Professional Documents
Culture Documents
Republic of the Philippines Consequently, respondent sued petitioner for damages before the
SUPREME COURT RTC of Pasig City, Branch 261. Respondent alleged, among others,
Manila that petitioner’s employment with Professional Pension Plans, Inc.
violated the non-involvement clause in her contract of employment,
to wit:
SECOND DIVISION
8. NON INVOLVEMENT PROVISION – The EMPLOYEE further
G.R. No. 163512 February 28, 2007 undertakes that during his/her engagement with EMPLOYER and in
case of separation from the Company, whether voluntary or for
cause, he/she shall not, for the next TWO (2) years thereafter, There being no sufficient evidence presented to sustain the grant of
engage in or be involved with any corporation, association or entity, attorney’s fees, the Court deems it proper not to award any.
whether directly or indirectly, engaged in the same business or
belonging to the same pre-need industry as the EMPLOYER. Any SO ORDERED.6
breach of the foregoing provision shall render the EMPLOYEE liable
to the EMPLOYER in the amount of One Hundred Thousand Pesos
(P100,000.00) for and as liquidated damages. 5 On appeal, the Court of Appeals affirmed the trial court’s ruling. It
reasoned that petitioner entered into the contract on her own will
and volition. Thus, she bound herself to fulfill not only what was
Respondent thus prayed for ₱100,000 as compensatory damages; expressly stipulated in the contract, but also all its consequences
₱200,000 as moral damages; ₱100,000 as exemplary damages; and that were not against good faith, usage, and law. The appellate court
25% of the total amount due plus ₱1,000 per counsel’s court also ruled that the stipulation prohibiting non-employment for two
appearance, as attorney’s fees. years was valid and enforceable considering the nature of
respondent’s business.
Petitioner countered that the non-involvement clause was
unenforceable for being against public order or public policy: First, Petitioner moved for reconsideration but was denied. Hence, this
the restraint imposed was much greater than what was necessary to appeal by certiorari where petitioner alleges that the Court of
afford respondent a fair and reasonable protection. Petitioner Appeals erred when:
contended that the transfer to a rival company was an accepted
practice in the pre-need industry. Since the products sold by the
A.
companies were more or less the same, there was nothing peculiar or
unique to protect. Second, respondent did not invest in petitioner’s
training or improvement. At the time petitioner was recruited, she … [IT SUSTAINED] THE VALIDITY OF THE NON-INVOLVEMENT
already possessed the knowledge and expertise required in the pre- CLAUSE IN PETITIONER’S CONTRACT CONSIDERING THAT THE
need industry and respondent benefited tremendously from it. Third, PERIOD FIXED THEREIN IS VOID FOR BEING OFFENSIVE TO
a strict application of the non-involvement clause would amount to a PUBLIC POLICY
deprivation of petitioner’s right to engage in the only work she knew.
B.
In upholding the validity of the non-involvement clause, the trial
court ruled that a contract in restraint of trade is valid provided that … [IT SUSTAINED] THE AWARD OF LIQUIDATED DAMAGES
there is a limitation upon either time or place. In the case of the pre- CONSIDERING THAT IT BEING IN THE NATURE OF A PENALTY THE
need industry, the trial court found the two-year restriction to be SAME IS EXCESSIVE, INIQUITOUS OR UNCONSCIONABLE 7
valid and reasonable. The dispositive portion of the decision reads:
Plainly stated, the core issue is whether the non-involvement clause
WHEREFORE, judgment is hereby rendered in favor of the plaintiff is valid.
and against the defendant, ordering the latter to pay the following:
Petitioner avers that the non-involvement clause is offensive to
1. the amount of One Hundred Thousand Pesos public policy since the restraint imposed is much greater than what
(P100,000.00) for and as damages, for the breach of the non- is necessary to afford respondent a fair and reasonable protection.
involvement provision (Item No. 8) of the contract of She adds that since the products sold in the pre-need industry are
employment; more or less the same, the transfer to a rival company is acceptable.
Petitioner also points out that respondent did not invest in her
2. costs of suit. training or improvement. At the time she joined respondent, she
already had the knowledge and expertise required in the pre-need four miles from the employer’s place of business during the time the
industry. Finally, petitioner argues that a strict application of the employer was operating his drugstore. We said that a contract in
non-involvement clause would deprive her of the right to engage in restraint of trade is valid provided there is a limitation upon either
the only work she knows. time or place and the restraint upon one party is not greater than the
protection the other party requires.
Respondent counters that the validity of a non-involvement clause
has been sustained by the Supreme Court in a long line of cases. It Finally, in Consulta v. Court of Appeals, 11 we considered a non-
contends that the inclusion of the two-year non-involvement clause involvement clause in accordance with Article 1306 12 of the Civil
in petitioner’s contract of employment was reasonable and needed Code. While the complainant in that case was an independent agent
since her job gave her access to the company’s confidential and not an employee, she was prohibited for one year from engaging
marketing strategies. Respondent adds that the non-involvement directly or indirectly in activities of other companies that compete
clause merely enjoined her from engaging in pre-need business akin with the business of her principal. We noted therein that the
to respondent’s within two years from petitioner’s separation from restriction did not prohibit the agent from engaging in any other
respondent. She had not been prohibited from marketing other business, or from being connected with any other company, for as
service plans. long as the business or company did not compete with the principal’s
business. Further, the prohibition applied only for one year after the
As early as 1916, we already had the occasion to discuss the validity termination of the agent’s contract and was therefore a reasonable
of a non-involvement clause. In Ferrazzini v. Gsell, 8 we said that restriction designed to prevent acts prejudicial to the employer.
such clause was unreasonable restraint of trade and therefore
against public policy. In Ferrazzini, the employee was prohibited Conformably then with the aforementioned pronouncements, a non-
from engaging in any business or occupation in the Philippines for a involvement clause is not necessarily void for being in restraint of
period of five years after the termination of his employment contract trade as long as there are reasonable limitations as to time, trade,
and must first get the written permission of his employer if he were and place.
to do so. The Court ruled that while the stipulation was indeed
limited as to time and space, it was not limited as to trade. Such In this case, the non-involvement clause has a time limit: two years
prohibition, in effect, forces an employee to leave the Philippines to from the time petitioner’s employment with respondent ends. It is
work should his employer refuse to give a written permission. also limited as to trade, since it only prohibits petitioner from
engaging in any pre-need business akin to respondent’s.1awphi1.net
In G. Martini, Ltd. v. Glaiserman,9 we also declared a similar
stipulation as void for being an unreasonable restraint of trade. More significantly, since petitioner was the Senior Assistant Vice-
There, the employee was prohibited from engaging in any business President and Territorial Operations Head in charge of respondent’s
similar to that of his employer for a period of one year. Since the Hongkong and Asean operations, she had been privy to confidential
employee was employed only in connection with the purchase and and highly sensitive marketing strategies of respondent’s business.
export of abaca, among the many businesses of the employer, the To allow her to engage in a rival business soon after she leaves would
Court considered the restraint too broad since it effectively prevented make respondent’s trade secrets vulnerable especially in a highly
the employee from working in any other business similar to his competitive marketing environment. In sum, we find the non-
employer even if his employment was limited only to one of its involvement clause not contrary to public welfare and not greater
multifarious business activities. than is necessary to afford a fair and reasonable protection to
respondent.13
However, in Del Castillo v. Richmond, 10 we upheld a similar
stipulation as legal, reasonable, and not contrary to public policy. In In any event, Article 1306 of the Civil Code provides that parties to a
the said case, the employee was restricted from opening, owning or contract may establish such stipulations, clauses, terms and
having any connection with any other drugstore within a radius of
conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy.
Article 115914 of the same Code also provides that obligations arising
from contracts have the force of law between the contracting parties
and should be complied with in good faith. Courts cannot stipulate
for the parties nor amend their agreement where the same does not
contravene law, morals, good customs, public order or public policy,
for to do so would be to alter the real intent of the parties, and would
run contrary to the function of the courts to give force and effect
thereto.15 Not being contrary to public policy, the non-involvement
clause, which petitioner and respondent freely agreed upon, has the
force of law between them, and thus, should be complied with in
good faith.16
Thus, as held by the trial court and the Court of Appeals, petitioner
is bound to pay respondent ₱100,000 as liquidated damages. While
we have equitably reduced liquidated damages in certain cases, 17 we
cannot do so in this case, since it appears that even from the start,
petitioner had not shown the least intention to fulfill the non-
involvement clause in good faith.
SO ORDERED.
LEONARDO A. QUISUMBING
Associate Justice
The exclusivity clause is more often the subject of critical scrutiny when it is
perceived to collide with the Constitutional proscription against unreasonable
restraint of trade or occupation. Restraint of trade or occupation embraces acts,
contracts, agreements or combinations which restrict competition or obstruct due
course of trade. (Avon Cosmetics, Incorporated vs. Luna, 511 SCRA 376[2006])
Obligations and Contracts; Interests; Words and Phrases; Interest is a obligated to return the same. The quasi-contract of solutio indebiti harks back to the
compensation fixed by the parties for the use or forbearance of money, and this is ancient principle that no one shall enrich himself unjustly at the expense of another.
referred to as monetary interest; Interest may also be imposed by law or by courts The principle of solutio indebiti applies where (1) a payment is made when there
as penalty or indemnity for damages, and this is called compensatory interest; exists no binding relation between the payor, who has no duty to pay, and the person
Article 1956 of the Civil Code refers to monetary interest; Monetary interest shall who received the payment; and (2) the payment is made through mistake, and not
be due only if it has been expressly stipulated in writing.—Interest is a compensation through liberality or some other cause. We have held that the principle of solutio
fixed by the parties for the use or forbearance of money. This is referred to as indebiti applies in case of erroneous payment of undue interest.
monetary interest. Interest may also be imposed by law or by courts as penalty or
indemnity for damages. This is called compensatory interest. The right to interest Damages; Article 2216 of the Civil Code instructs that assessment of
arises only by virtue of a contract or by virtue of damages for delay or failure to pay damages is left to the discretion of the court according to the circumstances of each
the principal loan on which interest is demanded. Article 1956 of the Civil Code, case, which discretion is limited by the principle that the amount awarded should
which refers to monetary interest, specifically mandates that no interest shall be due not be palpably excessive as to indicate that it was the result of prejudice or
unless it has been expressly stipulated in writing. As can be gleaned from the corruption on the part of the trial court.—Article 2217 of the Civil Code provides
foregoing provision, payment of monetary interest is allowed only if: (1) there was that moral damages may be recovered if the party underwent physical suffering,
an express stipulation for the payment of interest; and (2) the agreement for the mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
payment of interest was reduced in writing. The concurrence of the two conditions is moral shock, social humiliation and similar injury. Respondent testified that she
required for the payment of monetary interest. Thus, we have held that collection of experienced sleepless nights and wounded feelings when petitioner refused to return
interest without any stipulation therefor in writing is prohibited by law. the amount paid as interest despite her repeated demands. Hence, the award of moral
damages is justified. However, its corresponding amount of P300,000.00, as fixed
Same; Same; The interest under Arts. 2209 and 2212 of the Civil Code may by the RTC and the Court of Appeals, is exorbitant and should be equitably reduced.
be imposed only as a penalty or damages for breach of contractual obligations—it Article 2216 of the Civil Code instructs that assessment of damages is left to the
cannot be charged as a compensation for the use or forbearance of money.—There discretion of the court according to the circumstances of each case. This discretion is
are instances in which an interest may be imposed even in the absence of express limited by the principle that the amount awarded should not be palpably excessive as
stipulation, verbal or written, regarding payment of interest. Article 2209 of the to indicate that it was the result of prejudice or corruption on the part of the trial
Civil Code states that if the obligation consists in the payment of a sum of money, court. To our mind, the amount of P150,000.00 as moral damages is fair, reasonable,
and the debtor incurs delay, a legal interest of 12% per annum may be imposed as and proportionate to the injury suffered by respondent.
indemnity for damages if no stipulation on the payment of interest was agreed upon.
Likewise, Article 2212 of the Civil Code provides that interest due shall earn legal Same; In a quasi-contract, such as solutio indebiti, exemplary damages may
interest from the time it is judicially demanded, although the obligation may be be imposed if the defendant acted in an oppressive manner, such as when the
silent on this point. All the same, the interest under these two instances may be creditor defendant acted oppressively by pestering debtor to pay interest and
imposed only as a penalty or damages for breach of contractual obligations. It threatening to block the latter’s transactions with a government office if she would
cannot be charged as a compensation for the use or forbearance of money. In other not pay interest.—Article 2232 of the Civil Code states that in a quasi-contract, such
words, the two instances apply only to compensatory interest and not to monetary as solutio indebiti, exemplary damages may be imposed if the defendant acted in an
interest. The case at bar involves petitioner’s claim for monetary interest. oppressive manner. Petitioner acted oppressively when he pestered respondent to
pay interest and threatened to block her transactions with the PNO if she would not
Same; Same; Solutio Indebiti; The principle of solutio indebiti applies in case of pay interest. This forced respondent to pay interest despite lack of agreement
erroneous payment of undue interest.—Under Article 1960 of the Civil Code, if the thereto. Thus, the award of exemplary damages is appropriate. The amount of
borrower of loan pays interest when there has been no stipulation therefor, the P50,000.00 imposed as exemplary damages by the RTC and the Court is fitting so as
provisions of the Civil Code concerning solutio indebiti shall be applied. Article to deter petitioner and other lenders from committing similar and other serious
2154 of the Civil Code explains the principle of solutio indebiti. Said provision wrongdoings.
provides that if something is received when there is no right to demand it, and it was Same; Attorney’s Fees; In awarding attorney’s fees, the trial court must state the
unduly delivered through mistake, the obligation to return it arises. In such a case, a factual, legal or equitable justification for awarding the same.—Jurisprudence
creditor-debtor relationship is created under a quasi-contract whereby the payor instructs that in awarding attorney’s fees, the trial court must state the factual, legal
becomes the creditor who then has the right to demand the return of payment made or equitable justification for awarding the same. In the case under consideration, the
by mistake, and the person who has no right to receive such payment becomes RTC stated in its Decision that the award of attorney’s fees equivalent to 25% of the
amount paid as interest by respondent to petitioner is reasonable and moderate Respondent. January 20, 2009
considering the extent of work rendered by respondent’s lawyer in the instant case x----------------------------------------------
and the fact that it dragged on for several years. Further, respondent testified that she - - - -x
agreed to compensate her lawyer handling the instant case such amount. The award,
therefore, of attorney’s fees and its amount equivalent to 25% of the amount paid as
interest by respondent to petitioner is proper. DECISION
Interests; Where the obligation arose from a quasi-contract of solutio indebiti CHICO-NAZARIO, J.:
and not from a loan or forbearance of money, the interest of 6% per annum should
be imposed on the amount to be refunded as well as on the damages awarded and Before Us is a Petition [1] for Review on Certiorari under Rule
on the attorney’s fees, to be computed from the time of the extrajudicial demand up 45 of the Rules of Court seeking to set aside the Decision, [2] dated 16
to the finality of the Decision.—In Eastern Shipping Lines, Inc. v. Court of Appeals, December 2005, and Resolution, [3] dated 19 June 2006 of the Court
234 SCRA 78 (1994), that when an obligation, not constituting a loan or forbearance of Appeals in CA-G.R. CV No. 71814, which affirmed in toto the
of money is breached, an interest on the amount of damages awarded may be Decision,[4] dated 26 January 2001, of the Las Pinas City Regional
imposed at the rate of 6% per annum. We further declared that when the judgment Trial Court, Branch 255, in Civil Case No. LP-98-0068.
of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether it is a loan/forbearance of money or not, shall be 12% per The facts gathered from the records are as follows:
annum from such finality until its satisfaction, this interim period being deemed
equivalent to a forbearance of credit. In the present case, petitioner’s obligation On 30 March 1998, respondent Alicia Villanueva filed a
arose from a quasi-contract of solutio indebiti and not from a loan or forbearance of complaint[5] for sum of money against petitioner Sebastian Siga-an
money. Thus, an interest of 6% per annum should be imposed on the amount to be before the Las Pinas City Regional Trial Court (RTC), Branch 255,
refunded as well as on the damages awarded and on the attorney’s fees, to be docketed as Civil Case No. LP-98-0068. Respondent alleged that she
computed from the time of the extrajudicial demand on 3 March 1998, up to the was a businesswoman engaged in supplying office materials and
finality of this Decision. In addition, the interest shall become 12% per annum from
equipments to the Philippine Navy Office (PNO) located at Fort
the finality of this Decision up to its satisfaction.
Bonifacio, Taguig City, while petitioner was a military officer and
comptroller of the PNO from 1991 to 1996.
THIRD DIVISION
Respondent claimed that sometime in 1992, petitioner
approached her inside the PNO and offered to loan her the amount
of P540,000.00. Since she needed capital for her business
SEBASTIAN SIGA-AN, G.R. No. 173227
transactions with the PNO, she accepted petitioners proposal. The
Petitioner,
loan agreement was not reduced in writing. Also, there was no
Present:
stipulation as to the payment of interest for the loan. [6]
YNARES-SANTIAGO,
On 31 August 1993, respondent issued a check
Chairperson,
worth P500,000.00 to petitioner as partial payment of the loan. On
AUSTRIA-MARTINEZ,
31 October 1993, she issued another check in the amount
-versus CHICO-NAZARIO,
of P200,000.00 to petitioner as payment of the remaining balance of
NACHURA, and
the loan. Petitioner told her that since she paid a total amount
LEONARDO-DE CASTRO,* JJ.
of P700,000.00 for the P540,000.00 worth of loan, the excess
amount of P160,000.00 would be applied as interest for the loan. Not
satisfied with the amount applied as interest, petitioner pestered her
Promulgated:
to pay additional interest. Petitioner threatened to block or
ALICIA VILLANUEVA,
disapprove her transactions with the PNO if she would not comply
with his demand. As all her transactions with the PNO were subject the payment of the loan. This time he rejected her plea. Thus,
to the approval of petitioner as comptroller of the PNO, and fearing respondent proposed to execute a promissory note wherein she
that petitioner might block or unduly influence the payment of her would acknowledge her obligation to him, inclusive of interest, and
vouchers in the PNO, she conceded. Thus, she paid additional that she would issue several postdated checks to guarantee the
amounts in cash and checks as interests for the loan. She asked payment of her obligation. Upon his approval of respondents request
petitioner for receipt for the payments but petitioner told her that it for restructuring of the loan, respondent executed a promissory note
was not necessary as there was mutual trust and confidence dated 12 September 1994 wherein she admitted having borrowed an
between them. According to her computation, the total amount she amount of P1,240,000.00, inclusive of interest, from petitioner and
paid to petitioner for the loan and interest accumulated that she would pay said amount in March 1995. Respondent also
to P1,200,000.00.[7] issued to him six postdated checks amounting to P1,240,000.00 as
guarantee of compliance with her obligation. Subsequently, he
Thereafter, respondent consulted a lawyer regarding the presented the six checks for encashment but only one check was
propriety of paying interest on the loan despite absence of agreement honored. He demanded that respondent settle her obligation, but the
to that effect. Her lawyer told her that petitioner could not validly latter failed to do so. Hence, he filed criminal cases for Violation of
collect interest on the loan because there was no agreement between the Bouncing Checks Law (Batas Pambansa Blg. 22) against
her and petitioner regarding payment of interest. Since she paid respondent. The cases were assigned to the Metropolitan Trial Court
petitioner a total amount of P1,200,000.00 for the P540,000.00 of Makati City, Branch 65 (MeTC).[12]
worth of loan, and upon being advised by her lawyer that she made
overpayment to petitioner, she sent a demand letter to petitioner Petitioner insisted that there was no overpayment because
asking for the return of the excess amount of P660,000.00. respondent admitted in the latters promissory note that her
Petitioner, despite receipt of the demand letter, ignored her claim for monetary obligation as of 12 September 1994 amounted
reimbursement.[8] to P1,240,000.00 inclusive of interests. He argued that respondent
was already estopped from complaining that she should not have
Respondent prayed that the RTC render judgment ordering paid any interest, because she was given several times to settle her
petitioner to pay respondent (1) P660,000.00 plus legal interest from obligation but failed to do so. He maintained that to rule in favor of
the time of demand; (2) P300,000.00 as moral damages; respondent is tantamount to concluding that the loan was given
(3) P50,000.00 as exemplary damages; and (4) an amount equivalent interest-free. Based on the foregoing averments, he asked the RTC to
to 25% of P660,000.00 as attorneys fees.[9] dismiss respondents complaint.
In his answer[10] to the complaint, petitioner denied that he After trial, the RTC rendered a Decision on 26 January 2001
offered a loan to respondent. He averred that in 1992, respondent holding that respondent made an overpayment of her loan obligation
approached and asked him if he could grant her a loan, as she to petitioner and that the latter should refund the excess amount to
needed money to finance her business venture with the PNO. At first, the former. It ratiocinated that respondents obligation was only to
he was reluctant to deal with respondent, because the latter had a pay the loaned amount of P540,000.00, and that the alleged
spotty record as a supplier of the PNO. However, since respondent interests due should not be included in the computation of
was an acquaintance of his officemate, he agreed to grant her a respondents total monetary debt because there was no agreement
loan. Respondent paid the loan in full.[11] between them regarding payment of interest. It concluded that since
respondent made an excess payment to petitioner in the amount
Subsequently, respondent again asked him to give her a of P660,000.00 through mistake, petitioner should return the said
loan. As respondent had been able to pay the previous loan in full, amount to respondent pursuant to the principle of solutio indebiti.[13]
he agreed to grant her another loan. Later, respondent requested
him to restructure the payment of the loan because she could not The RTC also ruled that petitioner should pay moral
give full payment on the due date. He acceded to her damages for the sleepless nights and wounded feelings experienced
request. Thereafter, respondent pleaded for another restructuring of by respondent. Further, petitioner should pay exemplary damages by
way of example or correction for the public good, plus attorneys fees THE RTC AND THE COURT OF APPEALS ERRED IN
and costs of suit. RULING THAT NO INTEREST WAS DUE TO
PETITIONER;
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing II.
evidence and in the light of the provisions of law and
jurisprudence on the matter, judgment is hereby THE RTC AND THE COURT OF APPEALS ERRED IN
rendered in favor of the plaintiff and against the APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.[17]
defendant as follows:
(1) Ordering defendant to pay Interest is a compensation fixed by the parties for the use or
plaintiff the amount of P660,000.00 plus legal forbearance of money. This is referred to as monetary interest.
interest of 12% per annum computed from 3 March Interest may also be imposed by law or by courts as penalty or
1998 until the amount is paid in full; indemnity for damages. This is called compensatory interest. [18] The
(2) Ordering defendant to pay plaintiff the right to interest arises only by virtue of a contract or by virtue of
amount of P300,000.00 as moral damages; damages for delay or failure to pay the principal loan on which
interest is demanded.[19]
(3) Ordering defendant to pay plaintiff the
amount of P50,000.00 as exemplary damages; Article 1956 of the Civil Code, which refers to monetary
interest,[20] specifically mandates that no interest shall be due unless
(4) Ordering defendant to pay plaintiff the it has been expressly stipulated in writing. As can be gleaned from
amount equivalent to 25% of P660,000.00 as the foregoing provision, payment of monetary interest is allowed only
attorneys fees; and if: (1) there was an express stipulation for the payment of interest;
and (2) the agreement for the payment of interest was reduced in
(5) Ordering defendant to pay the costs of writing. The concurrence of the two conditions is required for the
suit.[14] payment of monetary interest. Thus, we have held that collection of
interest without any stipulation therefor in writing is prohibited by
law.[21]
Petitioner appealed to the Court of Appeals. On 16 December
2005, the appellate court promulgated its Decision affirming in It appears that petitioner and respondent did not agree on
toto the RTC Decision, thus: the payment of interest for the loan. Neither was there convincing
proof of written agreement between the two regarding the payment of
WHEREFORE, the foregoing considered, the interest. Respondent testified that although she accepted petitioners
instant appeal is hereby DENIED and the assailed offer of loan amounting to P540,000.00, there was, nonetheless, no
decision [is] AFFIRMED in toto.[15] verbal or written agreement for her to pay interest on the loan. [22]
Petitioner presented a handwritten promissory note dated 12
Petitioner filed a motion for reconsideration of the appellate September 1994[23] wherein respondent purportedly admitted owing
courts decision but this was denied. [16] Hence, petitioner lodged the petitioner capital and interest. Respondent, however, explained that
instant petition before us assigning the following errors: it was petitioner who made a promissory note and she was told to
I. copy it in her own handwriting; that all her transactions with the
PNO were subject to the approval of petitioner as comptroller of the
PNO; that petitioner threatened to disapprove her transactions with
the PNO if she would not pay interest; that being unaware of the law and respect especially when affirmed by the appellate court. [27] We
on interest and fearing that petitioner would make good of his found no compelling reason to disturb the ruling of both courts.
threats if she would not obey his instruction to copy the promissory
note, she copied the promissory note in her own handwriting; and Petitioners reliance on respondents alleged admission in the
that such was the same promissory note presented by petitioner as Batas Pambansa Blg. 22 cases that they had agreed on the payment
alleged proof of their written agreement on interest. [24] Petitioner did of interest at the rate of 7% deserves scant consideration. In the said
not rebut the foregoing testimony. It is evident that respondent did case, respondent merely testified that after paying the total amount
not really consent to the payment of interest for the loan and that of loan, petitioner ordered her to pay interest. [28] Respondent did not
she was merely tricked and coerced by petitioner to pay categorically declare in the same case that she and respondent made
interest. Hence, it cannot be gainfully said that such promissory note an express stipulation in writing as regards payment of interest at
pertains to an express stipulation of interest or written agreement of the rate of 7%. As earlier discussed, monetary interest is due only if
interest on the loan between petitioner and respondent. there was an express stipulation in writing for the payment of
interest.
Petitioner, nevertheless, claims that both the RTC and the
Court of Appeals found that he and respondent agreed on the There are instances in which an interest may be imposed
payment of 7% rate of interest on the loan; that the agreed 7% rate of even in the absence of express stipulation, verbal or written,
interest was duly admitted by respondent in her testimony in the regarding payment of interest. Article 2209 of the Civil Code states
Batas Pambansa Blg. 22 cases he filed against respondent; that that if the obligation consists in the payment of a sum of money, and
despite such judicial admission by respondent, the RTC and the the debtor incurs delay, a legal interest of 12% per annum may be
Court of Appeals, citing Article 1956 of the Civil Code, still held that imposed as indemnity for damages if no stipulation on the payment
no interest was due him since the agreement on interest was not of interest was agreed upon. Likewise, Article 2212 of the Civil Code
reduced in writing; that the application of Article 1956 of the Civil provides that interest due shall earn legal interest from the time it is
Code should not be absolute, and an exception to the application of judicially demanded, although the obligation may be silent on this
such provision should be made when the borrower admits that a point.
specific rate of interest was agreed upon as in the present case; and
that it would be unfair to allow respondent to pay only the loan when All the same, the interest under these two instances may be
the latter very well knew and even admitted in the Batas Pambansa imposed only as a penalty or damages for breach of contractual
Blg. 22 cases that there was an agreed 7% rate of interest on the obligations. It cannot be charged as a compensation for the use or
loan.[25] forbearance of money. In other words, the two instances apply only
to compensatory interest and not to monetary interest. [29] The case at
We have carefully examined the RTC Decision and found bar involves petitioners claim for monetary interest.
that the RTC did not make a ruling therein that petitioner and
respondent agreed on the payment of interest at the rate of 7% for Further, said compensatory interest is not chargeable in the
the loan. The RTC clearly stated that although petitioner and instant case because it was not duly proven that respondent
respondent entered into a valid oral contract of loan amounting defaulted in paying the loan. Also, as earlier found, no interest was
to P540,000.00, they, nonetheless, never intended the payment of due on the loan because there was no written agreement as regards
interest thereon.[26] While the Court of Appeals mentioned in its payment of interest.
Decision that it concurred in the RTCs ruling that petitioner and
respondent agreed on a certain rate of interest as regards the loan, Apropos the second assigned error, petitioner argues that the
we consider this as merely an inadvertence because, as earlier principle of solutio indebiti does not apply to the instant case. Thus,
elucidated, both the RTC and the Court of Appeals ruled that he cannot be compelled to return the alleged excess amount paid by
petitioner is not entitled to the payment of interest on the loan. The respondent as interest.[30]
rule is that factual findings of the trial court deserve great weight
Under Article 1960 of the Civil Code, if the borrower of loan respondent paid him a total amount of P175,000.00 cash in addition
pays interest when there has been no stipulation therefor, the to the two checks. Section 26 Rule 130 of the Rules of Evidence
provisions of the Civil Code concerning solutio indebiti shall be provides that the declaration of a party as to a relevant fact may be
applied. Article 2154 of the Civil Code explains the principle given in evidence against him. Aside from the amounts
of solutio indebiti. Said provision provides that if something is of P160,000.00 and P175,000.00 paid as interest, no other proof of
received when there is no right to demand it, and it was unduly additional payment as interest was presented by respondent. Since
delivered through mistake, the obligation to return it arises. In such we have previously found that petitioner is not entitled to payment of
a case, a creditor-debtor relationship is created under a quasi- interest and that the principle of solutio indebiti applies to the instant
contract whereby the payor becomes the creditor who then has the case, petitioner should return to respondent the excess amount
right to demand the return of payment made by mistake, and the of P160,000.00 and P175,000.00 or the total amount
person who has no right to receive such payment becomes obligated of P335,000.00. Accordingly, the reimbursable amount to respondent
to return the same. The quasi-contract of solutio indebiti harks back fixed by the RTC and the Court of Appeals should be reduced
to the ancient principle that no one shall enrich himself unjustly at from P660,000.00 to P335,000.00.
the expense of another.[31] The principle of solutio indebiti applies
where (1) a payment is made when there exists no binding relation As earlier stated, petitioner filed five (5) criminal cases for
between the payor, who has no duty to pay, and the person who violation of Batas Pambansa Blg. 22 against respondent. In the said
received the payment; and (2) the payment is made through mistake, cases, the MeTC found respondent guilty of violating Batas
and not through liberality or some other cause. [32] We have held that Pambansa Blg. 22 for issuing five dishonored checks to petitioner.
the principle of solutio indebiti applies in case of erroneous payment Nonetheless, respondents conviction therein does not affect our
of undue interest.[33] ruling in the instant case. The two checks, subject matter of this
case, totaling P700,000.00 which respondent claimed as payment of
It was duly established that respondent paid interest to the P540,000.00 worth of loan, were not among the five checks found
petitioner. Respondent was under no duty to make such payment to be dishonored or bounced in the five criminal cases. Further, the
because there was no express stipulation in writing to that MeTC found that respondent made an overpayment of the loan by
effect. There was no binding relation between petitioner and reason of the interest which the latter paid to petitioner. [39]
respondent as regards the payment of interest. The payment was
clearly a mistake. Since petitioner received something when there Article 2217 of the Civil Code provides that moral damages
was no right to demand it, he has an obligation to return it. may be recovered if the party underwent physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded
We shall now determine the propriety of the monetary award feelings, moral shock, social humiliation and similar injury.
and damages imposed by the RTC and the Court of Appeals. Respondent testified that she experienced sleepless nights and
wounded feelings when petitioner refused to return the amount paid
Records show that respondent received a loan amounting as interest despite her repeated demands. Hence, the award of moral
to P540,000.00 from petitioner.[34] Respondent issued two checks damages is justified. However, its corresponding amount
with a total worth of P700,000.00 in favor of petitioner as payment of of P300,000.00, as fixed by the RTC and the Court of Appeals, is
the loan.[35] These checks were subsequently encashed by petitioner. exorbitant and should be equitably reduced. Article 2216 of the Civil
[36]
Obviously, there was an excess of P160,000.00 in the payment for Code instructs that assessment of damages is left to the discretion of
the loan. Petitioner claims that the excess of P160,000.00 serves as the court according to the circumstances of each case. This
interest on the loan to which he was entitled. Aside from issuing the discretion is limited by the principle that the amount awarded
said two checks, respondent also paid cash in the total amount should not be palpably excessive as to indicate that it was the result
of P175,000.00 to petitioner as interest. [37]Although no receipts of prejudice or corruption on the part of the trial court. [40] To our
reflecting the same were presented because petitioner refused to mind, the amount of P150,000.00 as moral damages is fair,
issue such to respondent, petitioner, nonetheless, admitted in his reasonable, and proportionate to the injury suffered by respondent.
Reply-Affidavit[38] in the Batas Pambansa Blg. 22 cases that
Article 2232 of the Civil Code states that in a quasi-contract, on the attorneys fees, to be computed from the time of the extra-
such as solutio indebiti, exemplary damages may be imposed if the judicial demand on 3 March 1998, [46] up to the finality of this
defendant acted in an oppressive manner. Petitioner acted Decision. In addition, the interest shall become 12% per annum from
oppressively when he pestered respondent to pay interest and the finality of this Decision up to its satisfaction.
threatened to block her transactions with the PNO if she would not
pay interest. This forced respondent to pay interest despite lack of WHEREFORE, the Decision of the Court of Appeals in CA-
agreement thereto. Thus, the award of exemplary damages is G.R. CV No. 71814, dated 16 December 2005, is
appropriate. The amount of P50,000.00 imposed as exemplary hereby AFFIRMED with the following MODIFICATIONS: (1) the
damages by the RTC and the Court is fitting so as to deter petitioner amount of P660,000.00 as refundable amount of interest is reduced
and other lenders from committing similar and other serious to THREE HUNDRED THIRTY FIVE THOUSAND PESOS
wrongdoings.[41] (P335,000.00); (2) the amount of P300,000.00 imposed as moral
damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS
Jurisprudence instructs that in awarding attorneys fees, the (P150,000.00); (3) an interest of 6% per annum is imposed on
trial court must state the factual, legal or equitable justification for the P335,000.00, on the damages awarded and on the attorneys fees
awarding the same.[42] In the case under consideration, the RTC to be computed from the time of the extra-judicial demand on 3
stated in its Decision that the award of attorneys fees equivalent to March 1998 up to the finality of this Decision; and (4) an interest of
25% of the amount paid as interest by respondent to petitioner is 12% per annum is also imposed from the finality of this Decision up
reasonable and moderate considering the extent of work rendered by to its satisfaction. Costs against petitioner.
respondents lawyer in the instant case and the fact that it dragged
on for several years.[43] Further, respondent testified that she agreed SO ORDERED.
to compensate her lawyer handling the instant case such amount.
[44]
The award, therefore, of attorneys fees and its amount equivalent
to 25% of the amount paid as interest by respondent to petitioner is
proper.
Finally, the RTC and the Court of Appeals imposed a 12%
rate of legal interest on the amount refundable to respondent
computed from 3 March 1998 until its full payment. This is
erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals,
[45]
that when an obligation, not constituting a loan or forbearance of
money is breached, an interest on the amount of damages awarded
may be imposed at the rate of 6% per annum. We further declared
that when the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether it is a
loan/forbearance of money or not, shall be 12% per annum from
such finality until its satisfaction, this interim period being deemed
equivalent to a forbearance of credit.
In the present case, petitioners obligation arose from a
quasi-contract of solutio indebiti and not from a loan or forbearance
of money. Thus, an interest of 6% per annum should be imposed on
the amount to be refunded as well as on the damages awarded and
Banks and Banking; Bank Deposits; Loans; The contractual relationship over the deposits.—Taxes are created primarily to generate revenues for the
between banks and their depositors is governed by the Civil Code provisions on maintenance of the government. However, this particular tax may also serve as
simple loan.—The contractual relationship between banks and their depositors is guard against the release of deposits to persons who have no sufficient and valid
governed by the Civil Code provisions on simple loan. Once a person makes a claim over the deposits. Based on the assumption that only those with sufficient and
deposit of his or her money to the bank, he or she is considered to have lent the bank valid claim to the deposit will pay the taxes for it, requiring the certificate from the
that money. The bank becomes his or her debtor, and he or she becomes the creditor BIR increases the chance that the deposit will be released only to them.
of the bank, which is obligated to pay him or her on demand. The default standard of
diligence in the performance of obligations is “diligence of a good father of a Banks and Banking; Diligence Required of Banks; Petitioner Philippine
family.” National Bank (PNB) is a bank from which a degree of diligence higher than that of
a good father of a family is expected.—Petitioner PNB is a bank from which a
Same; Same; Fiduciary Relationship; The Supreme Court (SC) has degree of diligence higher than that of a good father of a family is expected.
recognized the fiduciary nature of the banks’ functions, and attached a special Petitioner PNB and its manager, petitioner Aguilar, failed to meet even the standard
standard of diligence for the exercise of their functions.—Other industries, because of diligence of a good father of a family. Their actions and inactions constitute gross
of their nature, are bound by law to observe higher standards of diligence. Common negligence. It is for this reason that we sustain the trial court’s and the Court of
carriers, for example, must observe “extraordinary diligence in the vigilance over Appeals’ rulings that petitioners PNB and Aguilar are solidarily liable with each
the goods and for the safety of [their] passengers” because it is considered a business other.
affected with public interest. “Extraordinary diligence” with respect to passenger
safety is further qualified as “carry[ing] the passengers safely as far as human care Same; Damages; Moral Damages; The Supreme Court (SC) sustains the
and foresight can provide, using the utmost diligence of very cautious persons, with award of moral damages; The bank’s negligence was the result of lack of due care
a due regard for all the circumstances.” Similar to common carriers, banking is a and caution required of managers and employees of a firm engaged in so sensitive
business that is impressed with public interest. It affects economies and plays a and demanding business as banking.—For the same reason, we sustain the award for
significant role in businesses and commerce. The public reposes its faith and moral damages. Petitioners PNB and Aguilar’s gross negligence deprived Angel C.
confidence upon banks, such that “even the humble wage-earner has not hesitated to Santos’ heirs what is rightfully theirs. Respondents also testified that they
entrust his life’s savings to the bank of his choice, knowing that they will be safe in experienced anger and embarrassment when petitioners PNB and Aguilar refused to
its custody and will even earn some interest for him.” This is why we have release Angel C. Santos’ deposit. “The bank’s negligence was the result of lack of
recognized the fiduciary nature of the banks’ functions, and attached a special due care and caution required of managers and employees of a firm engaged in so
standard of diligence for the exercise of their functions. sensitive and demanding business as banking.”
Same; Same; Same; This fiduciary relationship means that the bank’s Same; Same; Exemplary Damages; The law allows the grant of exemplary
obligation to observe “high standards of integrity and performance” is deemed damages by way of example for the public good.—Exemplary damages should also
written into every deposit agreement between a bank and its depositor. The be awarded. “The law allows the grant of exemplary damages by way of example
fiduciary nature of banking requires banks to assume a degree of diligence higher for the public good. The public relies on the banks’ sworn profession of diligence
than that of a good father of a family.—In The Consolidated Bank and Trust and meticulousness in giving irreproachable service. The level of meticulousness
Corporation v. Court of Appeals, 410 SCRA 562 (2003), this court explained the must be maintained at all times by the banking sector.”
meaning of fiduciary relationship and the standard of diligence assumed by
banks: This fiduciary relationship means that the banks obligation to observe “high Same; Same; Attorney’s Fees; Since exemplary damages are awarded and
standards of integrity and performance” is deemed written into every deposit since respondents were compelled to litigate to protect their interests, the award of
agreement between a bank and its depositor. The fiduciary nature of banking attorney’s fees is also proper.—Since exemplary damages are awarded and since
requires banks to assume a degree of diligence higher than that of a good father of respondents were compelled to litigate to protect their interests, the award of
a family. Article 1172 of the Civil Code states that the degree of diligence required attorney’s fees is also proper.
of an obligor is that prescribed by law or contract, and absent such stipulation then
the diligence a good father of a family. Same; Same; Interest Rates; The Court of Appeals’ (CA’s) award of interest
should be modified to twelve percent (12%) from demand on April 25, 1998 until
Taxation; Estate Tax; Bank Deposits; Estate tax may also serve as guard June 30, 2013, and six percent (6%) from July 1, 2013 until fully paid.—The Court
against the release of deposits to persons who have no sufficient and valid claim of Appeals’ award of interest should be modified to 12% from demand on April 26,
1998 until June 30, 2013, and 6% from July 1, 2013 until fully paid. In Nacar v. DECISION
Gallery Frames, 703 SCRA 439 (2013): Thus, from the foregoing, in the absence of
an express stipulation as to the rate of interest that would govern the parties, the rate LEONEN, J.:
of legal interest for loans or forbearance of any money . . . shall no longer be twelve
percent (12%) per annum . . . but will now be six percent (6%) per annum effective
July 1, 2013. It should be noted, nonetheless, that . . . the twelve percent (12%) per The standard of diligence required of banks is higher than the degree
annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the of diligence of a good father of a family. Respondents are children of
new rate of six percent (6%) per annum shall be the prevailing rate of interest when Angel C. Santos who died on March 21, 1991.1
applicable. . . . . 1. When the obligation is breached, and it consists in the payment of
a sum of money, i.e., a loan or forbearance of money, the interest due should be that Sometime in May 1996, respondents discovered that their father
which may have been stipulated in writing. Furthermore, the interest due shall itself maintained a premium savings account with Philippine National
earn legal interest from the time it is judicially demanded. In the absence of Bank (PNB), Sta. Elena-Marikina City Branch.2 As of July 14, 1996,
stipulation, the rate of interest shall be 6% per annum to be computed from the deposit amounted to 1,759,082.63.3 Later, respondents would
default, i.e., from judicial or extrajudicial demand. . . . . . . 3. When the judgment of discover that their father also had a time deposit of 1,000,000.00
the court awarding a sum of money becomes final and executory, the rate of legal with PNB.4
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit. Respondents went to PNB to withdraw their father’s deposit. 5
Angel P. Santos denied having anything to do with the special power 3. Ordering the third party defendants Bernardito P. Manimbo, Angel
of attorney and affidavit of self-adjudication presented by P. Santos and Capital Insurance & Surety Co., Inc., jointly and
Manimbo.22 He also alleged that Manimbo presented the certificate of severally liable to pay third party plaintiff PNB, the amount of Php
time deposit without his knowledge and consent. 23 1,877,438.83 pursuant to the Heir’s Bond and the amount of Php
50,000.00 as attorney’s fees and the costs of suit.
Capital Insurance and Surety Co., Inc. alleged that its undertaking
was to pay claims only when persons who were unduly deprived of SO ORDERED.30
their lawful participation in the estate filed an action in court for
their claims.24 It did not undertake to pay claims resulting from The trial court found that Angel C. Santos had only one account with
PNB’s negligence.25 PNB.31 The account was originally a time deposit, which was
converted into a premium savings account when it was not renewed
In the decision26 dated February 22, 2011, the trial court held that on maturity.32 The trial court took judicial notice that in 1989,
PNB and Aguilar were jointly and severally liable to pay respondents automatic rollover of time deposit was not yet prevailing. 33
the amount of 1,882,002.05 with an interest rate of 6% starting May
20, 1998.27 PNB and Aguilar were also declared jointly and severally On the liability of PNB and Aguilar, the trial court held that they
liable for moral and exemplary damages, attorney’s fees, and costs of were both negligent in releasing the deposit to Manimbo. 34 The trial
suit.28Manimbo, Angel P. Santos, and Capital Insurance and Surety court noted PNB’s failure to notify the depositor about the maturity
Co., Inc. were held jointly and severally liable to pay PNB of the time deposit and the conversion of the time deposit into a
1,877,438.83 pursuant to the heir’s bond and 50,000.00 as premium savings account.35 The trial court also noted PNB’s failure
to cancel the certificate of time deposit despite conversion. 36 PNB and
Aguilar also failed to require the production of birth certificates to The Court of Appeals removed the award of exemplary damages,
prove claimants’ relationship to the depositor. 37 Further, they relied upon finding that there was no malice or bad faith. 56
on the affidavit of self-adjudication when several persons claiming to
be heirs had already approached them previously. 38 The Court of Appeals considered the deposit as an ordinary loan by
the bank from Angel C. Santos or his heirs. 57Therefore, the deposit
Aguilar filed a motion for reconsideration 39 of the February 22, 2011 was a forbearance which should earn an interest of 12% per
Regional Trial Court decision. This was denied in the June 21, 2011 annum.58 The dispositive portion of the Court of Appeals’ decision
Regional Trial Court order.40 reads:
PNB and Aguilar appealed before the Court of Appeals. 41 WHEREFORE, premises considered, the assailed decision of the
court a quo dated February 22, 2011 is AFFIRMED with
Aguilar contended that she was not negligent and should not have the MODIFICATIONS in that the rate of interest shall be twelve
been made jointly and severally liable with PNB. 42 She merely percent (12%) per annum computed from the filing of the case until
implemented PNB’s Legal Department’s directive to release the fully satisfied. The interest due shall further earn an interest of
deposit to Manimbo.43 12% per annum to be computed from the date of the filing of the
complaint until fully paid. Meanwhile, the award of exemplary
damages is DELETED.
PNB argued that it was not negligent. 44 The release of the deposit to
Manimbo was pursuant to an existing policy. 45Moreover, the
documents submitted by Manimbo were more substantial than those SO ORDERED.59
submitted by respondents.46Respondents could have avoided the
incident "had they accomplished the required documents PNB and Aguilar filed their separate petitions for review of the Court
immediately."47 of Appeals’ July 25, 2013 decision. 60
In the decision48 promulgated on July 25, 2013, the Court of Appeals We resolve the following issues:
sustained the trial court’s finding that there was only one
account.49 Angel C. Santos could not have possibly opened the I. Whether Philippine National Bank was negligent in releasing the
premium savings account in 1994 since he already died in deposit to Bernardito Manimbo;
1991.50 The Court of Appeals also held that PNB and Aguilar were
negligent in handling the deposit.51 The deposit amount was released
to Manimbo who did not present all the requirements, particularly II. Whether Lina B. Aguilar is jointly and severally liable with
the Bureau of Internal Revenue (BIR) certification that estate taxes Philippine National Bank for the release of the deposit to Bernardito
had already been paid.52 They should also not have honored the Manimbo; and
The Court of Appeals ruled that Aguilar could not escape liability by Petitioner Aguilar argued that the Court of Appeals had already
pointing her finger at PNB’s Legal Department. 54As the Bank found no malice or bad faith on her part. 61 Moreover, as a mere
Manager, she should have given the Legal Department all the officer of the bank, she cannot be made personally liable for acts that
necessary information that must be known in order to protect both she was authorized to do.62 These acts were mere directives to her by
the depositors’ and the bank’s interests.55 her superiors.63 Hence, she should not be held solidarily liable with
PNB.64
Petitioner PNB argued that it was the presumptuousness and ART. 1173. The fault or negligence of the obligor consists in the
cavalier attitude of respondents that gave rise to the controversy and omission of that diligence which is required by the nature of the
not its judgment call.65 Respondents were lacking in sufficient obligation and corresponds with the circumstances of the persons, of
documentation.66 Petitioner PNB also argued that respondents failed the time and of the place. When negligence shows bad faith, the
to show any justification for the award of moral damages. 67 No bad provisions of articles 1171 and 2201, paragraph 2, shall apply.
faith can be attributed to Aguilar.68
If the law or contract does not state the diligence which is to be
In their separate comments to the petitions, respondents argued that observed in the performance, that which is expected of a good father
the trial court and the Court of Appeals did not err in finding that of a family shall be required. (Emphasis supplied)
petitioners PNB and Aguilar were negligent in handling their father’s
deposit.69 The acceptance of invalid and incomplete documents to "Diligence of a good father of a family" is the standard of diligence
support the deposit’s release to Manimbo was a violation of the expected of, among others,
bank’s fiduciary duty to its clients.70 These acts constituted gross
negligence on the part of petitioners PNB and Aguilar. 71
usufructuaries,76 passengers of common
carriers,77 agents,78 depositaries,79 pledgees,80 officious
However, according to respondents, the Court of Appeals erred in managers,81 and persons deemed by law as responsible for the acts
deleting the award for exemplary damages because the acts in of others.82 "The diligence of a good father of a family requires only
violation of the bank’s fiduciary were done in bad faith. 72 that diligence which an ordinary prudent man would exercise with
regard to his own property.83
We rule for the respondents.
Other industries, because of their nature, are bound by law to
The trial court and the Court of Appeals correctly found that observe higher standards of diligence. Common carriers, for example,
petitioners PNB and Aguilar were negligent in handling the deposit of must observe "extraordinary diligence in the vigilance over the goods
Angel C. Santos. and for the safety of [their] passengers"84 because it is considered a
business affected with public interest. "Extraordinary diligence" with
The contractual relationship between banks and their depositors is respect to passenger safety is further qualified as "carry[ing] the
governed by the Civil Code provisions on simple loan. 73 Once a passengers safely as far as human care and foresight can provide,
person makes a deposit of his or her money to the bank, he or she is using the utmost diligence of very cautious persons, with a due
considered to have lent the bank that money.74 The bank becomes regard for all the circumstances."85
his or her debtor, and he or she becomes the creditor of the bank,
which is obligated to pay him or her on demand. 75 Similar to common carriers, banking is a business that is impressed
with public interest. It affects economies and plays a significant role
The default standard of diligence in the performance of obligations is in businesses and commerce.86 The public reposes its faith and
"diligence of a good father of a family." Thus, the Civil Code provides: confidence upon banks, such that "even the humble wage-earner has
not hesitated to entrust his life’s savings to the bank of his choice,
knowing that they will be safe in its custody and will even earn some
ART. 1163. Every person obliged to give something is also obliged to interest for him."87 This is why we have recognized the fiduciary
take care of it with the proper diligence of a good father of a family, nature of the banks’ functions, and attached a special standard of
unless the law or the stipulation of the parties requires another diligence for the exercise of their functions.
standard of care.
....
In Simex International (Manila), Inc. v. Court of Appeals,88 this court They accepted Manimbo’s representations despite knowledge of the
described the nature of banks’ functions and the attitude expected of existence of circumstances that should have raised doubts on such
banks in handling their depositors’ accounts, thus: representations. As a result, Angel C. Santos’ deposit was given to a
person stranger to him.
In every case, the depositor expects the bank to treat his account
with the utmost fidelity, whether such account consists only of a few Petitioner PNB pointed out that since petitioner Aguilar assumed
hundred pesos or of millions. . . . office as PNB-Sta. Elena-Marikina City Branch Manager only five (5)
years from Angel C. Santos’ death, she was not in the position to
The point is that as a business affected with public interest and know that respondents were the heirs of Angel C. Santos. 92 She could
because of the nature of its functions, the bank is under obligation not have accepted the unsigned and unnotarized extrajudicial
to treat the accounts of its depositors with meticulous care, always settlement deed that respondents had first showed her. 93 She was
having in mind the fiduciary nature of their relationship.89 (Emphasis not competent to make a conclusion whether that deed was
supplied) genuine.94 Neither could petitioners PNB and Aguilar pass judgment
on a letter from respondents’ lawyer stating that respondents were
the nine heirs of Angel C. Santos. 95 Petitioners PNB and Aguilar’s
The fiduciary nature of banking is affirmed in Republic Act No. 8791 negligence is not based on their failure to accept respondents’
or The General Banking Law, thus: documents as evidence of their right to claim Angel C. Santos’
deposit. Rather, it is based on their failure to exercise the diligence
SEC. 2. Declaration of Policy.—The State recognizes the vital role of required of banks when they accepted the fraudulent representations
banks in providing an environment conducive to the sustained of Manimbo. Petitioners PNB and Aguilar disregarded their own
development of the national economy and the fiduciary nature of requirements for the release of the deposit to persons claiming to be
banking that requires high standards of integrity and performance. In heirs of a deceased depositor. When respondents asked for the
furtherance thereof, the State shall promote and maintain a stable release of Angel C. Santos’ deposit, they were required to present the
and efficient banking and financial system that is globally following: "(1) original or certified true copy of the Death Certificate of
competitive, dynamic and responsive to the demands of a developing Angel C. Santos; (2) certificate of payment of, or exemption from,
economy. (Emphasis supplied) estate tax issued by the Bureau of Internal Revenue (BIR); (3) Deed of
Extrajudicial Settlement; (4) Publisher’s Affidavit of publication of the
In The Consolidated Bank and Trust Corporation v. Court of Deed of Extrajudicial Settlement; and (5) Surety bond effective for
Appeals,90 this court explained the meaning of fiduciary relationship two (2) years and in an amount equal to the balance of the deposit to
and the standard of diligence assumed by banks: be withdrawn."96
This fiduciary relationship means that the bank’s obligation to observe Petitioners PNB and Aguilar, however, accepted Manimbo’s
"high standards of integrity and performance" is deemed written into representations, and they released Angel C. Santos’ deposit based on
every deposit agreement between a bank and its depositor. The only the following documents:
fiduciary nature of banking requires banks to assume a degree of
diligence higher than that of a good father of a family. Article 1172 of 1. Death certificate of Angel C. Santos;
the Civil Code states that the degree of diligence required of an
obligor is that prescribed by law or contract, and absent such 2. Birth certificate of Reyme L. Santos;
stipulation then the diligence of a good father of a
family.91 (Emphasis supplied, citation omitted)
3. Affidavit of self-adjudication of Reyme L. Santos;
Petitioners PNB and Aguilar’s treatment of Angel C. Santos’ account
is inconsistent with the high standard of diligence required of banks. 4. Affidavit of publication;
5. Special power of attorney that Reyme L. Santos executed in favor amount not exceeding 10,000 without the said certification. For this
of Bernardito Manimbo and Angel P. Santos; purpose, all withdrawal slips shall contain a statement to the effect
that all of the joint depositors are still living at the time of withdrawal
6. Personal items of Angel C. Santos, such as photocopies or by any one of the joint depositors and such statement shall be under
originals of passport, residence certificate for year 1990, SSS I.D., oath by the said depositors.99 (Emphasis supplied)
etc.;
This provision was reproduced in Section 97 of the 1997 National
7. Surety good for two (2) years; and Internal Revenue Code, thus:
8. Certificate of Time Deposit No. 341306. 97 SEC. 97. Payment of Tax Antecedent to the Transfer of Shares,
Bonds or Rights. - There shall not be transferred to any new owner
in the books of any corporation, sociedad anonima, partnership,
Based on these enumerations, petitioners PNB and Aguilar either business, or industry organized or established in the Philippines any
have no fixed standards for the release of their deceased clients’ share, obligation, bond or right by way of gift inter vivos or mortis
deposits or they have standards that they disregard for convenience, causa, legacy or inheritance, unless a certification from the
favor, or upon exercise of discretion. Both are inconsistent with the Commissioner that the taxes fixed in this Title and due thereon have
required diligence of banks. These threaten the safety of the been paid is shown.
depositors’ accounts as they provide avenues for fraudulent practices
by third persons or by bank officers themselves.
If a bank has knowledge of the death of a person, who maintained a
bank deposit account alone, or jointly with another, it shall not allow
In this case, petitioners PNB and Aguilar released Angel C. Santos’ any withdrawal from the said deposit account, unless the
deposit to Manimbo without having been presented the BIR-issued Commissioner has certified that the taxes imposed thereon by this
certificate of payment of, or exception from, estate tax. This is a legal Title have been paid: Provided, however, That the administrator of
requirement before the deposit of a decedent is released. Presidential the estate or any one (1) of the heirs of the decedent may, upon
Decree No. 1158,98 the tax code applicable when Angel C. Santos authorization by the Commissioner, withdraw an amount not
died in 1991, provides: exceeding Twenty thousand pesos (20,000) without the said
certification. For this purpose, all withdrawal slips shall contain a
SEC. 118. Payment of tax antecedent to the transfer of shares, bonds, statement to the effect that all of the joint depositors are still living at
or rights. — There shall not be transferred to any new owner in the the time of withdrawal by any one of the joint depositors and such
books of any corporation, sociedad anonima, partnership, business, statement shall be under oath by the said depositors. (Emphasis
or industry organized or established in the Philippines, any shares, supplied)
obligations, bonds or rights by way of gift inter vivos or mortis causa,
legacy, or inheritance unless a certification from the Commissioner Taxes are created primarily to generate revenues for the maintenance
that the taxes fixed in this Title and due thereon have been paid is of the government. However, this particular tax may also serve as
shown. guard against the release of deposits to persons who have no
sufficient and valid claim over the deposits. Based on the
If a bank has knowledge of the death of a person who maintained a assumption that only those with sufficient and valid claim to the
bank deposit account alone, or jointly with another, it shall not allow deposit will pay the taxes for it, requiring the certificate from the BIR
any withdrawal from the said deposit account, unless the increases the chance that the deposit will be released only to them.
Commissioner has certified that the taxes imposed thereon by this
Title have been paid; Provided, however, That the administrator of the In their compulsory counterclaim,100 petitioners PNB and Aguilar
estate or any one of the heirs of the decedent may upon claimed that Manimbo presented a certificate of payment of estate
authorization by the Commissioner of Internal Revenue, withdraw an
tax.101 During trial, however, it turned out that this certificate was of Angel C. Santos. Contrary to petitioner Aguilar’s reasoning, the
instead an authority to accept payment, which is not the certificate fact that Reyme L. Santos was not petitioner PNB’s client should
required for the release of bank deposits. 102 It appears that Manimbo have moved her to take measures to ensure the veracity of
was not even required to submit the BIR certificate. 103 He, thus, Manimbo’s documents and representations. This is because she had
failed to present such certificate. Petitioners PNB and Aguilar no previous knowledge of Reyme L. Santos his representatives, and
provided no satisfactory explanation why Angel C. Santos’ deposit his signature.
was released without it.
Petitioner PNB is a bank from which a degree of diligence higher than
Petitioners PNB and Aguilar’s negligence is also clear when they that of a good father of a family is expected. Petitioner PNB and its
accepted as bases for the release of the deposit to Manimbo: (a) a manager, petitioner Aguilar, failed to meet even the standard of
mere photocopy of Angel C. Santos’ death certificate; 104 (b) the diligence of a good father of a family. Their actions and inactions
falsified affidavit of self-adjudication and special power of attorney constitute gross negligence. It is for this reason that we sustain the
purportedly executed by Reyme L. Santos; 105 and (c) the certificate of trial court’s and the Court of Appeals’ rulings that petitioners PNB
time deposit.106 and Aguilar are solidarily liable with each other. 111
Petitioner Aguilar was aware that there were other claimants to Angel For the same reason, we sustain the award for moral damages.
C. Santos’ deposit. Respondents had already communicated with Petitioners PNB and Aguilar’s gross negligence deprived Angel C.
petitioner Aguilar regarding Angel C. Santos’ account before Santos’ heirs what is rightfully theirs. Respondents also testified that
Manimbo appeared. Petitioner Aguilar even gave respondents the they experienced anger and embarrassment when petitioners PNB
updated passbook of Angel C. Santos’ account. 107 Yet, petitioners and Aguilar refused to release Angel C. Santos’ deposit. 112 "The
PNB and Aguilar did not think twice before they released the deposit bank’s negligence was the result of lack of due care and caution
to Manimbo. They did not doubt why no original death certificate required of managers and employees of a firm engaged in so sensitive
could be submitted. They did not doubt why Reyme L. Santos would and demanding business as banking."113
execute an affidavit of self-adjudication when he, together with
others, had previously asked for the release of Angel C. Santos’ Exemplary damages should also be awarded. "The law allows the
deposit. They also relied on the certificate of time deposit and on grant of exemplary damages by way of example for the public good.
Manimbo’s representation that the passbook was lost when the The public relies on the banks’ sworn profession of diligence and
passbook had just been previously presented to Aguilar for meticulousness in giving irreproachable service. The level of
updating.108 meticulousness must be maintained at all times by the banking
sector."114
During the trial, petitioner PNB’s counsel only reasoned that the
photocopy of the death certificate was also submitted with other Since exemplary damages are awarded and since respondents were
documents, which led him to no other conclusion than that Angel C. compelled to litigate to protect their interests, 115 the award of
Santos was already dead.109 On petitioners PNB and Aguilar’s attorney’s fees is also proper.
reliance special power of attorney allegedly executed by Reyme L.
Santos, Aguilar admitted that she did not contact Reyme L. Santos
for verification. Her reason was that Reyme L. Santos was their The Court of Appeals' award of interest should be modified to 12%
client. Therefore, they had no obligation to do so. 110 from demand on April 26, 1998 until June 30, 2013, and 6% from
July I, 2013 until fully paid. In Nacar v. Gallery Frames:116
Given the circumstances, "diligence of a good father of a family"
would have required petitioners PNB and Aguilar to verify. A prudent Thus, from the foregoing, in the absence of an express stipulation as
man would have inquired why Reyme L. Santos would issue an to the rate of interest that would govern the parties, the rate of legal
affidavit of selfadjudication when others had also claimed to be heirs interest for loans or forbearance of any money. . . s.hall no longer be
twelve percent (12%) per annum ... but will now be six percent
(6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that. .. the twelve percent (12%) per annum legal
interest shall apply only until June 30, 2013. Come July 1, 2013 the
new rate of six percent (6%) per annum shall be the prevailing rate of
interest when applicable.
....
....
SO ORDERED.
V. THE TRIAL COURT ERRED IN FAILING TO VII. THE REGIONAL TRIAL COURT ERRED IN
AWARD ACTUAL, MORAL AND EXEMPLARY AWARDING EXEMPLARY DAMAGES TO
DAMAGES AND ATTORNEYS FEES IN FAVOR PLAINTIFF-APPELLEE.
OF DEFENDANTS-APPELLANTS.[27]
VIII. THE REGIONAL TRIAL [COURT] ERRED IN
AWARDING LIQUIDATED DAMAGES TO
For its part, FGU interposed the following assignment of PLAINTIFF-APPELLEE.
errors:
IX. THE REGIONAL TRIAL COURT ERRED IN
I. THE REGIONAL TRIAL COURT ERRED IN AWARDING ATTORNEYS FEES TO
NOT RULING THAT DEFENDANT-APPELLANT PLAINTIFF-APPELLEE.
RAMON GAITE VALIDLY TERMINATED THE
X. THE REGIONAL TRIAL COURT ERRED IN
HOLDING DEFENDANT-APPELLANT FGU However, the CA modified the award of damages holding that
INSURANCE CORPORATION LIABLE TO the claim for actual damages of P525,422.73 representing the
PLAINTIFF-APPELLEE.[28] damaged owner-furnished materials was not supported by any
evidence. Instead, the CA granted temperate damages in the amount
of P300,000.00. As to moral damages, no specific finding for the
On June 27, 2006, the CA affirmed the Decision of the trial factual basis of said award was made by the trial court, and hence it
court but modified the award of damages as follows: should be deleted. Likewise, liquidated damages is not proper
considering that this is not a case of delay but non-completion of the
WHEREFORE, the Decision dated July 3, project. The Plaza similarly failed to establish that Rhogen and Gaite
1997 rendered by the Regional Trial Court of Makati acted with malice or bad faith; consequently, the award of exemplary
City, Branch 63 in Civil Case Nos. 40755 and 1328 damages must be deleted. Finally, there being no bad faith on the
is AFFIRMED with the modification that: (a) the part of the defendants, the award of attorneys fees cannot be
award for actual damages representing the owner- sustained.[32]
furnished materials and the expenses for uprooting
are deleted, and in lieu thereof, the amount of The motion for reconsideration of the aforesaid Decision was
P300,000.00 as temperate damages is awarded; and denied in the Resolution dated April 20, 2007 for lack of
(b) the awards for moral, exemplary, liquidated and merit. Hence, this appeal.
attorneys fees are likewise deleted.
I.
According to the CA, The Plaza cannot now be demanded to
comply with its obligation under the contract since Rhogen has Whether or not the Court of Appeals acted without
already failed to comply with its own contractual obligation. Thus, or in excess of jurisdiction, or with grave abuse of
The Plaza had every reason not to pay the progress billing as a result discretion amounting to lack of or excess of
of Rhogens inability to perform its obligations under the jurisdiction, when it found that Petitioner Rhogen
contract. Further, the stoppage and revocation orders were issued on had no factual or legal basis to terminate the
account of Rhogens own violations involving the construction as General Construction Contract.
found by the local building official. Clearly, Rhogen cannot blame
The Plaza for its own failure to comply with its contractual II.
obligations. The CA stressed that Rhogen obliged itself to comply
Whether or not the Court of Appeals acted without
with all the laws, city and municipal ordinances and all government
or in excess of jurisdiction, or with grave abuse of
regulations insofar as they are binding upon or affect the parties [to
discretion amounting to lack of or excess of
the contract] , the work or those engaged thereon. [30] As such, it was
jurisdiction, when, as a consequence of its finding
responsible for the lifting of the stoppage and revocation orders. As
that Petitioners did not have valid grounds to
to Rhogens act of challenging the validity of the stoppage and
terminate the Construction Contract, it directed
revocation orders, the CA held that it cannot be done in the present
Petitioners to return the downpayment paid by The
case because under Section 307 of the National Building Code,
Plaza, with legal interest.
appeal to the Secretary of the Department of Public Works and
Highways (DPWH) whose decision is subject to review by the Office of
III.
the President -- is available as remedy for Rhogen. [31]
Whether or not the Court of Appeals acted without them. The breach contemplated in the provision is the obligors
or in excess of jurisdiction, or with grave abuse of failure to comply with an existing obligation. Thus, the power to
discretion amounting to lack of or excess of rescind is given only to the injured party. The injured party is the
jurisdiction, when, in addition thereto, it awarded party who has faithfully fulfilled his obligation or is ready and willing
temperate damages to The Plaza. to perform his obligation.[35]
IV.
The construction contract between Rhogen and The Plaza provides
Whether or not the Court of Appeals acted without for reciprocal obligations whereby the latters obligation to pay the
or in excess of jurisdiction, or with grave abuse of contract price or progress billing is conditioned on the formers
discretion amounting to lack of or excess of performance of its undertaking to complete the works within the
jurisdiction, when it failed to award damages in stipulated period and in accordance with approved plans and other
favor of Petitioners.[33] specifications by the owner. Pursuant to its contractual obligation,
The Plaza furnished materials and paid the agreed down payment. It
also exercised the option of furnishing and delivering construction
materials at the jobsite pursuant to Article III of the Construction
Petitioners contend that the CA gravely erred in not holding that
Contract. However, just two months after commencement of the
there were valid and legal grounds for Rhogen to terminate the
project, construction works were ordered stopped by the local
contract pursuant to Article 1191 of the Civil Code and Article 123 of
building official and the building permit subsequently revoked on
the General Conditions of the Construction Contract. Petitioners
account of several violations of the National Building Code and other
claim that Rhogen sent Progress Billing No. 1 dated September 10,
regulations of the municipal authorities.
1980 and demanded payment from The Plaza in the net amount
of P473,554.06 for the work it had accomplished from July 28,
1980 until September 7, 1980. The Plaza, however, failed to pay the Petitioners reiterate their position that the stoppage order
said amount. According to petitioners, Article 123 of the General was unlawful, citing the fact that when the new contractor (ACK
Conditions of the Construction Contract gives The Plaza seven days Construction, Inc.) took over the project, the local government
from notice within which to pay the Progress Billing; otherwise, of Makati allowed the construction of the building using the old
Rhogen may terminate the contract. Petitioners also invoke Article building permit; moreover, the basement depth of only two meters
1191 of the Civil Code, which states that the power to rescind was retained, with no further excavation made. They cite the
obligations is implied in reciprocal ones, in case one of the obligors testimony of the late Ramon Gaite before the trial court that at the
should not comply with what is incumbent upon him. time, he had incurred the ire of then Mayor of Makati because his
(Gaite) brother was the Mayors political opponent; hence, they
sought to file whatever charge they could against him in order to call
We deny the petition.
the attention of his brother. This political harassment defense was
raised by petitioners in their Amended Answer. Gaites testimony was
Reciprocal obligations are those which arise from the same cause, intended to explain the circumstances leading to his decision to
and in which each party is a debtor and a creditor of the other, such terminate the construction contract and not to question the
that the obligation of one is dependent upon the obligation of the revocation of the building permit. As the available remedy was
other. They are to be performed simultaneously such that the already foreclosed, it was thus error for the CA to suggest that
performance of one is conditioned upon the simultaneous fulfillment Rhogen should have appealed the stoppage and revocations orders
of the other. Respondent The Plaza predicated its action on Article issued by the municipal authorities to the DPWH and then to the OP.
[36]
1191[34] of the Civil Code, which provides for the remedy of rescission
or more properly resolution, a principal action based on breach of
faith by the other party who violates the reciprocity between
Article 123 of the Articles of General Conditions states the grounds be personally, fully and solely liable for any and
for the termination of the work or contract by the Contractor: all violations of the same.[38] (Emphasis supplied.)
Upon the foregoing, we find petitioners claim for actual, moral and
exemplary damages and attorneys fees lacking in legal basis and
undeserving of further discussion.
SO ORDERED.
Banks and Banking; Fiduciary Nature of Banking; The bank is under SECOND DIVISION
obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship; The CENTRAL BANK OF THE PHILIPPINES, G.R. No. 141835
fiduciary nature of banking requires banks to assume a degree of Petitioner,
diligence higher than that of a good father of a family.—The law Present:
imposes on banks high standards in view of the fiduciary nature of
banking. Section 2 of Republic Act No. 8791 (“RA 8791”), which took CARPIO MORALES,* J., Acting
effect on 13 June 2000, declares that the State recognizes the - versus - Chairperson,
“fiduciary nature of banking that requires high standards of integrity TINGA,
and performance.” This new provision in the general banking law, NAZARIO,
introduced in 2000, is a statutory affirmation of Supreme Court NACHURA,** and
decisions, starting with the 1990 case of Simex International v. Court CITYTRUST BANKING CORPORATION, BRION, JJ.
of Appeals, holding that “the bank is under obligation to treat the Respondent.
accounts of its depositors with meticulous care, always having in
mind the fiduciary nature of their relationship.” This fiduciary Promulgated:
relationship means that the bank’s obligation to observe “high February 4, 2009
standards of integrity and performance” is deemed written into x----------------------------------------------
every deposit agreement between a bank and its depositor. The - - - -x
fiduciary nature of banking requires banks to assume a degree of
diligence higher than that of a good father of a family. DECISION
Same; Same; Petitioner’s liability to Citytrust mitigated on a 60- CARPIO MORALES, J.:
40-ratio.—Citytrust’s failure to timely examine its account, cancel the Pursuant to Republic Act No. 625, the old Central Bank Law,
checks and notify petitioner of their alleged loss/theft should respondent Citytrust Banking Corporation (Citytrust), formerly Feati
mitigate petitioner’s liability, in accordance with Article 2179 of the Bank, maintained a demand deposit account with petitioner Central
Civil Code which provides that if the plaintiff’s negligence was only Bank of the Philippines, now Bangko Sentral ng Pilipinas.
contributory, the immediate and proximate cause of the injury being
the defendant’s lack of due care, the plaintiff may recover damages, As required, Citytrust furnished petitioner with the names
but the courts shall mitigate the damages to be awarded. For had and corresponding signatures of five of its officers authorized to sign
Citytrust timely discovered the loss/theft and/or subsequent checks and serve as drawers and indorsers for its account. And it
encashment, their proceeds or part thereof could have been provided petitioner with the list and corresponding signatures of its
recovered. In line with the ruling in Consolidated Bank and Trust roving tellers authorized to withdraw, sign receipts and perform other
Corporation v. Court of Appeals, 410 SCRA 562 (2003), the Court transactions on its behalf. Petitioner later issued security
deems it proper to allocate the loss between petitioner and Citytrust identification cards to the roving tellers one of whom was Rounceval
on a 60-40 ratio. Flores (Flores).
On July 15, 1977, Flores presented for payment to
petitioners Senior Teller Iluminada dela Cruz (Iluminada) two
Citytrust checks of even date, payable to Citytrust, one in the
amount ofP850,000 and the other in the amount of P900,000, both
of which were signed and indorsed by Citytrusts authorized
signatory-drawers.
After the checks were certified by petitioners Accounting entirely blame-free in light of its failure to verify the signature of
Department, Iluminada verified them, prepared the cash transfer slip Citytrusts agent authorized to receive payment.
on which she affixed her signature, stamped the checks with the
notation Received Payment and asked Flores to, as he did, sign on Brushing aside petitioners contention that it cannot be sued,
the space above such notation. Instead of signing his name, the appellate court held that petitioners Charter specifically clothes it
however, Flores signed as Rosauro C. Cayabyab a fact Iluminada with the power to sue and be sued.
failed to notice.
Also brushing aside petitioners assertion that Citytrusts
Iluminada thereupon sent the cash transfer slip and checks reservation of the filing of a separate civil action against Flores
to petitioners Cash Department where an officer verified and precluded Citytrust from filing the civil action against it, the
compared the drawers signatures on the checks against their appellate court held that the action for the recovery of sum of money
specimen signatures provided by Citytrust, and finding the same in is separate and distinct and is grounded on a separate cause of
order, approved the cash transfer slip and paid the corresponding action from that of the criminal case for estafa.
amounts to Flores. Petitioner then debited the amount of the checks
totaling P1,750,000 from Citytrusts demand deposit account. Hence, the present appeal, petitioner maintaining that Flores
having been an authorized roving teller, Citytrust is bound by his
More than a year and nine months later, Citytrust, by letter acts. Also maintaining that it was not negligent in releasing the
dated April 23, 1979, alleging that the checks were already cancelled proceeds of the checks to Flores, the failure of its teller to properly
because they were stolen, demanded petitioner to restore the verify his signature notwithstanding, petitioner contends that
amounts covered thereby to its demand deposit account. Petitioner verification could be dispensed with, Flores having been known to be
did not heed the demand, however. an authorized roving teller of Citytrust who had had numerous
transactions with it (petitioner) on its (Citytrusts) behalf for five years
Citytrust later filed a complaint for estafa, with reservation prior to the questioned transaction.
on the filing of a separate civil action, against Flores. Flores was
convicted. Attributing negligence solely to Citytrust, petitioner harps on
Citytrusts allowing Flores to steal the checks and failing to timely
Citytrust thereafter filed before the Regional Trial Court cancel them; allowing Flores to wear the issued identification card
(RTC) of Manila a complaint for recovery of sum of money with issued by it (petitioner); failing to report Flores absence from work on
damages against petitioner which it alleged erred in encashing the the day of the incident; and failing to explain the circumstances
checks and in charging the proceeds thereof to its account, despite surrounding the supposed theft and cancellation of the checks.
the lack of authority of Rosauro C. Cayabyab.
Drawing attention to Citytrusts considerable delay in
By Decision[1] of November 13, 1991, Branch 32 of the RTC demanding the restoration of the proceeds of the checks, petitioners
of Manila found both Citytrust and petitioner negligent and argue that, assuming arguendo that its teller was negligent,
accordingly held them equally liable for the loss. Both parties Citytrusts negligence, which preceded that committed by the teller,
appealed to the Court of Appeals which, by Decision [2] dated July 16, was the proximate cause of the loss or fraud.
1999, affirmed the trial courts decision, it holding that both parties
contributed equally to the fraudulent encashment of the checks, The petition is bereft of merit.
hence, they should equally share the loss in consonance with Article
2179[3] vis a vis Article 1172[4] of the Civil Code. Petitioners teller Iluminada did not verify Flores signature on
the flimsy excuse that Flores had had previous transactions with it
In arriving at its Decision, the appellate court noted that for a number of years. That circumstance did not excuse the teller
while Citytrust failed to take adequate precautionary measures to from focusing attention to or at least glancing at Flores as he was
prevent the fraudulent encashment of its checks, petitioner was not signing, and to satisfy herself that the signature he had just affixed
matched that of his specimen signature. Had she done that, she integrity and performance is deemed written into
would have readily been put on notice that Flores was affixing, not every deposit agreement between a bank and its
his but a fictitious signature. depositor. The fiduciary nature of banking
requires banks to assume a degree of diligence
Given that petitioner is the government body mandated to higher than that of a good father of a
supervise and regulate banking and other financial institutions, this family. Article 1172 of the Civil Code states that the
Courts ruling in Consolidated Bank and Trust Corporation v. Court of degree of diligence required of an obligor is that
Appeals[5] illumines: prescribed by law or contract, and absent such
stipulation then the diligence of a good father of a
family. Section 2 of RA 8791 prescribes the statutory
The contract between the bank and its diligence required from banks that banks must
depositor is governed by the provisions of the Civil observe high standards of integrity and performance
Code on simple loan. Article 1980 of the Civil Code in servicing their depositors. Although RA 8791
expressly provides that x x x savings x x x deposits took effect almost nine years after the
of money in banks and similar institutions shall be unauthorized withdrawal of the P300,000 from
governed by the provisions concerning simple L.C. Diazs savings account, jurisprudence at the
loan. There is a debtor-creditor relationship between time of the withdrawal already imposed on banks
the bank and its depositor. The bank is the debtor the same high standard of diligence required
and the depositor is the creditor. The depositor lends under RA No. 8791. (Emphasis supplied)
the bank money and the bank agrees to pay the
depositor on demand. The savings deposit agreement Citytrusts failure to timely examine its account, cancel the
between the bank and the depositor is the contract checks and notify petitioner of their alleged loss/theft should
that determines the rights and obligations of the mitigate petitioners liability, in accordance with Article 2179 of the
parties. Civil Code which provides that if the plaintiffs negligence was only
contributory, the immediate and proximate cause of the injury being
the defendants lack of due care, the plaintiff may recover damages,
The law imposes on banks high standards in but the courts shall mitigate the damages to be awarded. For had
view of the fiduciary nature of banking. Section 2 of Citytrust timely discovered the loss/theft and/or subsequent
Republic Act No. 8791 (RA 8791), which took effect encashment, their proceeds or part thereof could have been
on 13 June 2000, declares that the State recognizes recovered.
the fiduciary nature of banking that requires high
standards of integrity and performance. This new In line with the ruling in Consolidated Bank, the Court
provision in the general banking law, introduced in deems it proper to allocate the loss between petitioner and Citytrust
2000, is a statutory affirmation of Supreme Court on a 60-40 ratio.
decisions, starting with the 1990 case of Simex
International v. Court of Appeals, holding that WHEREFORE, the assailed Court of Appeals Decision of
the bank is under obligation to treat the accounts of July 16, 1999 is hereby AFFIRMED with MODIFICATION, in that
its depositors with meticulous care, always having in petitioner and Citytrust should bear the loss on a 60-40 ratio.
mind the fiduciary nature of their relationship.
SO ORDERED.
This fiduciary relationship means that CONCHITA CARPIO MORALES
the banks obligation to observe high standards of Associate Justice
Courts; Judgments; The discretion to decide a case one way or another is admission, or that his admission was taken out of context. x x x that the party can
broad enough to justify the adoption of the arguments put forth by one of the also show that he made no “such admission”, i.e., not in the sense in which the
parties, as long as these are legally tenable and supported by law and the facts on admission is made to appear. That is the reason for the modifier “such” because if
records.—To begin with, although it is true that indeed the CA findings were exact the rule simply states that the admission may be contradicted by showing that “no
reproductions of the arguments raised in respondents’ (appellants’) brief filed with admission was made,” the rule would not really be providing for a contradiction of
the CA, we find the same to be not fatally infirmed. Upon examination of the the admission but just a denial. (Emphasis supplied).
Decision, we find that it expressed clearly and distinctly the facts and the law on
which it is based as required by Section 8, Article VIII of the Constitution. The Obligations and Contracts; Fortuitous Events; Elements; Words and
discretion to decide a case one way or another is broad enough to justify the Phrases; Fortuitous events by definition are extraordinary events not foreseeable or
adoption of the arguments put forth by one of the parties, as long as these are legally avoidable—it is therefore, not enough that the event should not have been foreseen
tenable and supported by law and the facts on records. or anticipated, as is commonly believed but it must be one impossible to foresee or
to avoid.—Fortuitous events by definition are extraordinary events not foreseeable
Corporation Law; Piercing the Veil of Corporate Fiction; The rule is that the or avoidable. It is therefore, not enough that the event should not have been foreseen
veil of corporate fiction may be pierced when made as a shield to perpetrate fraud or anticipated, as is commonly believed but it must be one impossible to foresee or
and/or confuse legitimate issues—the theory of corporate entity was not meant to to avoid. The mere difficulty to foresee the happening is not impossibility to foresee
promote unfair objectives or otherwise to shield them.—The CA correctly pierced the same. To constitute a fortuitous event, the following elements must concur: (a)
the veil of the corporate fiction and adjudged petitioner Sicam liable together with the cause of the unforeseen and unexpected occurrence or of the failure of the debtor
petitioner corporation. The rule is that the veil of corporate fiction may be pierced to comply with obligations must be independent of human will; (b) it must be
when made as a shield to perpetrate fraud and/or confuse legitimate issues. The impossible to foresee the event that constitutes the caso fortuito or, if it can be
theory of corporate entity was not meant to promote unfair objectives or otherwise foreseen, it must be impossible to avoid; (c) the occurrence must be such as to
to shield them. Notably, the evidence on record shows that at the time respondent render it impossible for the debtor to fulfill obligations in a normal manner; and, (d)
Lulu pawned her jewelry, the pawnshop was owned by petitioner Sicam himself. As the obligor must be free from any participation in the aggravation of the injury or
correctly observed by the CA, in all the pawnshop receipts issued to respondent Lulu loss.
in September 1987, all bear the words “Agencia de R.C. Sicam,” notwithstanding
that the pawnshop was allegedly incorporated in April 1987. The receipts issued Same; Same; In order for a fortuitous event to exempt one from liability, it is
after such alleged incorporation were still in the name of “Agencia de R.C. Sicam,” necessary that one has committed no negligence or misconduct that may have
thus inevitably misleading, or at the very least, creating the wrong impression to occasioned the loss; When the effect is found to be partly the result of a person’s
respondents and the public as well, that the pawnshop was owned solely by participation—whether by active intervention, neglect or failure to act—the whole
petitioner Sicam and not by a corporation. occurrence is humanized and removed from the rules applicable to acts of God.—
The burden of proving that the loss was due to a fortuitous event rests on him who
Actions; Judicial Admissions; The general rule that a judicial admission is invokes it. And, in order for a fortuitous event to exempt one from liability, it is
conclusive upon the party making it and does not require proof, admits of two necessary that one has committed no negligence or misconduct that may have
exceptions, to wit—(1) when it is shown that such admission was made through occasioned the loss. It has been held that an act of God cannot be invoked to protect
palpable mistake, and (2) when it is shown that no such admission was in fact made; a person who has failed to take steps to forestall the possible adverse consequences
If a party invokes an “admission” by an adverse party, but cites the admission “out of such a loss. One’s negligence may have concurred with an act of God in
of context,” then the one making the “admission” may show that he made no producing damage and injury to another; nonetheless, showing that the immediate or
“such” admission, or that his admission was taken out of context.—The general rule proximate cause of the damage or injury was a fortuitous event would not exempt
that a judicial admission is conclusive upon the party making it and does not require one from liability. When the effect is found to be partly the result of a person’s
proof, admits of two exceptions, to wit: (1) when it is shown that such admission participation—whether by active intervention, neglect or failure to act—the whole
was made through palpable mistake, and (2) when it is shown that no such occurrence is humanized and removed from the rules applicable to acts of God.
admission was in fact made. The latter exception allows one to contradict an
admission by denying that he made such an admission. The Committee on the Same; Same; Pawnshops; Robbery; Robbery per se, just like carnapping, is
Revision of the Rules of Court explained the second exception in this wise: x x x if a not a fortuitous event; Merely presenting the police report on the robbery committed
party invokes an “admission” by an adverse party, but cites the admission “out of based on the report of the employees of the pawnshop owner is not sufficient to
context,” then the one making the “admission” may show that he made no “such” establish robbery.—Robbery per se, just like carnapping, is not a fortuitous event. It
does not foreclose the possibility of negligence on the part of herein petitioners. exercise reasonable care and caution that an ordinarily prudent person would have
In Co v. Court of Appeals, 291 SCRA 111 (1998), the Court held: It is not a defense used in the same situation. Petitioners were guilty of negligence in the operation of
for a repair shop of motor vehicles to escape liability simply because the damage or their pawnshop business.
loss of a thing lawfully placed in its possession was due to carnapping. Carnapping
per se cannot be considered as a fortuitous event. The fact that a thing was Same; Same; Same; Same; The Central Bank considered it not feasible to
unlawfully and forcefully taken from another’s rightful possession, as in cases of require insurance of pawned articles against burglary—there was no statutory duty
carnapping, does not automatically give rise to a fortuitous event. To be considered imposed on the pawnshop owner to insure the pawned jewelry.—Under Section 17
as such, carnapping entails more than the mere forceful taking of another’s of Central Bank Circular No. 374, Rules and Regulations for Pawnshops, which
property. It must be proved and established that the event was an act of God or was took effect on July 13, 1973, and which was issued pursuant to Presidential Decree
done solely by third parties and that neither the claimant nor the person alleged to No. 114, Pawnshop Regulation Act, it is provided that pawns pledged must be
be negligent has any participation. In accordance with the Rules of Evidence, the insured, to wit: Sec. 17. Insurance of Office Building and Pawns.—The place of
burden of proving that the loss was due to a fortuitous event rests on him who business of a pawnshop and the pawns pledged to it must be insured against fire
invokes it—which in this case is the private respondent. However, other than the and against burglary as well as for the latter(sic), by an insurance company
police report of the alleged carnapping incident, no other evidence was presented by accredited by the Insurance Commissioner. However, this Section was subsequently
private respondent to the effect that the incident was not due to its fault. A police amended by CB Circular No. 764 which took effect on October 1, 1980, to wit: Sec.
report of an alleged crime, to which only private respondent is privy, does not 17. Insurance of Office Building and Pawns.—The office building/premises and
suffice to establish the carnapping. Neither does it prove that there was no fault on pawns of a pawnshop must be insured against fire. (emphasis supplied). where the
the part of private respondent notwithstanding the parties’ agreement at the pre-trial requirement that insurance against burglary was deleted. Obviously, the Central
that the car was carnapped. Carnapping does not foreclose the possibility of fault or Bank considered it not feasible to require insurance of pawned articles against
negligence on the part of private respondent. Just like in Co, petitioners merely burglary. The robbery in the pawnshop happened in 1987, and considering the
presented the police report of the Parañaque Police Station on the robbery above-quoted amendment, there is no statutory duty imposed on petitioners to insure
committed based on the report of petitioners’ employees which is not sufficient to the pawned jewelry in which case it was error for the CA to consider it as a factor in
establish robbery. Such report also does not prove that petitioners were not at fault. concluding that petitioners were negligent.
Same; Same; Same; Article 2123 of the Civil Code provides that with regard Same; Same; Same; Same; The diligence with which the law requires the
to pawnshops and other establishments which are engaged in making loans secured individual at all times to govern his conduct varies with the nature of the situation
by pledges, the special laws and regulations concerning them shall be observed, and in which he is placed and the importance of the act which he is to perform.—The
subsidiarily, the provisions on pledge, mortgage and antichresis.—Article 2123 of preponderance of evidence shows that petitioners failed to exercise the diligence
the Civil Code provides that with regard to pawnshops and other establishments required of them under the Civil Code. The diligence with which the law requires
which are engaged in making loans secured by pledges, the special laws and the individual at all times to govern his conduct varies with the nature of the
regulations concerning them shall be observed, and subsidiarily, the provisions on situation in which he is placed and the importance of the act which he is to perform.
pledge, mortgage and antichresis. The provision on pledge, particularly Article 2099 Thus, the cases of Austria v. Court of Appeals, 39 SCRA 527 (1971), Hernandez v.
of the Civil Code, provides that the creditor shall take care of the thing pledged with Chairman, Commission on Audit, 179 SCRA 39 (1989), and Cruz v. Gangan, 211
the diligence of a good father of a family. This means that petitioners must take care SCRA 517 (1992), cited by petitioners in their pleadings, where the victims of
of the pawns the way a prudent person would as to his own property. robbery were exonerated from liability, find no application to the present case.
Hence, respondent filed a complaint for damages against petitioner before the
Metropolitan Trial Court, Branch 24, Manila (MeTC), docketed as Civil Case No.
152822.3 Respondent alleged that petitioner failed to exercise due diligence in the
upkeep and maintenance of her cooking equipments, as well as the selection and
supervision of her employees; that petitioner's negligence was the proximate cause MeTC but increased the amount of temperate damages awarded to the respondent
of the fire that gutted the fastfood stalls.4 from P50,000.00 to P80,000.00.8
In her Answer dated September 23, 1996, petitioner denied liability on the grounds Petitioner filed a Motion for Reconsideration contending that the increase in the
that the fire was a fortuitous event and that she exercised due diligence in the award of temperate damages is unreasonable since she also incurred losses from the
selection and supervision of her employees.5 fire.
After trial, the MeTC rendered its Decision 6 dated April 5, 1999 in favor of the In its Order dated April 12, 2000, the RTC denied petitioner's Motion for
respondent, the dispositive portion of which reads: Reconsideration holding that it cannot disregard evidence showing that the fire
originated from petitioner's fastfood stall; that the increased amount of temperate
WHEREFORE, in light of the foregoing, judgment is hereby rendered in favor of damages awarded to respondent is not a full compensation but only a fair
the plaintiff and against the defendant ordering the latter: approximate of what he lost due to the negligence of petitioner's workers. 9
1) To pay the plaintiff the sum of P50,000.00 representing temperate or Petitioner then filed a Petition for Review with the CA, docketed as CA-G.R. SP No.
moderate damages; and 58799.10 On June 16, 2000, the CA issued a Resolution dismissing the petition for
being "procedurally flawed/deficient."11 The CA held that the attached RTC
Decision was not certified as a true copy by the Clerk of Court; that a certified true
2) To pay the plaintiff the sum of P25,000.00 as and for attorney's fees and copy of the MeTC Decision was not attached; that material portions of the record,
litigation expenses. such as the position papers of the parties and affidavits of witnesses, as would
support the material allegations of the petition were also not attached. 12
The counterclaim filed by the defendant is hereby DENIED FOR LACK OF
MERIT. On July 14, 2000, petitioner filed her Motion for Reconsideration, 13 attaching
photocopies of the Decisions of the RTC and MeTC as certified correct by the Clerk
SO ORDERED.7 of Court.14
The MeTC held that the investigation conducted by the appropriate authority On November 27, 2000, the CA issued its Resolution denying petitioner's Motion
revealed that the fire broke out due to the leaking fumes coming from the LPG stove for Reconsideration.15
and tank installed at petitioner's fastfood stall; that factual circumstances did not
show any sign of interference by any force of nature to infer that the fire occurred Hence, the present petition raising the following issues:
due to fortuitous event; that the petitioner failed to exercise due diligence,
precaution, and vigilance in the conduct of her business, particularly, in maintaining
the safety of her cooking equipment as well as in the selection and supervision of 1. Whether the submitted certified true copy of the appealed decision of
her employees; that even if petitioner passes the fault to her employees, Article 2180 the Regional Trial Court as authenticated by a court employee other than
of the Civil Code finds application; that in the absence of supporting evidence, the the Clerk of Court who was not around at that time said copy was secured
amount of actual damages and unrealized profits prayed for by respondent cannot be constitutes compliance with the Rules?
granted; that, nonetheless, respondent is entitled to temperate damages since
respondent sustained pecuniary loss, though its true value cannot, from the very 2. Whether the submission of a certified true copy of the Metropolitan
nature of the case, be proved with certainty. Trial Court's judgment is still an indispensable requirement in filing a
petition for review before the Court of Appeals despite the fact that said
Dissatisfied, petitioner filed an appeal with the Regional Trial Court, Branch 43, judgment was already modified by the above decision of the Regional
Manila (RTC), docketed as Civil Case No. 99-94606, insisting that the fire was a Trial Court and it is the latter decision that is the proper subject of the
fortuitous event. On November 26, 1999, the RTC affirmed the Decision of the petition for review?
3. Whether the submission of copies of the respective position papers of Lastly, she argues that the RTC cannot increase the amount of temperate damages
the contending parties is still an indispensable requirement in filing a since the respondent did not appeal from the judgment of the MeTC.
petition for review before the Court of Appeals despite the fact that the
contents thereof are already quoted in the body of the verified petition and Respondent opted not to file a Comment, manifesting that the petition contains no
in the subject judgment of the Metropolitan Trial Court? new arguments which would require a comment since the arguments are but a
rehash of those raised and decided by the lower courts. 17
4. Whether the herein petitioner could be held liable for damages as a
result of the fire that razed not only her own food kiosk but also the The Court gave due course to the petition and required both parties to submit their
adjacent foodstalls at the Food Center premises of the Philippine Women's respective memoranda.18 In compliance therewith, petitioner submitted her
University, including that of the respondent? Memorandum.19 On the other hand, respondent filed a Manifestation stating that
since no new issues have been raised by the petitioner in her petition and in order
5. Whether the Regional Trial Court could increase the amount of not to be redundant, he adopts as his memorandum the memoranda he filed in the
damages awarded by the Metropolitan Trial Court in favor of the MeTC and the RTC.20
respondent who has not even filed an appeal therefrom?16
In his Memoranda before the MeTC and RTC, respondent emphasized the evidence
Petitioner submits that rules of procedure should not be applied in a very harsh, he presented to establish his cause of action against petitioner, principally the
inflexible and technically unreasonable sense. testimony of Fire Investigator SFO1 Arnel G. Pinca stating that the fire originated
from the LPG stove and tank in petitioner's fastfood stall.
While admitting that the RTC Decision and Order were not certified by the Clerk of
Court himself, petitioner insists that they were certified as authentic copies by The requirements as to form and content of a petition for review of a decision of the
Administrative Officer IV Gregorio B. Paraon of the RTC. RTC are laid down in Section 2 of Rule 42 of the Revised Rules of Court, thus:
As to the MeTC Decision, petitioner contends that the submission of a certified true Sec. 2. Form and contents. - The petition shall be filed in seven (7) legible copies,
copy thereof is not an indispensable requirement because that judgment is not the with the original copy intended for the court being indicated as such by the
subject of the petition for review. petitioner, and shall (a) state the full names of the parties to the case, without
impleading the lower courts or judges thereof either as petitioners or respondents;
In any case, petitioner submits that she had substantially complied with the (b) indicate the specific material dates showing that it was filed on time; (c) set forth
requirements of the rule when she attached with her Motion for Reconsideration the concisely a statement of the matters involved, the issues raised, the specification of
copies of the Decisions of the RTC and MeTC as certified correct by the Clerk of errors of fact or law, or both, allegedly committed by the Regional Trial Court, and
Court. the reasons or arguments relied upon for the allowance of the appeal; (d) be
accompanied by clearly legible duplicate originals or true copies of the judgments or
final orders of both lower courts, certified correct by the clerk of court of the
Anent the non-submission of the position papers of the parties, petitioner maintains Regional Trial Court, the requisite number of plain copies thereof and of the
that the contents of said position papers were lengthily quoted verbatim in the pleadings and other material portions of the record as would support the allegations
petition and in the attached copy of the MeTC Decision. of the petition. (Emphasis supplied)
On the submission of affidavits of witnesses, petitioner contends that it was not xxxx
necessary because the case before the MeTC was not covered by summary
proceedings.
Under Section 3 of the same Rule, failure to comply with the above requirements
"shall be sufficient ground for the dismissal thereof."
On the merits of her petition before the CA, petitioner avers that she should not be
held liable for a fire which was a fortuitous event since the fire could not be foreseen
and the spread of the fire to the adjacent fastfood stalls was inevitable.
However, Section 6, Rule 1 of the Revised Rules of Court also provides that rules The Court's pronouncement in Republic of the Philippines v. Court of Appeals26 is
shall be liberally construed in order to promote their objective of securing a just, worth echoing: "cases should be determined on the merits, after full opportunity to
speedy and inexpensive disposition of every action and proceeding. Indeed, rules of all parties for ventilation of their causes and defenses, rather than on technicality or
procedure should be used to promote, not frustrate justice. 21 some procedural imperfections. In that way, the ends of justice would be better
served."27 Thus, what should guide judicial action is that a party litigant is given the
In the present case, petitioner's submission of copies of the RTC Decision and Order fullest opportunity to establish the merits of his action or defense rather than for him
certified as correct by the Administrative Officer IV of the RTC is insufficient to lose life, honor or property on mere technicalities. 28
compliance with the requirements of the rule. Petitioner failed to show that the Clerk
of Court was officially on leave and the Administrative Officer was officially The next most logical step would then be for the Court to simply set aside the
designated as officer-in-charge. The rule is explicit in its mandate that the legible challenged resolutions, remand the case to the CA and direct the latter to resolve on
duplicate originals or true copies of the judgments or final orders of both lower the merits of the petition in CA-G.R. SP No. 58799. But, that would further delay
courts must be certified correct by the Clerk of Court. the case. Considering the issues raised which can be resolved on the basis of the
pleadings and documents filed, and the fact that petitioner herself has asked the
Nonetheless, a strict application of the rule in this case is not called for. This Court Court to decide her petition on the merits, the Court deems it more practical and in
has ruled against the dismissal of appeals based solely on technicalities in several the greater interest of justice not to remand the case to the CA but, instead, to
cases, especially when the appellant had substantially complied with the formal resolve the controversy once and for all.29
requirements.22 There is ample jurisprudence holding that the subsequent and
substantial compliance of a party may call for the relaxation of the rules of The Court shall now address the issue of whether the fire was a fortuitous event.
procedure.23 When the CA dismisses a petition outright and the petitioner files a
motion for the reconsideration of such dismissal, appending thereto the requisite Jurisprudence defines the elements of a "fortuitous event" as follows: (a) the cause
pleadings, documents or order/resolution, this would constitute substantial of the unforeseen and unexpected occurrence must be independent of human will;
compliance with the Revised Rules of Court.24 (b) it must be impossible to foresee the event which constitutes the caso fortuito, or
if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such
Thus, in the present case, there was substantial compliance when petitioner attached as to render it impossible for the debtor to fulfill his obligation in a normal manner;
in her Motion for Reconsideration a photocopy of the Decision of the RTC as and (d) the obligor must be free from any participation in the aggravation of the
certified correct by the Clerk of Court of the RTC. In like manner, there was injury resulting to the creditor. 30
substantial compliance when petitioner attached, in her Motion for Reconsideration,
a photocopy of the Decision of the MeTC as certified correct by the Clerk of Court Article 1174 of the Civil Code provides that no person shall be responsible for a
of the RTC. fortuitous event which could not be foreseen, or which, though foreseen, was
inevitable. In other words, there must be an entire exclusion of human agency from
On the necessity of attaching position papers and affidavits of witnesses, Section 2 the cause of injury or loss.31
of Rule 42 of the Revised Rules of Court requires attachments if these would
support the allegations of the petition. 25 In the present case, there was no compelling It is established by evidence that the fire originated from leaking fumes from the
need to attach the position papers of the parties since the Decisions of the MeTC and LPG stove and tank installed at petitioner's fastfood stall and her employees failed to
RTC already stated their respective arguments. As to the affidavits, the Court notes prevent the fire from spreading and destroying the other fastfood stalls, including
that they were presented by the respondent as part of the testimony of his witness respondent's fastfood stall. Such circumstances do not support petitioner's theory of
Fire Investigator Pinca and therefore would not support the allegations of the fortuitous event.
petitioner.
Petitioner's bare allegation is far from sufficient proof for the Court to rule in her
Truly, in dismissing the petition for review, the CA had committed grave abuse of favor. It is basic in the rule of evidence that bare allegations, unsubstantiated by
discretion amounting to lack of jurisdiction in putting a premium on technicalities at evidence, are not equivalent to proof.32 In short, mere allegations are not evidence. 33
the expense of a just resolution of the case.
The Civil Code provides: As to the award of temperate damages, the increase in the amount thereof by the
RTC is improper. The RTC could no longer examine the amounts awarded by the
Art. 2176. Whoever by act or omission causes damage to another, there being fault MeTC since respondent did not appeal from the Decision of the MeTC. 37 It is well-
or negligence, is obliged to pay for the damage done. x x x settled that a party who does not appeal from the decision may not obtain any
affirmative relief from the appellate court other than what he has obtained from the
lower court, if any, whose decision is brought up on appeal. 38 While there are
Art. 2180. The obligation imposed by Article 2176 is demandable not only for one's exceptions to this rule, such as if they involve (1) errors affecting the lower court's
own acts or omissions, but also for those of persons for whom one is responsible. jurisdiction over the subject matter, (2) plain errors not specified, and (3) clerical
errors,39 none apply here.
xxxx
WHEREFORE, the petition is GRANTED. The assailed Resolutions dated June 16,
The owners and managers of an establishment or enterprise are likewise responsible 2000 and November 27, 2000 of the Court of Appeals
for damages caused by their employees in the service of the branches in which the are REVERSED and SET ASIDE. The Decision dated November 26, 1999 of the
latter are employed or on the occasion of their functions. Regional Trial Court, Branch 43, Manila
is AFFIRMED with MODIFICATION that the temperate damages awarded is
Employers shall be liable for the damages caused by their employees and household reduced from P80,000.00 to P50,000.00 as awarded by the Metropolitan Trial Court,
helpers acting within the scope of their assigned tasks, even though the former are Branch 24, Manila in its Decision dated April 5, 1999.
not engaged in any business or industry.
No costs.
xxxx
SO ORDERED.
The responsibility treated of in this article shall cease when the persons herein
mentioned prove that they observed all the diligence of a good father of a family to MA. ALICIA AUSTRIA-MARTINEZ
prevent damage. Associate Justice
In this case, petitioner not only failed to show that she submitted proof that the LPG
stove and tank in her fastfood stall were maintained in good condition and
periodically checked for defects but she also failed to submit proof that she
exercised the diligence of a good father of a family in the selection and supervision
of her employees. For failing to prove care and diligence in the maintenance of her
cooking equipment and in the selection and supervision of her employees, the
necessary inference was that petitioner had been negligent. 36
Actions; Compromise Agreements.—The Compromise Agreement dated June 28, To help finance the project, petitioner, on June 30, 1997, entered into an Omnibus
1999 executed by Mondragon and CDC, not being contrary to law, morals, good Loan and Security Agreement[3] (hereafter Omnibus Agreement) with respondent
customs, and public order and public policy is hereby NOTED. banks for a syndicated term loan in the aggregate principal amount of US$20M.
Under the agreement, as amended on January 19, 1999,[4] the proceeds of the loan
were to be released through advances evidenced by promissory notes to be executed
FIRST DIVISION by petitioner in favor of each lender-bank, and to be paid within a six-year period
from the date of initial advance inclusive of a one year and two quarters grace
MONDRAGON LEISURE AND G.R. No. 154188 period.
RESORTS CORPORATION,
Petitioner, Present: To secure the repayment of the loan, petitioner pledged in favor of respondents
Davide, Jr., C.J., US$20M worth of MIPI shares of stocks; assigned, transferred and delivered all
(Chairman), rights, title to and interest in the pledged shares; and assigned by way of security its
Quisumbing, leasehold rights over the project and all the rights, title, interests and benefits in, to
- versus - Ynares-Santiago, and under any and all agreements in connection with the project.
Carpio, and
Azcuna, JJ. On July 3, 1997, petitioner fully availed of and received the full amount of the
syndicated loan agreement. Petitioner, which had regularly paid the monthly
interests due on the promissory notes until October 1998, thereafter failed to make
COURT OF APPEALS, ASIAN BANK payments. Consequently, on January 6 and February 5, 1999, written notices of
CORPORATION, FAR EAST BANK default, acceleration of payment and demand letters were sent by the lenders to the
AND TRUST COMPANY, and Promulgated: petitioner. Then on August 27, 1999, respondents filed a complaint, docketed as
UNITED COCONUT PLANTERS Civil Case No. 9527, for the foreclosure of leasehold rights against petitioner.
BANK, June 15, 2005
Respondents. Petitioner moved for the dismissal of the complaint on the following grounds: (1) a
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x condition precedent for the filing of the complaint has not been complied with
and/or the instant complaint failed to state a cause of action, or otherwise the filing
DECISION was premature; (2) the certification of non-forum shopping appended to the
complaint was fatally defective since one of the plaintiffs, UCPB, deliberately failed
to mention that it had previously filed another complaint; and (3) plaintiffs had
QUISUMBING, J.: engaged in forum shopping in filing the instant complaint.
The trial court denied the motion and ruled as follows:
[1]
In its Decision dated March 12, 2002, the Court of Appeals in CA-G.R. SP No. ...
61047 dismissed the petition for certiorari filed by Mondragon Leisure and Resorts After a careful study of the arguments of the parties, this court
Corporation against the Order[2]dated March 9, 2000, of finds that the motion to dismiss is without merit. As correctly
the Regional Trial Court of Angeles City, Branch 61, in Civil Case No. 9527. pointed out by the plaintiffs under par. 6.01, the borrower
Likewise, in its Resolution dated July 3, 2002, the CA denied the motion for defaults when interests due at stated maturity are not paid and
reconsideration. the lenders are authorized to accelerate any amount payable
under the loan agreements. One of the consequences of such
The facts of the case are undisputed. default is the foreclosure of collaterals. This is the action taken
by the herein plaintiffs-lenders.
On February 28, 1994, Mondragon International Philippines, Inc. (MIPI),
Mondragon Securities Corporation (MSC) and herein petitioner entered into a lease
agreement with the Clark Development Corporation (CDC) for the development of
what is now known as the Mimosa Leisure Estate.
This court also finds the alleged force majeure baseless. The THE COMPLAINT IN CIVIL CASE NO. 9527 HAS NOT
same are not those provided for under Sec. 1, Article 41 of the BEEN COMPLIED WITH, OR THAT IT IS OTHERWISE
loan agreement. PREMATURE, AND/OR THAT IT FAILS TO STATE A
CAUSE OF ACTION AGAINST PETITIONER-APPELLANT.
As to the allegation of forum shopping, the herein parties Asian
Bank Corporation and Far East Bank and Trust Company are not
parties to this case in 9510 (sic). The subject matter of Civil
Case No. 9527 is not the same with the subject matter in Civil III
Case No. 9510.
THE RESPONDENT-APPELLEE COURT OF APPEALS
Wherefore, premises considered, the motion to dismiss is COMMITTED A SERIOUS ERROR OF LAW AND ACTED
denied. The defendant is given 15 days from receipt hereof WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO
within which to file its answer and/or responsive pleading. LACK OR EXCESS OF JURISDICTION IN NOT RULING
THAT RESPONDENT-APPELLEE BANKS, IN FILING THE
SO ORDERED.[5] COMPLAINT IN CIVIL CASE NO. 9527, DELIBERATELY
ENGAGED IN FORUM SHOPPING.[9]
Petitioner moved for the reconsideration of the order and argued that the complaint
is premature, since it had not been validly declared in default. [6] The trial court In brief, three issues are presented for resolution, namely, (1) Was the certificate of
denied the motion for reconsideration. Seasonably, petitioner filed a special civil non-forum shopping defective? (2) Did respondents engage in forum shopping? and
action for certiorari with the Court of Appeals. (3) Do respondents have a cause of action against the petitioner?
Before the appellate court, petitioner reiterated its arguments in its motion to dismiss On the first issue, petitioner asserts that the verification and certificate of forum
before the trial court, including the failure of the respondents to attach the board shopping were defective because there was no proof as to the authority of the
resolutions authorizing them to file the complaint. [7] signatories to file the complaint. Petitioner avers that UCPB Resolution 48-87,
which was only presented in the Court of Appeals, merely authorized the signatory
The Court of Appeals dismissed the petition and denied the subsequent motion for to appear, act for, or otherwise represent the bank in all judicial, quasi-judicial or
reconsideration. Hence, this appeal by certiorari[8] imputing the following errors: administrative hearings or incidents, including pre-trial conference, and in
I connection therewith, to do any and all of the following acts and deeds and clearly
pertains to a pending proceeding.
THE RESPONDENT-APPELLEE COURT OF APPEALS
COMMITTED A SERIOUS ERROR OF LAW AND ACTED Respondents, on the other hand, contend that the lack of authority of the persons
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO who verified and certified the complaint was neither raised in the motion to dismiss
LACK OR EXCESS OF JURISDICTION IN RULING THAT nor in the motion for reconsideration of the petitioner. They aver that the verification
THE COMPLAINT IN CIVIL CASE NO. 9527 COMPLIED and certification of non-forum shopping contained a statement by the persons who
WITH THE MANDATORY REQUIREMENTS OF signed it that they had been so authorized by the board of directors of their
CERTIFICATION OF NON-FORUM SHOPPING. respective corporations.
II Considering the submissions of the parties, we are constrained to agree with the
respondents contention. The trial court did not err in denying the motion to dismiss.
THE RESPONDENT-APPELLEE COURT OF APPEALS
The issue concerning the signatories authorization was never raised before it.
COMMITTED A SERIOUS ERROR OF LAW AND ACTED
Likewise, the appellate court did not err in refusing to take cognizance of the issue,
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO
since the parties did not raise it beforehand. Issues not raised in the trial court cannot
LACK OR EXCESS OF JURISDICTION IN NOT RULING
be raised for the first time on appeal.[10]
THAT A CONDITION PRECEDENT FOR THE FILING OF
On the second issue, petitioner claims that respondent UCPB engaged in forum 6.01 Events of Default
shopping since it earlier instituted an action for foreclosure of mortgage and/or
collection, docketed as Civil Case No. 9510. [11] This claim, in our view, is untenable. Each of the following events shall constitute an Event of Default
A comparison of the two complaints would show its utter lack of merit. under this Omnibus Agreement:
Civil Case No. 9510 pertains to an Omnibus Credit and Security Agreement (a) Payment Default The BORROWER defaults in the payment
executed by and between the petitioner and respondent UCPB on November 23, when due at stated maturity, by acceleration or
1995. This is separate and distinct from the Omnibus Agreement involved in Civil otherwise, of any amount payable under the Loan
Case No. 9527. Moreover, respondents Asian Bank and Far East Bank are not Documents.[14]
among the parties to Civil Case No. 9510. ...
As pointed out by the Court of Appeals, forum shopping exists when both actions
involve the same transactions, with the same essential facts and circumstances; and
Clearly, under the foregoing provisions of the Agreement, petitioner may be validly
where identical causes of actions, subject matter and issues are raised. The test to
declared in default for failure to pay the interest. As a consequence of default, the
determine the existence of forum shopping is whether the elements of litis
unpaid amount shall earn default interest, [15] and the respondent-banks have four
pendentia are present, or whether a final judgment in one case will amount to res
alternative remedies without prejudice to the application of the provisions on
judicata in another.[12] The requisites in order that an action may be dismissed on the
collaterals and any other steps or action which may be adopted by the majority
ground of litis pendentia are (a) the identity of parties, or at least such as
lender.[16]
representing the same interest in both actions; (b) the identity of rights asserted and
relief prayed for, the relief being founded on the same facts; and (c) the identity of
the two cases such that judgment in one, regardless of which party is successful,
The four remedies are alternative, with the right of choice given to the lenders, in
would amount to res judicata in the other.[13] Such requisites are not present in this
this case the respondents. Under Article 1201 of the Civil Code, the choice shall
controversy.
produce no effect except from the time it has been communicated. This is the reason
Apropos the third issue, petitioner contends the subject obligation of the instant case why a written notice is required under Section 6.02 of the Omnibus Agreement.
is not yet due and demandable because the Omnibus Agreement allows a full six-
year term of payment. Even if it failed to pay some installments, petitioner insists it In the present case, we find that written notices were sent to the petitioner by the
is not in default because respondents merely sent collection and demand letters, but respondents. The notices clearly indicate respondents choice of remedy: to
failed to give the written notice of default required under their agreement. Moreover, accelerate all payments payable under the loan agreement. On January 6, 1999,
petitioner avers that the provisions on default in the Omnibus Agreement have been respondents notified petitioner that it was in default, and demanded payment of the
rendered inapplicable and unenforceable by fortuitous events, namely the Asian stated amount within five days from receipt of the letter, otherwise all outstanding
economic crisis and the closure of the Mimosa Regency Casino, which was availments of the US$20M term loan together with interests and other sum payable
petitioners primary source of revenues. shall be declared due and demandable. [17] The letter clearly indicated the choice of
remedy by the respondents, pursuant to the Omnibus Agreement.
Respondents counter that the Omnibus Agreement defines, as an event of default,
the failure of petitioner to pay when due at stated maturity, by acceleration or Even though subsequent demand is waived by the petitioner in Section 6.02 of Part
otherwise, any amount payable under the loan documents. Since petitioner is also B of the Omnibus Agreement, on February 5, 1999, the respondents nevertheless
required to pay interest, respondents posit that non-payment thereof constituted a actually made their demand in writing for the payment of the principal plus interest
clear and unmistakable case of default. Respondents add that they had properly and penalty charges due on or before February 28, 1999, with express notice that
advised the petitioner that it had been declared in default, referring to the January 6 they would take all legal remedies available to protect the interests of their clients.
and February 5, 1999 letters as their compliance with the notice requirement. [18]
Clearly, respondents have more than complied with the requirement concerning
On this issue, we are unable to agree with the petitioner. notice to the petitioner.
Section 2.06 (a) of Part B of the Omnibus Agreement provides that the borrower It should be noted that the agreement also provides that the choice of remedy is
shall pay interest on the advances outstanding from time to time on each interest without prejudice to the action on the collaterals. Thus, respondents could properly
payment date, while Section 6 of Part A reads
file an action for foreclosure of the leasehold rights to obtain payment for the requisite diligence, and there need not be an express finding of
amount demanded. negligence to hold it liable.—The common carrier’s duty to observe
the requisite diligence in the shipment of goods lasts from the time
Petitioners claim, that the respondents could not be held in default because of a the articles are surrendered to or unconditionally placed in the
fortuitous event, is untenable. Said event, the Asian financial crisis of 1997, is not possession of, and received by, the carrier for transportation until
among the fortuitous events contemplated under Article 1174 [19] of the Civil Code. delivered to, or until the lapse of a reasonable time for their
To exempt the obligor from liability for a breach of an obligation by reason of a acceptance by, the person entitled to receive them (Arts. 1736-1738,
fortuitous event, the following requisites must concur: (a) the cause of the breach of Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs.
the obligation must be independent of the will of the debtor; (b) the event must be Dollar Steamship Lines, 52 Phil. 863). When the goods shipped
either unforeseeable or unavoidable; (c) the event must be such as to render it either are lost or arrive in damaged condition, a presumption arises
impossible for the debtor to fulfill his obligation in a normal manner; and (d) the against the carrier of its failure to observe that diligence, and there
debtor must be free from any participation in, or aggravation of the injury to the need not be an express finding of negligence to hold it liable (Art.
creditor.[20] 1735, Civil Code; Philippine National Railways vs. Court of Appeals,
139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA
As pointed out by the respondents, the loan agreement was entered into on June 30, 365). There are, of course, exceptional cases when such presumption
1997, or when the Asian economic crisis had already started. Petitioner, as a long of fault is not observed but these cases, enumerated in Article 1734
established corporation, should have been well aware of the economic environment of the Civil Code, are exclusive, not one of which can be applied to
at that time, yet it still took the risk to expand operations. Likewise, the closure of this case.
the Mimosa Regency Casino was not an unforeseeable or unavoidable event, in the
context of the contract of lease between petitioner and CDC. Every business venture
Same; Same; Arrastre Operator; Carrier and arrastre operator
involves risks. Risks are not unforeseeable; they are inherent in business.
liable in solidum for the proper delivery of the goods to the consignee.
—The question of charging both the carrier and the arrastre operator
Worthy of note, risk is an exception to the general rule on fortuitous events. Under
with the obligation of properly delivering the goods to the consignee
the law, these exceptions are: (1) when the law expressly so specifies; (2) when it is
has, too, been passed upon by the Court. In Fireman’s Fund
otherwise declared by the parties; and (3) when the nature of the obligation requires
the assumption of risks.[21] We find that in the Omnibus Agreement, the parties Insurance Co. vs. Metro Port Service, Inc. (182 SCRA 455), we have
expressly agreed that any enactment, official action, act of war, act of nature or explained, in holding the carrier and the arrastre operator liable
other force majeure or other similar circumstances shall in no way affect the in solidum, thus: “The legal relationship between the consignee and
obligation of the borrowers to make payments.[22] the arrastre operator is akin to that of a depositor and
warehouseman (Lua Kian v. Manila Railroad Co., et al., 19 SCRA 5
In sum, the appellate court did not err in dismissing petitioners action for certiorari [1967]. The relationship between the consignee and the common
and in denying the motion for reconsideration. It committed no reversible error, carrier is similar to that of the consignee and the arrastre operator
much less any grave abuse of discretion amounting to lack or excess of jurisdiction, (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]).
contrary to petitioners contentions. Since it is the duty of the ARRASTRE to take good care of the goods
that are in its custody and to deliver them in good condition to the
WHEREFORE, the appeal is DENIED for lack of merit. The Decision consignee, such responsibility also devolves upon the CARRIER.
dated March 12, 2002 and the Resolution dated July 3, 2002 of the Court of Appeals Both the ARRASTRE and the CARRIER are therefore charged with
in CA-G.R. SP No. 61047 are hereby AFFIRMED. the obligation to deliver the goods in good condition to the
consignee.”
Costs against petitioner.
1. The amount of P19,032.95, with the In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error
present legal interest of 12% per and grave abuse of discretion on the part of the appellate court when —
annum from October 1, 1982, the date of
filing of this complaints, until fully paid (the I. IT HELD PETITIONER CARRIER JOINTLY AND
liability of defendant Eastern Shipping, Inc. SEVERALLY LIABLE WITH THE ARRASTRE OPERATOR
shall not exceed US$500 per case or the CIF AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE
value of the loss, whichever is lesser, while RESPONDENT AS GRANTED IN THE QUESTIONED
the liability of defendant Metro Port Service, DECISION;
Inc. shall be to the extent of the actual
invoice value of each package, crate box or
container in no case to exceed P5,000.00 II. IT HELD THAT THE GRANT OF INTEREST ON THE
each, pursuant to Section 6.01 of the CLAIM OF PRIVATE RESPONDENT SHOULD
Management Contract); COMMENCE FROM THE DATE OF THE FILING OF THE
COMPLAINT AT THE RATE OF TWELVE PERCENT PER
ANNUM INSTEAD OF FROM THE DATE OF THE
2. P3,000.00 as attorney's fees, and DECISION OF THE TRIAL COURT AND ONLY AT THE
RATE OF SIX PERCENT PER ANNUM, PRIVATE
3. Costs. RESPONDENT'S CLAIM BEING INDISPUTABLY
UNLIQUIDATED.
B. Dismissing the
counterclaims and The petition is, in part, granted.
crossclaim of
defendant/cross- In this decision, we have begun by saying that the questions raised by petitioner
claimant Allied carrier are not all that novel. Indeed, we do have a fairly good number of previous
Brokerage Corporation. decisions this Court can merely tack to.
SO ORDERED. (p. 207, Record). The common carrier's duty to observe the requisite diligence in the shipment of
goods lasts from the time the articles are surrendered to or unconditionally placed in
Dissatisfied, defendant's recourse to US. the possession of, and received by, the carrier for transportation until delivered to, or
until the lapse of a reasonable time for their acceptance by, the person entitled to
The appeal is devoid of merit. receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161
SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods
shipped either are lost or arrive in damaged condition, a presumption arises against
After a careful scrutiny of the evidence on record. We find that the carrier of its failure to observe that diligence, and there need not be an express
the conclusion drawn therefrom is correct. As there is sufficient finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National
evidence that the shipment sustained damage while in the Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of
successive possession of appellants, and therefore they are liable Appeals, 131 SCRA 365). There are, of course, exceptional cases when such
presumption of fault is not observed but these cases, enumerated in Article 1734 1 of amount of its claim for the value of the undelivered goods amounted to P3,947.20.
the Civil Code, are exclusive, not one of which can be applied to this case. This demand, however, was neither established in its totality nor definitely
ascertained. In the stipulation of facts later entered into by the parties, in lieu of
The question of charging both the carrier and the arrastre operator with the proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment
obligation of properly delivering the goods to the consignee has, too, been passed ordering the appellants (defendants) Manila Port Service and Manila Railroad
upon by the Court. In Fireman's Fund Insurance vs. Metro Port Services (182 Company to pay appellee Malayan Insurance the sum of P1,447.51 with legal
SCRA 455), we have explained, in holding the carrier and the arrastre operator interest thereon from the date the complaint was filed on 28 December 1962 until
liable in solidum, thus: full payment thereof. The appellants then assailed, inter alia, the award of legal
interest. In sustaining the appellants, this Court ruled:
The legal relationship between the consignee and the arrastre
operator is akin to that of a depositor and warehouseman (Lua Interest upon an obligation which calls for the payment of
Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The money, absent a stipulation, is the legal rate. Such interest
relationship between the consignee and the common carrier is normally is allowable from the date of demand, judicial or
similar to that of the consignee and the arrastre operator extrajudicial. The trial court opted for judicial demand as the
(Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 starting point.
[1960]). Since it is the duty of the ARRASTRE to take good
care of the goods that are in its custody and to deliver them in But then upon the provisions of Article 2213 of the Civil Code,
good condition to the consignee, such responsibility also interest "cannot be recovered upon unliquidated claims or
devolves upon the CARRIER. Both the ARRASTRE and the damages, except when the demand can be established with
CARRIER are therefore charged with the obligation to deliver reasonable certainty." And as was held by this Court in Rivera
the goods in good condition to the consignee. vs. Perez,4 L-6998, February 29, 1956, if the suit were for
damages, "unliquidated and not known until definitely
We do not, of course, imply by the above pronouncement that the arrastre operator ascertained, assessed and determined by the courts after proof
and the customs broker are themselves always and necessarily liable solidarily with (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447;
the carrier, or vice-versa, nor that attendant facts in a given case may not vary the Lichauco v. Guzman,
rule. The instant petition has been brought solely by Eastern Shipping Lines, which, 38 Phil. 302)," then, interest "should be from the date of the
being the carrier and not having been able to rebut the presumption of fault, is, in decision." (Emphasis supplied)
any event, to be held liable in this particular case. A factual finding of both the
court a quo and the appellate court, we take note, is that "there is sufficient evidence The case of Reformina vs. Tomol,5 rendered on 11 October 1985, was for "Recovery
that the shipment sustained damage while in the successive possession of appellants" of Damages for Injury to Person and Loss of Property." After trial, the lower court
(the herein petitioner among them). Accordingly, the liability imposed on Eastern decreed:
Shipping Lines, Inc., the sole petitioner in this case, is inevitable regardless of
whether there are others solidarily liable with it. WHEREFORE, judgment is hereby rendered in favor of the
plaintiffs and third party defendants and against the defendants
It is over the issue of legal interest adjudged by the appellate court that deserves and third party plaintiffs as follows:
more than just a passing remark.
Ordering defendants and third party plaintiffs Shell and Michael,
Let us first see a chronological recitation of the major rulings of this Court: Incorporated to pay jointly and severally the following persons:
The early case of Malayan Insurance Co., Inc., vs. Manila Port xxx xxx xxx
Service,2 decided3 on 15 May 1969, involved a suit for recovery of money arising
out of short deliveries and pilferage of goods. In this case, appellee Malayan
Insurance (the plaintiff in the lower court) averred in its complaint that the total
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the Coming to the case at bar, the decision herein sought to be
sum of P131,084.00 which is the value of the boat F B Pacita III executed is one rendered in an Action for Damages for injury to
together with its accessories, fishing gear and equipment minus persons and loss of property and does not involve any loan,
P80,000.00 which is the value of the insurance recovered and much less forbearances of any money, goods or credits. As
the amount of P10,000.00 a month as the estimated monthly loss correctly argued by the private respondents, the law applicable
suffered by them as a result of the fire of May 6, 1969 up to the to the said case is Article 2209 of the New Civil Code which
time they are actually paid or already the total sum of reads —
P370,000.00 as of June 4, 1972 with legal interest from the
filing of the complaint until paid and to pay attorney's fees of Art. 2209. — If the obligation consists in the
P5,000.00 with costs against defendants and third party payment of a sum of money, and the debtor
plaintiffs. (Emphasis supplied.) incurs in delay, the indemnity for damages,
there being no stipulation to the contrary,
On appeal to the Court of Appeals, the latter modified the amount of shall be the payment of interest agreed upon,
damages awarded but sustained the trial court in adjudging legal interest and in the absence of stipulation, the legal
from the filing of the complaint until fully paid. When the appellate court's interest which is six percent per annum.
decision became final, the case was remanded to the lower court for
execution, and this was when the trial court issued its assailed resolution The above rule was reiterated in Philippine Rabbit Bus Lines, Inc.,
which applied the 6% interest per annum prescribed in Article 2209 of the v. Cruz,7 promulgated on 28 July 1986. The case was for damages occasioned by an
Civil Code. In their petition for review on certiorari, the petitioners injury to person and loss of property. The trial court awarded private respondent
contended that Central Bank Circular Pedro Manabat actual and compensatory damages in the amount of P72,500.00
No. 416, providing thus — with legal interest thereon from the filing of the complaint until fully paid. Relying
on the Reformina v. Tomol case, this Court8 modified the interest award from 12%
By virtue of the authority granted to it under Section 1 of Act to 6% interest per annum but sustained the time computation thereof, i.e., from the
2655, as amended, Monetary Board in its Resolution No. 1622 filing of the complaint until fully paid.
dated July 29, 1974, has prescribed that the rate of interest for
the loan, or forbearance of any money, goods, or credits and the In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for the
rate allowed in judgments, in the absence of express contract as recovery of damages arising from the collapse of a building, ordered,
to such rate of interest, shall be twelve (12%) percent per inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
annum. This Circular shall take effect immediately. (Emphasis . . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate
found in the text) — from November 29, 1968, the date of the filing of the complaint until full
payment . . . ." Save from the modification of the amount granted by the lower court,
should have, instead, been applied. This Court6 ruled: the Court of Appeals sustained the trial court's decision. When taken to this Court
for review, the case, on 03 October 1986, was decided, thus:
The judgments spoken of and referred to are judgments in
litigations involving loans or forbearance of any money, goods WHEREFORE, the decision appealed from is hereby
or credits. Any other kind of monetary judgment which has MODIFIED and considering the special and environmental
nothing to do with, nor involving loans or forbearance of any circumstances of this case, we deem it reasonable to render a
money, goods or credits does not fall within the coverage of the decision imposing, as We do hereby impose, upon the defendant
said law for it is not within the ambit of the authority granted to and the third-party defendants (with the exception of Roman
the Central Bank. Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of
xxx xxx xxx FIVE MILLION (P5,000,000.00) Pesos to cover all damages
(with the exception to attorney's fees) occasioned by the loss of
the building (including interest charges and lost rentals) and an from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this
additional ONE HUNDRED THOUSAND (P100,000.00) Pesos Court, while recognizing the right of the private respondent to recover damages,
as and for attorney's fees, the total sum being payable upon the held the award, however, for moral damages by the trial court, later sustained by the
finality of this decision. Upon failure to pay on such finality, IAC, to be inconceivably large. The Court12 thus set aside the decision of the
twelve (12%) per cent interest per annum shall be imposed upon appellate court and rendered a new one, "ordering the petitioner to pay private
aforementioned amounts from finality until paid. Solidary costs respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral
against the defendant and third-party defendants (Except Roman damages, with
Ozaeta). (Emphasis supplied) six (6%) percent interest thereon computed from the finality of this decision until
paid. (Emphasis supplied)
A motion for reconsideration was filed by United Construction,
contending that "the interest of twelve (12%) per cent per annum imposed Reformina came into fore again in the 21 February 1989 case of Florendo
on the total amount of the monetary award was in contravention of law." v. Ruiz13 which arose from a breach of employment contract. For having been
The Court10 ruled out the applicability of the Reformina and Philippine illegally dismissed, the petitioner was awarded by the trial court moral and
Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it exemplary damages without, however, providing any legal interest thereon. When
explained: the decision was appealed to the Court of Appeals, the latter held:
There should be no dispute that the imposition of 12% interest WHEREFORE, except as modified hereinabove the decision of
pursuant to Central Bank Circular No. 416 . . . is applicable only the CFI of Negros Oriental dated October 31, 1972 is affirmed
in the following: (1) loans; (2) forbearance of any money, goods in all respects, with the modification that defendants-appellants,
or credit; and except defendant-appellant Merton Munn, are ordered to pay,
(3) rate allowed in judgments (judgments spoken of refer to jointly and severally, the amounts stated in the dispositive
judgments involving loans or forbearance of any money, goods portion of the decision, including the sum of P1,400.00 in
or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA concept of compensatory damages, with interest at the legal
160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 rate from the date of the filing of the complaint until fully
[1985]). It is true that in the instant case, there is neither a loan paid(Emphasis supplied.)
or a forbearance, but then no interest is actually imposed
provided the sums referred to in the judgment are paid upon the The petition for review to this Court was denied. The records were
finality of the judgment. It is delay in the payment of such final thereupon transmitted to the trial court, and an entry of judgment was
judgment, that will cause the imposition of the interest. made. The writ of execution issued by the trial court directed that only
compensatory damages should earn interest at 6% per annum from the
It will be noted that in the cases already adverted to, the rate of date of the filing of the complaint. Ascribing grave abuse of discretion on
interest is imposed on the total sum, from the filing of the the part of the trial judge, a petition for certiorari assailed the said order.
complaint until paid; in other words, as part of the judgment for This Court said:
damages. Clearly, they are not applicable to the instant case.
(Emphasis supplied.) . . . , it is to be noted that the Court of Appeals ordered the
payment of interest "at the legal rate" from the time of the filing
The subsequent case of American Express International, Inc., vs. Intermediate of the complaint. . . Said circular [Central Bank Circular No.
Appellate Court11 was a petition for review on certiorari from the decision, dated 27 416] does not apply to actions based on a breach of employment
February 1985, of the then Intermediate Appellate Court reducing the amount of contract like the case at bar. (Emphasis supplied)
moral and exemplary damages awarded by the trial court, to P240,000.00 and
P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the The Court reiterated that the 6% interest per annum on the damages
amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages should be computed from the time the complaint was filed until the
and P400,000.00 as exemplary damages with interest thereon at 12% per annum amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power The "second group", did not alter the pronounced rule on the application of the 6%
Corporation vs. Angas,14decided on 08 May 1992, involved the expropriation of or 12% interest per annum,17depending on whether or not the amount involved is a
certain parcels of land. After conducting a hearing on the complaints for eminent loan or forbearance, on the one hand, or one of indemnity for damage, on the other
domain, the trial court ordered the petitioner to pay the private respondents certain hand. Unlike, however, the "first group" which remained consistent in holding that
sums of money as just compensation for their lands so expropriated "with legal the running of the legal interest should be from the time of the filing of the
interest thereon . . . until fully paid." Again, in applying the 6% legal interest per complaint until fully paid, the "second group" varied on the commencement of the
annum under the Civil Code, the Court15 declared: running of the legal interest.
. . . , (T)he transaction involved is clearly not a loan or Malayan held that the amount awarded should bear legal interest from the date of
forbearance of money, goods or credits but expropriation of the decision of the court a quo,explaining that "if the suit were for damages,
certain parcels of land for a public purpose, the payment of 'unliquidated and not known until definitely ascertained, assessed and determined by
which is without stipulation regarding interest, and the interest the courts after proof,' then, interest 'should be from the date of the
adjudged by the trial court is in the nature of indemnity for decision.'" American Express International v. IAC, introduced a different time frame
damages. The legal interest required to be paid on the amount of for reckoning the 6% interest by ordering it to be "computed from the finality of
just compensation for the properties expropriated is manifestly (the) decision until paid." The Nakpil and Sons case ruled that 12% interest per
in the form of indemnity for damages for the delay in the annum should be imposed from the finality of the decision until the judgment
payment thereof. Therefore, since the kind of interest involved amount is paid.
in the joint judgment of the lower court sought to be enforced in
this case is interest by way of damages, and not by way of The ostensible discord is not difficult to explain. The factual circumstances may
earnings from loans, etc. Art. 2209 of the Civil Code shall apply. have called for different applications, guided by the rule that the courts are vested
with discretion, depending on the equities of each case, on the award of interest.
Concededly, there have been seeming variances in the above holdings. The cases Nonetheless, it may not be unwise, by way of clarification and reconciliation, to
can perhaps be classified into two groups according to the similarity of the issues suggest the following rules of thumb for future guidance.
involved and the corresponding rulings rendered by the court. The "first group"
would consist of the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
Lines v. Cruz(1986), Florendo v. Ruiz (1989) delicts or quasi-delicts18 is breached, the contravenor can be held liable for
and National Power Corporation v. Angas (1992). In the "second group" would damages.19 The provisions under Title XVIII on "Damages" of the Civil Code
be Malayan Insurance Company v.Manila Port Service (1969), Nakpil and Sons govern in determining the measure of recoverable damages. 20
v. Court of Appeals (1988), and American Express International v.Intermediate
Appellate Court (1988).
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
In the "first group", the basic issue focuses on the application of either the 6% imposed, as follows:
(under the Civil Code) or 12% (under the Central Bank Circular) interest per annum.
It is easily discernible in these cases that there has been a consistent holding that the
Central Bank Circular imposing the 12% interest per annum applies only to loans or 1. When the obligation is breached, and it consists in the payment of a sum of
forbearance16 of money, goods or credits, as well as to judgments involving such money, i.e., a loan or forbearance of money, the interest due should be that which
loan or forbearance of money, goods or credits, and that the 6% interest under the may have been stipulated in writing. 21 Furthermore, the interest due shall itself earn
Civil Code governs when the transaction involves the payment of indemnities in the legal interest from the time it is judicially demanded. 22 In the absence of stipulation,
concept of damage arising from the breach or a delay in the performance of the rate of interest shall be 12% per annum to be computed from default, i.e., from
obligations in general. Observe, too, that in these cases, a common time frame in the judicial or extrajudicial demand under and subject to the provisions of Article
computation of the 6% interest per annum has been applied, i.e., from the time the 116923 of the Civil Code.
complaint is filed until the adjudged amount is fully paid.
2. When an obligation, not constituting a loan or forbearance of money, is breached,
an interest on the amount of damages awarded may be imposed at the discretion of
the court24 at the rate of 6% per annum.25 No interest, however, shall be adjudged on illegal dismissal ruling stands; only the computation of monetary consequences of
unliquidated claims or damages except when or until the demand can be established this dismissal is affected, and this is not a violation of the principle of immutability
with reasonable certainty.26 Accordingly, where the demand is established with of final judgments.
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot Same; Same; Same; Article 279 of the Labor Code provides for the
be so reasonably established at the time the demand is made, the interest shall begin consequences of illegal dismissal in no uncertain terms, qualified only by
to run only from the date the judgment of the court is made (at which time the jurisprudence in its interpretation of when separation pay in lieu of reinstatement is
quantification of damages may be deemed to have been reasonably ascertained). The allowed.—That the amount respondents shall now pay has greatly increased is a
actual base for the computation of legal interest shall, in any case, be on the amount consequence that it cannot avoid as it is the risk that it ran when it continued to seek
finally adjudged. recourses against the Labor Arbiter’s decision. Article 279 provides for the
consequences of illegal dismissal in no uncertain terms, qualified only by
3. When the judgment of the court awarding a sum of money becomes final and jurisprudence in its interpretation of when separation pay in lieu of reinstatement is
executory, the rate of legal interest, whether the case falls under paragraph 1 or allowed. When that happens, the finality of the illegal dismissal decision becomes
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, the reckoning point instead of the reinstatement that the law decrees. In allowing
this interim period being deemed to be by then an equivalent to a forbearance of separation pay, the final decision effectively declares that the employment
credit. relationship ended so that separation pay and backwages are to be computed up to
that point.
WHEREFORE, the petition is partly GRANTED. The appealed decision is Interest Rates; In the absence of an express stipulation as to the rate of interest that
AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX would govern the parties, the rate of legal interest for loans or forbearance of any
PERCENT (6%) on the amount due computed from the decision, dated money, goods or credits and the rate allowed in judgments shall no longer be twelve
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu percent (12%) per annum — as reflected in the case of Eastern Shipping Lines vs.
of SIX PERCENT (6%), shall be imposed on such amount upon finality of this Court of Appeals, 234 SCRA 78 (1994), and Subsection X305.1 of the Manual of
decision until the payment thereof. Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual
of Regulations for Non-Bank Financial Institutions, before its amendment by BSP-
SO ORDERED. MB Circular No. 799 — but will now be six percent (6%) per annum effective July
1, 2013.—In the absence of an express stipulation as to the rate of interest that
Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., would govern the parties, the rate of legal interest for loans or forbearance of any
Romero, Bellosillo, Melo, Quiason, Puno and Kapunan, JJ., concur. money, goods or credits and the rate allowed in judgments shall no longer be twelve
percent (12%) per annum — as reflected in the case of Eastern Shipping Lines, Inc.
v. Court of Appeals, 234 SCRA 78 (1994) and Subsection X305.1 of the Manual of
Mendoza, J., took no part. Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of
Regulations for Non-Bank Financial Institutions, before its amendment by BSP-MB
Labor Law; Termination of Employment; Illegal Dismissals; By the nature of an Circular No. 799 — but will now be six percent (6%) per annum effective July 1,
illegal dismissal case, the reliefs continue to add up until full satisfaction, as 2013. It should be noted, nonetheless, that the new rate could only be applied
expressed under Article 279 of the Labor Code.—No essential change is made by a prospectively and not retroactively. Consequently, the twelve percent (12%) per
recomputation as this step is a necessary consequence that flows from the nature of annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the
the illegality of dismissal declared by the Labor Arbiter in that decision. A new rate of six percent (6%) per annum shall be the prevailing rate of interest when
recomputation (or an original computation, if no previous computation has been applicable.
made) is a part of the law — specifically, Article 279 of the Labor Code and the
established jurisprudence on this provision — that is read into the decision. By the Same; Monetary Board; The Bangko Sentral ng Pilipinas-Monetary Board
nature of an illegal dismissal case, the reliefs continue to add up until full may prescribe the maximum rate or rates of interest for all loans or renewals
satisfaction, as expressed under Article 279 of the Labor Code. The recomputation thereof or the forbearance of any money, goods or credits, including those for loans
of the consequences of illegal dismissal upon execution of the decision does not of low priority such as consumer loans, as well as such loans made by pawnshops,
constitute an alteration or amendment of the final decision being implemented. The finance companies and similar credit institutions.—In the recent case of Advocates
for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral Monetary judicial or extrajudicial demand under and subject to the provisions of Article 1169
Board, 688 SCRA 530 (2013), this Court affirmed the authority of the BSP-MB to of the Civil Code.
set interest rates and to issue and enforce Circulars when it ruled that “the BSP-MB
may prescribe the maximum rate or rates of interest for all loans or renewals thereof
or the forbearance of any money, goods or credits, including those for loans of low
priority such as consumer loans, as well as such loans made by pawnshops, finance
companies and similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of borrowings,
including deposits and deposit substitutes, or loans of financial intermediaries.”
With the foregoing, we find and so rule that respondents failed to To pay jointly and severally the complainant the amount of sixty-two
discharge the burden of showing that complainant was dismissed thousand nine hundred eighty-six pesos and 56/100 (₱62,986.56)
from employment for a just or valid cause. All the more, it is clear Pesos representing his separation pay;
from the records that complainant was never afforded due process
before he was terminated. As such, we are perforce constrained to
grant complainant’s prayer for the payments of separation pay in lieu To pay jointly and severally the complainant the amount of nine (sic)
of reinstatement to his former position, considering the strained five thousand nine hundred thirty-three and 36/100 (₱95,933.36)
relationship between the parties, and his apparent reluctance to be representing his backwages; and
reinstated, computed only up to promulgation of this decision as
follows: All other claims are hereby dismissed for lack of merit.
Respondents again appealed before the NLRC, which on June 30, Petitioner then appealed before the NLRC, 21 which appeal was denied
2003 issued a Resolution17 granting the appeal in favor of the by the NLRC in its Resolution 22 dated September 27, 2006. Petitioner
respondents and ordered the recomputation of the judgment award. filed a Motion for Reconsideration, but it was likewise denied in the
Resolution23dated January 31, 2007.
On August 20, 2003, an Entry of Judgment was issued declaring the
Resolution of the NLRC to be final and executory. Consequently, Aggrieved, petitioner then sought recourse before the CA, docketed
another pre-execution conference was held, but respondents failed to as CA-G.R. SP No. 98591.
appear on time. Meanwhile, petitioner moved that an Alias Writ of
Execution be issued to enforce the earlier recomputed judgment
award in the sum of ₱471,320.31.18 On September 23, 2008, the CA rendered a Decision 24 denying the
petition. The CA opined that since petitioner no longer appealed the
October 15, 1998 Decision of the Labor Arbiter, which already
The records of the case were again forwarded to the Computation became final and executory, a belated correction thereof is no longer
and Examination Unit for recomputation, where the judgment award allowed. The CA stated that there is nothing left to be done except to
of petitioner was reassessed to be in the total amount of only enforce the said judgment. Consequently, it can no longer be
₱147,560.19. modified in any respect, except to correct clerical errors or mistakes.
Petitioner then moved that a writ of execution be issued ordering Petitioner filed a Motion for Reconsideration, but it was denied in the
respondents to pay him the original amount as determined by the Resolution25 dated October 9, 2009.
Labor Arbiter in his Decision dated October 15, 1998, pending the
final computation of his backwages and separation pay.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS The instant case is similar to the case of Session Delights Ice Cream
SERIOUSLY ERRED, COMMITTED GRAVE ABUSE OF DISCRETION and Fast Foods v. Court of Appeals (Sixth Division), 27 wherein the
AND DECIDED CONTRARY TO LAW IN UPHOLDING THE issue submitted to the Court for resolution was the propriety of the
QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, computation of the awards made, and whether this violated the
SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER principle of immutability of judgment. Like in the present case, it
MAGAT MAKING THE DISPOSITIVE PORTION OF THE OCTOBER was a distinct feature of the judgment of the Labor Arbiter in the
15, 1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT above-cited case that the decision already provided for the
TO AN OPINION EXPRESSED IN THE BODY OF THE SAME computation of the payable separation pay and backwages due and
DECISION.26 did not further order the computation of the monetary awards up to
the time of the finality of the judgment. Also in Session Delights, the
Petitioner argues that notwithstanding the fact that there was a dismissed employee failed to appeal the decision of the labor arbiter.
computation of backwages in the Labor Arbiter’s decision, the same The Court clarified, thus:
is not final until reinstatement is made or until finality of the
decision, in case of an award of separation pay. Petitioner maintains In concrete terms, the question is whether a re-computation in the
that considering that the October 15, 1998 decision of the Labor course of execution of the labor arbiter's original computation of the
Arbiter did not become final and executory until the April 17, 2002 awards made, pegged as of the time the decision was rendered and
Resolution of the Supreme Court in G.R. No. 151332 was entered in confirmed with modification by a final CA decision, is legally proper.
the Book of Entries on May 27, 2002, the reckoning point for the The question is posed, given that the petitioner did not immediately
computation of the backwages and separation pay should be on May pay the awards stated in the original labor arbiter's decision; it
27, 2002 and not when the decision of the Labor Arbiter was delayed payment because it continued with the litigation until final
rendered on October 15, 1998. Further, petitioner posits that he is judgment at the CA level.
also entitled to the payment of interest from the finality of the
decision until full payment by the respondents. A source of misunderstanding in implementing the final decision in
this case proceeds from the way the original labor arbiter framed his
On their part, respondents assert that since only separation pay and decision. The decision consists essentially of two parts.
limited backwages were awarded to petitioner by the October 15,
1998 decision of the Labor Arbiter, no more recomputation is The first is that part of the decision that cannot now be disputed
required to be made of said awards. Respondents insist that since because it has been confirmed with finality. This is the finding of the
the decision clearly stated that the separation pay and backwages illegality of the dismissal and the awards of separation pay in lieu of
are "computed only up to [the] promulgation of this decision," and reinstatement, backwages, attorney's fees, and legal interests.
considering that petitioner no longer appealed the decision,
petitioner is only entitled to the award as computed by the Labor
Arbiter in the total amount of ₱158,919.92. Respondents added that The second part is the computation of the awards made. On its face,
it was only during the execution proceedings that the petitioner the computation the labor arbiter made shows that it was time-
questioned the award, long after the decision had become final and bound as can be seen from the figures used in the computation. This
executory. Respondents contend that to allow the further part, being merely a computation of what the first part of the
recomputation of the backwages to be awarded to petitioner at this decision established and declared, can, by its nature, be re-
point of the proceedings would substantially vary the decision of the computed. This is the part, too, that the petitioner now posits should
Labor Arbiter as it violates the rule on immutability of judgments. no longer be re-computed because the computation is already in the
labor arbiter's decision that the CA had affirmed. The public and
private respondents, on the other hand, posit that a re-computation
The petition is meritorious. is necessary because the relief in an illegal dismissal decision goes
all the way up to reinstatement if reinstatement is to be made, or up
to the finality of the decision, if separation pay is to be given in lieu beyond the finality of the CA decision (July 29, 2003) and included
reinstatement. as well the payment for awards the final CA decision had deleted -
specifically, the proportionate 13th month pay and the indemnity
That the labor arbiter's decision, at the same time that it found that awards. Hence, the CA issued the decision now questioned in the
an illegal dismissal had taken place, also made a computation of the present petition.
award, is understandable in light of Section 3, Rule VIII of the then
NLRC Rules of Procedure which requires that a computation be We see no error in the CA decision confirming that a re-computation
made. This Section in part states: is necessary as it essentially considered the labor arbiter's original
decision in accordance with its basic component parts as we
[T]he Labor Arbiter of origin, in cases involving monetary awards and discussed above. To reiterate, the first part contains the finding of
at all events, as far as practicable, shall embody in any such decision illegality and its monetary consequences; the second part is the
or order the detailed and full amount awarded. computation of the awards or monetary consequences of the illegal
dismissal, computed as of the time of the labor arbiter's original
decision.28
Clearly implied from this original computation is its currency up to
the finality of the labor arbiter's decision. As we noted above, this
implication is apparent from the terms of the computation itself, and Consequently, from the above disquisitions, under the terms of the
no question would have arisen had the parties terminated the case decision which is sought to be executed by the petitioner, no
and implemented the decision at that point. essential change is made by a recomputation as this step is a
necessary consequence that flows from the nature of the illegality of
dismissal declared by the Labor Arbiter in that decision. 29 A
However, the petitioner disagreed with the labor arbiter's findings on recomputation (or an original computation, if no previous
all counts - i.e., on the finding of illegality as well as on all the computation has been made) is a part of the law – specifically, Article
consequent awards made. Hence, the petitioner appealed the case to 279 of the Labor Code and the established jurisprudence on this
the NLRC which, in turn, affirmed the labor arbiter's decision. By provision – that is read into the decision. By the nature of an illegal
law, the NLRC decision is final, reviewable only by the CA on dismissal case, the reliefs continue to add up until full satisfaction,
jurisdictional grounds. as expressed under Article 279 of the Labor Code. The
recomputation of the consequences of illegal dismissal upon
The petitioner appropriately sought to nullify the NLRC decision on execution of the decision does not constitute an alteration or
jurisdictional grounds through a timely filed Rule 65 petition for amendment of the final decision being implemented. The illegal
certiorari. The CA decision, finding that NLRC exceeded its authority dismissal ruling stands; only the computation of monetary
in affirming the payment of 13th month pay and indemnity, lapsed to consequences of this dismissal is affected, and this is not a violation
finality and was subsequently returned to the labor arbiter of origin of the principle of immutability of final judgments. 30
for execution.
That the amount respondents shall now pay has greatly increased is
It was at this point that the present case arose. Focusing on the core a consequence that it cannot avoid as it is the risk that it ran when it
illegal dismissal portion of the original labor arbiter's decision, the continued to seek recourses against the Labor Arbiter's decision.
implementing labor arbiter ordered the award re-computed; he Article 279 provides for the consequences of illegal dismissal in no
apparently read the figures originally ordered to be paid to be the uncertain terms, qualified only by jurisprudence in its interpretation
computation due had the case been terminated and implemented at of when separation pay in lieu of reinstatement is allowed. When that
the labor arbiter's level. Thus, the labor arbiter re-computed the happens, the finality of the illegal dismissal decision becomes the
award to include the separation pay and the backwages due up to reckoning point instead of the reinstatement that the law decrees. In
the finality of the CA decision that fully terminated the case on the allowing separation pay, the final decision effectively declares that
merits. Unfortunately, the labor arbiter's approved computation went
the employment relationship ended so that separation pay and above, shall be 12% per annum from such finality until its
backwages are to be computed up to that point.31 satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.33
Finally, anent the payment of legal interest. In the landmark case of
Eastern Shipping Lines, Inc. v. Court of Appeals, 32 the Court laid Recently, however, the Bangko Sentral ng Pilipinas Monetary Board
down the guidelines regarding the manner of computing legal (BSP-MB), in its Resolution No. 796 dated May 16, 2013, approved
interest, to wit: the amendment of Section 234 of Circular No. 905, Series of 1982
and, accordingly, issued Circular No. 799, 35 Series of 2013, effective
II. With regard particularly to an award of interest in the concept of July 1, 2013, the pertinent portion of which reads:
actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows: The Monetary Board, in its Resolution No. 796 dated 16 May 2013,
approved the following revisions governing the rate of interest in the
1. When the obligation is breached, and it consists in the absence of stipulation in loan contracts, thereby amending Section 2
payment of a sum of money, i.e., a loan or forbearance of of Circular No. 905, Series of 1982:
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall Section 1. The rate of interest for the loan or forbearance of any
itself earn legal interest from the time it is judicially money, goods or credits and the rate allowed in judgments, in the
demanded. In the absence of stipulation, the rate of interest absence of an express contract as to such rate of interest, shall be
shall be 12% per annum to be computed from default, i.e., six percent (6%) per annum.
from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code. Section 2. In view of the above, Subsection X305.1 36 of the Manual of
Regulations for Banks and Sections 4305Q.1, 37 4305S.338 and
2. When an obligation, not constituting a loan or forbearance 4303P.139 of the Manual of Regulations for Non-Bank Financial
of money, is breached, an interest on the amount of damages Institutions are hereby amended accordingly.
awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be This Circular shall take effect on 1 July 2013.
adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with Thus, from the foregoing, in the absence of an express stipulation as
reasonable certainty, the interest shall begin to run from the to the rate of interest that would govern the parties, the rate of legal
time the claim is made judicially or extrajudicially (Art. 1169, interest for loans or forbearance of any money, goods or credits and
Civil Code) but when such certainty cannot be so reasonably the rate allowed in judgments shall no longer be twelve percent (12%)
established at the time the demand is made, the interest per annum - as reflected in the case of Eastern Shipping Lines 40and
shall begin to run only from the date the judgment of the Subsection X305.1 of the Manual of Regulations for Banks and
court is made (at which time the quantification of damages Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of
may be deemed to have been reasonably ascertained). The Regulations for Non-Bank Financial Institutions, before its
actual base for the computation of legal interest shall, in any amendment by BSP-MB Circular No. 799 - but will now be six
case, be on the amount finally adjudged. percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively
and not retroactively. Consequently, the twelve percent (12%) per
3. When the judgment of the court awarding a sum of money annum legal interest shall apply only until June 30, 2013. Come
becomes final and executory, the rate of legal interest, July 1, 2013 the new rate of six percent (6%) per annum shall be the
whether the case falls under paragraph 1 or paragraph 2, prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. When an obligation, not constituting a loan or forbearance of money,
and Eduardo B. Olaguer v. Bangko Sentral Monetary Board, 41 this is breached, an interest on the amount of damages awarded may be
Court affirmed the authority of the BSP-MB to set interest rates and imposed at the discretion of the court at the rate of 6% per annum.
to issue and enforce Circulars when it ruled that "the BSP-MB may No interest, however, shall be adjudged on unliquidated claims or
prescribe the maximum rate or rates of interest for all loans or damages, except when or until the demand can be established with
renewals thereof or the forbearance of any money, goods or credits, reasonable certainty. Accordingly, where the demand is established
including those for loans of low priority such as consumer loans, as with reasonable certainty, the interest shall begin to run from the
well as such loans made by pawnshops, finance companies and time the claim is made judicially or extrajudicially (Art. 1169, Civil
similar credit institutions. It even authorizes the BSP-MB to Code), but when such certainty cannot be so reasonably established
prescribe different maximum rate or rates for different types of at the time the demand is made, the interest shall begin to run only
borrowings, including deposits and deposit substitutes, or loans of from the date the judgment of the court is made (at which time the
financial intermediaries." quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest
Nonetheless, with regard to those judgments that have become final shall, in any case, be on the amount finally adjudged.
and executory prior to July 1, 2013, said judgments shall not be
disturbed and shall continue to be implemented applying the rate of When the judgment of the court awarding a sum of money becomes
interest fixed therein.1awp++i1 final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 6% per annum
To recapitulate and for future guidance, the guidelines laid down in from such finality until its satisfaction, this interim period being
the case of Eastern Shipping Lines 42 are accordingly modified to deemed to be by then an equivalent to a forbearance of credit.
embody BSP-MB Circular No. 799, as follows:
And, in addition to the above, judgments that have become final and
I. When an obligation, regardless of its source, i.e., law, executory prior to July 1, 2013, shall not be disturbed and shall
contracts, quasi-contracts, delicts or quasi-delicts is continue to be implemented applying the rate of interest fixed
breached, the contravenor can be held liable for damages. therein.
The provisions under Title XVIII on "Damages" of the Civil
Code govern in determining the measure of recoverable WHEREFORE, premises considered, the Decision dated September
damages.1âwphi1 23, 2008 of the Court of Appeals in CA-G.R. SP No. 98591, and the
Resolution dated October 9, 2009 are REVERSED and SET ASIDE.
II. With regard particularly to an award of interest in the Respondents are Ordered to Pay petitioner:
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as (1) backwages computed from the time petitioner was
follows: illegally dismissed on January 24, 1997 up to May 27, 2002,
when the Resolution of this Court in G.R. No. 151332
When the obligation is breached, and it consists in the payment of a became final and executory;
sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. (2) separation pay computed from August 1990 up to May
Furthermore, the interest due shall itself earn legal interest from the 27, 2002 at the rate of one month pay per year of service;
time it is judicially demanded. In the absence of stipulation, the rate and
of interest shall be 6% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the (3) interest of twelve percent (12%) per annum of the total
provisions of Article 1169 of the Civil Code. monetary awards, computed from May 27, 2002 to June 30,
2013 and six percent (6%) per annum from July 1, 2013 Same; Same; The Supreme Court does not consider the interest rate of 23% p.a.
until their full satisfaction. agreed upon by petitioners and respondent bank to be unconscionable.―In this
case, the interest rate agreed upon by the parties was only 23% p.a., or less than 2%
The Labor Arbiter is hereby ORDERED to make another per month, which are much lower than those interest rates agreed upon by the parties
recomputation of the total monetary benefits awarded and due to in the above-mentioned cases. Thus, there is no similarity of factual milieu for the
application of those cases. We do not consider the interest rate of 23% p.a. agreed
petitioner in accordance with this Decision.
upon by petitioners and respondent bank to be unconscionable.
SO ORDERED. Same; Same; A contract is the law between the parties and they are bound by
the stipulations therein.―Petitioners defaulted in the payment of their loan
Civil Law; Contracts; Parties are free to enter into agreements and stipulate as to obligation with respondent bank and their contract provided for the payment of 12%
the terms and conditions of their contract, but such freedom is not absolute; Hence, p.a. penalty charge, and since there was no showing that petitioners’ failure to
if the stipulations in the contract are valid, the parties thereto are bound to comply perform their obligation was due to force majeure or to respondent bank’s acts,
with them, since such contract is the law between the parties.―Parties are free to petitioners cannot now back out on their obligation to pay the penalty charge. A
enter into agreements and stipulate as to the terms and conditions of their contract, contract is the law between the parties and they are bound by the stipulations
but such freedom is not absolute. As Article 1306 of the Civil Code provides, “The therein.
contracting parties may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.” Hence, if the stipulations in the contract are
valid, the parties thereto are bound to comply with them, since such contract is the
law between the parties. In this case, petitioners and respondent bank agreed upon
on a 23% p.a. interest rate on the P1.7 million loan. However, petitioners now
contend that the interest rate of 23% p.a. imposed by respondent bank is excessive or
unconscionable, invoking our ruling in Medel v. Court of Appeals, 299 SCRA 481
(1998), Toring v. Spouses Ganzon-Olan, 568 SCRA 376 (2008), and Chua v. Timan,
562 SCRA 146 (2008).
SPOUSES FLORENTINO T. MALLARI and AUREA V. On February 25, 1992, respondent bank filed with the Regional Trial Court (RTC)
MALLARI, Petitioners, of Tarlac, a petition for the extrajudicial foreclosure of petitioners' mortgaged
vs. property for the satisfaction of the latter's obligation of ₱1,700,000.00 secured by
PRUDENTIAL BANK (now BANK OF THE PHILIPPINE such mortgage, thus, the auction sale was set by the Provincial Sheriff on April 23,
ISLANDS), Respondent. 1992.7
DECISION On April 10, 1992, respondent bank's Assistant Manager sent petitioners two (2)
separate Statements of Account as of April 23, 1992, i.e., the loan of ₱300,000.00
was increased to ₱594,043.54, while the ₱1,700,000.00 loan was already
PERALTA, J.: ₱3,171,836.18.
Before us is a Petition for Review on Certiorari under Rule 45, assailing the On April 20, 1992, petitioners filed a complaint for annulment of mortgage, deeds,
Decision1 dated June 17, 2010 and the Resolution 2 dated July 20, 2011 of the Court injunction, preliminary injunction, temporary restraining order and damages
of Appeals (CA) in CA-G.R. CV No. 65993. claiming, among others, that: (1) the ₱300,000.00 loan obligation should have been
considered paid, because the time deposit with the same amount under Certificate of
The antecedent facts are as follows: Time Deposit No. 284051 had already been assigned to respondent bank; (2)
respondent bank still added the ₱300,000.00 loan to the ₱1.7 million loan obligation
On December 11, 1984, petitioner Florentino T. Mallari (Florentino) obtained from for purposes of applying the proceeds of the auction sale; and (3) they realized that
respondent Prudential Bank-Tarlac Branch (respondent bank), a loan in the amount there were onerous terms and conditions imposed by respondent bank when it tried
of ₱300,000.00 as evidenced by Promissory Note (PN) No. BD 84-055. 3 Under the to unilaterally increase the charges and interest over and above those stipulated.
promissory note, the loan was subject to an interest rate of 21% per annum (p.a.), Petitioners asked the court to restrain respondent bank from proceeding with the
attorney's fees equivalent to 15% of the total amount due but not less than ₱200.00 scheduled foreclosure sale.
and, in case of default, a penalty and collection charges of 12% p.a. of the total
amount due. The loan had a maturity date of January 10, 1985, but was renewed up Respondent bank filed its Answer with counterclaim arguing that: (1) the interest
to February 17, 1985. Petitioner Florentino executed a Deed of Assignment 4 wherein rates were clearly provided in the promissory notes, which were used in computing
he authorized the respondent bank to pay his loan with his time deposit with the for interest charges; (2) as early as January 1986, petitioners' time deposit was made
latter in the amount of ₱300,000.00. to apply for the payment of interest of their ₱300,000.00 loan; and (3) the statement
of account as of April 10, 1992 provided for a computation of interest and penalty
On December 22, 1989, petitioners spouses Florentino and Aurea Mallari charges only from May 26, 1989, since the proceeds of petitioners' time deposit was
(petitioners) obtained again from respondent bank another loan of ₱1.7 million as applied to the payment of interest and penalty charges for the preceding period.
evidenced by PN No. BDS 606-89 5 with a maturity date of March 22, 1990. They Respondent bank also claimed that petitioners were fully apprised of the bank's
stipulated that the loan will bear 23% interest p.a., attorney's fees equivalent to 15% terms and conditions; and that the extrajudicial foreclosure was sought for the
p.a. of the total amount due, but not less than ₱200.00, and penalty and collection satisfaction of the second loan in the amount of ₱1.7 million covered by PN No.
charges of 12% p.a. Petitioners executed a Deed of Real Estate Mortgage 6 in favor BDS 606-89 and the real estate mortgage, and not the ₱300,000.00 loan covered by
another PN No. 84-055.
In an Order8 dated November 10, 1992, the RTC denied the Application for a Writ As to the ₱1.7 million loan which petitioners obtained from respondent bank after
of Preliminary Injunction. However, in petitioners' Supplemental Motion for the ₱300,000.00 loan, it had reached the amount of ₱3,171,836.18 per Statement of
Issuance of a Restraining Order and/or Preliminary Injunction to enjoin respondent Account dated April 27, 1993, which was computed based on the 23% interest rate
bank and the Provincial Sheriff from effecting or conducting the auction sale, the and 12% penalty charge agreed upon by the parties; and that contrary to petitioners'
RTC reversed itself and issued the restraining order in its Order 9 dated January 14, claim, respondent bank did not add the ₱300,000.00 loan to the ₱1.7 million loan
1993. obligation for purposes of applying the proceeds of the auction sale.
Respondent bank filed its Motion to Lift Restraining Order, which the RTC granted The RTC found no legal basis for petitioners' claim that since the total obligation
in its Order10 dated March 9, 1993. Respondent bank then proceeded with the was ₱1.7 million and respondent bank's bid price was ₱3.5 million, the latter should
extrajudicial foreclosure of the mortgaged property. On July 7, 1993, a Certificate of return to petitioners the difference of ₱1.8 million. It found that since petitioners'
Sale was issued to respondent bank being the highest bidder in the amount of obligation had reached ₱2,991,294.82 as of January 31, 1992, but the certificate of
₱3,500,000.00. sale was executed by the sheriff only on July 7, 1993, after the restraining order was
lifted, the stipulated interest and penalty charges from January 31, 1992 to July 7,
Subsequently, respondent bank filed a Motion to Dismiss Complaint 11 for failure to 1993 added to the loan already amounted to ₱3.5 million as of the auction sale.
prosecute action for unreasonable length of time to which petitioners filed their
Opposition.12 On November 19, 1998, the RTC issued its Order 13 denying The RTC found that the 23% interest rate p.a., which was then the prevailing loan
respondent bank's Motion to Dismiss Complaint. rate of interest could not be considered unconscionable, since banks are not
hospitable or equitable institutions but are entities formed primarily for profit. It also
Trial thereafter ensued. Petitioner Florentino was presented as the lone witness for found that Article 1229 of the Civil Code invoked by petitioners for the reduction of
the plaintiffs. Subsequently, respondent bank filed a Demurrer to Evidence. the interest was not applicable, since petitioners had not paid any single centavo of
the ₱1.7 million loan which showed they had not complied with any part of the
obligation.
On November 15, 1999, the RTC issued its Order14 granting respondent's demurrer
to evidence, the dispositive portion of which reads:
Petitioners appealed the RTC decision to the CA. A Comment was filed by
respondent bank and petitioners filed their Reply thereto.
WHEREFORE, this case is hereby ordered DISMISSED. Considering there is no
evidence of bad faith, the Court need not order the plaintiffs to pay damages under
the general concept that there should be no premium on the right to litigate. On June 17, 2010, the CA issued its assailed Decision, the dispositive portion of
which reads:
NO COSTS.
WHEREFORE, the instant appeal is hereby DENIED. The Order dated November
15, 1999 issued by the Regional Trial Court (RTC), Branch 64, Tarlac City, in Civil
SO ORDERED.15 Case No. 7550 is hereby AFFIRMED.16
The RTC found that as to the ₱300,000.00 loan, petitioners had assigned petitioner The CA found that the time deposit of ₱300,000.00 was equivalent only to the
Florentino's time deposit in the amount of ₱300,000.00 in favor of respondent bank, principal amount of the loan of ₱300,000.00 and would not be sufficient to cover the
which maturity coincided with petitioners' loan maturity. Thus, if the loan was interest, penalty, collection charges and attorney's fees agreed upon, thus, in the
unpaid, which was later extended to February 17, 1985, respondent bank should had Statement of Account dated April 10, 1992, the outstanding balance of petitioners'
just applied the time deposit to the loan. However, respondent bank did not, and loan was ₱594,043.54. It also found not persuasive petitioners' claim that the
allowed the loan interest to accumulate reaching the amount of ₱594,043.54 as of ₱300,000.00 loan was added to the ₱1.7 million loan. The CA, likewise, found that
April 10, 1992, hence, the amount of ₱292,600.00 as penalty charges was unjust and the interest rates and penalty charges imposed were not unconscionable and adopted
without basis. in toto the findings of the RTC on the matter.
Petitioners filed their Motion for Reconsideration, which the CA denied in a In this case, the interest rate agreed upon by the parties was only 23% p.a., or less
Resolution dated July 20, 2011. than 2% per month, which are much lower than those interest rates agreed upon by
the parties in the above-mentioned cases. Thus, there is no similarity of factual
Hence, petitioners filed this petition for review arguing that: milieu for the application of those cases.
THE HON. COURT OF APPEALS ERRED IN AFFIRMING THE ORDER OF We do not consider the interest rate of 23% p.a. agreed upon by petitioners and
THE RTC-BRANCH 64, TARLAC CITY, DATED NOVEMBER 15, 1999, respondent bank to be unconscionable.
DESPITE THE FACT THAT THE SAME IS CONTRARY TO SETTLED
JURISPRUDENCE ON THE MATTER.17 In Villanueva v. Court of Appeals, 25 where the issue raised was whether the 24%
p.a. stipulated interest rate is unreasonable under the circumstances, we answered in
The issue for resolution is whether the 23% p.a. interest rate and the 12% p.a. the negative and held:
penalty charge on petitioners' ₱1,700,000.00 loan to which they agreed upon is
excessive or unconscionable under the circumstances. In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino Savings and
Mortgage Bank, Dagupan City Branch, this Court held that the interest rate of 24%
Parties are free to enter into agreements and stipulate as to the terms and conditions per annum on a loan of ₱244,000.00, agreed upon by the parties, may not be
of their contract, but such freedom is not absolute. As Article 1306 of the Civil Code considered as unconscionable and excessive. As such, the Court ruled that the
provides, "The contracting parties may establish such stipulations, clauses, terms borrowers cannot renege on their obligation to comply with what is incumbent upon
and conditions as they may deem convenient, provided they are not contrary to law, them under the contract of loan as the said contract is the law between the parties
morals, good customs, public order, or public policy." Hence, if the stipulations in and they are bound by its stipulations.
the contract are valid, the parties thereto are bound to comply with them, since such
contract is the law between the parties. In this case, petitioners and respondent bank Also, in Garcia v. Court of Appeals, this Court sustained the agreement of the
agreed upon on a 23% p.a. interest rate on the ₱1.7 million loan. However, parties to a 24% per annum interest on an ₱8,649,250.00 loan finding the same to be
petitioners now contend that the interest rate of 23% p.a. imposed by respondent reasonable and clearly evidenced by the amended credit line agreement entered into
bank is excessive or unconscionable, invoking our ruling in Medel v. Court of by the parties as well as two promissory notes executed by the borrower in favor of
Appeals,18 Toring v. Spouses Ganzon-Olan,19 and Chua v. Timan.20 the lender.
We are not persuaded. Based on the above jurisprudence, the Court finds that the 24% per annum interest
rate, provided for in the subject mortgage contracts for a loan of ₱225,000.00, may
In Medel v. Court of Appeals, 21 we found the stipulated interest rate of 66% p.a. or a not be considered unconscionable. Moreover, considering that the mortgage
5.5% per month on a ₱500,000.00 loan excessive, unconscionable and exorbitant, agreement was freely entered into by both parties, the same is the law between them
hence, contrary to morals if not against the law and declared such stipulation void. and they are bound to comply with the provisions contained therein. 26
In Toring v. Spouses Ganzon-Olan, 22 the stipulated interest rates involved were 3%
and 3.81% per month on a ₱10 million loan, which we find under the circumstances Clearly, jurisprudence establish that the 24% p.a. stipulated interest rate was not
excessive and reduced the same to 1% per month. While in Chua v. Timan, 23 where considered unconscionable, thus, the 23% p.a. interest rate imposed on petitioners'
the stipulated interest rates were 7% and 5% a month, which are equivalent to 84% loan in this case can by no means be considered excessive or unconscionable.
and 60% p.a., respectively, we had reduced the same to 1% per month or 12% p.a.
We said that we need not unsettle the principle we had affirmed in a plethora of We also do not find the stipulated 12% p.a. penalty charge excessive or
cases that stipulated interest rates of 3% per month and higher are excessive, unconscionable.
unconscionable and exorbitant, hence, the stipulation was void for being contrary to
morals.24
In Ruiz v. CA,27 we held:
The 1% surcharge on the principal loan for every month of default is valid. This
surcharge or penalty stipulated in a loan agreement in case of default partakes of the
nature of liquidated damages under Art. 2227 of the New Civil Code, and is separate
and distinct from interest payment. Also referred to as a penalty clause, it is
expressly recognized by law. It is an accessory undertaking to assume greater Civil Law; Contracts; Interest Rates; In view of Central Bank Circular No.
liability on the part of an obligor in case of breach of an obligation. The obligor 905 s. 1982 which suspended the Usury Law ceiling on interest effective January 1,
would then be bound to pay the stipulated amount of indemnity without the 1983, parties to a loan agreement have wide latitude to stipulate interest rates; Such
necessity of proof on the existence and on the measure of damages caused by the stipulated interest rates may be declared as illegal if the same is unconscionable.—
breach. x x x28 And in Development Bank of the Philippines v. Family Foods In view of Central Bank Circular No. 905 s. 1982, which suspended the Usury Law
Manufacturing Co., Ltd.,29 we held that: ceiling on interest effective January 1, 1983, parties to a loan agreement have wide
latitude to stipulate interest rates. Nevertheless, such stipulated interest rates may be
x x x The enforcement of the penalty can be demanded by the creditor only when the declared as illegal if the same is unconscionable. There is certainly nothing in said
non-performance is due to the fault or fraud of the debtor. The non-performance circular which grants lenders carte blanche authority to raise interest rates to levels
gives rise to the presumption of fault; in order to avoid the payment of the penalty, which will either enslave their borrowers or lead to a hemorrhaging of their assets.
the debtor has the burden of proving an excuse - the failure of the performance was In fact, in Medel v. Court of Appeals, 299 SCRA 481 (1998), we annulled a
due to either force majeure or the acts of the creditor himself. 30 stipulated 5.5% per month or 66% per annuminterest with additional service charge
of 2% per annum and penalty charge of 1% per month on a P500,000.00 loan for
being excessive, iniquitous, unconscionable and exorbitant.
Here, petitioners defaulted in the payment of their loan obligation with respondent
bank and their contract provided for the payment of 12% p.a. penalty charge, and Same; Same; Same; A litigant may be denied relief by a court of equity on the
since there was no showing that petitioners' failure to perform their obligation was ground that has been inequitable, unfair, and dishonest or fraudulent or deceitful as
due to force majeure or to respondent bank's acts, petitioners cannot now back out to the controversy in issue.—After years of benefiting from the proceeds of the loans
on their obligation to pay the penalty charge. A contract is the law between the bearing an interest rate of 6% to 7% per month and paying for the same, Jocelyn
parties and they are bound by the stipulations therein. cannot now go to court to have the said interest rate annulled on the ground that it is
excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to the
WHEREFORE, the petition for review is DENIED. The Decision dated June 17, conscience of man. “This is so because among the maxims of equity are (1) he who
2010 and the Resolution dated July 20, 2011 of the Court of Appeals are hereby seeks equity must do equity, and (2) he who comes into equity must come with clean
AFFIRMED. hands. The latter is a frequently stated maxim which is also expressed in the
principle that he who has done inequity shall not have equity. It signifies that a
SO ORDERED. litigant may be denied relief by a court of equity on the ground that his conduct has
been inequitable, unfair and dishonest, or fraudulent, or deceitful as to the
controversy in issue.”
DIOSDADO M. PERALTA Same; Same; Estoppel; Essential Elements of Estoppel.—The essential elements
Associate Justice of estoppel are: (1) conduct amounting to false representation or concealment of
material facts or at least calculated to convey the impression that the facts are
otherwise than, and inconsistent with, those which the party subsequently attempts
to assert; (2) intent, or at least expectation, that this conduct shall be acted upon by,
or at least influence, the other party; and, (3) knowledge, actual or constructive, of
the real facts.
Same; Same; Same; A party to a contract cannot deny the validity thereof
after enjoying its benefits without outrage to one’s sense of justice and fairness;
Courts have no power to relieve parties from obligations voluntarily assumed,
simply because their contracts turned out to be disastrous or unwise investments.—
Jocelyn already availed herself of the benefits of the “Acknowledgment of Debt,”
the validity of which she now impugns. As aptly found by the RTC and the CA,
Jocelyn was making a business out of the loaned amounts. She was actually using MARILOU M. HYDEN, Promulgated:
the money to make advance payments for her prospective clients so that her sales Respondent. December 8, 2010
production would increase. Accordingly, she did not mind the 6% to 7% interest per x-------------------------------------------------------------------
month as she was getting a 50% rebate on her sales. Clearly, by her own acts, x
Jocelyn is estopped from impugning the validity of the “Acknowledgment of Debt.”
“[A] party to a contract cannot deny the validity thereof after enjoying its benefits DECISION
without outrage to one’s sense of justice and fairness.” “It is a long established
doctrine that the law does not relieve a party from the effects of an unwise, foolish DEL CASTILLO, J.:
or disastrous contract, entered into with all the required formalities and with full
awareness of what she was doing. Courts have no power to relieve parties from It is true that the imposition of an unconscionable rate of interest on a money debt is immoral
obligations voluntarily assumed, simply because their contracts turned out to be and unjust and the court may come to the aid of the aggrieved party to that contract. However,
disastrous or unwise investments.” before doing so, courts have to consider the settled principle that the law will not relieve a party
from the effects of an unwise, foolish or disastrous contract if such party had full awareness of
what she was doing.
This Petition for Review on Certiorari[1] assails the Decision[2] dated August 24, 2005 of the
Court of Appeals (CA) in CA-G.R. CV No. 79805, which affirmed the Decision dated March
10, 2003[3] of the Regional Trial Court (RTC), Branch 22, Cebu City in Civil Case No. CEB-
22867. Also assailed is the
Resolution dated March 8, 2006 denying the motion for reconsideration.
Factual Antecedents
Petitioner Jocelyn M. Toledo (Jocelyn), who was then the Vice-President of the College
Assurance Plan (CAP) Phils., Inc., obtained several loans from respondent Marilou M. Hyden
(Marilou). The transactions are briefly summarized below:
1) August 15, 1993
FIRST DIVISION P 30,000.00
2) April 21, 1994 100,000.00
JOCELYN M. TOLEDO , G.R. No. 172139 3) October 2, 1995 30,000.00
Petitioner, 4) October 9, 1995 30,000.00
5) May 22, 1997 100,000.00 with 7% monthly interest
Present: TOTAL AMOUNT P 290,000.00[4]
OF LOAN
CORONA, C. J., Chairperson, From August 15, 1993 up to December 31, 1997, Jocelyn had been religiously paying Marilou
- versus - LEONARDO-DE CASTRO, the stipulated monthly interest by issuing checks and depositing sums of money in the bank
DEL CASTILLO, account of the latter. However, the total principal amount of P290,000.00 remained
ABAD,⃰ and unpaid. Thus, in April 1998, Marilou visited Jocelyn in her office at CAP in Cebu City and
PEREZ, JJ.
asked Jocelyn and the other employees who were likewise indebted to her to acknowledge payment of P528,550.00 to interest alone is illegal, unfounded, unjust, oppressive and contrary
their debts. A document entitled Acknowledgment of Debt[5] for the amount of P290,000.00 to law because there was no written agreement to pay interest.
was signed by Jocelyn with two of her subordinates as witnesses. The said amount represents
the principal consolidated amount of the aforementioned previous debts due on December 25, On November 23, 1998, Marilou filed an Answer[7] with Special Affirmative
1998. Also on said occasion, Jocelyn issued five checks to Marilou representing renewal Defenses and Counterclaim alleging that Jocelyn voluntarily obtained the said loans knowing
payment of her five previous loans, viz: fully well that the interest rate was at 6% to 7% per month. In fact, a 6% to 7% advance interest
was already deducted from the loan amount given to Jocelyn.
Check No. 0010761 dated September 2, . . . . . . . . . P 30,000.00
1998 Ruling of the Regional Trial Court
Check No. 0010762 dated September 9, . . . . . . . . . 30,000.00
1998 The court a quo did not find any showing that Jocelyn was forced, threatened, or
Check No. 0010763 dated September 15, . . . . . . . . . 30,000.00 intimidated in signing the document referred to as Acknowledgment of Debt and in issuing the
1998 postdated checks. Thus, in its March 10, 2003 Decision the trial court ruled in favor of
Check No. 0010764 dated September 22, . . . . . . . . . 100,000.00 Marilou, viz:
1998
Check No. 0010765 dated September 25, . . . . . . . . . 100,000.00 WHEREFORE, premised on the foregoing, the Court hereby
1998 declares the document Acknowledgment of Debt valid and binding.
TOTAL P 290,000.00 PLAINTIFF is indebted to DEFENDANT [for] the amount of TWO
In June 1998, Jocelyn asked Marilou for the recall of Check No. 0010761 in the HUNDRED NINETY THOUSAND (P290,000.00) PESOS since
amount of P30,000.00 and replaced the same with six checks, in staggered amounts, namely: December 25, 1998 less the amount of EIGHTEEN THOUSAND
NINE HUNDRED (P18,900.00) PESOS, equivalent to the three checks
Check No. 0010494 dated July 2, 1998 ......... P 6,625.00 made good (P6,625.00 dated 07-02-1998; P6,300.00 dated 08-02-1998;
Check No. 0010495 dated August 2, 1998 . . . . . . . . . 6,300.00 and P5,975.00 dated 09-02-1998).
Check No. 0010496 dated September 2, . . . . . . . . . 5,975.00
1998 Consequently, PLAINTIFF is hereby ordered to pay
Check No. 0010497 dated October 2, . . . . . . . . . 6,500.00 DEFENDANT the amount of TWO HUNDRED SEVENTY ONE
1998 THOUSAND ONE HUNDRED (P271,100.00) PESOS due on
Check No. 0010498 dated November 2, . . . . . . . . . 5,325.00 December 25, 1998 with a 12% interest per annum or 1% interest per
1998 month until such time that the said amount shall have been fully paid.
Check No. 0010499 dated December 2, . . . . . . . . . 5,000.00
1998 No pronouncement as to costs.
TOTAL P 35,725.00
SO ORDERED.[8]
After honoring Check Nos. 0010494, 0010495 and 0010496, Jocelyn ordered the stop
payment on the remaining checks and on October 27, 1998, filed with the RTC of Cebu City a On March 26, 2003, Jocelyn filed an Earnest Motion for Reconsideration,[9] which was denied
complaint[6] against Marilou for Declaration of Nullity and Payment, Annulment, Sum of by the trial court in its Order[10] dated April 29, 2003 stating that it finds no sufficient reason to
Money, Injunction and Damages. disturb its March 10, 2003 Decision.
Jocelyn averred that Marilou forced, threatened and intimidated her into signing the Ruling of the Court of Appeals
Acknowledgment of Debt and at the same time forced her to issue the seven postdated
checks. She claimed that Marilou even threatened to sue her for violation of Batas
Pambansa (BP) Blg. 22 or the Bouncing Checks Law if she will not sign the said document On appeal, Jocelyn asserts that she had made payments in the total amount
and draw the above-mentioned checks. Jocelyn further claimed that the application of her total of P778,000.00 for a principal amount of loan of only P290,000.00. What is appalling,
according to Jocelyn, was that such payments covered only the interest because of the
excessive, iniquitous, unconscionable and exorbitant imposition of the 6% to 7% monthly On the other hand, Marilou would like this Court to consider the fact that the
interest. document referred to as Acknowledgment of Debt was executed in the safe surroundings of
On August 24, 2005, the CA issued its Decision which provides: the office of Jocelyn and it was witnessed by two of her staff. If at all there had been coercion,
then Jocelyn could have easily prevented her staff from affixing their signatures to said
WHEREFORE, premises considered, the Decision dated document. In fact, petitioner had admitted that she was the one who went to the tables of her
March 10, 2003 and the Order dated April 29, 2003, of the Regional staff to let them sign the said document.
Trial Court, 7th Judicial Region, Branch 22, Cebu City, in Civil Case
No. CEB-22867 are hereby AFFIRMED. No pronouncement as to Our Ruling
costs.
The petition is without merit.
SO ORDERED.[11]
The 6% to 7% interest per
month paid by Jocelyn is
The Motion for Reconsideration[12] filed by Jocelyn was denied by the CA through its not excessive under the
Resolution[13] dated March 8, 2006. circumstances of this case.
Issues
In view of Central Bank Circular No. 905 s. 1982, which suspended the Usury Law ceiling on
Hence, this petition raising the following issues: interest effective January 1, 1983, parties to a loan agreement have wide latitude to stipulate
interest rates. Nevertheless, such stipulated interest rates may be declared as illegal if the same
I. is unconscionable.[14] There is certainly nothing in said circular which grants lenders carte
Whether the CA gravely erred when it held that the imposition of blanche authority to raise interest rates to levels which will either enslave their borrowers or
interest at the rate of six percent (6%) to seven percent (7%) is not lead to a hemorrhaging of their assets.[15] In fact, in Medel v. Court of Appeals,[16] we annulled
contrary to law, morals, good customs, public order or public policy. a stipulated 5.5% per month or 66% per annum interest with additional service charge of 2%
per annum and penalty charge of 1% per month on a P500,000.00 loan for being excessive,
II. iniquitous, unconscionable and exorbitant.
Whether the CA gravely erred when it failed to declare that the
Acknowledgment of Debt is an inexistent contract that is void from the In this case, however, we cannot consider the disputed 6% to 7% monthly interest rate to be
very beginning pursuant to Article 1409 of the New Civil Code. iniquitous or unconscionable vis--vis the principle laid down in Medel. Noteworthy is the fact
that in Medel, the defendant-spouses were never able to pay their indebtedness from the very
beginning and when their obligations ballooned into a staggering sum, the creditors filed a
Petitioners Arguments collection case against them. In this case, there was no urgency of the need for money on the
part of Jocelyn, the debtor, which compelled her to enter into said loan transactions. She used
the money from the loans to make advance payments for prospective clients of educational
Jocelyn posits that the CA erred when it held that the imposition of interest at the rates of 6% to plans offered by her employer. In this way, her sales production would increase, thereby
7% per month is not contrary to law, not unconscionable and not contrary to morals. She entitling her to 50% rebate on her sales. This is the reason why she did not mind the 6% to 7%
likewise contends that the CA erred in ruling that the Acknowledgment of Debt is valid and monthly interest. Notably too, a business transaction of this nature between Jocelyn and
binding. According to Jocelyn, even assuming that the execution of said document was not Marilou continued for more than five years. Jocelyn religiously paid the agreed amount of
attended with force, threat and intimidation, the same must nevertheless be declared null and interest until she ordered for stop payment on some of the checks issued to Marilou. The
void for being contrary to law and public policy. This is borne out by the fact that the checks were in fact sufficiently funded when she ordered the stop payment and then filed a
payments in the total amount of P778,000.00 was applied to interest payment alone. This only case questioning the imposition of a 6% to 7% interest rate for being allegedly iniquitous or
proves that the transaction was iniquitous, excessive, oppressive and unconscionable. unconscionable and, hence, contrary to morals.
Respondents Arguments It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the
same carried with it an interest rate of 6% to 7% per month, yet she did not complain. In fact,
when she availed of said loans, an advance interest of 6% to 7% was already deducted from Art. 1335. There is violence when in order to wrest consent,
the loan amount, yet she never uttered a word of protest. serious or irresistible force is employed.
After years of benefiting from the proceeds of the loans bearing an interest rate of xxxx
6% to 7% per month and paying for the same, Jocelyn cannot now go to court to have the said
interest rate annulled on the ground that it is excessive, iniquitous, unconscionable, exorbitant, A threat to enforce ones claim through competent
and absolutely revolting to the conscience of man. This is so because among the maxims of authority, if the claim is just or legal, does not vitiate
equity are (1) he who seeks equity must do equity, and (2) he who comes into equity must consent. (Emphasis supplied.)
come with clean hands. The latter is a frequently stated maxim which is also expressed in the
principle that he who has done inequity shall not have equity. It signifies that a litigant may be
denied relief by a court of equity on the ground that his conduct has been inequitable, unfair Clearly, we cannot grant Jocelyn the relief she seeks.
and dishonest, or fraudulent, or deceitful as to the controversy in issue. [17]
As can be seen from the records of the case, Jocelyn has failed to prove her claim that she was
We are convinced that Jocelyn did not come to court for equitable relief with equity or with made to sign the document Acknowledgment of Debt and draw the seven Bank of Commerce
clean hands. It is patently clear from the above summary of the facts that the conduct of checks through force, threat and intimidation. As earlier stressed, said document was signed in
Jocelyn can by no means be characterized as nobly fair, just, and reasonable. This Court the office of Jocelyn, a high ranking executive of CAP, and it was Jocelyn herself who went to
likewise notes certain acts of Jocelyn before filing the case with the RTC. In September 1998, the table of her two subordinates to procure their signatures as witnesses to the execution of
she requested Marilou not to deposit her checks as she can cover the checks only the following said document. If indeed, she was forced to sign said document, then Jocelyn should have
month. On the next month, Jocelyn again requested for another extension of one month. It immediately taken the proper legal remedy. But she did not. Furthermore, it must be noted that
turned out that she was only sweet-talking Marilou into believing that she had no money at that after the execution of said document, Jocelyn honored the first three checks before filing the
time. But as testified by Serapio Romarate,[18] an employee of the Bank of Commerce where complaint with the RTC. If indeed she was forced she would never have made good on the
Jocelyn is one of their clients, there was an available balance of P276,203.03 in the latters first three checks.
account and yet she ordered for the stop payments of the seven checks which can actually be
covered by the available funds in said account. She then caught Marilou by surprise when she It is provided, as one of the conclusive presumptions under Rule 131, Section 2(a), of the Rules
surreptitiously filed a case for declaration of nullity of the document and for damages. of Court that, Whenever a party has, by his own declaration, act or omission, intentionally and
deliberately led another to believe a particular thing to be true, and to act upon such belief, he
The document cannot, in any litigation arising out of such declaration, act or omission, be permitted to falsify
Acknowledgment of Debt is it. This is known as the principle of estoppel.
valid and binding.
The essential elements of estoppel are: (1) conduct amounting to false representation or
concealment of material facts or at least calculated to convey the impression that the facts are
Jocelyn seeks for the nullification of the document entitled Acknowledgment of Debt and otherwise than, and inconsistent with, those which the party subsequently attempts to assert;
wants this Court to declare that she is no longer indebted to Marilou in the amount (2) intent, or at least expectation, that this conduct shall be acted upon by, or at least influence,
of P290,000.00 as she had already paid a total amount of P778,000.00. She claims that said the other party; and, (3) knowledge, actual or constructive, of the real facts.[20]
document is an inexistent contract that is void from the very beginning as clearly provided for
by Article 1409[19] of the New Civil Code. Here, it is uncontested that Jocelyn had in fact signed the Acknowledgment of Debt in April
1998 and two of her subordinates served as witnesses to its execution, knowing fully well the
Jocelyn further claims that she signed the said document and issued the seven postdated checks nature of the contract she was entering into. Next, Jocelyn issued five checks in favor of
because Marilou threatened to sue her for violation of BP Blg. 22. Marilou representing renewal payment of her loans amounting to P290,000.00. In June 1998,
she asked to recall Check No. 0010761 in the amount of P30,000.00 and replaced the same
Jocelyn is misguided. Even if there was indeed such threat made by Marilou, the with six checks, in staggered amounts. All these are indicia that Jocelyn treated the
same is not considered as threat that would vitiate consent. Article 1335 of the New Civil Code Acknowledgment of Debt as a valid and binding contract.
is very specific on this matter. It provides:
More significantly, Jocelyn already availed herself of the benefits of the Acknowledgment of
Debt, the validity of which she now impugns. As aptly found by the RTC and the CA, Jocelyn
was making a business out of the loaned amounts. She was actually using the money to make
advance payments for her prospective clients so that her sales production would
increase. Accordingly, she did not mind the 6% to 7% interest per month as she was getting a
50% rebate on her sales.
Clearly, by her own acts, Jocelyn is estopped from impugning the validity of the
Acknowledgment of Debt. [A] party to a contract cannot deny the validity thereof after
enjoying its benefits without outrage to ones sense of justice and fairness. [21] It is a long
established doctrine that the law does not relieve a party from the effects of an unwise, foolish
or disastrous contract, entered into with all the required formalities and with full awareness of
what she was doing. Courts have no power to relieve parties from obligations voluntarily
assumed, simply because their contracts turned out to be disastrous or unwise investments.[22]
WHEREFORE, the instant petition for review on certiorari is DENIED. The Decision of
the Court of Appeals in CA-G.R. CV No. 79805 dated August 24, 2005 affirming the
Decision dated March 10, 2003 of the Regional Trial Court, Branch 22, Cebu City, in Civil
Case No. CEB-22867 is AFFIRMED.
SO ORDERED.
Corporation Law; Board of Directors; Under the Corporation Law, unless Corporation Law; Trust Fund Doctrine; Words and Phrases; Under the trust
otherwise provided, corporate powers are exercised by the Board of Directors.— fund doctrine, the capital stock, property, and other assets of a corporation are
The resolution of the petition hinges, in the main, on whether the advice in the letter regarded as equity in trust for the payment of corporate creditors which are
of Atty. Doce that Yamamoto may retrieve the machineries and equipment, which preferred over the stockholders in the distribution of corporate assets.—It is settled
admittedly were part of his investment, bound the corporation. The Court holds in that the property of a corporation is not the property of its stockholders or members.
the negative. Indeed, without a Board Resolution authorizing respondent Nishino to Under the trust fund doctrine, the capital stock, property, and other assets of a
act for and in behalf of the corporation, he cannot bind the latter. Under the corporation are regarded as equity in trust for the payment of corporate creditors
Corporation Law, unless otherwise provided, corporate powers are exercised by the which are preferred over the stockholders in the distribution of corporate assets. The
Board of Directors. distribution of corporate assets and property cannot be made to depend on the whims
and caprices of the stockholders, officers, or directors of the corporation unless the
Same; Doctrine of Piercing the Veil of Corporate Fiction; Elements.—While the indispensable conditions and procedures for the protection of corporate creditors are
veil of separate corporate personality may be pierced when the corporation is merely followed.
an adjunct, a business conduit, or alter ego of a person, the mere ownership by a
single stockholder of even all or nearly all of the capital stocks of a corporation is
not by itself a sufficient ground to disregard the separate corporate personality. The
elements determinative of the applicability of the doctrine of piercing the veil of
corporate fiction follow: “1. Control, not mere majority or complete stock control,
but complete domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own; 2. Such control must
have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in
contravention of the plaintiff’s legal rights; and 3. The aforesaid control and breach
of duty must proximately cause the injury or unjust loss complained of. The
absence of any one of these elements prevents “piercing the corporate veil.” In
applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the individual
defendant’s relationship to that operation.” (Italics in the original; emphasis and
underscoring supplied)
Same; Same; The Court, having made the observation that it was desirable
for the vendor to file a separate action to fix the period for the vendee’s obligation
to negotiate a road right of way, the Court finds it necessary to fix said period in
these proceedings.—After thorough review of the records of this case, we have
come to the conclusion that petitioners failed to demonstrate that the Court of
Appeals committed any reversible error in deciding the present controversy.
However, having made the observation that it was desirable for the Catungals to file
a separate action to fix the period for respondent Rodriguez’s obligation to negotiate FIRST DIVISION
a road right of way, the Court finds it necessary to fix said period in these
proceedings. It is but equitable for us to make a determination of the issue here to
obviate further delay and in line with the judicial policy of avoiding multiplicity of
suits. If still warranted, Rodriguez is given a period of thirty (30) days from the
finality of this decision to negotiate a road right of way. In the event no road right of ROLANDO T. CATUNGAL, JOSE G.R. No. 146839
way is secured by Rodriguez at the end of said period, the parties shall reassess and T. CATUNGAL, JR., CAROLYN T.
discuss other options as stipulated in paragraph 1(b) of the Conditional Deed of Sale CATUNGAL and ERLINDA
and, for this purpose, they are given a period of thirty (30) days to agree on a course CATUNGAL-WESSEL, Present:
of action. Should the discussions of the parties prove futile after the said thirty (30)- Petitioners,
day period, immediately upon the expiration of said period for discussion,
Rodriguez may (a) exercise his option to rescind the contract, subject to the return of CORONA, C.J.,
his downpayment, in accordance with the provisions of paragraphs 1(b) and 5 of the Chairperson,
Conditional Deed of Sale or (b) waive the road right of way and pay the balance of VELASCO, JR.,
the deducted purchase price as determined in the RTC Decision dated May 30, 1992. LEONARDO-DE CASTRO,
DEL CASTILLO, and
PEREZ, JJ.
- versus -
Promulgated:
March 23, 2011
ANGEL S. RODRIGUEZ,
Respondent. City. The said property was allegedly the exclusive paraphernal
property of Agapita.
x----------------------------------------------
-----x
On April 23, 1990, Agapita, with the consent of her husband Jose,
entered into a Contract to Sell[6] with respondent
Rodriguez. Subsequently, the Contract to Sell was purportedly
upgraded into a Conditional Deed of Sale [7] dated July 26, 1990
DECISION between the same parties. Both the Contract to Sell and the
Conditional Deed of Sale were annotated on the title.
LEONARDO-DE CASTRO, J.: The provisions of the Conditional Deed of Sale pertinent to the
present dispute are quoted below:
Before the Court is a Petition for Review on Certiorari, assailing the
following issuances of the Court of Appeals in CA-G.R. CV No. 40627 1. The VENDOR for and in consideration of the sum
consolidated with CA-G.R. SP No. 27565: (a) the August 8, 2000 of TWENTY[-]FIVE MILLION PESOS
Decision,[1] which affirmed the Decision[2] dated May 30, 1992 of the (P25,000,000.00) payable as follows:
Regional Trial Court (RTC), Branch 27 of Lapu-lapu City, Cebu in
Civil Case No. 2365-L, and (b) the January 30, 2001 Resolution,
[3]
denying herein petitioners motion for reconsideration of the August
8, 2000 Decision. a. FIVE HUNDRED THOUSAND PESOS
(P500,000.00) downpayment upon the signing of this
The relevant factual and procedural antecedents of this case are as agreement, receipt of which sum is hereby
follows: acknowledged in full from the VENDEE.
This controversy arose from a Complaint for Damages and Injunction b. The balance of TWENTY[-]FOUR MILLION FIVE
with Preliminary Injunction/Restraining Order[4] filed on December HUNDRED THOUSAND PESOS (P24,500,000.00)
10, 1990 by herein respondent Angel S. Rodriguez (Rodriguez), with shall be payable in five separate checks, made to the
the RTC, Branch 27, Lapu-lapu City, Cebu, docketed as Civil Case order of JOSE Ch. CATUNGAL, the first check shall
No. 2365-L against the spouses Agapita and Jose Catungal (the be for FOUR MILLION FIVE HUNDRED THOUSAND
spouses Catungal), the parents of petitioners. PESOS (P4,500,000.00) and the remaining balance
to be paid in four checks in the amounts of FIVE
MILLION PESOS (P5,000,000.00) each after the
VENDEE have (sic) successfully negotiated, secured
In the said Complaint, it was alleged that Agapita T. Catungal and provided a Road Right of Way consisting of 12
(Agapita) owned a parcel of land (Lot 10963) with an area of 65,246 meters in width cutting across Lot 10884 up to the
square meters, covered by Original Certificate of Title (OCT) No. national road, either by widening the existing Road
105[5] in her name situated in the Barrio of Talamban, Cebu
Right of Way or by securing a new Road Right of Way upon the event that the VENDOR shall have been
of 12 meters in width. If however said Road Right of able to sell the property to another party.[8]
Way could not be negotiated, the VENDEE shall give
notice to the VENDOR for them to reassess and solve
the problem by taking other options and should the
situation ultimately prove futile, he shall take steps
to rescind or cancel the herein Conditional Deed of
Sale. In accordance with the Conditional Deed of Sale, Rodriguez
purportedly secured the necessary surveys and plans and through
his efforts, the property was reclassified from agricultural land into
residential land which he claimed substantially increased the
c. That the access road or Road Right of Way leading propertys value. He likewise alleged that he actively negotiated for
to Lot 10963 shall be the responsibility of the the road right of way as stipulated in the contract. [9]
VENDEE to secure and any or all cost relative to the
acquisition thereof shall be borne solely by the
VENDEE. He shall, however, be accorded with
enough time necessary for the success of his Rodriguez further claimed that on August 31, 1990 the spouses
endeavor, granting him a free hand in negotiating for Catungal requested an advance of P5,000,000.00 on the purchase
the passage. price for personal reasons. Rodriquez allegedly refused on the ground
that the amount was substantial and was not due under the terms of
their agreement. Shortly after his refusal to pay the advance, he
purportedly learned that the Catungals were offering the property for
BY THESE PRESENTS, the VENDOR do hereby sale to third parties.[10]
agree to sell by way of herein CONDITIONAL DEED
OF SALE to VENDEE, his heirs, successors and
assigns, the real property described in the Original
Certificate of Title No. 105 x x x. Thereafter, Rodriguez received letters dated October 22, 1990,
[11]
October 24, 1990[12] and October 29, 1990,[13] all signed by Jose
Catungal who was a lawyer, essentially demanding that the former
make up his mind about buying the land or exercising his option to
xxxx buy because the spouses Catungal allegedly received other offers and
they needed money to pay for personal obligations and for investing
in other properties/business ventures. Should Rodriguez fail to
exercise his option to buy the land, the Catungals warned that they
5. That the VENDEE has the option to rescind the would consider the contract cancelled and that they were free to look
sale. In the event the VENDEE exercises his option for other buyers.
to rescind the herein Conditional Deed of Sale, the
VENDEE shall notify the VENDOR by way of a
written notice relinquishing his rights over the
property. The VENDEE shall then be reimbursed by In a letter dated November 4, 1990, [14] Rodriguez registered his
the VENDOR the sum of FIVE HUNDRED objections to what he termed the Catungals unwarranted demands
THOUSAND PESOS (P500,000.00) representing the in view of the terms of the Conditional Deed of Sale which allowed
downpayment, interest free, payable but contingent him sufficient time to negotiate a road right of way and granted him,
the vendee, the exclusive right to rescind the contract. Still, on
November 15, 1990, Rodriguez purportedly received a letter dated Agreement and their performance of acts in violation
November 9, 1990[15] from Atty. Catungal, stating that the contract or disregard of the said Agreement;
had been cancelled and terminated.
Moral damages in the amount
Contending that the Catungals unilateral rescission of the of P200,000.00;
Conditional Deed of Sale was unjustified, arbitrary and unwarranted,
Rodriquez prayed in his Complaint, that:
1. Upon the filing of this complaint, a restraining Exemplary damages in the amount
order be issued enjoining defendants [the spouses of P200,000.00; Expenses of litigation and attorneys
Catungal], their employees, agents, representatives fees in the amount of P100,000.00; and
or other persons acting in their behalf from offering
the property subject of this case for sale to third
persons; from entertaining offers or proposals by
third persons to purchase the said property; and, in Costs of suit.[16]
general, from performing acts in furtherance or
implementation of defendants rescission of their
Conditional Deed of Sale with plaintiff [Rodriguez].
On December 12, 1990, the trial court issued a temporary
2. After hearing, a writ of preliminary injunction be restraining order and set the application for a writ of preliminary
issued upon such reasonable bond as may be fixed injunction for hearing on December 21, 1990 with a directive to the
by the court enjoining defendants and other persons spouses Catungal to show cause within five days from notice why
acting in their behalf from performing any of the acts preliminary injunction should not be granted. The trial court likewise
mentioned in the next preceding paragraph. ordered that summons be served on them.[17]
On August 8, 2000, the Court of Appeals rendered a contract and were not entitled to relief for not having come to court
Decision in the consolidated cases CA-G.R. CV No. 40627 and CA- with clean hands.
G.R. SP No. 27565,[47] affirming the trial courts Decision.
The Court gave due course to the Petition [53] and the parties
In a Motion for Reconsideration dated August 21, 2000, filed their respective Memoranda.
[48]
counsel for the Catungals, Atty. Borromeo, argued for the first
time that paragraphs 1(b) and 5 [49] of the Conditional Deed of Sale,
whether taken separately or jointly, violated the principle of
mutuality of contracts under Article 1308 of the Civil Code and thus, The issues to be resolved in the case at bar can be summed
said contract was void ab initio. He adverted to the cases mentioned into two questions:
in his various citations of authorities to support his argument of
nullity of the contract and his position that this issue may be raised
for the first time on appeal.
I. Are petitioners allowed to raise their theory of
nullity of the Conditional Deed of Sale for the first
time on appeal?
Meanwhile, a Second Motion for Substitution [50] was filed by
Atty. Borromeo in view of the death of Jose Catungal.
In a Resolution dated January 30, 2001, the Court of Appeals II. Do paragraphs 1(b) and 5 of the Conditional
allowed the substitution of the deceased Agapita and Jose Catungal Deed of Sale violate the principle of mutuality of
by their surviving heirs and denied the motion for reconsideration for contracts under Article 1308 of the Civil Code?
lack of merit
On petitioners change of
Hence, the heirs of Agapita and Jose Catungal filed on theory
March 27, 2001 the present petition for review, [51] which essentially
argued that the Court of Appeals erred in not finding that
paragraphs 1(b) and/or 5 of the Conditional Deed of Sale, violated
the principle of mutuality of contracts under Article 1308 of the Civil Petitioners claimed that the Court of Appeals should have
Code. Thus, said contract was supposedly void ab initio and the reversed the trial courts Decision on the ground of the alleged nullity
Catungals rescission thereof was superfluous. of paragraphs 1(b) and 5 of the Conditional Deed of Sale
notwithstanding that the same was not raised as an error in their
appellants brief. Citing Catholic Bishop of Balanga v. Court of
Appeals,[54] petitioners argued in the Petition that this case falls
In his Comment,[52] Rodriguez highlighted that (a) petitioners under the following exceptions:
were raising new matters that cannot be passed upon on appeal; (b)
the validity of the Conditional Deed of Sale was already admitted and
petitioners cannot be allowed to change theories on appeal; (c) the
questioned paragraphs of the Conditional Deed of Sale were valid; (3) Matters not assigned as errors on appeal
and (d) petitioners were the ones who committed fraud and breach of but consideration of which is necessary in arriving at
a just decision and complete resolution of the case
[56]
or to serve the interest of justice or to avoid In Philippine National Construction Corporation v. Court of Appeals,
[57]
dispensing piecemeal justice; we held that [w]hen a party adopts a certain theory in the trial
court, he will not be permitted to change his theory on appeal, for to
permit him to do so would not only be unfair to the other party but it
would also be offensive to the basic rules of fair play, justice and due
(4) Matters not specifically assigned as process.[58]
errors on appeal but raised in the trial court and are
matters of record having some bearing on the issue
submitted which the parties failed to raise or which
the lower court ignored; We have also previously ruled that courts of justice have no
jurisdiction or power to decide a question not in issue. Thus, a
judgment that goes beyond the issues and purports to adjudicate
something on which the court did not hear the parties, is not only
(5) Matters not assigned as errors on appeal irregular but also extrajudicial and invalid. The rule rests on the
but closely related to an error assigned; and fundamental tenets of fair play.[59]
(6) Matters not assigned as errors but upon During the proceedings before the trial court, the spouses
which the determination of a question properly Catungal never claimed that the provisions in the Conditional Deed
assigned is dependent.[55] of Sale, stipulating that the payment of the balance of the purchase
price was contingent upon the successful negotiation of a road right
of way (paragraph 1[b]) and granting Rodriguez the option to rescind
(paragraph 5), were void for allegedly making the fulfillment of the
contract dependent solely on the will of Rodriguez.
At the outset, it should be noted that what the parties entered into is
a Conditional Deed of Sale, whereby the spouses Catungal agreed to
sell and Rodriguez agreed to buy Lot 10963 conditioned on the Art. 1545. Where the obligation of either party to a
payment of a certain price but the payment of the purchase price contract of sale is subject to any condition which is
was additionally made contingent on the successful negotiation of a not performed, such party may refuse to proceed
road right of way. It is elementary that [i]n conditional obligations, with the contract or he may waive performance of
the acquisition of rights, as well as the extinguishment or loss of the condition x x x.
those already acquired, shall depend upon the happening of the
event which constitutes the condition. [60]
remove the squatters from the property" within
the stipulated period gives petitioner the right to
Paragraph 1(b) of the Conditional Deed of Sale, stating that either refuse to proceed with the agreement or
respondent shall pay the balance of the purchase price when he has waive that condition in consonance with Article
successfully negotiated and secured a road right of way, is not a 1545 of the Civil Code. This option clearly belongs
condition on the perfection of the contract nor on the validity of the to petitioner and not to private respondent.
entire contract or its compliance as contemplated in Article 1308. It
is a condition imposed only on respondents obligation to pay the
remainder of the purchase price. In our view and applying Article
1182, such a condition is not purely potestative as petitioners We share the opinion of the appellate
contend. It is not dependent on the sole will of the debtor but also on court that the undertaking required of private
the will of third persons who own the adjacent land and from whom respondent does not constitute a "potestative
the road right of way shall be negotiated. In a manner of speaking, condition dependent solely on his will" that
such a condition is likewise dependent on chance as there is no might, otherwise, be void in accordance with
guarantee that respondent and the third party-landowners would Article 1182 of the Civil Code but a "mixed"
come to an agreement regarding the road right of way. This type of condition "dependent not on the will of the
mixed condition is expressly allowed under Article 1182 of the Civil vendor alone but also of third persons like the
Code. squatters and government agencies and
personnel concerned." We must hasten to add,
however, that where the so-called "potestative
condition" is imposed not on the birth of the
Analogous to the present case is Romero v. Court of Appeals, obligation but on its fulfillment, only the condition is
[62]
wherein the Court interpreted the legal effect of a condition in a avoided, leaving unaffected the obligation itself.
deed of sale that the balance of the purchase price would be paid by [63]
(Emphases supplied.)
the vendee when the vendor has successfully ejected the informal
settlers occupying the property. In Romero, we found that such a
condition did not affect the perfection of the contract but only
imposed a condition on the fulfillment of the obligation to pay the
balance of the purchase price, to wit:
From the provisions of the Conditional Deed of Sale subject
matter of this case, it was the vendee (Rodriguez) that had the
obligation to successfully negotiate and secure the road right of
From the moment the contract is perfected, way.However, in the decision of the trial court, which was affirmed
the parties are bound not only to the fulfillment of by the Court of Appeals, it was found that respondent Rodriguez
what has been expressly stipulated but also to all diligently exerted efforts to secure the road right of way but the
the consequences which, according to their nature, spouses Catungal, in bad faith, contributed to the collapse of the
may be in keeping with good faith, usage and law. negotiations for said road right of way. To quote from the trial courts
Under the agreement, private respondent is decision:
obligated to evict the squatters on the property. The
ejectment of the squatters is a condition the
operative act of which sets into motion the
period of compliance by petitioner of his own It is therefore apparent that the vendees
obligation, i.e., to pay the balance of the obligations (sic) to pay the balance of the purchase
purchase price. Private respondent's failure to price arises only when the road-right-of-way to the
property shall have been successfully negotiated, In all, we see no cogent reason to disturb the foregoing
secured and provided. In other words, the obligation factual findings of the trial court.
to pay the balance is conditioned upon the
acquisition of the road-right-of-way, in accordance
with paragraph 2 of Article 1181 of the New Civil
Code. Accordingly, an obligation dependent upon a Furthermore, it is evident from the language of paragraph
suspensive condition cannot be demanded until 1(b) that the condition precedent (for respondents obligation to pay
after the condition takes place because it is only the balance of the purchase price to arise) in itself partly involves an
after the fulfillment of the condition that the obligation to do, i.e., the undertaking of respondent to negotiate and
obligation arises. (Javier v[s] CA 183 SCRA) Exhibits secure a road right of way at his own expense. [65] It does not escape
H, D, P, R, T, FF and JJ show that plaintiff our notice as well, that far from disclaiming paragraph 1(b) as void, it
[Rodriguez] indeed was diligent in his efforts to was the Catungals contention before the trial court that said
negotiate for a road-right-of-way to the property. provision should be read in relation to paragraph 1(c) which stated:
The written offers, proposals and follow-up of his
proposals show that plaintiff [Rodriguez] went all out
in his efforts to immediately acquire an access road
to the property, even going to the extent of c. That the access road or Road Right of Way
offering P3,000.00 per square meter for the road lots leading to Lot 10963 shall be the responsibility of
(Exh. Q) from the original P550.00 per sq. meter. the VENDEE to secure and any or all cost relative to
This Court also notes that defendant (sic) [the the acquisition thereof shall be borne solely by the
Catungals] made misrepresentation in the VENDEE. He shall, however, be accorded with
negotiation they have entered into with enough time necessary for the success of his
plaintiff [Rodriguez]. (Exhs. F and G) The endeavor, granting him a free hand in negotiating
misrepresentation of defendant (sic) [the Catungals] for the passage.[66] (Emphasis supplied.)
as to the third lot (Lot 10986) to be part and parcel
of the subject property [(]Lot 10963) contributed in
defeating the plaintiffs [Rodriguezs] effort in
acquiring the road-right-of-way to the property.
Defendants [the Catungals] cannot now invoke
the non-fulfillment of the condition in the The Catungals interpretation of the foregoing stipulation was
contract as a ground for rescission when that Rodriguezs obligation to negotiate and secure a road right of
defendants [the Catungals] themselves are guilty way was one with a period and that period, i.e., enough time to
of preventing the fulfillment of such condition. negotiate, had already lapsed by the time they demanded the
payment of P5,000,000.00 from respondent. Even assuming
arguendo that the Catungals were correct that the respondents
obligation to negotiate a road right of way was one with an uncertain
From the foregoing, this Court is of the period, their rescission of the Conditional Deed of Sale would still be
considered view that rescission of the conditional unwarranted. Based on their own theory, the Catungals had a
deed of sale by the defendants is without any legal or remedy under Article 1197 of the Civil Code, which mandates:
factual basis.[64] x x x. (Emphases supplied.)
Art. 1197. If the obligation does not fix a
period, but from its nature and the circumstances it
can be inferred that a period was intended, the downpayment, interest free, payable but contingent
courts may fix the duration thereof. upon the event that the VENDOR shall have been
able to sell the property to another party.[67]
The courts shall also fix the duration of the
period when it depends upon the will of the debtor.
Reciprocal obligations are those which arise from the same cause,
The petitioner submits the following issues:
and in which each party is a debtor and a creditor of the other, such
that the obligation of one is dependent upon the obligation of the
a. Whether or not the petitioners are obligated to perform their other. They are to be performed simultaneously, so that the
obligations under the JVA, including that of providing performance of one is conditioned upon the simultaneous fulfillment
round-the-clock security for the subject properties, despite of the other. In reciprocal obligations, neither party incurs in delay if
respondents' failure or refusal to acknowledge, or perform the other does not comply or is not ready to comply in a proper
their reciprocal obligations there; manner with what is incumbent upon him. From the moment one of
the parties fulfills his obligation, delay by the other begins.
b. Whether or not the RTC gravely abused its discretion in
directing the petitioners to perform their obligations under xxxx
the JVA, including that of providing round-the-clock security
for the subject properties, although the JVA had been In reciprocal obligations, before a party can demand the performance
suspended due to the parties' disagreement as to how to of the obligation of the other, the former must also perform its own
implement the same; obligation. For its failure to turn over a complete project in
accordance with the terms and conditions of the installation all tenants, settlers, successful development of Take possession of
contracts, CIGI cannot demand for the payment of the contract price occupants, tillers, the Project the parcels of land
balance from AMC, which, in turn, cannot legally be ordered to cultivators of the Art. V par. 2 Art. III (j)
pay.25chanrobleslaw land in question. Pay real estate taxes Secure property
Art. II(c) from invasion of
The determination of default on the part of either of the parties Allow DEVELOPER to take squatters and other
depends on the terms of the JVA that clearly categorized the parties' possession of subject elements
several obligations into two types. property Art. III (c)
To negotiate with
The first type related to the continuous obligations that would be occupants
continuously performed from the moment of the execution of the JVA
until the parties shall have achieved the purpose of their joint DEVELOPER to pay Art. II(b) Art. V par. 2
venture. The continuous obligations under the JVA were as follows: and settle all Deliver any and all Pay real estate taxes
(1) the developer would secure the joint venture property from monetary claims of documents required for the Art. II(c)
unauthorized occupants;26 (2) the owner would allow the developer to all tenants, settlers, successful development of Take possession of
take possession of the joint venture property; 27 (3) the owner would occupants, tillers, the Project the parcels of land
deliver any and all documents necessary for the accomplishment of cultivators of the Art. V par. 2 Art. III (j)
each activity;28 and (4) both the developer and the owner would pay land. Pay real estate taxes Secure property
the real estate taxes.29chanroblesvirtuallawlibrary Art. VI from invasion of
Must consent on the squatters and other
The second type referred to the activity obligations. The following reasonableness of the elements
table shows the activity obligations of the parties under the JVA, to expenses. Art. III(a) par. 1
wit: Advance expense for
settlement and
relocation
SEQUENCE OF ACTIVITIES (Article XIV of the JVA) Art. III(a) par. 2
ACTIVITY OWNER DEVELOPER Deposit P10M in a
OBLIGATION OBLIGATION joint account of
parties.
Signing of JVA. Sign JVA Sign JVA
Art. II(b) Art. V par. 2 DEVELOPER to Art. II(b) Art. V par. 2
Deliver any and all Pay real estate relocate and Deliver any and all Pay real estate taxes
documents required for the taxes transfer all the documents required for the Art. III(c)
successful development of Art. IIIa par. 2 tenants, settlers, successful development of Take possession of
the Project Deposit P10M occupants, tillers, the Project the parcels of land
Art. V par. 2 cultivators of the Art. V par. 2 Art. III(j)
Pay real estate taxes land to their Pay real estate taxes Secure property
Art. II(g) relocation site, and Art. II(d) from invasion of
Warrant absolute shall endeavor to Agree to allocate and squatters and other
ownership fulfill the same and aggregate a resettlement elements
the two site within the property Art. III(a) par. 1
DEVELOPER to Art. II(b) Art. V par. 2 immediately subject to mutually Advance expense for
negotiate Deliver any and all Pay real estate taxes preceding accepted conditions. settlement and
immediately with documents required for the Art. II(c) paragraphs (b & c) Art. VI relocation
up to the extent of Must consent on the Art. III(a)par. 2 development plan
75% reasonableness of the Deposit P10M in a (within 6 months to
accomplishment expenses. joint account of one year from the
thereof within a OWNER and execution of the
period of one (1) DEVELOPER JVA)
year from date of Art. III(c)
DEVELOPER to Art. II(b) Art. V par. 2
execution of this Relocate the
apply for and Deliver any and all Pay real estate taxes
Agreement. The occupants
secure all documents required for the Art. II(c)
remaining 25% of
necessary successful development of Take possession of
the same
development the Project the parcels of land
requirements shall
permit, Art. V par. 2 Art. III (j)
be fully
performance Pay real estate taxes Secure property
accomplished
bonds, from invasion of
within another 6
environmental squatters and other
months from date
compliance elements
of expiration of the
certificate, license Art. III(f)
original one-year
to sell and all other Secure development
period.
related requirement permit, ECC,
DEVELOPER to Art. II(b) Art. V par. 2 from the pertinent License to Sell, etc.
apply for and Deliver any and all Pay real estate Municipal
secure exemption documents required for the taxes Government,
or conversion successful development of Art. II(c) DENR, HLURB and
permit and such the Project Take possession of other governmental
other related Art. V par. 2 the parcels of land agencies concerned
requirements Pay real estate taxes Art. III (j) within a period of 2
needed for the Art. II(f) Secure property years from date of
approval of Assist DEVELOPER secure from invasion of execution of this
exemption or exemption from CARL and squatters and other Agreement.
conversion conversion/reclassification elements
DEVELOPER Art. II(b) Art. V par. 2
application of the of subject property Art. III(a)
construction Deliver any and all Pay real estate taxes
land in question Art. III(b) Advance expenses
stage/ground documents required for the Art. II(c)
within a period of Give DEVELOPER for exemption,
breaking to successful development of Take possession of
one and a half (1 authority to apply for conversion, re-
commence after the Project the parcels of land
1/2) years from exemption, conversion and classification
release of DAR Art. V par. 2 Art. III (j)
date of execution of re-classification. expenses.
exemption permit Pay real estate taxes Secure property
this Agreement Art. VI Art.III(b) secure
or conversion from invasion of
subject to a six (6) Must consent on the exemption and
clearance and squatters and other
month extension. reasonableness of the conversion permit
approval of other elements
expenses.
required permits by Art. III(e)
DEVELOPER to lay Art.III(i) Art. III(d) pertinent agencies Mobilize
out a complete Give written conformity to Complete of the government. development work
Development Plan the development plan comprehensive and solely pay its
expenses payment for disturbance compensation, and to relocate the
Art. III(f) occupants to an area within the subject land, while the owner was
Develop the obliged to agree to and to allocate the resettlement site within the
property and solely property, and to approve the expenses to be incurred for the process.
pay its expenses on Should the owner fail to allocate the site for the resettlement, the
necessary permits obligation of the developer to relocate would not be demandable.
Conversely, should the developer fail to negotiate with the occupants,
DEVELOPER to Art. II(b) Art. V par. 2 the owner's obligation to allocate the resettlement site would not
secure approval of Deliver any and all Pay real estate taxes become due.
subdivision plan documents required for the Art. II(c)
and technical successful development of Take possession of As to the second activity (i.e., the completion of the development
description from the Project the parcels of land plan), the developer had the obligation to lay out the plan, but the
the Bureau of Art. V par. 2 Art. III (j) owner needed to conform to the plan before the same was finalized.
Lands based on the Pay real estate taxes Secure property Accordingly, the final development plan would not be generated
approved scheme Art. II(a) from invasion of should the owner fail to approve the lay-out plan; nor would the
and thereafter to Deliver titles to squatters and other owner be able to approve if no such plan had been initially laid out
petition, follow-up DEVELOPER elements by the developer.
and secure the Art. II(a) Art. III(k)
release of Execute Deed of Process titling of In each activity, the obligation of each party was dependent upon the
individual titles for Assignment lots obligation of the other. Although their obligations were to be
all lots in the Art. III(a) performed simultaneously, the performance of an activity obligation
project in the Pay all expenses for was still conditioned upon the fulfillment of the continuous
respective names of settlement of claims, obligation, and vice versa. Should either party cease to perform a
the parties form the relocation, application for continuous obligation, the other's subsequent activity obligation
register of deeds. exemption, conversion, re- would not accrue. Conversely, if an activity obligation was not
classification. performed by either party, the continuous obligation of the other
would cease to take effect. The performance of the continuous
Market and Sell the Fix selling date Fix selling date
property obligation was subject to the resolutory condition that
the precedent obligation of the other party, whether continuous or
Owner to activity, was fulfilled as it became due. Otherwise, the continuous
reimburse and pay obligation would be extinguished.
the DEVELOPER
According to Article 1184 of the Civil Code, the condition that some
event happen at a determinate time shall extinguish the obligation as
The activities under the JVA fell into seven major categories, soon as the time expires, or if it has become indubitable that the
specifically: (l)the relocation of the occupants; (2) the completion of event will not take place. Here, the common cause of the parties in
the development plan; (3) the securing of exemption and conversion entering into the joint venture was the development of the joint
permits; (4) the obtention of the development permits from venture property into the residential subdivision as to eventually
government agencies; (5) the development of the subject land; (6) the profit therefrom. Consequently, all of the obligations under the JVA
issuance of titles for the subdivided lots; and (7) the selling of the were subject to the happening of the complete development of the
subdivided lots and the reimbursement of the advances. joint venture property, or if it would become indubitable that the
completion would not take place, like when an obligation, whether
For the first activity (i.e., the relocation of the occupants), the continuous or activity, was not performed. Should any of the
developer was obliged to negotiate with the occupants, to advance obligations, whether continuous or activity, be not performed, all the
other remainingobligations would not ripen into demandable order of November 5, 2002, therefore, the RTC acted whimsically
obligations while those already performed would cease to take effect. because it did not first ascertain whether or not the precedent
This is because every single obligation of each party under the JVA reciprocal obligation of the owner upon which the demanded
rested on the common cause of profiting from the developed obligation of the developer was dependent had already been
subdivision. performed. Without such showing that the developer had ceased to
perform a continuous obligation to provide security over the joint
It appears that upon the execution of the JVA, the parties were venture property despite complete fulfillment by the owner of all its
performing their respective obligations until disagreement arose accrued obligations, the owner had no right to demand from the
between them that affected the subsequent performance of their developer the round-the-clock security over the 215 hectares of land.
accrued obligations. Being reciprocal in nature, their respective
obligations as the owner and the developer were dependent upon the The CA further gravely erred in characterizing the order for the
performance by the other of its obligations; hence, any claim of delay petitioners to implement the round-the-clock security provision of
or non-performance against the other could prosper only if the the JVA and the addendum as an established and undisputed
complaining party had faithfully complied with its own correlative interim measure that could be issued pending the resolution of the
obligation.30chanroblesvirtuallawlibrary case on the merits.
A respected commentator has cogently observed in this Apart from the provisional remedies expressly recognized and made
connection:31chanroblesvirtuallawlibrary available under Rule 56 to Rule 61 of the Rules of Court, the Court
has sanctioned only the issuance of the status quo ante order but
§ 135. Same; consequences of simultaneous performance. As a only to maintain the last, actual, peaceable and uncontested state of
consequence of the rule of simultaneous performance, if the party things that preceded the controversy.32 The eminent Justice Florenz
who has not performed his obligation demands performance from the D. Regalado,33 an authority on remedial law, has delineated the
other, the latter may interpose the defense of unfulfilled contract nature of the status quo ante order, and distinguished it from the
(exceptio non adimpleli contraclus) by virtue of which he cannot be provisional remedy of temporary restraining order, as follows:
obliged to perform while the other's obligation remains unfulfilled.
Hence, the Spanish Supreme Court has ruled that the non- There have been instances when the Supreme Court has issued
performance of one party is justified if based on the non-performance a status quo order which, as the very term connotes, is merely
of the other; that the party who has failed to perform cannot demand intended to maintain the last, actual, peaceable and uncontested
performance from the other; and that judicial approval is not state of things which preceded the controversy. This was resorted to
necessary to release a party from his obligation, the non-performance when the projected proceedings in the case made the conservation of
of the other being a sufficient defense against any demand for the status quo desirable or essential, but the affected party neither
performance by the guilty party. sought such relief or the allegations in his pleading did not
sufficiently make out a case for a temporary restraining order. The
Another consequence of simultaneous performance is the rule status quo order was thus issued motu proprio on equitable
of compensatio morae, that is to say that neither party incurs in considerations. Also, unlike a temporary restraining order or a
delay if the other does not or is not ready to comply in a proper preliminary injunction, a status quo order is more in the nature of a
manner with what is incumbent upon him. From the moment one of cease and desist order, since it neither directs the doing or undoing
the parties fulfills his obligations, delay by the other begins. of acts as in the case of prohibitory or mandatory injunctive relief.
The further distinction is provided by the present amendment in the
Yet, the record is bereft of the proof to support the lower courts' sense that, unlike the amended rule on restraining orders, a status
unanimous conclusion that the owner had already performed its quoorder does not require the posting of a bond.
correlative obligation under the JVA as to place itself in the position
to demand that the developer should already perform its obligation of The order of November 5, 2002, by directing the developer to provide
providing the round-the-clock security on the property. In issuing its sufficient round-the-clock security for the protection of the joint
venture property during the pendency of the case, was not of the statutory ground. (6 C. J., 89.) This distinction between jurisdiction
nature of the status quo ante order because the developer, as averred to issue the attachment as an ancillary remedy incident to the
in the complaint, had not yet provided a single security watchman to principal litigation is of importance; as a court's jurisdiction over the
secure the entire 215 hectares of land for several years. 34 Also, the main action may be complete, and yet it may lack authority to grant
owner stated in the comment to the petition that the developer had an attachment as ancillary to such action. This distinction between
dismissed all the security guards posted in the property since jurisdiction over the ancillary has been recognized by this court in
1997.35 At the time of the filing of the complaint for specific connection with actions involving the appointment of a receiver.
performance on February 29, 2000, therefore, the last actual, Thus in Rocha & Co. vs. Crossfield and Figueras (6 Phil. Rep., 355),
peaceable and uncontested state of things preceding the controversy a receiver had been appointed without legal justification. It was held
was the absence of such security, not the installation of the security that the order making the appointment was beyond the jurisdiction
personnel/measures. In fact, the failure of the developer to provide of the court; and though the court admittedly had jurisdiction of the
the round-the-clock security itself became the controversy that main cause, the order was vacated by this court upon application a
impelled the owner to bring the action against the petitioners. writ of certiorari. (See Blanco vs. Ambler, 3 Phil. Rep., 358, Blanco
vs. Ambler and McMicking 3 Phil. Rep., 735, Yangco vs. Rohde, 1
By preliminarily directing the developer to provide sufficient round- Phil. Rep., 404.)
the-clock security for the protection of the joint venture property
during the pendency of the case, the November 5, 2002 order of the By parity of reasoning it must follow that when a court issues a writ
RTC did not come under the category of the status quo ante order of attachment for which there is no statutory authority, it is acting
that would issue upon equitable consideration, or even of an irregularly and in excess of its jurisdiction, in the sense necessary to
injunctive relief that would issue under Rule 58 of the Rules of Court. justify the Supreme Court in granting relief by the writ of certiorari.
Hence, the issuance of the order constituted a blatant jurisdictional
error that needed to be excised. Verily, a jurisdictional error is one by WHEREFORE, the Court GRANTS the petition for review
which the act complained of was issued by the court without or in on certiorari; REVERSES and SETS ASIDE the decision promulgated
excess of jurisdiction. 36Without jurisdiction means that the court on April 27, 2005 and the resolution promulgated on September 12,
acted with absolute want of jurisdiction. Excess of jurisdiction means 2005; NULLIFIES the orders issued on November 5, 2002 and May
that the court has jurisdiction but has transcended the same or 19, 2003 in Civil Case No. 67813 by the Regional Trial Court, Branch
acted without any statutory authority.37chanroblesvirtuallawlibrary 67, in Pasig City; DIRECTS the Regional Trial Court, Branch 67, in
Pasig City to resume the proceedings in Civil Case No. 67813 with
Although the RTC undoubtedly had jurisdiction to hear and decide dispatch; and ORDERS the respondents to pay the costs of suit.
the principal action for specific performance as well as to act on the
motions submitted to it in the course of the proceedings, the SO ORDERED.cralawlawlibrary
distinction between jurisdiction over the case and jurisdiction to
issue an interlocutory order as an ancillary remedy incident to the Sereno, C.J., Leonardo-De Castro, Perez, and Perlas-Bernabe, JJ.,
principal action should be discerned. We have frequently declared concur.
that a court may have jurisdiction over the principal action but may
nevertheless act irregularly or in excess of its jurisdiction in the
course of its proceedings by the granting of an auxiliary
remedy.38 In Leung Ben v. O'Brien,39 for instance, this Court has thus
clarified:
Same; Same; In the award of government contracts, the law requires a Same; Same; Same; “Right to Match” and “Right to Top,” Distinguished.—
competitive public bidding, which aims to protect the public interest by giving the In contradistinction, the “right to match” and “right to top” can only be exercised
public the best possible advantages thru open competition.—In the award of once the best or highest bid is determined. The “right to match” grants the
government contracts, the law requires a competitive public bidding, which aims to beneficiary the right to offer the same amount as the highest bid to beat the highest
protect the public interest by giving the public the best possible advantages thru bidder, while the “right to top” accords the beneficiary the right to offer a higher
open competition. It is a mechanism that enables the government agency to avoid or amount to beat the highest bid.
preclude anomalies in the execution of public contracts.
Same; Same; Same; View that while the “right of first refusal” entails the
Velasco, Jr.,J., Concurring Opinion: right to be offered the project first, the “right to match” and “right to top” can be
Civil Law; Lease; Right of First Refusal; Bids and Bidding; Right to Top; seen as the right to be offered last.—While the “right of first refusal” entails the
View that jurisprudence is clear that “right to top” stipulations are weighed with right to be offered the project first, the “right to match” and “right to top” can be
the taint of invalidity for contravening the policy requiring government contracts to seen as the right to be offered last. Moreover, in exercising the right of first refusal,
be awarded through public bidding.—Jurisprudence is clear that “right to top” the contract price is dictated primarily by the bid documents and the offer by the
stipulations are weighed with the taint of invalidity for contravening the policy beneficiary need not exceed the minimum requirements set by the government. On
requiring government contracts to be awarded through public bidding. These clauses the other hand, the contract price, in the exercise of the right to match or right to top,
are cleansed of the stain only in the narrow instance wherein the right is founded on is dependent on the highest bid from the participants in the bidding process.
the beneficiary’s interest on the object over which the right is to be exercised, and
only when the government stands to benefit from the stipulation.
Same; Same; Same; Same; View that the “right of first refusal,” as the
phrase itself connotes, requires that the contract be offered first to the beneficiary
before being offered to the public.—The “right of first refusal,” as the phrase itself
connotes, requires that the contract be offered first to the beneficiary before being
offered to the public. In order to have full compliance with the contractual right SPECIAL THIRD DIVISION
granting a party the first option to purchase, the sale of the properties for the price
for which they were finally sold to a third person should have likewise been first G.R. No. 212686, October 05, 2016
offered to the former. Further, there should be identity of the terms and conditions to
be offered to the buyer holding a right of first refusal if such right is not to be
SERGIO R. OSMEÑA III, Petitioner, v. POWER SECTOR ASSETS
rendered illusory.
AND LIABILITIES MANAGEMENT CORPORATION, EMMANUEL R.
LEDESMA, JR., SPC POWER CORPORATION, AND THERMA
Same; Same; Same; Same; View that public bidding is an essential first step
POWER VISAYAS, INC., Respondents.
in the exercise of the right of first refusal because it is only after the public bidding
that the Government will have basis with which to offer the beneficiary the option to
accept or reject the terms of the subject of procurement.—The concept of “right of RESOLUTION
first refusal” is not irreconcilable with the national policy requiring government
disposition to be subject to public bidding. In fact, public bidding is an essential first VELASCO JR., J.:
step in the exercise of the right because it is only after the public bidding that the
Government will have basis with which to offer the beneficiary the option to accept
or reject the terms of the subject of procurement. If the beneficiary so participates, For resolution of the Court is the Manifestation/Motion dated March
he will automatically be awarded the project so long as he is eligible and meets the 16, 2016 of private respondent Therma Power Visayas, Inc. (TPVI). As
minimum requirements outlined in the bid documents. In awarding the project, the TVPI expounded,1 a Notice of Award dated April 30, 2014 was issued
in its favor for the purchase of the Naga Power Plant Complex
(NPPC). The award, however, was cancelled because of the exercise the rights of SPC under Section 3.02 of the LLA is not legally and
by SPC Power Corporation (SPC) of its Right to Top. TVPI then validly consummated, upon notice by PSALM, the Winning Bidder
implores the Court to clarify the effect on the Notice of Award of the must enter into and fully and faithfully comply with the Asset
subsequent annulment of the said Right to Top in our September 28, Purchase Agreement."
2015 Decision, and prays for the reinstatement thereof. On the assumption that SPC validly exercised its Right to Top,
PSALM executed the NPPC-APA and NPPC-LLA in SPC's favor,
The Facts cancelling TPVI's Notice of Award in the process. The Right to Top
and the resultant agreements from its exercise, however, were
On December 27, 2013, the Board of Directors of the Power Sector subsequently nullified by the Court through its September 28, 2015
Assets and Liabilities Management Corporation (PSALM) approved Decision, the dispositive portion of which reads:
the commencement of the 3rd round of bidding for the sale of the WHEREFORE, the petition is hereby GIVEN DUE COURSE and the
153.1MW NPPC. Respondents SPC Power Corporation (SPC) and writ prayed for accordingly GRANTED. The right of first refusal (right
TVPI submitted their respective bids for the project. 2 The results of to top) granted to Saicon Power Corporation under the 2009 Naga
the bidding are as follows:3 LBGT-LLA is hereby declared NULL and VOID. Consequently, the
Asset Purchase Agreement (NPPC-APA) and Land Lease Agreement
TPVI SPC
(NPPC-LLA) executed by the Power Sector Assets and Liabilities
a. Purchase Price 441,191,500.00 211,391,388.88 Management Corporation and SPC are ANNULLED and SET ASIDE.
b. Rentals 588,735,000.00 588,735,000.00
No costs.
c. Option Price 58,873,500.00 58,873,500.00
SO ORDERED.
Financial Bid, PhP 1,088,800,000.00 858,999,888.88 Petitioner Sergio R. Osmeña III (Osmeña) and respondents PSALM
In due course, PSALM issued a Notice of Award dated April 30, 2014 and SPC filed their respective motions for reconsideration.
in favor of TPVI, declaring the latter as the Winning Bidder. The Meanwhile, respondent TPVI filed the instant Manifestation/Motion
execution of a Land Lease Agreement (LLA) and Assets Purchase wherein it maintained that the nullification of SPC's Right to Top
Agreement (APA) in favor of TPVI, however, was subject to SPC's non- calls for the reinstatement of the cancelled April 30, 2014 Notice of
exercise of its Right to Top. The pertinent portion of the Notice of Award in its favor.
Award provides:4
In accordance with the bidding procedures for the sale of the The Court resolved to deny with finality SPC's motion on December
153.1MW Naga Power Plant dated 6 February 2014, the Power Sector 9, 2015,5 and those of Osmeña and PSALM on April 6, 2016.
Assets and Liabilities Management Corporation (PSALM) Privatization Notwithstanding the denial with finality of their respective motions,
Bids and Awards Committee (PBAC) hereby issues this Notice of they were nevertheless required to comment on TPVI's
Award which declares that TPVI is the Winning Bidder for the Sale of Manifestation/Motion that remained unresolved.6 For their part,
NPP. respondents SPC and PSALM contend that the Decision resulted in
the material alteration of the terms of the public bidding and called
PSALM's execution of the APA, however, shall be subject to the for the conduct of another in its stead.
second paragraph of Section IB-20 (Award to the Winning Bidder) of
the Bidding Procedures, which provides that: "PSALM's entering into Our Ruling
the Asset Purchase Agreement with the Winning Bidder shall be
subject to SPC's rights under Section 3.02 of the LLA. Hence, if the TPVI's motion is impressed with merit.
exercise of the rights of SPC under Section 3.02 of the LLA is legally
and validly consummated, PSALM shall not enter into the Asset The Bidding Procedures contain a severability clause that allows
Purchase Agreement with the Winning Bidder. Should SPC not the award in favor of TPVI to survive
exercise its rights under Section 3.02 of the LLA or if the exercise of
Section IB-20 of the PSALM Bidding Procedures pertinently declared the third round of bidding as invalid. Clear from the
provides:7 language of the dispositive portion of the Court's Decision is that the
Anything in these bidding procedures notwithstanding, PSALM's nullification was limited only to SPC's Right to Top and the NPPC-
entering into the Asset Purchase Agreement with the Winning Bidder LLA and NPPC-APA in its favor, nothing more. The results of the
shall be subject to SPC's rights under Section 3.02 of the LLA. prior conducted bidding process should then be upheld, and the
Hence, if the exercise of the rights of SPC under Section 3.02 of the Notice of Award dated April 30, 2014, reinstated.
LLA is legally and validly consummated, PSALM shall not enter
into the Asset Purchase Agreement with the Winning Bidder. Should The Notice of Award dated April 30, 2014 is a perfected contract
SPC not exercise its rights under Section 3.02 of the LLA or if between PSALM and TPVI.9 As can be recalled, it states that the
the exercise of the rights of SPC under Section 3.02 of the LLA obligation of PSALM to execute the NPPC-APA and NPPC-LLA in favor
is not legally or validly consummated, upon Notice by PSALM, the of TPVI is conditioned on SPC's non-exercise or failure to legally and
Winning Bidder must enter into and fully and faithfully comply with validly exercise its Right to Top. This agreement is the law between
the Asset Purchase Agreement. (emphasis added) the contracting parties with which they are required to comply in
Tucked at the end of the guidelines, however, is a severability good faith.10chanrobleslaw
clause that reads:8
In view of the Court's Decision, however, the condition in the Notice
IB-28 General Conditions of Award should be deemed as not written, and the obligation to
award the NPPC-LLA and NPPC-APA to TPVI, due and demandable.
xxxx Furthermore, the mutual obligation of the parties to abide by their
covenant in good faith remains, entitling TPVI to demand compliance
26. If any one or more of the provisions of the Bidding from PSALM, including the award of the purchase contracts in its
Procedures or any part of the bidding package is held to be favor. This is but the proper application of the severability clause.
invalid, illegal or unenforceable, the validity, legality, or
enforceability of the remaining provisions will not be affected Articles 1181 and 1185 of the Civil Code find application in this
thereby and shall remain in full force and effect. (emphasis case
added)
Contrary to the postulations of respondents PSALM and SPC, the The award of the NPPC-LLA and NPPC-LLA to TPVI further finds
nullification of the Right to Top did not change the complexion of the justification under Arts. 1181 and 1185 of the Civil Code, viz:
bidding. By no means should this be considered an alteration of the Article 1181. In conditional obligations, the acquisition of rights, as
terms of the public bidding, let alone a material one, for it was clearly well as the extinguishment or loss of those already acquired, shall
a contingency expressly covered by the provisions of the Bidding depend upon the happening of the event which constitutes the
Procedure as evidenced by the severability clause. condition.
It is the non-occurrence or non-execution of the share purchase In the case at bar, respondents PSALM and SPC challenge the
agreement that would give rise to the obligation to both parties to conduct of the bidding process for allegedly violating the second
free each other from their respective undertakings. This includes principle. They posit that SPC's Right to Top prevented genuine
returning to each other all that they received in pursuit of entering competition by discouraging other corporations from submitting their
into the share purchase agreement. respective bids.
At the lapse of the 40-day period, the parties failed to enter into a PSALM and SPC's contentions are untenable.
share purchase agreement. This lapse is the first circumstance
provided for in Article 118.5 that gives rise to the obligation. Applying It bears stressing on the outset that the severability clause under IB-
Article 1185, the parties were then obligated to return to each other 28, paragraph 26 was known to the bidders, as it was embodied in
all that they had received in order to be freed from their respective the Bidding Procedures itself. Thus, any interested party had prior
undertakings. knowledge of the possibility of the eventual nullification of SPC's
Right to Top and of its repercussions.
However, the parties continued their negotiations after the lapse of
the 40-day period. They made subsequent transactions with the That aside, the allegation that the Right to Top discouraged parties
intention to enter into the share purchase agreement. Despite that, from participating in the bidding process is speculative. There is no
they still failed to enter into a share purchase agreement. guarantee that conducting another round of bidding will increase the
Communication between the parties ceased, and no further number of bidders.
transactions took place.
To put the situation into perspective, it is well to recall that SPC's
It became evident that, once again, the parties would not enter into right to top can be found in IB-20 of the Bidding Procedure. Thus,
the share purchase agreement. This is the second circumstance parties interested in buying the NPPC would only know of SPC's
provided for in Article 1185. Thus, the obligation to free each other Right to Top if they availed of the bid documents. There is no
from their respective undertakings remained. showing, however, that there is a disparity between the number of
In the case at bar, PSALM's obligation to award the contract in TPVI's parties who purchased the bid documents, on the one hand, and the
favor was dependent on the non-occurrence of an event: SPC's legal number of parties who actually submitted their respective bids, on
and valid exercise of its Right to Top. As phrased by PSALM: "the the other. Only then could PSALM and SPC have possibly, but not
approval of the sale to TPVI was a conditional one, the consummation even conclusively, established that the Right to Top dissuaded other
of which is dependent on the non-exercise by SPC of its right to parties from submitting their bids.
top."13 It has become apparent, however, that such event will never
occur. SPC can never legally and validly invoke its Right to Top in It is likewise worthy to note that this is already the third round of
view of its nullity. The condition, therefore, is deemed complied with bidding for the purchase of NPPC and in this round, only two
by operation of law, and the obligation to execute the purchase companies participated: respondents SPC and TPVI. It may then be
contracts in favor of TPVI, due and demandable. that the properties subjected to bidding are just really not attractive
assets to begin with so as to appeal to the public.
There was genuine competition when the public bidding was
conducted Furthermore, almost three (3) years had already elapsed since the
third round of bidding commenced, and even longer since the first.
In JG Summit Holdings, Inc. v. Court of Appeals,14 the Court NPPC's assets, by now, have already significantly depreciated and
may no longer fetch the same price as that offered by TPVI. It is not
entirely implausible, therefore, that the new bids would even be These clauses escape the taint of invalidity only in the narrow
lower than TPVI's winning bid. instance where the right of first refusal (or "right to top") is
founded on the beneficiary's "interest on the object over which
Similarly, there is no assurance that the new winning bid would be the right of first refusal is to be exercised" (such as a "tenant with
higher than TPVI's proposal, for it is possible that the Right to Top respect to the land occupied, a lessee vis-a-vis the property leased, a
even encouraged TPVI to maximize its bid in this third round. It stockholder as regards shares of stock, and a mortgagor in relation
could even be said that the existence of the Right to Top drove the to the subject of the mortgage") and the government stands to benefit
interested parties to bid an amount that would have been difficult, if from the stipulation. x x x (emphasis added)
not impossible, for SPC to meet, if not exceed. The above disquisition served as nothing less than a warning. The
clear message conveyed is that the advantage granted is generally
To pursue the argument that other parties were dissuaded by the viewed as invalid, in consonance with the more fundamental
Right to Top would be to consider its exercise as an absolute principle that all government procurement must undergo public
eventual certainty rather than a mere possibility. This would run bidding under equal terms. It must first be established that the
counter to the clear language of the Bidding Guidelines that the beneficiary has an existing interest in the object of the contract
contract will be awarded to the winning bidder "should SPC not before his preferential right can "escape the taint of invalidity.
exercise its right."
In this case, however, SPC had knowledge that it did not possess the
Neither can SPC claim that its Right to Top influenced its bid. That requisite subsisting interest in the NPPC project. It was then aware
SPC mistakenly rested chiefly on its Right to Top is no one's fault but that its Right to Top under the LBGT contract, which involves a
its own. To recall, SPC's Right to Top is embodied in Sec. 3.02 of the separate and distinct power plant from that in the NPPC project,
LBGT-LLA.15 The same document, however, likewise contains a could not possibly be able to withstand judicial scrutiny.
severability clause that mirrors that in paragraph 26 of IB-28 of the
Bidding Procedure:16 In view of the foregoing circumstances—the Severability Clause in
14.16. Severability Sec. 14.16 of the LBGT-LLA and in IB-28 of the Bidding Procedure,
the Court's warning in Stronghold, and SPC's knowledge of its lack of
If any one or more of the provisions of this Agreement is declared subsisting interest—SPC should, therefore, be bound by its initial
invalid or unenforceable in any respect under any Philippine Law, bid of P858,999,888.88. It was never deprived of a fair chance to bid,
the validity, legality or enforceability of the remaining provisions notwithstanding the Court's subsequent nullification of its Right to
contained herein shall not in any way be affected or impaired. Top. It was simply mistaken when it put much premium on its
Thus, SPC was fully aware of the possibility that the Land-Based Gas alleged Right to Top when it calculated its bid, even though it knew
Turbine (LBGT)-LLA provisions, the Right to Top included, would not or ought to have known of its defect.
necessarily be upheld by the courts at every turn.
SPC did not legally and validly exercise its Right to Top
Moreover, the Court was also not remiss in reminding bidders of
government contracts against their blind reliance on their alleged Regardless of whether or not the Right to Top was nullified, however,
preferential rights. As held in LTFRB v. Stronghold:17 the award of the purchase contracts to TPVI would still be in order,
In the field of public contracts, these stipulations are weighed with for it appears that SPC did not validly exercise its erstwhile
the taint of invalidity for contravening the policy requiring advantage.
government contracts to be awarded through public bidding. Unless
clearly falling under statutory exceptions, government contracts for The exercise of the Right to Top is no different from the manner of
the procurement of goods or services are required to undergo public perfecting any other sales contract. It is perfected by mere consent,
bidding "to protect the public interest by giving the public the best upon a meeting of the minds on the offer and the acceptance thereof
possible advantages thru open competition." x x x based on subject matter, price and terms of payment. 18chanrobleslaw
that the ascertainment of whether there is a meeting of minds on the
In the case at bar, PSALM Chief Emmanuel R. Ledesma, Jr., on April offer and acceptance depends on the circumstances surrounding the
29, 2014, wrote to SPC informing the latter that it has the right to case.
top the winning bid of TPVI for a 10-year lease on NPPC that will As applied, it can readily be seen that there is no identity between
expire on January 29, 2020. The letter likewise directed SPC to pay what was offered and what was accepted. There is a glaring
within thirty (30) days should it exercise the said right. This is difference not only in the term of the lease but also in its reckoning
constitutive of a defmite offer. period. It cannot then meet the criteria of an "unqualified acceptance"
as discussed in the Medrano case.
In reply, SPC wrote to PSALM in the following wise: 19
As SPC also participated in the bidding, the bid for the lease Furthermore, whether the lease should only be until 2020 or 25
component clearly computed on the basis of, and was for twenty-five years from closing date was an issue that reached the Office of the
(25) years. However, by now stating in your letter that the "lease Government Corporate Counsel (OGCC). Through Opinion No. 98,
has a Term often (10) years and will expire on 29 January Series of 2014,21 dated May 21, 2014, the OGCC opined in the
2020," SPC would effectively have less than six (6) years from today following wise:22
to use the property, which is extremely short for the lease component We agree with PSALM's position that SPC's Right to Top should be
computed and based on the twenty-five (25) year term that was consistent with the 2009 LLA provisions. It is established that the
offered during the bidding. While we are aware that the second 2009 LLA is the source of SPC's Right to Top and explicitly provides
paragraph of Section 3.02 of the LLA-LBGT provides that the that such right is to be exercised in accordance with its provisions.
property covered by the right to top will be "governed" by the LLA-
LBGT, we are of the reasonable belief that this does not include Section 3.02 of the 2009 LLA is clear. If SPC opts to exercise the
"Term" under Section 2.01 thereof considering that the "Draft Land Right to Top, the property will form part of the Leased Premises and
Lease Agreement for the 153.1-MW Naga Power Plant," which formed shall be subject to the LLA's provisions. Section 2.01 of the LLA is
part of the bid documents, specifically provided for a "Term" of explicit that the lease shall expire on 29 January 2020. Should SPC
twenty-five (25) years. opt to exercise the Right to Top, it must do so within the 2009 LLA's
parameters.
On the basis of the foregoing, SPC confirms that it is exercising its Thus, when the 30-day period to exercise the Right to Top was about
right to top the winning bid of TPVI and will pay the amount of to lapse, the standing offer to SPC was for a lease expiring on
P1,143,240,000.00 on the understanding that the Term of the January 29, 2020. Without SPC communicating its unqualified
lease is twenty-five (25) years from closing date. acceptance of such offer before the Right to Top expired, the award of
It is clear from the tenor of SPC's letter that its acceptance of the purchase contracts to TPVI became due.
PSALM's offer can never be categorized as unqualified. Instead, what
SPC communicated was its counter-offer for a longer lease period. Although the Department of Justice eventually found for SPC on
This is further made evident by our pronouncement in Development June 23, 2014,23 the 30-day period to exercise the Right to Top has
Bank of the Philippines v. Medrano(Medrano),20 to wit: already elapsed, and the said right, by then, could no longer be
Under the law, a contract is perfected by mere consent, that is, from validly or legally consummated. It was incumbent upon SPC to seek
the moment that there is a meeting of the offer and the acceptance judicial intervention to toll the running of the 30-day period pending
upon the thing and the cause that constitute the contract. The law the resolution of the issue. No recourse, however, was interposed by
requires that the offer must be certain and the acceptance absolute SPC.
and unqualified. An acceptance of an offer may be express and
implied; a qualified offer constitutes a counter-offer. Case law holds The finality of Decision prevents the Court from departing from
that an offer, to be considered certain, must be definite, while an the clear language of the ruling
acceptance is considered absolute and unqualified when it is
identical in all respects with that of the offer so as to produce Lastly, in treating the Manifestation/Motion, due regard must be
consent or a meeting of the minds. We have also previously held given to the finality of the judgment accorded to the Court's
September 28, 2015 ruling. Jurisprudence teaches that a decision spawn a multiplicity of suits and clogging of the court docket. Such
that has acquired finality becomes immutable and unalterable, and event is without a doubt contrary to the established policy of the
may no longer be modified in any respect, even if the modification is Court to provide in its rules of procedure a just, speedy, and
meant to correct erroneous conclusions of fact and law, and whether inexpensive disposition of every action and
it be made by the court that rendered it or by the Highest Court of proceeding.26chanrobleslaw
the land.24chanrobleslaw
WHEREFORE, premises considered, the Manifestation/Motion dated
The dispositive portion of the September 28, 2015 Decision is clear. March 16, 2016 of respondent TPVI is hereby GRANTED. The Entry
Only SPC's Right to Top and the documents executed pursuant to its of Judgment is LIFTED. The fallo of the September 28, 2015
exercise were nullified by the Court. The Court never invalidated Decision is hereby amended to include a directive that the April 30,
the entire bidding process since it was not established that there 2014 Notice of Award in favor of said respondent be REINSTATED,
was a deviation from the procedure outlined in Republic Act No. excluding the portion therein granting to SPC the Right to Top.
9184, otherwise known as the Government Procurement Reform Act, Respondent PSALM is further directed to execute the NPPC-APA and
nor from the bidding guidelines. The acts of the procuring agency NPPC-LLA in favor of respondent TPVI with dispatch. As amended,
prior to SPC's exercise of its Right to Top, therefore, subsist. the fallo of said Decision shall read:
Consequently, there is merit in TPVI's motion that the Notice of WHEREFORE, the petition is hereby GIVEN DUE COURSE and the
Award dated April 30, 2014 be reinstated and the purchase contracts writ prayed for accordingly GRANTED. The right of first refusal (right
in its favor ordered executed. to top) granted to Salcon Power Corporation (now SPC Power
Corporation) under the 2009 Naga LBGT-LLA is hereby
This should in no way be construed as a departure from the express declared NULL and VOID. Consequently, the Asset Purchase
wording of the Court's Decision. On the contrary, it adheres to the Agreement (NPPC-APA) and Land Lease Agreement (NPPC-LLA)
plain wording of its fallo: that only SPC's Right to Top and the NPPC- executed by the Power Sector Assets and Liabilities Management
LLA and NPPC-APA in its favor were declared null and void. Corporation and SPC are ANNULLED and SET ASIDE. The Notice of
Award dated April 30, 2014 in favor of Therma Power Visayas, Inc. is
Furthermore, it bears stressing in this case that the finality of the hereby REINSTATED, excluding the portion therein granting to SPC
September 28, 2015 Decision extends only to petitioner Osmeña and the Right to Top. Respondent PSALM is directed to execute the
respondents SPC and PSALM. Noticeably, while their respective NPPC-APA and NPPC-LLA in favor of TPVI with dispatch.
motions for reconsideration have already been denied with finality,
the Court has yet to resolve TPVI's pending Manifestation/Motion. No costs.
The Court even ordered the other parties to Comment thereon,
thereby reserving the power to grant the same. The Court can still, SO ORDERED.
therefore, grant TPVI's motion and uphold the validity of the prior- Perez, and Reyes, JJ., concur.
conducted bidding process. Peralta, J., I join the opinion of J. Jardeleza.
Jardeleza, J., see dissenting opinion.
In any event, the Court is not precluded from rendering a nunc pro
tunc judgment to amend the dispositive portion of the September 28,
2015 Decision for it to truly reflect the action of the
Court.25cralawredThe lack of directive in the fallo on how to proceed
from the nullification of SPC's Right to Top and its NPPC-APA and
NPPC-LLA contracts, nothing more, left the parties at a quandary,
prompting them to seek judicial intervention anew. The Court must,
therefore, supply herein what was inadvertently omitted in the
Decision—the natural and logical consequence of our September 28,
2015 ruling. Otherwise, a rejection of the plea of TPVI will only
Civil Law; Contracts; Sales; Contract of Sale and Contract to Sell CARPIO,*
Distinguished.—In a contract of sale, the seller conveys ownership of the property to - v e r s u s - VELASCO, JR.,
the buyer upon the perfection of the contract. Should the buyer default in the NACHURA and
payment of the purchase price, the seller may either sue for the collection thereof or PERALTA, JJ.
have the contract judicially resolved and set aside. The non-payment of the price is BENITA T. ONG.[1],
therefore a negative resolutory condition. On the other hand, a contract to sell is Respondent. Promulgated:
subject to a positive suspensive condition. The buyer does not acquire ownership of February 2,
the property until he fully pays the purchase price. For this reason, if the buyer 2010
defaults in the payment thereof, the seller can only sue for damages.
x--------------------------------------------------
Same; Same; Same; Seller obliged to transfer title over the properties and x
deliver the same to the buyer; Execution of a notarized deed of sale is equivalent to
the delivery of a thing sold.—Settled is the rule that the seller is obliged to transfer DECISION
title over the properties and deliver the same to the buyer. In this regard, Article CORONA, J.:
1498 of the Civil Code provides that, as a rule, the execution of a notarized deed of
sale is equivalent to the delivery of a thing sold.
On March 10, 1993, petitioner Raymundo S. de Leon sold three
Same; Same; Same; Condition regarding the approval of the assumption of parcels of land[2] with improvements situated in Antipolo, Rizal to
mortgage considered fulfilled as petitioner prevented its fulfillment by paying his respondent Benita T. Ong. As these properties were mortgaged to
outstanding obligation and taking back the certificates of title without even Real Savings and Loan Association, Incorporated (RSLAI), petitioner
notifying respondent.—Even assuming arguendo that the agreement of the parties and respondent executed a notarized deed of absolute sale with
was subject to the condition that RSLAI had to approve the assumption of mortgage, assumption of mortgage[3] stating:
the said condition was considered fulfilled as petitioner prevented its fulfillment by x x x x x x x x x
paying his outstanding obligation and taking back the certificates of title without
even notifying respondent. In this connection, Article 1186 of the Civil Code
That for and in consideration of the sum of ONE
provides: Article 1186. The condition shall be deemed fulfilled when the obligor
MILLION ONE HUNDRED THOUSAND PESOS (P1.1
voluntarily prevents its fulfillment.
million), Philippine currency, the receipt whereof is
hereby acknowledged from [RESPONDENT] to the
Same; Same; Same; Definition of a Buyer in Good Faith.—A purchaser in
entire satisfaction of
good faith is one who buys the property of another without notice that some other
person has a right to, or an interest in, such property and pays a full and fair price for [PETITIONER], said [PETITIONER] does hereby
the same at the time of such purchase, or before he has notice of some other person’s sell, transfer and convey in a manner absolute
claim or interest in the property. The law requires, on the part of the buyer, lack of and irrevocable, unto said [RESPONDENT], his
notice of a defect in the title of the seller and payment in full of the fair price at the heirs and assigns that certain real estate together
time of the sale or prior to having notice of any defect in the seller’s title. with the buildings and other improvements existing
thereon, situated in [Barrio] Mayamot, Antipolo,
Rizal under the following terms and conditions:
THIRD DIVISION
1. That upon full payment of
RAYMUNDO S. DE LEON, G.R. No. 170405 [respondent] of the amount of FOUR
Petitioner, HUNDRED FIFTEEN THOUSAND FIVE
Present: HUNDRED (P415,000), [petitioner] shall
execute and sign a deed of assumption
CORONA, J., Chairperson,
of mortgage in favor of [respondent] of mortgage), they only entered into a contract to sell. Inasmuch as
without any further cost whatsoever; respondent did apply for a loan from RSLAI, the condition did not
arise. Consequently, the sale was not perfected and he could freely
2. That [respondent] shall assume dispose of the properties. Furthermore, he made a counter-claim for
payment of the outstanding loan of SIX damages as respondent filed the complaint allegedly with gross and
HUNDRED EIGHTY FOUR THOUSAND evident bad faith.
FIVE HUNDRED PESOS (P684,500) with
REAL SAVINGS AND LOAN,[4] Cainta, Because respondent was a licensed real estate broker, the
Rizal (emphasis supplied) RTC concluded that she knew that the validity of the sale was
subject to a condition. The perfection of a contract of sale depended
x x x x x x x x x on RSLAIs approval of the assumption of mortgage. Since RSLAI did
not allow respondent to assume petitioners obligation, the RTC held
Pursuant to this deed, respondent gave petitioner P415,500 that the sale was never perfected.
as partial payment. Petitioner, on the other hand, handed the keys to
the properties and wrote a letter informing RSLAI of the sale and In a decision dated August 27, 1999, [7] the RTC dismissed
authorizing it to accept payment from respondent and release the the complaint for lack of cause of action and ordered respondent to
certificates of title. pay petitioner P100,000 moral damages, P20,000 attorneys fees and
the cost of suit.
Thereafter, respondent undertook repairs and made
improvements on the properties.[5] Respondent likewise informed Aggrieved, respondent appealed to the Court of Appeals (CA),
[8]
RSLAI of her agreement with petitioner for her to assume petitioners asserting that the court a quo erred in dismissing the complaint.
outstanding loan. RSLAI required her to undergo credit investigation.
The CA found that the March 10, 2003 contract executed by
Subsequently, respondent learned that petitioner again sold the parties did not impose any condition on the sale and held that
the same properties to one Leona Viloria after March 10, 1993 and the parties entered into a contract of sale. Consequently, because
changed the locks, rendering the keys he gave her useless. petitioner no longer owned the properties when he sold them to
Respondent thus proceeded to RSLAI to inquire about the credit Viloria, it declared the second sale void. Moreover, it found petitioner
investigation. However, she was informed that petitioner had already liable for moral and exemplary damages for fraudulently depriving
paid the amount due and had taken back the certificates of title. respondent of the properties.
Respondent persistently contacted petitioner but her efforts In a decision dated July 22, 2005, [9] the CA upheld the sale
proved futile. to respondent and nullified the sale to Viloria. It likewise ordered
respondent to reimburse petitioner P715,250 (or the amount he paid
On June 18, 1993, respondent filed a complaint for specific to RSLAI). Petitioner, on the other hand, was ordered to deliver the
performance, declaration of nullity of the second sale and certificates of titles to respondent and pay her P50,000 moral
damages[6] against petitioner and Viloria in the Regional Trial Court damages and P15,000 exemplary damages.
(RTC) of Antipolo, Rizal, Branch 74. She claimed that since petitioner Petitioner moved for reconsideration but it was denied in a resolution
had previously sold the properties to her on March 10, 1993, he no dated November 11, 2005. [10] Hence, this petition,[11] with the sole
longer had the right to sell the same to Viloria. Thus, petitioner issue being whether the parties entered into a contract of sale or a
fraudulently deprived her of the properties. contract to sell.
Petitioner, on the other hand, insisted that respondent did
not have a cause of action against him and consequently prayed for Petitioner insists that he entered into a contract to sell since the
the dismissal of the complaint. He claimed that since the transaction validity of the transaction was subject to a suspensive condition, that
was subject to a condition (i.e., that RSLAI approve the assumption is, the approval by RSLAI of respondents assumption of mortgage.
Because RSLAI did not allow respondent to assume his (petitioners) said terms and conditions pertained to the performance of the
obligation, the condition never materialized. Consequently, there was contract, not the perfection thereof nor the transfer of ownership.
no sale.
Settled is the rule that the seller is obliged to transfer title over the
Respondent, on the other hand, asserts that they entered into a properties and deliver the same to the buyer. [18] In this regard, Article
contract of sale as petitioner already conveyed full ownership of the 1498 of the Civil Code[19] provides that, as a rule, the execution of a
subject properties upon the execution of the deed. notarized deed of sale is equivalent to the delivery of a thing sold.
We modify the decision of the CA. In this instance, petitioner executed a notarized deed of
absolute sale in favor of respondent. Moreover, not only did
petitioner turn over the keys to the properties to respondent, he also
CONTRACT OF SALE OR CONTRACT TO SELL? authorized RSLAI to receive payment from respondent and release
his certificates of title to her. The totality of petitioners acts clearly
indicates that he had unqualifiedly delivered and transferred
The RTC and the CA had conflicting interpretations of the March 10, ownership of the properties to respondent. Clearly, it was a contract
1993 deed. The RTC ruled that it was a contract to sell while the CA of sale the parties entered into.
held that it was a contract of sale.
Furthermore, even assuming arguendo that the agreement of
In a contract of sale, the seller conveys ownership of the the parties was subject to the condition that RSLAI had to approve
property to the buyer upon the perfection of the contract. Should the the assumption of mortgage, the said condition was considered
buyer default in the payment of the purchase price, the seller may fulfilled as petitioner prevented its fulfillment by paying his
either sue for the collection thereof or have the contract judicially outstanding obligation and taking back the certificates of title
resolved and set aside. The non-payment of the price is therefore a without even notifying respondent. In this connection, Article 1186 of
negative resolutory condition. [12] the Civil Code provides:
On the other hand, a contract to sell is subject to a positive Article 1186. The condition shall be deemed fulfilled
suspensive condition. The buyer does not acquire ownership of the when the obligor voluntarily prevents its fulfillment.
property until he fully pays the purchase price. For this reason, if the
buyer defaults in the payment thereof, the seller can only sue for
damages.[13]
VOID SALE OR DOUBLE SALE?
The deed executed by the parties (as previously quoted) stated that
petitioner sold the properties to respondent in a manner absolute and
irrevocable for a sum of P1.1 million.[14] With regard to the manner of Petitioner sold the same properties to two buyers, first to
payment, it required respondent to pay P415,500 in cash to respondent and then to Viloria on two separate occasions.
[20]
petitioner upon the execution of the deed, with the balance [15] payable However, the second sale was not void for the sole reason that
directly to RSLAI (on behalf of petitioner) within a reasonable time. petitioner had previously sold the same properties to respondent. On
[16]
Nothing in said instrument implied that petitioner reserved this account, the CA erred.
ownership of the properties until the full payment of the purchase
price.[17] On the contrary, the terms and conditions of the deed only This case involves a double sale as the disputed properties
affected the manner of payment, not the immediate transfer of were sold validly on two separate occasions by the same seller to the
ownership (upon the execution of the notarized contract) from two different buyers in good faith.
petitioner as seller to respondent as buyer. Otherwise stated, the
Article 1544 of the Civil Code provides:
Article 1544. If the same thing should have Article 1266 of the Civil Code provides:
been sold to different vendees, the ownership shall
be transferred to the person who may have first Article 1266. The debtor in obligations to do
taken possession thereof in good faith, if it should be shall be released when the prestation become legally
movable property. or physically impossible without the fault of the
obligor.
Should it be immovable property, the ownership
shall belong to the person acquiring it who in Since respondents obligation to assume petitioners outstanding
good faith first recorded it in the Registry of balance with RSLAI became impossible without her fault, she was
Property. released from the said obligation. Moreover, because petitioner
himself willfully prevented the condition vis--vis the payment of the
Should there be no inscription, the ownership remainder of the purchase price, the said condition is considered
shall pertain to the person who in good faith was fulfilled pursuant to Article 1186 of the Civil Code. For purposes,
first in the possession; and, in the absence therefore, of determining whether respondent was a purchaser in
thereof, to the person who presents the oldest good faith, she is deemed to have fully complied with the condition of
title, provided there is good faith. (emphasis the payment of the remainder of the purchase price.
supplied)
Respondent was not aware of any interest in or a claim on
This provision clearly states that the rules on double or multiple the properties other than the mortgage to RSLAI which
sales apply only to purchasers in good faith. Needless to say, it she undertook to assume. Moreover, Viloria bought the properties
disqualifies any purchaser in bad faith. from petitioner after the latter sold them to respondent. Respondent
was therefore a purchaser in good faith. Hence, the rules on double
A purchaser in good faith is one who buys the property of sale are applicable.
another without notice that some other person has a right to, or an Article 1544 of the Civil Code provides that when neither
interest in, such property and pays a full and fair price for the same buyer registered the sale of the properties with the registrar of deeds,
at the time of such purchase, or before he has notice of some other the one who took prior possession of the properties shall be the
persons claim or interest in the property. [21] The law requires, on the lawful owner thereof.
part of the buyer, lack of notice of a defect in the title of the seller
and payment in full of the fair price at the time of the sale or prior to In this instance, petitioner delivered the properties to
having notice of any defect in the sellers title. respondent when he executed the notarized deed [22] and handed over
to respondent the keys to the properties. For this reason, respondent
Was respondent a purchaser in good faith? Yes. took actual possession and exercised control thereof by making
repairs and improvements thereon. Clearly, the sale was perfected
Respondent purchased the properties, knowing they were and consummated on March 10, 1993. Thus, respondent became the
encumbered only by the mortgage to RSLAI. According to her lawful owner of the properties.
agreement with petitioner, respondent had the obligation to assume
the balance of petitioners outstanding obligation to RSLAI. Nonetheless, while the condition as to the payment of the
Consequently, respondent informed RSLAI of the sale and of her balance of the purchase price was deemed fulfilled, respondents
assumption of petitioners obligation. However, because petitioner obligation to pay it subsisted. Otherwise, she would be unjustly
surreptitiously paid his outstanding obligation and took back her enriched at the expense of petitioner.
certificates of title, petitioner himself rendered respondents
obligation to assume petitioners indebtedness to RSLAI impossible to Therefore, respondent must pay petitioner P684,500, the
perform. amount stated in the deed. This is because the provisions, terms and
conditions of the contract constitute the law between the parties.
Moreover, the deed itself provided that the assumption of mortgage
was without any further cost whatsoever. Petitioner, on the other
hand, must deliver the certificates of title to respondent. We likewise
affirm the award of damages.
WHEREFORE, the July 22, 2005 decision and November 11,
2005 resolution of the Court of Appeals in CA-G.R. CV No. 59748 are
hereby AFFIRMED with MODIFICATION insofar as respondent
Benita T. Ong is ordered to pay petitioner Raymundo de
Leon P684,500 representing the balance of the purchase price as
provided in their March 10, 1993 agreement.
Costs against petitioner.
SO ORDERED.
RENATO C. CORONA
Associate Justice
Chairperson
THIRD DIVISION charges were for the period of July 2003 to November 2003, and
were for a total amount of US$9,742.81.8
G.R. No. 199455, June 27, 2018
On December 15, 2003, Luwalhati and Eliza were in the Philippines.
FEDERAL EXPRESS CORPORATION, Petitioner, v. LUWALHATI R. As the monthly common charges on the Unit had become due, they
ANTONINO AND ELIZA BETTINA RICASA decided to send several Citibank checks to Veronica Z. Sison (Sison),
ANTONINO, Respondents. who was based in New York. Citibank checks allegedly amounting to
US$17,726.18 for the payment of monthly charges and
US$11,619.35 for the payment of real estate taxes were sent by
DECISION Luwalhati through FedEx with Account No. x2546-4948-1 and
Tracking No. 8442 4588 4268. The package was addressed to Sison
LEONEN, J.: who was tasked to deliver the checks payable to Maxwell-Kates, Inc.
and to the New York County Department of Finance. Sison allegedly
The duty of common carriers to observe extraordinary diligence in did not receive the package, resulting in the non-payment of
shipping goods does not terminate until delivery to the consignee or Luwalhati and Eliza's obligations and the foreclosure of the Unit. 9
to the specific person authorized to receive the shipped goods.
Failure to deliver to the person authorized to receive the goods is Upon learning that the checks were sent on December 15, 2003,
tantamount to loss of the goods, thereby engendering the common Sison contacted FedEx on February 9, 2004 to inquire about the
carrier's liability for loss. Ambiguities in contracts of carriage, which non-delivery. She was informed that the package was delivered to her
are contracts of adhesion, must be interpreted against the common neighbor but there was no signed receipt.10
carrier that prepared these contracts.
On March 14, 2004, Luwalhati and Eliza, through their counsel, sent
This resolves a Petition for Review on Certiorari 1 under Rule 45 of the a demand letter to FedEx for payment of damages due to the non-
1997 Rules of Civil Procedure praying that the assailed Court of delivery of the package, but FedEx refused to heed their
Appeals August 31, 2011 Decision2 and November 21, 2011 demand.11Hence, on April 5, 2004, they filed their Complaint 12 for
Resolution3 in CA-G.R. CV No. 91216 be reversed and set aside and damages.
that Luwalhati R. Antonino (Luwalhati) and Eliza Bettina Ricasa
Antonino (Eliza) be held liable on Federal Express Corporation's FedEx claimed that Luwalhati and Eliza "ha[d] no cause of action
(FedEx) counterclaim. against it because [they] failed to comply with a condition precedent,
that of filing a written notice of claim within the 45 calendar days
The assailed Court of Appeals August 31, 2011 Decision denied the from the acceptance of the shipment." 13 It added that it was absolved
appeal filed by FedEx and affirmed the May 8, 2008 Decision 4 of of liability as Luwalhati and Eliza shipped prohibited items and
Branch 217, Regional Trial Court, Quezon City, awarding moral and misdeclared these items as "documents." 14 It pointed to conditions
exemplary damages, and attorney's fees to Luwalhati and Eliza. 5 In under its Air Waybill prohibiting the "transportation of money
its assailed November 21, 2011 Resolution, the Court of Appeals (including but not limited to coins or negotiable instruments
denied FedEx's Motion for Reconsideration. 6 equivalent to cash such as endorsed stocks and bonds)." 15
Eliza was the owner of Unit 22-A (the Unit) in Allegro Condominium, In its May 8, 2008 Decision, 16 the Regional Trial Court ruled for
located at 62 West 62nd St., New York, United States. 7 In November Luwalhati and Eliza, awarding them moral and exemplary damages,
2003, monthly common charges on the Unit became due. These and attorney's fees.17
The Regional Trial Court found that Luwalhati failed to accurately the package in good condition and could not subsequently deny
declare the contents of the package as "checks."18 However, it ruled liability for loss.28 The Court of Appeals sustained the Regional Trial
that a check is not legal tender or a "negotiable instrument Court's conclusion that checks are not legal tender, and thus, not
equivalent to cash," as prohibited by the Air Waybill. 19 It explained covered by the Air Waybill's prohibition. 29 It further noted that an Air
that common carriers are presumed to be at fault whenever goods Waybill is a contract of adhesion and should be construed against
are lost.20 Luwalhati testified on the non-delivery of the package. the party that drafted it.30
FedEx, on the other hand, claimed that the shipment was released
without the signature of the actual recipient, as authorized by the The dispositive portion of the Court of Appeals August 31, 2011
shipper or recipient. However, it failed to show that this Decision read:
authorization was made; thus, it was still liable for the loss of the
package.21
WHEREFORE, premises considered, the present appeal is hereby
DENIED. The assailed May 08, 2008 Decision of the Regional Trial
On non-compliance with a condition precedent, it ruled that under Court, Branch 217, Quezon City in Civil case No. Q-04-52325 is
the Air Waybill, the prescriptive period for filing an action was AFFIRMED. Costs against the herein appellant.
"within two (2) years from the date of delivery of the shipment or
from the date on which the shipment should have been
delivered."22 Luwalhati and Eliza's demand letter made on March 11, SO ORDERED.31
2004 was within the two (2)-year period sanctioned by the Air
Waybill.23 The trial court also noted that they were given a "run- Following the Court of Appeals' denial 32 of its Motion for
around" by FedEx employees, and thus, were deemed to have Reconsideration, FedEx filed the present Petition.
complied with the filing of the formal claim. 24
For resolution of this Court is the sole issue of whether or not
The dispositive portion of the Regional Trial Court May 8, 2008 petitioner Federal Express Corporation may be held liable for
Decision read: damages on account of its failure to deliver the checks shipped by
respondents Luwalhati R. Antonino and Eliza Bettina Ricasa
WHEREFORE, judgment is hereby rendered in favor of plaintiffs Antonino to the consignee Veronica Sison.
Luwalhati R. Antonino and Eliza Bettina Ricasa Antonino ordering
the following: I
1) The amount of P200,000.00 by way of moral damages; Petitioner disclaims liability because of respondents' failure to
2) The amount of P100,000.00 by way of exemplary damages; and comply with a condition precedent, that is, the filing of a written
[3]) The amount of P150,000.00 as and for attorney's fees. Costs notice of a claim for non-delivery or misdelivery within 45 days from
against defendant. acceptance of the shipment.33 The Regional Trial Court found the
condition precedent to have been substantially complied with and
The counterclaim is ordered dismissed. attributed respondents' noncompliance to FedEx for giving them a
run-around.34 This Court affirms this finding.
SO ORDERED.25
A provision in a contract of carriage requiring the filing of a formal
claim within a specified period is a valid stipulation. Jurisprudence
In its assailed August 31, 2011 Decision, 26 the Court of Appeals maintains that compliance with this provision is a legitimate
affirmed the ruling of the Regional Trial Court. 27 According to it, by condition precedent to an action for damages arising from loss of the
accepting the package despite its supposed defect, FedEx was shipment:
deemed to have acquiesced to the transaction. Thus, it must deliver
More particularly, where the contract of shipment contains a there was substantial compliance with the period because of the
reasonable requirement of giving notice of loss of or injury to the zealous efforts demonstrated by Mejia in following up her
goods, the giving of such notice is a condition precedent to the action claim.40 These efforts coupled with Philippine Airlines' "tossing
for loss or injury or the right to enforce the carrier's liability. Such around the claim and leaving it unresolved for an indefinite period of
requirement is not an empty formalism. The fundamental reason or time" led this Court to deem the requisite period satisfied. 41 This is
purpose of such a stipulation is not to relieve the carrier from just pursuant to Article 1186 of the New Civil Code which provides that
liability, but reasonably to inform it that the shipment has been "[t]he condition shall be deemed fulfilled when the obligor voluntarily
damaged and that it is charged with liability therefor, and to give it prevents its fulfillment": 42
an opportunity to examine the nature and extent of the injury. This
protects the carrier by affording it an opportunity to make an Considering the abovementioned incident and private respondent
investigation of a claim while the matter is fresh and easily Mejia's own zealous efforts in following up the claim, it was clearly
investigated so as to safeguard itself from false and fraudulent not her fault that the letter of demand for damages could only be
claims.35 (Citation omitted) filed, after months of exasperating follow-up of the claim, on August
13, 1990. If there was any failure at all to file the formal claim within
Petitioner's Air Waybill stipulates the following on filing of claims: the prescriptive period contemplated in the air waybill, this was
largely because of PAL's own doing, the consequences of which
Claims for Loss, Damage, or Delay. All claims must be made in cannot, in all fairness, be attributed to private respondent.
writing and within strict time limits. See any applicable tariff, our
service guide or our standard conditions for carriage for details. Even if the claim for damages was conditioned on the timely filing of
a formal claim, 'under Article 1186 of the Civil Code that condition
The right to damages against us shall be extinguished unless an was deemed fulfilled, considering that the collective action of PAL's
action is brought within two (2) years from the date of delivery of the personnel in tossing around the claim and leaving it unresolved for
shipment or from the date on which the shipment should have been an indefinite period of time was tantamount to "voluntarily
delivered. preventing its fulfillment." On grounds of equity, the filing of the
baggage freight claim, which sufficiently informed PAL of the damage
sustained by private respondent's cargo, constituted substantial
Within forty-five (45) days after notification of the claim, it must be compliance with the requirement in the contract for the filing of a
documented by sending to us [all the] relevant information about it. 36 formal claim.43 (Citations omitted)
For their claim to prosper, respondents must, thus, surpass two (2) Here, the Court of Appeals detailed the efforts made by respondent
hurdles: first, the filing of their formal claim within 45 days; and Luwalhati and consignee Sison. It also noted petitioner's ambiguous
second, the subsequent filing of the action within two (2) years. and evasive responses, nonchalant handling of respondents'
concerns, and how these bogged down respondents' actions and
There is no dispute on respondents' compliance with the second impaired their compliance with the required 45-day period:
period as their Complaint was filed on April 5, 2004. 37
Anent the issues concerning lack of cause of action and their so-
In appraising respondents' compliance with the first condition, this called "run-around" matter, We uphold the lower court's finding that
Court is guided by settled standards in jurisprudence. the herein appellees complied with the requirement for the
immediate filing of a formal claim for damages as required in the Air
In Philippine Airlines, Inc. v. Court of Appeals, 38 Philippine Airlines Waybill or, at least, We find that there was substantial compliance
alleged that shipper Gilda Mejia (Mejia) failed to file a formal claim therewith. Luwalhati testified that the addressee, Veronica Z. Sison
within the period stated in the Air Waybill. 39 This Court ruled that promptly traced the whereabouts of the said package, but to no avail.
Her testimony narrated what happened thereafter, thus:
". . .
"COURT: All right. She was informed that it was lost. What steps "Q What did she report to you?
did you take to find out or to recover back this package?
"A She reported to me that first, she checked with the Fedex
"ATTY. ALENTAJAN: and the first answer was they were going to trace it. The
second answer was that, it was delivered to the lady, her
"Q What did you do to Fedex? neighbor and the neighbor completely denied it and as
". . . they show a signature that is not my signature, so the
next time she called again, another person answered. She
called to say that the neighbor did not receive and the
WITNESS: First, I asked the secretary here to call Fedex Manila and person on the other line I think she got his name, said
they said, the record show that it was sent to New York, that, it is because it is December and we usually do that
Your Honor. just leave it and then they cut the line and so I asked my
friend to issue a sworn statement in the form of affidavit
and have it notarized in the Philippine Embassy or
". . . Consulate, Sir. That is what she did.
ATTY. ALENTAJAN:
"Q After calling Fedex, what did Fedex do? "Q On your part here in the Philippines after doing that, after
instructing Veronica Sison, what else did you do because
of this violation?
"A None, sir. They washed their hands because according to
them it is New York because they have sent it. Their
records show that New York received it, Sir. "A I think the next step was to issue a demand letter
because any way I do not want to go to Court, it is so
hard, Sir."
"Q New York Fedex?
The foregoing event show Luwalhati's own ardent campaign in
following up the claim. To the Court's mind, it is beyond her control
"A Yes, Sir. why the demand letter for damages was only sent subsequent to her
infuriating follow-ups regarding the whereabouts of the said package.
We can surmise that if there was any omission at all to file the said
"Q Now what else did you do after that? claim within the prescriptive period provided for under the Air
Waybill it was mostly due to herein appellant's own behavior, the
outcome thereof cannot, by any chance, be imputed to the herein
"A And then I asked my friend Mrs. Veronica Sison to trace appellees.44 (Grammatical errors in the original)
it, Sir.
Petitioner has been unable to persuasively refute Luwalhati's
recollection of the efforts that she and Sison exerted, and of the
". . . responses it gave them. It instead insists that the 45-day period
stated in its Air Waybill is sacrosanct. This Court is unable to bring
itself to sustaining petitioner's appeal to a convenient reprieve. It is The responsibility of common carriers to exercise extraordinary
one with the Regional Trial Court and the Court of Appeals in diligence lasts from the time the goods are unconditionally placed in
stressing that respondents' inability to expediently file a formal claim their possession until they are delivered "to the consignee, or to the
can only be attributed to petitioner hampering its fulfillment. Thus, person who has a right to receive them." 49 Thus, part of the
respondents must be deemed to have substantially complied with the extraordinary responsibility of common carriers is the duty to ensure
requisite 45-day period for filing a formal claim. that shipments are received by none but "the person who has a right
to receive them."50 Common carriers must ascertain the identity of
II the recipient. Failing to deliver shipment to the designated recipient
amounts to a failure to deliver. The shipment shall then be
considered lost, and liability for this loss ensues.
The Civil Code mandates common carriers to observe extraordinary
diligence in caring for the goods they are transporting:
Petitioner is unable to prove that it exercised extraordinary diligence
in ensuring delivery of the package to its designated consignee. It
Article 1733. Common carriers, from the nature of their business claims to have made a delivery but it even admits that it was not to
and for reasons of public policy, are bound to observe extraordinary the designated consignee. It asserts instead that it was authorized to
diligence in the vigilance over the goods and for the safety of the release the package without the signature of the designated recipient
passengers transported by them, according to all the circumstances and that the neighbor of the consignee, one identified only as "LGAA
of each case. 385507," received it.51 This fails to impress.
"Extraordinary diligence is that extreme measure of care and caution The assertion that receipt was made by "LGAA 385507" amounts to
which persons of unusual prudence and circumspection use for little, if any, value in proving petitioner's successful discharge of its
securing and preserving their own property or rights." 45 Consistent duty. "LGAA 385507" is nothing but an alphanumeric code that
with the mandate of extraordinary diligence, the Civil Code stipulates outside of petitioner's personnel and internal systems signifies
that in case of loss or damage to goods, common carriers are nothing. This code does not represent a definite, readily identifiable
presumed to be negligent or at fault,46 except in the following person, contrary to how commonly accepted identifiers, such as
instances: numbers attached to official, public, or professional identifications
like social security numbers and professional license numbers,
(1) Flood, storm, earthquake, lightning, or other natural disaster or function. Reliance on this code is tantamount to reliance on nothing
calamity; more than petitioner's bare, self-serving allegations. Certainly, this
cannot satisfy the requisite of extraordinary diligence consummated
(2) Act of the public enemy in war, whether international or civil; through delivery to none but "the person who has a right to
(3) Act or omission of the shipper or owner of the goods; receive"52 the package.
(4) The character of the goods or defects in the packing or in the Given the circumstances in this case, the more reasonable
containers; conclusion is that the package was not delivered. The package
(5) Order or act or competent public authority. 47 shipped by respondents should then be considered lost, thereby
engendering the liability of a common carrier for this loss.
In all other cases, common carriers must prove that they exercised
Petitioner cannot but be liable for this loss. It failed to ensure that
extraordinary diligence in the performance of their duties, if they are
the package was delivered to the named consignee. It admitted to
to be absolved of liability.48
delivering to a mere neighbor. Even as it claimed this, it failed to
identify that neighbor.
III shall be legal tender in the Philippines for all debts, both public and
private: Provided, however, That, unless otherwise fixed by the
Petitioner further asserts that respondents violated the terms of the Monetary Board, coins shall be legal tender in amounts not
Air Waybill by shipping checks. It adds that this violation exempts it exceeding Fifty pesos (P50.00) for denomination of Twenty-five
from liability.53 centavos and above, and in amounts not exceeding Twenty pesos
(P20.00) for denominations of Ten centavos or less. 58
This is untenable.
It is settled in jurisprudence that checks, being only negotiable
instruments, are only substitutes for money and are not legal tender;
Petitioner's International Air Waybill states: more so when the check has a named payee and is not payable to
bearer. In Philippine Airlines, Inc. v. Court of Appeals,59 this Court
Items Not Acceptable for Transportation. We do not accept ruled that the payment of a check to the sheriff did not satisfy the
transportation of money (including but not limited to coins or judgment debt as checks are not considered legal tender. This has
negotiable instruments equivalent to cash such as endorsed stocks been maintained in other cases decided by this Court. In Cebu
and bonds). We exclude all liability for shipments of such items International Finance Corporation v. Court of Appeals,60 this Court
accepted by mistake. Other items may be accepted for carriage only held that the debts paid in a money market transaction through the
to limited destinations or under restricted conditions. We reserve the use of a check is not a valid tender of payment as a check is not legal
right to reject packages based upon these limitations or for reasons tender in the Philippines. Further, in Bank of the Philippine Islands
of safety or security. You may consult our Service Guide, Standard v. Court of Appeals,61 this Court held that "a check, whether a
Conditions of Carriage, or any applicable tariff for specific manager's check or ordinary check, is not legal tender." 62
details.54 (Emphasis in the original)
The Air Waybill's prohibition mentions "negotiable instruments" only
The prohibition has a singular object: money. What follows the in the course of making an example. Thus, they are not prohibited
phrase "transportation of money" is a phrase enclosed in items themselves. Moreover, the illustrative example does not even
parentheses, and commencing with the words "including but not pertain to negotiable instruments per se but to "negotiable
limited to." The additional phrase, enclosed as it is in parentheses, is instruments equivalent to cash."63
not the object of the prohibition, but merely a postscript to the word
"money." Moreover, its introductory words "including but not limited The checks involved here are payable to specific payees, Maxwell-
to" signify that the items that follow are illustrative examples; they Kates, Inc. and the New York County Department of Finance. 64 Thus,
are not qualifiers that are integral to or inseverable from "money." they are order instruments. They are not payable to their bearer,
Despite the utterance of the enclosed phrase, the singular i.e., bearer instruments. Order instruments differ from bearer
prohibition remains: money. instruments in their manner of negotiation:
Money is "what is generally acceptable in exchange for goods." 55 It Under Section 30 of the [Negotiable Instruments Law], an order
can take many forms, most commonly as coins and banknotes. instrument requires an indorsement from the payee or holder before
Despite its myriad forms, its key element is its general it may be validly negotiated. A bearer instrument, on the other hand,
acceptability.56 Laws usually define what can be considered as a does not require an indorsement to be validly negotiated. 65
generally acceptable medium of exchange. 57 In the Philippines,
Republic Act No. 7653, otherwise known as The New Central Bank
Act, defines "legal tender" as follows: There is no question that checks, whether payable to order or to
bearer, so long as they comply with the requirements under Section
1 of the Negotiable Instruments Law, are negotiable
All notes and coins issued by the Bangko Sentral shall be fully instruments.66 The more relevant consideration is whether checks
guaranteed by the Government of the Republic of the Philippines and
with a specified payee are negotiable instruments equivalent to cash, Velasco, Jr., (Chairperson), Bersamin, Martires, and Gesmundo, JJ.,
as contemplated in the example added to the Air Waybill's concur.
prohibition.
SO ORDERED.
Actions; A well-settled rule in procedural law is that the allegations in the
body of the pleading or the complaint, and not its title, determine the nature of an Corporations; Authorized Capital Stocks; Under the Corporation Code,
action.—A well-settled rule in procedural law is that the allegations in the body of before a stock corporation may be incorporated and registered, it is required that at
the pleading or the complaint, and not its title, determine the nature of an action. An least twenty-five percent (25%) of its authorized capital stock as stated in the
examination of Fong’s complaint shows that although it was labeled as an action articles of incorporation, be first subscribed at the time of incorporation, and at
for a sum of money and damages, it was actually a complaint for rescission. The least 25% of the total subscription, be paid upon subscription.—Under the
following allegations in the complaint support this finding: 9. Notwithstanding the Corporation Code, before a stock corporation may be incorporated and registered, it
aforesaid remittances, defendant failed for an unreasonable length of time to is required that at least twenty-five percent (25%) of its authorized capital stock as
submit a valuation of the equipment of D.C. Danton and Bakcomx x x. 10. stated in the articles of incorporation, be first subscribed at the time of incorporation,
Worse, despite repeated reminders from plaintiff, defendant failed to accomplish and at least twenty-five percent (25%) of the total subscription, be paid upon
the organization and incorporation of the proposed holding company, contrary subscription. To prove compliance with this requirement, the SEC requires the
to his representation to promptly do so. x x x x 17. Considering that the incorporators to submit a treasurer’s affidavit and a certificate of bank deposit,
incorporation of the proposed holding company failed to materialize, despite showing the existence of an amount compliant with the prescribed capital
the lapse of one year and four months from the time of subscription, plaintiff subscription. In this light, we conclude that Fong’s cash contributions play an
has the right to revoke his pre-incorporation subscription. Such revocation indispensable part in Alliance’s incorporation. The process necessarily requires
entitles plaintiff to a refund of the amount of P5,000,000.00 he remitted to the money not only to fund Alliance’s registration with the SEC but also its initial
defendant, representing advances made in favor of defendant to be considered as capital subscription.
payment on plaintiff’s subscription to the proposed holding company upon its
incorporation, plus interest from receipt by defendant of said amount until fully paid. Civil Law; Obligations; Reciprocal Obligations; Rescission; After rescission,
the parties must go back to their original status before they entered into the
Civil Law; Obligations; Reciprocal Obligations; Rescission; As a contractual agreement.—As the Court cannot precisely determine who between the parties first
remedy, rescission is available when one of the parties substantially fails to do what violated the agreement, we apply the second part of Article 1192 which states: “if it
he has obligated himself to perform.—As a contractual remedy, rescission is cannot be determined which of the parties first violated the contract, the same shall
available when one of the parties substantially fails to do what he has obligated be deemed extinguished, and each shall bear his own damages.” In these lights, the
himself to perform. It aims to address the breach of faith and the violation of Court holds that the joint venture agreement between Fong and Dueñas is deemed
reciprocity between two parties in a contract. Under Article 1191 of the Civil Code, extinguished through rescission under Article 1192 in relation with Article 1191
the right of rescission is inherent in reciprocal obligations, viz.: The power to rescind of the Civil Code. Dueñasmust therefore return the P5 Million that Fong initially
obligations is implied in reciprocal ones, in case one of the obligors should not contributed since rescission requires mutual restitution. After rescission, the
comply with what is incumbent upon him. parties must go back to their original status before they entered into the
agreement. Dueñas cannot keep Fong’s contribution as this would constitute unjust
Same; Same; Same; Words and Phrases; Reciprocal obligations are those enrichment. No damages shall be awarded to any party in accordance with the rule
which arise from the same cause, in which each party is a debtor and a creditor of under Article 1192 of the Civil Code that in case of mutual breach and the first
the other, such that the obligation of one is dependent on the obligation of the other. infractor of the contract cannot exactly be determined, each party shall bear his own
—Reciprocal obligations are those which arise from the same cause, in which each damages.
party is a debtor and a creditor of the other, such that the obligation of one is
dependent on the obligation of the other. Fong and Dueñas’ execution of a joint
venture agreement created between them reciprocal obligations that must be
performed in order to fully consummate the contract and achieve the purpose for Republic of the Philippines
which it was entered into. Both parties verbally agreed to incorporate a company SUPREME COURT
that would hold the shares of Danton and Bakcom and which, in turn, would be the Manila
platform for their food business. Fong obligated himself to contribute half of the
capital or P32.5 Million in cash. On the other hand, Dueñasbound himself to
shoulder the other half by contributing his Danton and Bakcom shares, which were SECOND DIVISION
allegedly also valued at P32.5 Million. Aside from this, Dueñas undertook to
process Alliance’s incorporation and registration with the SEC. G.R. No. 185592 June 15, 2015
GEORGE C. FONG, Petitioner, On November 25, 1996, Fong started remitting in tranches his share
vs. in the proposed corporation’s capital. He made the remittances
JOSE V. DUEÑAS, Respondent. under the impression that his contribution would be applied as his
subscription to fifty percent (50%) of Alliance’s total shareholdings.
DECISION On the other hand, Dueñas started processing the
Boboli9 international license that they would use in their food
business. Fong’s cash contributions are summarized below. 10
BRION, J.:
We resolve in this petition for review on certiorari 1 the challenge to Date Amount
the September 16, 2008 decision 2 and the December 8, 2008
resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 88396. November 25, 1996 ₱1,980,475.20
These assailed CA rulings annulled the June 27, 2006 decision 4 and January 14, 1997 ₱1,000,000.00
October 30, 2006 order 5 of the Regional Trial Court of Makati,
Branch 64 (trial court), which directed respondent Jose V. Dueñas
(Dueñas) to pay Five Million Pesos (₱5 Million) to petitioner George C. February 8, 1997 ₱500,000.00
Fong (Fong), and imposed a six percent (6%) annual interest on this
amount. March 7, 1997 ₱100,000.00
Factual Antecedents
April 28, 1997 ₱500,000.00
The parties agreed that Fong would contribute Thirty Two Million Mr. Jose Dueñas
and Five Hundred Thousand Pesos (₱32.5 Million) in cash while c/o Camira Industries
Dueñas would contribute all his Danton and Bakcom shares which
he valued at ₱32.5 Million.8 Fong required Dueñas to submit the Re: Proposed JV in Bakcom, D.C. Danton and Boboli
financial documents supporting the valuation of these shares.
Dear Jojit,
Enclosed is our check for ₱919,534.80 representing our additional to incorporate and register Alliance with the Securities and Exchange
advances to subject company in process of incorporation. This will Commission (SEC).12
make our total advances to date amounting to ₱5 million.
These circumstances convinced Fong that Dueñas would no longer
Since we agreed in principal late last year to pursue subject matter, honor his obligations in their joint venture agreement.13 Thus, on
the delays in implementing the joint venture have caused us to October 30, 1997, Fong wrote Dueñas informing him of his decision
rethink our position. First, we were faced with the ‘personal’ factor to cancel the joint venture agreement. He also asked for the refund of
which was explained to you one time. This has caused us to turn the ₱5 Million that he advanced. 14 In response, Dueñas admitted
down a number of business opportunities. Secondly, since last year, that he could not immediately return the money since he used it to
the operation of Century 21 has been taking more time from us than defray the business expenses of Danton and Bakcom. 15
anticipated. That is why we decided to relinquish our original plan to
manage and operate ‘Boboli’ knowing this limitation. For us, it does To meet Fong’s demand, Dueñas proposed several schemes for
not make sense anymore to go for a significant shareholding when payment of the ₱5 Million.16 However, Fong did not accept any of
we cannot be hands on and participate actively as originally planned. these proposed schemes. On March 25, 1998, Fong wrote a final
For your information, we will probably be giving up our subway letter of demand17 informing Dueñas that he would file a judicial
franchise too. action against him should he still fail to pay after receipt of this
written demand.
Together with our business advisers and legal counsel, we came to a
decision to hold our commitment (from advances to investment) at Since Dueñas did not pay, Fong filed a complaint against him for
₱5 million only for now from the original plan of ₱32.5 million, if this collection of a sum of money and damages18 on April 24, 1998.
is acceptable to you.
The Trial Court’s Ruling
We know that our decision will somewhat upset the overall plans.
But it will probably be more problematic for us in the long run if we
continue full speed. We have put our money down in trust and good In its June 27, 2006 decision, the trial court ruled in favor of Fong
faith despite the much delayed financials. We continue to believe in and held that a careful examination of the complaint shows that
your game plan and capabilities to achieve the desired goals for although it was labeled as an action for collection of a sum of money,
subject undertaking. Please permit us instead to be just a modest it was actually an action for rescission. 19
silent investor now with a take out plan when time and price is right.
The trial court noted that Dueñas’ failure to furnish Fong with the
Thank you for your kind understanding and consideration. financial documents on the valuation of the Danton and Bakcom
shares, as well as the almost one year delay in the incorporation of
Alliance, caused Fong to rescind the joint venture
With best regards. agreement.20 According to the trial court, these are adequate and
acceptable reasons for rescission.
(Signed) George Fong11
The trial court also held that Dueñas erroneously invested Fong’s
Fong observed that despite his ₱5 Million contribution, Dueñas still cash contributions in his two companies, Danton and Bakcom. The
failed to give him the financial documents on the valuation of the signed receipts,21 presented as evidence, expressly provided that
Danton and Bakcom shares. Thus, except for Dueñas’ each remittance should be applied as advance subscription to Fong’s
representations, Fong had nothing to rely on to ensure that these shareholding in Alliance. Thus, Dueñas’ investment of the money in
shares were really valued at ₱32.5 Million. Moreover, Dueñas failed Danton and Bakcom was clearly unauthorized and contrary to the
parties’ agreement.
Since Dueñas was unjustly enriched by Fong’s advance capital he contributed to fund Alliance’s capital and incorporation, not to
contributions, the trial court ordered him to return the money pay for Danton and Bakcom’s business expenses. 27
amounting to ₱5 Million and to pay ten percent (10%) of this amount
in attorney’s fees, as well as the cost of the suit. 22 The Case for Dueñas
Fong filed a partial motion for reconsideration from the trial court’s Dueñas contends that he could no longer refund the ₱5 Million since
June 27, 2006 decision and asked for the imposition of a six percent he had already applied it to his two companies; that this is proper
(6%) annual interest, computed from the date of extrajudicial since Danton and Bakcom’s shares would also form part of his
demand until full payment of the award. The trial court granted this capital contribution to Alliance.28
prayer in its October 30, 2006 order. 23
Moreover, the incorporation did not push through because Fong
The CA’s Ruling unilaterally rescinded the joint venture agreement by limiting his
investment from ₱32.5 Million to ₱5 Million.29 Thus, it was Fong who
Dueñas responded to the trial court’s ruling through an appeal with first breached the contract, not he. Consequently, Fong’s failure to
the CA, which granted the appeal and annulled the trial court’s comply with his undertaking disqualified him from seeking the
ruling. agreement’s rescission. 30
The CA ruled that Fong’s June 13, 1997 letter evidenced his The Court's Ruling
intention to convert his cash contributions from "advances" to the
proposed corporation’s shares, to mere "investments." Thus, contrary We resolve to GRANT the petition.
to the trial court’s ruling, Dueñas correctly invested Fong’s ₱5
Million contribution to Bakcom and Danton. This did not deviate
from the parties’ original agreement as eventually, the shares of At the outset, the Court notes that the parties’ joint venture
these two companies would form part of Alliance’s capital. 24 agreement to incorporate a company that would hold the shares of
Danton and Bakcom and that would serve as the business vehicle for
their food enterprise, is a valid agreement. The failure to reduce the
Lastly, the CA held that the June 13, 1997 letter showed that Fong agreement to writing does not affect its validity or enforceability as
knew all along that he could not immediately ask for the return of there is no law or regulation which provides that an agreement to
his ₱5 Million investment. Thus, whether the action filed was a incorporate must be in writing.
complaint for collection of a sum of money, or rescission, it must still
fail.25
With this as premise, we now address the related issues raised by
the parties.
The Petition
The body rather than the title of
Fong submits that the CA erred when it ruled that his June 13, 1997
letter showed his intent to convert his contributions from advance
subscriptions to Alliance’s shares, to investments in Dueñas’ two the complaint determines the
companies. Contrary to the CA’s findings, the receipts and the letter
expressly mentioned that his contributions should all be treated as nature of the action.
his share subscription to Alliance. 26 Also, Fong argues that Dueñas’
unjustified retention of the ₱5 Million and its appropriation to his
(Dueñas’) own business, amounted to unjust enrichment; and that
A well-settled rule in procedural law is that the allegations in the The power to rescind obligations is implied in reciprocal ones, in case
body of the pleading or the complaint, and not its title, determine the one of the obligors should not comply with what is incumbent upon
nature of an action.31 him. [Emphasis supplied.]
An examination of Fong’s complaint shows that although it was Dueñas submits that Fong’s prayer for the return of his cash
labeled as an action for a sum of money and damages, it was contribution supports his claim that Fong’s complaint is an action
actually a complaint for rescission. The following allegations in the for collection of a sum of money. However, Dueñas failed to
complaint support this finding: appreciate that the ultimate effect of rescission is to restore the
parties to their original status before they entered in a contract. As
9. Notwithstanding the aforesaid remittances, defendant failed for an the Court ruled in Unlad Resources v. Dragon: 34 Rescission has the
unreasonable length of time to submit a valuation of the equipment effect of "unmaking a contract, or its undoing from the beginning,
of D.C. Danton and Bakcom x x x. and not merely its termination." Hence, rescission creates the
obligation to return the object of the contract. It can be carried out
only when the one who demands rescission can return whatever he
10. Worse, despite repeated reminders from plaintiff, defendant failed may be obliged to restore. To rescind is to declare a contract void at
to accomplish the organization and incorporation of the proposed its inception and to put an end to it as though it never was. It is not
holding company, contrary to his representation to promptly do so. merely to terminate it and release the parties from further obligations
to each other, but to abrogate it from the beginning and restore the
xxxx parties to their relative positions as if no contract has been made.
17. Considering that the incorporation of the proposed holding Accordingly, when a decree for rescission is handed down, it is the
company failed to materialize, despite the lapse of one year and four duty of the court to require both parties to surrender that which they
months from the time of subscription, plaintiff has the right to have respectively received and to place each other as far as
revoke his pre-incorporation subscription. Such revocation entitles practicable in his original situation. 35 [Emphasis supplied.]
plaintiff to a refund of the amount of ₱5,000,000.00 he remitted to
defendant, representing advances made in favor of defendant to be In this light, we rule that Fong’s prayer for the return of his
considered as payment on plaintiff’s subscription to the proposed contribution did not automatically convert the action to a complaint
holding company upon its incorporation, plus interest from receipt for a sum of money. The mutual restitution of the parties’ original
by defendant of said amount until fully paid. [Emphasis supplied.] contributions is only a necessary consequence of their agreement’s
rescission. Rescission under Art. 1191 is
Fong’s allegations primarily pertained to his cancellation of their
verbal agreement because Dueñas failed to perform his obligations to applicable in the present case
provide verifiable documents on the valuation of the Danton’s and
Bakcom’s shares, and to incorporate the proposed corporation.
These allegations clearly show that what Fong sought was the joint Reciprocal obligations are those which arise from the same cause, in
venture agreement’s rescission. which each party is a debtor and a creditor of the other, such that
the obligation of one is dependent on the obligation of the other. 36
As a contractual remedy, rescission is available when one of the
parties substantially fails to do what he has obligated himself to Fong and Dueñas’ execution of a joint venture agreement created
perform.32 It aims to address the breach of faith and the violation of between them reciprocal obligations that must be performed in order
reciprocity between two parties in a contract. 33 Under Article 1191 of to fully consummate the contract and achieve the purpose for which
the Civil Code, the right of rescission is inherent in reciprocal it was entered into.
obligations, viz:
Both parties verbally agreed to incorporate a company that would To prove compliance with this requirement, the SEC requires the
hold the shares of Danton and Bakcom and which, in turn, would be incorporators to submit a treasurer’s affidavit and a certificate of
the platform for their food business. Fong obligated himself to bank deposit, showing the existence of an amount compliant with
contribute half of the capital or ₱32.5 Million in cash. On the other the prescribed capital subscription. 39
hand, Dueñas bound himself to shoulder the other half by
contributing his Danton and Bakcom shares, which were allegedly In this light, we conclude that Fong’s cash contributions play an
also valued at ₱32.5 Million. Aside from this, Dueñas undertook indispensable part in Alliance’s incorporation. The process
toprocess Alliance’s incorporation and registration with the SEC. necessarily requires the money not only to fund Alliance’s
registration with the SEC but also its initial capital subscription.
When the proposed company remained unincorporated by October This is evident in the receipts which Dueñas himself executed, one of
30, 1997, Fong cancelled the joint venture agreement and demanded which provides:
the return of his ₱5 Million contribution.
I, JOSE V. DUEÑAS, hereby acknowledge the receipt on January 14,
For his part, Dueñas explained that he could not immediately return 1997 of the amount of One Million Pesos (Php1,000,000.00) Check
the ₱5 Million since he had invested it in his two companies. He No. 118 118 7014 Metro Bank, Pasong Tamo branch dated January
found nothing irregular in this as eventually, the Danton and 13, 1997 from Mr. George Fong, which amount shall constitute an
Bakcom shares would form part of Alliance’s capital. advance of the contribution or investment of Mr. Fong in the joint
venture which he and I are in the process of organizing. Specifically,
Dueñas’ assertion is erroneous. this amount will be considered as part of Mr. Fong’s subscription to
the shares of stock of the joint venture company which we will
incorporate to embody and carry out our joint venture. 40 [Emphasis
The parties never agreed that Fong would invest his money in supplied.]
Danton and Bakcom. Contrary toDueñas’ submission, Fong’s
understanding was that his money would be applied to his
shareholdings in Alliance. As shown in Fong’s June13, 1997 letter, Thus, Dueñas erred when he invested Fong’s contributions in his
this fact remained to be true even after he limited his contribution to two companies. This money should have been used in processing
₱5 Million, viz: Alliance’s registration. Its incorporation would not materialize if there
would be no funds for its initial capital. Moreover, Dueñas
represented that Danton and Bakcom’s shares were valued at ₱32.5
Dear Jojit, Million. If this was true, then there was no need for Fong’s additional
₱5 Million investment, which may possibly increase the value of the
Enclosed is our check for ₱919,534.80 representing our additional Danton and Bakcom shares.
advances to subject company in process of incorporation. This will
make our total advances to date amounting to ₱5 Under these circumstances, the Court agrees with the trial court that
million.37[Emphasis supplied.] Dueñas violated his agreement with Fong. Aside from unilaterally
applying Fong’s contributions to his two companies, Dueñas also
Moreover, under the Corporation Code, before a stock corporation failed to deliver the valuation documents of the Danton and Bakcom
may be incorporated and registered, itis required that at least twenty shares to prove that the combined values of their capital
five percent (25%) of its authorized capital stock as stated in the contributions actually amounted to ₱32.5 Million. These acts led to
articles of incorporation, be first subscribed at the time of Dueñas’ delay in incorporating the planned holding company, thus
incorporation, and at least twenty five percent (25%) of the total resulting in his breach of the contract.
subscription, be paid upon subscription. 38
On this basis, Dueñas’ breach justified Fong’s rescission of the joint the evidence does not show if the parties agreed on valid causes that
venture agreement under Article 1191. As the Court ruled in Velarde would justify the limitation of the parties’ capital contributions. Their
v. Court of Appeals:41 only admission was that they obligated themselves to contribute
₱32.5 Million each.
The right of rescission of a party to an obligation under Article 1191
of the Civil Code is predicated on a breach of faith by the other party Hence, Fong’s diminution of his capital share to ₱5 Million also
who violates the reciprocity between them. The breach contemplated amounted to a substantial breach of the joint venture agreement,
in the said provision is the obligor’s failure to comply with an existing which breach occurred before Fong decided to rescind his agreement
obligation. When the obligor cannot comply with what is incumbent with Dueñas. Thus, Fong also contributed to the non-incorporation
upon it, the obligee may seek rescission and in the absence of any of Alliance that needed ₱65 Million as capital to operate.
just cause for the court to determine the period of compliance, the
court shall decree the rescission. Fong cannot entirely blame Dueñas since the substantial reduction
of his capital contribution also greatly impeded the implementation
In the present case, private respondents validly exercised their right of their agreement to engage in the food business and to incorporate
to rescind the contract, because of the failure of petitioners to comply a holding company for it.
with their obligation to pay the balance of the purchase price.
Indubitably, the latter violated the very essence of reciprocity in the As both parties failed to comply with their respective reciprocal
contract of sale, a violation that consequently gave rise to private obligations, we apply Article 1192 of the Civil Code, which provides:
respondents’ right to rescind the same in accordance with
law.42 [Emphasis supplied.]
Art. 1192. In case both parties have committed a breach of the
obligation, the liability of the first in fractor shall be equitably
However, the Court notes that Fong also breached his obligation in tempered by the courts. If it cannot be determined which of the
the joint venture agreement. In his June 13, 1997 letter, Fong parties first violated the contract, the same shall be deemed
expressly informed Dueñas that he would be limiting his cash extinguished, and each shall bear his own damages. [Emphasis
contribution from ₱32.5 Million to ₱5 Million because of the following supplied.]
reasons which we quote verbatim:
Notably, the Court is not aware of the schedule of performance of the
1. First, we were faced with the ‘personal’ factor which was parties’ obligations since the joint venture agreement was never
explained to you one time. This has caused us to turn down reduced to writing. The facts, however, show that both parties began
a number of business opportunities; performing their obligations after executing the joint venture
agreement. Fong started remitting his share while Dueñas started
2. Secondly, since last year, the operation of Century 21 has processing the Boboli international license for the proposed
been taking more time from us than anticipated. That is why corporation’s food business.
we decided to relinquish our original plan to manage and
operate ‘Boboli’ knowing this limitation. For us, it does not The absence of a written contract renders the Court unsure as to
make sense anymore to go for a significant shareholding whose obligation must be performed first. It is possible that the
when we cannot be hands on and participate actively as parties agreed that Fong would infuse capital first and Dueñas’
originally planned.43 x x x. submission of the documents on the Danton and Bakcom shares
would just follow. It could also be the other way around. Further, the
Although these reasons appear to be valid, they do not erase the fact parties could have even agreed to simultaneously perform their
that Fong still reneged on his original promise to contribute ₱32.5 respective obligations.
Million. The joint venture agreement was not reduced to writing and
Despite these gray areas, the fact that both Fong and Dueñas
substantially contributed to the non-incorporation of Alliance and to
the failure of their food business plans remains certain.
In these lights, the Court holds that the joint venture agreement
between Fong and Dueñas is deemed extinguished through
rescission under Article 1192 in relation with Article 1191 of the Civil
Code. Dueñas must therefore return the ₱5 Million that Fong initially
contributed since rescission requires mutual restitution. 44 After
rescission, the parties must go back to their original status before
they entered into the agreement. Dueñas cannot keep Fong's
contribution as this would constitute unjust enrichment.
SO ORDERED.
ARTURO D. BRION
Associate Justice
Republic of the Philippines Only two months into the program, problems began to loom in the
SUPREME COURT horizon. On July 17, HCI notified EMI that its accreditation with
Manila DLSUMC was suspended and advised it to avail of the services of
nearby accredited institutions. A more detailed communication to
THIRD DIVISION subscribers came out days later informing them of the problems of
the HMO industry in the wake of the Asian regional financial crisis
and proposing interim measures for the unexpired service contracts.
G.R. No. 162802 October 9, 2013 In a quickly convened meeting, EMI and HCI hammered out this
handwritten 5-point agreement:
EDS MANUFACTURING, INC., Petitioner,
vs. "1) Healthcheck to furnish EMI with list of procedural
HEALTHCHECK INTERNATIONAL INC., Respondent. enhancements by 7/24 (FRI)-hospitals & professional fees
payment.
DECISION
2) Healthcheck to reduce no. of accredited hospitals to
PERALTA, J.: improve monitoring of bills for payment & other problems.
This is a Petition for Review on Certiorari under Rule 45 of the Rules 3) EMI to study the possibility of adding ‘LIABILITY CLAUSE’
of Court seeking the reversal of the Decision 1dated November 28, to existing contract; to furnish HC copy for its review.
2003 and Resolution2 dated March 16, 2004 of the Court of Appeals
(CA) in CA-G.R. CV No. 69420. 4) No renewal of contract w/ HC should there be another
suspension of services in any hospitals to be chosen (w/
The facts, as found by the CA, are as follows: regard to item #2.) w/in the present contract period.
The plaintiff Healthcheck Inc. is a 1-lcalth Maintenance Organization 5) HC decision on APE provided by 7/24(FRI)."
HMO) that provides prepaid health and medical insurance coverage
to its clients. To under gird its program, it maintains a network of Although HCI had yet to settle its accounts with it, DLSUMC
accredited hospitals and medical clinics, one of which is the De La resumed services on July 24. In another meeting with EMI on August
Salle University Medical Center located at Dasmariñas. Cavite. Being 3, HCI undertook to settle all its accounts with DLSUMC in order to
within the access of this medical facility, the defendant Eds maintain its accreditation. Despite this commitment, HCI failed to
Manufacturing Inc. with about 5,000 employees at Imus, Cavite saw preserve its credit standing with DLSUMC prompting the latter to
fit in April 1998 to obtain insurance coverage from it. They entered suspend its accreditation for a second time from August 15 to 20. A
into a one-year contract from May 1, 1998 to April 30, 1999 in which third suspension was still to follow on September 9 and remained in
HCI was to provide the 4,191 employees of EMI and their 4,592 force until the end of the contract period.
dependents as host of medical services and benefits. Attached to the
Agreement was a Service Program which listed the services that HCI
would provide and the responsibilities that EMI would undertake in Until the difficulties between HCI and its client came to a head in
order to avail of the services. Putting the Agreement into effect, EMI September 1998, complaints from EMI employees and workers were
paid the full premium for the coverage in the staggering amount of pouring in that their HMO cards were not being honored by the
₱8,826,307.50. DLSUMC and other hospitals and physicians. On September 3, EMI
formally notified HCI that it was rescinding their April 1998
Agreement on account of HCI’s serious and repeated breach of its deliver such assets as properly belonged to HCI. EMI responded with
undertaking including but not limited to the unjustified non- an answer alleging that HCI reneged on its duty to provide adequate
availability of services. It demanded a return of premium for the medical coverage after EMI paid the premium in full. Having
unused period after September 3, giving a ballpark figure of ₱6 rescinded the contract, it claimed that it was entitled to the
million. unutilized portion of the premium, and that the accounting required
by HCI could not be undertaken until it submitted the monthly
What went in the way of the rescission of the contract, the fly in the utilization reports mentioned in the Agreement. EMI asked for the
ointment so to speak, was the failure of EMI to collect all the HMO dismissal of the complaint and interposed a counterclaim for
cards of the employees and surrender them to HCI as stipulated in damages and unutilized premium of ₱5,884,205.
the Agreement. HCI had to tell EMI on October 12, 1998 that its
employees were still utilizing the cards even beyond the In September 2000, after trial, the court ruled in favor of HCI. It
pretermination date set by EMI. It asked for the surrender of the found that EMI’s rescission of the Agreement on September 3, 1998
cards so that it could process the pretermination of the contract and was not done through court action or by a notarial act and was
finalize the reconciliation of accounts. Until we have received the IDs, based on casual or slight breaches of the contract. Moreover, despite
HCI said, we will consider your account with us ongoing and the announced rescission, the employees of EMI continued to avail of
existing, thus subject for inclusion to present billing and payment. HCI’s services until March 1999. The services rendered by HCI from
May 1998 to March 1999 purportedly came to a total of
Without responding to this reminder, EMI sent HCI two letters in ₱10,149,821.13. The court deducted from this figure the premium
January 1999 demanding for the payment of ₱5,884,205 as the 2/3 paid by EMI, leaving a net payable to HCI of ₱1,323,513.63, in
portion of the premium that remained unutilized after the Agreement addition to moral damages and attorney’s fees. EMI’s counterclaims,
was rescinded in the previous September. The computation was on the other hand, were dismissed for lack of merit. 3
made on the basis of these observations:
On appeal, the CA reversed the decision of the Regional Trial Court
- that EMI paid premium of ₱8,826,307.50 (RTC) of Pasig City and ruled that although Healthcheck
International, (HCI) substantially breached their agreement, it also
appears that Eds Manufacturing, Inc. (EMI) did not validly rescind
- Healthcheck’s accreditation with DLSUMC was suspended the contract between them. Thus, the CA dismissed the complaint
on July 17, August 15 and Sept. 9, 1998 by reason of filed by HCI, while at the same time dismissing the counterclaim filed
Healthcheck’s unjustified failure to pay its benefits to the by EMI.
hospital.
Undeterred, EMI filed a Motion for Partial Reconsideration against
- That Healthcheck’s accreditation with other hospitals and said decision. However, the same was denied in a Resolution dated
individual physicians was also suspended on various dates March 16, 2004.
for the same reason.
Hence, EMI filed the present petition raising the following issues for
- That, in effect Healthcheck managed to comply with its our resolution:
obligation only for the first 4 months of the year-long
contract, or 1/3 thereof.
A
HCI pre-empted EMI’s threat of legal action by instituting the present
case before the Regional Trial Court of Pasig. The cause of action it THE COURT OF APPEALS, WHILE CORRECTLY
presented was the unlawful pretermination of the contract and OVERTURNING THE RTC’S DECISION BY DISMISSING THE
failure of EMI to submit to a joint reconciliation of accounts and COMPLAINT, COMMITTED A REVERSIBLE AND GROSS
ERROR WHEN IT LIKEWISE DISMISSED THE The court shall decree the rescission claimed, unless there be just
COUNTERCLAIM ON THE GROUND THAT PETITIONER EMI cause authorizing the fixing of a period.
DID NOT ACTUALLY RESCIND THE CONTRACT WHICH
RULING BY THE APPELLATE COURT ALREADY WENT This is understood to be without prejudice to the rights of third
BEYOND THE AGREED/SUBMITTED ISSUES FOR persons who have acquired the thing, in accordance with Articles
ADJUDICATION. 1385 and 1388 and the Mortgage Law.5
The power to rescind obligations is implied in reciprocal ones, in case Thus, the rescission referred to in Article 1191, more appropriately
one of the obligors should not comply with what is incumbent upon referred to as resolution, is on the breach of faith by one of the
him. parties which is violative of the reciprocity between them. 11
The injured party may choose between the fulfillment and the In the present case, it is apparent that HCI violated its contract with
rescission of the obligation, with the payment of damages in either EMI to provide medical service to its employees in a substantial way.
case. He may also seek rescission, even after he has chosen As aptly found by the CA, the various reports made by the EMI
fulfillment, if the latter should become impossible. employees from July to August 1998 are living testaments to the
gross denial of services to them at a time when the delivery was decree of the court and not the mere act of the vendor. Since a
crucial to their health and lives. judicial or notarial act is required by law for a valid rescission to take
place, the letter written by respondent declaring his intention to
However, although a ground exists to validly rescind the contract rescind did not operate to validly rescind the contract. 13
between the parties, it appears that EMI failed to judicially rescind
the same. In Iringan v. Court of Appeals, 12 this Court reiterated the What is more, it is evident that EMI had not rescinded the contract
rule that in the absence of a stipulation, a party cannot unilaterally at all. As observed by the CA, despite EMI s pronouncement, it failed
and extrajudicially rescind a contract. A judicial or notarial act is to surrender the HMO cards of its employees although this was
necessary before a valid rescission (or resolution) can take place. required by the Agreement, and allowed them to continue using them
Thus – beyond the date of the rescission. The in-patient and the out-patient
utilization reports submitted by 1 ICI shows entries as late as March
Clearly, a judicial or notarial act is necessary before a valid 1999, signifying that EMI employees 1 were availing of the services
rescission can take place, whether or not automatic rescission has until the contract period were almost over. The continued use by
been stipulated. It is to be noted that the law uses the phrase "even them of their privileges under the contract, with the apparent
though" emphasizing that when no stipulation is found on automatic consent of EMI, belies any intention to cancel or rescind it, even as
rescission, the judicial or notarial requirement still applies. they felt that they ought to have received more than what they got.
The party entitled to rescind should apply to the court for a decree of
rescission. The right cannot be exercised solely on a party’s own
judgment that the other committed a breach of the obligation. The
operative act which produces the resolution of the contract is the
Civil Law; Sales; Contract of Sale; Reciprocal Obligations; A contract of and damages had already been filed before the Regional Trial Court of Pasay City. If
sale entails reciprocal obligations.—A contract of sale, such as that entered into by at all, the offer was nothing more than a belated reaction to undercut litigation. By
petitioner and respondent, entails reciprocal obligations. As explained in Spouses the time respondent made its attempt at rectification, petitioner was no longer
Velarde v. Court of Appeals, 361 SCRA 56 (2001), “[i]n a contract of sale, the seller capable of accommodating contractual modifications. Jurisprudence has established
obligates itself to transfer the ownership of and deliver a determinate thing, and the the impropriety of modifying awarded contracts that were previously subjected to
buyer to pay therefor a price certain in money or its equivalent.” public bidding, such as that between petitioner and respondent: An essential element
of a publicly bidded contract is that all bidders must be on equal footing. Not simply
Same; Contracts; Rescission; Jurisprudence has long settled that the in terms of application of the procedural rules and regulations imposed by the
restoration of the contracting parties to their original state is the very essence of relevant government agency, but more importantly, on the contract bidded upon.
rescission.—Respondent correctly notes that rescission under Article 1911 results in Each bidder must be able to bid on the same thing. The rationale is obvious. If the
mutual restitution. Jurisprudence has long settled that the restoration of the winning bidder is allowed to later include or modify certain provisions in the
contracting parties to their original state is the very essence of rescission. In Spouses contract awarded such that the contract is altered in any material respect, then the
Velarde v. Court of Appeals, 361 SCRA 56 (2001): Considering that the rescission essence of fair competition in the public bidding is destroyed. A public bidding
of the contract is based on Article 1191 of the Civil Code, mutual restitution is would indeed be a farce if after the contract is awarded, the winning bidder may
required to bring back the parties to their original situation prior to the inception of modify the contract and include provisions which are favorable to it that were not
the contract. Accordingly, the initial payment of P800,000 and the corresponding previously made available to the other bidders.
mortgage payments . . . should be returned by private respondents, lest the latter
unjustly enrich themselves at the expense of the former. Rescission creates the Damages; Liquidated Damages; Words and Phrases; By definition,
obligation to return the object of the contract. It can be carried out only when the liquidated damages are a penalty, meant to impress upon defaulting obligors the
one who demands rescission can return whatever he may be obliged to restore. To graver consequences of their own culpability.—By definition, liquidated damages
rescind is to declare a contract void at its inception and to put an end to it as though are a penalty, meant to impress upon defaulting obligors the graverconsequences of
it never was. It is not merely to terminate it and release the parties from further their own culpability. Liquidated damages must necessarily make
obligations to each other, but to abrogate it from the beginning and restore the noncompliance more cumbersome than compliance. Otherwise, contracts might as
parties to their relative positions as if no contract has been made. well make no threat of a penalty at all: Liquidated damages are those that the parties
agree to be paid in case of a breach. As worded, the amount agreed upon answers for
Same; Same; Same; Liquidated Damages; Mutual restitution under Article damages suffered by the owner due to delays in the completion of the project. Under
1191 is no license for the negation of contractually stipulated liquidated damages.— Philippine laws, these damages take the nature of penalties. A penal clause is an
Contrary to respondent’s assertion, mutual restitution under Article 1191 is, accessory undertaking to assume greater liability in case of a breach. It is attached to
however, no license for the negation of contractually stipulated liquidated damages. an obligation in order to ensure performance.
Article 1191 itself clearly states that the options of rescission and specific
performance come with “with the payment of damages in either case.” The very
same breach or delay in performance that triggers rescission is what makes damages SECOND DIVISION
due. When the contracting parties, by their own free acts of will, agreed on what
these damages ought to be, they established the law between themselves. Their
contemplation of the consequences proper in the event of a breach has been G.R. No. 185765, September 28, 2016
articulated. When courts are, thereafter, confronted with the need to award damages
in tandem with rescission, courts must not lose sight of how the parties have PHILIPPINE ECONOMIC ZONE AUTHORITY, Petitioner, v. PILHINO
explicitly stated, in their own language, these consequences. To uphold both Article SALES CORPORATION, Respondent.
1191 of the Civil Code and the parties’ will, contractually stipulated liquidated
damages must, as a rule, be maintained. DECISION
Bids and Bidding; Jurisprudence has established the impropriety of
modifying awarded contracts that were previously subjected to public bidding.—
Respondent’s attempt at rectification came too late and under such circumstances LEONEN, J.:
that petitioner was no longer even in a position to accept respondent’s offer. As
petitioner notes, by the time respondent made its offer, the Complaint for rescission
Although the provisions of a contract are legally null and void, the stipulated method The Philippine Economic Zone Authority furnished Pilhino with a purchase order
of computing liquidated damages may be accepted as evidence of the intent of the dated November 6, 1997.14 Pilhino failed to deliver the trucks as it had
parties. The provisions, therefore, can be basis for finding a factual anchor for committed.15 This prompted the Philippine Economic Zone Authority to make
liquidated damages. The liable party may nevertheless present better evidence to formal demands on Pilhino on July 27, 199816 and on February 23, 1999.17 As
establish a more accurate basis for awarding damages. In this case, the respondent Pilhino still failed to comply, the Philippine Economic Zone Authority filed before
failed to do so. the Regional Trial Court of Pasay City a Complaint18 for rescission of contract and
damages. This was docketed as Civil Case No. 00-0343 and raffled to Branch
This resolves a Petition for Review on Certiorari1 praying that the assailed May 2, 108.19chanrobleslaw
2008 Decision2 and November 25, 2008 Resolution3 of the Court of Appeals in CA
G.R. CV No. 86406 be reversed and set aside and that the Decision 4 dated In its defense, Pilhino claimed that there was no starting date from which its
November 2, 2005 of Branch 108 of the Regional Trial Court of Pasay City in Civil obligation to deliver could be reckoned, considering that the Complaint supposedly
Case No. 00-0343 be reinstated. failed to allege acceptance by Pilhino of the purchase order. 20 Pilhino suggested that
there was not even a meeting of minds between it and the Philippine Economic Zone
The Regional Trial Court's November 2, 2005 Decision ruled in favor of petitioner Authority.21chanrobleslaw
Philippine Economic Zone Authority, which, as plaintiff, brought an action for
rescission of contract and damages against the defendant, now respondent Pilhino In its November 2, 2005 Decision,22 the Regional Trial Court ruled for the Philippine
Sales Corporation (Pilhino).5chanrobleslaw Economic Zone Authority. The dispositive portion of the Decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
The assailed Court of Appeals Decision partly granted Pilhino's appeal by reducing defendant ordering the latter to:
the amount of liquidated damages due from it to the Philippine Economic Zone 1. Pay the plaintiff in liquidated damages a[t] the rate of 1/10 of
Authority, and by deleting the forfeiture of its performance bond. 6 The assailed 1% of the total contract price of Php 5,800,000.00 for each day
Court of Appeals Resolution denied the Philippine Economic Zone Authority's of delay commencing from June 19, 1998.
Motion for Reconsideration.7chanrobleslaw 2. Pay the plaintiff exemplary damages in the amount of Php
100,00[0].00.
The facts are not disputed, and all that is in issue is the consequence of Pilhino's 3. That the contract be declared rescinded and the performance
contractual breach. bond posted by the defendant be forfeited in favor of the
plaintiff.
On October 4, 1997, the Philippine Economic Zone Authority published an 4. For defendant to pay the cost of the suit.
invitation to bid in the Business Daily for its acquisition of two (2) brand new fire
truck units "with a capacity of 4,000-5,000 liters [of] water and 500-1,000 liters [of SO ORDERED.23chanroblesvirtuallawlibrary
chemical foam,] with complete accessories." 8chanrobleslaw Pilhino then appealed before the Court of Appeals.
Three (3) companies participated in the bidding: Starbilt Enterprise, Inc., Shurway In its assailed May 2, 2008 Decision, 24 the Court of Appeals partly granted Pilhino's
Industries, Inc., and Pilhino.9 Pilhino secured the contract for the acquisition of the appeal by deleting the forfeiture of Pilhino's performance bond and pegging the
fire trucks.10 The contract price was initially at P3,000,000.00 per truck, but this was liquidated damages due from it to the Philippine Economic Zone Authority in the
reduced after negotiation to P2,900,000.00 per truck.11chanrobleslaw amount of P1,400,000.00.
The contract awarded to Pilhino stipulated that Pilhino was to deliver to the The Court of Appeals debunked Pilhino's claim that there was no meeting of minds.
Philippine Economic Zone Authority two (2) FF3HP brand fire trucks within 45 It emphasized that Pilhino "manifested its acquiescence . . . [to] the Purchase Order .
days of receipt of a purchase order from the Philippine Economic Zone . . when it submitted to [the Philippine Economic Zone Authority] a Performance
Authority.12 A further stipulation stated that "[i]n case of fail[u]re to deliver the . . . Bond dated 02 June 1999 and Indemnity Agreement dated 09 June 1998 duly signed
good on the date specified . . . , the Supplier agree[s] to pay penalty at the rate of by its Vice President."25cralawred It added that in a subsequent letter dated March
1/10 of 1% of the total contract price for each days [sic] commencing on the first 29, 199926 "signed by [Pilhino's] Hino Division Manager Edgar R. Santiago and
day after the date stipulated above."13chanrobleslaw noted by VP-Operations Roberto R. Garcia, [Pilhino] admitted that it can no longer
meet the requirements regarding the specification on the two (2) units of fire
truck[s]."27chanrobleslaw Whether or not a contract can be rescinded and declared void ab initio, and then thus
rescinded, can a stipulation for liquidated damages or penalty contained in that very
In this March 29, 1999 letter, Pilhino not only acknowledged its inability to meet its same contract be given separate life, force and effect, that is, separate and distinct
obligations but also proposed a modified arrangement with the Philippine Economic from the rescinded and voided contract itself?40chanroblesvirtuallawlibrary
Zone Authority: Therefore, respondent suggests that with the rescission of its contract with petitioner
must have come the negation of the contractual stipulation on liquidated damages
[P]lease allow us to submit our new proposal for your consideration and the obliteration of its liability for such liquidated damages. 41chanrobleslaw
(please see attached specifications). Our price for this new specification if
P3,600,000.00/unit. However, we are willing to shoulder the difference We resolve the twin issues of:
between the original price of P2,900,000.00/unit and P3,600,000.00 in lieu
of the penalty. May we also request your good office to stop the First, the propriety of an award based on contractually stipulated liquidated damages
accumulation of the penalty [.]28chanroblesvirtuallawlibrary notwithstanding the rescission of the same contract stipulating it; and Second, on the
In calibrating the amount of liquidated damages, the Court of Appeals cited Articles assumption that such award is proper, the propriety of the Court of Appeals'
122929 and 222730 of the Civil Code. It reasoned that through its March 29, 1999 reduction of the liquidated damages due to petitioner.
letter, Pilhino made an attempt at rectification or mitigation: I
In the instant case, we consider the supervening reality that after appellant's failure
to deliver to appellee the two (2) brand new units of fire trucks in accordance with Respondent's intimation that with the rescission of a contract necessarily and
the specifications previously agreed upon, appellant nevertheless tried to remedy the inexorably follows the obliteration of liability for what the same contracts stipulates
situation by offering to appellee new specifications at P3,600,000.00 per unit; and as liquidated damages42 is entirely misplaced.
expressed willingness to shoulder the difference between the original price (based
on the contract) of P2,900,000.00 per unit and the price corresponding to the new A contract of. sale, such as that entered into by petitioner and respondent, entails
specifications. Further, it is undisputed that appellee has not paid any amount to reciprocal obligations. As explained in Spouses Velarde v. Court of Appeals,43 "[i]n
appellant in connection with said undelivered two (2) brand new units of fire trucks. a contract of sale, the seller obligates itself to transfer the ownership of and deliver a
We thus equitably reduce said liquidated damages to P1,400,000.00, which is the determinate thing, and the buyer to pay therefor a price certain in money or its
difference between the contract price of P5,800,000.00 and P7,200,000.00 based on equivalent."44chanrobleslaw
the new specifications for two (2) new units of fire
trucks.31chanroblesvirtuallawlibrary Rescission on account of breach of reciprocal obligations is provided for in Article
The Philippine Economic Zone Authority moved for reconsideration of the 1191 of the Civil Code:
modifications to the Regional Trial Court's award. As this Motion was denied in the
Court of Appeals' assailed November 25, 2008 Resolution,32 the Philippine Article 1191. The power to rescind obligations is implied in reciprocal
Economic Zone Authority filed the present Petition. ones, in case one of the obligors should not comply with what is
incumbent upon him.
Petitioner asks for the reinstatement of the Regional Trial Court's award asserting
that it already suffered damage when respondent Pilhino Sales Corporation failed to The injured party may choose between the fulfillment and the rescission of the
deliver the trucks on time;33 that the contractually stipulated penalty of 1/10 of 1% of obligation, with the payment of damages in either case. He may also seek rescission,
the contract price for every day of delay was neither unreasonable 34 nor contrary to even after he has chosen fulfillment, if the latter should become impossible.
law, morals, or public order;35 that the stipulation on liquidated damages was freely
entered into by it and respondent;36 and that the Court of Appeals' computation had The court shall decree the rescission claimed, unless there be just cause authorizing
no basis in fact and law.37 Regarding respondent's supposed attempt at mitigation, the fixing of a period.
petitioner notes that by the time the offer was made, the Complaint for rescission
and damages had already been filed38 and was, therefore, inconsequential and hardly This is understood to be without prejudice to the rights of third persons who have
a remedy. acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage
Law. (Emphasis supplied)
Commenting on petitioner's Petition,39 respondent raises the question of:
Respondent correctly notes that rescission under Article 1911 results in mutual "In this case, indemnity for damages may be demanded from the person causing the
restitution. Jurisprudence has long settled that the restoration of the contracting loss."
parties to their original state is the very essence of rescission. In Spouses Velarde: As a consequence of the resolution by petitioners, rights to the lot should be restored
Considering that the rescission of the contract is based on Article 1191 of the Civil to private respondent or the same should be replaced by another acceptable lot.
Code, mutual restitution is required to bring back the parties to their original However, considering that the property had already been sold to a third person and
situation prior to the inception of the contract. Accordingly, the initial payment of there is no evidence on record that other lots are still available, private respondent is
P800,000 and the corresponding mortgage payments . . . should be returned by entitled to the refund of installments paid plus interest at the legal rate of 12%
private respondents, lest the latter unjustly enrich themselves at the expense of the computed from the date of the institution of the action. It would be most inequitable
former. if petitioners were to be allowed to retain private respondent's payments and at the
same time appropriate the proceeds of the second sale to another.
Rescission creates the obligation to return the object of the contract. It can be carried Applying the clear language of the law and the consistent jurisprudence on the
out only when the one who demands rescission can return whatever he may be matter, therefore, the Court rules that rescission under Article 1191 in the present
obliged to restore. To rescind is to declare a contract void at its inception and to put case, carries with it the corresponding obligation of restitution. 47 (Citations omitted)
an end to it as though it never was. It is not merely to terminate it and release the Contrary to respondent's assertion, mutual restitution under Article 1191 is,
parties from further obligations to each other, but to abrogate it from the beginning however, no license for the negation of contractually stipulated liquidated damages.
and restore the parties to their relative positions as if no contract has been
made.45 (Citations omitted) Article 1191 itself clearly states that the options of rescission and specific
Laperal v. Solid Homes, Inc.46 has explained how the restitution spoken of in performance come with "with the payment of damages in either case." The very
rescission under Article 1385 of the Civil Code equally holds true for rescission same breach or delay in performance that triggers rescission is what makes damages
under Article 1191 of the Civil Code: due.
Despite the fact that Article 1124 of the old Civil Code from whence Article 1191
was taken, used the term "resolution", the amendment thereto (presently, Article When the contracting parties, by their own free acts of will, agreed on what these
1191) explicitly and clearly used the term "rescission". Unless Article 1191 is damages ought to be, they established the law between themselves. Their
subsequently amended to revert back to the term "resolution", this Court has no contemplation of the consequences proper in the event of a breach has been
alternative but to apply the law, as it is written. articulated. When courts are, thereafter, confronted with the need to award damages
in tandem with rescission, courts must not lose sight of how the parties have
Again, since Article 1385 of the Civil Code expressly and clearly states that explicitly stated, in their own language, these consequences. To uphold both Article
"rescission creates the obligation to return the things which were the object of the 1191 of the Civil Code and the parties' will, contractually stipulated liquidated
contract, together with their fruits, and the price with its interest," the Court finds no damages must, as a rule,48 be maintained.
justification to sustain petitioners' position that said Article 1385 does not apply to
rescission under Article 1191. What respondent purports to be the ensuing nullification of liquidated damages is
not a novel question in jurisprudence. This matter has been settled, and respondent's
In Palay, Inc. vs. Clave, this Court applied Article 1385 in a case involving position has been rebuked. In Laperal:
"resolution" under Article 1191, thus: This notwithstanding, the Court does not agree with the Court of Appeals that, as a
Regarding the second issue on refund of the installment payments made by private consequence of the obligation of mutual restitution in this case, petitioners should
respondent. Article 1385 of the Civil Code provides: return the amount of P5,200,833.27 to respondent.
"ART. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest; Article 1191 states that "the injured party may choose between fulfillment and
consequently, it can be carried out only when he who demands rescission can return rescission of the obligation, with the payment of damages in either case." In other
whatever he may be obliged to restore. words, while petitioners are indeed obliged to return the said amount to respondent
under Article 1385, assuming said figure is correct, respondent is at the same time
"Neither shall rescission take place when the things which are the object of the liable to petitioners in the same amount as liquidated damages by virtue of the
contract are legally in the possession of third persons who did not act in bad faith. forfeiture/penalty clause as freely stipulated upon by the parties in the Addendum,
paragraphs 1 and 2 of which respectively read:
WHEREAS, included as part of said agreement are the following:
As underscored by petitioner, however, this offer was inconsequential and hardly a
chanRoblesvirtualLawlibrary1. Further to the stipulations on paragraph 10, upon remedy to the predicament it found itself in.
default of performances, violations and/or non-compliance with the terms and
conditions herein agreed upon by the DEVELOPER wherein it appears that the Petitioner already suffered damage by respondent's mere delay. Philippine Economic
DEVELOPER deliberately abandoned or discontinued the work on the project, said Zone Authority Director General Lilia B. De Lima's internal memorandum to its
party shall lose any entitlement, if any, to any refund and/or advances it may have Board of Directors emphasized what was, at the time, the specific urgency of
incurred in connection with or relative to previous development works in the obtaining fire trucks:
subdivision; likewise, all improvements of whatever nature and kind introduced by 1. With the increase in the number of locator-enterprises at the regular zones, there
the DEVELOPER on the property, existing as of the date of default or violation, is a need for additional units of fire trucks to address any eventuality. The onset of
shall automatically belong to the OWNER without obligation on his part to pay for the El Niño phenomena further makes it imperative that PEZA be more prepared.
the costs thereof.
2. At present, there are only six (6) units of serviceable fire trucks distributed as
2. Similarly with the same condition of default or violation obtaining, as stated in follows:
paragraph 10 of said agreement, all advances made and remittances of proceeds
from reservations and sales given by the DEVELOPER to the OWNER as provided chanRoblesvirtualLawlibrary
for in this agreement shall be deemed absolutely forfeited in favor of the OWNER, Bataan EZ 2
resulting to waiver of DEVELOPER'S rights, if any, with respect to said amount(s). Baguio City EZ 1
If this Court recognized the right of the parties to stipulate on an extrajudicial Cavite EZ 1
rescission under Article 1191, there is no reason why this Court will not allow the Mactan EZ 252 (Emphasis supplied)
parties to stipulate on the matter of damages in case of such rescission under Book The Court of Appeals itself recognized that "time was of the essence when the
IV, Title VIII, Chapter 3, Section 2 of the Civil Code governing liquidated contract . . . was awarded to [respondent] and the non-compliance therewith exposed
damages.49 (Citations omitted) [petitioner's] operations [at] risk."53chanrobleslaw
We see no reason for departing from this. It is true that Laperal involved
extrajudicial rescission, while this case involves rescission through judicial action. Respondent's attempt at rectification came too late and under such circumstances
The distinction between judicial and extrajudicial rescission is in how extrajudicial that petitioner was no longer even in a position to accept respondent's offer. As
rescission is possible only when the contract has an express stipulation to that petitioner notes, by the time respondent made its offer, the Complaint for rescission
effect.50 This distinction does not diminish the rights of a contracting party under and damages had already been filed before the Regional-Trial Court of Pasay
Article 1191 of the Civil Code and is immaterial for purposes of the availability of City.54 If at all, the offer was nothing more than a belated reaction to undercut
liquidated damages. litigation.
To sustain respondent's claim would be to sustain an absurdity and an injustice. By the time respondent made its attempt at rectification, petitioner was no longer
Respondent's position suggests that with rescission must necessarily come the capable of accommodating contractual modifications. Jurisprudence has established
obliteration of the punitive consequence which, to begin with, was the product of its the impropriety of modifying awarded contracts that were previously subjected to
own (along with the other contracting party's) volition. Its position turns public bidding, such as that between petitioner and respondent:
delinquency into a profitable enterprise, enabling contractual breach to itself be the
means for evading its own fallout. It is a position we cannot tolerate. An essential element of a publicly bidded contract is that all bidders must
be on equal footing. Not simply in terms of application of the procedural
II rules and regulations imposed by the relevant government agency, but
more importantly, on the contract bidded upon. Each bidder must be able
In calibrating the amount of liquidated damages, the Court of Appeals relied on how to bid on the same thing. The rationale is obvious. If the winning bidder is
respondent supposedly attempted to rectify things "by offering to [petitioner] new allowed to later include or modify certain provisions in the contract
specifications at P3,600,000.00 per unit; and expressed willingness to shoulder the awarded such that the contract is altered in any material respect, then the
difference between the original price (based on the contract) of P2,900,000.00 per essence of fair competition in the public bidding is destroyed. A public
unit and the price corresponding to the new specifications." 51chanrobleslaw bidding would indeed be a farce if after the contract is awarded, the
winning bidder may modify the contract and include provisions which are is REINSTATED.
favorable to it that were not previously made available to the other
bidders. Thus: SO ORDERED.chanRoblesvirtualLawlibrary
It is inherent in public biddings that there shall be a fair competition Brion,**(Acting Chairperson), Del Castillo, and Mendoza, JJ., concur.
among the bidders. The specifications in such biddings provide the Carpio, J., on official leave.
common ground or basis for the bidders. The specifications should,
accordingly, operate equally or indiscriminately upon all bidders.
The same rule was restated by Chief Justice Stuart of the Supreme Court
of Minnesota:
The law is well settled that where, as in this case, municipal authorities
can only let a contract for public work to the lowest responsible bidder, the
proposals and specifications therefore must be so framed as to permit free
and full competition. Nor can they enter into a contract with the best
bidder containing substantial provisions beneficial to him, not included or
contemplated in the terms and specifications upon which the bids were
invited.55 (Emphasis supplied)
Liquidated damages are those that the parties agree to be paid in case of a
breach. As worded, the amount agreed upon answers for damages suffered
by the owner due to delays in the completion of the project. Under
Philippine laws, these damages take the nature of penalties. A penal clause
is an accessory undertaking to assume greater liability in case of a breach.
It is attached to an obligation in order to ensure performance. 56(Citations
omitted)
Respondent cannot now balk at the natural result of its own breach. As for the Court
of Appeals, we find it to be in error in frustrating the express terms of the contract
that respondent actively endeavored to be awarded to it. The exigencies that
impelled petitioner to obtain fire trucks made it imperative for respondent to act with
dispatch. Instead, it dragged its feet, left petitioner with inadequate means for
addressing the very emergencies that engendered the need for fire trucks, and forced
it into litigation to enforce its rights.
PREMISES CONSIDERED, the case is hereby dismissed. Plaintiff is 2. P440,000.00 as actual damages;
ordered to pay the following:
3. P25,000.00 as moral damages; and
1) PHP 130,000.00 representing the amount of the generator
set, plus legal interest at 12% per annum from December 4. P50,000.00 as exemplary damages.
1992 until fully paid; and
SO ORDERED.46 (Emphasis supplied)
The Court of Appeals agreed with the trial court’s Decision, but standard accessories are concerned, since Kodak Philippines, Ltd.
extensively discussed the basis for the modification of the dispositive had the right to possess it:48
portion.
The purchase price of said equipment is P1,796,000.00 which, under
The Court of Appeals ruled that the Letter Agreement executed by the agreement is payable with forty eight (48) monthly amortization.
the parties showed that their obligations were susceptible of partial It is undisputed that Sps. Lam made payments which amounted to
performance. Under Article 1225 of the New Civil Code, their Two Hundred Seventy Thousand Pesos (P270,000.00) through the
obligations are divisible: following checks: Metrobank Check Nos. 00892620 and 00892621
dated 31 March 1992 and 30 April 1992 respectively in the amount
In determining the divisibility of an obligation, the following factors of Thirty Five Thousand Pesos (P35,000.00) each, and BPI Family
may be considered, to wit: (1) the will or intention of the parties, Check dated 31 July 1992 amounting to Two Hundred Thousand
which may be expressed or presumed; (2) the objective or purpose of Pesos (P200,000.00). This being the case, Sps. Lam are still liable to
the stipulated prestation; (3) the nature of the thing; and (4) Kodak in the amount of One Million Five Hundred Twenty Six
provisions of law affecting the prestation. Thousand Pesos (P1,526,000.00), which is payable in several
monthly amortization, pursuant to the Letter Agreement. However,
Sps. Lam admitted that sometime in May 1992, they had already
Applying the foregoing factors to this case, We found that the ordered their drawee bank to stop the payment on all the other checks
intention of the parties is to be bound separately for each Minilab they had issued to Kodak as payment for the Minilab Equipment
Equipment to be delivered as shown by the separate purchase price delivered to them. Clearly then, Kodak ha[d] the right to repossess the
for each of the item, by the acceptance of Sps. Lam of separate said equipment, through this replevin suit. Sps. Lam cannot excuse
deliveries for the first Minilab Equipment and for those of the themselves from paying in full the purchase price of the equipment
remaining two and the separate payment arrangements for each of delivered to them on account of Kodak’s breach of the contract to
the equipment. Under this premise, Sps. Lam shall be liable for the deliver the other two (2) Minilab Equipment, as contemplated in the
entire amount of the purchase price of the Minilab Letter Agreement.49(Emphasis supplied)
Equipment delivered considering that Kodak had already completely Echoing the ruling of the trial court, the Court of Appeals held that
fulfilled its obligation to deliver the same. . . . the liability of the Lam Spouses to pay the remaining balance for the
first delivered unit is based on the second sentence of Article 1592 of
Third, it is also evident that the contract is one that is severable in the New Civil Code.50 The Lam Spouses’ receipt and use of the
character as demonstrated by the separate purchase price for each of Minilab Equipment before they knew that Kodak Philippines, Ltd.
the minilab equipment. "If the part to be performed by one party would not deliver the two (2) remaining units has made them liable
consists in several distinct and separate items and the price is for the unpaid portion of the purchase price.51
apportioned to each of them, the contract will generally be held to be
severable. In such case, each distinct stipulation relating to a The Court of Appeals noted that Kodak Philippines, Ltd. sought the
separate subject matter will be treated as a separate rescission of its contract with the Lam Spouses in the letter dated
contract." Considering this, Kodak's breach of its obligation to deliver October 14, 1992.52 The rescission was based on Article 1191 of the
the other two (2) equipment cannot bar its recovery for the full New Civil Code, which provides: "The power to rescind obligations is
payment of the equipment already delivered. As far as Kodak is implied in reciprocal ones, in case one of the obligors should not
concerned, it had already fully complied with its separable obligation comply with what is incumbent upon him." 53 In its letter, Kodak
to deliver the first unit of Minilab Equipment. 47 (Emphasis supplied) Philippines, Ltd. demanded that the Lam Spouses surrender the lone
delivered unit of Minilab Equipment along with its standard
The Court of Appeals held that the issuance of a writ of replevin is accessories.54
proper insofar as the delivered Minilab Equipment unit and its
The Court of Appeals likewise noted that the Lam Spouses rescinded amount of ₱130,000.00, is sufficient compensation for whatever
the contract through its letter dated November 18, 1992 on account damage the Lam Spouses suffered on account of its improper
of Kodak Philippines, Inc.’s breach of the parties’ agreement to seizure.62
deliver the two (2) remaining units.55
The Court of Appeals also ruled on the Lam Spouses’ entitlement to
As a result of this rescission under Article 1191, the Court of moral and exemplary damages, as well as attorney’s fees and
Appeals ruled that "both parties must be restored to their original litigation expenses:
situation, as far as practicable, as if the contract was never entered
into."56 The Court of Appeals ratiocinated that Article 1191 had the In seeking recovery of the Minilab Equipment, Kodak cannot be
effect of extinguishing the obligatory relation as if one was never considered to have manifested bad faith and malevolence because as
created:57 earlier ruled upon, it was well within its right to do the same.
However, with respect to the seizure of the generator set, where
To rescind is to declare a contract void in its inception and to put an Kodak misrepresented to the court a quo its alleged right over the
end to it as though it never were. It is not merely to terminate it and said item, Kodak’s bad faith and abuse of judicial processes become
to release parties from further obligations to each other but abrogate self-evident. Considering the off-setting circumstances attendant, the
it from the beginning and restore parties to relative positions which amount of P25,000.00 by way of moral damages is considered
they would have occupied had no contract been made. 58 sufficient.
The Lam Spouses were ordered to relinquish possession of the In addition, so as to serve as an example to the public that an
Minilab Equipment unit and its standard accessories, while Kodak application for replevin should not be accompanied by any false
Philippines, Ltd. was ordered to return the amount of ₱270,000.00, claims and misrepresentation, the amount of P50,000.00 by way of
tendered by the Lam Spouses as partial payment. 59 exemplary damages should be pegged against Kodak.
As to the actual damages sought by the parties, the Court of Appeals With respect to the attorney’s fees and litigation expenses, We find
found that the Lam Spouses were able to substantiate the following: that there is no basis to award Sps. Lam the amount sought for. 63
Incentive fee paid to Mr. Ruales in the amount of P100,000.00; the Kodak Philippines, Ltd. moved for reconsideration of the Court of
rider to the contract of lease which made the Sps. Lam liable, by way Appeals Decision, but it was denied for lack of merit. 64 However, the
of advance payment, in the amount of P40,000.00, the same being Court of Appeals noted that the Lam Spouses’ Opposition correctly
intended for the repair of the flooring of the leased premises; and pointed out that the additional award of ₱270,000.00 made by the
lastly, the payment of P300,000.00, as compromise agreement for trial court was not mentioned in the decretal portion of the March
the pre-termination of the contract of lease with Ruales. 60 30, 2005 Decision:
The total amount is ₱440,000.00. The Court of Appeals found that Going over the Decision, specifically page 12 thereof, the Court noted
all other claims made by the Lam Spouses were not supported by that, in addition to the amount of Two Hundred Seventy Thousand
evidence, either through official receipts or check payments. 61 (P270,000.00) which plaintiff-appellant should return to the
defendantsappellants, the Court also ruled that defendants-
As regards the generator set improperly seized from Kodak appellants should, in turn, relinquish possession of the Minilab
Philippines, Ltd. on the basis of the writ of replevin, the Court of Equipment and the standard accessories to plaintiff-appellant.
Appeals found that there was no basis for the Lam Spouses’ claim for Inadvertently, these material items were not mentioned in the
reasonable rental of ₱5,000.00. It held that the trial court’s award of decretal portion of the Decision. Hence, the proper correction should
12% interest, in addition to the cost of the generator set in the herein be made.65
The Lam Spouses filed this Petition for Review on April 14, 2005. On SO ORDERED."
the other hand, Kodak Philippines, Ltd. filed its Motion for
Reconsideration66 before the Court of Appeals on April 22, 2005. SO ORDERED.68 (Emphasis in the original)
While the Petition for Review on Certiorari filed by the Lam Spouses Upon receiving the Amended Decision of the Court of Appeals, Kodak
was pending before this court, the Court of Appeals Special Philippines, Ltd. filed a Motion for Extension of Time to File an
Fourteenth Division, acting on Kodak Philippines, Ltd.’s Motion for Appeal by Certiorari under Rule 45 of the 1997 Rules of Civil
Reconsideration, issued the Amended Decision 67 dated September 9, Procedure before this court.69
2005. The dispositive portion of the Decision reads:
This was docketed as G.R. No. 169639. In the Motion for
WHEREFORE, premises considered, this Court resolved that: Consolidation dated November 2, 2005, the Lam Spouses moved that
G.R. No. 167615 and G.R. No. 169639 be consolidated since both
A. Plaintiff-appellant’s Motion for Reconsideration is involved the same parties, issues, transactions, and essential facts
hereby DENIED for lack of merit. and circumstances.70
B. The decretal portion of the 30 March 2005 Decision In the Resolution dated November 16, 2005, this court noted the
should now read as follows: Lam Spouses’ September 23 and September 30, 2005 Manifestations
praying that the Court of Appeals’ September 9, 2005 Amended
"WHEREFORE, PREMISES CONSIDERED, the Assailed Decision Decision be considered in the resolution of the Petition for Review on
dated 26 February 1999 of the Regional Trial Court, Branch 65 in Certiorari.71 It also granted the Lam Spouses’ Motion for
Civil Cases No. 92-3442 is hereby MODIFIED. Plaintiff-appellant is Consolidation.72
ordered to pay the following:
In the Resolution73 dated September 20, 2006, this court
a. P270,000.00 representing the partial payment made on deconsolidated G.R No. 167615 from G.R. No. 169639 and declared
the Minilab equipment. G.R. No. 169639 closed and terminated since Kodak Philippines, Ltd.
failed to file its Petition for Review.
b. P130,000.00 representing the amount of the generator
set, plus legal interest at 12% per annum from December II
1992 until fully paid;
We resolve the following issues:
c. P440,000.00 as actual damages;
First, whether the contract between petitioners Spouses Alexander
d. P25,000.00 as moral damages; and and Julie Lam and respondent Kodak Philippines, Ltd. pertained to
obligations that are severable, divisible, and susceptible of partial
performance under Article 1225 of the New Civil Code; and
e. P50,000.00 as exemplary damages.
Second, upon rescission of the contract, what the parties are entitled
Upon the other hand, defendants-appellants are hereby ordered to to under Article 1190 and Article 1522 of the New Civil Code.
return to plaintiff-appellant the Minilab equipment and the standard
accessories delivered by plaintiff-appellant.
Petitioners argue that the Letter Agreement it executed with
respondent for three (3) Minilab Equipment units was not severable,
divisible, and susceptible of partial performance. Respondent’s Petitioners also assert that they are entitled to attorney’s fees and
recovery of the delivered unit was unjustified. 74 litigation expenses under Article 2208 of the New Civil Code since
respondent’s act of bringing a suit against them was baseless and
Petitioners assert that the obligations of the parties were not malicious. This prompted them to engage the services of a lawyer. 87
susceptible of partial performance since the Letter Agreement was for
a package deal consisting of three (3) units. 75 For the delivery of Respondent argues that the parties’ Letter Agreement contained
these units, petitioners were obliged to pay 48 monthly payments, divisible obligations susceptible of partial performance as defined by
the total of which constituted one debt.76 Having relied on Article 1225 of the New Civil Code. 88 In respondent’s view, it was the
respondent’s assurance that the three units would be delivered at intention of the parties to be bound separately for each individually
the same time, petitioners simultaneously rented and renovated priced Minilab Equipment unit to be delivered to different outlets: 89
three stores in anticipation of simultaneous operations. 77 Petitioners
argue that the divisibility of the object does not necessarily determine The three (3) Minilab Equipment are intended by petitioners LAM for
the divisibility of the obligation since the latter is tested against its install[a]tion at their Tagum, Davao del Norte, Sta. Cruz, Manila and
susceptibility to a partial performance. 78 They argue that even if the Cotabato City outlets. Each of these units [is] independent from one
object is susceptible of separate deliveries, the transaction is another, as many of them may perform its own job without the other.
indivisible if the parties intended the realization of all parts of the Clearly the objective or purpose of the prestation, the obligation is
agreed obligation.79 divisible.
Petitioners support the claim that it was the parties’ intention to The nature of each unit of the three (3) Minilab Equipment is such
have an indivisible agreement by asserting that the payments they that one can perform its own functions, without awaiting for the
made to respondent were intended to be applied to the whole other units to perform and complete its job. So much so, the nature
package of three units.80 The postdated checks were also intended as of the object of the Letter Agreement is susceptible of partial
initial payment for the whole package. 81 The separate purchase price performance, thus the obligation is divisible. 90
for each item was merely intended to particularize the unit prices,
not to negate the indivisible nature of their transaction. 82 As to the
issue of delivery, petitioners claim that their acceptance of separate With the contract being severable in character, respondent argues
deliveries of the units was solely due to the constraints faced by that it performed its obligation when it delivered one unit of the
respondent, who had sole control over delivery matters. 83 Minilab Equipment.91 Since each unit could perform on its own,
there was no need to await the delivery of the other units to complete
its job.92 Respondent then is of the view that when petitioners
With the obligation being indivisible, petitioners argue that ordered the depository bank to stop payment of the issued checks
respondent’s failure to comply with its obligation to deliver the two covering the first delivered unit, they violated their obligations under
(2) remaining Minilab Equipment units amounted to a breach. the Letter Agreement since respondent was already entitled to full
Petitioners claim that the breach entitled them to the remedy of payment.93
rescission and damages under Article 1191 of the New Civil Code. 84
Respondent also argues that petitioners benefited from the use of the
Petitioners also argue that they are entitled to moral damages more Minilab Equipment for 10 months—from March to December 1992—
than the ₱50,000.00 awarded by the Court of Appeals since despite having paid only two (2) monthly installments. 94 Respondent
respondent’s wrongful act of accusing them of non-payment of their avers that the two monthly installments amounting to ₱70,000.00
obligations caused them sleepless nights, mental anguish, and should be the subject of an offset against the amount the Court of
wounded feelings.85 They further claim that, to serve as an example Appeals awarded to petitioners.95
for the public good, they are entitled to exemplary damages as
respondent, in making false allegations, acted in evident bad faith
and in a wanton, oppressive, capricious, and malevolent manner. 86
Respondent further avers that petitioners have no basis for claiming 5. Prevailing price of Kodak Minilab System 22XL as of
damages since the seizure and recovery of the Minilab Equipment January 8, 1992 is at ONE MILLION SEVEN HUNDRED
was not in bad faith and respondent was well within its right. 96 NINETY SIX THOUSAND PESOS.
The Letter Agreement contained an indivisible obligation. *Secured with PDCs; 1st monthly amortization due 45 days
after installation[.]98
Both parties rely on the Letter Agreement 97 as basis of their
respective obligations. Written by respondent’s Jeffrey T. Go and Based on the foregoing, the intention of the parties is for there to be
Antonio V. Mines and addressed to petitioner Alexander Lam, the a single transaction covering all three (3) units of the Minilab
Letter Agreement contemplated a "package deal" involving three (3) Equipment. Respondent’s obligation was to deliver all products
units of the Kodak Minilab System 22XL, with the following terms purchased under a "package," and, in turn, petitioners’ obligation
and conditions: was to pay for the total purchase price, payable in installments.
This confirms our verbal agreement for Kodak Phils., Ltd. to provide The intention of the parties to bind themselves to an indivisible
Colorkwik Laboratories, Inc. with three (3) units Kodak Minilab obligation can be further discerned through their direct acts in
System 22XL . . . for your proposed outlets in Rizal Avenue (Manila), relation to the package deal. There was only one agreement covering
Tagum (Davao del Norte), and your existing Multicolor photo counter all three (3) units of the Minilab Equipment and their accessories.
in Cotabato City under the following terms and conditions: The Letter Agreement specified only one purpose for the buyer, which
was to obtain these units for three different outlets. If the intention of
1. Said Minilab Equipment packages will avail a total of 19% the parties were to have a divisible contract, then separate
multiple order discount based on prevailing equipment price agreements could have been made for each Minilab Equipment unit
provided said equipment packages will be purchased not instead of covering all three in one package deal. Furthermore, the
later than June 30, 1992. 19% multiple order discount as contained in the Letter Agreement
was applied to all three acquired units. 99 The "no downpayment"
term contained in the Letter Agreement was also applicable to all the
2. 19% Multiple Order Discount shall be applied in the form Minilab Equipment units. Lastly, the fourth clause of the Letter
of merchandise and delivered in advance immediately after Agreement clearly referred to the object of the contract as "Minilab
signing of the contract. Equipment Package."
* Also includes start-up packages worth P61,000.00. In ruling that the contract between the parties intended to cover
divisible obligations, the Court of Appeals highlighted: (a) the
3. NO DOWNPAYMENT. separate purchase price of each item; (b) petitioners’ acceptance of
separate deliveries of the units; and (c) the separate payment
4. Minilab Equipment Package shall be payable in 48 arrangements for each unit.100 However, through the specified terms
monthly installments at THIRTY FIVE THOUSAND PESOS and conditions, the tenor of the Letter Agreement indicated an
(P35,000.00) inclusive of 24% interest rate for the first 12 intention for a single transaction. This intent must prevail even
months; the balance shall be re-amortized for the remaining though the articles involved are physically separable and capable of
36 months and the prevailing interest shall be applied. being paid for and delivered individually, consistent with the New
Civil Code:
Article 1225. For the purposes of the preceding articles, obligations With both parties opting for rescission of the contract under Article
to give definite things and those which are not susceptible of partial 1191, the Court of Appeals correctly ordered for restitution.
performance shall be deemed to be indivisible.
The contract between the parties is one of sale, where one party
When the obligation has for its object the execution of a certain obligates himself or herself to transfer the ownership and deliver a
number of days of work, the accomplishment of work by metrical determinate thing, while the other pays a certain price in money or
units, or analogous things which by their nature are susceptible of its equivalent.103 A contract of sale is perfected upon the meeting of
partial performance, it shall be divisible. minds as to the object and the price, and the parties may reciprocally
demand the performance of their respective obligations from that
However, even though the object or service may be physically point on.104
divisible, an obligation is indivisible if so provided by law or intended
by the parties. (Emphasis supplied) The Court of Appeals correctly noted that respondent had rescinded
the parties’ Letter Agreement through the letter dated October 14,
In Nazareno v. Court of Appeals, 101 the indivisibility of an obligation is 1992.105 It likewise noted petitioners’ rescission through the letter
tested against whether it can be the subject of partial performance: dated November 18, 1992.106This rescission from both parties is
founded on Article 1191 of the New Civil Code:
An obligation is indivisible when it cannot be validly performed in
parts, whatever may be the nature of the thing which is the object The power to rescind obligations is implied in reciprocal ones, in case
thereof. The indivisibility refers to the prestation and not to the object one of the obligors should not comply with what is incumbent upon
thereof. In the present case, the Deed of Sale of January 29, 1970 him.
supposedly conveyed the six lots to Natividad. The obligation is
clearly indivisible because the performance of the contract cannot be The injured party may choose between the fulfilment and the
done in parts, otherwise the value of what is transferred is rescission of the obligation, with the payment of damages in either
diminished. Petitioners are therefore mistaken in basing the case. He may also seek rescission, even after he has chosen
indivisibility of a contract on the number of obligors. 102 (Emphasis fulfilment, if the latter should become impossible.
supplied, citation omitted)
The court shall decree the rescission claimed, unless there be just
There is no indication in the Letter Agreement that the units cause authorizing the fixing of a period.
petitioners ordered were covered by three (3) separate transactions.
The factors considered by the Court of Appeals are mere incidents of Rescission under Article 1191 has the effect of mutual
the execution of the obligation, which is to deliver three units of the restitution.107 In Velarde v. Court of Appeals:108
Minilab Equipment on the part of respondent and payment for all
three on the part of petitioners. The intention to create an indivisible
contract is apparent from the benefits that the Letter Agreement Rescission abrogates the contract from its inception and requires a
afforded to both parties. Petitioners were given the 19% discount on mutual restitution of benefits received.
account of a multiple order, with the discount being equally
applicable to all units that they sought to acquire. The provision on ....
"no downpayment" was also applicable to all units. Respondent, in
turn, was entitled to payment of all three Minilab Equipment units, Rescission creates the obligation to return the object of the contract. It
payable by installments. can be carried out only when the one who demands rescission can
return whatever he may be obliged to restore. To rescind is to declare
IV a contract void at its inception and to put an end to it as though it
never was. It is not merely to terminate it and release the parties from failed to comply with his or her obligation disputes the resolution of
further obligations to each other, but to abrogate it from the beginning the contract.115 Since both parties in this case have exercised their
and restore the parties to their relative positions as if no contract has right to resolve under Article 1191, there is no need for a judicial
been made.109 (Emphasis supplied, citations omitted) decree before the resolution produces effects.
On July 15, 1990, Johnny Josefa entered into a Contract of Lease [3] with
San Buenaventura over the said parcel of land. The parties agreed, inter alia, that
1. The period covered by this lease agreement is
from August 1, 1990 to July 31, 1995, or a period of five (5)
years, renewable upon agreement of the parties. [4]
FIRST DIVISION
Upon the expiry of the contract, San Buenaventura wrote Josefa informing
him that the lease would no longer be extended but that he may continue with the
JOHNNY JOSEFA, G.R. No. 163429
Petitioner, lease at a rental rate of P30,000.00 a month.[5] Josefa was told to vacate the property
Present: and pay any arrearages if he opted not to lease the property after the expiration of
the lease contract. However, Josefa refused to vacate the premises. He continued to
- versus - PANGANIBAN, C.J., Chairperson, occupy the property and paid a monthly rental of P15,400.00 which San
YNARES-SANTIAGO, Buenaventura received. However, the latter subsequently made demands for Josefa
AUSTRIA- to vacate the property in a Letter dated June 3, 1998.[6] Josefa still refused to leave
MARTINEZ, the premises.[7]
LOURDES SAN CALLEJO, SR., and
BUENAVENTURA, CHICO-NAZARIO, JJ.
represented by Attorneys-in- This prompted San Buenaventura to file a complaint for unlawful detainer
Fact, TERESITA SAN against Josefa which was, however, dismissed due to the plaintiffs failure to secure a
BUENAVENTURA and/or Promulgated: certification from the lupon ng barangay.[8] San Buenaventura refiled the
RAUL SAN BUENAVENTURA, Complaint[9] on July 9, 1998 with the Metropolitan Trial Court (MeTC)
of Pasig City. The complaint, docketed as Civil Case No. 6798, was raffled to
Branch 69. It contained the following prayer: WHEREFORE, premises considered, judgment is
hereby rendered ordering herein defendant and all persons
WHEREFORE, premises considered, plaintiff claiming rights under him to vacate the subject leased premises
respectfully prays that this Honorable Court, after due hearing, located as (sic) A. Mabini St., Capasigan, Pasig City and
lender [sic] judgment, in favor of plaintiff and against defendant, surrender possession thereof to the plaintiff; ordering defendant
ordering the latter: to pay P10,000.00 as and for attorneys fees, the same being
deemed just and equitable, and to pay the costs of suit.
1. To vacate the premises and to deliver the peaceful
possession thereof to plaintiff; The claim for moral and exemplary damages is
denied, the same not being recoverable in an ejectment suit.
Moreover, for lack of basis, the claim for deficit in monthly
rentals from August 1, 1995 is likewise denied. Defendant is,
therefore, directed to continue to pay reasonable compensation
2. To pay plaintiff the amount equivalent to the deficit
for his continued use and occupation of the subject premises at
on monthly rentals from August 1, 1995 up to the time that
the old rate of P15,000.00 a month from the time of the
defendant actually surrenders possession of the property at the
institution of this complaint until defendant and all person[s]
rate of PhP 30,000.00 per month;
claiming rights under him shall have completely vacated the
premises.
3. To pay plaintiff the amount of PhP 100,000.00 as
and by way of moral damages;
Defendants counterclaim is dismissed for want of
basis.
4. To pay plaintiff the amount of PhP 100,000.00 as
and by way of exemplary damages;
SO ORDERED.[13]
5. To pay plaintiff the amount of PhP 50,000.00 and
PhP 1,500.00/per appearance as and by way of attorneys fees; The MeTC declared that the phrase renewable upon agreement of the
and parties in the lease contract implied mutuality, i.e., both parties consent to the
renewal of the lease. Thus, San Buenaventuras demand for Josefa to vacate the
6. To pay costs of suit and expenses of litigations. premises after the expiration of the lease necessarily negates the idea of her consent
to such renewal. The court also held that the clause does not and cannot constitute a
Other reliefs just and equitable under the premises are commitment or a promise on the part of San Buenaventura to renew the lease. [14]
likewise prayed for.[10]
Josefa appealed the decision to the Regional Trial Court (RTC). On June
In his Answer,[11] Josefa averred that San Buenaventura had no cause of 27, 2001, the RTC rendered its Decision[15] reversing and setting aside the ruling of
action against him because, under the contract, she (San Buenaventura) was obliged the MeTC and dismissing San Buenaventuras complaint. The decretal portion of the
to renew the lease. Josefa pointed out that because of this commitment to renew the decision reads:
contract, he had made renovations and improvements on the land. Josefa also set up
attorneys fees as counterclaim against San Buenaventura. He likewise prayed that WHEREFORE, premises considered, the questioned
should the lease contract not be renewed, San Buenaventura be ordered to reimburse Decision is REVERSED and SET ASIDE, and the Complaint in
to him the cost of the improvements in the amount of not less than P3 million. Civil Case No. 6798 hereby DISMISSED.[16]
On July 15, 1999, the MeTC rendered its Decision, [12] the dispositive The RTC held that the inclusion of the renewal clause in the contract
portion of which reads: showed the intent on the part of both parties to extend the lease without any
condition or requirement of mutual agreement. It declared that the phrase was 5.6 Petitioner respectfully submits that the
merely a useless addition for the convenience of any party who may wish, in bad REGIONAL TRIAL COURT erred in dismissing the ejectment
faith, to back out of the extension of the lease. According to the RTC, the only time Complaint.[18]
that phrase may come into play is when both parties mutually decline to extend the
lease, but when only one party insists on the extension while the other refuses, the San Buenaventura argued that the RTC failed to apply the ruling of this
latter party is bound by the term.[17] Court in Fernandez v. Court of Appeals,[19] where a similar clause in the lease
contract of the parties was construed.
On November 22, 2002, the CA granted the petition and reversed the
This time, San Buenaventura appealed to the CA via a Petition for Review decision of the RTC. The fallo of the decision reads:
under Rule 42 of the Revised Rules of Court, where she alleged the following:
IN VIEW OF ALL THE FOREGOING, the
challenged RTC Decision is hereby REVERSED and SET
5.1 Petitioner respectfully submits that the
ASIDE, reinstating in the process the earlier judgment of the
REGIONAL TRIAL COURT erred in finding that the phrase
MTC in Civil Case No. 6798, with a modification that herein
renewable upon agreement of the parties is an outright intent of
respondent Josefa is ordered to pay petitioner San Buenaventura
the parties to renew the contract upon its expiration.
rentals in the sum of P30,000.00 a month from the first demand
therefor until he vacates the leased premises. In all other
5.2 Petitioner respectfully submits that the
respect[s], the MTC Decision stands. No cost.
REGIONAL TRIAL COURT erred in finding that the phrase
renewable upon agreement of the parties does not mean that
SO ORDERED.[20]
there has to be mutual consent before the lease contract may be
extended.
The appellate court declared that, after the expiration of the five-year
5.3 Petitioner respectfully submits that the period in the lease contract, the owner of the property had the right not only to
REGIONAL TRIAL COURT erred in finding that the phrase terminate the lease but to demand a new rental rate. It held that it was unfair for the
renewable upon agreement of the parties is indeed renewable lessee to refuse to pay the demanded increased rate and still remain in possession of
and without any condition or requirement of mutual agreement the property. The CA also ruled that Josefa could not claim to be a builder in good
notwithstanding the phrase upon agreement of the parties which faith since he knew that he was only a lessee, whose rights relative to the
the Court found as a useless addition for the convenience of any improvements he introduced on the property are governed by Article 1678 of the
party who may wish, in bad faith, to back out of the extension.
New Civil Code.
5.4 Petitioner respectfully submits that the
REGIONAL TRIAL COURT erred in finding that the act of Josefa (now petitioner) filed the instant petition against San Buenaventura
sending defendant a demand to vacate, signifying her lack of (respondent) and raises the following issues for resolution: (a) whether the lease
intention to renew the lease is in violation of the terms and contract between petitioner and respondent contained a renewal clause, and as such,
conditions of the lease contract. they had agreed to extend the period of the lease after July 31, 1995; (b) whether
petitioner is entitled to reimbursement for his improvements on the leased premises;
5.5 Petitioner submits that the Regional Trial Court and (c) whether petitioner is obliged to pay P30,000.00 a month by way of
erred in not ordering respondent to pay PHP 30,000.00 monthly
reasonable compensation for his continued occupancy of the property.
rental.
On the first issue, petitioner recalls that his predecessor had leased the property way
back in 1939, and that said lease had always been renewed. Petitioner insists that
when his lease contract with respondent was executed on July 15, 1990, a parties. If no such agreement is forged, petitioner has no other option except to
commitment was made to renew it upon its expiration on July 31, 1995, which was vacate the property.
why the clause renewable upon agreement of the parties was incorporated in the
lease contract. He posits that respondent could not unilaterally cancel the lease Even petitioner himself admits that under the subject clause, the lease contract
contract without affording him an opportunity to negotiate for its renewal. While the would not be automatically renewed upon its expiration on July 31,
clause could not be construed to mean that the lease contract would be automatically 1995. Respondent, as the owner of the property whose title is recognized in the lease
renewed contract, was not obliged to agree to renew the lease contract, much less negotiate
after its expiry, the provision negates the right of respondent to terminate the lease with petitioner for such renewal if she opts not to renew the agreement. Since the
until after negotiations for its renewal should prove to be unsuccessful. However, he renewal of the contract contemplates the death of the old contract, it is necessary
also maintains that respondent had the obligation to renew the lease contract without that a new one be executed by the parties. [29] A contract can only be renewed upon
modifying any of its terms and conditions. He posits that the ruling of this Court the mutual agreement of the parties or at the will of both of them. After all, as the
in Fernandez v. Court of Appeals[21] is not controlling in this case. Court ruled in Buce v. Court of Appeals:[30]
Respondent, for her part, avers that a similar issue was raised and resolved by this In the case at bar, it was not specifically indicated who may
Court in the following cases: Fernandez v. Court of Appeals,[22] Heirs of Amando exercise the option to renew, neither was it stated that the option
Dalisay v. Court of Appeals,[23]Buce v. Court of Appeals,[24] and LL and Company was given for the benefit of herein petitioner. Thus, pursuant to
the Fernandez ruling and Article 1196 of the Civil Code, the
Development and Agro-Industrial Corporation v. Huang Chao Chun.[25] Respondent
period of the lease contract is deemed to have been set for the
asserts that the rulings of this Court in said cases should apply. benefit of both parties. Renewal of the contract may be had only
upon their mutual agreement or at the will of both of
The contention of petitioner has no merit. them. Since the private respondents were not amenable to a
renewal, they cannot be compelled to execute a new contract
It bears stressing that after the subject lease contract expired on July 15, 1995, when the old contract terminated on 1 June 1994. It is the
petitioner was already unlawfully withholding possession of the leased premises owner-lessors prerogative to terminate the lease at its
from respondent as to entitle the latter to file her complaint for ejectment against expiration. The continuance, effectivity and fulfillment of a
contract of lease cannot be made to depend exclusively upon the
petitioner as defendant.[26] Since the lease contract was executed for a determinate
free and uncontrolled choice of the lessee between continuing
time, such contract ceased on the day fixed without need of further demand. [27] A the payment of the rentals or not, completely depriving the
notice to vacate constitutes an express act on the part of the lessor that he no longer owner of any say in the matter. Mutuality does not obtain in
consents to the continued occupation by the lessee of the property. [28] Hence, such a contract of lease and no equality exists between the lessor
respondent, as plaintiff in the trial court, had a cause of action for ejectment against and the lessee since the life of the contract would be dictated
petitioner who was the defendant below. solely by the lessee.[31]
In Fernandez v. Court of Appeals,[32] the Court ruled that the stipulation of the
parties in their lease contract to be renewable at the option of both parties stresses
It is true that petitioner and respondent agreed that the subject lease contract was that the faculty to renew was given not to the lessee alone nor to the lessor by
renewable upon agreement. The Court notes, however, that the effect of petitioners himself but to the two simultaneously; hence, both must agree to renew if a new
intransigent refusal to pay theP30,000.00 monthly rental proposed by respondent contract is to come about.
was the failure of the parties to agree on the renewal of the contract. The clause
renewable upon agreement of the parties in the lease contract is clear and admits of Petitioners contention that respondents had verbally agreed to extend the lease
no other interpretation: the contract is renewable only upon agreement of the indefinitely is inadmissible to qualify the terms of the written contract under the
parole evidence rule, and unenforceable under the statute of frauds. [33]
On the third issue, petitioner avers that the CA erred in ordering him to
On the second issue, petitioner avers that the CA erred in denying his claim for pay P30,000.00 monthly rental for the renewal of the lease contract. He maintains
compensation of one-half of the value of the improvements he had introduced in the that the amount has no factual basis and is exorbitant.
property amounting to P3,000,000.00. Citing Article 1678 of the New Civil Code,
[34]
he avers that while he may not be a possessor in good faith being a lessee, he is a
builder in good faith since his possession as lessee is lawful; as such, he is entitled to
recover one-half of the value of his useful improvements. Petitioner insists that the The submission of petitioner has no merit. In the first place, the CA
CA erred in applying Article 526[35] of the New Civil Code. awarded the P30,000.00 monthly rentals not for the renewal of the lease contract,
but as compensation for petitioners continued occupancy of the property after the
The Court is not persuaded. lease expired. However, we agree with petitioners contention that the increase of the
award to P30,000.00 has no factual basis, considering that the appellate court failed
The issue of whether a lessee may be considered a builder in good faith was to state its basis for doubling the amount adjudged by the trial court. It simply
resolved by the Court in Geminiano v. Court of Appeals.[36] The Court stressed that increased the award in the dispositive portion of its decision. Rule 70, Section 17 of
the private respondents therein, being mere lessees, knew that their occupation of the the 1997 Rules of Civil Procedure reads:
premises would continue only for the life of the lease, and as such, could not be
considered as possessors nor builders in good faith. SEC. 17. Judgment. If after trial the court finds that the
allegations of the complaint are true, it shall render judgment in
The Court went on to explain: favor of the plaintiff for the restitution of the premises, the
sum justly due as arrears of rent or as reasonable compensation
In a plethora of cases, this Court has held that Article for the use and occupation of the premises, attorneys fees and
448 of the Civil Code, in relation to Article 546 of the same costs. If it finds that said allegations are not true, it shall render
Code, which allows full reimbursement of useful improvements judgment for the defendant to recover his costs. If a
and retention of the premises until reimbursement is made, counterclaim is established, the court shall render judgment for
applies only to a possessor in good faith, i.e., one who builds on the sum found in arrears from either party and award costs as
land with the belief that he is the owner thereof. It does not justice requires. (Emphasis added)
apply where ones only interest is that of a lessee under a rental
contract; otherwise, it would always be in the power of the In Asian Transmission Corporation v. Canlubang Sugar Estates,[40] the Court ruled
tenant to improve his landlord out of his property.[37] that the reasonable compensation contemplated under said Rule partakes of the
nature of actual damages. While the trial court may fix the reasonable amount of
In this case, there is no question that petitioner was initially a lawful possessor rent, it must base its action on the evidence adduced by the parties. The Court also
because his entry into the property is by virtue of a lease contract with ruled that fair rental value is defined as the amount at which a willing lessee would
respondent. However, as a mere lessee whose possession after the expiration of the pay and a willing lessor would receive for the use of a certain property, neither being
contract is at the sufferance of the owner of the property, he cannot claim to be a under compulsion and both parties having a reasonable knowledge of all facts, such
builder in good faith. Under Article 1678 of the New Civil Code, petitioner is as the extent, character and utility of the property, sales and holding prices of similar
entitled to one-half of the value of the improvements only if respondent, as the land and the highest and best use of the property. The Court further held that the
owner, decides to appropriate the improvements. Since respondent refused to rental value refers to the value as ascertained by proof of what the property would
appropriate the improvements, petitioner cannot compel her to reimburse to him rent or by evidence of other facts from which the fair rental value may be
one-half their value.[38] The sole right of petitioner under Article 1678 is to remove determined.[41]
the improvements without causing any more damage upon the property leased than
is necessary.[39]
In D.O. Plaza Management Corporation v. Co-Owners Heirs of Andres Atega,[42] the court had the authority to fix the reasonable
Court ruled that the following factors may be considered in determining the value for the continued use and occupancy
reasonableness of the rental charged: (a) the prevailing rates in the vicinity; (b) of the premises after termination of the lease
contract.
location of the property; (c) use of the property; (d) inflation rate; and (e) the
testimony of one of the private respondents.[43] It must be underscored that the respondent was the plaintiff in
the MTC. It had the burden to adduce evidence to prove the fair
In the present case, there is no evidence on record to justify the increase of the rental value or reasonable compensation for the leased
award to P30,000.00. Respondents bare proposal to increase the monthly rental property. If the respondent failed to discharge its burden, the
to P30,000.00 after July 31, 1995 cannot be the factual basis for such increase in the petitioner was not obligated to adduce controverting
compensation due to petitioner for respondents occupancy on the property after the evidence. The burden of evidence would be shifted to the
lease contract expired. Thus, aside from unilaterally and perfunctorily increasing petitioner only if the respondent, as plaintiff, would be able to
adduce preponderant evidence to prove its claim. [45]
such rentals, the appellate court also ignored the trial courts award of P15,000.00
which was based on the evidence on record. As this Court emphasized in Asian
The Court holds that the trial courts award of P15,000.00 as reasonable
Transmission Corporation v. Canlubang Sugar Estates:[44]
compensation for petitioners occupancy of the property after the expiration of the
But the court made no ratiocination as to how it arrived at the lease should be maintained.
amount of P15,000,000 with reference to the evidence that the
respondent adduced, if any, to prove the said claim, vis--vis the IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY
evidence adduced by the petitioner. The court made a conclusion GRANTED. The decision of the Court of Appeals is AFFIRMED WITH
without any factual basis. What is so worrisome is that under MODIFICATION. The award of P30,000.00 a month, by way of reasonable
their MOA, the parties fixed the annual rental of the property for compensation for petitioner Johnny Josefas occupancy of the property from July 31,
the period of July 1, 1991 to June 30, 1992 at P3,373,352.80; 1995, is DELETED, and the award of P15,000.00 a month made by the MeTC of
and for the period of July 1, 1992 to June 30, 1993 at the said
Pasig City, Branch 69, is REINSTATED. No costs.
amount plus 8% or in the amount of P3,642,187.50. But in its
decision, the MTC increased the amount by no less than 500%
for the period of July 1, 1993 onwards. The trial court did not SO ORDERED.
bother to explain or elucidate how and for what reason the rental
value of the property was increased by 500%
from P3,642,187.50 to P15,000,000 annually. ROMEO J. CALLEJO, SR.
Associate Justice
The CA decision is likewise as nebulous. It affirmed the
decision of the RTC, which affirmed on appeal the decision of
the MTC, fixing the reasonable compensation at P15,000,000
simply because the petitioner offered no controverting evidence
as to the fair rental value of the leased property
With respect to the rental fixed by the trial
court, suffice it to say that petitioner failed
to present controverting evidence as to the
fair rental value of the leased premises. The
burden of proof to show that the
rental demanded is unconscionable or
exorbitant rests upon the lessee. The trial
Civil Law; Donations; Civil Procedure; The issue of whether or not DECS still failed to draw up plans to use the property for school purposes. In fine,
petitioner DECS was able to comply with the condition imposed in the deed of petitioner DECS has no use for the property; hence, the same shall be reverted to the
donation is one of fact. Under Rule 45 of the 1997 Rules of Civil Procedure, only respondents.
questions of law may be raised in a petition for review on certiorari, for the simple
reason that the Supreme Court is not a trier of facts.—The issue of whether or not
petitioner DECS was able to comply with the condition imposed in the deed of
donation is one of fact. There is a question of fact when the doubt or difference
arises as to the truth or falsehood of alleged facts or when the query necessarily
solicits calibration of the whole evidence considering mostly the credibility of
witnesses, existence and relevancy of specific surrounding circumstances, their
relation to each other and to the whole and probabilities of the situation. Under Rule
45 of the 1997 Rules of Civil Procedure, only questions of law may be raised in a
petition for review on certiorari, for the simple reason that this Court is not a trier of
facts. It is not for the Court to calibrate the evidence on record, as this is the function
of the trial court. Although there are well-defined exceptions to the rule,
nevertheless, after a review of the records, we find no justification to depart
therefrom. Moreover, the trial court’s findings of facts, as affirmed by the appellate
court on appeal, are binding on this Court, unless the trial and appellate courts
overlooked, misconstrued or misinterpreted facts and circumstances of substance
which, if considered, would change the outcome of the case. The case has been
reviewed thoroughly, and we find no justification to reverse the CA decision.
the New Civil Code is necessary. Said article SO ORDERED.
provides that if the obligation does not fix a period,
but from its nature and the circumstances it can be
inferred that a period was intended, the courts may ROMEO J. CALLEJO, SR.
fix the duration thereof. Indeed, from the nature and Associate Justice
circumstances of the condition of the subject
donation, it can be inferred that a period was
contemplated by the donors. The donors could not
have intended their property to remain idle for a very
long period of time when, in fact, they specifically
obliged the defendant-appellants to utilize the land
donated for school purposes and thus put it in good
use. xxx[20]
In Central Philippine University v. Court of Appeals,[21] a case squarely
in point, we have established that the legal possibility of bringing the
action begins with the expiration of a reasonable opportunity for
the donee to fulfill what has been charged upon it by the
donor. Likewise, we held that even if Article 1197 of the New Civil
Code provides that the courts may fix the duration when the
obligation does not determine the period but from its nature and
circumstances it can be inferred that a period was intended, the
general rule cannot be applied because to do so would be a mere
technicality and would serve no other purpose than to delay or lead
to an unnecessary and expensive multiplication of suits. [22]
Civil Law; Obligations; Alternative Obligations; In an alternative obligation, there to do so results in an abuse of that right, which may become the basis of an action
is more than one object, and the fulfillment of one is sufficient, determined by the for damages.—Breaches of contract done in bad faith, however, are not specified
choice of the debtor who generally has the right of election.—“In an alternative within this enumeration. When a party breaches a contract, he or she goes against
obligation, there is more than one object, and the fulfillment of one is sufficient, Article 19 of the Civil Code, which states: Article 19. Every person must, in the
determined by the choice of the debtor who generally has the right of election.” The exercise of his rights and in the performance of his duties, act with justice, give
right of election is extinguished when the party who may exercise that option everyone his due, and observe honesty and good faith. Persons who have the right to
categorically and unequivocally makes his or her choice known. The choice of the enter into contractual relations must exercise that right with honesty and good faith.
debtor must also be communicated to the creditor who must receive notice of it Failure to do so results in an abuse of that right, which may become the basis of an
since: The object of this notice is to give the creditor . . . opportunity to express his action for damages. Article 19, however, cannot be its sole basis: Article 19 is the
consent, or to impugn the election made by the debtor, and only after said notice general rule which governs the conduct of human relations. By itself, it is not the
shall the election take legal effect when consented by the creditor, or if impugned by basis of an actionable tort. Article 19 describes the degree of care required so that an
the latter, when declared proper by a competent court. actionable tort may arise when it is alleged together with Article 20 or Article 21.
Same; Same; Novation; Novation extinguishes an obligation between two Same; Same; Exemplary Damages; Exemplary damages may also be
parties when there is a substitution of objects or debtors or when there is awarded in this case to serve as a deterrent to those who use fraudulent means to
subrogation of the creditor.—Novation extinguishes an obligation between two evade their liabilities.—Business owners must always be forthright in their dealings.
parties when there is a substitution of objects or debtors or when there is subrogation They cannot be allowed to renege on their obligations, considering that these
of the creditor. It occurs only when the new contract declares so “in unequivocal obligations were freely entered into by them. Exemplary damages may also be
terms” or that “the old and the new obligations be on every point incompatible with awarded in this case to serve as a deterrent to those who use fraudulent means to
each other.” evade their liabilities. Since the award of exemplary damages is proper, attorney’s
fees and cost of the suit may also be recovered. Article 2208 of the Civil Code
Same; Same; Same; The consent of the creditor must also be secured for the states: Article 2208. In the absence of stipulation, attorney’s fees and expenses of
novation to be valid.—The consent of the creditor must also be secured for the litigation, other than judicial costs, cannot be recovered, except: (1) When
novation to be valid: Novation must be expressly consented to. Moreover, the exemplary damages are awarded[.]
conflicting intention and acts of the parties underscore the absence of any express
disclosure or circumstances with which to deduce a clear and unequivocal intent by Same; Obligations; Liability of Corporate Officers; As a general rule,
the parties to novate the old agreement. directors, officers, or employees of a corporation cannot be held personally liable
for obligations incurred by the corporation.—As a general rule, directors, officers,
Same; Damages; Moral Damages; Moral damages are not awarded as a or employees of a corporation cannot be held personally liable for obligations
matter of right but only after the party claiming it proved that the breach was due to incurred by the corporation. However, this veil of corporate fiction may be pierced if
fraud or bad faith.—Under Article 2220 of the Civil Code, moral damages may be complainant is able to prove, as in this case, that (1) the officer is guilty of
awarded in case of breach of contract where the breach is due to fraud or bad faith: negligence or bad faith, and (2) such negligence or bad faith was clearly and
Art. 2220. Willfull injury to property may be a legal ground for awarding moral convincingly proven. Here, petitioner Santos entered into a contract with respondent
damages if the court should find that, under the circumstances, such damages are in her capacity as the President and Chief Executive Officer of Arco Pulp and Paper.
justly due. The same rule applies to breaches of contract where the defendant She also issued the check in partial payment of petitioner corporation’s obligations
acted fraudulently or in bad faith. (Emphasis supplied) Moral damages are not to respondent on behalf of petitioner Arco Pulp and Paper. This is clear on the face
awarded as a matter of right but only after the party claiming it proved that the of the check bearing the account name, “Arco Pulp & Paper, Co., Inc.” Any
breach was due to fraud or bad faith. As this court stated: Moral damages are not obligation arising from these acts would not, ordinarily, be petitioner Santos’
recoverable simply because a contract has been breached. They are recoverable only personal undertaking for which she would be solidarily liable with petitioner Arco
if the party from whom it is claimed acted fraudulently or in bad faith or in wanton Pulp and Paper.
disregard of his contractual obligations. The breach must be wanton, reckless,
malicious or in bad faith, and oppressive or abusive. Same; Same; Rates of Interest; In view of the promulgation by the Supreme
Court of the decision dated August 13, 2013 in Nacar v. Gallery Frames, 703 SCRA
Same; Same; Abuse of Rights; Persons who have the right to enter into 439, the rate of interest due on the obligation must be modified from 12% per
contractual relations must exercise that right with honesty and good faith. Failure annum to 6% per annum from the time of demand.—In view, however, of the
promulgation by this court of the decision dated August 13, 2013 in Nacar v.
Gallery Frames, 703 SCRA 439, the rate of interest due on the obligation must be
modified from 12% per annum to 6% per annum from the time of demand. Nacar
effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,
234 SCRA 78 (1994), and we have laid down the following guidelines with regard
to the rate of legal interest: To recapitulate and for future guidance, the
guidelines laid down in the case of Eastern Shipping Lines are accordingly
modified to embody BSP-MB Circular No. 799, as follows: I. When an
obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on “Damages” of the Civil Code govern in determining
the measure of recoverable damages. II. With regard particularly to an award of
interest in the concept of actual and compensatory damages, the rate of interest, as
well as the accrual thereof, is imposed, as follows: 1. When the obligation is
breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 6% per annum to be computed from default, i.e., from judicial
or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code. 2. When an obligation, not constituting a loan or forbearance of money,
is breached, an interest on the amount of damages awarded may be imposed at Republic of the Philippines
the discretion of the court at the rate of 6% per annum. No interest, however, shall SUPREME COURT
be adjudged on unliquidated claims or damages, except when or until the demand Manila
can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when THIRD DIVISION
such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of the court is made G.R. No. 206806 June 25, 2014
(at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall,
ARCO PULP AND PAPER CO., INC. and CANDIDA A.
in any case, be on the amount finally adjudged. 3. When the judgment of the court
SANTOS, Petitioners,
awarding a sum of money becomes final and executory, the rate of legal interest,
vs.
whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per
DAN T. LIM, doing business under the name and style of
annum from such finality until its satisfaction, this interim period being deemed to
QUALITY PAPERS & PLASTIC PRODUCTS
be by then an equivalent to a forbearance of credit. And, in addition to the above,
ENTERPRISES, Respondent.
judgments that have become final and executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented applying the rate of interest fixed
therein. DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to ....
extinguish an obligation. It cannot be presumed and may be implied
only if the old and new contracts are incompatible on every point. It has been agreed further that the Local OCC materials to be used
for the production of the above Test Liners will be supplied by
Before us is a petition for review on certiorari 1 assailing the Court of Quality Paper & Plastic Products Ent., total of 600 Metric Tons at
Appeals’ decision2 in CA-G.R. CV No. 95709, which stemmed from a ₱6.50 per kg. (price subject to change per advance notice). Quantity
complaint3 filed in the Regional Trial Court of Valenzuela City, of Local OCC delivery will be based on the quantity of Test Liner
Branch 171, for collection of sum of money. delivered to Megapack Container Corp. based on the above
production schedule.11
The facts are as follows:
On May 5, 2007, Dan T.Lim sent a letter 12 to Arco Pulp and Paper
Dan T. Lim works in the business of supplying scrap papers, demanding payment of the amount of 7,220,968.31, but no payment
cartons, and other raw materials, under the name Quality Paper and was made to him.13
Plastic Products, Enterprises, to factories engaged in the paper mill
business.4 From February 2007 to March 2007, he delivered scrap Dan T. Lim filed a complaint 14 for collection of sum of money with
papers worth 7,220,968.31 to Arco Pulp and Paper Company, Inc. prayer for attachment with the Regional Trial Court, Branch 171,
(Arco Pulp and Paper) through its Chief Executive Officer and Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its
President, Candida A. Santos. 5 The parties allegedly agreed that Arco answer15 but failed to have its representatives attend the pre-trial
Pulp and Paper would either pay Dan T. Lim the value of the raw hearing. Hence, the trial court allowed Dan T. Lim to present his
materials or deliver to him their finished products of equivalent evidence ex parte.16
value.6
On September 19, 2008, the trial court rendered a judgment in favor
Dan T. Lim alleged that when he delivered the raw materials, Arco of Arco Pulp and Paper and dismissed the complaint, holding that
Pulp and Paper issued a post-dated check dated April 18, 2007 7 in when Arco Pulp and Paper and Eric Sy entered into the
the amount of 1,487,766.68 as partial payment, with the assurance memorandum of agreement, novation took place, which extinguished
that the check would not bounce.8 When he deposited the check on Arco Pulp and Paper’s obligation to Dan T. Lim. 17
April 18, 2007, it was dishonored for being drawn against a closed
account.9 Dan T. Lim appealed18 the judgment with the Court of Appeals.
According to him, novation did not take place since the
On the same day, Arco Pulp and Paper and a certain Eric Sy memorandum of agreement between Arco Pulp and Paper and Eric
executed a memorandum of agreement 10 where Arco Pulp and Paper Sy was an exclusive and private agreement between them. He argued
bound themselves to deliver their finished products to Megapack that if his name was mentioned in the contract, it was only for
Container Corporation, owned by Eric Sy, for his account. According supplying the parties their required scrap papers, where his
to the memorandum, the raw materials would be supplied by Dan T. conformity through a separate contract was indispensable. 19
Lim, through his company, Quality Paper and Plastic Products. The
memorandum of agreement reads as follows: On January 11, 2013, the Court of Appeals 20 rendered a
decision21 reversing and setting aside the judgment dated September
Per meeting held at ARCO, April 18, 2007, it has been mutually 19, 2008 and ordering Arco Pulp and Paper to jointly and severally
agreed between Mrs. Candida A. Santos and Mr. Eric Sy that ARCO pay Dan T. Lim the amount of ₱7,220,968.31 with interest at 12%
will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches per annum from the time of demand; ₱50,000.00 moral damages;
at the price of ₱18.50 per kg. to Megapack Container for Mr. Eric ₱50,000.00 exemplary damages; and ₱50,000.00 attorney’s fees.22
Sy’s account. Schedule of deliveries are as follows:
The appellate court ruled that the facts and circumstances in this 2. Whether Candida A. Santos was solidarily liable with Arco
case clearly showed the existence of an alternative obligation. 23 It Pulp and Paper Co., Inc.
also ruled that Dan T. Lim was entitled to damages and attorney’s
fees due to the bad faith exhibited by Arco Pulp and Paper in not 3. Whether moral damages, exemplary damages, and
honoring its undertaking.24 attorney’s fees can be awarded
Its motion for reconsideration 25 having been denied,26 Arco Pulp and The petition is denied.
Paper and its President and Chief Executive Officer, Candida A.
Santos, bring this petition for review on certiorari.
The obligation between the parties was an alternative obligation
On one hand, petitioners argue that the execution of the
memorandum of agreement constituted a novation of the original The rule on alternative obligations is governed by Article 1199 of the
obligation since Eric Sy became the new debtor of respondent. They Civil Code, which states:
also argue that there is no legal basis to hold petitioner Candida A.
Santos personally liable for the transaction that petitioner Article 1199. A person alternatively bound by different prestations
corporation entered into with respondent. The Court of Appeals, they shall completely perform one of them.
allege, also erred in awarding moral and exemplary damages and
attorney’s fees to respondent who did not show proof that he was The creditor cannot be compelled to receive part of one and part of
entitled to damages.27 the other undertaking.
Respondent, on the other hand, argues that the Court of Appeals "In an alternative obligation, there is more than one object, and the
was correct in ruling that there was no proper novation in this case. fulfillment of one is sufficient, determined by the choice of the debtor
He argues that the Court of Appeals was correct in ordering the who generally has the right of election."32 The right of election is
payment of 7,220,968.31 with damages since the debt of petitioners extinguished when the party who may exercise that option
remains unpaid.28 He also argues that the Court of Appeals was categorically and unequivocally makes his or her choice known. 33
correct in holding petitioners solidarily liable since petitioner
Candida A. Santos was "the prime mover for such outstanding
corporate liability."29 In their reply, petitioners reiterate that novation The choice of the debtor must also be communicated to the creditor
took place since there was nothing in the memorandum of agreement who must receive notice of it since: The object of this notice is to give
showing that the obligation was alternative. They also argue that the creditor . . . opportunity to express his consent, or to impugn the
when respondent allowed them to deliver the finished products to election made by the debtor, and only after said notice shall the
Eric Sy, the original obligation was novated. 30 election take legal effect when consented by the creditor, or if
impugned by the latter, when declared proper by a competent
court.34
A rejoinder was submitted by respondent, but it was noted without
action in view of A.M. No. 99-2-04-SC dated November 21, 2000. 31
According to the factual findings of the trial court and the appellate
court, the original contract between the parties was for respondent to
The issues to be resolved by this court are as follows: deliver scrap papers worth ₱7,220,968.31 to petitioner Arco Pulp
and Paper. The payment for this delivery became petitioner Arco Pulp
1. Whether the obligation between the parties was and Paper’s obligation. By agreement, petitioner Arco Pulp and
extinguished by novation Paper, as the debtor, had the option to either (1) pay the price or(2)
deliver the finished products of equivalent value to respondent. 35
The appellate court, therefore, correctly identified the obligation Article 1292. In order that an obligation may be extinguished by
between the parties as an alternative obligation, whereby petitioner another which substitute the same, it is imperative that it be so
Arco Pulp and Paper, after receiving the raw materials from declared in unequivocal terms, or that the old and the new
respondent, would either pay him the price of the raw materials or, obligations be on every point incompatible with each other. (1204)
in the alternative, deliver to him the finished products of equivalent
value. Article 1293. Novation which consists in substituting a new debtor in
the place of the original one, may be made even without the
When petitioner Arco Pulp and Paper tendered a check to respondent knowledge or against the will of the latter, but not without the
in partial payment for the scrap papers, they exercised their option consent of the creditor. Payment by the new debtor gives him the
to pay the price. Respondent’s receipt of the check and his rights mentioned in Articles 1236 and 1237. (1205a)
subsequent act of depositing it constituted his notice of petitioner
Arco Pulp and Paper’s option to pay. Novation extinguishes an obligation between two parties when there
is a substitution of objects or debtors or when there is subrogation of
This choice was also shown by the terms of the memorandum of the creditor. It occurs only when the new contract declares so "in
agreement, which was executed on the same day. The memorandum unequivocal terms" or that "the old and the new obligations be on
declared in clear terms that the delivery of petitioner Arco Pulp and every point incompatible with each other."36
Paper’s finished products would be to a third person, thereby
extinguishing the option to deliver the finished products of Novation was extensively discussed by this court in Garcia v.
equivalent value to respondent. Llamas:37
The memorandum of agreement did not constitute a novation of Novation is a mode of extinguishing an obligation by changing its
the original contract objects or principal obligations, by substituting a new debtor in place
of the old one, or by subrogating a third person to the rights of the
The trial court erroneously ruled that the execution of the creditor. Article 1293 of the Civil Code defines novation as follows:
memorandum of agreement constituted a novation of the contract
between the parties. When petitioner Arco Pulp and Paper opted "Art. 1293. Novation which consists in substituting a new debtor in
instead to deliver the finished products to a third person, it did not the place of the original one, may be made even without the
novate the original obligation between the parties. knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him rights
The rules on novation are outlined in the Civil Code, thus: mentioned in articles 1236 and 1237."
Article 1291. Obligations may be modified by: In general, there are two modes of substituting the person of the
debtor: (1) expromision and (2) delegacion. In expromision, the
(1) Changing their object or principal conditions; initiative for the change does not come from — and may even be
made without the knowledge of — the debtor, since it consists of a
third person’s assumption of the obligation. As such, it logically
(2) Substituting the person of the debtor; requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third person
(3) Subrogating a third person in the rights of the creditor. who consents to the substitution and assumes the obligation; thus,
(1203) the consent of these three persons are necessary. Both modes of
substitution by the debtor require the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when The consent of the creditor must also be secured for the novation to
an old obligation is terminated by the creation of a new one that be valid:
takes the place of the former. It is merely modificatory when the old
obligation subsists to the extent that it remains compatible with the Novation must be expressly consented to. Moreover, the conflicting
amendatory agreement. Whether extinctive or modificatory, novation intention and acts of the parties underscore the absence of any
is made either by changing the object or the principal conditions, express disclosure or circumstances with which to deduce a clear
referred to as objective or real novation; or by substituting the person and unequivocal intent by the parties to novate the old
of the debtor or subrogating a third person to the rights of the agreement.40 (Emphasis supplied)
creditor, an act known as subjective or personal novation. For
novation to take place, the following requisites must concur:
In this case, respondent was not privy to the memorandum of
agreement, thus, his conformity to the contract need not be secured.
1) There must be a previous valid obligation. This is clear from the first line of the memorandum, which states:
2) The parties concerned must agree to a new contract. Per meeting held at ARCO, April 18, 2007, it has been mutually
agreed between Mrs. Candida A. Santos and Mr. Eric Sy. . . . 41
3) The old contract must be extinguished.
If the memorandum of agreement was intended to novate the original
4) There must be a valid new contract. agreement between the parties, respondent must have first agreed to
the substitution of Eric Sy as his new debtor. The memorandum of
Novation may also be express or implied. It is express when the new agreement must also state in clear and unequivocal terms that it has
obligation declares in unequivocal terms that the old obligation is replaced the original obligation of petitioner Arco Pulp and Paper to
extinguished. It is implied when the new obligation is incompatible respondent. Neither of these circumstances is present in this case.
with the old one on every point. The test of incompatibility is whether
the two obligations can stand together, each one with its own Petitioner Arco Pulp and Paper’s act of tendering partial payment to
independent existence.38 (Emphasis supplied) respondent also conflicts with their alleged intent to pass on their
obligation to Eric Sy. When respondent sent his letter of demand to
Because novation requires that it be clear and unequivocal, it is petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that
never presumed, thus: the former neither acknowledged nor consented to the latter as his
new debtor. These acts, when taken together, clearly show that
novation did not take place. Since there was no novation, petitioner
In the civil law setting, novatio is literally construed as to make new. Arco Pulp and Paper’s obligation to respondent remains valid and
So it is deeply rooted in the Roman Law jurisprudence, the principle existing. Petitioner Arco Pulp and Paper, therefore, must still pay
— novatio non praesumitur —that novation is never presumed.At respondent the full amount of ₱7,220,968.31.
bottom, for novation tobe a jural reality, its animus must be ever
present, debitum pro debito — basically extinguishing the old
obligation for the new one.39 (Emphasis supplied) There is nothing in Petitioners are liable for damages
the memorandum of agreement that states that with its execution,
the obligation of petitioner Arco Pulp and Paper to respondent would Under Article 2220 of the Civil Code, moral damages may be awarded
be extinguished. It also does not state that Eric Sy somehow in case of breach of contract where the breach is due to fraud or bad
substituted petitioner Arco Pulp and Paper as respondent’s debtor. It faith:
merely shows that petitioner Arco Pulp and Paper opted to deliver the
finished products to a third person instead.
Art. 2220. Willfull injury to property may be a legal ground for Article 2219. Moral damages may be recovered in the following and
awarding moral damages if the court should find that, under the analogous cases:
circumstances, such damages are justly due. The same rule applies
to breaches of contract where the defendant acted fraudulently or in (1) A criminal offense resulting in physical injuries;
bad faith. (Emphasis supplied)
(2) Quasi-delicts causing physical injuries;
Moral damages are not awarded as a matter of right but only after
the party claiming it proved that the breach was due to fraud or bad
faith. As this court stated: (3) Seduction, abduction, rape, or other lascivious acts;
Moral damages are not recoverable simply because a contract has (4) Adultery or concubinage;
been breached. They are recoverable only if the party from whom it is
claimed acted fraudulently or in bad faith or in wanton disregard of (5) Illegal or arbitrary detention or arrest;
his contractual obligations. The breach must be wanton, reckless,
malicious or in bad faith, and oppressive or abusive. 42 (6) Illegal search;
Further, the following requisites must be proven for the recovery of (7) Libel, slander or any other form of defamation;
moral damages:
(8) Malicious prosecution;
An award of moral damages would require certain conditions to be
met, to wit: (1)first, there must be an injury, whether physical,
mental or psychological, clearly sustained by the claimant; (2) (9) Acts mentioned in Article 309;
second, there must be culpable act or omission factually established;
(3) third, the wrongful act or omission of the defendant is the (10) Acts and actions referred to in Articles 21, 26, 27, 28,
proximate cause of the injury sustained by the claimant; and (4) 29, 30, 32, 34, and 35.
fourth, the award of damages is predicated on any of the cases stated
in Article 2219 of the Civil Code.43 Breaches of contract done in bad faith, however, are not specified
within this enumeration. When a party breaches a contract, he or
Here, the injury suffered by respondent is the loss of ₱7,220,968.31 she goes against Article 19 of the Civil Code, which states: Article 19.
from his business. This has remained unpaid since 2007. This injury Every person must, in the exercise of his rights and in the
undoubtedly was caused by petitioner Arco Pulp and Paper’s act of performance of his duties, act with justice, give everyone his due,
refusing to pay its obligations. and observe honesty and good faith.
When the obligation became due and demandable, petitioner Arco Persons who have the right to enter into contractual relations must
Pulp and Paper not only issued an unfunded check but also entered exercise that right with honesty and good faith. Failure to do so
into a contract with a third person in an effort to evade its liability. results in an abuse of that right, which may become the basis of an
This proves the third requirement. action for damages. Article 19, however, cannot be its sole basis:
As to the fourth requisite, Article 2219 of the Civil Code provides that Article 19 is the general rule which governs the conduct of human
moral damages may be awarded in the following instances: relations. By itself, it is not the basis of an actionable tort. Article 19
describes the degree of care required so that an actionable tort may
arise when it is alleged together with Article 20 or Article 21. 44
Article 20 and 21 of the Civil Code are as follows: obligations arising from contracts in bad faith, the act is not only
contrary to morals, good customs, and public policy; it is also a
Article 20. Every person who, contrary to law, wilfully or negligently violation of Article 1159. Breaches of contract become the basis of
causes damage to another, shall indemnify the latter for the same. moral damages, not only under Article 2220, but also under Articles
19 and 20 in relation to Article 1159.
Article 21.Any person who wilfully causes loss or injury to another in
a manner that is contrary to morals, good customs or public policy Moral damages, however, are not recoverable on the mere breach of
shall compensate the latter for the damage. the contract. Article 2220 requires that the breach be done
fraudulently or in bad faith. In Adriano v. Lasala: 46
To be actionable, Article 20 requires a violation of law, while Article
21 only concerns with lawful acts that are contrary to morals, good To recover moral damages in an action for breach of contract, the
customs, and public policy: breach must be palpably wanton, reckless and malicious, in bad
faith, oppressive, or abusive. Hence, the person claiming bad faith
must prove its existence by clear and convincing evidence for the law
Article 20 concerns violations of existing law as basis for an injury. It always presumes good faith.
allows recovery should the act have been willful or negligent. Willful
may refer to the intention to do the act and the desire to achieve the
outcome which is considered by the plaintiff in tort action as Bad faith does not simply connote bad judgment or negligence. It
injurious. Negligence may refer to a situation where the act was imports a dishonest purpose or some moral obliquity and conscious
consciously done but without intending the result which the plaintiff doing of a wrong, a breach of known duty through some motive or
considers as injurious. interest or ill will that partakes of the nature of fraud. It is, therefore,
a question of intention, which can be inferred from one’s conduct
and/or contemporaneous statements.47 (Emphasis supplied)
Article 21, on the other hand, concerns injuries that may be caused
by acts which are not necessarily proscribed by law. This article
requires that the act be willful, that is, that there was an intention to Since a finding of bad faith is generally premised on the intent of the
do the act and a desire to achieve the outcome. In cases under doer, it requires an examination of the circumstances in each case.
Article 21, the legal issues revolve around whether such outcome
should be considered a legal injury on the part of the plaintiff or When petitioner Arco Pulp and Paper issued a check in partial
whether the commission of the act was done in violation of the payment of its obligation to respondent, it was presumably with the
standards of care required in Article 19. 45 knowledge that it was being drawn against a closed account. Worse,
it attempted to shift their obligations to a third person without the
When parties act in bad faith and do not faithfully comply with their consent of respondent.
obligations under contract, they run the risk of violating Article 1159
of the Civil Code: Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest
purpose or some moral obliquity and conscious doing of a wrong, a
Article 1159. Obligations arising from contracts have the force of law breach of known duty through some motive or interest or ill will that
between the contracting parties and should be complied with in good partakes of the nature of fraud." 48 Moral damages may, therefore, be
faith. awarded.
Article 2219, therefore, is not an exhaustive list of the instances Exemplary damages may also be awarded. Under the Civil Code,
where moral damages may be recovered since it only specifies, exemplary damages are due in the following circumstances:
among others, Article 21. When a party reneges on his or her
Article 2232. In contracts and quasi-contracts, the court may award (1) they may be imposed by way of example in addition to
exemplary damages if the defendant acted in a wanton, fraudulent, compensatory damages, and only after the claimant's right to
reckless, oppressive, or malevolent manner. them has been established;
Article 2233. Exemplary damages cannot be recovered as a matter of (2) that they cannot be recovered as a matter of right, their
right; the court will decide whether or not they should be determination depending upon the amount of compensatory
adjudicated. damages that may be awarded to the claimant; and
Article 2234. While the amount of the exemplary damages need not (3) the act must be accompanied by bad faith or done in a
be proven, the plaintiff must show that he is entitled to moral, wanton, fraudulent, oppressive or malevolent manner. 51
temperate or compensatory damages before the court may consider
the question of whether or not exemplary damages should be Business owners must always be forthright in their dealings. They
awarded. cannot be allowed to renege on their obligations, considering that
these obligations were freely entered into by them. Exemplary
In Tankeh v. Development Bank of the Philippines, 49 we stated that: damages may also be awarded in this case to serve as a deterrent to
those who use fraudulent means to evade their liabilities.
The purpose of exemplary damages is to serve as a deterrent to
future and subsequent parties from the commission of a similar Since the award of exemplary damages is proper, attorney’s fees and
offense. The case of People v. Ranteciting People v. Dalisay held that: cost of the suit may also be recovered.
Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or Article 2208 of the Civil Code states:
corrective damages are intended to serve as a deterrent to serious
wrong doings, and as a vindication of undue sufferings and wanton Article 2208. In the absence of stipulation, attorney's fees and
invasion of the rights of an injured or a punishment for those guilty expenses of litigation, other than judicial costs, cannot be recovered,
of outrageous conduct. These terms are generally, but not always, except:
used interchangeably. In common law, there is preference in the use
of exemplary damages when the award is to account for injury to
feelings and for the sense of indignity and humiliation suffered by a (1) When exemplary damages are awarded[.]
person as a result of an injury that has been maliciously and Petitioner Candida A. Santos is solidarily liable with petitioner
wantonly inflicted, the theory being that there should be corporation
compensation for the hurt caused by the highly reprehensible
conduct of the defendant—associated with such circumstances as Petitioners argue that the finding of solidary liability was erroneous
willfulness, wantonness, malice, gross negligence or recklessness, since no evidence was adduced to prove that the transaction was
oppression, insult or fraud or gross fraud—that intensifies the also a personal undertaking of petitioner Santos. We disagree.
injury. The terms punitive or vindictive damages are often used to
refer to those species of damages that may be awarded against a In Heirs of Fe Tan Uy v. International Exchange Bank, 52 we stated
person to punish him for his outrageous conduct. In either case, that:
these damages are intended in good measure to deter the wrongdoer
and others like him from similar conduct in the future. 50 (Emphasis
supplied; citations omitted) Basic is the rule in corporation law that a corporation is a juridical
entity which is vested with a legal personality separate and distinct
from those acting for and in its behalf and, in general, from the
The requisites for the award of exemplary damages are as follows: people comprising it. Following this principle, obligations incurred by
the corporation, acting through its directors, officers and employees, We find, however, that the corporate veil must be pierced. In Livesey
are its sole liabilities. A director, officer or employee of a corporation v. Binswanger Philippines:55
is generally not held personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be disregarded if it is Piercing the veil of corporate fiction is an equitable doctrine
used as a means to perpetrate fraud or an illegal act, or as a vehicle developed to address situations where the separate corporate
for the evasion of an existing obligation, the circumvention of personality of a corporation is abused or used for wrongful purposes.
statutes, or to confuse legitimate issues. Under the doctrine, the corporate existence may be disregarded
where the entity is formed or used for non-legitimate purposes, such
.... as to evade a just and due obligation, or to justify a wrong, to shield
or perpetrate fraud or to carry out similar or inequitable
Before a director or officer of a corporation can be held personally considerations, other unjustifiable aims or intentions, in which case,
liable for corporate obligations, however, the following requisites the fiction will be disregarded and the individuals composing it and
must concur: (1) the complainant must allege in the complaint that the two corporations will be treated as identical. 56 (Emphasis
the director or officer assented to patently unlawful acts of the supplied)
corporation, or that the officer was guilty of gross negligence or bad
faith; and (2) the complainant must clearly and convincingly prove According to the Court of Appeals, petitioner Santos was solidarily
such unlawful acts, negligence or bad faith. liable with petitioner Arco Pulp and Paper, stating that:
While it is true that the determination of the existence of any of the In the present case, We find bad faith on the part of the [petitioners]
circumstances that would warrant the piercing of the veil of when they unjustifiably refused to honor their undertaking in favor
corporate fiction is a question of fact which cannot be the subject of of the [respondent]. After the check in the amount of 1,487,766.68
a petition for review on certiorari under Rule 45, this Court can take issued by [petitioner] Santos was dishonored for being drawn against
cognizance of factual issues if the findings of the lower court are not a closed account, [petitioner] corporation denied any privity with
supported by the evidence on record or are based on a [respondent]. These acts prompted the [respondent] to avail of the
misapprehension of facts.53 (Emphasis supplied) remedies provided by law in order to protect his rights. 57
As a general rule, directors, officers, or employees of a corporation We agree with the Court of Appeals. Petitioner Santos cannot be
cannot be held personally liable for obligations incurred by the allowed to hide behind the corporate veil.1âwphi1 When petitioner
corporation. However, this veil of corporate fiction may be pierced if Arco Pulp and Paper’s obligation to respondent became due and
complainant is able to prove, as in this case, that (1) the officer is demandable, she not only issued an unfunded check but also
guilty of negligence or bad faith, and (2) such negligence or bad faith contracted with a third party in an effort to shift petitioner Arco Pulp
was clearly and convincingly proven. and Paper’s liability. She unjustifiably refused to honor petitioner
corporation’s obligations to respondent. These acts clearly amount to
Here, petitioner Santos entered into a contract with respondent in bad faith. In this instance, the corporate veil may be pierced, and
her capacity as the President and Chief Executive Officer of Arco petitioner Santos may be held solidarily liable with petitioner Arco
Pulp and Paper. She also issued the check in partial payment of Pulp and Paper.
petitioner corporation’s obligations to respondent on behalf of
petitioner Arco Pulp and Paper. This is clear on the face of the check The rate of interest due on the obligation must be reduced in
bearing the account name, "Arco Pulp & Paper, Co., Inc." 54 Any view of Nacar v. Gallery Frames58
obligation arising from these acts would not, ordinarily, be petitioner
Santos’ personal undertaking for which she would be solidarily liable In view, however, of the promulgation by this court of the decision
with petitioner Arco Pulp and Paper. dated August 13, 2013 in Nacar v. Gallery Frames, 59 the rate of
interest due on the obligation must be modified from 12% per annum shall begin to run only from the date the judgment of the
to 6% per annum from the time of demand. court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The
Nacar effectively amended the guidelines stated in Eastern Shipping actual base for the computation of legal interest shall, in any
v. Court of Appeals, 60 and we have laid down the following guidelines case, be on the amount finally adjudged.
with regard to the rate of legal interest:
3. When the judgment of the court awarding a sum of money
To recapitulate and for future guidance, the guidelines laid down in becomes final and executory, the rate of legal interest,
the case of Eastern Shipping Linesare accordingly modified to whether the case falls under paragraph 1 or paragraph 2,
embody BSP-MB Circular No. 799, as follows: above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
I. When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the contravenor
can be held liable for damages. The provisions under Title XVIII on And, in addition to the above, judgments that have become final and
"Damages" of the Civil Code govern in determining the measure of executory prior to July 1, 2013, shall not be disturbed and shall
recoverable damages. continue to be implemented applying the rate of interest fixed
therein.61 (Emphasis supplied; citations omitted.)
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as the According to these guidelines, the interest due on the obligation of
accrual thereof, is imposed, as follows: ₱7,220,968.31 should now be at 6% per annum, computed from May
5, 2007, when respondent sent his letter of demand to petitioners.
This interest shall continue to be due from the finality of this
1. When the obligation is breached, and it consists in the decision until its full satisfaction.
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall WHEREFORE, the petition is DENIED in part. The decision in CA-
itself earn legal interest from the time it is judicially G.R. CV No. 95709 is AFFIRMED.
demanded. In the absence of stipulation, the rate of interest
shall be 6% per annum to be computed from default, i.e., Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are
from judicial or extrajudicial demand under and subject to hereby ordered solidarily to pay respondent Dan T. Lim the amount
the provisions of Article 1169 of the Civil Code. of ₱7,220,968.31 with interest of 6% per annum at the time of
demand until finality of judgment and its full satisfaction, with moral
2. When an obligation, not constituting a loan or forbearance damages in the amount of ₱50,000.00, exemplary damages in the
of money, is breached, an interest on the amount of damages amount of ₱50,000.00, and attorney's fees in the amount of
awarded may be imposed at the discretion of the court at the ₱50,000.00.
rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages, except when or SO ORDERED.
until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with MARVIC MARIO VICTOR F. LEONEN
reasonable certainty, the interest shall begin to run from the Associate Justice
time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest
Mercantile Law; Negotiable Instruments Law; Promissory Notes; Words and G.R. No. 193890 March 11, 2015
Phrases; A promissory note (PN) is a solemn acknowledgment of a debt and a
formal commitment to repay it on the date and under the conditions agreed upon by ESTANISLAO and AFRICA SINAMBAN, Petitioners,
the borrower and the lender.—“A promissory note is a solemn acknowledgment of vs.
a debt and a formal commitment to repay it on the date and under the conditions CHINA BANKING CORPORATION, Respondent.
agreed upon by the borrower and the lender. A person who signs such an instrument
is bound to honor it as a legitimate obligation duly assumed by him through the
signature he affixes thereto as a token of his good faith. If he reneges on his promise DECISION
without cause, he forfeits the sympathy and assistance of this Court and deserves
instead its sharp repudiation.” REYES, J.:
All of the three promissory notes carried an acceleration clause OACL 634-95 1,800,000.00 1,035,787.50 1,429,200.00 4,264,987.50
stating that if the borrowers failed to pay any stipulated interest,
installment or loan amortization as they accrued, the notes shall, at
the option of Chinabank and without need of notice, immediately CLF 005-93 148,255.08 64,461.84 156,541.58 369,258.50
----------------------- ----------------------- ------------------- ------------------
become due and demandable. A penalty clause also provides that an
---- -----
additional amount shall be paid equivalent to 1/10 of 1% per day of
the total amount due from date of default until fully paid, and the
further sum of 10% of the total amount due, inclusive of interests, TOTAL P2,273,255.08 1,284,928.34 1,843,791.58 5,401,975.00
charges and penalties, as and for attorney’s fees and costs. 10
TOTAL AMOUNT DUE 5,401,975.00
In Chinabank’s Statement of Account11 dated May 18, 1998,
reproduced below, the outstanding balances of the three loans are
broken down, as follows: PLUS 10% ATTORNEY’S FEE 540,197.50
------------------
-----
(a) PN No. OACL 636-95 has an outstanding principal of 5,942,172.50
₱325,000.00, cumulative interest of ₱184,679.00, and
cumulative penalties of ₱258,050.00, or a total amount due
ADD: OTHER EXPENSES
of ₱767,729.00; (b) PN No. OACL 634-95 has an outstanding
principal of ₱1,800,000.00, cumulative interest of
₱1,035,787.50, and cumulative penalties of 1,429,200.00, or
INSURANCE PREMIUM 22,618.37
a total amount due of 4,264,987.50; and
(c) PN No. CLF 5-93 has an outstanding principal of POSTING OF NOTICE OF SALE 700.00
₱148,255.08, cumulative interest of ₱64,461.84, and
cumulative penalties of ₱156,541.58, or a total amount due
of ₱369,258.50. Note that from the original amount of PUBLICATION FEE 17,500.00
₱1,300,000.00, the loan principal had been reduced to only
₱148,255.08 as of May 18, 1998.12
REGISTRATION OF CERTIFICATE OF SALE (MISC.) 1,000.00 On the basis of the above statement of account, and
pursuant to the promissory notes, Chinabank instituted
extrajudicial foreclosure proceedings against the mortgage
REGISTRATION OF CERTIFICATE OF SALE (REGISTER OF DEEDS) security. The foreclosure sale was held on May 18, 1998,
with Chinabank offering the highest bid of ₱4,600,000.00,
but by then the defendants’ total obligations on the three
Registration fee 10,923.00 promissory notes had risen to ₱5,401,975.00, before
attorney’s fees of 10% and auction expenses, leaving a loan
deficiency of ₱1,758,427.87.14 Thus, in the complaint before
Entry fee 30.00
the RTC, Chinabank prayed to direct the defendants to
jointly and severally settle the said deficiency, plus 12%
Legal fund 20.00 interest per annum after May 18, 1998, 15 the date of the
auction sale.16
BIR certification 60.00 The spouses Sinamban, in their Answer17 dated February 26,
1999, averred that they do not recall having executed PN No.
OACL 636-95 for ₱325,000.00 on May 23, 1995, or PN No.
Doc. stamps tax 69,000.00
CLF 5-93 for ₱1,300,000.00 on February 26, 1991, and had
no participation in the execution of PN No. OACL 634-95 for
Capital Gains tax 276,000.00 356,033.00 ₱1,800,000.00 on April 24, 1995. They however admitted
------------------ that they signed some PN forms as co-makers upon the
----- request of the spouses Manalastas who are their relatives;
although they insisted that they derived no money or other
EXPENSES INCURRED ON OCULAR INSPECTION MADE 404.00
benefits from the loans. They denied knowing about the
ON mortgage security provided by the spouses Manalastas, or
TCT#173532-R & TCT#173533-R that the latter defaulted on their loans. They also refused to
acknowledge the loan deficiency of ₱1,758,427.87 on the
PNs, insisting that the mortgage collateral was worth more
ATTORNEY’S FEE 18,000.00
than ₱10,000,000.00, enough to answer for all the loans,
interests and penalties. They also claimed that they were not
notified of the auction sale, and denied that they knew about
the Certificate of Sale18 and the Statement of Account dated
416,255.37 May 18, 1998, and insisted that Chinabank manipulated the
foreclosure sale to exclude them therefrom. By way of
LESS: BID PRICE 4,600,000.00 counterclaim, the Spouses Sinamban prayed for damages
---------- and attorney’s fees of 25%, plus litigation expenses and costs
- of suit.
From the Order dated December 8, 1999 of the RTC, the 2. Sps. Estanislao and Africa Sinamban are
spouses Sinamban appealed to the CA on January 4, 2000, solidarily liable with Sps. Danilo and Magdalena
Manalastas for the amount of Php844,501.90 showing that it is the Sps. Sinamban, as the
(inclusive of 10% attorney’s fees) on Promissory Note debtors, and not the respondent bank, who are given
No. OACL00636-95 dated 23 May 1995; the choice under Article 1252 of the Civil Code to
have the proceeds of the auction sale applied as
3. Estanislao Sinamban and Sps. Danilo and payments to their obligations under PN# OACL 636-
Magdalena Manalastas are solidarily liable for the 95 dated 23 May 1995 and PN# CLF 5-93 dated 26
amount of Php406,184.35 (inclusive of 10% February 1991.35
attorney’s fees) on Promissory Note No. CLF 5-93
dated 26 February 1991; and Ruling of the Court
4. The foregoing amounts shall bear interest at the The Court modifies the CA decision.
rate of 12% per annum from 18 November 1998
until fully paid. A co-maker of a PN who binds
himself with the maker "jointly and
SO ORDERED.34 (Some emphasis ours) severally" renders himself directly
and primarily liable with the maker
Petition for Review to the Supreme Court on the debt, without reference to his
solvency.
In this petition for review, the spouses Sinamban seek to be
completely relieved of any liability on the PNs, solidary or "A promissory note is a solemn acknowledgment of a debt
otherwise, by interposing the following issues: and a formal commitment to repay it on the date and under
the conditions agreed upon by the borrower and the lender.
A person who signs such an instrument is bound to honor it
5.1 Whether or not the Honorable Court of Appeals as a legitimate obligation duly assumed by him through the
erred in not considering that the Sps. Sinamban’s signature he affixes thereto as a token of his good faith. If he
obligations under PN# OACL 636-95 dated May 23, reneges on his promise without cause, he forfeits the
1995 in the principal sum of Php325,000.00 and sympathy and assistance of this Court and deserves instead
PN# CLF 5-93 dated February 26, 1991 in the its sharp repudiation."36
principal sum of Php1,300,000.00 are more onerous
and burdensome on their part as mere sureties (co-
makers) of their co-defendants-spouses Danilo and Employing words of common commercial usage and well-
Magdalena Manalastas’ (hereinafter referred to as accepted legal significance, the three subject PNs uniformly
the "Sps. Manalastas") obligations over the same, describe the solidary nature and extent of the obligation
compared to the Sps. Manalastas’ sole obligation assumed by each of the defendants in Civil Case No. 11708,
under PN# OACL 634-95 dated 24 April 1995 in the to wit:
principal amount of Php1,800,000.00, such that the
proceeds of the auction sale of the properties "FOR VALUE RECEIVED, I/We jointly and severally promise
securing all the three (3) promissory notes should to pay to the CHINA BANKING CORPORATION or its order
first be applied to satisfy the promissory notes the sum of PESOS x x x[.]"37 (Emphasis ours)
signed by the Sps. Sinamban; and
According to Article 2047 of the Civil Code, 38 if a person
5.2 Whether or not the Honorable Court of Appeals binds himself solidarily with the principal debtor, the
erred in not considering the facts indubitably provisions of Articles 1207 to 1222 of the Civil Code (Section
4, Chapter 3,Title I, Book IV) on joint and solidary the three (3) promissory notes," concluding that "[j]ust as the
obligations shall be observed. Thus, where there is a liability of the [spouses] Sinamban was lessened by the
concurrence of two or more creditors or of two or more foreclosure proceedings, so must they also share in the
debtors in one and the same obligation, Article 1207 deficiency judgment, in proportion to the PNs they co-signed
provides that among them, "[t]here is a solidary liability only with the [spouses] Manalastas, but notthe entire deficiency
when the obligation expressly so states, or when the law or judgment of ₱1,758,427.87."41
the nature of the obligation requires solidarity." It is settled
that when the obligor or obligors undertake to be "jointly and Significantly, in modifying the RTC’s second amended
severally" liable, it means that the obligation is solidary. 39 In decision, which provides for the pro rata distribution of the
this case, the spouses Sinamban expressly bound loan deficiency of ₱1,758,427.87, the CA first applied the
themselves to be jointly and severally, or solidarily, liable entire net proceeds of the auction sale of ₱4,183,744.63
with the principal makers of the PNs, the spouses (after auction expenses of ₱416,255.37), to PN No. OACL
Manalastas. 634-95, which on May 18, 1998 had an outstanding balance
of ₱4,264,987.50, inclusive of interest and penalties, plus
Moreover, as the CA pointed out, in Paragraph 5 of the PNs, 10% attorney’s fees, or a total of ₱4,691,486.25. Thus,
the borrowers and their co-makers expressly authorized ₱4,691,486.25 less ₱4,183,744.63 leaves a deficiency on PN
Chinabank, as follows: No. OACL 634-95 of ₱507,741.62, which is due solely from
the spouses Manalastas.
[T]o apply to the payment of this note and/or any other
particular obligation or obligations of all or any one of us to As for PN No. OACL 636-95, the CA ordered the spouses
the CHINA BANKING CORPORATION as the said Corporation Sinamban to pay, solidarily with the spouses Manalastas,
may select, irrespective of the dates of maturity, whether or the entire amount due thereon, ₱844,501.90, consisting of
not said obligations are then due, any or all moneys, the loan principal of ₱767,729.00 plus accrued interest,
securities and things of value which are now or which may penalties and 10% attorney’s fees; concerning PN No. CLF 5-
hereafter be in its hands on deposit or otherwise to the credit 93, the CA ordered the spouses Sinamban to pay, solidarily
of, or belonging to, all or any one of us, and the CHINA with the spouses Manalastas, the amount of ₱406,184.35,
BANKING CORPORATION is hereby authorized to sell at consisting of the balance of the loan principal of
public or private sale such securities or things of value for ₱369,258.50 plus accrued interest, penalties and 10%
the purpose of applying their proceeds to such payments. 40 attorney’s fees. The CA further ordered the payment of 12%
interest per annum from November 18, 1998, the date of
Pursuant to Article 1216 of the Civil Code, as well as judicial demand, until fully paid, on the above deficiencies.
Paragraph 5 of the PNs, Chinabank opted to proceed
against the co-debtors simultaneously, as implied in its Article 1216 of the Civil Code provides that "[t]he creditor
May 18, 1998 statement of account when it applied the may proceed against any one of the solidary debtors or some
entire amount of its auction bid to the aggregate amount or all of them simultaneously. The demand made against one
of the loan obligations. of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the
The PNs were executed to acknowledge each loan obtained debt has not been fully collected." Article 1252 42 of the Civil
from the credit line extended by Chinabank, which the Code does not apply, as urged by the petitioners, because in
principal makers and true beneficiaries, the spouses the said article the situation contemplated is that of a debtor
Manalastas, secured with a REM they executed over their with several debts due, whereas the reverse is true, with
properties. As the RTC noted in its Order dated December 8, each solidary debt imputable to several debtors.
1999, "the real estate mortgage was constituted to secure all
While the CA correctly noted that the choice is given to the security, the foreclosure of which will also benefit them
solidary creditor to determine against whom he wishes to proportionately. No PN enjoys any priority or preference in
enforce payment, the CA stated that Chinabank, in the payment over the others, with the only difference being that
exercise of the aforesaid option, chose to apply the net the spouses Sinamban are solidarily liable for the deficiency
proceeds of the extrajudicial foreclosure sale first to the PN on two of them.
solely signed by spouses Manalastas.43 Thus, the net
proceeds were applied first to PN No. OACL 634-95 in the Pursuant, then, to the order or manner of application of the
principal amount of ₱1,800,000.00, instead of pro rata to all auction proceeds chosen by Chinabank, the solidary liability
three PNs due. of the defendants pertaining to each PN shall be as follows:
The Court finds this factual conclusion of the CA not a) PN No. OACL 634-95, with a balance as of May
supported by any evidence or any previous 18, 1998 of ₱4,264,987.50: its share in the total
arrangement.1âwphi1 To the contrary, as clearly shown in deficiency is computed as the ratio of ₱4,264,987.50
its Statement of Account dated May 18, 1998, Chinabank to ₱5,401,975.00, multiplied by ₱1,758,427.87, or
opted to apply the entire auction proceeds to the aggregate ₱1,388,320.55, (not ₱507,741.62 as found by the
amount of the three PNs due, ₱5,401,975.00 (before CA);
attorney’s fees and auction expenses). Had it chosen to
enforce the debts as ruled by the CA, the Statement of
Account would have shown that the loan due on PN No. b) PN No. OACL 636-95, with a balance of
OACL 634-95 which is ₱4,691,486.25, should have been ₱767,729.00 as of May 18, 1998: its share in the
deducted first from the net auction proceeds of deficiency is computed as the ratio of ₱767,729.00
₱4,183,744.63, arriving at a deficiency of ₱507,741.62on PN to ₱5,401,975.00, multiplied by ₱1,758,427.87, or
No. OACL 634-95 alone; thereby, leaving no remainder of the ₱249,907.87, (not ₱844,501.90 as computed by the
proceeds available to partially settle the other two PNs. As it CA);
appears, the auction proceeds are not even sufficient to
cover just PN No. OACL 634-95 alone. c) PN No. CLF 5-93, with an outstanding balance of
₱369,258.50 as of May 18, 1998: its share in the
But as the Court has noted, by deducting the auction deficiency is computed as the ratio of ₱369,258.50
proceeds from the aggregate amount of the three loans due, to ₱5,401,975.00, multiplied by ₱1,758,427.87, or
Chinabank in effect opted to apply the entire proceeds of the ₱120,199.45, (not ₱406,184.35 as found by the CA).
auction simultaneously to all the three loans. This implies
that each PN will assume a pro rata portion of the resulting In short, in the CA decision, the spouses Manalastas would
deficiency on the total indebtedness as bears upon each PN’s be solely liable on PN No. OACL 634-95 for only
outstanding balance. Contrary to the spouses Sinamban’s ₱507,741.62(instead of the much bigger amount of
insistence, none of the three PNs is more onerous than the ₱1,388,320.55which this Court found), whereas the spouses
others to justify applying the proceeds according to Article Sinamban would be solidarily liable with the spouses
1254 of the Civil Code, in relation to Articles 1252 and Manalastas for a total deficiency of ₱1,250,686.25 on PN No.
1253.44 Since each loan, represented by each PN, was OACL 636-95 and PN No. CLF 5-93. But under the Court’s
obtained under a single credit line extended by Chinabank interpretation, the spouses Sinamban are solidarily liable
for the working capital requirements of the spouses with the spouses Manalastas for only ₱370,107.32on the
Manalastas’ rice milling business, which credit line was said two PNs, for a significant difference of ₱880,578.93.
secured also by a single REM over their properties, then
each PN is simultaneously covered by the same mortgage
Pursuant to Monetary Board Circular No. 799, effective 3. Estanislao Sinamban and spouses Danilo and
July 1, 2013, the rate of interest for the loan or Magdalena Manalastas are solidarily liable for the
forbearance of any money, goods or credits and the rate deficiency amount of ₱120,199.45 (inclusive of 10%
allowed in judgments, in the absence of an express attorney’s fees) on Promissory Note No. CLF 5-93
contract as to such rate of interest, has been reduced to dated February 26, 1991; and
six percent (6%) per annum.
4. The foregoing amounts shall bear interest at the
The subject three PNs bear interests ranging from 21% to rate of twelve percent (12%) per annum from
23% per annum, exclusive of penalty of 1% on the overdue November 18, 1998 to June 30, 2013, and six
amount per month of delay, whereas in its complaint, percent (6%) per annum from July 1, 2013 until
Chinabank prayed to recover only the legal rate of 12% on fully paid.
whatever judgment it could obtain. Meanwhile, the Monetary
Board of the Bangko Sentral ng Pilipinas in its Resolution SO ORDERED.
No. 796 dated May 16, 2013, and now embodied in Monetary
Board Circular No. 799, has effective July 1, 2013 reduced
to 6%, from 12%, the legal rate of interest for the loan or BIENVENIDO L. REYES
forbearance of any money, goods or credits and the rate Associate Justice
allowed in judgments, in the absence of stipulation. 45 Since
Chinabank demanded only the legal, not the stipulated,
interest rate on the deficiency and attorney’s fees due, the
defendants will solidarily pay interest on their shares in the
deficiency at the rate of 12% from November 18, 1998 to
June 30, 2013, and 6% from July 1, 2013 until fully paid.
WHEREFORE, the Decision of the Court of Appeals dated
May 19, 2010 in CA-G.R. CV No. 66274 is MODIFIED. The
Decision dated July 30, 1999 and the Order dated December
8, 1999 of the Regional Trial Court of San Fernando City,
Pampanga, Branch 45 in Civil Case No. 11708 are hereby
AFFIRMED with MODIFICATIONS as follows:
Meanwhile, defendant Villaruz allegedly proved during trial Additionally, respondents contended that petitioner Petron
that he had exercised diligence in the selection and supervision of was also negligent when the latter allowed the use of an unaccredited
his employees and, thus, he was not responsible for the damages truck in violation of its hauling contract with Villaruz.
caused by the fire. In addition, he alleged that Igdanis, whom
respondents failed to implead as a defendant in the lower court, did On 12 December 2001, the CA promulgated its Decision
not have a chance to defend himself. Since there was no showing affirming that of the trial court, to wit:
that any act or omission of Igdanis was the proximate cause of the WHEREFORE, premises considered, the
instant appeals are DISMISSED and the assailed
fire, Villaruz insisted that the latter himself could not be held liable
consolidated Decision of the court a quo dated 27
for the acts of his employee, who was not even impleaded or proven April 1998 in Civil Case Nos. 19633, 19684 and
to be negligent. 20122 is AFFIRMED in all respects. Costs against
appellants.
SO ORDERED.8
Dortina Uy, in her appeal, alleged that she had no direct
The appellate court upheld the findings of the RTC that
participation in the management or administration of the gasoline
petitioner Petron was negligent for having allowed the operation of
station. She also alleged that she was not the employer of Igdanis,
the gasoline station absent a valid dealership contract. Thus, the CA
considered the gasoline station as one run by petitioner itself, and
the persons managing the gasoline station as petitioner’s mere 4. Whether or not a supplier of fuel can be held liable for the
agents. Even if a valid dealership contract existed, petitioner was still neglect of others in distributing and storing such fuel. 9
liable for damages, because there was as yet no complete delivery of
In the present case, petitioner does not implead its co-
its products. The fire had broken out while petroleum was being
defendants Villaruz, Rubin Uy and Dortina Uy. Neither does it assail
unloaded from the tank truck to the storage tank.
the dismissal by the lower courts of the cross-claim or counterclaim
it filed against its co-defendants and herein respondents,
The CA further held that petitioner was also negligent in
respectively. Nor is there any question on respondents’ right to claim
allowing Villaruz to use an unaccredited tank truck for the transport
damages. Petitioner merely prays for absolution from liability
and delivery of the petroleum at the time of the incident.
resulting from the fire by claiming that it had no direct participation
in the incident.
With regard to the liability of Villaruz, the appellate court
found him to be negligent in the conduct of his business. Thus, he
In support of the issues raised above, petitioner contends
was made liable for the damages caused by his employee in
that, first, there was an implied renewal of the dealership contract –
accordance with Article 2180 in relation to Article 2176 of the Civil
Rubin Uy remained as the operator of the gasoline station. It further
Code.
contends that there is no law supporting the conclusion of the CA
that, upon expiration of the contract, the dealer automatically
Finally, with regard to Dortina Uy, the CA held that, as one
became the supplier’s agent.
of the operators of the gasoline station, she failed to submit evidence
that she had exercised due diligence in the operation thereof.
Second, petitioner asserts that there was no rational link
between its alleged neglect in renewing the dealership agreement and
Dissatisfied with the CA’s ruling, petitioner is now before us
the act that caused the fire.
with the present Petition for Review.
We first discuss the liability of petitioner in relation to the The RTC and the CA ruled that, by virtue of the expiration of
dealership contract. the dealership contract, the dealer was relegated to being petitioner’s
agent. On this point, we agree with petitioner that the expiration or
Petitioner, as an importer and a distributer of gasoline and nonexistence of a dealership contract did not ipso facto transform the
other petroleum product, executed with a dealer of these products an relationship of the dealer and petitioner into one of agency. As far as
exclusive dealership agreement for mutual benefit and gain. On one the parties to the dealership contract were concerned, the rights and
hand, petitioner benefits from the sale of its products, as well as the obligations as to them still subsisted, since they continued to
advertisement it gains when it broadens its geographical coverage in mutually benefit from the agreement. Thus, neither party can claim
contracting with independent dealers in different areas. The products that it is no longer bound by the terms of the contract and the
sold and the services rendered by the dealer also contribute to its expiration thereof.
goodwill. Thus, despite the transfer of ownership upon the sale and
delivery of its products, petitioner still imposes the obligation on the We then judiciously reviewed the terms of the contract and
dealer to exclusively carry its products. found that petitioner is liable to respondents for the damages caused
by the fire.
The dealer also benefits from the dealership agreement, not
only from the resale of the products of petitioner, but also from the As petitioner itself points out, it owns the equipment relevant
latter’s goodwill. to the handling and storage of gasoline, including the gasoline
pumps and the underground tank. 10 It is also responsible for the
However, with the use of its trade name and trademark, delivery of the petroleum to the dealer. The incident occurred at the
petitioner and the dealer inform and guarantee to the public that the time the petroleum was being unloaded to the underground tank
products and services are of a particular standard or quality. More petitioner owned. Aside from failing to show the actual cause of the
importantly, the public, which is not privy to the dealership contract, fire, it also failed to rebut the presumption that it was negligent in
assumes that the gasoline station is owned or operated by petitioner. the maintenance of its properties and in the conduct of its business.
Petitioner contends that under paragraph 8 of the dealership the presumption that the employer was negligent in the supervision
contract, the dealer’s liability is as follows: of an employee who caused damages to another; and, thus,
LOSSES AND CLAIMS. BUYER shall make petitioner should likewise be held accountable for the negligence of
good, settle and pay, and hold SELLER harmless
Villaruz and Igdanis.
against all losses and claims (including those of the
parties, their agents and employees) for death,
personal injury or property arising out of (1) any use To reiterate, petitioner, the dealer Rubin Uy – acting through
or condition of BUYER’s premises or the equipment his agent, Dortina Uy – shared the responsibility for the maintenance
and facilities thereon, regardless of any defects
therein (2) BUYER’s non-performance of this of the equipment used in the gasoline station and for making sure
contract, or (3) the storage and handling of products that the unloading and the storage of highly flammable products
on the premises. were without incident. As both were equally negligent in those
aspects, petitioner cannot pursue a claim against the dealer for the
While both parties to the contract have the right to provide a
clause for non-liability, petitioner admits that they both incident. Therefore, both are solidarily liable to respondents for
share the maintenance of its equipment. Petitioner states damages caused by the fire.
that its responsibility extended to “the operating condition of
the gasoline station, e.g. whether the fuel pumps were
functioning properly.”11 Petitioner was likewise negligent in allowing a tank truck
different from that specifically provided under its hauling contract
Moreover, it cannot be denied that petitioner likewise with Villaruz. The enumeration and specification of particular tank
obligated itself to deliver the products to the dealer. When
trucks in the contract serve a purpose – to ensure the safe
the incident occurred, petitioner, through Gale Freight
Services, was still in the process of fulfilling its obligation to transportation, storage and delivery of highly flammable products.
the dealer. We disagree with its contention that delivery was Under the hauling contract, these requirements are as follows: 12
perfected upon payment of the goods at its depot. There was
yet no complete delivery of the goods as evidenced by the 1. Duly registered under the hired
aforementioned hauling contract petitioner executed with truck (TH) classification and subject
Villaruz. That contract made it clear that delivery would only to the rules and regulations of Land
be perfected upon the complete unloading of the gasoline. Transportation Commission (LTC)
and Board of Transportation (BOT).
Thus, with regard to the delivery of the petroleum, Villaruz was 2. Properly sealed and calibrated in
accordance with the requirements of
acting as the agent of petitioner Petron. For a fee, he delivered the
NSTA.
petroleum products on its behalf. Notably, petitioner even imposed a
3. Equipped with safety and other
penalty clause in instances when there was a violation of the hauling auxiliary equipment as specified by
contract, wherein it may impose a penalty ranging from a written PETROPHIL (Petron) as per attached
warning to the termination of the contract. Therefore, as far as the Annex “8”.13
4. Provided with fire permits and other
dealer was concerned with regard to the terms of the dealership
permits required by the government
contract, acts of Villaruz and his employees are also acts of authorities.
petitioner. Both the RTC and the CA held that Villaruz failed to rebut 5. In good working condition and in
good appearance at all times,
6. Fully complying with the tank truck storage tank, or both. Petitioner, which had the obligation to ensure
color scheme, standard truck
that the truck was safe, is likewise liable for the operation of that
number, bumper stripes, hauler’s
name on cab door, and such other truck.
similar requirements for good
appearance as may be required by Petitioner maintains that by virtue of the hauling contract,
PETROPHIL.
Villaruz must be held responsible for the acts of Igdanis, the driver of
Annex “B” attached to the contract, which refers to the tank
the tank truck. In this aspect, petitioner is correct. While it may be
truck safety and accessories equipment, likewise provides that the
vicariously liable to third persons for damages caused by Villaruz,
following are the specified safety equipment and other accessories for
the latter is nevertheless liable to petitioner by virtue of the non-
tank truck operations:14
liability clause in the hauling contract. Under this provision, he
1. Fire extinguisher, Type B & C saved petitioner from any and all claims of third persons arising out
2. Manhole covers of, but not necessarily limited to, his performance of the terms and
3. Manhole cover gasket conditions of this agreement. Petitioner even obligated him to
4. Product level markers
maintain an acceptable Merchandise Floater Policy to provide
5. Manhole cover pins
6. NIST Calibration and scale insurance coverage for the products entrusted to him; and a
7. Discharge valves (quick closing) Comprehensive General Liability Insurance to cover any and all
8. Front Fenders claims for damages for personal injury, including death or damages
9. Door glasses
10. ________ (illegible) glasses to property, which may arise from operations under the contract. 15
11. Windshield Thus, Villaruz is also liable to petitioner based on the
12. Wipers hauling contract. Under Rule 6, Sec. 8 of the Rules of Court,
13. Horn
petitioner may enforce the terms of the hauling contract against him.
14. Floor matting
15. Ceiling However, considering that it did not implead Villaruz in the present
16. Seats case, nor did it assail the Decision of the CA in dismissing the cross-
17. (Illegible) claim, petitioner can no longer go after him based on that cross-
18. Air hose connector
claim.
Nonetheless, this is not the same as saying that Villaruz is
With respect to the claims of third persons, it is not enough
no longer solidarily liable to respondents.
for petitioner to allege that the tank truck met the same
As the employer of Igdanis, Villaruz was impleaded by herein
requirements provided under the contract; it must duly prove its
respondents in the lower court and was found to be solidarily liable
allegations. This, petitioner failed to do. To reiterate, it was not able
with his other co-defendants. Absent an appeal before this Court
to prove the proximate cause of the fire, only the involvement of the
assailing the ruling of the lower court and the CA, Villaruz remains
tank truck and the underground storage tank. Notably, both pieces
to be solidarily liable with petitioner and co-defendants Rubin Uy
of equipment were under its responsibility. Absent any positive
and Dortina Uy. Thus, petitioner may only claim contribution from
determination of the cause of the fire, a presumption exists that
him in accordance with Article 1217 of the Civil Code, and not by
there was something wrong with the truck or the underground
virtue of its hauling contract, in the event that respondents decide to longer seek indemnification or subrogation from him under its
proceed against petitioner alone for the satisfaction of judgment. Art. dismissed cross-claim. Petitioner may not pursue its cross-claim
1217 states: against Rubin Uy and Dortina Uy, because the cross-claims against
Payment made by one of the solidary debtors them were also dismissed; moreover, they were all equally liable for
extinguishes the obligation. If two or more solidary
the conflagration as discussed herein.
debtors offer to pay, the creditor may choose which
offer to accept.
He who made the payment may claim Finally, the incident occurred in 1992. Almost 20 years have
from his co-debtors only the share which passed; yet, respondents, who were innocent bystanders, have not
corresponds to each, with the interest for the
payment already made. If the payment is made been compensated for the loss of their homes, properties and
before the debt is due, no interest for the intervening livelihood. Notably, neither the RTC nor the CA imposed legal interest
period may be demanded. (Emphasis supplied) on the actual damages that it awarded respondents. In Eastern
Shipping Lines v. Court of Appeals,16 enunciated in PCI Leasing &
The share, meanwhile, of solidary debtors is contained in
Finance Inc. v. Trojan Metal Industries, Inc., 17 we laid down the rules
Art. 1208, to wit:
for the imposition of legal interest as follows:
This petition for review on certiorari under Rule 45 of the 1997 Rules
of Civil Procedure assails the February 27, 2009 Decision [1] of the
Regional Trial Court, Pasig City, Branch 71 (RTC), in Civil Case No.
71034, ordering defendant Lucky Star to pay petitioner Asset
Builders Corporation the sum of P575,000.00 with damages, but
absolving respondent Stronghold Insurance Company, Incorporated
(Stronghold) of any liability on its Surety Bond and Performance
Bond.
SECOND DIVISION
THE FACTS
On April 28, 2006, Asset Builders Corporation (ABC) entered into an
ASSET BUILDERS G.R. No. 187116 agreement with Lucky Star Drilling & Construction
Corporation (Lucky Star) as part of the completion of its project to corporation duly organized and existing under and
construct the ACG Commercial Complex on NHA by virtue of laws of the Philippines, as surety, are
Avenue corner Olalia Street, Barangay Dela Paz, Antipolo City.[2] As held and firmly bound unto ASSET BUILDERS
can be gleaned from the Purchase Order, [3] Lucky Star was to supply CORPORATION to the sum of Pesos FIVE HUNDRED
SEVENTY FIVE THOUSAND ONLY (P575,000.00)
labor, materials, tools, and equipment including technical
Philippine Currency, for the payment of which, well
supervision to drill one (1) exploratory production well on the project and truly to be made, we bind ourselves, our heirs,
site. The total contract price for the said project executors, administrators, successors and assigns,
was P1,150,000.00. The salient terms and conditions of said jointly and severally, firmly by these presents.
agreement are as follows:
i. Lump sum price--------PHP1,150,000.00; THE CONDITIONS OF THIS OBLIGATION
ARE AS FOLLOWS:
ii. 50% downpayment---upon submission of
surety bond in an equivalent amount and To fully and faithfully guarantee
performance bond equivalent to 30 % of contract the repayment to be done through
amount; deductions from periodic billings of the
advance payment made or to be made by
iii. Completion date-----60 calendar days; the Obligee to the Principal in connection
with the supply of labor, materials, tools
iv. Penalty----2/10 of 1% of total contract amount and equipment including technical
for every day of delay; supervision to drill one (1) exploratory
production well located at NIA Ave. cor.
v. Terms---50% down payment to be released Olalia St., Brgy. dela
after submission of bonds; Paz, Antipolo City. This bond is callable on
demand.
vi. RetentionSubject to 10% retention to be
released after the project is accepted by the The liability of the surety company
owner; upon determination under this bond shall
in no case exceed the penal sum of
To guarantee faithful compliance with their agreement, PESOS: FIVE HUNDRED SEVENTY FIVE
Lucky Star engaged respondent Stronghold which issued two (2) THOUSAND (P575,000.00) only, Philippine
bonds in favor of petitioner. The first, SURETY BOND G(16) No. Currency.
141558, dated May 9, 2006, covers the sum of P575,000.00[4] or the
WHEREAS, the Obligee requires said
required downpayment for the drilling work. The full text of the
principal to give a good and sufficient bond in the
surety bond is herein quoted: above stated sum to secure the full and faithful
performance on his part of said undertakings.
KNOW ALL MEN BY THESE PRESENTS: NOW, THEREFORE, if the above bounden
principal shall in all respects duly and fully observe
That we, LUCKY STAR DRILLING & and perform all and singular the aforesaid [co]-
CONSTRUCTION CORP., 168 ACACIA St., Octagon venants, conditions and agreements to the true
Industrial Estate Subd., Pasig City as principal, and intent and meaning thereof, then this obligation
STRONGHOLD INSURANCE COMPANY, INC., a
shall be null and void, otherwise to remain in full Comply with the supply of labor, materials,
force and effect. tools and equipment including technical
supervision to drill one (1) exploratory
Liability of surety on this bond will expire production well located at NIA
on May 09, 2007 and said bond will be cancelled five Ave. cor. Olalia St., Brgy. Dela
DAYS after its expiration, unless surety is notified of Paz, Antipolo City. This bond is callable on
and existing obligations hereunder. demand.
x x x[5] WHEREAS, the liability of the Surety Company
under this bond shall in no case exceed the sum of
With respect to the second contract, PERFORMANCE BOND PESOS THREE HUNDRED FORTY FIVE THOUSAND
G(13) No. 115388, dated May 09, 2006, it covers the sum ONLY (P345,000.00) Philippine Currency, inclusive
of P345,000.00.[6] Thus: of interest, attorneys fee, and other damages, and
shall not be liable for any advances of the obligee to
the principal.
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, said contract requires the said principal
That we, LUCKY STAR DRILLING & CONSTRUCTION to give a good and sufficient bond in the above-
of 168 Acacia St., Octagon Indl., contractor, of stated sum to secure the full and faithfull
Estate, Sub., Pasig City Philippines, as principal and performance on its part of said contract, and the
the STRONGHOLD INSURANCE COMPANY, INC. a satisfaction of obligations for materials used and
corporation duly organized and existing under and labor employed upon the work;
by virtue of the laws of the Philippines, with head
office at Makati, as Surety, are held and firmly NOW THEREFORE, if the principal shall
bound unto the ASSET BUILDERS CORPORATION perform well and truly and fulfill all the
and to any individual, firm, partnership, corporation undertakings, covenants, terms, conditions, and
or association supplying the principal with labor or agreements of said contract during the original term
materials in the penal sum of THREE HUNDRED of said contract and any extension thereof that may
FORTY FIVE THOUSAND ONLY (P345,000.00), be granted by the obligee, with notice to the surety
Philippine Currency, for the payment of which sum, and during the life of any guaranty required under
well and truly to be made, we bind ourselves, our the contract, and shall also perform well and truly
heirs, executors, administrators, successors and and fulfill all the undertakings, covenants, terms,
assigns, jointly and severally, firmly by these conditions, and agreements of any and all duly
presents. authorized modifications of said contract that may
hereinafter be made, without notice to the surety
The CONDITIONS OF THIS OBLIGATION except when such modifications increase the
are as follows; contract price; and such principal contractor or his
or its sub-contractors shall promptly make payment
WHEREAS the above bounden principal on the ___ to any individual, firm, partnership, corporation or
day of __________, 19__ entered into a contract with association supplying the principal of its sub-
the ASSET BUILDERS CORPORATION represented contractors with labor and materials in the
by _________________, to fully and faithfully. prosecution of the work provided for in the said
contract, then, this obligation shall be null and void;
otherwise it shall remain in full force and effect. Any
extension of the period of time which may be granted (4) to pay PHP150,000.00 in other consequential
by the obligee to the contractor shall be considered damages;
as given, and any modifications of said contract
shall be considered as authorized, with the express (5) to pay exemplary damages in the amount
consent of the Surety. of PHP150,000.00;
The right of any individual, firm, partnership, (6) to vacate the project site, together with all your
corporation or association supplying the contractor men and equipment.
with labor or materials for the prosecution of the
work hereinbefore stated, to institute action on the Should you refuse to comply with our demand
penal bond, pursuant to the provision of Act No. within the above period, we shall be constrained to
3688, is hereby acknowledge and confirmed. x x x sue you in court, in which event we shall demand
On May 20, 2006, ABC paid Lucky Star P575,000.00 (with 2% payment of attorneys fees in the amount of at least
withholding tax) as advance payment, representing 50% of the PHP100,000.0.
contract price.[7] Lucky Star, thereafter, commenced the drilling
work.By July 18, 2006, just a few days before the agreed completion
date of 60 calendar days, Lucky Star managed to accomplish only On August 16, 2006, ABC sent a Notice of Claim for payment to
ten (10) % of the drilling work. On the same date, petitioner sent a Stronghold to make good its obligation under its bonds.[10]
demand letter to Lucky Star for the immediate completion of the
Despite notice, ABC did not receive any reply either from Lucky Star
drilling work[8] with a threat to cancel the agreement and forfeit the
or Stronghold, prompting it to file its Complaint for Rescission with
bonds should it still fail to complete said project within the agreed
Damages against both before the RTC[11] on November 21, 2006.
period.
On August 3, 2006, ABC sent a Notice of Rescission of Contract with In its Answer (with Complusory Counterclaim and Cross-Claim),
Demand for Damages to Lucky Star. [9] Pertinent portions of said dated January 24, 2007, Stronghold denied any liability arguing that
notice read: ABC had not shown any proof that it made an advance payment of
50% of the contract price of the project. It further averred that ABCs
Pursuant to paragraph 1 of the Terms and
Conditions of the service contract, notice is hereby rescission of its contract with Lucky Star virtually revoked the claims
made on you of the rescission of the contract and against the two bonds and absolved them from further liability. [12]
accordingly demand is hereby made on you, within
seven (7) days from receipt hereof: Lucky Star, on the other hand, failed to file a responsive
pleading within the prescribed period and, thus, was declared in
(1) to refund the down payment of PHP563,500.00,
plus legal interest thereon; default by the RTC in its Order dated August 24, 2007.[13]
(2) to pay liquidated damages equivalent to 2/10 of On February 27, 2009, the RTC rendered the assailed decision
1% of the contract price for every day of delay, or a ordering Lucky Star to pay ABC but absolving Stronghold from
total of PHP138,000.00; liability.[14] Relevant parts of the decision, including the decretal
portion, read:
(3) to pay the amount guaranteed by your
performance bond in the amount of PHP345,000.00;
On the liability of defendant Stronghold
Insurance, the Court rules on the negative. GROUNDS
The surety bond and performance bond
executed by defendants Lucky Star and Stronghold A. The Lower Court seriously erred and
Insurance are in the nature of accessory contracts unjustly ACTED ARBITRARILY with
which depend for its existence upon another manifest bias and grave abuse of
contract. Thus, when the agreement (Exhibit A) discretion, CONTRARY to applicable
between the plaintiff and defendant Asset Builders laws and established jurisprudence in declaring
was rescinded, the surety and performance bond the automatic CANCELLATION of respondent
were automatically cancelled. Strongholds Surety Bond and Performance Bond,
because:
WHEREFORE, in view of the foregoing,
judgment is hereby rendered in favor of the plaintiff (a) Despite rescission, there
and against defendant Lucky Star Drilling & exists a continuing VALID PRINCIPAL
Construction, ordering the latter as follows: OBLIGATION guaranteed by
Respondents Bonds, arising out of the
1. to pay plaintiff in the amount of Contractors DEFAULTand Non-
PHP575,000.00 as actual performance.
damages plus legal interest from (b) Upon breach by its
the filing of the complaint; Principal/contractor, the LIABILITIES of
Respondents bonds had
2. to pay plaintiff in the amount of already ACCRUED, automatically
PHP100,000.00 as liquidated attached, and had become
damages; already DIRECT,
PRIMARY and ABSOLUTE, even
3. to pay plaintiff in the amount of before Petitioners legitimate exercise of
PHP50,000.00 as exemplary its option under Art. 1191 of the New
damages; Civil Code.
4. to pay plaintiff in the amount of (c) Rescission does
PHP 50,000.00 as attorneys NOT AFFECT the liabilities of the
fees; Respondent Stronghold as
its LIABILITIES on its subject bonds
5. to pay the costs of the suit. have already
become INTERWOVEN and INSEPARABL
Defendant Stronghold Insurance Company, Inc.s E with the liabilities of its Principal, the
compulsory counterclaim and cross-claim are Contractor Lucky Star.
dismissed.[15]
B. With the Lower Courts completely
Hence, this petition. erroneous ruling on the liabilities of Respondents
bonds, the Lower Court equally ERRED with
Petitioner ABC prays for the reversal of the challenged manifest bias and grave abuse, in its FAILURE to
comply with the duty of court to make a finding
decision based on the following
of unreasonable denial or withholding by
Respondent Stronghold or Petitioners claims and own act, but merely accessory or collateral to the
impose upon the Respondent obligation contracted by the
the penalties provided for under Section 241 and principal. Nevertheless,although the contract of a
244 of the Insurance Code.[16] surety is in essence secondary only to a valid
principal obligation, his liability to the creditor or
promisee of the principal is said to be direct,
Essentially, the primary issue is whether or not respondent
primary and absolute; in other words, he
insurance company, as surety, can be held liable under its bonds. is directly and equally bound with the principal.
The Court rules in the affirmative. Suretyship, in essence, contains two types of relationship
the principal relationship between the obligee (petitioner) and the
Respondent, along with its principal, Lucky Star, bound
obligor (Lucky Star), and the accessory surety relationship between
itself to the petitioner when it executed in its favor surety and
the principal (Lucky Star) and the surety (respondent). In this
performance bonds. The contents of the said contracts clearly
arrangement, the obligee accepts the suretys solidary undertaking to
establish that the parties entered into a surety agreement as defined
pay if the obligor does not pay. Such acceptance, however, does not
under Article 2047 of the New Civil Code. Thus:
change in any material way the obligees relationship with the
principal obligor. Neither does it make the surety an active party to
Art. 2047. By guaranty a person, called the
guarantor, binds himself to the creditor to fulfill the the principal obligee-obligor relationship. Thus, the acceptance does
obligation of the principal debtor in case the latter not give the surety the right to intervene in the principal
should fail to do so. contract. The suretys role arises only upon the obligors default, at
If a person binds himself solidarily with the which time, it can be directly held liable by the obligee for payment
principal debtor, the provisions of Section 4, Chapter as a solidary obligor.[21]
3, Title I of this Book shall be observed. In such In the case at bench, when Lucky Star failed to finish the
case the contract is called a suretyship. drilling work within the agreed time frame despite petitioners
[Emphasis supplied] demand for completion, it was already in delay. Due to this default,
Lucky Stars liability attached and, as a necessary consequence,
As provided in Article 2047, the surety undertakes to be respondents liability under the surety agreement arose.
bound solidarily with the principal obligor. That undertaking makes Undeniably, when Lucky Star reneged on its undertaking
a surety agreement an ancillary contract as it presupposes the with the petitioner and further failed to return the P575,000.00
existence of a principal contract. Although the contract of a surety is downpayment that was already advanced to it, respondent, as
in essence secondary only to a valid principal obligation, the surety surety, became solidarily bound with Lucky Star for the repayment of
becomes liable for the debt or duty of another although it possesses the said amount to petitioner. The clause, this bond is callable on
no direct or personal interest over the obligations nor does it receive demand, strongly speaks of respondents primary and direct
any benefit therefrom.[17] Let it be stressed that notwithstanding the responsibility to the petitioner.
fact that the surety contract is secondary to the principal obligation,
the surety assumes liability as a regular party to the undertaking. [18] Accordingly, after liability has attached to the principal, the
Stronghold Insurance Company, Inc. v. Republic-Asahi Glass obligee or, in this case, the petitioner, can exercise the right to
Corporation,[19] reiterating the ruling in Garcia v. Court of Appeals, proceed against Lucky Star or respondent or both. Article 1216 of the
[20]
expounds on the nature of the suretys liability: New Civil Code states:
X x x. The suretys obligation is not an The creditor may proceed against any one of
original and direct one for the performance of his the solidary debtors or some or all of them
simultaneously. The demand made against one of
them shall not be an obstacle to those which may
subsequently be directed against the others, so long
as the debt has not been fully collected.
Contrary to the trial courts ruling, respondent insurance
company was not automatically released from any liability when
petitioner resorted to the rescission of the principal contract for
failure of the other party to perform its undertaking. Precisely, the
liability of the surety arising from the surety contracts comes to life
upon the solidary obligors default. It should be emphasized that
petitioner had to choose rescission in order to prevent further loss
that may arise from the delay of the progress of the project. Without
a doubt, Lucky Stars unsatisfactory progress in the drilling work and
its failure to complete it in due time amount to non-performance of
its obligation.
In fine, respondent should be answerable to petitioner on
account of Lucky Stars non-performance of its obligation as
guaranteed by the performance bond.
Finally, Article 1217[22] of the New Civil Code acknowledges
the right of reimbursement from a co-debtor (the principal co-debtor,
in case of suretyship) in favor of the one who paid (the surety). Thus,
respondent is entitled to reimbursement from Lucky Star for the
amount it may be required to pay petitioner arising from its bonds.
WHEREFORE, the February 27, 2009 Decision of the
Regional Trial Court, Pasig City, Branch 71,
is AFFIRMED with MODIFICATION. Respondent Stronghold
Insurance is hereby declared jointly and severally liable with Lucky
Star for the payment of P575,000.00 and the payment
of P345,000.00 on the basis of its performance bond.
SO ORDERED.
JOSE CATRAL MENDOZA
Associate Justice