State, as sovereign over the land situated within it, may
provide for the adjudication of title in a proceeding in rem or
one in the nature of or akin a to proceeding in rem which shall
be binding upon all persons, known or unknown (Moscoso vs.
Court of appeals, 128 SCRA 719 [1984], citing: City of
Manila vs. Lack, et al., 19 Phil. 324, 337; Roxas vs. Enriquez,
29 Phil. 31; Director of Lands vs. Roman Catholic Archbishop
of Manila, 41 Phil. 120; Aguilar vs. Caogdan, 105 Phil. 661).
It is thus evident that respondents' right over the property was
barred by res judicata when the decree of registration was
issued to spouses Vivas and Lizards. It does not matter that
they may have had some right even the right of ownership,
BEFORE the grant of the Torrens Title.
Thus, under Section 44 of P.D. 1529, every registered owner
receiving a certificate of title in pursuance of a decree of
registration, and every subsequent purchaser of registered land
taking a certificate of title for value and in good faith, shall
hold the same free from all encumbrances except those noted
on the certificate and any of the encumbrances which may be
subsisting, and enumerated in the law. Under said provision,
claims and liens of whatever character, except those
mentioned by law as existing, against the land prior to the
issuance of certificate of title, are cut off by such certificate if
not noted thereon, and the certificate so issued binds the whole
world, including the government (Aldecoa and Co. vs. Warner
Barns & Co., 30 Phil. 209 [1915]; Snyder vs. Fiscal of Cebu
and Avila, 42 Phil. 766 [1922]). Under said ruling, if the
purchaser is the only party who appears in the deeds and the
registration of titles in the property registry, no one except
such purchaser may be deemed by law to be the owner of the
properties in question (Ibid). Moreover, no title to registered
land in derogation to that of the registered owner shall be
acquired by prescription or adverse possession (Umbay vs.
Alecha, 135 SCRA 427 [1985]).
It does not appear that private respondents' claim falls under
any of the exceptions provided for under Section 44 of P.D.
1529 which can be enforced against petitioner herein.
Thus, it has been invariably restated by this Court, that "The
real purpose of the Torrens System is to quiet title to land and
to stop forever any question as to its legality. "Once a title is
registered, the owner may rest secure, without the necessity of
waiting in the portals of the court, or sitting on the "mirador su
casato," avoid the possibility of losing his land." "An indirect
or collateral attack on a Torrens Title is not allowed (Dominga
vs. Santos, 55 Phil. 361; Singian vs. Manila Railroad, 62 Phil.
467)."
The only exception to this rule is where a person obtains a
certificate of title to a land belonging to another and he has
full knowledge of the rights of the true owner. He is then
considered as guilty of fraud and he may be compelled to
transfer the land to the defrauded owner so long as the
property has not passed to the hands of an innocent purchaser
for value (Angeles vs. Sania, 66 Phil. 444 [1938], emphasis
supplied).
It will be noted that the spouses Vivas and Lizardo never
committed any fraud in procuring the registration of the
property in question. On the contrary, their application for
registration which resulted in the issuance of OCT No. 1728
was with complete knowledge and implied authority of private
respondents who retained a portion of the consideration until
the issuance to said spouses of a certificate of title applied for
under the Torrens Act and the corresponding delivery of said
title to them. The question therefore, is not about the validity
of OCT No. 1728 but in the breach of contract between private
respondents and the Vivas spouses. Petitioner NGA was never
a privy to this transaction. Neither was it shown that it had any
knowledge at the time of the execution of the mortgage, of the
existence of the suspensive condition in the deed of absolute
sale much less of its violation. Nothing appeared to excite
suspicion. The Special Power of Attorney was regular on its
face; the OCT was in the name of the mortgagor and the NGA
was the highest bidder in the public auction. Unquestionably,
therefore, the NGA is an innocent purchaser for value, first as
an innocent mortgagee under Section 32 of P.D. 1529 and
later as innocent purchaser for value in the public auction sale.
the property, their rights cannot be disregarded (Duran vs.
IAC, 138 SCRA 489 [1985]).
Under the circumstances, the Regional Trial Court could not
have erred in ruling that plaintiffs (private respondents herein)
complaint insofar as it prays that they be declared owners of
the land in question can not prosper in view of the doctrine of
indefeasibility of title under the Torrens System, because it is
an established principle that a petition for review of the decree
of registration will not prosper even if filed within one year
from the entry of the decree if the title has passed into the
hands of an innocent purchaser for value (Pres. Decree No.
1529, Sec. 32). The setting aside of the decree of registration
issued in land registration proceedings is operative only
between the parties to the fraud and the parties defrauded and
their privies, but not against acquirers in good faith and for
value and the successors in interest of the latter; as to them the
decree shall remain in full force and effect forever (Domingo
vs. The Mayon Realty Corp. et al., 102 Phil. 32 [19571).
Assuming, therefore, that there was fraud committed by the
sellers against the buyers in the instant case, petitioner NGA
who was not privy therein cannot be made to suffer the
consequences thereof As correctly declared by the trial court,
the National Grains Authority is the lawful owner of the
property in question by virtue of its indefeasible title.
As to private respondents' alternative prayer that the declared
owner be ordered to reconvey or transfer the ownership of the
property in their favor, it is clear that there is absolutely no
reason why petitioner, an innocent purchaser for value, should
reconvey the land to the private respondents.
PREMISES CONSIDERED, the decision of the Court of
Appeals is REVERSED and SET ASIDE, and the decision of
the Court of First Instance of Laguna and San Pablo City, now
Regional Trial Court, is REINSTATED.

Private respondents claim that NGA did not even field any SO ORDERED.
representative to the land which was not even in the
possession of the supposed mortgagors, nor present any
witness to prove its allegations in the ANSWER nor submit its
DEED OF MORTGAGE to show its being a mortgages in
good faith and for value (Rollo, p. 110).

Such contention is, however, untenable. Well settled is the

rule that all persons dealing with property covered by a torrens
certificate of title are not required to go beyond what appears
on the face of the title. When there is nothing on the certificate
of title to indicate any cloud or vice in the ownership of the
property, or any encumbrance thereon, the purchaser is not
required to explore further than what the torrens title upon its
face indicates in quest for any hidden defect or inchoate right
that may subsequently defeat his right thereto (Centeno vs.
Court of Appeals, 139 SCRA 545 [1985]).

More specifically, the Court has ruled that a bank is not

required before accepting a mortgage to make an investigation
of the title of the property being given as security (Phil.
National Cooperative Bank vs. Carandang Villalon, 139
SCRA 570 [1985]), and where innocent third persons like
mortgagee relying on the certificate of title acquire rights over