CONTRACTS (IN GENERAL until STAGES) Defendant Central Bank specifically denied in its answer certain facts set
specifically denied in its answer certain facts set forth in
G.R. No. L-25071 March 29, 1972
GEORGE W. BATCHELDER, doing business under the name and style of Batchelder
Equipment, plaintiff-appellant,
vs.
THE CENTRAL BANK OF THE PHILIPPINES, defendant-appellant.
Quasha, Asperilla, Blanco, Zafra, and Tayag for plaintiff-appellant.
F.E. Evangelista, Cruz-Espiritu & Associates for defendant-appellant.
FERNANDO, J.:p
In essence, the pivotal legal question presented by this appeal of defendant Central
Bank of the Philippines,1 is whether or not the issuance of a monetary policy by it,
thereafter implemented by the appropriate resolutions, as to the rate of exchange
at which dollars after being surrendered and sold to it could be re-acquired, creates
a contractual obligation. It was the holding of the lower court that in law there was
such a contract, the terms of which had to be respected by defendant Central Bank.
Such a conclusion is challenged in this appeal. For reasons to be hereinafter set
forth, we find that the lower court was far too generous in its appreciation of the
claim of plaintiff George W. Batchelder. The law in our opinion does not go that far,
and accordingly, we reverse.
This is a suit filed by plaintiff George W. Batchelder to compel defendant Central
Bank of the Philippines, now appellant, to resell to him $170,210.60 at the
preferred rate of exchange of two Philippine pesos for one American dollar, more
specifically P2.00375, or, in the alternative, to pay to him the difference between
the peso cost of such amount at the market rate prevailing on the date of the
satisfaction of the judgment in his favor and the peso cost of $170,210.60 at said
preferred rate. Plaintiff likewise sought compensatory damages consisting of actual
expenses of litigation and attorney's fees as well as exemplary damages.
the complaint and was quite insistent on the absence of any such right on the part
of plaintiff to re-acquire from it the sum of $170,210.60 at the preferred rate of
exchange. It would follow accordingly that it was not liable either to plaintiff for
the difference between its peso cost at the rate prevailing on the date of the
satisfaction of whatever judgment there may be in plaintiff's favor and the peso
cost of $170,210.60 at said preferred rate. There was likewise a denial of liability
for compensatory and exemplary damages, attorney's fees, and costs of the suit.
According to the appealed decision: "From the evidence on record, it appears that
the plaintiff is an American citizen who has been permanently residing in the
Philippines and who is engaged in the construction business under the name and
style of Batchelder Equipment. The defendant is a government corporation duly
organized and existing under Republic Act No. 265."2 Then came this portion: "On
December 9, 1949, the defendant issued Central Bank Circular No. 20 imposing
exchange contract in this jurisdiction ... . To implement the program of exchange
controls, the defendant issued subsequent circulars, one of which was Circular No.
44 dated June 12, 1953 ... . On July 16, 1959, Republic Act No. 2609 was
approvedwhich, among other things, provides that "the monetary authorities shall
take steps for the adoption of a four-year program of gradual decontrol." To
implement this program of gradual decontrol, defendant Central Bank issued
Circular No. 105 on April 25, 1960 ..., providing for the gradual lifting of the
restrictions on transactions involving gold and foreign exchange. Likewise, on the
same date, it issued Circular No. 106 ... governing the sale agent banks — of foreign
exchange in the free market. On September 12, 1960, Circular No. 105 was
amended by Circular No. 111 ... and by Circular No. 117 ... on November 28, 1960.
This last Circular No. 117 was amended by Circular No. 121 ... on March 2. 1961,
which in return, was amended by Circular No. 133 ... on January 21, 1962,
providing, among others, that "only authorized agent banks may sell foreign
exchange for imports" and that "such exchange should be sold at the prevailing
free market rate to any applicant, without requiring prior specific licensing from
the Central Bank." "3 The appealed decision went on to state "that on March 30,
1960, the U.S. Navy accepted the proposal of the plaintiff of March 18, 1960 in the
sum of $188,000.00 for the construction of the Mindanao Weather Station,
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Bukidnon, Mindanao, Philippines, in accordance with Bid Item 3, Yards and Docks
Specifications No. 13374/59 ... ."4
Reference was then therein made to the specific resolution of defendant Central
Bank. Thus: "In connection with construction projects in U.S. military bases in the
Philippines, the defendant through its Monetary Board, promulgated Monetary
Board Resolution No. 857 on June 17, 1960 ... which, in part, provided: "I. General
Policy — Filipino and resident American contractors undertaking construction
projects in U.S. military bases in the Philippines shall be authorized to utilize ninety
per cent (90%) of the proceeds of their contracts for the purchase of construction
equipment, spare parts and either supplies, regardless of commodity classification,
to be used in projects inside the U.S. military bases in the Philippines, as well as for
payment of imports of construction equipment, materials and supplies, except
those commodity items falling under "NEC" and "UI" categories, either for resale
or to be used in their projects outside the U.S. military bases; provided, that in the
latter case (where the imported items will be used outside of their projects in the
U.S. military bases) the margin levy shall be imposed." "5
There was moreover an implementation of the above resolution with the Central
Bank issuing "its Memorandum to Authorized Agent Banks ID-FM No. 11 dated June
23, 1960 ... . Under Resolution No. 857 of the Monetary Board, which was fully
quoted in the Memorandum to Authorized Agent Banks of the defendant ..., it was
specifically provided that: "For imports against proceeds of contracts entered into
prior to April 25, 1960, the preferred buying rate shall govern, regardless of the
present commodity classifications." " 6 There was however a modification arising
from Monetary Board Resolution No. 695 of April 28, 1961, which specified that
the agent bank should, upon compliance with its terms, credit the contractor's
accounts in pesos, the buying rate being governed by the appropriate rules and
regulations.7
The following facts as found by the lower court are likewise relevant: "It appears
that in compliance with defendant's Monetary Board Resolutions Nos. 857 and 695
..., plaintiff surrendered to the Central Bank, through the latter's authorized agents,
his dollar earnings amounting to U.S. $199,966.00 ... . The plaintiff also appears to
have applied with the defendant for licences to utilize 90% of his surrendered
earnings or the sum of U.S. $25,847.84 ... or 21.41% of the amount applied for. The
plaintiff demanded from the defendant that it be allowed to utilize the balance of
the 90% of his surrendered dollar earnings. However, it was only on March 21,
1963, after the plaintiff had filed the complaint in the present case and after full
decontrol had been established through Circular No. 133 dated January 21, 1962
..., that the defendant informed the plaintiff, through its communication ..., that
the lattercould utilize at the free market rate the balance of his said 90% of
surrendered earnings which had not been previously granted by the defendant for
his importations.The present action, therefore, seeks to compel the defendant to
permit the plaintiff to utilize the said balance of his 90% surrendered earnings for
importation at the preferred rate of exchange which is P2.00 per U.S. $1.00"8
The appealed decision took note that in answer to the contention of defendant
Central Bank that the Monetary Board Resolutions Nos. 857 and 695 relied upon
simply laid down a mere policy without in any way giving rise to a valid and binding
agreement to which the law should give effect, plaintiff Batchelder would stress
that the enunciation of the policy embodied in the appropriate resolution did give
rise to a contract that must be complied with. That argument found favor with the
lower court, for in its opinion, "considering the facts surrounding the transaction
between the plaintiff and the defendant, the defendant is now bound by a contract,
which could be implied from its stated policy, as enunciated in Monetary Board
Resolutions Nos. 857 and 695, and the plaintiff's reliance on said resolutions,to
resell in favor of the plaintiff 90% of the U.S. dollars earned by him under his U.S.
Navy Contract aforementioned which were duly surrendered to the defendant."9
The appealed decision recapitulated matters thus: "In short, it is apparent that by
the issuance of its various resolutions and circulars aforementioned the defendant
had considered the plaintiff and other contractors similarly situated with contracts
with the U.S. military authorities predating April 25, 1960, as exempted from
decontrol, pursuant to defendant's Monetary Board Resolutions Nos. 857 and 695.
Hence, they are entitled to the utilization of the 90% of the U.S. dollars surrendered
by them to the defendant at the preferred rate of exchange." 10
Judgment was thus rendered in favor of plaintiff George W. Batchelder, ordering
defendant Central Bank "to resell to plaintiff U.S. $154,094.56 at the rate of
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exchange Philippine peso P2.00375 per U.S. $1.00 or, in the alternative, to pay to
the plaintiff in pesos the difference between the peso cost of said U.S. $154,094.56
at the rate prevailing on the date of the satisfaction of judgment and the peso cost
of said $154,094.56 at said preferred rate." 11 As noted earlier, an appeal was
interposed by defendant Central Bank, raising as a principal legal question that
there was no such contractual obligation by virtue of which it could be held liable.
It is its contention that its refusal to honor plaintiff's claim is impressed with validity
in accordance with the governing provision of the existing rules and regulations
governing the sale of foreign exchange. That, to repeat, is the crux of the litigation
now before us. The appeal which plaintiff did likewise interpose, complaining
against the alleged failure of the lower court to grant him actual expenses of
litigation, attorney's fees as well as exemplary damages, is dependent on the
disposition of such decisive issue posed as to the existence of a valid contractual
commitment on the part of defendant Central Bank.
After carefully going over the records of the case a well as the briefs of the parties,
it is the conclusion of Court, as set forth at the outset, that the governing principle
of law applicable to actuation of administrative agencies, like the Central Bank,
precludes a finding that under the circumstances disclosed by the case, there was
a contract in law giving rise to an obligation which must be fulfilled by such
governmental body. A reversal, as already mentioned, is thus indicated.
1. We start with fundamentals. The Civil Code expressly provides that a contract is
a meeting of minds between two persons whereby one binds himself with respect
to the other to give something or render some service. 12 The above provision is
practically a restatement, with slight modification, of Article1254 of the Civil Code
of Spain of 1889, formerly enforced in our jurisdiction. Such an article, in the
opinion of Justice J.B.L. Reyes, speaking for the Court, in A. Magsaysay, Inc. v. Cebu
Portland Cement Co., 13 requires that "the area of agreement must extend to all
points that the parties deem material or there is no contract." 14 It is noteworthy
that in his Outlines on Civil Law, with JudgeRicardo Puno as co-author, he speaks
highly of Article 1321 of the Civil Code of Italy. It reads thus: "A contract is the
accord of two (or more) persons (with previously diverging interests) for the
purpose of creating, modifying or extinguishing a juridical relation between
them." 15 Likewise all commentators on the Civil Code have agreed that the birth
or perfection of a consensual contract, Article 1315, commences from the moment
the parties come to an agreementon a definite subject matter and valid
consideration. Justice Capistrano, who was with the Code Commission, and
Senators Ambrosio Padilla and Arturo Tolentino,all three distinguished in the field
of civil law, are substantially in agreement." 16
Planiol states the following: "The consent of the parties, that is to say, the accord
of wills, is the essential element of every contract ... . The consent, in the matter of
contracts, is composed of a double operation. (1) The parties must commence by
agreeing as to the contents the "convention" that is to say, by making sufficiently
precise the object and the essential conditions, and discussing the particular
clauses which they desire to introduce to modify or to complete the ordinary
effects ... . (2) This first operation having been terminated, the parties are in accord
on the projected contract: there is between them what Littre calls the uniformity
of opinions, which is one sense of the word "consent", but the contract is not
included, it still exists in a projected state. There remains to give its obligatory force
by an act of will, expressing the individual adherence of each one of the parties to
the act thus prepared. ... . When all the necessary consents (sic) are obtained, and
manifested in legal form, the contract is formed, the lien of law is tied. It is
therefore the union of these adherences (sic) which constitute the contract and
which gives birth to the obligations which are derived from it. It is an act of volition,
while the preliminary operation of discussion of the project is a work of the mind
and reasoning. 17
In their Jurisprudence and Legal Philosophy, the late Professors Morris R. Cohen
and Felix R. Cohen, father and son and jurists of note, noted that the concepts
found in the Civil Code of Spain showing basic contract rules are "equally valid in
France, Chile, Columbia, Germany, Holland, Italy, Mexico, Portugal and many other
lands, and equally honored across eighteen and more centuries ... ." Even more
impressive is their conclusion that the views of such common law scholars as
Maine, Williston, Pound, Holdsworth, Llewellyn, and Kessler, are not dissimilar.
Thus Pollock could describe the English common law quoting whole paragraphs
from a German scholar's description of the law of ancient Rome. It is in that sense
that for them the Roman phrasing contrahitur obligatio "throws more light than
volumes of exegesis: One contracts an obligation as one contracts pneumonia or
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any otherdisability. Contract is that part of our legal burdens that we bring on
ourselves." 18
If there be full cognizance of the implications of the controlling principles as thus
expounded, impressive for their well-nigh unanimity of approach, the conclusion
reached by the lower court certainly cannot be accepted as correct.
2. As is so evident from the recital of facts made in the lower court and equally so
in the brief of plaintiff Batchelder, as appellant, what was done by the Central Bank
was merely to issue in pursuance of its rule-making power the resolutions relied
upon by plaintiff, which for him should be impressed with a contractual character.
Insofar as this aspect of the matter is concerned, his brief speaks for itself. "In July,
1959, the Republic of the Philippines adopted a gradual decontrol program through
the enactment of Republic Act No. 2609. To implement this legislation defendant
Central Bank issued Circular Nos. 105 and 106 both dated April 25, 1960 ... . The
exchange rate under the decontrol program was higher than the prevailing rate
before decontrol of P2.00 per US$1.00. On March 30, 1960, plaintiff-appellant
entered into a contract with the United States Navy for the construction of a
weather station in Bukidnon, Mindanao covered by U.S. Navy Contract No. NBy-
13374 ... . On June 17, 1960, the defendant-appellant through its governing
Monetary Board promulgated Resolution No. 857 ... and implemented this
resolution through its Memorandum to Authorized Agent Banks, I.D.-FM No. 11
dated June 23, 1960 ... . Under Resolution No. 857 and the implementing circular
aforesaid, Filipino and American resident contractors for constructions in U.S.
military bases in the Philippines whose contracts antedated April 25, 1960 were
required to surrender to the defendant-appellant Central Bank their dollar earnings
under their respective contracts but were entitled to utilize 90% of their
surrendered dollars for importation at the preferred rate of commodities for use
within or outside said U.S. military bases. The defendant-appellant pursuant to the
decontrol program also promulgated Circulars Nos. 111, 117, and 121,
dated September 12, 1960 ..., November 28, 1960 ...; and March 2, 1961 ...,
respectively, and finally adopted full decontrol through its Circular No. 133 dated
January 21, 1962 ... . Defendant-appellant also promulgated Monetary Board
Resolution No. 695 dated April 28, 1961 ... amending MB Resolution No. 857 of
June 23, 1960, and implementing the former through Memorandum ID-FM No. 30
on May 18, 1961 ... ." 19
There is no question that the Central Bank as a public corporation could enter into
contracts. It is so provided for among the corporate powers vested in it. Thus:"The
Central Bank is hereby authorized to adopt, alter, and use a corporate seal which
shall be judicially noticed; to make contracts; to lease or own real personal
property, and to sell or otherwise dispose of the same; to sue and be sued; and
otherwise to do and perform any and all things that may be necessary or proper to
carry out the purposes of this Act." 20 No doubt would have arisen therefore if
defendant Central Bank, utilizing a power expressly granted, did enter into a
contract with plaintiff. It could have done so, but it did not do so. How could it
possibly be maintained then that merely through the exercise of its regulatory
power to implement statutory provisions, a contract as known to the law was
thereby created?.
Yet that is precisely what the lower court held in reaching such a conclusion. It was
not only unmindful of the controlling doctrines as to when a contract exists, but
itwas equally oblivious of the competence lodged in an administrative agency like
the Central Bank. Even the most cursory perusal of Republic Act No. 265 would
yield the irresistible conclusion that the establishment of the Central Bankwas
intended to attain basic objectives in the field of currency and finance. In the
language of the Act: "It shall be the responsibility of the Central Bankof the
Philippines to administer the monetary and banking system of the Republic. It shall
be the duty of the Central Bank to use the powers granted to it under this Act to
achieve the following objectives: (a) to maintain monetary stability in the
Philippines; (b) to preserve the international value of the pesoand the convertibility
of the peso into other freely convertible currencies; and (c) to promote a rising level
of production, employment and real income in the Philippines." 21
It would be then to set at naught fundamental concepts in administrative law that
accord due recognition to the vesting of quasi-legislative and quasi-judicial power
in administrative law for the purpose of attaining statutory objectives, especially
now that government is saddled with greater responsibilities due to the complex
situation of the modern era, if the lower court is to be upheld. For if such be the
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case then, by the judiciary failing to exercise due care in itsoversight of an Had there been greater care therefore on the part of the plaintiff to show why in
administrative agency, substituting its own discretion for what usually is the more his opinion he could assert a right in accordance not with a contract binding on the
expert appraisal of such an instrumentality, there may even be a frustration if not Central Bank, because there is none, but by virtue of compliance with rules and
a nullification of the objective of the law. regulations of an administrative tribunal, then perhaps a different outcome would
have been justified.
Nor is this to deal unjustly with plaintiff. Defendant Central Bank in its motion to
dismiss before the lower court was quite explicit as to why under the 3. With the disposition of this Court makes on this appeal of defendant Central
circumstances, no right could be recognized as possessed by him. As set forth in Bank, there is no need to consider at all the appeal of the plaintiff insofar as the
such pleading: "We contend that Monetary Board Resolution No. 857, dated June lower court denied his plea for the recovery of the actual expenses of litigation,
17, 1960, as amended by Monetary Board Resolution No. 695, dated April 28, 1961, attorney's fees and exemplary damages. Clearly there is no ground for the award
does not give right to Filipino and resident American contractors undertaking of such items sought.
construction projects in U.S. military bases to reacquire at the preferred rate ninety
WHEREFORE, the decision of the lower court of January 10, 1963 is reversed and
per cent (90%) of the foreign exchange sold or surrendered to defendant Central
the complaint of the plaintiff dismissed, without prejudice to his taking the
Bank thru the authorized agent banks. Nor does said resolution serve as a general
appropriate action to enforce whatever rights he possesses against defendant
authorization or license granted by the Central Bank to utilize the ninety per cent
Central Bank in accordance with its valid and binding rules and regulations. With
(90%) of their dollar earnings. M.B. Resolution No. 857, as amended, merely laid
costs against plaintiff.
down a general policy on the utilization of the dollar earnings of Filipino and
resident American contractors undertaking projects in U.S. military bases, ...
." 22 Further, there is this equally relevant portion in such motion to dismiss: "It is
clear from the aforecited provisions of said memorandum that not all imports
againt proceeds of contracts entered into prior to April 25, 1960 are entitled to the
preferred buying rate of exchange. Only imports against proceeds of contracts
entered into prior to April 25, 1960, not otherwise classified as dollar-to-dollar
transactions, are entitled to the preferred rate of exchange. It is for this reason that
the contractor is required to first file an application with defendant Central Bank
(Import Department) thru theAuthorized Agent Banks, for the purpose of
determining whether the imports against proceeds of contracts entered into prior
to April 25, 1960 are classified asdollar-to-dollar transactions (which are not
entitled to the preferred rate of exchange), or not (which are entitled to the
preferred rate of exchange), and that if said imports are entitled to the preferred
rate of exchange, defendant Central Bank would issue a license to the contractor
for authority to buy foreign exchange at the preferred rate for the payment of said
imports." 33

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G.R. No. L-18841 January 27, 1969
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, defendant-appellant.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio
A. Torres and Solicitor Camilo D. Quiason for plaintiff-appellant.
Ponce Enrile, Siguion Reyna, Montecillo and Belo for defendant-appellant.
REYES, J.B.L., J.:
Direct appeals, upon a joint record on appeal, by both the plaintiff and the
defendant from the dismissal, after hearing, by the Court of First Instance of
Manila, in its Civil Case No. 35805, of their respective complaint and counterclaims,
but making permanent a preliminary mandatory injunction theretofore issued
against the defendant on the interconnection of telephone facilities owned and
operated by said parties.
The plaintiff, Republic of the Philippines, is a political entity exercising
governmental powers through its branches and instrumentalities, one of which is
the Bureau of Telecommunications. That office was created on 1 July 1947, under
Executive Order No. 94, with the following powers and duties, in addition to certain
powers and duties formerly vested in the Director of Posts: 1awphil.ñêt
SEC. 79. The Bureau of Telecommunications shall exercise the following powers
and duties:
(a) To operate and maintain existing wire-telegraph and radio-telegraph offices,
stations, and facilities, and those to be established to restore the pre-war
telecommunication service under the Bureau of Posts, as well as such additional
offices or stations as may hereafter be established to provide telecommunication
service in places requiring such service;
(b) To investigate, consolidate, negotiate for, operate and maintain wire-telephone
or radio telephone communication service throughout the Philippines by utilizing
such existing facilities in cities, towns, and provinces as may be found feasible and
under such terms and conditions or arrangements with the present owners or
operators thereof as may be agreed upon to the satisfaction of all concerned;
(c) To prescribe, subject to approval by the Department Head, equitable rates of
charges for messages handled by the system and/or for time calls and other
services that may be rendered by said system;
(d) To establish and maintain coastal stations to serve ships at sea or aircrafts and,
when public interest so requires, to engage in the international telecommunication
service in agreement with other countries desiring to establish such service with
the Republic of the Philippines; and
(e) To abide by all existing rules and regulations prescribed by the International
Telecommunication Convention relative to the accounting, disposition and
exchange of messages handled in the international service, and those that may
hereafter be promulgated by said convention and adhered to by the Government
of the Republic of the Philippines. 1
The defendant, Philippine Long Distance Telephone Company (PLDT for short), is
a public service corporation holding a legislative franchise, Act 3426, as amended
by Commonwealth Act 407, to install, operate and maintain a telephone system
throughout the Philippines and to carry on the business of electrical transmission
of messages within the Philippines and between the Philippines and the telephone
systems of other countries. 2 The RCA Communications, Inc., (which is not a party
to the present case but has contractual relations with the parties) is an American
corporation authorized to transact business in the Philippines and is the grantee,
by assignment, of a legislative franchise to operate a domestic station for the
reception and transmission of long distance wireless messages (Act 2178) and to
operate broadcasting and radio-telephone and radio-telegraphic communications
services (Act 3180). 3
Sometime in 1933, the defendant, PLDT, and the RCA Communications, Inc.,
entered into an agreement whereby telephone messages, coming from the United
States and received by RCA's domestic station, could automatically be transferred
to the lines of PLDT; and vice-versa, for calls collected by the PLDT for transmission
from the Philippines to the United States. The contracting parties agreed to divide
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the tolls, as follows: 25% to PLDT and 75% to RCA. The sharing was amended in 1958, the PLDT would sever the telephone connections. 13 When the PLDT received
1941 to 30% for PLDT and 70% for RCA, and again amended in 1947 to a 50-50 no reply, it disconnected the trunk lines being rented by the Bureau at midnight on
basis. The arrangement was later extended to radio-telephone messages to and 12 April 1958. 14 The result was the isolation of the Philippines, on telephone
from European and Asiatic countries. Their contract contained a stipulation that services, from the rest of the world, except the United States. 15
either party could terminate it on a 24-month notice to the other. 4 On 2 February
At that time, the Bureau was maintaining 5,000 telephones and had 5,000 pending
1956, PLDT gave notice to RCA to terminate their contract on 2 February 1958. 5
applications for telephone connection. 16 The PLDT was also maintaining 60,000
Soon after its creation in 1947, the Bureau of Telecommunications set up its own telephones and had also 20,000 pending applications. 17 Through the years, neither
Government Telephone System by utilizing its own appropriation and equipment of them has been able to fill up the demand for telephone service.
and by renting trunk lines of the PLDT to enable government offices to call private
The Bureau of Telecommunications had proposed to the PLDT on 8 January 1958
parties. 6 Its application for the use of these trunk lines was in the usual form of
that both enter into an interconnecting agreement, with the government paying
applications for telephone service, containing a statement, above the signature of
(on a call basis) for all calls passing through the interconnecting facilities from the
the applicant, that the latter will abide by the rules and regulations of the PLDT
Government Telephone System to the PLDT. 18 The PLDT replied that it was willing
which are on file with the Public Service Commission. 7 One of the many rules
to enter into an agreement on overseas telephone service to Europe and Asian
prohibits the public use of the service furnished the telephone subscriber for his
countries provided that the Bureau would submit to the jurisdiction and
private use. 8 The Bureau has extended its services to the general public since
regulations of the Public Service Commission and in consideration of 37 1/2% of
1948, 9 using the same trunk lines owned by, and rented from, the PLDT, and
the gross revenues. 19 In its memorandum in lieu of oral argument in this Court
prescribing its (the Bureau's) own schedule of rates. 10 Through these trunk lines, a
dated 9 February 1964, on page 8, the defendant reduced its offer to 33 1/3 % (1/3)
Government Telephone System (GTS) subscriber could make a call to a PLDT
as its share in the overseas telephone service. The proposals were not accepted by
subscriber in the same way that the latter could make a call to the former.
either party.
On 5 March 1958, the plaintiff, through the Director of Telecommunications,
On 12 April 1958, plaintiff Republic commenced suit against the defendant,
entered into an agreement with RCA Communications, Inc., for a joint overseas
Philippine Long Distance Telephone Company, in the Court of First Instance of
telephone service whereby the Bureau would convey radio-telephone overseas
Manila (Civil Case No. 35805), praying in its complaint for judgment commanding
calls received by RCA's station to and from local residents. 11 Actually, they
the PLDT to execute a contract with plaintiff, through the Bureau, for the use of the
inaugurated this joint operation on 2 February 1958, under a "provisional"
facilities of defendant's telephone system throughout the Philippines under such
agreement. 12
terms and conditions as the court might consider reasonable, and for a writ of
On 7 April 1958, the defendant Philippine Long Distance Telephone Company, preliminary injunction against the defendant company to restrain the severance of
complained to the Bureau of Telecommunications that said bureau was violating the existing telephone connections and/or restore those severed.
the conditions under which their Private Branch Exchange (PBX) is inter-connected
Acting on the application of the plaintiff, and on the ground that the severance of
with the PLDT's facilities, referring to the rented trunk lines, for the Bureau had
telephone connections by the defendant company would isolate the Philippines
used the trunk lines not only for the use of government offices but even to serve
from other countries, the court a quo, on 14 April 1958, issued an order for the
private persons or the general public, in competition with the business of the PLDT;
defendant:
and gave notice that if said violations were not stopped by midnight of 12 April

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(1) to forthwith reconnect and restore the seventy-eight (78) trunk lines that it has
disconnected between the facilities of the Government Telephone System,
including its overseas telephone services, and the facilities of defendant; (2) to
refrain from carrying into effect its threat to sever the existing telephone
communication between the Bureau of Telecommunications and defendant, and
not to make connection over its telephone system of telephone calls coming to the
Philippines from foreign countries through the said Bureau's telephone facilities
and the radio facilities of RCA Communications, Inc.; and (3) to accept and connect
through its telephone system all such telephone calls coming to the Philippines
from foreign countries — until further order of this Court.
On 28 April 1958, the defendant company filed its answer, with counterclaims.
It denied any obligation on its part to execute a contrary of services with the
Bureau of Telecommunications; contested the jurisdiction of the Court of First
Instance to compel it to enter into interconnecting agreements, and averred that
it was justified to disconnect the trunk lines heretofore leased to the Bureau of
Telecommunications under the existing agreement because its facilities were being
used in fraud of its rights. PLDT further claimed that the Bureau was engaging in
commercial telephone operations in excess of authority, in competition with, and
to the prejudice of, the PLDT, using defendants own telephone poles, without
proper accounting of revenues.
After trial, the lower court rendered judgment that it could not compel the PLDT
to enter into an agreement with the Bureau because the parties were not in
agreement; that under Executive Order 94, establishing the Bureau of
Telecommunications, said Bureau was not limited to servicing government offices
alone, nor was there any in the contract of lease of the trunk lines, since the PLDT
knew, or ought to have known, at the time that their use by the Bureau was to be
public throughout the Islands, hence the Bureau was neither guilty of fraud, abuse,
or misuse of the poles of the PLDT; and, in view of serious public prejudice that
would result from the disconnection of the trunk lines, declared the preliminary
injunction permanent, although it dismissed both the complaint and the
counterclaims.
Both parties appealed.
Taking up first the appeal of the Republic, the latter complains of the action of the
trial court in dismissing the part of its complaint seeking to compel the defendant
to enter into an interconnecting contract with it, because the parties could not
agree on the terms and conditions of the interconnection, and of its refusal to fix
the terms and conditions therefor.
We agree with the court below that parties can not be coerced to enter into a
contract where no agreement is had between them as to the principal terms and
conditions of the contract. Freedom to stipulate such terms and conditions is of the
essence of our contractual system, and by express provision of the statute, a
contract may be annulled if tainted by violence, intimidation, or undue influence
(Articles 1306, 1336, 1337, Civil Code of the Philippines). But the court a quo has
apparently overlooked that while the Republic may not compel the PLDT to
celebrate a contract with it, the Republic may, in the exercise of the sovereign
power of eminent domain, require the telephone company to permit
interconnection of the government telephone system and that of the PLDT, as the
needs of the government service may require, subject to the payment of just
compensation to be determined by the court. Nominally, of course, the power of
eminent domain results in the taking or appropriation of title to, and possession of,
the expropriated property; but no cogent reason appears why the said power may
not be availed of to impose only a burden upon the owner of condemned property,
without loss of title and possession. It is unquestionable that real property may,
through expropriation, be subjected to an easement of right of way. The use of the
PLDT's lines and services to allow inter-service connection between both telephone
systems is not much different. In either case private property is subjected to a
burden for public use and benefit. If, under section 6, Article XIII, of the
Constitution, the State may, in the interest of national welfare, transfer utilities to
public ownership upon payment of just compensation, there is no reason why the
State may not require a public utility to render services in the general interest,
provided just compensation is paid therefor. Ultimately, the beneficiary of the
interconnecting service would be the users of both telephone systems, so that the
condemnation would be for public use.
The Bureau of Telecommunications, under section 78 (b) of Executive Order No.
94, may operate and maintain wire telephone or radio telephone communications
Page | 8
throughout the Philippines by utilizing existing facilities in cities, towns, and
provinces under such terms and conditions or arrangement with present owners
or operators as may be agreed upon to the satisfaction of all concerned; but there
is nothing in this section that would exclude resort to condemnation proceedings
where unreasonable or unjust terms and conditions are exacted, to the extent of
crippling or seriously hampering the operations of said Bureau.
A perusal of the complaint shows that the Republic's cause of action is predicated
upon the radio telephonic isolation of the Bureau's facilities from the outside world
if the severance of interconnection were to be carried out by the PLDT, thereby
preventing the Bureau of Telecommunications from properly discharging its
functions, to the prejudice of the general public. Save for the prayer to compel the
PLDT to enter into a contract (and the prayer is no essential part of the pleading),
the averments make out a case for compulsory rendering of inter-connecting
services by the telephone company upon such terms and conditions as the court
may determine to be just. And since the lower court found that both parties "are
practically at one that defendant (PLDT) is entitled to reasonable compensation
from plaintiff for the reasonable use of the former's telephone facilities" (Decision,
Record on Appeal, page 224), the lower court should have proceeded to treat the
case as one of condemnation of such services independently of contract and
proceeded to determine the just and reasonable compensation for the same,
instead of dismissing the petition.
This view we have taken of the true nature of the Republic's petition necessarily
results in overruling the plea of defendant-appellant PLDT that the court of first
instance had no jurisdiction to entertain the petition and that the proper forum for
the action was the Public Service Commission. That body, under the law, has no
authority to pass upon actions for the taking of private property under the
sovereign right of eminent domain. Furthermore, while the defendant telephone
company is a public utility corporation whose franchise, equipment and other
properties are under the jurisdiction, supervision and control of the Public Service
Commission (Sec. 13, Public Service Act), yet the plaintiff's telecommunications
network is a public service owned by the Republic and operated by an
instrumentality of the National Government, hence exempt, under Section 14 of
the Public Service Act, from such jurisdiction, supervision and control. The Bureau
of Telecommunications was created in pursuance of a state policy reorganizing the
government offices —
to meet the exigencies attendant upon the establishment of the free and
independent Government of the Republic of the Philippines, and for the purpose
of promoting simplicity, economy and efficiency in its operation (Section 1,
Republic Act No. 51) —
and the determination of state policy is not vested in the Commission (Utilities
Com. vs. Bartonville Bus Line, 290 Ill. 574; 124 N.E. 373).
Defendant PLDT, as appellant, contends that the court below was in error in not
holding that the Bureau of Telecommunications was not empowered to engage in
commercial telephone business, and in ruling that said defendant was not justified
in disconnecting the telephone trunk lines it had previously leased to the Bureau.
We find that the court a quo ruled correctly in rejecting both assertions.
Executive Order No. 94, Series of 1947, reorganizing the Bureau of
Telecommunications, expressly empowered the latter in its Section 79, subsection
(b), to "negotiate for, operate and maintain wire telephone or radio telephone
communication service throughout the Philippines", and, in subsection (c), "to
prescribe, subject to approval by the Department Head, equitable rates of charges
for messages handled by the system and/or for time calls and other services that
may be rendered by the system". Nothing in these provisions limits the Bureau to
non-commercial activities or prevents it from serving the general public. It may be
that in its original prospectuses the Bureau officials had stated that the service
would be limited to government offices: but such limitations could not block future
expansion of the system, as authorized by the terms of the Executive Order, nor
could the officials of the Bureau bind the Government not to engage in services
that are authorized by law. It is a well-known rule that erroneous application and
enforcement of the law by public officers do not block subsequent correct
application of the statute (PLDT vs. Collector of Internal Revenue, 90 Phil. 676), and
that the Government is never estopped by mistake or error on the part of its agents
(Pineda vs. Court of First Instance of Tayabas, 52 Phil. 803, 807; Benguet
Consolidated Mining Co. vs. Pineda, 98 Phil. 711, 724).
Page | 9
 The theses that the Bureau's commercial services constituted unfair competition,
and that the Bureau was guilty of fraud and abuse under its contract, are, likewise,
untenable.
First, the competition is merely hypothetical, the demand for telephone service
being very much more than the supposed competitors can supply. As previously
noted, the PLDT had 20,000 pending applications at the time, and the Bureau had
another 5,000. The telephone company's inability to meet the demands for service
are notorious even now. Second, the charter of the defendant expressly provides:
SEC. 14. The rights herein granted shall not be exclusive, and the rights and power
to grant to any corporation, association or person other than the grantee franchise
for the telephone or electrical transmission of message or signals shall not be
impaired or affected by the granting of this franchise: — (Act 3436)
And third, as the trial court correctly stated, "when the Bureau of
Telecommunications subscribed to the trunk lines, defendant knew or should have
known that their use by the subscriber was more or less public and all embracing
in nature, that is, throughout the Philippines, if not abroad" (Decision, Record on
Appeal, page 216).
The acceptance by the defendant of the payment of rentals, despite its knowledge
that the plaintiff had extended the use of the trunk lines to commercial purposes,
continuously since 1948, implies assent by the defendant to such extended use.
Since this relationship has been maintained for a long time and the public has
patronized both telephone systems, and their interconnection is to the public
convenience, it is too late for the defendant to claim misuse of its facilities, and it
is not now at liberty to unilaterally sever the physical connection of the trunk lines.
..., but there is high authority for the position that, when such physical connection
has been voluntarily made, under a fair and workable arrangement and guaranteed
by contract and the continuous line has come to be patronized and established as
a great public convenience, such connection shall not in breach of the agreement
be severed by one of the parties. In that case, the public is held to have such an
interest in the arrangement that its rights must receive due consideration. This
position finds approval in State ex rel. vs. Cadwaller, 172 Ind. 619, 636, 87 N.E. 650,
and is stated in the elaborate and learned opinion of Chief Justice Myers as follows:
"Such physical connection cannot be required as of right, but if such connection is
voluntarily made by contract, as is here alleged to be the case, so that the public
acquires an interest in its continuance, the act of the parties in making such
connection is equivalent to a declaration of a purpose to waive the primary right of
independence, and it imposes upon the property such a public status that it may
not be disregarded" — citing Mahan v. Mich. Tel. Co., 132 Mich. 242, 93 N.W. 629,
and the reasons upon which it is in part made to rest are referred to in the same
opinion, as follows: "Where private property is by the consent of the owner
invested with a public interest or privilege for the benefit of the public, the owner
can no longer deal with it as private property only, but must hold it subject to the
right of the public in the exercise of that public interest or privilege conferred for
their benefit." Allnut v. Inglis (1810) 12 East, 527. The doctrine of this early case is
the acknowledged law. (Clinton-Dunn Tel. Co. v. Carolina Tel. & Tel. Co., 74 S.E. 636,
638).
It is clear that the main reason for the objection of the PLDT lies in the fact that
said appellant did not expect that the Bureau's telephone system would expand
with such rapidity as it has done; but this expansion is no ground for the
discontinuance of the service agreed upon.
The last issue urged by the PLDT as appellant is its right to compensation for the
use of its poles for bearing telephone wires of the Bureau of Telecommunications.
Admitting that section 19 of the PLDT charter reserves to the Government —
the privilege without compensation of using the poles of the grantee to attach
one ten-pin cross-arm, and to install, maintain and operate wires of its telegraph
system thereon; Provided, however, That the Bureau of Posts shall have the right
to place additional cross-arms and wires on the poles of the grantee by paying a
compensation, the rate of which is to be agreed upon by the Director of Posts and
the grantee; —
the defendant counterclaimed for P8,772.00 for the use of its poles by the
plaintiff, contending that what was allowed free use, under the aforequoted
provision, was one ten-pin cross-arm attachment and only for plaintiff's telegraph
system, not for its telephone system; that said section could not refer to the
Page | 10
plaintiff's telephone system, because it did not have such telephone system when Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando,
defendant acquired its franchise. The implication of the argument is that plaintiff Capistrano, Teehankee and Barredo, JJ., concur.
has to pay for the use of defendant's poles if such use is for plaintiff's telephone
system and has to pay also if it attaches more than one (1) ten-pin cross-arm for
telegraphic purposes.

As there is no proof that the telephone wires strain the poles of the PLDT more
than the telegraph wires, nor that they cause more damage than the wires of the
telegraph system, or that the Government has attached to the poles more than one
ten-pin cross-arm as permitted by the PLDT charter, we see no point in this
assignment of error. So long as the burden to be borne by the PLDT poles is not
increased, we see no reason why the reservation in favor of the telegraph wires of
the government should not be extended to its telephone lines, any time that the
government decided to engage also in this kind of communication.

In the ultimate analysis, the true objection of the PLDT to continue the link
between its network and that of the Government is that the latter competes
"parasitically" (sic) with its own telephone services. Considering, however, that the
PLDT franchise is non-exclusive; that it is well-known that defendant PLDT is unable
to adequately cope with the current demands for telephone service, as shown by
the number of pending applications therefor; and that the PLDT's right to just
compensation for the services rendered to the Government telephone system and
its users is herein recognized and preserved, the objections of defendant-appellant
are without merit. To uphold the PLDT's contention is to subordinate the needs of
the general public to the right of the PLDT to derive profit from the future
expansion of its services under its non-exclusive franchise.

WHEREFORE, the decision of the Court of First Instance, now under appeal, is
affirmed, except in so far as it dismisses the petition of the Republic of the
Philippines to compel the Philippine Long Distance Telephone Company to
continue servicing the Government telephone system upon such terms, and for a
compensation, that the trial court may determine to be just, including the period
elapsed from the filing of the original complaint or petition. And for this purpose,
the records are ordered returned to the court of origin for further hearings and
other proceedings not inconsistent with this opinion. No costs.

Page | 11
G.R. No. L-40424 June 30, 1980
R. MARINO CORPUS, petitioner,
vs.
COURT OF APPEALS and JUAN T. DAVID, respondents
MAKASIAR, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals
promulgated on February 14, 1975 in CA-G.R. No. 40583-R, affirming the decision
of the court of Instance of Manila, Branch V. dated september 4, 1967, in Civil Case
no. 61802 entitled "Juan T. David,plaintiff, versus R. Mariano Corpus, defendant',
for the recovery of attorneys fees for professional services rendered by the
plaintiff, private respondent herein, to defendant, petitioner herein.
A this state that the plaintiff entered into the case under circumstances about which
Having been close friends, aside from being membres Civil Liberties Union,
petitioner Corpus intimately calls respondent David by his nickname "Juaning" and
the latter addresses the former simply as "Marino".
The factual setting of this case is stated in the decision of the lower court, thus:
It appears that in March, 1958, the defendant was charged administratively by
several employee of the Central Bank Export Department of which the defendant
is the director. The defendant was represented by Atty. Rosauro Alvarez. Pending
the investigation and effective March 18, 1958, he defendant was suspended from
office. After the investigating committee found the administrative charges to be
without merit, and subsequently recommended the immediate reinstatement of
the defendant, the then Governor of Central Bank, Miguel Cuaderno, Sr.,
recommended that the defendant be considered resigned as on the ground that he
had lost confidence in him. The Monetary Board, by a resolution of July 20, 1959,
declared the defendant as resigned as of the date of suspension.
On August 18, 1959, the defendant, thru Atty. Alvarez, filed the Court of First
Instance of Manila a petition for certiorari, mandamus and quo warranto with
preliminary mandatory injuction and damages against Miguel Cuaderno, Sr., the
Central Bank and Mario Marcos who was appointed to the position of the
defendant, said case having been docketed as Civil Case No. 41226 and assigned to
Branch VII presided over by Judge Gregorio T. Lantin. On September 7, 1959, the
respondent filed a motion to dismiss the petition, alleging among other grounds,
the failure of the defendant to exhaust, available administrative remedies (Exh. X).
On September 25, 1959, the defendant, thru Atty. Alvarez, filed his opposition to
the said motion. On March 17, 1960, during the course of the presentation of the
evidence for the petition for a writ of preliminary mandatory injunction, Atty.
Alvarez manifested that the defendant was abandoning his prayer for a writ of
preliminary mandatory injunction and asked for a ruling on the motion to dismiss.
On June 14, 1960, Judge Lantin dismissed Civil Case No. 41226 for failure to exhaust
she administrative remedies available to the herein defendant.
On June 24, 1960, Atty. Alverez received a copy of the order of dismissal It was at
the parties herein have given divergent versions.
According to the plaintiff, six or seven days prior to the expiration of the period for
appeal from the order of dismissal, he chanced to meet the late Rafael Corpus,
father of the defendant, at the Taza de Oro coffee shop. After they talked about
the defendant's having lost his case before Judge Lantin, and knowing that the
plaintiff and the defendant were both members of the Civil Liberties Union, Rafael
Corpus requested the plaintiff to go over the case and further said that he would
send his son, the herein defendant, to the plaintiff to find out what could be done
about the case. The defendant called up the plaintiff the following morning for an
appointment, and the plaintiff agreed to am him in the latter's office. At said
conference, the defendant requested the plaintiff to handle the case because Atty.
Alvarez had already been disenchanted and wanted to give up the case. Although
at first reluctant to handle the case, the plaintiff finally agreed on condition that he
and Atty. Alverez would collaborate in the case.
The defendant's version of how the plaintiff came into the case is as follows:
After the order of dismissal issued by Judge Lantin was published in the
newspapers, the plaintiff sought a conference with the defendant at Taza de Oro,
Page | 12
but the defendant told him that he would rather meet the plaintiff at the Swiss Inn.
Even before the case was dismissed the plaintiff had shown interest in the same by
being present during the hearings of said case in the sala of Judge Lantin When the
plaintiff and the defendant met at the Swiss Inn, the plaintiff handed the defendant
a memorandum prepared by him on how he can secure the reversal of the order
of dismissal by means of a formula stated in said memorandum. During the said
occasion the plaintiff scribbled some notes on a paper napkin (Exhibit 19). On June
28, 1960, the defendant wrote the plaintiff, sending with it a copy of the order of
Judge Lantin dated June 14, 1960 (Exhibit S Inasmuch as said letter, Exhibit S
already mentions the 'memorandum' of the plaintiff, the defendant contends that
it was not six or seven days prior to the expiration of the period of appeal (which
should be on or about July 2 or 3, 1960) but on a date even earlier than June 28,
1960 that the plaintiff and the defendant met together to discuss the latter's case.
Laying aside for the moment the true circumstances under which the plaintiff
started rendering professional services to the defendant, the undisputed evidence
shows that on July 7, 1960, the plaintiff filed a motion for reconsideration of the
order of dismissal under the joint signatures of the plaintiff and Atty. Alverez
(Exhibit B). The plaintiff argued the said motion during the hearing thereof On
August 8, 1960, he file a 13-page 'Memorandum of Authorities in support of said
motion for reconsideration (Exhibit C). A 3-page supplemental memorandum of
authorities was filed by the plaintiff on September 6, 1960 (Exhibit D)
On November 15, 1960, Judge Lantin denied the motion for reconsideration. On
November 19, 1960, the plaintiff perfected the appeal from the order of dismissal
dated June 14, 1960. For purposes of said appeal the plaintiff prepared a 232-page
brief and submitted the same before the Supreme Court in Baguio City on April 20,
1961. The plaintiff was the one who orally argued the case before the Supreme
Court. In connection with the trip to Baguio for the said oral argument, the plaintiff
used his car hich broke down and necessitated extensive repairs paid for by the
plaintiff himself.
On March 30, 1962, the Supreme Court promulgated its decision reversing the
order of dismissal and remanding the case for further proceedings. On April 18,
1962, after the promulgation of the decision of the Supreme Court reversing the
dismissal of the case the defendant wrote the plaintiff the following letter, Exhibit
'Q'. .
xxxxxxxxx
Dear Juaning
Will you please accept the attached check in the amount of TWO THOUSAND
P2,000.00) PESOS for legal services in the handling of L-17860 recently decided by
the Court? I wish I could give more but as y•u know we were banking on a SC
decision reinstating me and reimburse my backstage I had been wanting to offer
some token of my appreciation of your legal fight for and in my behalf, and it was
only last week that I received something on account of a pending claim.
Looking forward to a continuation of the case in the lower court, I remain
Sincerely yours, Illegible
xxxxxxxxx
In a reply letter dated April 25, 1962, the plaintiff returned the check, explaining
said act as follows:
April 25, 1962
My dear Marino:
Yesterday, I received your letter of April 18th with its enclosure. I wished thank you
for your kind thoughts, however, please don't take offense if I have to return the
check. I will explain.
When I decided to render professional services in your case, I was motivated by the
value to me of the very intimate relations which you and I have enjoyed during the
past many years. It was nor primarily, for a professional fee.
Although we were not fortunate to have obtained a decision in your case which
should have put an end to it. I feel that we have reason to be jubilant over the
outcome, because, the final favorable outcome of the case seems
certain irrespective of the length of time required to terminate the same.
Page | 13
Your appreciation of the efforts I have invested in your case is enough compensation
therefor, however, when you shall have obtained a decision which would have
finally resolved the case in your favor, remembering me then will make me happy. In
the meantime, you will make me happier by just keeping the check.
Sincerely yours,
JUANING
xxxxxxxxx
When the case was remanded for further proceedings before Judge Lantin, the
evidence for the defendant was presented by Atty. 'Alvarez with the plaintiff
cooperating in the same-'On June 24, 1963, Judge Lantin rendered his decision in
favor of the defendant declaring illegal the resolution of the Monetary Board of
July 20, 1959, and ordering the defendant's reinstatement and the payment of his
back salaries and allowances - The respondents in said Civil Case No. 41226 filed a
motion for reconsideration which was opposed by the herein plaintiff. The said
decision was appealed by the respondents, as well as by the herein defendant with
respect to the award of P5, 000. 00 attorney's feed The plaintiff prepared two briefs
for submission to the Court of Appeals one as appellee (Exhibit H) and the other as
appellant (Exhibit H-1). The Court of Appeal however, certified the case to the
Supreme Court in 1964.
On March 31, 1965, the Supreme Court rendered a decision affirming the judgment
of the Court of first Instance of Manila.
On April 19, 1965 the plaintiffs law office made a formal de command upon the
defendant for collection of 50% of the amount recovered by the defendant as back
salaries and other emoluments from the Central Bank (Exhibit N). This letter was
written after the defendant failed to appear at an appointment with the plaintiff so
that they could go together to the Central Bank to claim the possession of the office
to which the defendant was reinstated and after a confrontation in the office of the
plaintiff wherein the plaintiff was remanding 50% of the back salaries and other
emoluments amounting to P203,000.00 recoverable by the defendant. The
defendant demurred to this demand inasmuch as he had plenty of outstanding
obligations and that his tax liability for said back salaries was around P90,000.00,
and that he expected to net only around P10,000.00 after deducting all expenses
and taxes.
On the same date, April 19,1965 the plaintiff wrote the Governor for of Central
Bank requesting that the amount representing the sack salaries of the defendant
be made out in two one in favor of the defendant and the other representing the
professional fees equivalent to 50% of the said back salaries being claimed by the
plaintiff (Exhibit 8). F to obtain the relief from the Governor of Central Bank, the
plaintiff instituted this action before this Court on July 20, 1965 (Emphasis
supplied).
As therein defendant, herein petitioner Marino Corpus filed in August 5, 1965 an
answer with counter-claim. On August 30, 1965, private respondent Atty. Juan T.
David, plaintiff therein, filed a reply with answer to the counterclaim of petitioner.
After due trial, the lower court rendered judgment on September 4, 1967, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered, ordering the defendant to pay plaintiff
the sum of P30,000.00 in the concept of professional fees, and to pay the costs (pp.
112-113, CA Record on Appeal p. 54, rec.)
After receipt on September 7, 1967 of a copy of the aforequoted judgment,
petitioner Marino Corpus, defendant therein, filed on October 7, 1967 a notice of
appeal from said judgment to the Court of Appeals. In his appeal, he alleged that
the lower court erred:
1. In not holding that the plaintiff's professional services were offered and rendered
gratuitously;
2. Assuming that plaintiff is entitled to compensation — in holding that he was
entitled to attorney's fees in the amount of P30,000.00 when at most he would be
entitled to only P2,500.00;
3. In not dismissing plaintiff's complaint; and
4. In not awarding damages and attorney's fees to the defendant (p. 2, CA Decision,
p. 26, rec.)
Page | 14
Likewise, private respondent Atty. Juan T. David, plaintiff therein, appealed to the
Court of Appeals on October 9, 1967 assigning one error, to wit:
The lower court erred in ordering the defendant to pay the plaintiff only the sum
of P30,000.00 in the concept of attorney's fees (p. 1, CA Decision, p. 25, rec.).
On February 14, 1975, respondent Court of Appeals promulgated its decision
affirming in toto the decision of the lower court, with costs against petitioner
Marino Corpus (Annex A, Petition for Certiorari, p. 25, rec.)
Hence, the instant petition for review on certiorari, petitioner — contending that
the respondent Court of Appeals erred in finding that petitioner accepted private
respondent's services "with the understanding of both that he (private respondent)
was to be compensated" in money; and that the fee of private respondent was
contingent (pp. 3 & 5, Petition for Certiorari, pp. 17 & 19, rec.).
On October 1, 1975, the case was deemed submitted for decision (p. 177, rec.),
after the parties filed their respective memoranda.
B
On January 31, 1978, private respondent Atty. Juan T. David filed a petition to
remand the case to the court a quo for execution of the latter's decision in Civil
Case No. 61802, dated September 4, 1967, alleging that said decision is already
deemed affirmed pursuant to Section 11(2), Article X of the New Constitution by
reason of the failure of this Tribunal to decide the case within 18 months. Then on
July 7, 1978, another petition to remand the case to the lower court to execution
was filed by herein private respondent.
Subsequently, private respondent Atty. Juan T. David filed with The court a quo a
motion dated September 13, 1978 for the issuance of a writ of execution of the
lower court's decision in the aforesaid civil case, also invoking Section 11 (2), Article
X of the 1973 Constitution. In an order dated September 19, 1978, the lower court,
through Judge Jose H. Tecson, directed the issuance of a writ of execution. The writ
of execution was issued on October 2, 1978 and a notice of garnishment was also
issued n October 13, 1978 to garnish the bank deposits of herein petitioner Marino
Corpus in the Commercial Bank and Trust Company, Makati Branch.
It appears that on October 13, 1978, herein petitioner filed a motion for
reconsideration of the September 19, 1978 order. Private respondent Atty. Juan T.
David filed on October 19, 1978 an opposition to said motion and herein petitioner
filed a reply on October 30, 1978. The lower court denied said motion for
reconsideration in its over dated November 7, 1978.
It appears also that in a letter dated October 18, 1978, herein petitioner Marino
Corpus requested this Court to inquire into what appears to be an irregularity in
the issuance of the aforesaid garnishment notice to the Commercial Bank and Trust
Company, by virtue of which his bank deposits were garnished and he was
prevented from making withdrawals from his bank account.
In OUR resolution of November 3, 1978, WE required private respondent Atty. Juan
T. David and the Commercial Bank and Trust Company to comment on petitioner's
letter, and for the bank to explain why it did not honor petitioner's withdrawals
from his bank deposits when no garnishment order has been issued by the
Supreme Court. This Court further inquired from the lower court whether it has
issued any garnishment order during the pendency of the present case.
On November 27, 1978, the Commercial Bank and Trust Company filed its
comment which was noted in the Court's resolution of December 4, 1978. In said
resolution, the Court also required Judge Jose H. Tecson to comply with the
resolution of November 3, 1978, inquiring as to whether he had issued any
garnishment order, and to explain why a writ of execution was issued despite the
pendency of the present case before the Supreme Court.
Further, WE required private respondent Atty. Juan T. David Lo explain his failure
to file his comment, and to file the same as directed by the resolution of the Court
dated November 3, 1978. Private respondent's compliance came on December 13,
1978, requesting to be excused from the filing of his comment because herein
petitioner's letter was unverified. Judge Tecson's compliance was filed on
December 15, 1978, to which herein petitioner replied on January 11, 1979.
In OUR resolution dated January 3, 1979, WE set aside the order of Judge Jose H.
Tecson dated September 19, 1978, the writ of execution as well as the notice of
garnishment, and required private respondent Atty. Juan T. David to show cause
Page | 15
why he should not be cited for contempt for his failure to file his comment as
directed by the resolution of the Court dated December 4, 1978, and for filing a
motion for execution knowing that the case is pending appeal and review before
this Court Likewise, the Court required Judge Jose H. Tecson to show cause why he
should not be cited for contempt for issuing an order directing the issuance of a
writ of execution and for issuing such writ despite the pendency of the present case
in the Supreme Court.
On January 12, 1979, Judge Jose H. Tecson filed his compliance explanation as
directed by the aforesaid resolution of January 3, 1979, while private respondent
Atty. Juan T. David filed on January 30, 19 79 his compliance and motion for
reconsideration after the Court has granted him an extension of time to file his
compliance.
Private respondent Atty. Juan T. David filed on February 28, 1979, a petition praying
that the merits of his compliance be resolved by the Court en banc. Subsequently,
on March 26, 1979, another petition was filed by herein private respondent asking
the Chief
Justice and the members of the First Division to inhibit themselves from
participating in the determination of the merits of his compliance and for its merits
to be resolved by the Court en banc.
C
The main thrust of this petition for review is whether or not private respondent
Atty. Juan T. David is entitled to attorney's fees.
Petitioner Marino Corpus contends that respondent David is not entitled to
attorney's fees because there was no contract to that effect. On the other hand,
respondent David contends that the absence of a formal contract for the payment
of the attorney's fees will not negate the payment thereof because the contract
may be express or implied, and there was an implied understanding between the
petitioner and private respondent that the former will pay the latter attorney's fees
when a final decision shall have been rendered in favor of the petitioner reinstating
him to -his former position in the Central Bank and paying his back salaries.
I
WE find respondent David's position meritorious. While there was express
agreement between petitioner Corpus and respondent David as regards attorney's
fees, the facts of the case support the position of respondent David that there was
at least an implied agreement for the payment of attorney's fees.
Petitioner's act of giving the check for P2,000.00 through his aforestated April 18,
1962 letter to respondent David indicates petitioner's commitment to pay the
former attorney's fees, which is stressed by expressing that "I wish I could give
more but as you know we were banking on a SC decision reinstating me and
reimbursing my back salaries This last sentiment constitutes a promise to pay more
upon his reinstatement and payment of his back salaries. Petitioner ended his letter
that he was "looking forward to a continuation of the case in the lower court, ... to
which the certiorari-mandamus-quo warranto case was remanded by the Supreme
Court for further proceedings.
Moreover, respondent David's letter-reply of April 25, 1962 confirms the promise
of petitioner Corpus to pay attorney's fees upon his reinstatement and payment of
back salaries. Said reply states that respondent David decided to be his counsel in
the case because of the value to him of their intimate relationship over the years
and "not, primarily, for a professional fee." It is patent then, that respondent David
agreed to render professional services to petitioner Corpus secondarily for a
professional fee. This is stressed by the last paragraph of said reply which states
that "however, when you shall have obtained a decision which would have finally
resolved the case in your favor, remembering me then will make me happy. In the
meantime, you will make me happier by just keeping the check." Thereafter,
respondent David continued to render legal services to petitioner Corpus, in
collaboration with Atty. Alverez until he and Atty. Alvarez secured the decision
directing petitioner's reinstatement with back salaries, which legal services were
undisputedly accepted by, and benefited petitioner.
Moreover, there is no reason to doubt respondent David's assertion that Don
Rafael Corpus, the late father of petitioner Corpus, requested respondent to help
his son, whose suit for reinstatement was dismissed by the lower court; that
pursuant to such request, respondent conferred in his office with petitioner, who
Page | 16
requested respondent to handle the case as his lawyer, Atty. Alvarez, was already
disenchanted and wanted to give up the case; and that respondent agreed on the
case. It would have been unethical for respondent to even offer his services when
petitioner had a competent counsel in the person of Atty. Alvarez, who has been
teaching political, constitutional and administrative law for over twenty years.
addition, respondent David and petitioner's father, the late Rafael Corpus, were
also close friends. Thus, the absence of an express contract for attorney's fees
between respondent David and petitioner Corpus is no argument against the
payment of attorney's fees, considering their close relationship which signifies
mutual trust and confidence between them.

Likewise, it appears that after the Supreme Court affirmed on March 31, 1965 the II
order of the lower court reinstating petitioner Corpus with back salaries and
Moreover, the payment of attorney's fees to respondent David may also be
awarding attorney's fees of P5,000.00, respondent David made a written demand
justified by virtue of the innominate contract of facio ut des (I do and you give
on April 19, 1965 upon petitioner Corpus for the payment of his attorney's fees in
which is based on the principle that "no one shall unjustly enrich himself at the
an amount equivalent to 50% of what was paid as back salaries (Exh. N p. 75, Folder
expense of another." innominate contracts have been elevated to a codal provision
of Exhibits, Civil Case No. 61802). Petitioner Corpus, in his reply dated May 7, 1965
in the New Civil Code by providing under Article 1307 that such contracts shall be
to the aforesaid written demand, while disagreeing as to the amount of attorney's
regulated by the stipulations of the parties, by the general provisions or principles
fees demanded, did not categorically deny the right of respondent David to
of obligations and contracts, by the rules governing the most analogous nominate
attorney's fees but on the contrary gave the latter the amount of P2,500.00, which
contracts, and by the customs of the people. The rationale of this article was stated
is one-half (½) of the court-awarded attorney's fees of P5,000.00, thus impliedly
in the 1903 case of Perez vs. Pomar (2 Phil. 982). In that case, the Court sustained
admitting the right of respondent David to attorney's fees (Exh. K, p. 57, Folder of
the claim of plaintiff Perez for payment of services rendered against defendant
Exhibits, Civil Case No. 61802).
Pomar despite the absence of an express contract to that effect, thus:
It is further shown by the records that in the motion filed on March 5, 1975 by
It does not appear that any written contract was entered into between the parties
petitioner Corpus before the Court of Appeals for the reconsideration of its
for the employment of the plaintiff as interpreter, or that any other innominate
decision the order of the lower court granting P30,000.00 attorney's fee's to
contract was entered into but
respondent David, he admitted that he was the first to acknowledge that
whethertheplaintiffsservicesweresolicitedorwhethertheywereoffered to the
respondent David was entitled to tion for legal services rendered when he sent the
defendant for his assistance, inasmuch as these services were accepted and made
chock for P2,000.00 in his letter of April 18, 1962, and he is still to compensate the
use of by the latter, we must consider that there was a tacit and mutual consent as
respondent but only to the extent of P10,000.00 (p. 44, rec.). This admission serves
to the rendition of the services. This gives rise to the obligation upon the person
only to further emphasize the fact that petitioner Corpus was aware all the time
benefited by the services to make compensation therefor, since the bilateral
that he was liable to pay attorney's fees to respondent David which is therefore
obligation to render service as interpreter, on the one hand, and on the other to
inconsistent with his position that the services of respondent David were
pay for the service rendered, is thereby incurred. (Arts. 1088, 1089, and 1262 of
gratuitous, which did not entitle said respondent to compensation.
the Civil Code).
It may be advanced that respondent David may be faulted for not reducing the
xxxxxxxxx
agreement for attorney's fees with petitioner Corpus in writing. However, this
should be viewed from their special relationship. It appears that both have been ... Whether the service was solicited or offered, the fact remains that Perez
friends for several years and were co-members of the Civil Liberties Union. In rendered to Pomar services as interpreter. As it does not appear that he did this

Page | 17
gratuitously, the duty is imposed upon the defendant, he having accepted the
benefit of the service, to pay a just compensation therefor, by virtue of the
innominate contract of facio ut des implicitly established.
xxxxxxxxx
... because it is a well-known principle of law that no one should permitted to enrich
himself to the damage of another" (emphasis supplied; see also Tolentino, Civil
Code of the Philippines, p. 388, Vol. IV 119621, citing Estate of Reguera vs. Tandra
81 Phil. 404 [1948]; Arroyo vs. Azur 76 Phil. 493119461; and Perez vs. Pomar. 2 Phil.
682 [1903]).
WE reiterated this rule in Pacific Merchandising Corp. vs. Consolacion Insurance &
Surety Co., Inc. (73 SCRA 564 [1976]) citing the case of Perez v. Pomar, supra thus:
Where one has rendered services to another, and these services are accepted by
the latter, in the absence of proof that the service was rendered gratuitously, it is
but just that he should pay a reasonable remuneration therefor because 'it is a well-
known principle of law, that no one should be permitted to enrich himself to the
damage of another (emphasis supplied).
Likewise, under American law, the same rule obtains (7 CJS 1079; FL Still & Co. v.
Powell, 114 So 375).
III
There was no contract for contingent fee between Corpus and respondent David.
Contingent fees depend on an express contract therefor. Thus, "an attorney is not
entitled to a percentage of the amount recovered by his client in the absence of an
express contract to that effect" (7 C.J.S. 1063 citing Thurston v. Travelers Ins. Co.,
258 N.W. 66, 128 Neb. 141).
Where services were rendered without any agreement whatever as to the amount
or terms of compensation, the attorney is not acting under a contract for a
contingent fee, and a letter by the attorney to the client stating that a certain sum
would be a reasonable amount to charge for his services and adding that a rate of
not less than five percent nor more than ten would be reasonable and customary
does not convert the original agreement into a contract for a contingent fee (7 C.J.S.
1063 citing Fleming v. Phinizy 134 S.E. 814).
While there was no express contract between the parties for the payment of
attorney's fees, the fact remains that respondent David rendered legal services to
petitioner Corpus and therefore as aforestated, is entitled to compensation under
the innominate contract of facio lit des And such being the case, respondent David
is entitled to a reasonable compensation.
IV
In determining a reasonable fee to be paid to respondent David as compensation
for his services, on a quantum meruit basis, it is proper to consider all the facts and
circumstances obtaining in this case particularly the following:
The extent of the services rendered by respondent David should be considered
together with the extent of the services of Petitioner's other counsel, Atty. Rosauro
Alvarez, It is undisputed that Atty. Rosauro Alvarez had rendered legal services as
principal counsel for more shall six (6) years while respondent David has rendered
legal services as collaborating counsel for almost four (4) years. It appears that Atty.
Alvarez started to render legal services after the administrative case was filed on
March 7, 1958 against petitioner Corpus. He represented petitioner Corpus in the
hearing of said case which was conducted from May 5, 1958 to October 8, 1958,
involving 56 sessions, and this resulted in the complete exoneration by the
Investigating Committee of all the charges against the petitioner. It appears further
that after the Monetary Board, in its resolution of July 20, 1959, declared petitioner
Corpus as being considered resigned from the service, Atty. Alvarez instituted on
August 18, 1958 Civil Case No. 41126 in the Court of First Instance of Manila for the
setting aside of the aforestated resolution and for the reinstatement of petitioner
Corpus. Atty. Alvarez actively participated in the proceedings.
On the other hand, respondent David entered his appearance as counsel for
petitioner Corpus sometime after the dismissal on June 14, 1960 of the aforesaid
civil case. From the time he entered his appearance, both he and Atty. Alvarez
rendered legal services to petitioner Corpus in connection with the appeals of the
aforementioned civil case to the Court of Appeals and to the Supreme Court. The
Page | 18
records disclose that in connection with the appeal from the June 14, 1960 order
of dismissal, respondent David prepared and signed pleadings although the same
were made for and on behalf of Atty. Alvarez and himself And it is not far-fetched
to conclude that all appearances were made by both counsels considering that
Atty. Alverez was the principal counsel and respondent David was the collaborating
counsel. Thus, when the case was called for oral argument on April 20, 1961 before
the Supreme Court, respondent David and Atty. Alverez appeared for petitioner
Corpus although it was David who orally argued the case.
When the Supreme Court, in its decision of March 30, 1962, remanded the case to
the lower court for further it was Atty. Alverez who conducted the presentation of
evidence while respondent David assisted him The records also review that
respondent David prepared and signed for Atty. Alverez and himself. certain
pleadings, including a memorandum. Moreover, after the lower court rendered
judgment on June 2 4, 1963 ordering the reinstatement and payment of back
salaries to petitioner Corpus and awarding him P5,000.00 by way of attorney's fees,
both petitioner Corpus and the respondents in said case appealed the judgment.
At that stage, respondent David again prepared and signed for Atty. Alvarez and
himself, the necessary pleadings, including two appeal briefs. And in addition, he
made oral arguments in the hearings of motions filed in the lower court before the
records of the case were forwarded to the appellate court. Furthermore, while it
appears that it was Atty. Alvarez who laid down the basic theory and foundation of
the case of petitioner Corpus in the administrative case and later in the civil case,
respondent David also advanced legal propositions. Petitioner Corpus contends
that said legal propositions were invariably rejected by the courts. This is, however,
of no moment because the fact remains that respondent David faithfully rendered
legal services for the success of petitioner's case.
The benefits secured for petitioner Corpus may also be considered in ascertaining
what should be the compensation of respondent David. It cannot be denied that
both Atty. Alvarez and respondent David were instrumental in obtaining
substantial benefits for petitioner Corpus which consisted primarily of his
reinstatement, recovery of back salaries and the vindication of his honor and
reputation. But, note should also be taken of the fact that respondent David came
at the crucial stage when the case of petitioner Corpus was dismissed by the lower
court.
Atty. Rosauro Alvarez admittedly was paid by petitioner Corpus the sum of
P20,000.00 or at most P22,500.00 (T.s.n., Jan. 11, 1967, pp. 34-35; T.s.n., Feb. 10,
1967, pp. 48-49). On the other hand, petitioner Corpus, after WE suggested on
August 15, 1975 that they settle the case amicably has, in his September 15, 1975
pleading filed before this Court (p. 166, rec.), manifested his willingness to pay
P10,000.00 for the services of respondent David. However, respondent David has
not manifested his intention to accept the offer.
In his complaint in the instant case, he asked for P75,000.00 as his attorney's fees.
The records reveal that petitioner Corpus actually received only P150,158.50 as
back salaries and emoluments after deducting taxes as well as retirement and life
insurance premiums due to the GSIS. The amount thus claimed by respondent
David represents 50% of the amount actually received by petitioner Corpus. The
lower court, however, awarded only P30,000.00 and it was affirmed by the Court
of Appeals.
Considering the aforestated circumstances, WE are of the opinion that the
reasonable compensation of respondent David should be P20,000.00.
V
WE find private respondent Juan T. David and Judge Jose H. Tecson, Presiding Judge
of the Court of First Instance of Manila, Branch V, guilty of contempt of court.
Respondent David filed on or about September 13, 1978 a motion with the court a
quo for the issuance of a writ of execution to enforce its decision in Civil Case No
61802, subject of the present petition, knowing fully well that it was then still
pending appeal before this Court. In addition, no certification that the aforesaid
decision is already deemed affirmed had as yet been issued by the Chief Justice
pursuant to Section 11, paragraph 2, Article X of the New Constitution; because
respondent David's petitions filed with the Supreme Court on January 31, 1978 and
on July 7, 1978 to remand the case to the trial court for execution and for the
issuance of such certification had not yet been acted upon as the same were still
Page | 19
pending consideration by this Court. In fact, this Court has not as of this time made
any pronouncement on the aforesaid provision of the New Constitution.
This act of respondent David constitutes disrespect to, as well as disregard of, the
authority of this Court as the final arbiter of all cases duly appealed to it, especially
constitutional questions. It must be emphasized that as a member of the Philippine
Bar he is required "to observe and maintain the respect due to the court of justice
and judicial officers" (Section 20 (b), 138 of the Revised Rules of Court). Likewise,
Canon 1 of. the Canons of Professional Ethic expressly provide that: "It is the duty
of the lawyer to maintain towards the Courts a respectful attitude, not for the sake
of the temporary incumbent of the judgement office, but for the maintenance of
its supreme importance." And this Court had stressed that "the duty of an attorney
to the courts 'can only be maintained by rendering no service involving any
disrespect to the judicial office which he is bound to uphold'" (Rheem of the
Philippines v. Ferrer, 20 SCRA 441, 444 [1967] citing the case of Lualhati v. Albert,
67 Phil. 86, 92 [1932]).
Moreover, this Court takes judicial notice of the fact that herein respondent David,
in the previous case of Integrated Construction Services, Inc. and Engineering
Construction, Inc. v. Relova (65 SCRA 638 [1975]), had sent letters addressed to the
then Chief Justice Querube C. Makalintal and later to the late Chief Justice Fred Ruiz
Castro, requesting for the issuance of certification on the basis of the
aforementioned provision of the New Constitution which were not given due
consideration. And knowing this, respondent David should have been more
prudent and cautious in g with the court a quo any motion for execution.
Furthermore, there was even a taint of arrogance and defiance on the part of
respondent David in not filing his comment to the letter- complaint dated October
18, 1978 of petitioner Corpus, as required by this Court in its November 3, 1978
and December 4,1978 resolutions which were duly received by him, and instead,
he sent on December 13, 1978 a letter requesting to be excused from the filing of
his comment on the lame excuse that petitioner's letter-complaint was not verified.
On the part of Judge Jose H. Tecson, his presumptuous and precipitate act of
granting the motion for execution of dent David likewise constitutes disrespect to,
as well as of, the authority of this Court because he know for a that the case was
still pending apply as the had not yet been remanded to it and that no certification
has been issued by this Court. As a judicial officer, Judge Tecson is charged with the
knowledge of the fact that this Court has yet to make a definite pronouncement on
Section 11, paragraph 2, Article X of the New Constitution. Judge Tecson should
know that only the Supreme Court can authoritatively interpret Section 11 (2) of
Article X of the 1973 Constitution. Yet, Judge Tecson assumed the role of the
Highest Court of the Land. He should be reminded of what Justice Laurel speaking
for the Court, has said in People v. Vera (65 Phil 56, 82 [1937]):
A becoming modesty of inferior courts demands conscious realization of the
position that they occupy in the interrelation and operation of the integrated
judged system of the nation.
It may also be added that the improvident act of respondent David in firing the
motion for execution and the precipitate act of Judge Tecson in issuing the writ of
execution are intriguing as they invite suspicion that there was connivance
between the two. Respondent David would seem to imply that his claim for
attorney's fees should be given preference over the other cams now pending in this
Court. Certainly, such should not be the case because there are cases which by their
nature require immediate or preferential attention by this Tribunal like habeas
corpus cases, labor cases and c cases involving death sentence, let alone cases
involving properties and property rights of poor litigants pending decision or
resolution long before the New Constitution of 1973. Nobility and exempt
forbearance were expected of Atty. David, who is old and experienced in the
practice of the legal profession, from which he has derived a great measure. of
economic well-being and independence
Consequently, the filing of the motion for immediate tion and the issuance of the
writ of execution constitute a defiance and usurpation of the jurisdiction of the
Supreme Court. As a disciplinary measure for the preservation and vindication of
the dignity of this Supreme Tribunal respondent Atty. Juan T. David should be
REPRIMANDED for his precipitate action of filing a motion for execution as well as
Judge Jose H. Tecson for his improvident issuance of a writ of execution while the
case is pending appeal before the Supreme Court, and a repetition of said acts
would be dealt with more severely.
Page | 20
WHEREFORE, PETITIONER R. MARINO CORPUS IS HEREBY DIRECTED TO PAY
RESPONDENT ATTY. JUAN T. DAVID THE SUM OF TWENTY THOUSAND (P20,000.00)
PESOS AS ATTORNEY'S FEES.
RESPONDENT ATTY. JUAN T. DAVID AND JUDGE JOSE H. TECSON OF THE COURT OF
FIRST INSTANCE OF MANILA, BRANCH V, ARE HEREBY DECLARED GUILTY OF
CONTEMPT AND ARE HEREBY REPRIMANDED, WITH A WARNING THAT REPETITION
TION OF THE SAME OR SIMILAR ACTS WILL BE DEALT WITH MORE SEVERELY.
COSTS AGAINST PETITIONER.
SO ORDERED.
G.R. No. 192099, July 08, 2015
PAULINO M. EJERCITO, JESSIE M. EJERCITO AND JOHNNY D.
CHANG, Petitioners, v. ORIENTAL ASSURANCE CORPORATION, Respondent.
DECISION
SERENO, C.J.:
This is a Petition for Review on Certiorari1 filed by Paulino M. Ejercito, Jessie M.
Ejercito and Johnny D. Chang (petitioners) under Rule 45 of the 1997 Rules of Civil
Procedure assailing the Court of Appeals (CA) Decision dated 2 October 20092 and
Resolution dated 14 April 20103 in CA-G.R. CV No. 90828. The Special Third Division
of the CA reversed and set aside the Regional Trial Court (RTC) Decision in Civil Case
No. 01-101999:chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, the present appeal is hereby GRANTED. The

Decision dated February 2, 2007 of the Regional Trial Court of Manila, Branch 36 in
Civil Case No. 01-101999 is hereby SET ASIDE.

A new judgment is hereby entered ordering the defendants-appellees Merissa C.

Somes, Paulino M. Ejercito, Jessie M. Ejercito and Johnny D. Chang jointly and
severally liable to pay plaintiff-appellant Oriental Assurance Corporation the
following sums:chanRoblesvirtualLawlibrary

1. The principal amount of P3,000,000.00 with interest at the rate of 12% per
annum from the time of the filing of the complaint until the same shall have been
fully paid;

2. Attorney's fees in the amount of P30,000.00; and

3. Costs of suit.chanroblesvirtuallawlibrary

SO ORDERED.4

The Facts

Page | 21

The facts of the case, as found by the CA, are as follows:ChanRoblesVirtualawlibrary
On 10 May 1999, respondent Oriental Assurance Corporation, through its Executive
Vice President Luz N. Cotoco issued a Surety Bond in favor of FFV Travel & Tours,
Inc. (Company). The bond was intended to guarantee the Company's payment of
airline tickets purchased on credit from participating members of International Air
Transport Association (IATA) to the extent of P3 million.
On the same day, petitioners and Merissa C. Somes (Somes) executed a Deed of
Indemnity in favor of respondent. The Surety Bond was effective for one year from
its issuance until 10 May 2000. It was renewed for another year, from 10 May 2000
to 10 May 2001, as shown in Bond Endorsement No. OAC-2000/0145 dated 17 April
2000. The corresponding renewal premium amounting to P15,024.54 was paid by
the insured corporation under Official Receipt No. 100262.
FFV Travel & Tours, Inc. has been declared in default for failure to pay its obligations
amounting to P5,484,086.97 and USD 18,760.98 as of 31 July 2000. Consequently,
IATA demanded payment of the bond, and respondent heeded the demand on 28
November 2000 as evidenced by China Bank Check No. 104949. IATA executed a
Release of Claim on 29 November 2000 acknowledging payment of the surety
bond.
Respondent sent demand letters to petitioners and Somes for reimbursement of
the P3 million pursuant to the indemnity agreement. For their failure to reimburse
respondent, the latter filed a collection suit.
The RTC Ruling
After trial, the RTC rendered a Decision dismissing the complaint against petitioners
for lack of merit and pronouncing Somes liable to pay the amount of P3 million and
interest per annum at the rate of 12% of the principal obligation from the date the
complaint was filed up to the date the obligation would have been fully paid.
The RTC found that there was no written agreement to show the intention of
petitioners to renew the Deed of Indemnity. The absence thereof was evidenced
by the nonappearance of any signature on the Renewal Notice, which was not
signed by Somes. However, she was held liable to pay the surety value of the cost
of tickets as she had paid the premium for the renewal of the Surety Bond and used
the renewed bond by submitting it to IATA.
The CA Ruling
The CA reversed the finding of the RTC and ruled that petitioners could not escape
liability, as they had authorized respondent to grant any renewals or extensions
pursuant to the indemnity agreement. The Deed of Indemnity contained a
stipulation that the signatories (petitioners) were authorizing the Company
(respondent) to grant or consent to the grant of any extension, continuation,
increase, modification, change or alteration, and/or renewal of the original bond.
Petitioners voluntarily signed the agreement and, are educated persons (Paulino,
being a lawyer), so they could not have misunderstood the legal effects of the
undertaking they had signed.
Issues
Petitioners raise the following issues:chanRoblesvirtualLawlibrary
Whether or not the Honorable Court of Appeals erred in ruling that petitioners are
liable to indemnify the respondent under the deed of indemnity considering that
petitioners did not give their consent to be bound thereby beyond the one (1) year
effectivity period of the original surety bond.
Whether or not the Honorable Court of Appeals erred in ruling that petitioners are
liable to pay the respondent attorney's fees considering that petitioners did not
breach their obligation under the deed of indemnity to indemnify the respondent
during the one (1) year effectivity period of the original surety bond.5
The Court's Ruling
Page | 22
We find no merit in the Petition. INCONTESTABILITY OF PAYMENTS MADE BY THE
COMPANY:ChanRoblesVirtualawlibrary
The contract of indemnity is the law between the parties.6 It is a cardinal rule in the
interpretation of a contract that if its terms are clear and leave no doubt on the -- Any payment or disbursement made by the COMPANY on account of the above-
intention of the contracting parties, the literal meaning of its stipulation shall mentioned Bond, its renewals, extensions, modifications or substitutions either in
control.7 The CA aptly found provisions in the contract that could not exonerate the belief that the Company was obligated to make such payment or in the belief
petitioners from their liability. that said payment was necessary in order to avoid greater losses or obligation for
which the company might be liable by virtue of the terms of the above-mentioned
The Deed of Indemnity contains the following
Bond, its renewals, extensions, modifications or substitutions shall be final and will
stipulations:ChanRoblesVirtualawlibrary
not be disputed by the undersigned who jointly and severally bind themselves to
indemnify the COMPANY of any and all such payments as stated in the preceding
INDEMNITY: - To indemnify the COMPANY for any damages, payments, advances,
clauses.
prejudices, loss, costs and expenses of whatever kind and nature, including counsel
or attorney's fees, which the Company may at any time, sustain or incur, as a
x x x
consequence of having executed the above-mentioned Bond, its renewals,
extensions, modifications or substitutions and said attorney's fees shall not be less
WAIVER: — The undersigned hereby waive all the rights, privileges, and benefits
than fifteen (15%) per cent of the amount claimed by the Company in each action,
that they have or may have under Articles 2077, 2078, 2079, 2080 and 2081 of the
the same to be due and payable, irrespective of whether the case is settled
Civil Code.
judicially or extrajudicially.
x x x
x x x x
RENEWALS, ALTERATIONS AND SUBSTITUTIONS: - The undersigned
MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: - The said
hereby empower and authorize the Company to grant or consent to the granting
indemnities will be paid to the COMPANY as soon as demand is received from the
of, any extension, continuation, increase, modifications, change, alteration
Creditor, or as soon as it becomes liable to make payment of any sum under the
and/or renewal of the original bond herein referred to, and to execute or consent
terms of the above-mentioned Bond, its renewals, extension, modifications or
to the execution of any substitution for said bond with the same or different
substitutions, whether the said sum or sums or part thereof, have been actually
conditions and parties, and the undersigned hereby hold themselves jointly and
paid or not. We authorize the COMPANY to accept in any case and at its entire
severally liable to the Company for the original bond hereinabove mentioned or
discretion, from any of us, payment on account of the pending obligation, and to
for any extension, continuation, increase, modification, change,
grant extensions to any of us, to liquidate said obligations, without necessity of
alteration, renewal or substitution thereof until the full amount including
previous knowledge or consent from the obligors.
principal interests, premiums, costs and other expenses due to the Company
thereunder is fully paid up.8 (Emphasis on the original)
x x x x

Page | 23
Clearly, as far as respondent is concerned, petitioners have expressly bound have easily inserted a remark in the clause granting authority to the Company to
themselves to the contract, which provides for the terms granting authority to the renew the original bond, if the renewal thereof was not their intention.
Company to renew the original bond. The terms of the contract are clear, explicit
and unequivocal. Therefore, the subsequent acts of the Company, through Somes, The rule that ignorance of the contents of an instrument does not ordinarily affect
that led to the renewal of the surety bond are binding on petitioners as well. the liability of the one who signs it12 may also be applied to this Indemnity
Agreement. And the mistake of petitioners as to the legal effect of their obligation
The intention of Somes to renew the bond cannot be denied, as she paid the is ordinarily no reason for relieving them of liability.13chanrobleslaw
renewal premium and even submitted the renewed bond to IATA.9chanrobleslaw
WHEREFORE, premises considered, the Petition is DENIED. The Court of Appeals
The claim of petitioners that they only consented to the one-year validity of the Decision dated 2 October 2009 and Resolution dated 14 April 2010 in CA-G.R. CV
surety bond must be directed against Somes in a separate action. She allegedly No. 90828 are AFFIRMED.
convinced them that the bond was valid for one year only. The allegation of
petitioners is an agreement outside of the contract. In other words, respondent is SO ORDERED.
not privy to the alleged agreement between Somes and petitioners. For
respondent, there was a valid indemnity agreement executed by the parties, and
contained a proviso that became the basis for the authority to renew the original
bond.

With regard to the contention that the Deed of Indemnity is a contract of adhesion,
the Court has consistently held that contracts of adhesion are not invalid per se and
that their binding effects have been upheld on numerous occasions.10 The
pretension that petitioners did not consent to the renewal of the bond is belied by
the fact that the terms of the contract which they voluntarily entered into
contained a clause granting authority to the Company to grant or consent to the
renewal of the bond. Having entered into the contract with full knowledge of its
terms and conditions, petitioners are estopped from asserting that they did so
under the ignorance of the legal effect of the contract or the undertaking.

It is true that on some occasions, the Court has struck down such contract as void
when the weaker party is imposed upon in dealing with the dominant party and is
reduced to the alternative of accepting the contract or leaving it, completely
deprived of the opportunity to bargain on equal footing.11 This reasoning cannot
be used in the instant case. One of the petitioners, Paulino M. Ejercito, is a lawyer
who cannot feign ignorance of the legal effect of his undertaking. Petitioners could
Page | 24
[G.R. NO. 163512 : February 28, 2007]
DAISY B. TIU, Petitioner, v. PLATINUM PLANS PHIL., INC., Respondent.
DECISION
QUISUMBING, J.:
For review on certiorari are the Decision1 dated January 20, 2004 of the Court of
Appeals in CA-G.R. CV No. 74972, and its Resolution2 dated May 4, 2004 denying
reconsideration. The Court of Appeals had affirmed the decision3 dated February
28, 2002 of the Regional Trial Court (RTC) of Pasig City, Branch 261, in an action for
damages, ordering petitioner to pay respondent P100,000 as liquidated damages.
The relevant facts are as follows:
Respondent Platinum Plans Philippines, Inc. is a domestic corporation engaged in
the pre-need industry. From 1987 to 1989, petitioner Daisy B. Tiu was its Division
Marketing Director.
On January 1, 1993, respondent re-hired petitioner as Senior Assistant Vice-
President and Territorial Operations Head in charge of its Hongkong and Asean
operations. The parties executed a contract of employment valid for five years.4
On September 16, 1995, petitioner stopped reporting for work. In November 1995,
she became the Vice-President for Sales of Professional Pension Plans, Inc., a
corporation engaged also in the pre-need industry.
Consequently, respondent sued petitioner for damages before the RTC of Pasig
City, Branch 261. Respondent alleged, among others, that petitioner's employment
with Professional Pension Plans, Inc. violated the non-involvement clause in her
contract of employment, to wit:
8. NON INVOLVEMENT PROVISION - The EMPLOYEE further 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, engage in or be involved with any corporation, association or entity,
whether directly or indirectly, engaged in the same business or belonging to the
same pre-need industry as the EMPLOYER. Any 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
Respondent thus prayed for P100,000 as compensatory damages; P200,000 as
moral damages; P100,000 as exemplary damages; and 25% of the total amount due
plus P1,000 per counsel's court appearance, as attorney's fees.
Petitioner countered that the non-involvement clause was unenforceable for being
against public order or public policy: First, the restraint imposed was much greater
than what was necessary to afford respondent a fair and reasonable protection.
Petitioner contended that the transfer to a rival company was an accepted practice
in the pre-need industry. Since the products sold by the 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 already possessed the knowledge and expertise required in the pre-
need industry and respondent benefited tremendously from it. Third, a strict
application of the non-involvement clause would amount to a deprivation of
petitioner's right to engage in the only work she knew.
In upholding the validity of the non-involvement clause, the trial court ruled that a
contract in restraint of trade is valid provided that there is a limitation upon either
time or place. In the case of the pre-need industry, the trial court found the two-
year restriction to be valid and reasonable. The dispositive portion of the decision
reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant, ordering the latter to pay the following:
1. the amount of One Hundred Thousand Pesos (P100,000.00) for and as damages,
for the breach of the non-involvement provision (Item No. 8) of the contract of
employment;
2. costs of suit.
There being no sufficient evidence presented to sustain the grant of attorney's
fees, the Court deems it proper not to award any.
Page | 25
SO ORDERED.6
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 expressly stipulated in the contract, but also all
its consequences that were not against good faith, usage, and law. The appellate
court also ruled that the stipulation prohibiting non-employment for two years was
valid and enforceable considering the nature of respondent's business.
Petitioner moved for reconsideration but was denied. Hence, this appeal
by certiorari where petitioner alleges that the Court of Appeals erred when:
A.
'[IT SUSTAINED] THE VALIDITY OF THE NON-INVOLVEMENT CLAUSE IN
PETITIONER'S CONTRACT CONSIDERING THAT THE PERIOD FIXED THEREIN IS VOID
FOR BEING OFFENSIVE TO PUBLIC POLICY
B.
'[IT SUSTAINED] THE AWARD OF LIQUIDATED DAMAGES CONSIDERING THAT IT
BEING IN THE NATURE OF A PENALTY THE SAME IS EXCESSIVE, INIQUITOUS OR
UNCONSCIONABLE7
Plainly stated, the core issue is whether the non-involvement clause is valid.
Petitioner avers that the non-involvement clause is offensive to public policy since
the restraint imposed is much greater than what is necessary to afford respondent
a fair and reasonable protection. She adds that since the products sold in the pre-
need industry are more or less the same, the transfer to a rival company is
acceptable. Petitioner also points out that respondent did not invest in her training
or improvement. At the time she joined respondent, she already had the
knowledge and expertise required in the pre-need industry. Finally, petitioner
argues that a strict application of the non-involvement clause would deprive her of
the right to engage in the only work she knows.
Respondent counters that the validity of a non-involvement clause has been
sustained by the Supreme Court in a long line of cases. It contends that the
inclusion of the two-year non-involvement clause in petitioner's contract of
employment was reasonable and needed since her job gave her access to the
company's confidential marketing strategies. Respondent adds that the non-
involvement clause merely enjoined her from engaging in pre-need business akin
to respondent's within two years from petitioner's separation from respondent.
She had not been prohibited from marketing other service plans.
As early as 1916, we already had the occasion to discuss the validity of a non-
involvement clause. In Ferrazzini v. Gsell,8 we said that such clause was
unreasonable restraint of trade and therefore against public policy. In Ferrazzini,
the employee was prohibited from engaging in any business or occupation in the
Philippines for a period of five years after the termination of his employment
contract and must first get the written permission of his employer if he were 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 prohibition, in effect, forces an employee
to leave the Philippines to work should his employer refuse to give a written
permission.
In G. Martini, Ltd. v. Glaiserman,9 we also declared a similar stipulation as void for
being an unreasonable restraint of trade. There, the employee was prohibited from
engaging in any business similar to that of his employer for a period of one year.
Since the employee was employed only in connection with the purchase and export
of abaca, among the many businesses of the employer, the Court considered the
restraint too broad since it effectively prevented the employee from working in any
other business similar to his employer even if his employment was limited only to
one of its multifarious business activities.
However, in Del Castillo v. Richmond,10 we upheld a similar stipulation as legal,
reasonable, and not contrary to public policy. In the said case, the employee was
restricted from opening, owning or having any connection with any other drugstore
within a radius of four miles from the employer's place of business during the time
the employer was operating his drugstore. We said that a contract in restraint of
trade is valid provided there is a limitation upon either time or place and the
restraint upon one party is not greater than the protection the other party requires.
Page | 26
Finally, in Consulta v. Court of Appeals,11 we considered a non-involvement clause
in accordance with Article 130612 of the Civil Code. While the complainant in that
case was an independent agent and not an employee, she was prohibited for one
year from engaging directly or indirectly in activities of other companies that
compete with the business of her principal. We noted therein that the restriction
did not prohibit the agent from engaging in any other business, or from being
connected with any other company, for as long as the business or company did not
compete with the principal's business. Further, the prohibition applied only for one
year after the termination of the agent's contract and was therefore a reasonable
restriction designed to prevent acts prejudicial to the employer.
Conformably then with the aforementioned pronouncements, a non-involvement
clause is not necessarily void for being in restraint of trade as long as there are
reasonable limitations as to time, trade, and place.
In this case, the non-involvement clause has a time limit: two years from the time
petitioner's employment with respondent ends. It is also limited as to trade, since
it only prohibits petitioner from engaging in any pre-need business akin to
respondent's.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
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 P100,000 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.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January
20, 2004, and the Resolution dated May 4, 2004, of the Court of Appeals in CA-G.R.
CV No. 74972, are AFFIRMED. Costs against petitioner.
SO ORDERED.

More significantly, since petitioner was the Senior Assistant Vice-President and
Territorial Operations Head in charge of respondent's Hongkong and Asean
operations, she had been privy to confidential and highly sensitive marketing
strategies of respondent's business. To allow her to engage in a rival business soon
after she leaves would make respondent's trade secrets vulnerable especially in a
highly competitive marketing environment. In sum, we find the non-involvement
clause not contrary to public welfare and not greater than is necessary to afford a
fair and reasonable protection to respondent.13

In any event, Article 1306 of the Civil Code provides that parties to a contract 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.

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

Page | 27
G.R. No. L-15127 May 30, 1961
EMETERIO CUI, Plaintiff-Appellant, vs. ARELLANO UNIVERSITY, Defendant-
Appellee.
G.A.S. Sipin, Jr., for plaintiff-appellant.
E. Voltaire Garcia for defendant-appellee.
CONCEPCION, J.:chanrobles virtual law library
Appeal by plaintiff Emeterio Cui from a decision of the Court of First Instance of
Manila, absolving defendant Arellano University from plaintiff's complaint, with
costs against the plaintiff, and dismissing defendant's counter claim, for
insufficiency of proof thereon.chanroblesvirtualawlibrarychanrobles virtual law
library
In the language of the decision appealed from:
The essential facts of this case are short and undisputed. As established by the
agreement of facts Exhibits X and by the respective oral and documentary evidence
introduced by the parties, it appears conclusive that plaintiff, before the school
year 1948-1949 took up preparatory law course in the defendant University. After
finishing his preparatory law course plaintiff enrolled in the College of Law of the
defendant from the school year 1948-1949. Plaintiff finished his law studies in the
defendant university up to and including the first semester of the fourth year.
During all the school years in which plaintiff was studying law in defendant law
college, Francisco R. Capistrano, brother of the mother of plaintiff, was the dean of
the College of Law and legal counsel of the defendant university. Plaintiff enrolled
for the last semester of his law studies in the defendant university but failed to pay
his tuition fees because his uncle Dean Francisco R. Capistrano having severed his
connection with defendant and having accepted the deanship and chancellorship
of the College of Law of Abad Santos University, plaintiff left the defendant's law
college and enrolled for the last semester of his fourth year law in the college of
law of the Abad Santos University graduating from the college of law of the latter
university. Plaintiff, during all the time he was studying law in defendant university
was awarded scholarship grants, for scholastic merit, so that his semestral tuition
fees were returned to him after the ends of semester and when his scholarship
grants were awarded to him. The whole amount of tuition fees paid by plaintiff to
defendant and refunded to him by the latter from the first semester up to and
including the first semester of his last year in the college of law or the fourth year,
is in total P1,033.87. After graduating in law from Abad Santos University he applied
to take the bar examination. To secure permission to take the bar he needed the
transcripts of his records in defendant Arellano University. Plaintiff petitioned the
latter to issue to him the needed transcripts. The defendant refused until after he
had paid back the P1,033 87 which defendant refunded to him as above stated. As
he could not take the bar examination without those transcripts, plaintiff paid to
defendant the said sum under protest. This is the sum which plaintiff seeks to
recover from defendant in this case.chanroblesvirtualawlibrarychanrobles virtual
law library
Before defendant awarded to plaintiff the scholarship grants as above stated, he
was made to sign the following contract covenant and agreement:chanrobles
virtual law library
"In consideration of the scholarship granted to me by the University, I hereby waive
my right to transfer to another school without having refunded to the University
(defendant) the equivalent of my scholarship cash.
(Sgd.) Emeterio Cui".
It is admitted that, on August 16, 1949, the Director of Private Schools issued
Memorandum No. 38, series of 1949, on the subject of "Scholarship," addressed to
"All heads of private schools, colleges and universities," reading:
1. School catalogs and prospectuses submitted to this, Bureau show that some
schools offer full or partial scholarships to deserving students - for excellence in
scholarship or for leadership in extra-curricular activities. Such inducements to
poor but gifted students should be encouraged. But to stipulate the condition that
such scholarships are good only if the students concerned continue in the same
school nullifies the principle of merit in the award of these
scholarships.chanroblesvirtualawlibrarychanrobles virtual law library
Page | 28
2. When students are given full or partial scholarships, it is understood that such
scholarships are merited and earned. The amount in tuition and other fees
corresponding to these scholarships should not be subsequently charged to the
recipient students when they decide to quit school or to transfer to another
institution. Scholarships should not be offered merely to attract and keep students
in a school.chanroblesvirtualawlibrarychanrobles virtual law library
3. Several complaints have actually been received from students who have enjoyed
scholarships, full or partial, to the effect that they could not transfer to other
schools since their credentials would not be released unless they would pay the
fees corresponding to the period of the scholarships. Where the Bureau believes
that the right of the student to transfer is being denied on this ground, it reserves
the right to authorize such transfer.
that defendant herein received a copy of this memorandum; that plaintiff asked
the Bureau of Private Schools to pass upon the issue on his right to secure the
transcript of his record in defendant University, without being required to refund
the sum of P1,033.87; that the Bureau of Private Schools upheld the position taken
by the plaintiff and so advised the defendant; and that, this notwithstanding, the
latter refused to issue said transcript of records, unless said refund were made, and
even recommended to said Bureau that it issue a written order directing the
defendant to release said transcript of record, "so that the case may be presented
to the court for judicial action." As above stated, plaintiff was, accordingly,
constrained to pay, and did pay under protest, said sum of P1,033.87, in order that
he could take the bar examination in 1953. Subsequently, he brought this action
for the recovery of said amount, aside from P2,000 as moral damages, P500 as
exemplary damages, P2,000 as attorney's fees, and P500 as expenses of
litigation.chanroblesvirtualawlibrarychanrobles virtual law library
In its answer, defendant reiterated the stand it took, vis-a-vis the Bureau of Private
Schools, namely, that the provisions of its contract with plaintiff are valid and
binding and that the memorandum above-referred to is null and void. It, likewise,
set up a counterclaim for P10,000.00 as damages, and P3,000 as attorney's
fees.chanroblesvirtualawlibrarychanrobles virtual law library
The issue in this case is whether the above quoted provision of the contract
between plaintiff and the defendant, whereby the former waived his right to
transfer to another school without refunding to the latter the equivalent of his
scholarships in cash, is valid or not. The lower court resolved this question in the
affirmative, upon the ground that the aforementioned memorandum of the
Director of Private Schools is not a law; that the provisions thereof are advisory,
not mandatory in nature; and that, although the contractual provision "may be
unethical, yet it was more unethical for plaintiff to quit studying with the defendant
without good reasons and simply because he wanted to follow the example of his
uncle." Moreover, defendant maintains in its brief that the aforementioned
memorandum of the Director of Private Schools is null and void because said officer
had no authority to issue it, and because it had been neither approved by the
corresponding department head nor published in the official
gazette.chanroblesvirtualawlibrarychanrobles virtual law library
We do not deem it necessary or advisable to consider as the lower court did, the
question whether plaintiff had sufficient reasons or not to transfer from defendant
University to the Abad Santos University. The nature of the issue before us, and its
far reaching effects, transcend personal equations and demand a determination of
the case from a high impersonal plane. Neither do we deem it essential to pass
upon the validity of said Memorandum No. 38, for, regardless of the same, we are
of the opinion that the stipulation in question is contrary to public policy and,
hence, null and void. The aforesaid memorandum merely incorporates a sound
principle of public policy. As the Director of Private Schools correctly pointed, out
in his letter, Exhibit B, to the defendant,
There is one more point that merits refutation and that is whether or not the
contract entered into between Cui and Arellano University on September 10, 1951
was void as against public policy. In the case of Zeigel vs. Illinois Trust and Savings
Bank, 245 Ill. 180, 19 Ann. Case 127, the court said: 'In determining a public policy
of the state, courts are limited to a consideration of the Constitution, the judicial
decisions, the statutes, and the practice of government officers.' It might take more
than a government bureau or office to lay down or establish a public policy, as
alleged in your communication, but courts consider the practices of government
officials as one of the four factors in determining a public policy of the state. It has
Page | 29
been consistently held in America that under the principles relating to the doctrine help gifted students in whom society has an established interest or a first lien.
of public policy, as applied to the law of contracts, courts of justice will not (Emphasis supplied.)
recognize or uphold a transaction which its object, operation, or tendency is
WHEREFORE, the decision appealed from is hereby reversed and another one shall
calculated to be prejudicial to the public welfare, to sound morality or to civic
be entered sentencing the defendant to pay to the plaintiff the sum of P1,033.87,
honesty (Ritter vs. Mutual Life Ins. Co., 169 U.S. 139; Heding vs. Gallaghere 64 L.R.A.
with interest thereon at the legal rate from September 1, 1954, date of the
811; Veazy vs. Allen, 173 N.Y. 359). If Arellano University understood clearly the
institution of this case, as well as the costs, and dismissing defendant's
real essence of scholarships and the motives which prompted this office to issue
counterclaim. It is so ordered.
Memorandum No. 38, s. 1949, it should have not entered into a contract of waiver
with Cui on September 10, 1951, which is a direct violation of our Memorandum
and an open challenge to the authority of the Director of Private Schools because
the contract was repugnant to sound morality and civic honesty. And finally, in
Gabriel vs. Monte de Piedad, Off. Gazette Supp. Dec. 6, 1941, p. 67 we read: 'In
order to declare a contract void as against public policy, a court must find that the
contract as to consideration or the thing to be done, contravenes some established
interest of society, or is inconsistent with sound policy and good morals or tends
clearly to undermine the security of individual rights. The policy enunciated in
Memorandum No. 38, s. 1949 is sound policy. Scholarship are awarded in
recognition of merit not to keep outstanding students in school to bolster its
prestige. In the understanding of that university scholarships award is a business
scheme designed to increase the business potential of an education institution.
Thus conceived it is not only inconsistent with sound policy but also good morals.
But what is morals? Manresa has this definition. It is good customs; those generally
accepted principles of morality which have received some kind of social and
practical confirmation. The practice of awarding scholarships to attract students
and keep them in school is not good customs nor has it received some kind of social
and practical confirmation except in some private institutions as in Arellano
University. The University of the Philippines which implements Section 5 of Article
XIV of the Constitution with reference to the giving of free scholarships to gifted
children, does not require scholars to reimburse the corresponding value of the
scholarships if they transfer to other schools. So also with the leading colleges and
universities of the United States after which our educational practices or policies
are patterned. In these institutions scholarships are granted not to attract and to
keep brilliant students in school for their propaganda mine but to reward merit or

Page | 30
G.R. No. L-13403 March 23, 1960
RAMON E. SAURA, Plaintiff-Appellant, vs. ESTELA P. SINDICO, Defendant-
Appellee.
Anacleto Magno for appellant.
Espeque and Jalandoni for appellee.
REYES, J. B. L., J.: chanrobles virtual law library
Appeal on issues of law from an order of the Court of First Instance of Pangasinan
dismissing plaintiff's complaint for damages.
From the records it appears that Ramon E. Saura and Estela P. Sindico were
contesting for nomination as the official candidate of the Nacionalista Party in the
fourth district of Pangasinan in the congressional elections of November 12, 1957.
On August 23, 1957, the parties entered into a written agreement bearing the same
date, containing among other matters stated therein, a pledge that -
Each aspirant shall respect the result of the aforesaid convention, i.e., no one of us
shall either run as a rebel or independent candidate after losing in said convention.
In the provincial convention held by the Nacionalista Party on August 31, 1957,
Saura was elected and proclaimed the Party's official congressional candidate for
the aforesaid district of Pangasinan. Nonetheless, Sindico, in disregard of the
covenant, filed, on September 6, 1957, her certificate of candidacy for the same
office with the Commission on Elections, and she openly and actively campaigned
for her election. Wherefore, on October 5, 1957, plaintiff Saura commenced this
suit for the recovery of damages. Upon motion of the defendant, the lower court,
in its order of November 19, 1957, dismissed the complaint on the basis that the
agreement sued upon is null and void, in tat (1) the subject matter of the contract,
being a public office, is not within the commerce of man; and (2) the "pledge" was
in curtailment of the free exercise of elective franchise and therefore against public
policy. Hence, this appeal.
We agree with the lower court in adjudging the contract or agreement in question
a nullity. Among those that may not be the subject matter (object) of contracts are
certain rights of individuals, which the law and public policy have deemed wise to
exclude from the commerce of man. Among them are the political rights conferred
upon citizens, including, but not limited to, once's right to vote, the right to present
one's candidacy to the people and to be voted to public office, provided, however,
that all the qualifications prescribed by law obtain. Such rights may not, therefore,
be bargained away curtailed with impunity, for they are conferred not for individual
or private benefit or advantage but for the public good and interest.
Constitutional and statutory provision fix the qualifications of persons who may be
eligible for certain elective public offices. Said requirements may neither be
enlarged nor reduced by mere agreements between private parties. A voter
possessing all the qualifications required to fill an office may, by himself or through
a political party or group, present his candidacy without further limitations than
those provided by law.
Every voter has a right to be a candidate for public office if he possesses the
qualifications required to fill the office. It does not necessarily follow that he can be
the candidate of a particular political party. The statute provides when and how one
may be a candidate of a political party. If he cannot fill the requirement so as to be
the candidates of the political party of his choice, he may still be a candidate at the
general election by petition. The right of the voter to vote at the general election
for whom he pleases cannot be limited. (Roberts vs. Cleveland, Secretary of State
of State of New Mexico, 48 NM 226, 149 P (2d) 120, 153 A.L.R. 635, 637-638)
(Emphasis supplied)
In common law, certain agreements in consideration of the withdrawal of
candidates for office have invariably been condemned by the courts as being
against public policy, be it a withdrawal from the race for nomination or, after
nomination, from the race for election. (See notes in 37 L. R. A. (N.S.) 289 and cases
cited therein; 18 Am. Jur. Sec. 352, pp. 399-400)
In the case at hand, plaintiff complains on account of defendant's alleged violation
of the "pledge" in question by filing her own certificate o candidacy for a seat in
the Congress of the Philippines and in openly and actively campaigning for her
election. In the face of the preceding considerations, we certainly cannot entertain
Page | 31
plaintiff's action, which would result in limiting the choice of the electors to only
those persons selected by a small group or by party boses.
The case of Pendleton vs. Pace, 9 S.W. (2nd) 437, cited by the appellant, is clearly
inapplicable. The court there only sanctioned the validity of an agreement by the
opposing candidates for nomination setting aside and re-submitting the
nomination for another primary election on account of the protest or contest filed
by the losing candidate in the first primary election. To abandon the contest
proceedings, the candidates for nomination agreed to submit again their
nomination to the electors in the subsequent primary.
Appellant likewise cites and quotes a portion of our ruling in Monsale vs. Nico, 83
Phil., 758; 46 Off. Gaz., 210, to the effect that it is not incompetent or a candidate
to withdraw or annul his certificate of candidacy. This is not in point, for while we
stated there that he may do so, there being no legal prohibition against such a
voluntary withdrawal, it does not follow, nor did we imply anywhere in the
decision, that in case there is any agreement or consideration for such a
withdrawal, said agreement or consideration should be held valid or given effect.
We find it unnecessary to discuss the other points raised by the parties.
Wherefore, the order of dismissal appealed from is hereby affirmed. No
pronouncement as to costs.
G.R. No. L-65425 November 5, 1987
IRENEO LEAL, JOSE LEAL, CATALINA LEAL, BERNABELA LEAL, VICENTE LEAL
EUIOGIA LEAL PATERNO RAMOS, MACARIO DEL ROSARIO, MARGARITA
ALBERTO, VICTORIA TORRES, JUSTINA MANUEL, JULIAN MANUEL, MELANIA
SANTOS, CLEMENTE SAMARIO, MARIKINA VALLEY, INC., MIGUELA MENDOZA,
and REGISTER OF DEEDS OF RIZAL, petitioners,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT (4th Civil Cases Division),
and VICENTE SANTIAGO (Substituted by SALUD M. SANTIAGO), respondents.
SARMIENTO, J.:
In its resolution dated September 27, 1983, the respondent Intermediate Appellate
Court, 1 speaking through Justice Porfirio V, Sison, ordered, in part, the petitioners
to accept the sum of P5,600.00 from the private respondent as repurchase price of
the lots described in the "Compraventa" and, thereafter, to execute a Deed of
Repurchase to effect transfer over ownership over the same properties to the
private respondent.
This ruling was a complete reversal of the earlier decision, 2 dated June 28, 1.978,
penned by Justice Paras, of the Court of Appeals, in the same case, affirming the
trial court's dismissal of the private respondent's complaint.
The petitioners, feeling aggrieved and astonished by the complete turnaround of
the respondent court, come to Us with this petition for review by certiorari.
The antecedent facts are undisputed.
This case brings us back almost half a century ago, on March 21, 1941, when a
document entitled "Compraventa," written entirely in the Spanish language,
involving three parcels of land, was executed by the private respondent's
predecessors-in-interest, Vicente Santiago and his brother, Luis Santiago, in favor
of Cirilio Leal the deceased father of some of the petitioners, Pursuant to this
"Compraventa," the title over the three parcels of land in the name of the vendors
Page | 32
was cancelled and a new one was issued in the name of Cirilo Leal who immediately
took possession and exercised ownership over the said lands. When Cirilo died on
December 10, 1959, the subject lands were inherited by his six children, who are
among the petitioners, and who caused the consolidation and subdivision of the
properties among themselves.
Between the years 1960 and 1965, the properties were either mortgaged or leased
by the petitioners-children of Cirilo Leal — to their co-petitioners.
Sometime before the agricultural year 1966-1967, Vicente Santiago approached
the petitioners and offered re- repurchase the subject properties. Petitioners,
however, refused the offer. Consequently, Vicente Santiago instituted a complaint
for specific performance before the then Court of First Instance of Quezon City on
August 2, 1967.
All the trial, the court a quo rendered its decision,-dismissing the complaint on the
ground that the same was still premature considering that there was, as yet, no
sale nor any alienation equivalent to a sale. Not satisfied with this decision, the
private respondent appealed to the Court of Appeals and the latter, acting through
the Fourth Division and with Justice Edgardo Paras as ponente affirmed the
decision of the court a quo.
The petitioners seasonably filed a motion to amend the dispositive portion of the
decision so as to include an order for the cancellation of the annotations at the
back of the Transfer certificates of Title issued in their favor. The private
respondent,-on the other hand, filed a-timely motion for reconsideration of the
above decision and an opposition to petitioners' motion to amend. These incidents
were not resolved until then Court of Appeals was abolished and in lieu of which
the Intermideate Appellate Court was established In view of the said
reorganization, case was reassigned to the Fourth Civil in this cases Division.
Resolving the abovestated motion for reconsideration, the respondent court, in a
resolution penned by Justice Sison and promulgated on September 27, 1983, ruled,
as follows:
WHEREFORE, Our decision of June 28, 1978 is hereby reversed and set aside and
another one is rendered ordering: (1) defendants-appellees surnamed Leal to
accept the sum of P5,600.00 from plaintiff-appellant (substituted by Salud M.
Santiago) as repurchase price of the lots described in the "Compraventa" of March
21, 1941, and thereafter to execute a deed of repurchase sufficient in law to
transfer ownership of the properties to appellant Salud M. Santiago, the same to
be done within five (5) days from payment; (2) ordering the same defendants Leals
and defendant Clemente Samario to indemnify appellant in the sum of P3,087.50
as rental for the year 1967-1968 and the same amount every year thereafter; (3)
ordering an the defendants jointly and severally to pay the sum of Pl,500.00 as
attorney's fees and other expenses of litigation; and (4) ordering defendant
Register of Deeds of Rizal to cancel Transfer Certificate of Title No. 42535 in the
names of Vicente Santiago and Luis Santiago upon presentation of the deed of sale
herein ordered to be executed by the appellees in favor of Salud M. Santiago and
to issue thereof another Transfer Certificate of Title in the name alone of Salud M.
Santiago. No costs here and in the courts (sic) below.
SO ORDERED.
Verily, the well-spring whence the present controversy arose is the
abovementioned "Compraventa," more particularly paragraph (b) thereof, to wit:
xxx xxx xxx
(b) En caso de venta, no podran vender a otros dichos tres lotes de terreno sino al
aqui vendedor Vicente Santiago, o los herederos o sucesores de este por el niismo
precio de CINCO MIL SEISCIENTOS PESOS (P5,600.00) siempre y cuando estos
ultimos pueden hacer la compra. 3
xxx xxx xxx
which is now the subject of varying and conflicting interpretations.
xxx xxx xxx
It is admitted by both parties that the phrase "they shall not sell to others these
three lots but only to the seller Vicente Santiago or to his heirs or successors" is an
express prohibition against the sale of the lots described in the "Compraventa" to
third persons or strangers to the contract. However, while private respondent
Page | 33
naturally lauds the resolution of Justice Sison, which sustains the validity of this
prohibition, the petitioners, on the other hand, endorse the decision penned by
Justice Paras, which states, in part:
xxx xxx xxx
Finally, there is grave doubt re the validity of the ostensible resolutory condition
here, namely, the prohibition to sell the lots to persons other than the vendor
(appellant); uncertainly, a prohibition to alienate should not exceed at most a
period of twenty years, otherwise there would be subversion of public policy, which
naturally frowns on unwarranted restrictions on the right of ownership. 4
xxx xxx xxx
We agree with the Paras ponencia.
Contracts are generally binding between the parties, their assigns and heirs;
however, under Art. 1255 of the Civil Code of Spain, which is applicable in this
instance, pacts, clauses, and conditions which are contrary to public order are null
and void, thus, without any binding effect.
Parenthetically, the equivalent provision in the Civil Code of the Philippines is that
of Art. 1306, which states: "That 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.
Public order signifies the public weal — public policy. 5 Essentially, therefore, public
order and public policy mean one and the same thing. Public policy is simply the
English equivalent of "order publico" in Art. 1255 of the Civil Code of Spain. 6
One such condition which is contrary to public policy is the present prohibition to
self to third parties, because the same virtually amounts to a perpetual restriction
to the right of ownership, specifically the owner's right to freely dispose of his
properties. This, we hold that any such prohibition, indefinite and stated as to time,
so much so that it shall continue to be applicable even beyond the lifetime of the
original parties to the contract, is, without doubt, a nullity. In the light of this
pronouncement, we grant the petitioners' prayer for the cancellation of the
annotations of this prohibition at the back of their Transfer Certificates 'Title.
It will be noted, moreover, that the petitioners have never sold, or even attempted
to sell, the properties subject of the "Compraventa. "
We now come to what we believe is the very issue in this case which is, whether or
not under the aforequoted paragraph (b) of the "Compraventa" a right of
repurchase in favor of the private respondent exist.
The ruling of the Fourth Division (Justice Paras) is that the said stipulation does not
grant a right to repurchase. Contrarily, the resolution of the Fourth Civil Cases
Division (Justice P. V. Sison) interpreted the same provision as granting the right to
repurchase subject to a condition precedent.
Thus, the assailed Resolution, reversing the earlier decision of the same respondent
court, ruled
xxx xxx xxx
The all-importartant phrase "en caso de venta," must of necessity refer to the sale
of the properties either by Cirilo or his heirs to the Santiago brothers themselves
or to their heirs, including appellants Vicente Santiago including appellants Vicente
Santiago and Salud M Santiago, for the same sum of P5,600.00, "siempre y cuando
estos ultimos pueden hacer la compra" (when the latter shall be able to buy it).
xxx xxx xxx
... We repeat, The words envision the situation contemplated by the contracting
parties themselves, the resale of the lots to their owners, and NOT to a sale of the
lots to third parties or strangers to the contracts. ... 7
xxx xxx xxx
The law provides that for conventional redemption to take place, the vendor
should reserve, in no uncertain terms, the right to repurchase the thing sold.8 Thus,
the right to redeem must be expressly stipulated in the contract of sale in order
that it may have legal existence.
In the case before us, we cannot and any express or implied grant of a right to
repurchase, nor can we infer, from any word or words in the questioned paragraph,
Page | 34
the existence of any such right. The interpretation in the resolution (Justice Sison)
is rather strained. The phrase "in case case" of should be construed to mean
"should the buyers wish to sell which is the plain and simple import of the words,
and not "the buyers should sell," which is clearly a contorted construction of the
same phrase. The resort to Article 1373 of the Civil Code of the Philippines is
erroneous. The subject phrase is patent and unambiguous, hence, it must not be
given another interpretation
But even assuming that such a right of repurchase is granted under the
"Compraventa," the petitioner correctly asserts that the same has already
prescribed. Under Art. 1508 of the Civil Code of Spain (Art,. 1606 of the Civil Code
of the Philippines), the right to redeem or repurchase, in the absence of an express
agreement as to time, shall last four years from the date of the contract. In this
case then, the right to repurchase, if it was at four guaranteed under in the
"Compraventa," should have been exercise within four years from March 21, 1941
(indubitably the date of execution of the contract), or at the latest in 1945.
In the respondent court's resolution, it is further ruled that the right to repurchase
was given birth by the condition precedent provided for in the phrase "siempre y
cuando estos ultimos pueden hacer la compra" (when the buyer has money to buy).
In other words, it is the respondent court's contention that the right may be
exercised only when the buyer has money to buy. If this were so, the second
paragraph of Article 1508 would apply — there is agreement as to the time,
although it is indefinite, therefore, the right should be exercised within ten years,
because the law does not favor suspended ownership. Since the alleged right to
repurchase was attempted to be exercised by Vicente Santiago only in 1966, or 25
years from the date of the contract, the said right has undoubtedly expired.
WHEREFORE, in view of the foregoing, the Resolution dated September 27, 1983,
of the respondent court is SET ASIDE and the Decision promulgated on June 28,
1978 is hereby REINSTATED. The annotations of the prohibition to sell at the back
of TCT Nos. 138837, 138838, 138839, 138840, 138841, and 138842 are hereby
ordered CANCELLED. Costs against the private respondent.
SO ORDERED.
G.R. No. L-46591 July 28, 1987
BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner,
vs.
HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila,
Branch XXXI and FLORANTE DEL VALLE, respondents.
MELENCIO-HERRERA, J.:
This is a Petition to review on certiorari the Decision of respondent Court, the
dispositive portion of which decrees:
WHEREFORE, the Court finds that the enforcement of the escalation clause
retroactively before the lapse of the 15-year period stated in the promissory note
is contrary to Sec. 3 of Presidential Decree No. 116 and Sec. 109 of Republic Act No.
265, and hereby declares null and void the said escalation clause. The respondent
Banco Filipino Savings and Mortgage Bank is hereby ordered to desist from
enforcing the increased rate of interest on petitioner's loan.
SO ORDERED.
The facts are not in dispute:
On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan
secured by a real estate mortgage (the LOAN, for short) from petitioner BANCO
FILIPINO1 in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos,
payable and to be amortized within fifteen (15) years at twelve (12%) per cent
interest annually. Hence, the LOAN still had more than 730 days to run by January
2, 1976, the date when CIRCULAR No. 494 was issued by the Central Bank.
Stamped on the promissory note evidencing the loan is an Escalation Clause,
reading as follows:
I/We hereby authorize Banco Filipino to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event law should
be enacted increasing the lawful rates of interest that may be charged on this
particular kind of loan.
Page | 35
The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on September 24, 1976
January 2, 1976, the pertinent portion of which reads:
Mr. Florante del Valle
3. The maximum rate of interest, including commissions, premiums, fees and other 14 Palanca Street
charges on loans with maturity of more than seven hundred thirty (730) days, by B.F. Homes, Paranaque
banking institutions, including thrift banks and rural banks, or by financial Rizal
intermediaries authorized to engage in quasi-banking functions shall be nineteen
Dear Mr. del Valle:
percent (19%) per annum.
This refers to your letter dated August 28, 1976 addressed to the Governor, Central
xxx xxx xxx
Bank of the Philippines, seeking clarification and our official stand on Banco
7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof Filipino's recent decision to raise interest rates on lots bought on installment from
shall continue to be governed by the Usury Law, as amended." 12% to 17% per annum.

CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary
Board by Presidential Decree No. 116 (Amending Further Certain Sections of the
Usury Law) promulgated on January 29, 1973, the applicable section of which
provides:
Sec. 2. The same Act is hereby amended by adding the following section
immediately after section one thereof, which reads as follows:
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate
or rates of interest for the loan or renewal thereof or the forbearance of any
money, goods or credits, and to change such rate or rates whenever warranted by
prevailing economic and social conditions: Provided, that such changes shall not be
made oftener than once every twelve months.
The same grant of authority appears in P.D. No. 858, promulgated on December
31, 1975, except that the limitation on the frequency of changes was eliminated.
On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the
BORROWER on June 30, 1976 of the increase of interest rate on the LOAN from
12% to 17% per annum effective on March 1, 1976.
On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a
letter to the BORROWER as follows:
A verification made by our Examiner of the copy of your Promissory Note on file
with Banco Filipino showed that the following escalation clause with your signature
is stamped on the Promissory Note:
I /We hereby authorize Banco Filipino to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event a law
should be enacted increasing the lawful rates of interest that may be charged on
this particular kind of loan.
In this connection, please be advised that the Monetary Board, in its Resolution No.
1155 dated June 11, 1976, adopted the following guidelines to govern interest rate
adjustments by banks and non-banks performing quasi-banking functions on loans
already existing as of January 3, 1976, in the light of Central Bank Circulars Nos.
492-498:
l. Only banks and non-bank financial intermediaries performing quasi-banking
functions may increase interest rates on loans already existings of January 2, 1976,
provided that:
a. The pertinent loan contracts/documents contain escalation clauses expressly
authorizing lending bank or non-bank performing quasi-banking functions to
increase the rate of interest stipulated in the contract, in the event that any law or

Page | 36
Central Bank regulation is promulgated increasing the maximum interest rate for
loans; and
b. Said loans were directly granted by them and the remaining maturities thereof
were more than 730 days as of January 2, 1976; and
2. The increase in the rate of interest can be effective only as of January 2, 1976 or
on a later date.
The foregoing guidelines, however, shall not be understood as precluding affected
parties from questioning before a competent court of justice the legality or validity
of such escalation clauses.
We trust the above guidelines would help you resolve your problems regarding
additional interest charges of Banco Filipino.
Very truly yours,
(Sgd.) MERCEDES C. PAREDES
Director
Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation
Clause of the promissory note, the BORROWER filed suit against BANCO FILIPINO
for "Declaratory Relief" with respondent Court, praying that the Escalation Clause
be declared null and void and that BANCO FILIPINO be ordered to desist from
enforcing the increased rate of interest on the BORROWER's real estate loan.
For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the
BORROWER authorized it to increase the interest rate once a law was passed
increasing the rate of interest and that its authority to increase was provided for
by CIRCULAR No. 494.
In its judgment, respondent Court nullified the Escalation Clause and ordered
BANCO FILIPINO to desist from enforcing the increased rate of interest on the
BORROWER's loan. It reasoned out that P.D. No. 116 does not expressly grant the
Central Bank authority to maximize interest rates with retroactive effect and that
BANCO FILIPINO cannot legally impose a higher rate of interest before the
expiration of the 15-year period in which the loan is to be paid other than the 12%
per annum in force at the time of the execution of the loan.
It is from that Decision in favor of the BORROWER that BANCO FILIPINO has come
to this instance on review by Certiorari. We gave due course to the Petition, the
question being one of law.
On February 24, 1983, the parties represented by their respective counsel, not only
moved to withdraw the appeal on the ground that it had become moot and
academic "because of recent developments in the rules and regulations of the
Central Bank," but also prayed that "the decision rendered in the Court of First
Instance be therefore vacated and declared of no force and effect as if the case was
never filed," since the parties would like to end this matter once and for all."
However, "considering the subject matter of the controversy in which many
persons similarly situated are interested and because of the need for a definite
ruling on the question," the Court, in its Resolution of February 24, 1983,
impleaded the Central Bank and required it to submit its Comment, and
encouraged homeowners similarly situated as the BORROWER to intervene in the
proceedings.
At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage homeowner
at B.F. Resort Subdivision, was present and manifested that he was in a similar
situation as the BORROWER. Since then, he has written several letters to the Court,
pleading for early resolution of the case. The Court allowed the intervention of
Lolita Perono2 and issued a temporary restraining order enjoining the Regional Trial
Court (Pasay City Branch) in the case entitled "Banco Filipino Savings and Mortgage
Bank vs. Lolita Perono" from issuing a writ of possession over her mortgaged
property. Also snowed to intervene were Enrique Tabalon, Jose Llopis, et als., who
had obtained loans with Identical escalation clauses from Apex Mortgage and
Loans Corporation, apparently an affiliate of BANCO FILIPINO, Upon motion of Jose
Llopis, a Temporary Restraining Order was likewise issued enjoining the foreclosure
of his real estate mortgage by BANCO FILIPINO.
The Court made it explicit, however, that intervention was allowed only for the
purpose of "joining in the discussion of the legal issue involved in this proceedings,
Page | 37
to wit, the validity of the so-called "escalation clause," or its applicability to existing
contracts of loan."
The Central Bank has submitted its Comment and Supplemental Comment and like
BANCO FILIPINO, has taken the position that the issuance of its Circulars is a valid
exercise of its authority to scribe maximum rates of interest and that, based on
general principles of contract, the Escalation Clause is a valid provision in the loan
agreement provided that "(1) the increased rate imposed or charged by petitioner
does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is
made effective not earlier than the effectivity of the law or regulation authorizing
such an increase; and (3) the remaining maturities of the loans are more than 730
days as of the effectivity of the law or regulation authorizing such an increase.
However, with respect to loan agreements entered into,on or after March 17,
1980, such agreement, in order to be valid, must also include a de-escalation clause
as required by Presidential Decree No. 1684."3
The substantial question in this case is not really whether the Escalation Clause is a
valid or void stipulation. There should be no question that the clause is valid.
Some contracts contain what is known as an "escalator clause," which is defined as
one in which the contract fixes a base price but contains a provision that in the
event of specified cost increases, the seller or contractor may raise the price up to
a fixed percentage of the base. Attacks on such a clause have usually been based
on the claim that, because of the open price-provision, the contract was too
indefinite to be enforceable and did not evidence an actual meeting of the minds
of the parties, or that the arrangement left the price to be determined arbitrarily
by one party so that the contract lacked mutuality. In most instances, however,
these attacks have been unsuccessful.4
The Court further finds as a matter of law that the cost of living index adjustment,
or escalator clause, is not substantively unconscionable.
Cost of living index adjustment clauses are widely used in commercial contracts in
an effort to maintain fiscal stability and to retain "real dollar" value to the price
terms of long term contracts. The provision is a common one, and has been
universally upheld and enforced. Indeed, the Federal government has recognized
the efficacy of escalator clauses in tying Social Security benefits to the cost of living
index, 42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most
of the major labor unions are other examples. That inflation, expected or
otherwise, will cause a particular bargain to be more costly in terms of total dollars
than originally contemplated can be of little solace to the plaintiffs.5
What should be resolved is whether BANCO FILIPINO can increase the interest rate
on the LOAN from 12% to 17% per annum under the Escalation Clause. It is our
considered opinion that it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino to correspondingly increase
the interest rate stipulated in this contract without advance notice to me/us in the
event
a law
increasing
the lawful rates of interest that may be charged
on this particular
kind of loan. (Paragraphing and emphasis supplied)
It is clear from the stipulation between the parties that the interest rate may be
increased "in the event a law should be enacted increasing the lawful rate of
interest that may be charged on this particular kind of loan." " The Escalation Clause
was dependent on an increase of rate made by "law" alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a
circular duly issued is not strictly a statute or a law, it has, however, the force and
effect of law."6 (Italics supplied). "An administrative regulation adopted pursuant
to law has the force and effect of law."7 "That administrative rules and regulations
have the force of law can no longer be questioned. "8
Page | 38
The distinction between a law and an administrative regulation is recognized in the
Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes
of September 24, 1976 (supra). According to the guidelines, for a loan's interest to
be subject to the increases provided in CIRCULAR No. 494, there must be an
Escalation Clause allowing the increase "in the event that any law or Central Bank
regulation is promulgated increasing the maximum interest rate for loans." The
guidelines thus presuppose that a Central Bank regulation is not within the term
"any law."
The distinction is again recognized by P.D. No. 1684, promulgated on March 17,
1980, adding section 7-a to the Usury Law, providing that parties to an agreement
pertaining to a loan could stipulate that the rate of interest agreed upon may be
increased in the event that the applicable maximum rate of interest is increased
"by law or by the Monetary Board." To quote:
Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money,
goods or credits may stipulate that the rate of interest agreed upon may be
increased in the event that the applicable maximum rate of interest
is increased by law or by the Monetary Board:
Provided, That such stipulation shall be valid only if there is also a stipulation in the
agreement that the rate of interest agreed upon shall be reduced in the event that
the applicable maximum rate of interest is reduced by law or by the Monetary
Board;
Provided, further, That the adjustment in the rate of interest agreed upon shall
take effect on or after the effectivity of the increase or decrease in the maximum
rate of interest. (Paragraphing and emphasis supplied).
It is now clear that from March 17, 1980, escalation clauses to be valid should
specifically provide: (1) that there can be an increase in interest if increased by law
or by the Monetary Board; and (2) in order for such stipulation to be valid, it must
include a provision for reduction of the stipulated interest "in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board."
While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-
escalation clause in the Escalation Clause in question provides another reason why
it should not be given effect because of its one-sidedness in favor of the lender.
2. The Escalation Clause specifically stipulated that the increase in interest rate was
to be "on this particular kind of loan, " meaning one secured by registered real
estate mortgage.
Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals
continue to be governed by the Usury Law, as amended." So do Circular No. 586 of
the Central Bank, which superseded Circular No. 494, and Circular No. 705, which
superseded Circular No. 586. The Usury Law, as amended by Acts Nos. 3291, 3998
and 4070, became effective on May 1, 1916. It provided for the maximum yearly
interest of 12% for loans secured by a mortgage upon registered real estate
(Section 2), and a maximum annual interest of 14% for loans covered by security
other than mortgage upon registered real estate (Section 3). Significant is the
separate treatment of registered real estate loans and other loans not secured by
mortgage upon registered real estate. It appears clear in the Usury Law that the
policy is to make interest rates for loans guaranteed by registered real estate lower
than those for loans guaranteed by properties other than registered realty.
On June 15, 1948, Congress approved Republic Act No. 265, creating the Central
Bank, and establishing the Monetary Board. That law provides that "the Monetary
Board may, within the limits prescribed in the Usury law,9 fix the maximum rates of
interest which banks may charge for different types of loans and for any other
credit operations, ... " and that "any modification in the maximum interest rates
permitted for the borrowing or lending operations of the banks shall apply only to
future operations and not to those made prior to the date on which the
modification becomes effective" (Section 109).1avvphi1
On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The
Decree gave authority to the Monetary Board "to prescribe maximum rates of
interest for the loan or renewal thereof or the forbearance of any money goods or
credits, and to change such rate or rates whenever warranted by prevailing
economic and social conditions. In one section,10 the Monetary Board could
prescribe the maximum rate of interest for loans secured by mortgage upon
Page | 39
registered real estate or by any document conveying such real estate or an interest In the absence of any indication in CIRCULAR No. 494 as to which particular type of
therein and, in another separate section,11 the Monetary Board was also granted loan was meant by the Monetary Board, the more equitable construction is to limit
authority to fix the maximum interest rate for loans secured by types of security CIRCULAR No. 494 to loans guaranteed by securities other than mortgage upon
other than registered real property. The two sections read: registered realty.

SEC. 3. Section two of the same Act is hereby amended to read as follows: WHEREFORE, the Court rules that while an escalation clause like the one in
question can ordinarily be held valid, nevertheless, petitioner Banco Filipino cannot
SEC. 2. No person or corporation shall directly or indirectly take or receive in money
rely thereon to raise the interest on the borrower's loan from 12% to 17% per
or other property, real or personal, or choses in action, a higher rate of interest or
annum because Circular No. 494 of the Monetary Board was not the "law"
greater sum or value, including commissions, premiums, fines and penalties, for
contemplated by the parties, nor should said Circular be held as applicable to loans
the loan or renewal thereof or forbearance of money, goods, or credits, where such
secured by registered real estate in the absence of any such specific indication and
loan or renewal or forbearance is secured in whole or in part by a mortgage upon
in contravention of the policy behind the Usury Law. The judgment appealed from
real estate the title to which is duly registered or by any document conveying such
is, therefore, hereby affirmed in so far as it orders petitioner Banco Filipino to desist
real estate or an interest therein, than twelve per centum per annum or the
from enforcing the increased rate of interest on petitioner's loan.
maximum rate prescribed by the Monetary Board and in force at the time the loan
or renewal thereof or forbearance is granted: Provided, That the rate of interest The Temporary Restraining Orders heretofore issued are hereby made permanent
under this section or the maximum rate of interest that may be prescribed by the if the escalation clauses are Identical to the one herein and the loans involved have
Monetary Board under this section may likewise apply to loans secured by other applied the increased rate of interest authorized by Central Bank Circular No. 494.
types of security as may be specified by the Monetary Board.
SO ORDERED.
SEC. 4. Section three of the same Act is hereby amended to read as follows:

SEC. 3. No person or corporation shall directly or indirectly demand, take, receive,

or agree to charge in money or other property, real or personal, a higher rate or
greater sum or value for the loan or forbearance of money, goods, or credits, where
such loan or forbearance is not secured as provided in Section two hereof, than
fourteen per centum per annum or the maximum rate or rates prescribed by the
Monetary Board and in force at the time the loan or forbearance is granted.

Apparent then is that the separate treatment for the two classes of loans was
maintained. Yet, CIRCULAR No. 494 makes no distinction as to the types of loans
that it is applicable to unlike Circular No. 586 dated January 1, 1978 and Circular
No. 705 dated December 1, 1979, which fix the effective rate of interest on loan
transactions with maturities of more than 730 days to not exceeding 19% per
annum (Circular No. 586) and not exceeding 21% per annum (Circular No. 705) "on
both secured and unsecured loans as defined by the Usury Law, as amended."

Page | 40
G.R. No. 101771 December 17, 1996
SPOUSES MARIANO and GILDA FLORENDO, petitioners,
vs.
COURT OF APPEALS and LAND BANK OF THE PHILIPPINES, respondents.
PANGANIBAN, J.:p
May a bank unilaterally raise the interest rate on a housing loan granted an
employee, by reason of the voluntary resignation of the borrower?
Such is the query raised in the petition for review on certiorari now before us,
which assails the Decision promulgated on June 19, 1991 by respondent Court of
Appeals 1 in CA-G.R. CV No. 24956, upholding the validity and enforceability of the
escalation by private respondent Land Bank of the Philippines of the applicable
interest rate on the housing loan taken out by petitioner-spouses.
The Antecedent Facts
Petitioners filed an action for Injunction with Damages docketed as Civil Case No.
86-38146 before the Regional Trial Court of Manila, Branch XXII against respondent
bank. Both parties, after entering into a joint stipulation of facts, submitted the
case for decision on the basis of said stipulation and memoranda. The stipulation
reads in part: 2
1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent Bank) from
May 17, 1976 until August 16, 1984 when she voluntarily resigned. However,
before her resignation, she applied for a housing loan of P148,000.00, payable
within 25 years from (respondent bank's) Provident Fund on July 20, 1983;
2. That (petitioners) and (respondent bank), through the latter's duly authorized
representative, executed the Housing Loan Agreement, . . .;
3. That, together with the Housing Loan Agreement, (petitioners) and (respondent
bank), through the latter's authorized representative, also executed a Real Estate
Mortgage and Promissory
Note, . . .;
4. That the loan . . . was actually given to (petitioner) Gilda Florendo, . . ., in her
capacity as employee of (respondent bank);
5. That on March 19, 1985, (respondent bank) increased the interest rate on
(petitioner's) loan from 9% per annum to 17%, the said increase to take effect on
March 19, 1985;
6. That the details of the increase are embodied in (Landbank's) ManCom
Resolution No. 85-08 dated March 19, 1985, . . . , and in a PF (Provident Fund)
Memorandum Circular (No. 85-08, Series of 1985), . . .;
7. That (respondent bank) first informed (petitioners) of the said increase in a letter
dated June 7, 1985, . . . . Enclosed with the letter are a copy of the PF Memo Circular
. . . and a Statement of Account as of May 31, 1985, . . .;
8. That (petitioners) protested the increase in a letter dated June 11, 1985 to which
(respondent bank) replied through a letter dated July 1, 1985, . . . Enclosed with
the letter is a Memorandum dated June 26, 1985 of (respondent bank's) legal
counsel, A.B. F. Gaviola, Jr., . . .;
9. That thereafter, (respondent bank) kept on demanding that (petitioner) pay the
increased interest or the new monthly installments based on the increased interest
rate, but Plaintiff just as vehemently maintained that the said increase is unlawful
and unjustifiable. Because of (respondent bank's) repeated demands, (petitioners)
were forced to file the instant suit for Injunction and Damages;
10. That, just the same, despite (respondent bank's) demands that (petitioners) pay
the increased interest or increased monthly installments, they (petitioners) have
faithfully paid and discharged their loan obligations, more particularly the monthly
payment of the original stipulated installment of P1,248.72. Disregarding
(respondent bank's) repeated demand for increased interest and monthly
installment, (petitioners) are presently up-to-date in the payments of their
obligations under the original contracts (Housing Loan Agreement, Promissory
Note and Real Estate Mortgage) with (respondent bank);
xxx xxx xxx
Page | 41
The clauses or provisions in the Housing Loan Agreement and the Real Estate
Mortgage referred to above as the basis for the escalation are:
a. Section I-F of Article VI of the Housing Loan Agreement, 3 which provides that,
for as long as the loan or any portion thereof or any sum that may be due and
payable under the said loan agreement remains outstanding, the borrower shall —
f) Comply with all the rules and regulations of the program imposed by the LENDER
and to comply with all the rules and regulations that the Central Bank of the
Philippines has imposed or will impose in connection with the financing programs
for bank officers and employees in the form of fringe benefits.
b. Paragraph (f) of the Real Estate Mortgage 4 which states:
The rate of interest charged on the obligation secured by this mortgage. . ., shall be
subject, during the life of this contract, to such an increase/decrease in accordance
with prevailing rules, regulations and circulars of the Central Bank of the Philippines
as the Provident Fund Board of Trustees of the Mortgagee may prescribe for its
debtors and subject to the condition that the increase/decrease shall only take
effect on the date of effectivity of said increase/decrease and shall only apply to
the remaining balance of the loan.
c. and ManCom (Management Committee) Resolution No. 85-08, together with PF
(Provident Fund) Memorandum Circular No. 85-08, which escalated the interest
rates on outstanding housing loans of bank employees who voluntarily "secede"
(resign) from the Bank; the range of rates varied depending upon the number of
years service rendered by the employees concerned. The rates were made
applicable to those who had previously resigned from the bank as well as those
who would be resigning in the future.
The trial court ruled in favor of respondent bank, and held that the bank was vested
with authority to increase the interest rate (and the corresponding monthly
amortizations) pursuant to said escalation provisions in the housing loan
agreement and the mortgage contract. The dispositive portion of the said decision
reads: 5
WHEREFORE, judgment is hereby rendered denying the instant suit for injunction
and declaring that the rate of interest on the loan agreement in question shall be
17% per annum and the monthly amortization on said loan properly raised to
P2,064.75 a month, upon the finality of this judgment.
xxx xxx xxx
Petitioners promptly appealed, arguing that, inter alia, the increased rate of
interest is onerous and was imposed unilaterally, without the consent of the
borrower-spouses. Respondent bank likewise appealed and contested the
propriety of having the increased interest rate apply only upon the finality of the
judgment and not from March 19, 1985.
The respondent Court subsequently affirmed with modification the decision of the
trial court, holding that: 6
. . . Among the salient provisions of the mortgage is paragraph (f) which provides
that the interest rate shall be subject, during the term of the loan, to such
increases/decreases as may be allowed under the prevailing rules and/or circulars
of the Central Bank and as the Provident Fund of the Bank may prescribe for its
borrowers. In other words, the spouses agreed to the escalation of the interest rate
on their original loan. Such an agreement is a contractual one and the spouses are
bound by it. Escalation clauses have been ruled to be valid stipulations in contracts
in order to maintain fiscal stability and to retain the value of money in long term
contracts (Insular Bank of Asia and America vs. Spouses Epifania Salazar and
Ricardo Salazar, 159 SCRA 133). One of the conditions for the validity of an
escalation clause such as the one which refers to an increase rate is that the
contract should also contain a proviso for a decrease when circumstances so
warrant it. Paragraph (f) referred to above contains such provision.
A contract is binding on the parties no matter that a provision thereof later proves
onerous and which on hindsight, a party feels he should not have agreed to in the
first place.
and disposed as follows: 7
Page | 42
WHEREFORE, the dispositive part of the decision is MODIFIED in the sense that the
interest of 17% on the balance of the loan of the spouses shall be computed starting
July 1, 1985.
Dissatisfied, the petitioners had recourse to this Court.
The Issues
Petitioners ascribe to respondent Court "a grave and patent error" in not nullifying
the respondent bank's unilateral increase of the interest rate and monthly
amortizations of the loan —
1. . . . (simply because of) a bare and unqualified stipulation that the interest rate
may be increased;
2. . . . on the ground that the increase has no basis in the contracts between the
parties;
3. . . . on the ground that the increase violates Section 7-A of the Usury Law;
4. . . . on the ground that the increase and the contractual provision that
(respondent bank) relies upon for the increase are contrary to morals, good
customs, public order and public policy. 8
The key issue may be simply presented as follows: Did the respondent bank have a
valid and legal basis to impose an increased interest rate on the petitioners'
housing loan?
The Court's Ruling
Basis for Increased Interest Rate
Petitioners argue that the HLA provision covers only administrative and other
matters, and does not include interest rates per se, since Article VI of the
agreement deals with insurance on and upkeep of the mortgaged property. As for
the stipulation in the mortgage deed, they claim that it is vague because it does not
state if the "prevailing" CB rules and regulations referred to therein are those
prevailing at the time of the execution of these contracts or at the time of the
increase or decrease of the interest rate. They insist that the bank's authority to
escalate interest rates has not been shown to be "crystal-clear as a matter of fact"
and established beyond doubt. The contracts being "contracts of adhesion," any
vagueness in their provisions should be interpreted in favor of petitioners.
We note that Section 1-F of Article VI of the HLA cannot be read as an escalation
clause as it does not make any reference to increases or decreases in the interest
rate on loans. However, paragraph (f) of the mortgage contract is clearly and
indubitably an escalation provision, and therefore, the parties were and are bound
by the said stipulation that "(t)he rate of interest charged on the obligation secured
by this mortgage . . ., shall be subject, during the life of this contract, to such an
increase/decrease in accordance with prevailing rules, regulations and circulars of
the Central Bank of the Philippines as the Provident Fund Board of Trustees of the
Mortgagee (respondent bank) may prescribe for its debtors . . . ." 9 Contrary to
petitioners' allegation, there is no vagueness in the aforequoted proviso; even their
own arguments (below) indicate that this provision is quite clear to them.
In Banco Filipino Savings & Mortgage Bank vs. Navarro, 10 this Court in essence
ruled that in general there is nothing inherently wrong with escalation clauses.
In IBAA vs. Spouses Salazar, 11 the Court reiterated the rule that escalation clauses
are valid stipulations in commercial contracts to maintain fiscal stability and to
retain the value of money in long term contracts.
Application of the Escalation to Petitioners
Petitioners however insist that while ManCom Resolution No. 85-08 authorized a
rate increase for resigned employees, it could not apply as to petitioner-employee
because nowhere in the loan agreement or mortgage contract is it provided that
petitioner-wife's resignation will be a ground for the adjustment of interest rates,
which is the very bedrock of and the raison d'etre specified in said ManCom
Resolution.
They additionally contend that the escalation is violative of Section 7-A of the Usury
Law (Act No. 2655, as amended) which requires a law or MB act fixing an increased
maximum rate of interest, and that escalation upon the will of the respondent bank
is contrary to the principle of mutuality of contracts, per Philippine National Bank
vs. Court of Appeals. 12
Page | 43
What is actually central to the disposition of this case is not really the validity of
the escalation clause but the retroactive enforcement of the ManCom Resolution
as against petitioner-employee. In the case at bar, petitioners have put forth a
telling argument that there is in fact no Central Bank rule, regulation or other
issuance which would have triggered an application of the escalation clause as to
her factual situation.
In Banco Filipino, 13 this Court, speaking through Mme. Justice Ameurfina M.
Herrera, disallowed the bank from increasing the interest rate on the subject loan
from 12% to 17% despite an escalation clause in the loan agreement authorizing
the bank to "correspondingly increase the interest rate stipulated in this contract
without advance notice to me/us in the event a law should be enacted increasing
the lawful rates of interest that may be charged on this particular kind of loan". In
said case, the bank had relied upon a Central Bank circular as authority to up its
rates. The Court ruled that CB Circular No. 494, although it has the effect of law, is
not a law, but an administrative regulation.
In PNB vs. Court of Appeals, 14 this Court disallowed the increases in interest rate
imposed by the petitioner-bank therein, on the ground, among others, that said
bank relied merely on its own Board Resolution (No. 681), PNB Circular No. 40-79-
84, and PNB Circular No. 40-129-84, which were neither laws nor resolutions of the
Monetary Board.
In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became
effective on January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB
Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued December 1, 1979.
CB Circ. 905, lifting any interest rate ceiling prescribed under or pursuant to the
Usury Law, as amended, was promulgated in 1982. These and other relevant CB
issuances had already come into existence prior to the perfection of the housing
loan agreement and mortgage contract, and thus it may be said that these
regulations had been taken into consideration by the contracting parties when they
first entered into their loan contract. In light of the CB issuances in force at that
time, respondent bank was fully aware that it could have imposed an interest rate
higher than 9% per annum rate for the housing loans of its employees, but it did
not. In the subject loan, the respondent bank knowingly agreed that the interest
rate on petitioners' loan shall remain at 9% p.a. unless a CB issuance is passed
authorizing an increase (or decrease) in the rate on such employee loans and the
Provident Fund Board of Trustees acts accordingly. Thus, as far as the parties were
concerned, all other onerous factors, such as employee resignations, which could
have been used to trigger an application of the escalation clause were considered
barred or waived. If the intention were otherwise, they — especially respondent
bank — should have included such factors in their loan agreement.
ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the
Monetary Board, cannot be used as basis for the escalation in lieu of CB issuances,
since paragraph (f) of the mortgage contract very categorically specifies that any
interest rate increase be in accordance with "prevailing rules, regulations and
circulars of the Central Bank . . . as the Provident Fund Board . . . may prescribe."
The Banco Filipino and PNB doctrines are applicable four-square in this case. As a
matter of fact, the said escalation clause further provides that the increased
interest rate "shall only take effect on the date of effectivity of (the)
increase/decrease" authorized by the CB rule, regulation or circular. Without such
CB issuance, any proposed increased rate will never become effective.
We have already mentioned (and now reiterate our holding in several
cases 15) that by virtue of CB Circular 905, the Usury Law has been rendered
ineffective. Thus, petitioners' contention that the escalation clause is violative of
the said law is bereft of any merit.
On the other hand, it will not be amiss to point out that the unilateral
determination and imposition of increased interest rates by the herein respondent
bank is obviously violative of the principle of mutuality of contracts ordained in
Article 1308 of the Civil Code. As this Court held in PNB: 16
In order that obligations arising from contracts may have the force of law between
the parties, there must be mutuality between the parties based on their essential
equality. A contract containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties, is void
(Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the . . . loan
agreement between the PNB and the private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during the
Page | 44
term of the loan, that license would have been null and void for being violative of
the principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties do not
bargain on equal footing, the weaker party's (the debtor) participation being
reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock
Insurance Co., 95 Phil 85). Such a contract is a veritable trap for the weaker party
whom the courts of justice must protect against abuse and imposition.
WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and
SETS ASIDE the challenged Decision of the Court of Appeals. The interest rate on
the subject housing loan remains at nine (9) percent per annum and the monthly
amortization at P1,248.72.
SO ORDERED.

The respondent bank tried to sidestep this difficulty by averring that petitioner
Gilda Florendo as a former bank employee was very knowledgeable concerning
respondent bank's lending rates and procedures, and therefore, petitioners were
"on an equal footing" with respondent bank as far as the subject loan contract was
concerned. That may have been true insofar as entering into the original loan
agreement and mortgage contract was concerned. However, that does not hold
true when it comes to the determination and imposition of escalated rates of
interest as unilaterally provided in the ManCom Resolution, where she had no voice
at all in its preparation and application.

To allay fears that respondent bank will inordinately be prejudiced by being stuck
with this "sweetheart loan" at patently concessionary interest rates, which
according to respondent bank is the "sweetest deal" anyone could obtain and is an
act of generosity considering that in 1985 lending rates in the banking industry
were peaking well over 30% p.a., 17 we need only point out that the bank had the
option to impose in its loan contracts the condition that resignation of an
employee-borrower would be a ground for escalation. The fact is it did not. Hence,
it must live with such omission. And it would be totally unfair to now impose said
condition, not to mention that it would violate the principle of mutuality of consent
in contracts. It goes without saying that such escalation ground can be included in
future contracts — not to agreements already validly entered into.

Let it be clear that this Court understands respondent bank's position that the
concessional interest rate was really intended as a means to remunerate its
employees and thus an escalation due to resignation would have been a valid
stipulation. But no such stipulation was in fact made, and thus the escalation
provision could not be legally applied and enforced as against herein petitioners.

Page | 45
G.R. No. 187930, February 23, 2015
NEW WORLD DEVELOPERS AND MANAGEMENT, INC., Petitioner, v. AMA
COMPUTER LEARNING CENTER, INC., Respondent.
G.R. NO. 188250
AMA COMPUTER LEARNING CENTER, INC., Petitioner, v. NEW WORLD
DEVELOPERS AND MANAGEMENT, INC., Respondent.
DECISION
SERENO, C.J.:
Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the
Rules of Court assailing the Court of Appeals (CA) Decision1 dated 22 January 2009
and Resolution2 dated 18 May 2009 in CA-G.R. CV No. 89483.
The CA Decision ordered AMA Computer Learning Center, Inc. (AMA) to pay New
World Developers and Management, Inc. (New World) unpaid rentals for 2 months,
as well as liquidated damages equivalent to 4 months’ rent. The CA Resolution
denied the separate motions for reconsideration filed by the
parties.chanroblesvirtuallawlibrary
FACTS
New World is the owner of a commercial building located at No. 1104-1118 España
corner Paredes Streets, Sampaloc, Manila.3 In 1998, AMA agreed to lease the entire
second floor of the building for its computer learning center, and the parties
entered into a Contract of Lease4 covering the eight-year period from 15 June 1998
to 14 March 2006.
The monthly rental for the first year was set at P181,500, with an annual escalation
rate equivalent to 15% for the succeeding years.5 It was also provided that AMA
may preterminate the contract by sending notice in writing to New World at least
six months before the intended date.6 In case of pretermination, AMA shall be
liable for liquidated damages in an amount equivalent to six months of the
prevailing rent.
In compliance with the contract, AMA paid New World the amount of P450,000 as
advance rental and another P450,000 as security deposit.7cralawred
For the first three years, AMA paid the monthly rent as stipulated in the contract,
with the required adjustment in accordance with the escalation rate for the second
and the third years.8cralawred
In a letter dated 18 March 2002, AMA requested the deferment of the annual
increase in the monthly rent by citing financial constraints brought about by a
decrease in its enrollment. New World agreed to reduce the escalation rate by 50%
for the next six months. The following year, AMA again requested the adjustment
of the monthly rent and New World obliged by granting a 45% reduction of the
monthly rent and a 5% reduction of the escalation rate for the remaining term of
the lease. For this purpose, the parties entered into an Addendum to the Contract
of Lease.9cralawred
On the evening of 6 July 2004, AMA removed all its office equipment and furniture
from the leased premises. The following day, New World received a letter from
AMA dated 6 July 200410 stating that the former had decided to preterminate the
contract effective immediately on the ground of business losses due to a drastic
decline in enrollment. AMA also demanded the refund of its advance rental and
security deposit.
New World replied in a letter dated 12 July 2004,11 to which was attached a
Statement of Account12 indicating the following amounts to be paid by AMA: 1)
unpaid two months’ rent in the amount of P466,620; 2) 3% monthly interest for
the unpaid rent in the amount of P67,426.59; 3) liquidated damages equivalent to
six months of the prevailing rent in the amount of P1,399,860; and 4) damage to
the leased premises amounting to P15,580. The deduction of the advance rental
and security deposit paid by AMA still left an unpaid balance in the amount of
P1,049,486.59.
Page | 46
Despite the meetings between the parties, they failed to arrive at a settlement
regarding the payment of the foregoing amounts.13cralawred
On 27 October 2004, New World filed a complaint for a sum of money and damages
against AMA before the Regional Trial Court of Marikina City, Branch 156
(RTC).14cralawred
RULING OF THE RTC
In a Decision15 dated 31 January 2007, the RTC ordered AMA to pay New World
P466,620 as unpaid rentals plus 3% monthly penalty interest until payment;
P499,860 as liquidated damages equivalent to six months’ rent, with the advance
rental and security deposit paid by AMA to be deducted therefrom; P15,580 for the
damage to the leased premises; P100,000 as attorney’s fees; and costs of the suit.
According to the RTC, AMA never denied that it had arrearages equivalent to two
months’ rent. Other than its allegation that it did not participate in the preparation
of the Statement of Account, AMA did not proffer any evidence disputing the
unpaid rent. For its part, New World clearly explained the existence of the arrears.
While sympathizing with AMA in view of its business losses, the RTC ruled that AMA
could not shirk from its contractual obligations, which provided that it had to pay
liquidated damages equivalent to six months’ rent in case of a pretermination of
the lease.
The RTC provided no bases for awarding P15,580 for the damage to the leased
premises and P100,000 for attorney’s fees, while denying the prayer for exemplary
and moral damages.
In the assailed Decision dated 22 January 2009, the CA ordered AMA to pay New
World P466,620 for unpaid rentals and P33,240 for liquidated damages equivalent
to four months’ rent, with the advance rental and security deposit paid by AMA to
be deducted therefrom.17cralawred
The appellate court ruled that the RTC erred in imposing a 3% monthly penalty
interest on the unpaid rent, because there was no stipulation either in the Contract
of Lease or in the Addendum to the Contract of Lease concerning the imposition of
interest in the event of a delay in the payment of the rent.18 Thus, the CA ruled that
the rent in arrears should earn interest at the rate of 6% per annum only, reckoned
from the date of the extrajudicial demand on 12 July 2004 until the finality of the
Decision. Thereafter, interest at the rate of 12% per annum shall be imposed until
full payment.
The CA also ruled that the RTC’s imposition of liquidated damages equivalent to six
months’ rent was iniquitous.19 While conceding that AMA was liable for liquidated
damages for preterminating the lease, the CA also recognized that stipulated
penalties may be equitably reduced by the courts based on its sound discretion.
Considering that the unexpired portion of the term of lease was already less than
two years, and that AMA had suffered business losses rendering it incapable of
paying for its expenses, the CA deemed that liquidated damages equivalent to four
months’ rent was reasonable.20cralawred
The appellate court deleted the award for the damage to the leased premises,
because no proof other than the Statement of Account was presented by New
World.21 Furthermore, noting that the latter was already entitled to liquidated
damages, and that the trial court did not give any justification for attorney’s fees,
the CA disallowed the award thereof.22cralawred

Upon the denial of its motion for reconsideration, AMA filed an appeal before the Both parties filed their respective motions for reconsideration, which were denied
CA.16cralawred in the assailed Resolution dated 10 May 2009.

RULING OF THE CA Hence, the present petitions for review on certiorari. On 3 August 2009, the Court
Page | 47
resolved to consolidate the petitions, considering that they involve the same 1. Whether AMA is liable to pay six months’ worth of rent as liquidated
parties and assail the same CA Decision and Resolution.23cralawred damages.

PARTIES’ POSITIONS 2. Whether AMA remained liable for the rental arrears.

According to New World, when parties freely stipulate on the manner by which one
OUR RULING
may preterminate the lease, that stipulation has the force of law between them
and should be complied with in good faith.24 Since AMA preterminated the lease,
I.
it became liable to liquidated damages equivalent to six months’ rent.
AMA is liable for six months’ worth
Furthermore, its failure to give notice to New World six months prior to the
of rent as liquidated damages.
intended pretermination of the contract and its leaving the leased premises in the
middle of the night, with all its office equipment and furniture, smacked of gross
bad faith that renders it undeserving of sympathy from the courts.25 Thus, the CA Item No. 14 of the Contract of Lease states:chanRoblesvirtualLawlibrary
erred in reducing the liquidated damages from an amount equivalent to six
months’ rent to only four months. That [AMA] may pre-terminate this Contract of Lease by notice in writing to [New
World] at least six (6) months before the intended date of pre-termination,
New World also challenges the CA Decision and Resolution for disallowing the provided, however, that in such case, [AMA] shall be liable to [New World] for an
imposition of the 3% monthly interest on the unpaid rentals. It is argued that AMA amount equivalent to six (6) months current rental as liquidated
never disputed the imposition of the 3% monthly interest; rather, it only requested damages;30cralawlawlibrary
that the interest rate be reduced.26cralawred
Quite notable is the fact that AMA never denied its liability for the payment of
On the other hand, AMA assails the CA ruling for not recognizing the fact that liquidated damages in view of its pretermination of the lease contract with New
compensation took place between the unpaid rentals and the advance rental paid World. What it claims, however, is that it is entitled to the reduction of the amount
by AMA.27 Considering that the obligation of AMA as to the arrears has been due to the serious business losses it suffered as a result of a drastic decrease in its
extinguished by operation of law, there would be no occasion for the imposition of enrollment.
interest.28cralawred
This Court is, first and foremost, one of law. While we are also a court of equity, we
AMA also prays for the further reduction of the liquidated damages to an amount do not employ equitable principles when well-established doctrines and positive
equivalent to one month’s rent up to one and a half months, arguing that four provisions of the law clearly apply.31cralawred
months’ worth of rent is still iniquitous on account of the severe financial losses it
suffered.29cralawred The law does not relieve a party from the consequences of a contract it entered
ISSUES into with all the required formalities.32 Courts have no power to ease the burden
of obligations voluntarily assumed by parties, just because things did not turn out
as expected at the inception of the contract.33 It must also be emphasized that AMA
Page | 48
is an entity that has had significant business experience, and is not a mere babe in
the woods.
Articles 1159 and 1306 of the Civil Code state:chanRoblesvirtualLawlibrary
Art. 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.chanrobleslaw
damages in the event of the pretermination of a lease contract. Pretermination is
effectively the breach of a contract, that was originally intended to cover an agreed
upon period of time. A definite period assures the lessor a steady income for the
duration. A pretermination would suddenly cut short what would otherwise have
been a longer profitable relationship. Along the way, the lessor is bound to incur
losses until it is able to find a new lessee, and it is this loss of income that is sought
to be compensated by the payment of liquidated damages.

x x x x
There might have been other ways to work around its difficult financial situation
and lessen the impact of the pretermination to both parties. However, AMA opted
Art. 1306. The contracting parties may establish such stipulations, clauses, terms
to do the following:
and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy.cralawlawlibrary 1. It preterminated the lease without notifying New World at least six months
before the intended date.

The fundamental rule is that a contract is the law between the parties. Unless it has 2. It removed all its office equipment and left the premises in the middle of
been shown that its provisions are wholly or in part contrary to law, morals, good the night.
customs, public order, or public policy, the contract will be strictly enforced by the
3. Only after it had cleared the premises did it send New World a notice of
courts.34cralawred
pretermination effective immediately.
In rebuttal, AMA invokes Article 2227 of the Civil Code, to 4. It had the gall to demand a full refund of the advance rental and security
wit:chanRoblesvirtualLawlibrary deposit, albeit without prejudice to their removal of the improvements
introduced in the premises.
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty,
shall be equitably reduced if they are iniquitous or
unconscionable.cralawlawlibrary We cannot understand the inability of AMA to be forthright with New World,
considering that the former had been transparent about its business losses in its
previous requests for the reduction of the monthly rental. The drastic decrease in
In Ligutan v. CA, we held that the resolution of the question of whether a penalty
AMA’s enrollment had been unfolding since 2002. Thus, it cannot be said that the
is reasonable, or iniquitous or unconscionable would depend on factors including
business losses had taken it by surprise. It is also highly unlikely that the decision
but not limited to the type, extent and purpose of the penalty; the nature of the
to preterminate the lease contract was made at the last minute. The cancellation
obligation; the mode of the breach and its consequences; the supervening realities;
of classes, the transfer of students, and administrative preparations for the closure
and the standing and relationship of the parties.35 The appreciation of these factors
of the computer learning center and the removal of office equipment therefrom
is essentially addressed to the sound discretion of the court.36cralawred
should take at least weeks, if not months, of logistic planning. Had AMA come clean
about the impending pretermination, measures beneficial to both parties could
It is quite easy to understand the reason why a lessor would impose liquidated
Page | 49
have been arrived at, and the instant cases would not have reached this Court.
Instead, AMA forced New World to share in the former’s losses, causing the latter In this case, it is quite clear that New World sustained losses as a result of the
to scramble for new lessees while the premises remained untenanted and unwarranted acts of AMA. Further, were it not for the stipulation in the contract
unproductive. regarding the payment of liquidated damages, we would be awarding
compensatory damages to New World.
In the sphere of personal and contractual relations governed by laws, rules and
regulations created to promote justice and fairness, equity is deserved, not “Exemplary damages are designed by our civil law to permit the courts to reshape
demanded. The application of equity necessitates a balancing of the equities behaviour that is socially deleterious in its consequence by creating negative
involved in a case,37 for “[h]e who seeks equity must do equity, and he who comes incentives or deterrents against such behaviour.”40 As such, they may be awarded
into equity must come with clean hands.”38 Persons in dire straits are never even when not pleaded or prayed for.41 In order to prevent the commission of a
justified in trampling on other persons’ rights. Litigants shall be denied relief if their similar act in the future, AMA shall pay New World exemplary damages in the
conduct has been inequitable, unfair and dishonest as to the controversy in amount of P100,000.
issue.39 The actions of AMA smack of bad faith.
II.
We cannot abide by the prayer for the further reduction of the liquidated damages.
AMA’s liability for the rental arrears
We find that, in view of the surrounding circumstances, the CA even erred in
has already been extinguished.
reducing the liquidated damages to four month’s worth of rent. Under the terms
of the contract, and in light of the failure of AMA to show that it is deserving of this
Court’s indulgence, the payment of liquidated damages in an amount equivalent to AMA assails the CA ruling mainly for the imposition of legal interest on the rent in
six months’ rent is proper. arrears. AMA argues that the advance rental has extinguished its obligation as to
the arrears. Thus, it says, there is no more basis for the imposition of interest at the
Also proper is an award of exemplary damages. Article 2234 of the Civil Code rate of 6% per annum from the date of extrajudicial demand on 12 July 2004 until
provides:chanRoblesvirtualLawlibrary the finality of the Decision, plus interest at the rate of 12% per annum from finality
until full payment.
Art. 2234. While the amount of the exemplary damages need not be proved, the
plaintiff must show that he is entitled to moral, temperate or compensatory
At this juncture, it is necessary to look into the contract to determine the purpose
damages before the court may consider the question of whether or not exemplary
of the advance rental and security deposit.
damages should be awarded. In case liquidated damages have been agreed upon,
although no proof of loss is necessary in order that such liquidated damages may
Item Nos. 2, 3 and 4 of the Contract of Lease provide:chanRoblesvirtualLawlibrary
be recovered, nevertheless, before the court may consider the question of
granting exemplary in addition to the liquidated damages, the plaintiff must x x x x
show that he would be entitled to moral, temperate or compensatory damages
were it not for the stipulation for liquidated damages. (Emphasis 2. That [AMA] shall pay to [New World] in advance within the first 5 days of each
supplied)cralawlawlibrary

Page | 50
calendar month a monthly rental in accordance with the following schedule for the the balance of which shall be refunded by [New World] to [AMA] within sixty (60)
entire term of this Contract of Lease;ChanRoblesVirtualawlibrary days after the termination of the Contract, it being understood that such balance
is being held by [New World] in trust for [AMA].42cralawlawlibrary
PERIOD MONTHLY RENTAL RATES

Year 1 June 15, 1998 – Mar 14, 1999 P 181,500.00

Based on Item No. 4, the security deposit was paid precisely to answer for unpaid
Year 2 Mar 15, 1999 – Mar 14, 2000 P 208,725.00 rentals that may be incurred by AMA while the contract was in force. The security
deposit was held in trust by New World, and whatever may have been left of it after
Year 3 Mar 15, 2000 – Mar 14, 2001 P 240,033.75 the termination of the lease shall be refunded to AMA.
Year 4 Mar 15, 2001 – Mar 14, 2002 P 276,038.81
Based on Item No. 3 in relation to Item No. 2, the parties divided the advance rental
Year 5 Mar 15, 2002 – Mar 14, 2003 P 317,444.63 of P450,000 by 12 months. They came up with P37,500, which they intended to
Year 6 Mar 15, 2003 – Mar 14, 2004 P 365,061.33 deduct from the monthly rental to be paid by AMA for the last year of the lease
term. Thus, unlike the security deposit, no part of the advance rental was ever
Year 7 Mar 15, 2004 – Mar 14, 2005 P 419,820.53 meant to be refunded to AMA. Instead, the parties intended to apply the advance
rental, on a staggered basis, to a portion of the monthly rental in the last year of
Year 8 Mar 15, 2005 – Mar 14, 2006 P 482,793.61
the lease term.
(P482,793.61 – 37,500 =
Considering the pretermination of the lease contract in the present case, this intent
P445,293.61)
of the parties as regards the advance rental failed to take effect. The advance
rental, however, retains its purpose of answering for the outstanding amounts that
The monthly rentals referred to above were computed at an escalation rate of AMA may owe New World.
Fifteen Percent (15%) every year for the entire duration of this lease contract.
We now delve into the actual application of the security deposit and the advance
3. Upon signing of this Contract, [AMA] shall pay advance rental in the amount of rental.
FOUR HUNDRED FIFTY THOUSAND PESOS (P450,000.00); Said advance rental shall
be applied as part of the rental for the last year of the Contract with a remaining At the time of the pretermination of the contract of lease, the monthly rent stood
balance of Four Hundred Forty Five Thousand Two Hundred Ninety Three and at P233,310, inclusive of taxes;43 hence, the two-month rental arrears in the
61/100 Pesos (P445,293.61) as monthly rental for the tenth [sic] and last year of amount of P466,620.
the lease term;ChanRoblesVirtualawlibrary
Applying the security deposit of P450,000 to the arrears will leave a balance of
4. Upon signing of the Contract, [AMA] shall pay [New World] a Security Deposit in P16,620 in New World’s favor. Given that we have found AMA liable for liquidated
the amount of FOUR HUNDRED FIFTY THOUSAND PESOS (P450,000.00) which shall damages equivalent to six months’ rent in the amount of P1,399,860 (monthly rent
be applied for any unpaid rental balance and damages on the leased premises, and of P233,310 multiplied by 6 months), its total liability to New World is P1,416,480.

Page | 51
 4”, and “B-5”.
We then apply the advance rental of P450,000 to this amount to arrive at a total
extinguishment of the liability for the unpaid rentals and a partial extinguishment We are not persuaded.
of the liability for liquidated damages. This shall leave AMA still liable to New World
in the amount of P966,480 (P1,416,480 total liability less P450,000 advance rental). [New World’s] letter dated 12 July 2004 to [AMA], Statement of Account dated 07
July 2004; and another Statement of Account dated 27 October 2004 were all
Not constituting a forbearance of money,44 this amount shall earn interest prepared by [New World], with no participation or any indication of agreement on
pursuant to Item II(2)45 of our pronouncement in Eastern Shipping Lines v. [AMA’s] part. The alleged proposal of [AMA] as contained in the Schedule of
CA.46 This item remained unchanged by the modification made in Nacar v. Gallery Receivable/Payable is just a computer print-out and does not contain any signature
Frames.47 Interest at the rate of 6% per annum is hereby imposed on the amount showing [AMA’s] conformity to the same.49cralawlawlibrary
of P966,480 from the time of extrajudicial demand on 12 July 2004 until the finality
of this Decision.
Having relied on the Contract of Lease for its demand for payment of liquidated
damages, New World should have also referred to the contract to determine the
Thereafter – this time pursuant to the modification in Nacar – the amount due shall
proper application of the advance rental and security deposit. Had it done so in the
earn interest at the rate of 6% per annum until satisfaction, this interim period
first instance, it would have known that there is no occasion for the imposition of
being deemed to be by then equivalent to a forbearance of credit.48cralawred
interest, 3% or otherwise, on the unpaid rentals.
Considering the foregoing, there was no occasion for the unpaid two months’
WHEREFORE, the Court of Appeals Decision dated 22 January 2009 and Resolution
rental to earn interest. Besides, we cannot sanction the imposition of 3% monthly
dated 10 May 2009 in CA-G.R. CV No. 89483 is AFFIRMED with MODIFICATION.
penalty interest thereon. We quote with approval the ruling of the CA on this
issue:chanRoblesvirtualLawlibrary
AMA Computer Learning Center, Inc. is ordered to pay New World Developers and
If the obligation consists in the payment of a sum of money, and the debtor incurs Management, Inc. the amount of P966,480, with interest at the rate of 6% per
in delay, the indemnity for damages, there being no stipulation to the contrary, annum from 12 July 2004 until full payment.
shall be the payment of the interest agreed upon and in the absence of stipulation,
the legal interest, which is six per cent per annum. In addition, AMA shall pay New World exemplary damages in the amount of
?100,000, which shall earn interest at the rate of 6% per annum from the finality of
In the instant case, the Contract of Lease and the Addendum to the Contract of this Decision until full payment.
Lease do not specify any interest in the event of delay of payment of rentals.
Accordingly, there being no stipulation concerning interest, the trial court erred in SO ORDERED.
imposing 3% interest per month on the two-month unpaid rentals.

[New World] argues that the said 3% interest per month on the unpaid rentals was
agreed upon by the parties as allegedly shown in Exhibits “A-4”, “A-5”, “A-6”, “B-

Page | 52
G.R. No. 184041 : October 13, 2010
ANICETO G. SALUDO, JR., Petitioner, v. SECURITY BANK
CORPORATION, Respondent.cralaw
DECISION
PEREZ, J.:
Before this Court is a petition for review on certiorari seeking the reversal of the
Decision1cra1aw of the Court of Appeals in CA-G.R. CV No. 88079 dated 24 January
2008 which affirmed the Decision2cra1aw of Branch 149 of the Regional Trial Court
(RTC) of Makati City, finding petitioner Aniceto G. Saludo, Jr. and Booklight, Inc.
(Booklight) jointly and severally liable to Security Bank Corporation (SBC).
The basic facts follow
On 30 May 1996, Booklight was extended an omnibus line credit facility3cra1aw by
SBC in the amount of P10,000,000.00. Said loan was covered by a Credit
Agreement4cra1aw and a Continuing Suretyship5cra1aw with petitioner as surety,
both documents dated 1 August 1996, to secure full payment and performance of
the obligations arising from the credit accommodation.
Booklight drew several availments of the approved credit facility from 1996 to 1997
and faithfully complied with the terms of the loan. On 30 October 1997, SBC
approved the renewal of credit facility of Booklight in the amount
of P10,000,000.00 under the prevailing security lending rate.6cra1aw From August
3 to 14, 1998, Booklight executed nine (9) promissory notes7cra1aw in favor of SBC
in the aggregate amount of P9,652,725.00. For failure to settle the loans upon
maturity, demands8cra1aw were made on Booklight and petitioner for the
payment of the obligation but the duo failed to pay. As of 15 May 2000, the
obligation of Booklight stood at P10,487,875.41, inclusive of interest past due and
penalty.9chanroblesvirtuallawlibrary
On 16 June 2000, SBC filed against Booklight and herein petitioner an action for
collection of sum of money with the RTC. Booklight initially filed a motion to
dismiss, which was later on denied for lack of merit. In his Answer, Booklight
asserted that the amount demanded by SBC was not based on the omnibus credit
line facility of 30 May 1996, but rather on the amendment of the credit facilities on
15 October 1996 increasing the loan line from P8,000,000.00 to P10,000,000.00.
Booklight denied executing the promissory notes. It also claimed that it was not in
default as in fact, it paid the sum of P1,599,126.11 on 30 September 1999 as a
prelude to restructuring its loan for which it earnestly negotiated for a mutually
acceptable agreement until 5 July 2000, without knowing that SBC had already filed
the collection case.10chanroblesvirtuallawlibrary
In his Answer to the complaint, herein petitioner alleged that under the Continuing
Suretyship, it was the parties understanding that his undertaking and liability was
merely as an accommodation guarantor of Booklight. He countered that he came
to know that Booklight offered to pay SBC the partial payment of the loan and
proposed the restructuring of the obligation. Petitioner argued that said offer to
pay constitutes a valid tender of payment which discharged Booklights obligation
to the extent of the offer. Petitioner also averred that the imposition of the penalty
on the supposed due and unpaid principal obligation based on the penalty rate of
2% per month is clearly unconscionable.11chanroblesvirtuallawlibrary
On 7 March 2005, Booklight was declared in default. Consequently, SBC presented
its evidence ex-parte. The case against petitioner, however, proceeded and the
latter was able to present evidence on his behalf.
After trial, the RTC ruled that petitioner is jointly and solidarily liable with Booklight
under the Continuing Suretyship Agreement. The dispositive portion
reads:chanroblesvirtualawlibrary
WHEREFORE, in view of the foregoing considerations, the Court hereby finds in
favor of the plaintiff against the defendants by ordering the defendants Booklight,
Inc. and Aniceto G. Saludo, Jr., jointly and severally liable (solidarily liable) to
plaintiff [sic], the following sums of Philippine Pesos:chanroblesvirtualawlibrary
PN No. Amount Interest Rate (per BeginningUntil fully
annum) paid
Page | 53
74/787/98 P1,927,000.00 20.189% November 2, 1998 4. The approval of the second credit facility necessitates the consent of petitioner
for the latters Continuing Suretyship to be effective.
74/788/98 913,545.00 20.189% November 2, 1998 5. The nine (9) promissory notes executed and drawn by Booklight in 1998 did not
specify that they were drawn against and subject to the Continuing Suretyship.
74/789/98 1,927,090.00 20.189% November 2, 1998 Neither was it mentioned in the Continuing Suretyship that it was executed to serve
as collateral to the nine (9) promissory notes.
74/791/98 500,000.00 20.178% November 4, 1998
6. The Continuing Suretyship is a contract of adhesion and petitioners participation
to it is his signing of his contract.
74/792/98 800,000.00 20.178% November 4, 1998
7. The approval of the second credit facility is considered a novation of the first
74/793/98 665,000.00 20.178% November 3, 1998 sufficient to extinguish the Continuing Suretyship and discharge petitioner.

8. The 20.178% interest rate imposed by the RTC is

74/808/98 970,000.00 20.178% November 9, 1998 15
unconscionable. chanroblesvirtuallawlibrary

74/822/98 975,000.00 20.178% November 12, 1998
74/823/98 975,000.00 20.178% November 12, 1998
with attorneys fee of P100,000.00 plus cost of suit.12chanroblesvirtuallawlibrary
The Court of Appeals affirmed in toto the ruling of the RTC.13cra1aw Petitioner filed
a motion for reconsideration but it was denied by the Court of Appeals on 7 August
2008.14chanroblesvirtuallawlibrary
Hence, the instant petition on the following arguments:chanroblesvirtualawlibrary
1. The first credit facility has a one-year term from 30 June 1996 to 30 June 1997
while the second credit facility runs from 30 October 1997 to 30 October 1998.
2. When the first credit facility expired, its accessory contract, the Continuing
Surety agreement likewise expired.
3. The second credit facility is not covered by the Continuing Suretyship, thus,
availments made in 1998 by Booklight are not covered by the Continuing
Suretyship.
The main derivative of these averments is the issue of whether or not petitioner
should be held solidarily liable for the second credit facility extended to Booklight.
We rule in the affirmative.
There is no doubt that Booklight was extended two (2) credit facilities, each with a
one-year term, by SBC. Booklight availed of these two (2) credit lines. While
Booklight was able to comply with its obligation under the first credit line, it
defaulted in the payment of the loan obligation amounting to P9,652,725.00 under
the second credit line. There is likewise no dispute that the first credit line facility,
with a term from 30 June 1996 to 30 June 1997, was covered by a Continuing
Suretyship with petitioner acting as the surety. The dispute is on the coverage by
the Continuing Suretyship of the loan contracted under the second credit facility.
Under the Continuing Suretyship, petitioner undertook to guarantee the following
obligations:chanroblesvirtualawlibrary
a) "Guaranteed Obligations" the obligations of the Debtor arising from all credit
accommodations extended by the Bank to the Debtor, including increases,
renewals, roll-overs, extensions, restructurings, amendments or novations thereof,
as well as (i) all obligations of the Debtor presently or hereafter owing to the Bank,
Page | 54
as appears in the accounts, books and records of the Bank, whether direct or Collateral : Existing JSS of Atty. Aniceto Saludo (marital consent waived)
indirect, and (ii) any and all expenses which the Bank may incur in enforcing any of
Term : 180 day Promissory Notes
its rights, powers and remedies under the Credit Instruments as defined
hereinbelow; 16cra1aw (Emphasis supplied.) Interest Rate : Prevailing SBC lending rate; subject to monthly setting and payment
Whether the second credit facility is considered a renewal of the first or a brand Expiry : October 31, 1998
new credit facility altogether was indirectly answered by the trial court when it
invoked paragraph 10 of the Continuing Suretyship which x x x x.18chanroblesvirtuallawlibrary
provides:chanroblesvirtualawlibrary This very renewal is explicitly covered by the guaranteed obligations of the
10. Continuity of Suretyship. This Suretyship shall remain in full force and effect Continuing Suretyship.
until full and due payment and performance of the Guaranteed Obligations. This The essence of a continuing surety has been highlighted in the case of Totanes v.
Suretyship shall not be terminated by the partial payment to the Bank of China Banking Corporation19cra1aw in this wise:chanroblesvirtualawlibrary
Guaranteed Obligations by any other surety or sureties of the Guaranteed
Obligations, even if the particular surety or sureties are relieved of further Comprehensive or continuing surety agreements are, in fact, quite commonplace
liabilities.17chanroblesvirtuallawlibrary in present day financial and commercial practice. A bank or financing company
which anticipates entering into a series of credit transactions with a particular
and concluded that the liability of petitioner did not expire upon the termination company, normally requires the projected principal debtor to execute a continuing
of the first credit facility. surety agreement along with its sureties. By executing such an agreement, the
It cannot be gainsaid that the second credit facility was renewed for another one- principal places itself in a position to enter into the projected series of transactions
year term by SBC. The terms of renewal read:chanroblesvirtualawlibrary with its creditor; with such suretyship agreement, there would be no need to
execute a separate surety contract or bond for each financing or credit
30 October 1997 accommodation extended to the principal debtor.20chanroblesvirtuallawlibrary
BOOKLIGHT, INC. In Gateway Electronics Corporation v. Asianbank Corporation,21cra1aw the Court
emphasized that "[b]y its nature, a continuing suretyship covers current and future
xxxx
loans, provided that, with respect to future loan transactions, they are x x x within
Gentlemen:chanroblesvirtualawlibrary the description or contemplation of the contract of guaranty."

We are pleased to advise you that the Bank has approved the renewal of your credit Petitioner argues that the approval of the second credit facility necessitates his
facility subject to the terms and conditions set forth consent considering the onerous and solidary liability of a surety. This is contrary
below:chanroblesvirtualawlibrary to the express waiver of his consent to such renewal, contained in paragraph 12 of
the Continuing Suretyship, which provides in part:chanroblesvirtualawlibrary
Facility : Loan Line
12. Waivers by the Surety. The Surety hereby waives: x x x (v) notice or consent to
Amount : P10,000,000.00
any modification, amendment, renewal, extension or grace period granted by the

Page | 55
Bank to the Debtor with respect to the Credit
22
Instruments. chanroblesvirtuallawlibrary
Respondent, as last resort, harps on the novation of the first credit facility to
exculpate itself from liability from the second credit facility.
At the outset, it must be pointed out that the Credit Agreement is actually the
principal contract and it covers "all credit facilities now or hereafter extended by
[SBC] to [Booklight];"23cra1aw and that the suretyship agreement was executed
precisely to guarantee these obligations, i.e., the credit facilities arising from the
credit agreement. The principal contract is the credit agreement covered by the
Continuing Suretyship.
The two loan facilities availed by Booklight under the credit agreement are the
Omnibus Line amounting to P10,000,000.00 granted to Booklight in 1996 and the
other one is the Loan Line of the same amount in 1997. Petitioner however seeks
to muddle the issue by insisting that these two availments were two separate
principal contracts, conveniently ignoring the fact that it is the credit agreement
which constitutes the principal contract signed by Booklight in order to avail of SBCs
credit facilities. The two credit facilities are but loans made available to Booklight
pursuant to the credit agreement.
On these facts the novation argument advanced by petitioner must fail.
There is no novation to speak of. It is the first credit facility that expired and not
the Credit Agreement. There was a second loan pursuant to the same credit
agreement. The terms and conditions under the Credit Agreement continue to
apply and the Continuing Suretyship continues to guarantee the Credit Agreement.
The lameness of petitioners stand is pointed up by his attempt to escape from
liability by labelling the Continuing Suretyship as a contract of adhesion.
A contract of adhesion is defined as one in which one of the parties imposes a
ready-made form of contract, which the other party may accept or reject, but
which the latter cannot modify. One party prepares the stipulation in the contract,
while the other party merely affixes his signature or his adhesion thereto, giving no
room for negotiation and depriving the latter of the opportunity to bargain on
equal footing.24chanroblesvirtuallawlibrary
A contract of adhesion presupposes that the party adhering to the contract is a
weaker party. That cannot be said of petitioner. He is a lawyer. He is deemed
knowledgeable of the legal implications of the contract that he is signing.
It must be borne in mind, however, that contracts of adhesion are not invalid per
se. Contracts of adhesion, where one party imposes a ready-made form of contract
on the other, are not entirely prohibited. The one who adheres to the contract is,
in reality, free to reject it entirely; if he adheres, he gives his
consent.25chanroblesvirtuallawlibrary
Finally, petitioner challenges the imposition of 20.189% interest rate as
unconscionable. We rule otherwise. In Development Bank of the Philippines v.
Family Foods Manufacturing Co. Ltd.,26cra1aw this Court upheld the validity of the
imposition of 18% and 22% stipulated rates of interest in the two (2) promissory
notes. Likewise in Spouses Bacolor v. Banco Filipino Savings and Mortgage
Bank,27cra1aw the 24% interest rate agreed upon by parties was held as not
violative of the Usury Law, as amended by Presidential Decree No. 116.
WHEREFORE, the petition is DENIED. The Decision dated 24 January 2008 of the
Court of Appeals in CA-G.R. CV No. 88079 is AFFIRMED in toto.
SO ORDERED.
Page | 56
G.R. No. 164538 : August 9, 2010
METROPOLITAN BANK and TRUST COMPANY, Petitioner, v. ROGELIO REYNADO
and JOSE C. ADRANDEA,**Respondents.
DECISION
DEL CASTILLO, J.:
"It is a hornbook doctrine in our criminal law that the criminal liability for estafa is
not affected by a compromise, for it is a public offense which must be prosecuted
and punished by the government on its own motion, even though complete
reparation [has] been made of the damage suffered by the private offended party.
Since a criminal offense like estafa is committed against the State, the private
offended party may not waive or extinguish the criminal liability that the law
imposes for the commission of the crime."1cra1aw
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks the
reversal of the Court of Appeals' (CA's) Decision2cra1aw dated October 21, 2002 in
CA-G.R. SP No. 58548 and its further Resolution3cra1aw dated July 12, 2004
denying petitioner's Motion for Reconsideration.4cra1aw
Factual Antecedents
On January 31, 1997, petitioner Metropolitan Bank and Trust Company charged
respondents before the Office of the City Prosecutor of Manila with the crime of
estafa under Article 315, paragraph 1(b) of the Revised Penal Code. In the
affidavit5cra1aw of petitioner's audit officer, Antonio Ivan S. Aguirre, it was alleged
that the special audit conducted on the cash and lending operations of its Port Area
branch uncovered anomalous/fraudulent transactions perpetrated by respondents
in connivance with client Universal Converter Philippines, Inc. (Universal); that
respondents were the only voting members of the branch's credit committee
authorized to extend credit accommodation to clients up to P200,000.00; that
through the so-called Bills Purchase Transaction, Universal, which has a paid-up
capital of only P125,000.00 and actual maintaining balance of P5,000.00, was able
to make withdrawals totaling P81,652,000.006cra1aw against uncleared regional
checks deposited in its account at petitioner's Port Area branch; that,
consequently, Universal was able to utilize petitioner's funds even before the
seven-day clearing period for regional checks expired; that Universal's withdrawals
against uncleared regional check deposits were without prior approval of
petitioner's head office; that the uncleared checks were later dishonored by the
drawee bank for the reason "Account Closed"; and, that respondents acted with
fraud, deceit, and abuse of confidence.
In their defense, respondents denied responsibility in the anomalous transactions
with Universal and claimed that they only intended to help the Port Area branch
solicit and increase its deposit accounts and daily transactions.
Meanwhile, on February 26, 1997, petitioner and Universal entered into a Debt
Settlement Agreement7cra1aw whereby the latter acknowledged its indebtedness
to the former in the total amount of P50,990,976.278cra1aw as of February 4, 1997
and undertook to pay the same in bi-monthly amortizations in the sum
of P300,000.00 starting January 15, 1997, covered by postdated checks, "plus
balloon payment of the remaining principal balance and interest and other charges,
if any, on December 31, 2001."9cra1aw
Findings of the Prosecutor
Following the requisite preliminary investigation, Assistant City Prosecutor Winnie
M. Edad (Prosecutor Edad) in her Resolution10cra1aw dated July 10, 1997 found
petitioner's evidence insufficient to hold respondents liable for estafa. According
to Prosecutor Edad:chan robles virtual law library
The execution of the Debt Settlement Agreement puts complainant bank in
estoppel to argue that the liability is criminal. Since the agreement was made even
before the filing of this case, the relations between the parties [have] change[d],
novation has set in and prevented the incipience of any criminal liability on the part
of respondents.11cra1aw
Thus, Prosecutor Edad recommended the dismissal of the case:chan robles virtual
law library
WHEREFORE, for insufficiency of evidence, it is respectfully recommended that the
case be dismissed.12cra1aw
Page | 57
On December 9, 1997, petitioner appealed the Resolution of Prosecutor Edad to
the Department of Justice (DOJ) by means of a Petition for Review.13cra1aw
Ruling of the Department of Justice
On June 22, 1998, the DOJ dismissed the petition ratiocinating that:chan robles
virtual law library
It is evident that your client based on the same transaction chose to file estafa only
against its employees and treat with kid gloves its big time client Universal who was
the one who benefited from this transaction and instead, agreed that it should be
paid on installment basis.
To allow your client to make the choice is to make an unwarranted classification
under the law which will result in grave injustice against herein respondents. Thus,
if your client agreed that no estafa was committed in this transaction with Universal
who was the principal player and beneficiary of this transaction[,] more so with
herein respondents whose liabilities are based only on conspiracy with Universal.
Equivocally, there is no estafa in the instant case as it was not clearly shown how
respondents misappropriated the P53,873,500.00 which Universal owed your
client after its checks deposited with Metrobank were dishonored. Moreover,
fraud is not present considering that the Executive Committee and the Credit
Committee of Metrobank were duly notified of these transactions which they
approved. Further, no damage was caused to your client as it agreed [to] the
settlement [with] Universal.14cra1aw
A Motion for Reconsideration15cra1aw was filed by petitioner, but the same was
denied on March 1, 2000 by then Acting Secretary of Justice Artemio G.
Tuquero.16cra1aw
Aggrieved, petitioner went to the CA by filing a Petition for Certiorari &
Mandamus.17cra1aw
Ruling of the Court of Appeals
By Decision18cra1aw of October 21, 2002, the CA affirmed the twin resolutions of
the Secretary of Justice. Citing jurisprudence19cra1aw wherein we ruled that while
novation does not extinguish criminal liability, it may prevent the rise of such
liability as long as it occurs prior to the filing of the criminal information in
court.20cra1aw Hence, according to the CA, "[j]ust as Universal cannot be held
responsible under the bills purchase transactions on account of novation, private
respondents, who acted in complicity with the former, cannot be made liable [for]
the same transactions."21cra1aw The CA added that "[s]ince the dismissal of the
complaint is founded on legal ground, public respondents may not be compelled
by mandamus to file an information in court."22cra1aw
Incidentally, the CA totally ignored the Comment23cra1aw of the Office of the
Solicitor General (OSG) where the latter, despite being the statutory counsel of
public respondent DOJ, agreed with petitioner that the DOJ erred in dismissing the
complaint. It alleged that where novation does not extinguish criminal liability for
estafa neither does restitution negate the offense already committed.24cra1aw
Additionally, the OSG, in sharing the views of petitioner contended that failure to
implead other responsible individuals in the complaint does not warrant its
dismissal, suggesting that the proper remedy is to cause their inclusion in the
information.25cra1aw This notwithstanding, however, the CA disposed of the
petition as follows:chan robles virtual law library
WHEREFORE, the petition is DENIED due course and, accordingly, DISMISSED.
Consequently, the resolutions dated June 22, 1998 and March 1, 2000 of the
Secretary of Justice are AFFIRMED.
SO ORDERED.26cra1aw
Hence, this instant petition before the Court.
On November 8, 2004, we required27cra1aw respondents to file Comment, not a
motion to dismiss, on the petition within 10 days from notice. The OSG filed a
Manifestation and Motion in Lieu of Comment28cra1aw while respondent Jose C.
Adraneda (Adraneda) submitted his Comment29cra1aw on the petition. The
Secretary of Justice failed to file the required comment on the OSG's Manifestation
and Motion in Lieu of Comment and respondent Rogelio Reynado (Reynado) did
not submit any. For which reason, we issued a show cause order30cra1aw on July
19, 2006. Their persistent non-compliance with our directives constrained us to
Page | 58
resolve that they had waived the filing of comment and to impose a fine
of P1,000.00 on Reynado. Upon submission of the required memorandum by
petitioner and Adraneda, the instant petition was submitted for resolution.
Issues
Petitioner presented the following main arguments for our consideration:
1. Novation and undertaking to pay the amount embezzled do not extinguish
criminal liability.
2. It is the duty of the public prosecutor to implead all persons who appear
criminally liable for the offense charged.
Petitioner persistently insists that the execution of the Debt Settlement Agreement
with Universal did not absolve private respondents from criminal liability for estafa.
Petitioner submits that the settlement affects only the civil obligation of Universal
but did not extinguish the criminal liability of the respondents. Petitioner thus
faults the CA in sustaining the DOJ which in turn affirmed the finding of Prosecutor
Edad for committing apparent error in the appreciation and the application of the
law on novation. By petitioner's claim, citing Metropolitan Bank and Trust Co. v.
Tonda,31cra1aw the "negotiations pertain [to] and affect only the civil aspect of the
case but [do] not preclude prosecution for the offense already
committed."32cra1aw
In his Comment, Adraneda denies being a privy to the anomalous transactions and
passes on the sole responsibility to his co-respondent Reynado as the latter was
able to conceal the pertinent documents being the head of petitioner's Port Area
branch. Nonetheless, he contends that because of the Debt Settlement Agreement,
they cannot be held liable for estafa.
The OSG, for its part, instead of contesting the arguments of petitioner, even
prayed before the CA to give due course to the petition contending that DOJ indeed
erred in dismissing the complaint for estafa.
Given the facts of the case, the basic issue presented before this Court is whether
the execution of the Debt Settlement Agreement precluded petitioner from
holding respondents liable to stand trial for estafa under Art. 315 (1)(b) of the
Revised Penal Code.33cra1aw
Our Ruling
We find the petition highly meritorious.
Novation not a mode of extinguishing criminal liability for estafa;
Criminal liability for estafa not affected by compromise or novation of contract.
Initially, it is best to emphasize that "novation is not one of the grounds prescribed
by the Revised Penal Code for the extinguishment of criminal liability."34cra1aw
In a catena of cases, it was ruled that criminal liability for estafa is not affected by
a compromise or novation of contract. In Firaza v. People35cra1aw and Recuerdo v.
People,36cra1aw this Court ruled that in a crime of estafa, reimbursement or
belated payment to the offended party of the money swindled by the accused does
not extinguish the criminal liability of the latter. We also held in People v.
Moreno37cra1aw and in People v. Ladera38cra1aw that "criminal liability for estafa
is not affected by compromise or novation of contract, for it is a public offense
which must be prosecuted and punished by the Government on its own motion
even though complete reparation should have been made of the damage suffered
by the offended party." Similarly in the case of Metropolitan Bank and Trust
Company v. Tonda39cra1aw cited by petitioner, we held that in a crime of estafa,
reimbursement of or compromise as to the amount misappropriated, after the
commission of the crime, affects only the civil liability of the offender, and not his
criminal liability.
Thus, the doctrine that evolved from the aforecited cases is that a compromise or
settlement entered into after the commission of the crime does not extinguish
accused's liability for estafa. Neither will the same bar the prosecution of said
crime. Accordingly, in such a situation, as in this case, the complaint for estafa
against respondents should not be dismissed just because petitioner entered into
a Debt Settlement Agreement with Universal. Even the OSG arrived at the same
conclusion:chan robles virtual law library
Page | 59
Contrary to the conclusion of public respondent, the Debt Settlement Agreement
entered into between petitioner and Universal Converter Philippines extinguishes
merely the civil aspect of the latter's liability as a corporate entity but not the
criminal liability of the persons who actually committed the crime of estafa against
petitioner Metrobank. x x x40cra1aw
Unfortunately for petitioner, the above observation of the OSG was wittingly
glossed over in the body of the assailed Decision of the CA.
Execution of the Debt Settlement Agreement did not prevent the incipience of
criminal liability.
Even if the instant case is viewed from the standpoint of the law on contracts, the
disposition absolving the respondents from criminal liability because of novation is
still erroneous.
Under Article 1311 of the Civil Code, "contracts take effect only between the
parties, their assigns and heirs, except in case where the rights and obligations
arising from the contract are not transmissible by their nature, or by stipulation or
by provision of law." The civil law principle of relativity of contracts provides that
"contracts can only bind the parties who entered into it, and it cannot favor or
prejudice a third person, even if he is aware of such contract and has acted with
knowledge thereof."41cra1aw
In the case at bar, it is beyond cavil that respondents are not parties to the
agreement. The intention of the parties thereto not to include them is evident
either in the onerous or in the beneficent provisions of said agreement. They are
not assigns or heirs of either of the parties. Not being parties to the agreement,
respondents cannot take refuge therefrom to bar their anticipated trial for the
crime they committed. It may do well for respondents to remember that the
criminal action commenced by petitioner had its genesis from the alleged fraud,
unfaithfulness, and abuse of confidence perpetrated by them in relation to their
positions as responsible bank officers. It did not arise from a contractual dispute or
matters strictly between petitioner and Universal. This being so, respondents
cannot rely on subject settlement agreement to preclude prosecution of the
offense already committed to the end of extinguishing their criminal liability or
prevent the incipience of any liability that may arise from the criminal offense. This
only demonstrates that the execution of the agreement between petitioner and
Universal has no bearing on the innocence or guilt of the respondents.
Determination of the probable cause, a function belonging to the public
prosecutor;
judicial review allowed where it has been clearly established that the prosecutor
committed grave abuse of discretion.
In a preliminary investigation, a public prosecutor determines whether a crime has
been committed and whether there is probable cause that the accused is guilty
thereof.42cra1aw The Secretary of Justice, however, may review or modify the
resolution of the prosecutor.
"Probable cause is defined as such facts and circumstances that will engender a
well-founded belief that a crime has been committed and that the respondent is
probably guilty thereof and should be held for trial."43cra1aw Generally, a public
prosecutor is afforded a wide latitude of discretion in the conduct of a preliminary
investigation. By way of exception, however, judicial review is allowed where
respondent has clearly established that the prosecutor committed grave abuse of
discretion that is, when he has exercised his discretion "in an arbitrary, capricious,
whimsical or despotic manner by reason of passion or personal hostility, patent
and gross enough as to amount to an evasion of a positive duty or virtual refusal to
perform a duty enjoined by law."44cra1aw Tested against these guidelines, we find
that this case falls under the exception rather than the general rule.
A close scrutiny of the substance of Prosecutor Edad's Resolution dated July 10,
1997 readily reveals that were it not for the Debt Settlement Agreement, there was
indeed probable cause to indict respondents for the crime charged. From her own
assessment of the Complaint-Affidavit of petitioner's auditor, her preliminary
finding is that "Ordinarily, the offense of estafa has been sufficiently
established."45cra1aw Interestingly, she suddenly changed tack and declared that
the agreement altered the relation of the parties and that novation had set in
preventing the incipience of any criminal liability on respondents. In light of the
jurisprudence herein earlier discussed, the prosecutor should not have gone that
far and executed an apparent somersault. Compounding further the error, the DOJ
Page | 60
in dismissing petitioner's petition, ruled out estafa contrary to the findings of the complained of constitutes the offense charged. While probable cause demands
prosecutor. Pertinent portion of the ruling reads:chan robles virtual law library more than "bare suspicion," it requires "less than evidence which would justify
conviction." Herein, the DOJ reasoned as if no evidence was actually presented by
Equivocally, there is no estafa in the instant case as it was not clearly shown how
respondent HSBC when in fact the records of the case were teeming; or it
respondents misappropriated the P53,873,500.00 which Universal owed your
discounted the value of such substantiation when in fact the evidence presented
client after its checks deposited with Metrobank were dishonored. Moreover,
was adequate to excite in a reasonable mind the probability that petitioners Bernyl
fraud is not present considering that the Executive Committee and the Credit
and Katherene committed the crime/s complained of. In so doing, the DOJ
Committee of Metrobank were duly notified of these transactions which they
whimsically and capriciously exercised its discretion, amounting to grave abuse of
approved. Further, no damage was caused to your client as it agreed [to] the
discretion, which rendered its resolutions amenable to correction and annulment
settlement [with] Universal.46cra1aw
by the extraordinary remedy of certiorari.
The findings of the Secretary of Justice in sustaining the dismissal of the Complaint
In the case at bar, as analyzed by the prosecutor, a prima facie case of estafa exists
are matters of defense best left to the trial court's deliberation and contemplation
against respondents. As perused by her, the facts as presented in the Complaint-
after conducting the trial of the criminal case. To emphasize, a preliminary
Affidavit of the auditor are reasonable enough to excite her belief that respondents
investigation for the purpose of determining the existence of probable cause is "not
are guilty of the crime complained of. In Andres v. Justice Secretary
a part of the trial. A full and exhaustive presentation of the parties' evidence is not
Cuevas50cra1aw we had occasion to rule that the "presence or absence of the
required, but only such as may engender a well-grounded belief that an offense
elements of the crime is evidentiary in nature and is a matter of defense that may
has been committed and that the accused is probably guilty thereof."47cra1aw A
be passed upon after a full-blown trial on the merits."51cra1aw
"finding of probable cause does not require an inquiry into whether there is
sufficient evidence to procure a conviction. It is enough that it is believed that the Thus confronted with the issue on whether the public prosecutor and the Secretary
act or omission complained of constitutes the offense charged."48cra1aw So we of Justice committed grave abuse of discretion in disposing of the case of
held in Balangauan v. Court of Appeals:49cra1aw petitioner, given the sufficiency of evidence on hand, we do not hesitate to rule in
the affirmative. We have previously ruled that grave abuse of discretion may arise
Applying the foregoing disquisition to the present petition, the reasons of DOJ for
when a lower court or tribunal violates and contravenes the Constitution, the law
affirming the dismissal of the criminal complaints for estafa and/or qualified estafa
or existing jurisprudence.
are determinative of whether or not it committed grave abuse of discretion
amounting to lack or excess of jurisdiction. In requiring "hard facts and solid Non-inclusion of officers of Universal not a ground for the dismissal of the
evidence" as the basis for a finding of probable cause to hold petitioners Bernyl and complaint.
Katherene liable to stand trial for the crime complained of, the DOJ disregards the
The DOJ in resolving to deny petitioner's appeal from the resolution of the
definition of probable cause - that it is a reasonable ground of presumption that a
prosecutor gave another ground - failure to implead the officers of Universal. It
matter is, or may be, well-founded, such a state of facts in the mind of the
explained:chan robles virtual law library
prosecutor as would lead a person of ordinary caution and prudence to believe, or
entertain an honest or strong suspicion, that a thing is so. The term does not mean To allow your client to make the choice is to make an unwarranted classification
"actual and positive cause" nor does it import absolute certainty. It is merely based under the law which will result in grave injustice against herein respondents. Thus,
on opinion and reasonable belief; that is, the belief that the act or omission if your client agreed that no estafa was committed in this transaction with Universal

Page | 61
who was the principal player and beneficiary of this transaction[,] more so with
herein respondents whose liabilities are based only on conspiracy with
Universal.52cra1aw
The ratiocination of the Secretary of Justice conveys the idea that if the charge
against respondents rests upon the same evidence used to charge co-accused
(officers of Universal) based on the latter's conspiratorial participation, the non-
inclusion of said co-accused in the charge should benefit the respondents.
The reasoning of the DOJ is flawed.
Suffice it to say that it is indubitably within the discretion of the prosecutor to
determine who must be charged with what crime or for what offense. Public
prosecutors, not the private complainant, are the ones obliged to bring forth
before the law those who have transgressed it.
Section 2, Rule 110 of the Rules of Court53cra1aw mandates that all criminal actions
must be commenced either by complaint or information in the name of the People
of the Philippines against all persons who appear to be responsible therefor. Thus
the law makes it a legal duty for prosecuting officers to file the charges against
whomsoever the evidence may show to be responsible for the offense. The proper
remedy under the circumstances where persons who ought to be charged were not
included in the complaint of the private complainant is definitely not to dismiss the
complaint but to include them in the information. As the OSG correctly suggested,
the proper remedy should have been the inclusion of certain employees of
Universal who were found to have been in cahoots with respondents in defrauding
petitioner. The DOJ, therefore, cannot seriously argue that because the officers of
Universal were not indicted, respondents themselves should not likewise be
charged. Their non-inclusion cannot be perversely used to justify desistance by the
public prosecutor from prosecution of the criminal case just because not all of
those who are probably guilty thereof were charged.
Mandamus a proper remedy when resolution of public respondent is tainted with
grave abuse of discretion.
Mandamus is a remedial measure for parties aggrieved. It shall issue when "any
tribunal, corporation, board, officer or person unlawfully neglects the performance
of an act which the law specifically enjoins as a duty resulting from an office, trust
or station."54cra1aw The writ of mandamus is not available to control discretion
neither may it be issued to compel the exercise of discretion. Truly, it is a matter of
discretion on the part of the prosecutor to determine which persons appear
responsible for the commission of a crime. However, the moment he finds one to
be so liable it becomes his inescapable duty to charge him therewith and to
prosecute him for the same. In such a situation, the rule loses its discretionary
character and becomes mandatory. Thus, where, as in this case, despite the
sufficiency of the evidence before the prosecutor, he refuses to file the
corresponding information against the person responsible, he abuses his
discretion. His act is tantamount to a deliberate refusal to perform a duty enjoined
by law. The Secretary of Justice, on the other hand, gravely abused his discretion
when, despite the existence of sufficient evidence for the crime of estafa as
acknowledged by the investigating prosecutor, he completely ignored the latter's
finding and proceeded with the questioned resolution anchored on purely
evidentiary matters in utter disregard of the concept of probable cause as pointed
out in Balangauan. To be sure, findings of the Secretary of Justice are not subject
to review unless shown to have been made with grave abuse.55cra1aw The present
case calls for the application of the exception. Given the facts of this case,
petitioner has clearly established that the public prosecutor and the Secretary of
Justice committed grave abuse of discretion.
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of
Appeals in CA-G.R. SP No. 58548 promulgated on October 21, 2002 affirming the
Resolutions dated June 22, 1998 and March 1, 2000 of the Secretary of Justice, and
its Resolution dated July 12, 2004 denying reconsideration thereon are
hereby REVERSED and SET ASIDE. The public prosecutor is ordered to file the
necessary information for estafa against the respondents.
SO ORDERED.
Page | 62
G.R. No. 186738 September 27, 2010 Heeding Mendiola’s advice, respondent executed a Deed of Absolute Sale over the
properties in favor of Corazon following which or on December 4, 1995, Transfer
PRUDENTIAL BANK AND TRUST COMPANY (now BANK OF THE PHILIPPINE
Certificates of Title Nos. 164159 and 164160 were issued in the name of Corazon.
ISLANDS,1) Petitioner,
vs. Corazon’s application for a loan with PBTC’s Tondo Branch was approved on
LIWAYWAY ABASOLO, Respondent. December 1995. She thereupon executed a real estate mortgage covering the
properties to secure the payment of the loan. In the absence of a written request
DECISION
for a bank guarantee, the PBTC released the proceeds of the loan to Corazon.
CARPIO MORALES, J.:
Respondent later got wind of the approval of Corazon’s loan application and the
Leonor Valenzuela-Rosales inherited two parcels of land situated in Palanan, Sta. release of its proceeds to Corazon who, despite repeated demands, failed to pay
Cruz, Laguna (the properties), registered as Original Certificates of Title Nos. RO- the purchase price of the properties.
527 and RO-528. After she passed away, her heirs executed on June 14, 1993 a
Respondent eventually accepted from Corazon partial payment in kind consisting
Special Power of Attorney (SPA) in favor of Liwayway Abasolo (respondent)
of one owner type jeepney and four passenger jeepneys,3 plus installment
empowering her to sell the properties.2
payments, which, by the trial court’s computation, totaled ₱665,000.
Sometime in 1995, Corazon Marasigan (Corazon) wanted to buy the properties
In view of Corazon’s failure to fully pay the purchase price, respondent filed a
which were being sold for ₱2,448,960, but as she had no available cash, she
complaint for collection of sum of money and annulment of sale and mortgage with
broached the idea of first mortgaging the properties to petitioner Prudential Bank
damages, against Corazon and PBTC (hereafter petitioner), before the Regional
and Trust Company (PBTC), the proceeds of which would be paid directly to
Trial Court (RTC) of Sta. Cruz, Laguna.4
respondent. Respondent agreed to the proposal.
In her Answer,5 Corazon denied that there was an agreement that the proceeds of
On Corazon and respondent’s consultation with PBTC’s Head Office, its employee,
the loan would be paid directly to respondent. And she claimed that the vehicles
Norberto Mendiola (Mendiola), allegedly advised respondent to issue an
represented full payment of the properties, and had in fact overpaid ₱76,040.
authorization for Corazon to mortgage the properties, and for her (respondent) to
act as one of the co-makers so that the proceeds could be released to both of them. Petitioner also denied that there was any arrangement between it and respondent
that the proceeds of the loan would be released to her.6 It claimed that it "may
To guarantee the payment of the property, Corazon executed on August 25, 1995
process a loan application of the registered owner of the real property who
a Promissory Note for ₱2,448,960 in favor of respondent.
requests that proceeds of the loan or part thereof be payable directly to a third
By respondent’s claim, in October 1995, Mendiola advised her to transfer the party [but] the applicant must submit a letter request to the Bank."7
properties first to Corazon for the immediate processing of Corazon’s loan
On pre-trial, the parties stipulated that petitioner was not a party to the contract
application with assurance that the proceeds thereof would be paid directly to her
of sale between respondent and Corazon; that there was no written request that
(respondent), and the obligation would be reflected in a bank guarantee.
the proceeds of the loan should be paid to respondent; and that respondent
received five vehicles as partial payment of the properties.8

Page | 63
Despite notice, Corazon failed to appear during the trial to substantiate her claims. with Liwayway to the bank for several times. In her presence, Norberto Mendiola,
the head of the loan department, instructed Liwayway to transfer the title over the
By Decision of March 12, 2004,9 Branch 91 of the Sta. Cruz, Laguna RTC rendered
subject lots to Corazon to facilitate the release of the loan with the guarantee that
judgment in favor of respondent and against Corazon who was made directly liable
Liwayway will be paid upon the release of the proceeds.
to respondent, and against petitioner who was made subsidiarily liable in the event
that Corazon fails to pay. Thus the trial court disposed: Further, Liwayway would not have executed the deed of sale in favor of Corazon
had Norberto Mendiola did not promise and guarantee that the proceeds of the
WHEREFORE, premises considered, finding the plaintiff has established her claim
loan would be directly paid to her. Based on ordinary human experience, she would
against the defendants, Corazon Marasigan and Prudential Bank and Trust
not have readily transferred the title over the subject lots had there been no strong
Company, judgment is hereby rendered in favor of the plaintiff ordering:
and reliable guarantee. In this case, what caused her to transfer title is the promise
Defendant Corazon Marasigan to pay the plaintiff the amount of P1,783,960.00 and guarantee made by Norberto Mendiola that the proceeds of the loan would be
plus three percent (3%) monthly interest per month from August 25, 1995 until directly paid to her. 11 (emphasis underscoring supplied)
fully paid. Further, to pay the plaintiff the sum equivalent to twenty percent five
On appeal, the Court of Appeals¸ by Decision of January 14, 200812, affirmed the
[sic] (25%) of P1,783,960.00 as attorney’s fees.
trial court’s decision with modification on the amount of the balance of the
Defendant Prudential Bank and Trust Company to pay the plaintiff the amount of purchase price which was reduced from ₱1,783,960 to ₱1,753,960. It disposed:
P1,783,960.00 or a portion thereof plus the legal rate of interest per annum until
WHEREFORE, premises considered, the assailed Decision dated March 12, 2004 of
fully paid in the event that Defendant Corazon Marasigan fails to pay the said
the Regional Trial Court of Sta. Cruz, Laguna, Branch 91, is AFFIRMED WITH
amount or a portion thereof.
MODIFICATION as to the amount to be paid which is P1,753,960.00.
Other damages claimed not duly proved are hereby dismissed.
SO ORDERED.13 (emphasis in the original; underscoring supplied)
So Ordered.10 (emphasis in the original; underscoring partly in the original, partly
Petitioner’s motion for reconsideration having been denied by the appellate court
supplied)
by Resolution of February 23, 2009, the present petition for review was filed.
In finding petitioner subsidiarily liable, the trial court held that petitioner breached
The only issue petitioner raises is whether it is subsidiarily liable.
its understanding to release the proceeds of the loan to respondent:
The petition is meritorious.
Liwayway claims that the bank should also be held responsible for breach of its
obligation to directly release to her the proceeds of the loan or part thereof as In the absence of a lender-borrower relationship between petitioner and
payment for the subject lots. The evidence shows that her claim is valid. The Bank Liwayway, there is no inherent obligation of petitioner to release the proceeds of
had such an obligation as proven by evidence. It failed to rebut the credible the loan to her.
testimony of Liwayway which was given in a frank, spontaneous, and
To a banking institution, well-defined lending policies and sound lending practices
straightforward manner and withstood the test of rigorous cross-examination
are essential to perform its lending function effectively and minimize the risk
conducted by the counsel of the Bank. Her credibility is further strengthened by
inherent in any extension of credit.
the corroborative testimony of Miguela delos Reyes who testified that she went

Page | 64
Thus, Section X302 of the Manual of Regulations for Banks provides: Since it has not been established that petitioner had an obligation to Liwayway,
there is no breach to speak of. Liwayway’s claim should only be directed against
X-302. To ensure that timely and adequate management action is taken to maintain
Corazon. Petitioner cannot thus be held subisidiarily liable.
the quality of the loan portfolio and other risk assets and that adequate loss
reserves are set up and maintained at a level sufficient to absorb the loss inherent To the Court, Liwayway did not rely on Mendiola’s representations, even if he
in the loan portfolio and other risk assets, each bank shall establish a system of indeed made them. The contract for Liwayway to sell to Corazon was perfected
identifying and monitoring existing or potential problem loans and other risk assets from the moment there was a meeting of minds upon the properties-object of the
and of evaluating credit policies vis-à-vis prevailing circumstances and emerging contract and upon the price. Only the source of the funds to pay the purchase price
portfolio trends. Management must also recognize that loss reserve is a stabilizing was yet to be resolved at the time the two inquired from Mendiola. Consider
factor and that failure to account appropriately for losses or make adequate Liwayway’s testimony:
provisions for estimated future losses may result in misrepresentation of the bank’s
Q: We are referring to the promissory note which you aforementioned a while ago,
financial condition.
why did this promissory note come about?
In order to identify and monitor loans that a bank has extended, a system of
A: Because the negotiation was already completed, sir, and the deed of sale will
documentation is necessary. Under this fold falls the issuance by a bank of a
have to be executed, I asked the defendant (Corazon) to execute the promissory
guarantee which is essentially a promise to repay the liabilities of a debtor, in this
note first before I could execute a deed of absolute sale, for assurance that she
case Corazon. It would be contrary to established banking practice if Mendiola
really pay me, sir.14 (emphasis and underscoring supplied)
issued a bank guarantee, even if no request to that effect was made.
That it was on Corazon’s execution of a promissory note that prompted Liwayway
The principle of relativity of contracts in Article 1311 of the Civil Code supports
to finally execute the Deed of Sale is thus clear.
petitioner’s cause:
The trial Court’s reliance on the doctrine of apparent authority – that the principal,
Art. 1311. Contracts take effect only between the parties, their assigns and
in this case petitioner, is liable for the obligations contracted by its agent, in this
heirs, except in case where the rights and obligations arising from the contract are
case Mendiola, – does not lie. Prudential Bank v. Court of Appeals15 instructs:
not transmissible by their nature, or by stipulation or by provision of law. The heir
is not liable beyond the value of the property he received from the decedent. [A] banking corporation is liable to innocent third persons where the
representation is made in the course of its business by an agent acting within the
If a contract should contain some stipulation in favor of a third person, he may
general scope of his authority even though, in the particular case, the agent
demand its fulfillment provided he communicated his acceptance to the obligor
is secretly abusing his authority and attempting to perpetuate fraud upon his
before its revocation. A mere incidental benefit or interest of a person is not
principal or some person, for his own ultimate benefit.16 (underscoring supplied)
sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person. (underscoring supplied) The onus probandi that attempt to commit fraud attended petitioner’s employee
Mendiola’s acts and that he abused his authority lies on Liwayway. She, however,
For Liwayway to prove her claim against petitioner, a clear and deliberate act of
failed to discharge the onus. It bears noting that Mendiola was not privy to the
conferring a favor upon her must be present. A written request would have sufficed
approval or disallowance of Corazon’s application for a loan nor that he would
to prove this, given the nature of a banking business, not to mention the amount
benefit by the approval thereof.
involved.
Page | 65
Aside from Liwayway’s bare allegations, evidence is wanting to show that there was [G.R. No. 186550 : July 05, 2010]
collusion between Corazon and Mendiola to defraud her. Even in Liwayway’s
Complaint, the allegation of fraud is specifically directed against Corazon.17 ASIAN CATHAY FINANCE AND LEASING CORPORATION, PETITIONER, VS. SPOUSES
CESARIO GRAVADOR AND NORMA DE VERA AND SPOUSES EMMA CONCEPCION
IN FINE, Liwayway’s cause of action lies against only Corazon.
G. DUMIGPI AND FEDERICO L. DUMIGPI, RESPONDENTS.
WHEREFORE, the Decision of January 14, 2008 of the Court of Appeals, in so far as
it holds petitioner, Prudential Bank and Trust Company (now Bank of the Philippine DECISION
Islands), subsidiary liable in case its co-defendant Corazon Marasigan, who did not
appeal the trial court’s decision, fails to pay the judgment debt,
is REVERSED and SET ASIDE. The complaint against petitioner is accordingly NACHURA, J.:
DISMISSED.

SO ORDERED.
On appeal is the June 10, 2008 Decision[1] of the Court of Appeals (CA) in CA-G.R.
CV No. 83197, setting aside the April 5, 2004 decision[2] of the Regional Trial Court
(RTC), Branch 9, Bulacan, as well as its subsequent Resolution[3] dated February 11,
2009, denying petitioner's motion for reconsideration.

On October 22, 1999, petitioner Asian Cathay Finance and Leasing Corporation
(ACFLC) extended a loan of Eight Hundred Thousand Pesos (P800,000.00)[4] to
respondent Cesario Gravador, with respondents Norma de Vera and Emma
Concepcion Dumigpi as co-makers. The loan was payable in sixty (60) monthly
installments of P24,400.00 each. To secure the loan, respondent Cesario executed
a real estate mortgage[5] over his property in Sta. Maria, Bulacan, covered by
Transfer Certificate of Title No. T-29234.[6]

Respondents paid the initial installment due in November 1999. However, they
were unable to pay the subsequent ones. Consequently, on February 1, 2000,
respondents received a letter demanding payment of P1,871,480.00 within five (5)
days from receipt thereof. Respondents requested for an additional period to settle
their account, but ACFLC denied the request. Petitioner filed a petition for
extrajudicial foreclosure of mortgage with the Office of the Deputy Sheriff of
Malolos, Bulacan.

On April 7, 2000, respondents filed a suit for annulment of real estate mortgage
Page | 66
and promissory note with damages and prayer for issuance of a temporary
restraining order (TRO) and writ of preliminary injunction. Respondents claimed
that the real estate mortgage is null and void. They pointed out that the mortgage
does not make reference to the promissory note dated October 22, 1999. The
promissory note does not specify the maturity date of the loan, the interest rate,
and the mode of payment; and it illegally imposed liquidated damages. The real
estate mortgage, on the other hand, contains a provision on the waiver of the
mortgagor's right of redemption, a provision that is contrary to law and public
policy. Respondents added that ACFLC violated Republic Act No. 3765, or the Truth
in Lending Act, in the disclosure statement that should be issued to the
borrower. Respondents, thus, claimed that ACFLC's petition for foreclosure lacked
factual and legal basis, and prayed that the promissory note, real estate mortgage,
and any certificate of sale that might be issued in connection with ACFLC's petition
for extrajudicial foreclosure be declared null and void. In the alternative,
respondents prayed that the court fix their obligation at P800,000.00 if the
mortgage could not be annulled, and declare as null and void the provisions on the
waiver of mortgagor's right of redemption and imposition of the liquidated
damages. Respondents further prayed for moral and exemplary damages, as well
as attorney's fees, and for the issuance of a TRO to enjoin ACFLC from foreclosing
their property.
On April 12, 2000, the RTC issued an Order,[7] denying respondents' application for
TRO, as the acts sought to be enjoined were already fait accompli.
On May 12, 2000, ACFLC filed its Answer, denying the material allegations in the
complaint and averring failure to state a cause of action and lack of cause of action,
as defenses. ACFLC claimed that it was merely exercising its right as mortgagor;
hence, it prayed for the dismissal of the complaint.
After trial, the RTC rendered a decision, dismissing the complaint for lack of cause
of action. Sustaining the validity of the promissory note and the real estate
mortgage, the RTC held that respondents are well-educated individuals who could
not feign naiveté in the execution of the loan documents. It, therefore, rejected
respondents' claim that ACFLC deceived them into signing the promissory note,
disclosure statement, and deed of real estate mortgage. The RTC further held that
the alleged defects in the promissory note and in the deed of real estate mortgage
are too insubstantial to warrant the nullification of the mortgage. It added that a
promissory note is not one of the essential elements of a mortgage; thus, reference
to a promissory note is neither indispensable nor imperative for the validity of the
mortgage. The RTC also upheld the interest rate and the penalty charge imposed
by ACFLC, and the waiver of respondents' right of redemption provided in the deed
of real estate mortgage.
The RTC disposed thus:
WHEREFORE, on the basis of the evidence on record and the laws/jurisprudence
applicable thereto, judgment is hereby rendered DISMISSING the complaint in the
above-entitled case for want of cause of action as well as the counterclaim of
[petitioner] Asian Cathay Finance & Leasing Corporation for moral and exemplary
damages and attorney's fees for abject lack of proof to justify the same.
SO ORDERED.[8]
Aggrieved, respondents appealed to the CA. On June 10, 2008, the CA rendered the
assailed Decision, reversing the RTC. It held that the amount of P1,871,480.00
demanded by ACFLC from respondents is unconscionable and excessive. Thus, it
declared respondents' principal loan to be P800,000.00, and fixed the interest rate
at 12% per annum and reduced the penalty charge to 1% per month. It explained
that ACFLC could not insist on the interest rate provided on the note because it
failed to provide respondents with the disclosure statement prior to the
consummation of the loan transaction. Finally, the CA invalidated the waiver of
respondents' right of redemption for reasons of public policy. Thus, the CA ordered:
WHEREFORE, premises considered, the appealed decision is REVERSED AND SET
ASIDE. Judgment is hereby rendered as follows:
1) Affirming the amount of the principal loan under the REM and Disclosure
Statement both dated October 22, 1999 to be P800,000.00, subject to:
Page | 67
a. 1% interest per month (12% per annum) on the principal from November 23, suspended the Usury Law ceiling on interest rate effective January 1,
1999 until the date of the foreclosure sale, less P24,000.00 paid by 1983. However, interest rates, whenever unconscionable, may be equitably
[respondents] as first month amortization[;] reduced or even invalidated. In several cases,[10] this Court had declared as null and
void stipulations on interest and charges that were found excessive, iniquitous and
b. 1% penalty charge per month on the principal from December 23, 1999 until the unconscionable.
date of the foreclosure sale.
Records show that the amount of loan obtained by respondents on October 22,
2) Declaring par. 14 of the REM as null and void by reason of public policy, and 1999 was P800,000.00. Respondents paid the installment for November 1999, but
granting mortgagors a period of one year from the finality of this Decision within failed to pay the subsequent ones. On February 1, 2000, ACFLC demanded
which to redeem the subject property by paying the redemption price as payment of P1,871,480.00. In a span of three months, respondents' obligation
computed under paragraph 1 hereof, plus one percent (1%) interest thereon from ballooned by more than P1,000,000.00. ACFLC failed to show any computation on
the time of foreclosure up to the time of the actual redemption pursuant to how much interest was imposed and on the penalties charged. Thus, we fully agree
Section 28, Rule 39 of the 1997 Rules on Civil Procedure. with the CA that the amount claimed by ACFLC is unconscionable.

In Spouses Isagani and Diosdada Castro v. Angelina de Leon Tan, Sps. Concepcion
The claim of the [respondents] for moral and exemplary damages and attorney's
T. Clemente and Alexander C. Clemente, Sps. Elizabeth T. Carpio and Alvin Carpio,
fees is dismissed for lack of merit.
Sps. Marie Rose T. Soliman and Arvin Soliman and Julius Amiel Tan,[11] this Court
held:
SO ORDERED.[9]
The imposition of an unconscionable rate of interest on a money debt, even if
knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a
ACFLC filed a motion for reconsideration, but the CA denied it on February 11,
repugnant spoliation and an iniquitous deprivation of property, repulsive to the
2009.
common sense of man. It has no support in law, in principles of justice, or in the
human conscience nor is there any reason whatsoever which may justify such
ACFLC is now before us, faulting the CA for reversing the dismissal of respondents'
imposition as righteous and as one that may be sustained within the sphere of
complaint. It points out that respondents are well-educated persons who are
public or private morals.
familiar with the execution of loan documents. Thus, they cannot be deceived into
signing a document containing provisions that they are not amenable to. ACFLC
ascribes error on the part of the CA for invalidating the interest rates imposed on Stipulations authorizing the imposition of iniquitous or unconscionable interest are
respondents' loan, and the waiver of the right of redemption. contrary to morals, if not against the law. Under Article 1409 of the Civil Code,
these contracts are inexistent and void from the beginning. They cannot be ratified
The appeal lacks merit. nor the right to set up their illegality as a defense be waived. The nullity of the
stipulation on the usurious interest does not, however, affect the lender's right to
It is true that parties to a loan agreement have a wide latitude to stipulate on any recover the principal of the loan. Nor would it affect the terms of the real estate
interest rate in view of Central Bank Circular No. 905, series of 1982, which mortgage. The right to foreclose the mortgage remains with the creditors, and said
Page | 68
right can be exercised upon the failure of the debtors to pay the debt due. The practically nugatory this right that is provided by law for the mortgagor for reasons
debt due is to be considered without the stipulation of the excessive interest. A of public policy. A contract of adhesion may be struck down as void and
legal interest of 12% per annum will be added in place of the excessive interest unenforceable for being subversive to public policy, when the weaker party is
formerly imposed.[12] The nullification by the CA of the interest rate and the penalty completely deprived of the opportunity to bargain on equal footing.[14]
charge and the consequent imposition of an interest rate of 12% and penalty
charge of 1% per month cannot, therefore, be considered a reversible error.
In fine, when the redemptioner chooses to exercise his right of redemption, it is
the policy of the law to aid rather than to defeat his right.[15] Thus, we affirm the
ACFLC next faults the CA for invalidating paragraph 14 of the real estate mortgage
CA in nullifying the waiver of the right of redemption provided in the real estate
which provides for the waiver of the mortgagor's right of redemption. It argues
mortgage.
that the right of redemption is a privilege; hence, respondents are at liberty to
waive their right of redemption, as they did in this case.
Finally, ACFLC claims that respondents' complaint for annulment of mortgage is a
collateral attack on its certificate of title. The argument is specious.
Settled is the rule that for a waiver to be valid and effective, it must, in the first
place, be couched in clear and unequivocal terms which will leave no doubt as to
The instant complaint for annulment of mortgage was filed on April 7, 2000, long
the intention of a party to give up a right or benefit which legally pertains to him.
before the consolidation of ACFLC's title over the property. In fact, when
Additionally, the intention to waive a right or an advantage must be shown clearly
respondents filed this suit at the first instance, the title to the property was still in
and convincingly.[13] Unfortunately, ACFLC failed to convince us that respondents
the name of respondent Cesario. The instant case was pending with the RTC when
waived their right of redemption voluntarily.
ACFLC filed a petition for foreclosure of mortgage and even when a writ of
possession was issued. Clearly, ACFLC's title is subject to the final outcome of the
As the CA had taken pains to demonstrate:
present case.
The supposed waiver by the mortgagors was contained in a statement made in fine
print in the REM. It was made in the form and language prepared by WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the
[petitioner]ACFLC while the [respondents] merely affixed their signatures or Court of Appeals in CA-G.R. CV No. 83197 are AFFIRMED. Costs against petitioner.
adhesion thereto. It thus partakes of the nature of a contract of adhesion. It is
settled that doubts in the interpretation of stipulations in contracts of adhesion SO ORDERED.
should be resolved against the party that prepared them. This principle especially
holds true with regard to waivers, which are not presumed, but which must be
clearly and convincingly shown. [Petitioner] ACFLC presented no evidence hence
it failed to show the efficacy of this waiver.

Moreover, to say that the mortgagor's right of redemption may be waived through
a fine print in a mortgage contract is, in the last analysis, tantamount to placing at
the mortgagee's absolute disposal the property foreclosed. It would render

Page | 69
G.R. No. L-47544 January 28, 1980
PEPITO VELASCO, AMABLE LUMANLAN, RAMON GALANG, FELIPE LUMBANG and
APOLONIO DE LOS SANTOS, petitioners,
vs.
COURT OF APPEALS and GOVERNMENT SERVICE INSURANCE
SYSTEM, respondents.
Ocampo, Velasco, Sicat & Associate for petitioners.
Manuel M. Lazaro for respondent GSIS.
BARREDO, J.:
Petition for certiorari, erroneously citing Section I of Rule 65, for the review of the
decision of the Special Division of Five of the Court of Appeals dated December 6,
1977 in CA .G.R. No. 06152 declaring, by a vote of four to one, null and void the
order of the Court of First Instance of Pampanga in Civil Case No. 4260 dated
December 2, 1976, which had declared the judgment of said court in said case final
and executory, directing in consequence, said trial court to approve the record on
appeal of herein respondent Government Service Insurance System (GSIS for short)
and to give due course to its appeal, setting aside correspondingly the restraining
order it had previously issued in the same case, the Court of Appeals holding that,
contrary to the ruling of the trial court, the motion for new trial of the GSIS
admittedly filed on time is not pro-forma and, therefore, the period to appeal the
trial court's decision in question had been suspended by said motion, hence, said
decision was still appealable.
From the foregoing brief statement of the nature of the instant case, it would
appear that Our sole function in this proceeding should be to resolve the single
issue of whether or not the Court of Appeals erred in ruling that the motion for
new trial of the GSIS in question should indeed be deemed pro-forma. But going
over the extended pleadings of both parties, the Court is immediately impressed
that substantial justice may not be timely achieved, if We should decide this case
upon such a technical ground alone. We have carefully read all the allegations and
arguments of the parties, very ably and comprehensively expounded by evidently
knowledgeable and unusually competent counsel, and We feel We can better serve
the interests of justice by broadening the scope of Our inquiry, for as the record
before Us stands, We see that there is enough basis for Us to end the basic
controversy between the parties here and now, dispensing, however, with
procedural steps which would not anyway affect substantially the merits of their
respective claims.
As a matter of fact, after our first study of this case, We already announced Our
intention in this direction at the hearing held on February 21, 1979, where Attys.
Celestino T. Ocampo, Vicente Sicat and Victoriano David appeared and argued for
the petitioners and Justice Manuel Lazaro and Atty. Antonio F. Navarrete, for the
GSIS. We reiterated said intention in Our resolution of said date by requiring the
parties "to INFORM the Court ... whether or not there are any issues of fact that
the purported appeal of private respondent would involve and whether or not
petitioners controvert the same, with the end in view of enabling this Court to take
the necessary steps to convert this proceeding into an appeal ... (under) Republic
Act 5440". To be sure, in its compliance dated April 10, 1979 with said resolution,
GSIS does enumerate certain allegedly "pivotal factual issues" its appeal "would
involve." However, as will be explained anon even the "pivotal factual issues"
referred to may be justly resolved here without the need of returning this case to
the trial court. The exact position of the parties in respect to said issues and the
allegations of fact in their pleadings here and in the court below as well as the
undisputed evidence related thereto are so clearly stated and comprehensively
discussed by the parties in their said pleadings that to conduct further proceedings
or to await any other briefs from them would be superfluous and a waste of time
and effort. Accordingly, We now deem this case as submitted for Our decision as a
duly made appeal under Republic Act 5440.
According to GSIS:
A Detailed Statement of Facts and of the Case
It is not without reason to state that the ambience of a particular case has much to
contribute to the resolution thereof. So it is with the instant case. And for a better
appreciation of the antecedents which led to the decision of the Court of First
Page | 70
Instance of Pampanga and subsequently the questioned decision of the respondent This Agreement, executed this 29th day of November, 1969, in the City of Manila,
Court of Appeals, the environmental facts which spawned them should thus be laid by and between
bare before this Honorable Court, the better to appreciate their factual significance
LAIGO REALTY CORPORATION, ...
and legal consequences.
represented by its President,
1. Sometime on November 10, 1965, Alta Farms secured from the GSIS a Three
Million Two Hundred Fifty Five Thousand Pesos (P3,255,000.00) loan and an RHODY E. LAIGO, ... hereinafter referred to as the FIRST PARTY
additional loan of Five Million Sixty-Two Thousand Pesos (P5,062,000.00) on
October 5, 1967, to finance a piggery project. These loans were secured by two - and -
mortgage (Exh. "B"). ... AMABLE G. LUMANLAN ... hereinafter referred to as the SECOND PARTY.
2. Alta Farms defaulted in the payment of its amortizations. it is presumably And the signatories are -
because of this that Alta Farms executed a Deed of Sale With Assumption of
Mortgage with Asian Engineering Corporation on July 10, 1969 (Exh. "C"), but IN WITNESS WHEREOF, the parties hereunto affixed their signatures this 4th day of
without the previous consent or approval of the GSIS and in direct violation of the Dec. 1969 at Manila, Philippines.
provisions of the mortgage contracts.
(Sgd) Illegible
3. Even without the approval of the Deed of Sale With Assumption of Mortgage by
the GSIS, Asian Engineering Corporation executed an Exclusive Sales Agency,
LAIGO REALTY CORPORATION ALEJANDRO Y. DE JESUS
Management and Administration Contract in favor of Laigo Realty Corporation,
with the intention of converting the piggery farm into a subdivision (Exh. "D"). And
on October 20, 1969, Asian Engineering executed another contract with Laigo, BY: By:
whereby Laigo was to undertake the development of the property into a
subdivision (Exh. "E"). Conformably with the two contracts (Exh "D" and "E"), Laigo (Sgd) RHODY E. LAIGO (Sgd) Illegible
started the development of the lot into a subdivision.

Contract of Petitioner (t) RHODY E. LAIGO AMABLE G. LUMANLAN

Lumanlan and his admission

- President -
4. After developing the area, on December 4, 1969, Laigo entered into a contract
(Exh. "GG") with Amable Lumanlan, one of the petitioners, to construct for the (Sgd) Illegible
home buyers, 20 houses on the subdivision. The contract provided that Laigo shall
secure the agreement and signature of the home buyers (Paragraph 6 of
ANASTACIO F. DANAN
Agreement, Exh. "GG") and that Laigo "shall pay for the houses on a "turn-key"
bases" (Paragraph 5 of Agreement, Exh. "GG"). The parties to the agreement are,
stated by the agreement itself, as follows: (See Exh. "GG")
Page | 71
 5. Petitioner Lumanlan allegedly constructed 20 houses for the home buyers Aug. and 14,1970 659914 12,605.00 "
for which he claims a balance of P309,187.76 from the home buyers and Laigo. This
is reflected in Exhibit "X" of petitioners. However, in the letter of Lumanlan to the
GSIS on January 7, 1972, he was collecting only P216,500.00 (Exh. "W" evidence of Total P124,855.00
Lumanlan). Thus, even the evidence of Lumanlan on what is due him is conflicting.
8. In the same letter, Exh, "Y", Lumanlan admits that the checks of Laigo that were
6. Out of his claim, petitioner Lumanlan admits that Mrs. Rhody Laigo paid him in dishonored were intended to pay 8 houses occupied by home buyers, who caused
several checks totalling P124,855.00 but which checks were all dishonored when the construction in accordance with the Agreement of Laigo and Lumanlan (Exh.
presented for payment. This is Exhibit "X" of petitioners. "GG"). The letter of Lumanlan also admits -

7. Thus, on November 7, 1970, petitioner Lumanlan wrote a letter to Laigo Realty This amount was intended to pay for eight (8) houses occupied by the following
Corporation (Exh. "Y", evidence of Lumanlan) which reads — home buyers:

I wish to inform you that I have received from Mrs. Rhody E. Laigo several bank
1
. Liborio Yalung P18,000.00
checks which were either dishonored by the bank or were cancelled at the request
of Mrs. Rhody E. Laigo for reasons of insufficient funds.
2. Caridad Pascua 13,500.00
The following are the checks:
3. Antonio Candelaria 15,300.00
E SER. NO. AMOUNT BANK

4. Alberto Rarela 11,800.00

y 20,1970 646371 P36,000.00 Prudential Bank

5. Felomena Gonzales 16,200.00

e 10,1970 659907 9,000.00 "

6. Estelita Manalang 16,200.00

e 30, 1970 646397 20,000.00 "

7. Rogelio Zabala 16,200.00

6, 1970 646398 19,800.00 "

8. Wilhelmina Paras 16,200.00

3, 1970 464399 11,250.00 "

P123,400.00
. 7,1970 659913 16,200.00 "

Page | 72
Refund for expenses (Exh. "AA" for petitioners). Exhibit "AA" admits that Pepito Velasco is one of the
building contractors contracted by Laigo to construct houses for home buyers. it
states the names of the home buyers, the cost of houses agreed upon, the
n the execution of downpayment made by the buyers and their respective balance to Velasco. Since
the letter of Velasco, Exh. "AA", is a written admission that is highly revealing and
housing plans for the 1 ,455.00 illuminating we feel it important and material to quote therefrom as follows.

May I inform your good offices that the undersigned is one of the building
bove houses. P 124,855.00 contractors contracted by the Laigo Realty Corporation to construct residential
houses of lot buyers therein For your further information the following are the
It is significant to note that Exhibits "GG", "W" "X" and "Y" are part of the evidence
names of the lot owners for whom the undersigned have constructed houses for,
of petitioners.
including the respective balances payable to me as of this date.
9. On December 17, 1970, Laigo acknowledged its dishonored checks and promised
Name The
to make good the same. This is reflected in Exhibit "Y-l" of petitioners. of Buyer Cost of House Down Balances
dishonored checks were all presented by petitioners and marked Exhibits "II-l" to
"II-6". 1. Benjamin Cristobal P19,500.00 P1,950.00 17,550.00
Contract of Petitioner
2. Nehemiah Quipot 23,000.00 2,300.00 20,700.00
Velasco and his admissions

10. On December 29, 1969, Laigo entered into a contract with petitioner3. Alberto
Pepito Villalon 18,000.00 1,800.00 16,200.00
Velasco to construct houses for the home buyers who agreed with Velasco on the
prices and the downpayment. Exhibits "HH" and "HH-l" for petitioners. The parties
4. Luis Jacob 20,000.00 2,000.00 18,000.00
to the contract are -

LAIGO REALTY CORPORATION, ... as the FIRST PARTY 5. Jose Salonga 20,000.00 2,000.00 18,000.00

- and -
6. Antonio Jontillano 12,500.00 1,200.00 11,300.00
... PEPITO VELASCO, ... jointly known as the SECOND PARTY;

11. Petitioner Velasco constructed houses for various home buyers, who P101,750.00
individually agreed with Velasco, as to the prices and the downpayment to be paid
by the individual home buyers. xxx xxx xxx

When neither Laigo nor the individual home buyers paid for the home constructed, Very respectfully yours,
Velasco wrote the GSIS to intercede for the unpaid accounts of the home buyers
Page | 73
(Sgd) Pepito Velasco Contract of Petitioner

(t) PEPITO VELASCO Contractor' Galang and his admissions

This is the evidence of Velasco.
12. Velasco admits that Laigo paid him in five (5) checks with the total amount of
P35,000.00 but which all bounched or were dishonored (Exh. "BB" of petitioners).
It is interesting to note that in the same letter of Velasco to his lawyer, Velasco also
named the buyers of the houses for whom he constructed the houses and the
balance due from the home buyers (See Exh. "BB" of petitioners).
Con tract of Petitioner
de los Santos and his
Name Of Owner
admissions
14. Petitioner Ramon Galang also constructed a house for Victor Coquilla for an
agreed price of P14,000.00. Coquilla paid a downpayment of P1,400.00, thereby
leaving a balance of P12,600.00, which he wanted the GSIS to pay. Thus, in his letter
to the GSIS (Exh "CC" for Petitioners) he admits -
In connection with your Palos Verdes Estate Subdivision located in Talipapa,
Caloocan City and which was era d Realty Corporation I wish to inform you that I
have the Laigo Realty Corporation constructed in the subdivision the following
house, its owner and cost of construction
Cost of House Amount Paid Balance

1. Victor
13. On March 4, 1970, Laigo entered into a contract with petitioner Apolonio de los Coquilla P14,000.00 P1,400.00 P12,600.00
Santos whereby the latter agreed to construct houses for the home buyers and
Laigo agreed to pay the full purchase price of every house constructed ... based on May I inform your good Offices further that the amount of P12,600.00 referred to
a "turn- key arrangement". (Vide Exh. "A") The parties to the contract are shown as above as the 'balance 'is payable to the undersigned, Payment of which has been
follows: delayed for almost one and a half years now.

If these conditions above are acceptable to your good self, kindly signify your Trusting that you give this letter your usual Prompt attention, I beg to remain
conformity below.
Very respectfully yours,
Truly yours,
(Sgd.) Ramon R. Galang
(Sgd) Rhody E. Laigo
(t) RAMON R. GALANG
(t) RHODY E. LAIGO
Contractor,
CONFORME
(Vide Exh. "KK" for petitioners; emphasis supplied)
(Sgd) APOLONIO DE LOS SANTOS
Contract of Petitioner
(Date) March 4, 1970
Lumbang
(Vide Exhibit "A" of petitioners)

Page | 74
15. Petitioner Felipe Lumbang also claims to have constructed for the home buyers
upon the instance of Laigo, four (4) houses with the balance of P82,705.00.
Lumanlan admits that he constructed the four houses for the home buyers who
paid him a downpayment but who still have outstanding balances Vide Exh. "LL"
for the petitioners).
16. The Deed of Sale With Assumption of Mortgage between Alta Farms and Asian
Engineering, for one reason or another, was not approved by the GSIS. And when
Alta Farms failed to liquidate its accounts, GSIS foreclosed the properties including
all improvements (the house in 1970. In November and December 1971, the
Certificate of Sale in favor of the GSIS were issued.
17. While the properties were under foreclosure and even pending the
consolidation of titles, certain lots were sold on installment basis, for which Laigo
received P985,000.00, and 63 houses in various stages were constructed, among
which are the houses allegedly constructed by the petitioners.
xxx xxx xxx
21. An along, from the time the contracts were entered into by Laigo Realty
Corporation, the petitioners had always directed their claims against Laigo Realty
Corporation as may be shown by Exhibits "Z", "X", "Y" and "I-1"; Laigo would pay
by checks to the contractors; and when the checks were dishonored they would
always file a protest with Laigo Realty Corporation. Originally, an claims were
addressed to Laigo Realty Corporation, being the party who executed the contracts
22. When the petitioners could not collect from Laigo and the home buyers and
after the GSIS foreclosed the subdivision including the improvements (the houses
constructed), the petitioners sent a letter of demand on August 3, 1974 (Exhibit
"EE") for GSIS to pay for the indebtedness of Laigo Realty Corporation. It is
enlightening and interesting to note that the annexes to the letter specifies who
are the home buyers who caused the construction the agreed price of the
construction between the home buyers and the contractors, the downpayment
made by the home buyers to the contractors, and the balance of the home buyers
due the contractors by reason of the contracts (Exhibits "EE-l" and "EE-2"). It is
crystal clear from the letter of the lawyer of the petitioners that the ones who
caused the construction are home buyers through Laigo Realty Corporation, that
the home buyers made downpayments to the contractors, and that the latter
agreed to the price and the balance that were not paid by the home buyers This is
certainly indubitable proof that the GSIS had nothing to do whatsoever in the
construction of the houses by the petitioners.
23. On August 12. 1974, the Assistant General Manager on A legal affairs - he GSIS
categorically and specifically denied the an the firm and clear legal ground, among
others, that the has no privity of contract with the petitioners (Exhibit "FF"). This
denial of the claim of the negates, rebukes and belies any and all or on the other
inter-office the GSIS.
24. On April 14, 1975, the petitioners filed a case against the GSIS for the on of mm
of money representing labor and materials used in the construction of houses
caused by home buyers the intercession of Laigo Realty Corporation in the principal
sum of P607,328.27. The complaint, docketed as Civil Case No. 4260 of the Court
of First Instance of Pampanga, prayed for -
(1) The sum of SIX HUNDRED SEVEN THOUSAND THREE HUNDRED TWENTY EIGHT
& 271100 PESOS (P607,328.27) in its current value due to inflation with legal
interest from the date of extrajudicial demand;
(2) the sum of FIFTY THOUSAND (P50,000.00) PESOS as attorney's fees;
(3) such sum for exemplary damages as may be assess by this Honorable Court
against the defendant; and
(4) the costs of this suit (Vide pp. 91-95 of the instant Amended Petition)
25. On July 30, 1975, and within the extensions of time granted, the GSIS filed its
Answer traversing the claims and alleging, among others, that the petitioners have
no privity of contract with the GSIS; that the petitioners have no cause of action;
and that Laigo Realty Corporation which entered into the contracts with the
petitioners is a necessary and indispensable party who should be included as a
party to properly ventilate the issues and to avoid multiplicity of suits (pp. 96-101
of the instant Amended Petition).
Page | 75
26. After pre-trial was terminated the petitioners presented their evidence, and
thereafter, under date of December 16, 1975, they filed their Plaintiffs' Formal
Offer of Evidence (pp. 103-113 of the instant Amended Petition).
27. On February 20, 1976, the petitioners and the GSIS filed their "Joint
Manifestation" which in substance is a stipulation of facts (pp. 114-116 of the
instant Amended Petition). The petitioners agreed that the witnesses of the GSIS
to be presented would testify on the following-
a. The execution of the Deed of Quitclaim dated May 7, 1970, executed in favor of
defendant GSIS by Laigo Realty notwithstanding the followed ownership." GSIS if
they were presented evidence." (Pp. 379-391, Record. Corporation freeing said
defendant from any and all claims arising out of the suppliers, contractors and
house such as plaintiffs in the Palos Verdes Estate which now constitutes the GSIS
Hills Subdivision
b. At the time of the Extra-Judicial Foreclosure of the Estate Mortgage on
November, 1971, conducted by defendant or Laigo properties, plaintiff's claims are
not registered;
c. Plaintiffs' services were contracted by Laigo Corporation and not by the
defendant GSIS;
d That defendant up to the present has not collected the house owner of the 63
houses built by the plaintiffs proceedings and consolidation of ownership
The petitioners thus did not choose to cross-examine or dispute what they had
agreed upon as the testimonies of the witnesses of the to testify; hence, they stand
MATERIAL
as uncontroverted evidence. 1
Significantly, the trial court's conclusions of fact are substantially as alleged by
GSIS above, except as to certain details which We deem immaterial in the light of
the legal provisions and principles upon which We believe the resolution of this
controversy should be based. It may be stated in this connection, however, that
the trial court made the following findings and conclusions as regards the amount
petitioners are entitled to recover:
The next issue that would then necessarily follow is: - How much are the plaintiffs
entitled to be paid?
Again, an examination of the plaintiffs' uncontroverted evidence disclose that as of
the time they were ordered to 'cease and desist' from introducing any further
improvement on the property, they had already constructed several houses valued
(in common to them) in the total of P609,328.27 and for which amount
representing the actual cost of construction of the houses (materials and labor
already considered) as of those years of construction (1969-1970), they had not yet
been fully paid; that upon consolidation of ownership of the entire Palos Verdes
Estate Subdivision where said plaintiffs had introduced the improvements
aforesaid in the GSIS, they made written request for payment of what was already
then due them on the defendant GSIS - new owner of the premises but that their
said request had fallen on deaf ears. Consequently, for having been compelled to
litigate and to incur unnecessary expenses instead of given the opportunity of
making use of the proceeds of their investment and labor in further investments
and work, said plaintiffs are here now further invoking justice and equity on their
side and praying that they be paid their afore-stated entitlement in the amount of
P607,328.27 in the equivalent or present value of our Pesos as devaluated. Thus,
through testimonial evidence now also standing on record unrebutted, said
plaintiffs proceeded to show to the Court the effect of such devaluation of the
currency on the prices of materials, as well as on their rights and claims, as follow:
1969-1970 1975
Cost Cost
1.the
White Sand Porac P9.00 per cu. m. P30.00 per cu. m.
2. Crashed Gravel-Baliwag 15.00 per cu. m. 30.00 per cu. m.
3. Cement 3.90 per bag 14.00 per bag
Page | 76
mber .36 to .42 per 1. 70 to 1.80 per b. — Cost of labor 140,152 .50

board foot board ft. Total 607,328.00

ails . 75 per kilo 4.20 per kilo In effect, by considering the aforesaid four times increase in said materials costing
P467,175.50, the same materials would now cost P1,868,702.00. By adding 30% of
said amount of P1,868.702.00, or P560,610.60 for the cost of labor, to the said cost
Sheets 1.00 per linear 4.20 to 4.50 per of materials, the total amount to which plaintiffs would therefore, be justly and
equitably entitled is the sum of P2,429,312.60. And the facts and circumstances as
foot linear foot proven, in the honest opinion of this Court as a court of law and equity, truly
warrant that this said amount be awarded to the plaintiffs. (pp. 193-195, Record.)
int 10.50 to 1 1.00 per 38.00 to 40.00 Parenthetically, the following reprobation by the Court of Appeals of the foregoing
posture of the trial court reveals how much the same had evidently influenced said
gallon per gallon appellate court to rule in favor of allowing respondent's appeal:

This Court finds no compelling reason to bar appellate review of the unprecedented
on bars 2.7 5 to 3. 00 15.00 judgment, mentioned at the outset, which revalued upwards four-fold to
repeat, four times — the amount of plaintiffs' claim (as alleged in their complaint)
ilet materials 110.00 to 120.00 410. 00 to 420. 00 representing actual costs of houses built by them for the former owner-mortgagor
of the subdivision that, eventually, was acquired by the GSIS as highest bidder at
er closet, Phil. the foreclosure sale.

dard with seat cover
And indeed, this Court can take judicial notice of the fact that a house costing, say
P10,000.00 in 1969-1970, would now cost no less than P40,000.00. So that,
considering that the generally accepted standard or ratio in the determination of
the costs of materials and labor supplied and put in the construction by the builder-
contractors that the latter (labor) is 30% of that of the former (cost of materials), a
computation of plaintiffs dues as is, or P607,328,27, would give this:
a. — Cost of materials P 467,175.50
It bears emphasis that "unjust enrichment", which was invoked by plaintiffs in suing
the GSIS instead of the former owner and/or the developer (which contracted with
plaintiff in regard to the houses in question), is manifest in the judgment sought to
be elevated to this appellate court. For, under that judgment, plaintiffs stand to
receive, from and at the expense of the GSIS, as new owner, and to keep for
themselves as additional increment more than P 1.8 million OVER and
ABOVE actual costs of materials and labor that went into the building of said
houses, according to their own allegations and evidence. Whether or not the trial
court can, by the simple expedient of taking "judicial notice" of
inflation, quadruple the plaintiffs' claim, in the light of the Civil Code provision (Art.
1250) authorizing revaluation only upon proof of "extraordinary inflation or
deflation of the currency" and of Republic Act No. 524 providing that obligation
Page | 77
 shall be discharged in the currency that is legal tender at the time of payment, is an
important and far-reaching legal question that deserves further examination or
review not only by this court but also, if need be, by the Supreme Court." (Pp. 31-
32, Record.)
Truth to tell however, contrary to the contention of GSIS, the trial court's four-fold
award may not be said to be entirely baseless and arbitrary, much less based on no
more than the judicial notice taken by His Honor that "a house costing, say P10,000
in 1969-1970, would now cost no less than P40,000." That the trial court did not
award more than what petitioners had demanded in their complaint is clearly
evidenced by their allegation in Paragraph 5 of their complaint regarding the
effects of inflation as wen as by their prayer that they be paid "the sum of Six
Hundred Seven Thousand Three Hundred Twenty-Eight and 27/100 Pesos
(P607,328.27) in its current value due to inflation", as well as by the testimonial
evidence referred to in detail in the decision in question, as can be seen in the
portions thereof We have quoted above.
Thus, We find and hold that the material facts in this case are beyond dispute and
the only issues We have to resolve are legal ones. It is clear to Us that petitioners
did construct, furnishing the materials and labor needed for the purpose the 63
houses that now belong to or are owned by respondent GSIS. It is alleged in
Paragraphs 5 and 8 of petitioners' complaint that:
5. That during the period of the joint venture agreement being negotiated by the
Government Service Insurance System and the Laigo Realty Corporation, the
plaintiffs herein constructed residential house and other improvements at the said
GSIS His Subdivision, furnishing materials, supplies, labor and miscellaneous
services at their own expense, which costs of mass labor and miscellaneous
services total the amount of P607,328.27, and which is broken down or itemized
as follows:
Amable C. Lumanlan ------------ P309,187.76
Pepito Velasco -------------------- 142,510.00
Apolonio de los Santos -------- 60,325.51
Felipe Lumbang ------------------ 82,705.00
Ramon Galang -------------------- 12,600.00
That the foregoing expenditures and- claims are computed on the basis of actual
costs of ma and labor as of the time of the construction;
That owing to the inflation which is a matter of judicial notice, such costs of
materials and labor is now reasonably assessed at very much more than the above-
mentioned amount
xxx xxx xxx
8. That the construction of houses and improvements has greatly increased the
value of the aforesaid defendant's property. (Pp. 71-72, Record.)
The answer of GSIS to the foregoing allegations is as follows:
5. It specifically denies the allegations in paragraph 5, the truth being defendant is
not liable for any of the materials, supplies and labor allegedly furnished and
supplied by plaintiffs to Palos Verdes Estate Subdivision as the same pertain
exclusively to Laigo Realty Corporation, since on 7 May 1970, Laigo Realty
Corporation executed a Deed of Quitclaim and Undertaking, xerox copy of which is
hereto attached as Annex "1" and made an integral part hereof, holding free and
harmless defendant from claims of materialmen, contractor or any other person
arising out of or having connection with the development of the said subdivision.
Thus the "NOW, THEREFORE" clause of said Deed of Quitclaim and Undertaking
provides:
NO THEREFORE, for and in consideration of the above premises; and in the event
of disapproval by the GSIS of its proposal to develop- the aforesaid property of
ALTA FARMS, INC. into a subdivision, REALTY CORPORATION hereby forever
quitclaims, releases and waives in favor of the GSIS its rights and interests in the
aforesaid property of ALTA FARMS, INC. arising out of the development of the
Page | 78
aforesaid property into a subdivision, and further shall answer and pay for any
claim of or liability to any contractor, material furnisher, lot buyer, or any other
person arising out of or having connection with said subdivision development. If
the GSIS, for any reason, shall be held liable on any such claims or liabilities or
otherwise its mortgage hen be diminished, LAIGO REALTY CORPORATION further
binds itself to indemnify the GSIS such sums corresponding to such claims or
diminution.
xxx xxx xxx
8. It admits the allegations in paragraph 8.(Pp. 76-77, Record.)
In other words, apart from- admitting expressly that "the constructions of houses
and improvements has greatly increased the value" of the subdivision it now owns,
nowhere in its statement of the material facts in Paragraph 5 of its answer relative
to the allegations of the petitioners regarding the construction by them of the
houses in dispute and the cost thereof to each of them does respondent deny said
facts as not true. What GSIS limitedly alleged in its answer is the legal proposition
that it is not liable therefor because of lack of contractual privity between it and
petitioners. It may be safely said then that it does not now lie in the lips of GSIS to
maintain that petitioners did not build the houses in question and that the cost
thereof is different from what petitioners have stated in their complaint.
What is more, the reliance of GSIS on the Deed of Quitclaim of May 7, 1970 is to
Our mind misplaced. We have analyzed this document carefully, and We are of the
considered view that it is actually evidence against GSIS. Even if what is unnatural
in ordinary business or industrial experience were assumed, that is, that GSIS was
unaware all along during the period of their construction of the work then being
done by petitioners - albeit it is possible there was no express consent given to - by
and thru the aforementioned deed of quitclaim, GSIS agreed to receive and did
actually receive the benefits of what petitioners had accomplished or would
accomplish under their contracts with Laigo., So much so, that the dispositive
portion of the quitclaim dead does not really relieve GSIS from liability to
petitioners. Properly viewed, GSIS virtually assumed under said deed, liability in
regard to claims like those of petitioners who might not be paid by Laigo albeit said
liability has been made subject to the reservation that it could seek indemnity from
Laigo.
GSIS received Alta Farms' proposal about the conversion of their piggery project
into a subdivision (in which Laigo Realty's participation was mentioned) as early as
February 5, 1970. It was only in November, 1970 that it issued its "cease and desist"
order. From all indications, the jobs of petitioners were already practically finished
then. Thus, in Paragraph 17 of its Comment on the petition herein, GSIS states:
17. While the properties were under foreclosure and even pending the
consolidation of titles, certain lots were sold to installment basis, for which Laigo
received P985,000.00, and 63 houses in various stages were constructed, among
which are the houses allegedly constructed by the petitioners. (P. 387, Record.)
And in the Joint Manifestation filed by the parties with the trial court as late as
February 20, 1976, GSIS made it clear that "defendant (GSIS) up to the present has
not collected from the house owners of the 63 houses built by the
plaintiffs notwithstanding the foreclosure proceedings and consolidation 6f
ownership." Again, it is thus obvious that GSIS assumed ownership of the houses
built by petitioners and was benefited by the same, and the fact that it has not
collected any payment from the "house owners" or the construction of the houses
respectively occupied by them is of no moment insofar as its liability to petitioners
is concerned. Surely, it is not pretended that those "house owners" would be
allowed to enrich themselves at the expense of petitioners. Indeed, the term
"house owners" is inappropriate, if only because in Paragraph 16 of its Comment
on the petition herein, GSIS unequivocally state that "GSIS foreclosed the
properties including all improvements (the houses in 1970" and, thereby, became
the owner of said houses.
Upon the foregoing factual premises, the legal issue that arises is whether or not
GSIS is liable to the petitioners for the cost of the materials and labor furnished by
them in construction of the 63 houses now owned by the GSIS and for the
construction of which no payment has been made on the balance due petitioners.
Our considered view is and We so hold that even in equity alone, GSIS should pay
the petitioners. After all, it admits it has not collected from the ones who appear
to be the buyers thereof, albeit it must be collecting the installments on the lots.
Page | 79
All it has to do then is to pass on to them what it has to pay petitioners. In law, GSIS
is, under the peculiar circumstances of this case, the owner of said houses.
Pursuant to Article 1729 of the Civil Code:
Those who put their labor upon or furnish materials for a piece of work undertaken
by the contractor have an action against the owner up to the amount owing from
the latter to the contractor at the time the claim is made. However, the following
shall not prejudice the laborers, employees and furnishers of materials:
1) Payments made by the owner to the contractor before they are due;
2) Renunciation by the contractor of any amount due him from the owner.
This article is subject to the provisions of special laws. (1597a)
Laigo admittedly has not paid petitioners. The "bouncing" checks issued by it in
their favor is mentioned by GSIS itself in its statement of the facts. We hold that
upon this premise it is a fair construction of the Deed of Quitclaim aforementioned,
that GSIS can be held liable to petitioners, without prejudice to its securing
corresponding indemnity from Laigo. It is obvious from the terms of said deed that
GSIS contemplated the possibility of its being liable for Laigo's account, otherwise,
there was no need for the reservation. This is one such liability. In this connection
while, indeed, Article 1729 refers to the laborers and materialmen themselves,
under the peculiar circumstances of this case, it is but fair and just that petitioners
be deemed as suing for the reimbursement of what they have already paid the
laborers and materialmen, as otherwise they (petitioners) would be unduly
prejudiced while either Laigo, GSIS or the occupants of the houses would enrich
themselves at their expense. It is a bad law that would allow such a result.
At this juncture, We need to add only that Article 1311 of the Civil Code which GSIS
invokes is not applicable where the situation contemplated in Article 1729 obtains.
The intention of the latter provision is to protect the laborers and the materialmen
from being taken advantage of by unscrupulous contractors and from possible
connivance between owners and contractors. Thus, a constructive vinculum or
contractual privity is created by this provision, by way of exception to the principle
underlying Article 1311 between the owner, on the one hand, and those who
furnish labor and/or materials, on the other. As a matter of fact, insofar as the
laborers are concerned, by a special law, Act No. 3959, they are given added
protection by requiring contractors to file bonds guaranteeing payment to them.
And under Article 2242 of the Civil Code, paragraphs (3) and (4), claims of laborers
and materialmen, respectively, enjoy preference among the creditors of the owner
in regard to specific immovable property.
As regards Article 525 of the Civil Code also invoked by GSIS, suffice it to say that
this provision refers particularly to instances where the bad faith or the good faith
of the builder is the decisive factor in determining liability. In the case at bar, there
is no necessity to pass on the question of whether petitioners acted in good faith
or bad faith, for the simple reason that under the Deed of Quitclaim, GSIS freely
accepted the benefits of what they have accomplished.
GSIS contends that Laigo should have been joined as defendant in this case. While
petitioners could have done so, they were not under such obligation mandatorily.
Under the circumstances of this case, Laigo is only a necessary party, not an
indispensable one. And to allay GSIS, its right to secure reimbursement from Laigo
is hereby reserved.
Coming now to the amount for which GSIS is liable, We reiterate that, to be sure,
there is evidence in the record, uncontradicted at that, regarding the lower value
of money at the time the demand upon GSIS was made compared to that when
petitioners furnished the labor and materials in question. We are not, however,
inclined to go along with the trial court that the amount demanded should be
multiplied four times. We believe that it being a matter of judicial notice that the
prices of labor and material have substantially risen since 1970, it would be fair
enough to make respondent liable for interest on the amount of the demand,
which is supported by evidence and not effectively disputed by GSIS in its answer,
at the rate of 12% per annum from the time petitioners filed their complaint below
on April 14,1975.
In addition, We hold that our award to petitioners of attorney's fees in the amount
of Fifty Thousand (P50,00.00) Pesos would only be just and proper. As We view the
position taken by GSIS in this case, petitioners were compelled to litigate over a
matter that could have been justly and equitably settled without having to go to
court, particularly, when it is considered that under the Deed of Quitclaim several
Page | 80
times mentioned earlier, GSIS freely accepted from Laigo the benefits of the
expenses for labor and material incurred by petitioners in the houses in question,
hence, as We have said above, GSIS had no legal basis for insisting that Article 1729
of the Civil Code does not apply to this case, it being indisputably the owner of said
houses already. Besides, it must be borne in mind that the claims of petitioners are
in the nature of claims of the laborers and materialmen themselves. Accordingly,
Article 2208, paragraphs 2, 7 and 11, are applicable hereto. Indeed, the "house
owners " or occupants who have not paid either petitioners or Laigo, or even the
GSIS should not be allowed to enrich themselves at the expense of petitioners, and
the most feasible way of avoiding such a result is for GSIS to Pay Petitioners and
then pass on to said "house owners" what it would have to pay under this
judgment.
IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered affirming the
decision appealed from, with the modification that respondent GSIS shall pay
petitioners the total amount of SIX HUNDRED SEVEN THOUSAND THREE HUNDRED
TWENTY EIGHT AND 27/100 PESOS (P607,328.27), plus interest at 8% per annum
from April 14, 1975 (which is less than that allowed by Circular No. 416 of the
Central Bank dated July 29, 1974) until fully paid, the said sum to correspond
separately to petitioners as follows:
Amable C. Lumanlan P309,187.76 plus interest
Pepito Velasco 142,510.00
Apolonio de log Santos 60,325.51
Felipe Lumbang 82,705.00 and
Ramon Galang 12,600.00
plus Fifty Thousand (P50,000) Pesos as attorney's fees for an of them and the costs.
G.R. No. 16454 September 29, 1921
GEORGE A. KAUFFMAN, plaintiff-appellee,
vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
Roman J. Lacson for appellant.
Ross and Lawrence for appellee.
STREET, J.:
At the time of the transaction which gave rise to this litigation the plaintiff, George
A. Kauffman, was the president of a domestic corporation engaged chiefly in the
exportation of hemp from the Philippine Islands and known as the Philippine Fiber
and Produce Company, of which company the plaintiff apparently held in his own
right nearly the entire issue of capital stock. On February 5, 1918, the board of
directors of said company, declared a dividend of P100,000 from its surplus
earnings for the year 1917, of which the plaintiff was entitled to the sum of
P98,000. This amount was accordingly placed to his credit on the books of the
company, and so remained until in October of the same year when an unsuccessful
effort was made to transmit the whole, or a greater part thereof, to the plaintiff in
New York City.
In this connection it appears that on October 9, 1918, George B. Wicks, treasurer
of the Philippine Fiber and Produce Company, presented himself in the exchange
department of the Philippine National Bank in Manila and requested that a
telegraphic transfer of $45,000 should be made to the plaintiff in New York City,
upon account of the Philippine Fiber and Produce Company. He was informed that
the total cost of said transfer, including exchange and cost of message, would be
P90,355.50. Accordingly, Wicks, as treasurer of the Philippine Fiber and Produce
Company, thereupon drew and delivered a check for that amount on the Philippine
National Bank; and the same was accepted by the officer selling the exchange in
payment of the transfer in question. As evidence of this transaction a document
was made out and delivered to Wicks, which is referred to by the bank's assistant
cashier as its official receipt. This memorandum receipt is in the following language:
Page | 81
 October 9th, 1918. the withholding of payment had been received in New York, and payment was
therefore refused.
CABLE TRANSFER BOUGHT FROM In view of these facts, the plaintiff Kauffman instituted the present action in the
PHILIPPINE NATIONAL BANK, Court of First Instance of the city of Manila to recover said sum, with interest and
Manila, P.I. Stamp P18 costs; and judgment having been there entered favorably to the plaintiff, the
Foreign Amount Rate defendant appealed.
$45,000. 3/8 % P90,337.50 Among additional facts pertinent to the case we note the circumstance that at the
Payable through Philippine National Bank, New York. To G. A. Kauffman, New York. time of the transaction above-mentioned, the Philippines Fiber and Produce
Total P90,355.50. Account of Philippine Fiber and Produce Company. Sold to Company did not have on deposit in the Philippine National Bank money adequate
Messrs. Philippine Fiber and Produce Company, Manila. to pay the check for P90,355.50, which was delivered in payment of the telegraphic
order; but the company did have credit to that extent, or more, for overdraft in
(Sgd.) Y LERMA, current account, and the check in question was charged as an overdraft against the
Manager, Foreign Department. Philippine Fiber and Produce Company and has remained on the books of the bank
as an interest-bearing item in the account of said company.
On the same day the Philippine National Bank dispatched to its New York agency a
It is furthermore noteworthy that no evidence has been introduced tending to
cablegram to the following effect:
show failure of consideration with respect to the amount paid for said telegraphic
Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000. order. It is true that in the defendant's answer it is suggested that the failure of the
(Sgd.) PHILIPPINE NATIONAL BANK, Manila. bank to pay over the amount of this remittance to the plaintiff in New York City,
pursuant to its agreement, was due to a desire to protect the bank in its relations
Upon receiving this telegraphic message, the bank's representative in New York with the Philippine Fiber and Produce Company, whose credit was secured at the
sent a cable message in reply suggesting the advisability of withholding this money bank by warehouse receipts on Philippine products; and it is alleged that after the
from Kauffman, in view of his reluctance to accept certain bills of the Philippine exchange in question was sold the bank found that it did not have sufficient to
Fiber and Produce Company. The Philippine National Bank acquiesced in this and warrant payment of the remittance. In view, however, of the failure of the bank to
on October 11 dispatched to its New York agency another message to withhold the substantiate these allegations, or to offer any other proof showing failure of
Kauffman payment as suggested. consideration, it must be assumed that the obligation of the bank was supported
Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, by adequate consideration.
cabled to Kauffman in New York, advising him that $45,000 had been placed to his In this court the defense is mainly, if not exclusively, based upon the proposition
credit in the New York agency of the Philippine National Bank; and in response to that, inasmuch as the plaintiff Kauffman was not a party to the contract with the
this advice Kauffman presented himself at the office of the Philippine National Bank bank for the transmission of this credit, no right of action can be vested in him for
in New York City on October 15, 1918, and demanded the money. By this time, the breach thereof. "In this situation," — we here quote the words of the
however, the message from the Philippine National Bank of October 11, directing appellant's brief, — "if there exists a cause of action against the defendant, it would
not be in favor of the plaintiff who had taken no part at all in the transaction nor
Page | 82
had entered into any contract with the plaintiff, but in favor of the Philippine Fiber
and Produce Company, the party which contracted in its own name with the
defendant."
The question thus placed before us is one purely of law; and at the very threshold
of the discussion it can be stated that the provisions of the Negotiable Instruments
Law can come into operation there must be a document in existence of the
character described in section 1 of the Law; and no rights properly speaking arise
in respect to said instrument until it is delivered. In the case before us there was an
order, it is true, transmitted by the defendant bank to its New York branch, for the
payment of a specified sum of money to George A. Kauffman. But this order was
not made payable "to order or "to bearer," as required in subsection (d) of that Act;
and inasmuch as it never left the possession of the bank, or its representative in
New York City, there was no delivery in the sense intended in section 16 of the
same Law. In this connection it is unnecessary to point out that the official receipt
delivered by the bank to the purchaser of the telegraphic order, and already set
out above, cannot itself be viewed in the light of a negotiable instrument, although
it affords complete proof of the obligation actually assumed by the bank.
Stated in bare simplicity the admitted facts show that the defendant bank for a
valuable consideration paid by the Philippine Fiber and Produce Company agreed
on October 9, 1918, to cause a sum of money to be paid to the plaintiff in New York
City; and the question is whether the plaintiff can maintain an action against the
bank for the nonperformance of said undertaking. In other words, is the lack of
privity with the contract on the part of the plaintiff fatal to the maintenance of an
action by him?
The only express provision of law that has been cited as bearing directly on this
question is the second paragraph of article 1257 of the Civil Code; and unless the
present action can be maintained under the provision, the plaintiff admittedly has
no case. This provision states an exception to the more general rule expressed in
the first paragraph of the same article to the effect that contracts are productive
of effects only between the parties who execute them; and in harmony with this
general rule are numerous decisions of this court (Wolfson vs. Estate of Martinez,
20 Phil., 340; Ibañez de Aldecoa vs. Hongkong and Shanghai Banking Corporation,
22 Phil., 572, 584; Manila Railroad Co. vs. Compañia Trasatlantica and Atlantic, Gulf
and Pacific Co., 38 Phil., 873, 894.)
The paragraph introducing the exception which we are now to consider is in these
words:
Should the contract contain any stipulation in favor of a third person, he may
demand its fulfillment, provided he has given notice of his acceptance to the person
bound before the stipulation has been revoked. (Art. 1257, par. 2, Civ. Code.)
In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate
dissertation upon the history and interpretation of the paragraph above quoted
and so complete is the discussion contained in that opinion that it would be idle for
us here to go over the same matter. Suffice it to say that Justice Trent, speaking for
the court in that case, sums up its conclusions upon the conditions governing the
right of the person for whose benefit a contract is made to maintain an action for
the breach thereof in the following words:
So, we believe the fairest test, in this jurisdiction at least, whereby to determine
whether the interest of a third person in a contract is a stipulation pour autrui, or
merely an incidental interest, is to rely upon the intention of the parties as
disclosed by their contract.
If a third person claims an enforcible interest in the contract, the question must be
settled by determining whether the contracting parties desired to tender him such
an interest. Did they deliberately insert terms in their agreement with the avowed
purpose of conferring a favor upon such third person? In resolving this question, of
course, the ordinary rules of construction and interpretation of writings must be
observed. (Uy Tam and Uy Yet vs. Leonard, supra.)
Further on in the same opinion he adds: "In applying this test to a stipulation pour
autrui, it matters not whether the stipulation is in the nature of a gift or whether
there is an obligation owing from the promise to the third person. That no such
obligation exists may in some degree assist in determining whether the parties
intended to benefit a third person, whether they stipulated for him." (Uy Tam and
Uy Yet vs. Leonard, supra.)
Page | 83
In the light of the conclusion thus stated, the right of the plaintiff to maintain the As we view it there is nothing in the decision referred to decisive of the question
present action is clear enough; for it is undeniable that the bank's promise to cause now before us, wish is merely that of the right of the beneficiary to maintain an
a definite sum of money to be paid to the plaintiff in New York City is a stipulation action against the bank selling the transfer.
in his favor within the meaning of the paragraph above quoted; and the
Upon the considerations already stated, we are of the opinion that the right of
circumstances under which that promise was given disclose an evident intention
action exists, and the judgment must be affirmed. It is so ordered, with costs
on the part of the contracting parties that the plaintiff should have the money upon
against the appellant. Interest will be computed as prescribed in section 510 of the
demand in New York City. The recognition of this unqualified right in the plaintiff
Code of Civil Procedure.
to receive the money implies in our opinion the right in him to maintain an action
to recover it; and indeed if the provision in question were not applicable to the Johnson, Araullo, Avanceña and Villamor, JJ., concur.
facts now before us, it would be difficult to conceive of a case arising under it.

It will be noted that under the paragraph cited a third person seeking to enforce
compliance with a stipulation in his favor must signify his acceptance before it has
been revoked. In this case the plaintiff clearly signified his acceptance to the bank
by demanding payment; and although the Philippine National Bank had already
directed its New York agency to withhold payment when this demand was made,
the rights of the plaintiff cannot be considered to as there used, must be
understood to imply revocation by the mutual consent of the contracting parties,
or at least by direction of the party purchasing he exchange.

In the course of the argument attention was directed to the case of

Legniti vs. Mechanics, etc. Bank (130 N.E. Rep., 597), decided by the Court of
Appeals of the State of New York on March 1, 1921, wherein it is held that, by
selling a cable transfer of funds on a foreign country in ordinary course, a bank
incurs a simple contractual obligation, and cannot be considered as holding the
money which was paid for the transfer in the character of a specific trust. Thus, it
was said, "Cable transfers, therefore, mean a method of transmitting money by
cable wherein the seller engages that he has the balance at the point on which the
payment is ordered and that on receipt of the cable directing the transfer his
correspondent at such point will make payment to the beneficiary described in the
cable. All these transaction are matters of purchase and sale create no trust
relationship."

Page | 84
G.R. No. L-20853 May 29, 1967
BONIFACIO BROS., INC., ET AL., plaintiffs-appellants,
vs.
ENRIQUE MORA, ET AL., defendants-appellees.
G. Magsaysay for plaintiffs-appellants.
Abad Santos and Pablo for defendant-appellee H. E. Reyes, Inc.
J. P. Santilla and A. D. Hidalgo, Jr. for other defendant-appellee.
CASTRO, J.:
This is an appeal from the decision of the Court of First Instance of Manila, Branch
XV, in civil case 48823, affirming the decision of the Municipal Court of Manila,
declaring the H.S. Reyes, Inc. as having a better right than the Bonifacio Bros., Inc.
and the Ayala Auto Parts Company, appellants herein, to the proceeds of motor
insurance policy A-0615, in the sum of P2,002.73, issued by the State Bonding &
Insurance Co. Inc., and directing payment of the said amount to the H. Reyes, Inc.
Enrique Mora, owner of Oldsmobile sedan model 1956, bearing plate No. QC-
mortgaged the same to the H.S. Reyes, Inc., with the condition that the former
would insure the automobile with the latter as beneficiary. The automobile was
thereafter insured on June 23, 1959 with the State Bonding & Insurance Co., Inc.,
and motor car insurance policy A-0615 was issued to Enrique Mora, the pertinent
provisions of which read:
1. The Company (referring to the State Bonding & Insurance Co., Inc.) will, subject
to the Limits of Liability, indemnify the Insured against loss of or damages to the
Motor Vehicle and its accessories and spare parts whilst thereon; (a) by accidental
collision or overturning or collision or overturning consequent upon mechanical
breakdown or consequent upon wear and tear,
xxx xxx xxx
2. At its own option the Company may pay in cash the amount of the loss or damage
or may repair, reinstate, or replace the Motor Vehicle or any part thereof or its
accessories or spare parts. The liability of the Company shall not exceed the value
of the parts whichever is the less. The Insured's estimate of value stated in the
schedule will be the maximum amount payable by the Company in respect of any
claim for loss or damage.1äwphï1.ñët
xxx xxx xxx
4. The Insured may authorize the repair of the Motor Vehicle necessitated by
damage for which the Company may be liable under this Policy provided that: —
(a) The estimated cost of such repair does not exceed the Authorized Repair Limit,
(b) A detailed estimate of the cost is forwarded to the Company without delay,
subject to the condition that "Loss, if any is payable to H.S. Reyes, Inc.," by virtue
of the fact that said Oldsmobile sedan was mortgaged in favor of the said H.S.
Reyes, Inc. and that under a clause in said insurance policy, any loss was made
payable to the H.S. Reyes, Inc. as Mortgagee;
xxx xxx xxx
During the effectivity of the insurance contract, the car met with an accident. The
insurance company then assigned the accident to the Bayne Adjustment Co. for
investigation and appraisal of the damage. Enrique Mora, without the knowledge
and consent of the H.S. Reyes, Inc., authorized the Bonifacio Bros. Inc. to furnish
the labor and materials, some of which were supplied by the Ayala Auto Parts Co.
For the cost of labor and materials, Enrique Mora was billed at P2,102.73 through
the H.H. Bayne Adjustment Co. The insurance company after claiming a franchise
in the amount of P100, drew a check in the amount of P2,002.73, as proceeds of
the insurance policy, payable to the order of Enrique Mora or H.S. Reyes,. Inc., and
entrusted the check to the H.H. Bayne Adjustment Co. for disposition and delivery
to the proper party. In the meantime, the car was delivered to Enrique Mora
without the consent of the H.S. Reyes, Inc., and without payment to the Bonifacio
Bros. Inc. and the Ayala Auto Parts Co. of the cost of repairs and materials.
Upon the theory that the insurance proceeds should be paid directly to them, the
Bonifacio Bros. Inc. and the Ayala Auto Parts Co. filed on May 8, 1961 a complaint
with the Municipal Court of Manila against Enrique Mora and the State Bonding &
Insurance Co., Inc. for the collection of the sum of P2,002.73 The insurance
company filed its answer with a counterclaim for interpleader, requiring the
Page | 85
Bonifacio Bros. Inc. and the H.S. Reyes, Inc. to interplead in order to determine who
has better right to the insurance proceeds in question. Enrique Mora was declared
in default for failure to appear at the hearing, and evidence against him was
received ex parte. However, the counsel for the Bonifacio Bros. Inc., Ayala Auto
Parts Co. and State Bonding & Insurance Co. Inc. submitted a stipulation of facts,
on the basis of which are Municipal Court rendered a decision declaring the H.S.
Reyes, Inc. as having a better right to the disputed amount and ordering State
Bonding & Insurance Co. Inc. to pay to the H. S. Reyes, Inc. the said sum of
P2,002.73. From this decision, the appellants elevated the case to the Court of First
Instance of Manila which the stipulation of facts was reproduced. On October 19,
1962 the latter court rendered a decision, affirming the decision of the Municipal
Court. The Bonifacio Bros. Inc. and the Ayala Auto Parts Co. moved for
reconsideration of the decision, but the trial court denied the motion. Hence, this
appeal.
The main issue raised is whether there is privity of contract between the Bonifacio
Bros. Inc. and the Ayala Auto Parts Co. on the one hand and the insurance company
on the other. The appellants argue that the insurance company and Enrique Mora
are parties to the repair of the car as well as the towage thereof performed. The
authority for this assertion is to be found, it is alleged, in paragraph 4 of the
insurance contract which provides that "the insured may authorize the repair of
the Motor Vehicle necessitated by damage for which the company may be liable
under the policy provided that (a) the estimated cost of such repair does not exceed
the Authorized Repair Limit, and (b) a detailed estimate of the cost is forwarded to
the company without delay." It is stressed that the H.H. Bayne Adjustment
Company's recommendation of payment of the appellants' bill for materials and
repairs for which the latter drew a check for P2,002.73 indicates that Mora and the
H.H. Bayne Adjustment Co. acted for and in representation of the insurance
company.
This argument is, in our view, beside the point, because from the undisputed facts
and from the pleadings it will be seen that the appellants' alleged cause of action
rests exclusively upon the terms of the insurance contract. The appellants seek to
recover the insurance proceeds, and for this purpose, they rely upon paragraph 4
of the insurance contract document executed by and between the State Bonding
& Insurance Company, Inc. and Enrique Mora. The appellants are not mentioned in
the contract as parties thereto nor is there any clause or provision thereof from
which we can infer that there is an obligation on the part of the insurance company
to pay the cost of repairs directly to them. It is fundamental that contracts take
effect only between the parties thereto, except in some specific instances provided
by law where the contract contains some stipulation in favor of a third
person.1 Such stipulation is known as stipulation pour autrui or a provision in favor
of a third person not a pay to the contract. Under this doctrine, a third person is
allowed to avail himself of a benefit granted to him by the terms of the contract,
provided that the contracting parties have clearly and deliberately conferred a
favor upon such person.2 Consequently, a third person not a party to the contract
has no action against the parties thereto, and cannot generally demand the
enforcement of the same.3 The question of whether a third person has an
enforcible interest in a contract, must be settled by determining whether the
contracting parties intended to tender him such an interest by deliberately
inserting terms in their agreement with the avowed purpose of conferring a favor
upon such third person. In this connection, this Court has laid down the rule that
the fairest test to determine whether the interest of a third person in a contract is
a stipulation pour autrui or merely an incidental interest, is to rely upon the
intention of the parties as disclosed by their contract.4 In the instant case the
insurance contract does not contain any words or clauses to disclose an intent to
give any benefit to any repairmen or materialmen in case of repair of the car in
question. The parties to the insurance contract omitted such stipulation, which is a
circumstance that supports the said conclusion. On the other hand, the "loss
payable" clause of the insurance policy stipulates that "Loss, if any, is payable to
H.S. Reyes, Inc." indicating that it was only the H.S. Reyes, Inc. which they intended
to benefit.
We likewise observe from the brief of the State Bonding & Insurance Company that
it has vehemently opposed the assertion or pretension of the appellants that they
are privy to the contract. If it were the intention of the insurance company to make
itself liable to the repair shop or materialmen, it could have easily inserted in the
contract a stipulation to that effect. To hold now that the original parties to the
insurance contract intended to confer upon the appellants the benefit claimed by
Page | 86
them would require us to ignore the indespensable requisite that a stipulation pour Loss in insurance, defined. — The injury or damage sustained by the insured in
autrui must be clearly expressed by the parties, which we cannot do. consequence of the happening of one or more of the accidents or misfortune
against which the insurer, in consideration of the premium, has undertaken to
As regards paragraph 4 of the insurance contract, a perusal thereof would show
indemnify the insured. (1 Bouv. Ins. No. 1215; Black's Law Dictionary; Cyclopedic
that instead of establishing privity between the appellants and the insurance
Law Dictionary, cited in Martin's Phil. Commercial Laws, Vol. 1, 1961 ed. p. 608).
company, such stipulation merely establishes the procedure that the insured has
to follow in order to be entitled to indemnity for repair. This paragraph therefore Indeed, according to sec. 120 of the Insurance Act, a loss may be either total or
should not be construed as bringing into existence in favor of the appellants a right partial.
of action against the insurance company as such intention can never be inferred
Accordingly, the judgment appealed from is hereby affirmed, at appellants' cost.
therefrom.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar,
Another cogent reason for not recognizing a right of action by the appellants
Sanchez and Castro, JJ., concur.
against the insurance company is that "a policy of insurance is a distinct and
independent contract between the insured and insurer, and third persons have no
right either in a court of equity, or in a court of law, to the proceeds of it, unless
there be some contract of trust, expressed or implied between the insured and
third person."5 In this case, no contract of trust, expressed or implied exists. We,
therefore, agree with the trial court that no cause of action exists in favor of the
appellants in so far as the proceeds of insurance are concerned. The appellants'
claim, if at all, is merely equitable in nature and must be made effective through
Enrique Mora who entered into a contract with the Bonifacio Bros. Inc. This
conclusion is deducible not only from the principle governing the operation and
effect of insurance contracts in general, but is clearly covered by the express
provisions of section 50 of the Insurance Act which read:

The insurance shall be applied exclusively to the proper interests of the person in
whose name it is made unless otherwise specified in the policy.

The policy in question has been so framed that "Loss, if any, is payable to H.S.
Reyes, Inc.," which unmistakably shows the intention of the parties.

The final contention of the appellants is that the right of the H.S. Reyes, Inc. to the
insurance proceeds arises only if there was loss and not where there is mere
damage as in the instant case. Suffice it to say that any attempt to draw a
distinction between "loss" and "damage" is uncalled for, because the word "loss"
in insurance law embraces injury or damage.

Page | 87
G.R. No. L-27696 September 30, 1977
MIGUEL FLORENTINO, ROSARIO ENCARNACION de FLORENTINO, MANUEL ARCE,
JOSE FLORENTINO, VICTORINO FLORENTINO, ANTONIO FLORENTINO, REMEDION
ENCARNACION and SEVERINA ENCARNACION, Petitioners-
Appellants, v. SALVADOR ENCARNACION, SR., SALVADOR ENCARNACION, JR.,
and ANGEL ENCARNACION, oppositors to encumbrance-petitioners-appelles.
Jose F. Singson and Miguel Florentino for appellants.chanrobles virtual law library
Pedro Singson for appellees.
GUERRERO, J.:chanrobles virtual law library
Appeal from the decision of the Court of First Instance of Ilocos Sur, acting as a land
registration court, in Land Registration case No. N-
310.chanroblesvirtualawlibrarychanrobles virtual law library
On May 22, 1964, the petitioners-appellants Miguel Florentino, Remedios
Encarnacion de Florentino, Manuel Arce, Jose Florentino, Victorino Florentino,
Antonio Florentino, Remedior, Encarnacion and Severina Encamacion, and the
Petitiners-appellees Salvador Encamacion, Sr., Salvador Encamacion, Jr. and Angel
Encarnacion filed with the Court of First Instance of ilocos Sur an application for the
registration under Act 496 of a parcel of agricultural land located at Barrio Lubong
Dacquel Cabugao Ilocos Sur.chanroblesvirtualawlibrarychanrobles virtual law
library
The application alleged among other things that the applicants are the common
and pro-indiviso owners in fee simple of the said land with the improvements
existing thereon; that to the best of their knowledge and belief, there is no
mortgage, lien or encumbrance of any kind whatever affecting said land, nor any
other person having any estate or interest thereon, legal or equitable, remainder,
reservation or in expectancy; that said applicants had acquired the aforesaid land
thru and by inheritance from their predecessors in interest, lately from their aunt,
Doña Encarnacion Florentino who died in Vigan, Ilocos Sur in 1941, and for which
the said land was adjudicated to them by virtue of the deed of extrajudicial
partition dated August 24, 1947; that applicants Salvador Encarnacion, Jr. and
Angel Encarnacion acquired their respective shares of the land thru purchase from
the original heirs, Jesus, Caridad, Lourdes and Dolores surnamed Singson one hand
and from Asuncion Florentino on the other.chanroblesvirtualawlibrarychanrobles
virtual law library
After due notice and publication, the Court set the application for hearing. No
Opposition whatsoever was filed except that of the Director of Lands which was
later withdrawn, thereby leaving the option unopposed. Thereupon, an order of
general default was withdrawn against the whole world. Upon application of the
asets the Clerk Of court was commission will and to have the evidence of the agents
and or to submit the for the Court's for
resolution.chanroblesvirtualawlibrarychanrobles virtual law library
The crucial point in controversy in this registration case is centered in the
stipulation marked Exhibit O-1 embodied in the deed of extrajudicial partition
(Exhibit O) dated August 24, 1947 which states:
Los productos de esta parcela de terreno situada en el Barrio Lubong Dacquel
Cabugao Ilocos Sur, se destination para costear los tos de procesio de la Tercera
Caida celebration y sermon de Siete Palbras Seis Estaciones de Cuaresma,
procesion del Nino Jesus, tilaracion y conservacion de los mismos, construction le
union camarin en conde se depositan los carros mesas y otras cosas que seven para
lot leiracion de Siete Palabras y otras cosas mas Lo que sobra de lihos productos
despues de descontados todos los gastos se repartira nosotros los herederos.
In his testimony during the trial, applicant Miguel Florentino asked the court to
include the said stipulation (Exhibit O-1) as an encumbrance on the land sought to
be registered, and cause the entry of the same on the face of the title that will
finally be issued. Opposing its entry on the title as an encumbrance,
petitionersappellee Salvador Encamacion, Sr., Salvador Encarnaciori, Jr. and Angel
Encarriacion filed on October 3, 1966 a manifestation seeking to withdraw their
application on their respective shares of the land sought to be registered. The
withdrawal was opposed by the petitioners-
appellants.chanroblesvirtualawlibrarychanrobles virtual law library
Page | 88
The Court after hearing the motion for withdrawal and the opposition thereto
issued on November 17, 1966 an order and for the purpose of ascertaining and
implifying the issues therein stated that all the applicants admit the truth of the
following;
(1) That just after the death of Encarnacion FIorentino in 1941 up to last year and
as had always been the case since time immomorial the products of the land made
subiect matter of this land has been used in answering for the payment for the
religious functions specified in the Deed Extrajudicial Partition belated August 24,
1947:chanrobles virtual law library
(2) That this arrangement about the products answering for the comment of
experisence for religions functions as mentioned above was not registered in the
office of the Register of Deeds under Act No 3344, Act 496 or and, other system of
registration;chanrobles virtual law library
(3) That all the herein applicants know of the existence of his arrangement as
specified in the Deed of Extra judicial Partition of A adjust 24, 1947;chanrobles
virtual law library
(4) That the Deed of Extrajudicial Partition of August 24, 194-, not signed by Angel
Encarnacion or Salvador Encarnacion, Jr,.chanroblesvirtualawlibrarychanrobles
virtual law library
The court denied the petitioners-appellee motion to withdraw for lack of merit,
and rendered a decision under date of November 29, 1966 confirming the title of
the property in favor of the f appoints with their respective shares as
follows: chanrobles virtual law library
Spouses Miguel Florentino and Rosario Encarnacion de Florentino, both of legal
age, Filipinos, and residents of Vigan, Ilocos Sur, consisting of an undivided 31/297
and 8.25/297 portions, respectively; chanrobles virtual law library
Manuel Arce, of legal age, Filipino, married to Remedios Pichay and resident of
Vigan, Ilocos Sur, consisting of an undivided 66/297 portion; chanrobles virtual law
library
Salvador Encarnacion, Jr., of legal age, Filipino, married to Angelita Nagar and
resident of Vigan, Ilocos Sur, consisting of an undivided 66/297; Jose Florentino, of
legal age, Filipino, married to Salvacion Florendo and resident of 16 South Ninth
Diliman, Quezon City, consisting of an undivided 33/297 portion; chanrobles virtual
law library
Angel Encarnacion, of legal age, Filipino, single and resident of 1514 Milagros St.,
Sta. Cruz, Manila, consisting of an undivided 33/297 portion; chanrobles virtual law
library
Victorino Florentino, of legal age, Filipino, married to Mercedes L. Encarnacion and
resident of Vigan, Ilocos Sur, consisting of an undivided 17.5/297
portion; chanrobles virtual law library
Antonio Florentino, of legal age, Filipino, single and resident of Vigan, Ilocos Sur,
consisting of an undivided 17.5/297;chanrobles virtual law library
Salvador Encarnacion, Sr., of legal age, Filipino, married to Dolores Singson,
consisting of an undivided 8.25/297;chanrobles virtual law library
Remedios Encarnacion, of legal age, Filipino, single and resident of Vigan, Ilocos
Sur, consisting of an undivided 8.25/297 portion; andchanrobles virtual law library
Severina Encarnacion, of legal age, Filipino, single and resident of Vigan, Ilocos Sur,
consisting of 8.25/297 undivided portion.
The court, after ruling "that the contention of the proponents of encumbrance is
without merit bemuse, taking the self-imposed arrangement in favor of the Church
as a pure and simple donation, the same is void for the that the donee here has riot
accepted the donation (Art. 745, Civil Code) and for the further that, in the case of
Salvador Encarnacion, Jr. and Angel Encarnacion, they had made no oral or written
grant at all (Art. 748) as in fact they are even opposed to it," 1 held in the Positive
portion, as follows:
In view of all these, therefore, and insofar as the question of encumbrance is
concerned, let the religious expenses as herein specified be made and entered on
the undivided shares, interests and participations of all the applicants in this case,
Page | 89
except that of Salvador Encarnacion, Sr., Salvador Encarnacion, Jr. and Angel
Encarnacion.
On January 3, 1967, petitioners-appellants filed their Reply to the Opposition
reiterating their previous arguments, and also attacking the junction of the
registration court to pass upon the validity or invalidity of the agreement Exhibit O-
1, alleging that such is specified only in an ordinary action and not proper in a land
registration proceeding.chanroblesvirtualawlibrarychanrobles virtual law library
The Motion for Reconsideration and of New Trial was denied on January 14, 1967
for lack of merit, but the court modified its earlier decision of November 29, 1966,
to wit:
This Court believes, and so holds, that the contention of the movants (proponents
of the encumbrance) is without merit because the arrangement, stipulation or
grant as embodied in Exhibit O (Escritura de Particion Extrajudicial), by whatever
name it may be (called, whether donation, usufruct or ellemosynary gift, can be
revoked as in fact the oppositors Salvador Encarnacion, Sr., who is the only one of
the three oppositors who is a party to said Exhibit O (the two others, Salvador
Encarnacion, Jr. and Angel Encarnacion no parties to it) did revoke it as shown by
acts accompanying his refusal to have the same appear as an encumbrance on the
title to be issued. In fact, legally, the same can also be ignored or discararded by
will the three oppositors. The reasons are: First, if the said stipulation is pour bodies
in Exhibit O-1 is to be viewed as a stipulation pour autrui the same cannot now be
enforced because the Church in whose favor it was made has not communicated
its acceptance to the oppositors before the latter revoked it. Says the 2nd par. of
Art. 1311 of the New Civil Code:chanrobles virtual law library
"If a contract should contain some stipulation in favor of a third person he may
demand its fulfillment provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person." No evide nee has ever been submitted by the Church
to show its clear acceptance of the grant before its revocation by the oppositor
Salvador Encarnacion, Sr. (or of the two other oppositors, Salvador Encarnacion, Jr.
and Angel Encarnacion, who didn't even make any giant, in the first place), and so
not even the movants who have officiously taken into themselves the right to
enforce the grant cannot now maintain any action to compel compliance with it.
(Bank of the P.I. v. Concepcion y Hijos, Inc., 53 Phil. 806). Second, the Church in
whose favor the stipulation or grant had apparently been made ought to be the
proper party to compel the herein three oppositors to abide with the stipulation.
But it has not made any appearance nor registered its opposition to the application
even before Oct. 18, 1965 when an order of general default was issued. Third, the
movants are not, in the contemplation of Section 2, Rule 3 of the Rules of Court,
the real party in interest to raise the present issue; and Fourth, the movants having
once alleged in their application for registration that the land is without
encumbrance (par. 3 thereof), cannot now be alloted by the rules of pleading to
contradict said allegation of theirs. (McDaniel v. Apacible, 44 Phil. 248)chanrobles
virtual law library
SO ORDERED. 2chanrobles virtual law library
After Motions for Reconsideration were denied by the court, the petitioners-
appellants appealed directly to this Court pursuant to Rule 4 1, Rules of Court,
raising the following assign of error:
I. The lower court erred in concluding that the stipulation embodied in Exhibit O on
religious expenses is just an arrangement stipulation, or grant revocable at the
unilateral option of the coowners.chanroblesvirtualawlibrarychanrobles virtual law
library
II. The lower court erred in finding and concluding that the encumbrance or
religious expenses embodied in Exhibit O, the extrajudicial partition between the
co-heirs, is binding only on the appoints Miguel Florentino, Rosario Encarnacion de
Florentino, Manuel Arce, Jose Florentino, Antonio Florentino, Victorino Florentino,
Remedios Encarnacion and Severina
Encarnacion.chanroblesvirtualawlibrarychanrobles virtual law library
III. The lower court as a registration court erred in passing upon the merits of the
encumbrance (Exhibit O-1) as the sanie was never put to issue and as the question
involved is an adjudication of rights of the parties.
Page | 90
We find the first and second assignments of error impressed with merit and,
therefore, tenable. The stipulation embodied in Exhibit O-1 on religious expenses
is not revocable at the unilateral option of the co-owners and neither is it binding
only on the petitioners-appellants Miguel Florentino, Rosario Encarnacion de
Florentino Manuel Arce, Jose Florentino, Victorino Florentino Antonio Florentino,
Remedios Encarnacion and Severina E It is also binding on the oppositors-appellees
Angel Encarnacion, chanrobles virtual law library
The stipulation (Exhibit 411) in pan of an extrajudicial partition (Exh. O) duly agreed
and signed by the parties, hence the sanie must bind the contracting parties
thereto and its validity or compliance cannot be left to the with of one of them (Art.
1308, N.C.C.). Under Art 1311 of the New Civil Code, this stipulation takes effect
between the parties, their assign and heirs. The article provides:
Art. 1311. - Contracts take effect only between the parties, their assigns and heirs,
except in cases where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is
not liable beyond the value of the property he received from the
decedent.chanroblesvirtualawlibrarychanrobles virtual law library
If a contract should contain a stipulation in favor of a third person, he may demand
its fulfillment provided he communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest of a person is not sufficient. The
contracting parties must have clearly and deliberately conferred a favor upon a
third person.
The second paragraph of Article 1311 above-quoted states the law on
stipulations pour autrui. Consent the nature and purpose of the motion (Exh. O-1),
We hold that said stipulation is a station pour autrui. A stipulation pour autrui is a
stipulation in favor of a third person conferring a clear and deliberate favor upon
him, and which stipulation is merely a part of a contract entered into by the parties,
neither of whom acted as agent of the third person, and such third person and
demand its fulfillment provoked that he communicates his to the obligor before it
is revoked. 3 The requisites are: (1) that the stipulation in favor of a third person
should be a part, not the whole, of the contract; (2) that the favorable stipulation
should not be conditioned or compensated by any kind of obligation whatever; and
(3) neither of the contracting bears the legal represented or authorization of third
person.chanroblesvirtualawlibrarychanrobles virtual law library
To constitute a valid stipulation pour autrui it must be the purpose and intent of
the stipulating parties to benefit the third and it is not sufficient that the third
person may be incidentally benefited by the stipulation. The fairest test to
determine whether the interest of third person in a contract is a stipulation pour
autrui or merely an incidental interest, is to rely upon the intention of the parties
as disclosed by their contract. In applying this test, it meters not whether the
stipulation is in the nature of a gift or whether there is an obligation owing from
the promisee to the third person. That no such obsorption exists may in some
degree assist in determining whether the parties intended to benefit a third
person.4 chanrobles virtual law library
In the case at bar, the determining point is whether the co-owners intended to
benefit the Church when in their extrajudicial partition of several parcels of land
inherited by them from Doña Encarnacion Florendo they agreed that with respect
to the land situated in Barrio Lubong Dacquel Cabugao Ilocos Sur, the fruits thereof
shall serve to defray the religious expenses specified in Exhibit O-1. The evidence
on record shows that the true intent of the parties is to confer a direct and material
benefit upon the Church. The fruits of the aforesaid land were used thenceforth to
defray the expenses of the Church in the preparation and celebration of the Holy
Week, an annual Church function. Suffice it to say that were it not for Exhibit O-1,
the Church would have necessarily expended for this religious occasion, the annual
relisgious procession during the Holy Wock and also for the repair and preservation
of all the statutes, for the celebration of the Seven Last
Word.chanroblesvirtualawlibrarychanrobles virtual law library
We find that the trial court erred in holding that the stipulation, arrangement or
grant (Exhibit O-1) is revocable at the option of the co-owners. While a stipulation
in favor of a third person has no binding effect in itself before its acceptance by the
party favored, the law does not provide when the third person must make his
acceptance. As a rule, there is no time at such third person has after the time until
the stipulation is revoked. Here, We find that the Church accepted the stipulation
in its favor before it is sought to be revoked by some of the co-owners, namely the
Page | 91
petitioners-appellants herein. It is not disputed that from the time of the with of
Doña Encarnacion Florentino in 1941, as had always been the case since time
immemorial up to a year before the firing of their application in May 1964, the
Church had been enjoying the benefits of the stipulation. The enjoyment of
benefits flowing therefrom for almost seventeen years without question from any
quarters can only be construed as an implied acceptance by the Church of the
stipulation pour autrui before its revocation.
The acceptance does not have to be in any particular form, even when the
stipulation is for the third person an act of liberality or generosity on the part of
the promisor or promise.
It need not be made expressly and formally. Notification of acceptance, other than
such as is involved in the making of demand, is unnecessary.
A trust constituted between two contracting parties for the benefit of a third
person is not subject to the rules governing donation of real property. The
beneficiary of a trust may demand performance of the obligation without having
formally accepted the benefit of the this in a public document, upon mere
acquiescence in the formation of the trust and acceptance under the second
paragraph of Art. 1257 of the Civil Code.
Hence, the stipulation (Exhibit O-1) cannot now be revoked by any of the
stipulators at their own option. This must be so because of Article 1257, Civil Code
and the cardinal rule of contracts that it has the force of law between the
parties. 8 Thus, this Court ruled in Garcia v. Rita Legarda, Inc., 9"Article 1309 is a
virtual reproduction of Article 1256 of the Civil Code, so phrased to emphasize that
the contract must bind both parties, based on the principles (1) that obligation
arising from contracts have the force of law between the contracting parties; and
(2) that there must be mutuality between the parties based on their principle
equality, to which is repugnant to have one party bound by the contract leaving the
other free therefrom."
Consequently, Salvador Encarnacion, Sr. must bear with Exhibit O-1, being a
signatory to the Deed of Extrajudicial Partition embodying such beneficial
stipualtion. Likewise, with regards to Salvador, Jr. and Angel Encarnacion, they too
are bound to the agreement. Being subsequent purchasers, they are privies or
successors in interest; it is axiomatic that contracts are enforceable against the
parties and their privies. 10 Furthermore, they are shown to have given their
conformity to such agreement when they kept their peace in 1962 and 1963, having
already bought their respective shares of the subject land but did not question the
enforcement of the agreement as against them. They are also shown to have
knowledge of Exhibit O-1 as they had admitted in a Deed of Real Mortgage
executed by them on March 8, 1962 involving their shares of the subject land that,
"This parcel of land is encumbered as evidenced by the document No. 420, page
94, Book 1, series 1947, executed by the heirs of the late Encarnacion Florentino,
on August 26, 1947, before M. Francisco Ante, Notwy Public of Vigan, Ilocos Sur, in
its page 10 of the said document of partition, and also by other documents."
The annotation of Exhibit O-1 on the face of the title to be issued in this case is
merely a guarantee of the continued enforcement and fulfillment of the beneficial
stipulation. It is error for the lower court to rule that the petitioners-appellants are
not the real parties in interest, but the Church. That one of the parties to a
contract pour autrui is entitled to bring an action for its enforcement or to prevent
its breach is too clear to need any extensive discussion. Upon the other hand, that
the contract involved contained a stipulation pour autrui amplifies this settled rule
only in the sense that the third person for whose benefit the contract was entered
into may also demand its fulfillment provoked he had communicated his
acceptance thereof to the obligor before the stipulation in his favor is revoked.
Petitioners-appellants' third assignment of error is not well-taken. Firstly, the
otherwise rigid rule that the jurisdiction of the Land Registration Court, being
special and limited in character and proceedings thereon summary in nature, does
not extend to cases involving issues properly litigable in other independent suits or
ordinary civil actions, has time and again been relaxed in special and exceptional
circumstances. (See Government of the Phil. Islands v. Serafica, 61 Phil. 93 (1934);
Caoibes v. Sison, 102 Phil. 19 (1957); Luna v. Santos, 102 Phil. 588 (1957); Cruz v.
Tan, 93 Phil. 348 (1953); Gurbax Singh Pabla & Co. v. Reyes, 92 Phil. 177 (1952).
From these cases, it may be gleaned and gathered that the peculiarity of the
exceptions is based not only on the fact that Land Registration Courts are likewise
the same Courts of First Instance, but also the following premises (1) Mutual
Page | 92
consent of the parties or their acquired in submitting the at aforesaid G.R. No. 74521 November 11, 1986
determination by the court in the registration; (2) Full opportunity given to the
BANK OF AMERICA NT & SA, petitioner,
parties in the presentation of their respective skies of the issues and of the
vs.
evidence in support thereto; (3) Consideration by the court that the evidence
THE HON. FIRST CIVIL CASES DIVISION, INTERMEDIATE APPELLATE COURT and AIR
already of record is sufficient and adequate for rendering a decision upon these
CARGO AND TRAVEL CORPORATION, respondents.
issues. 12 In the case at bar, the records clearly show that the second and third
premism enumerated abow are fully mt. With regards to first premise, the Agcaoili & Associates for petitioner.
petioners-appellants cannot claim that the issues anent Exhibit O-1 were not put
in issue because this is contrary to their stand before the lower court where they Marcelo P. Villanuea for respondents.
took the initial step in praying for the court's determination of the merits of Exhibit
O-1 as an encumbrance to be annotated on the title to be issued by such court. On
the other hand, the petitioners-appellees who had the right to invoke the limited MELENCIO-HERRERA, J.:
jurisdiction of the registration court failed to do so but met the issues head-on. As the Petition and the Comment submitted by private respondent Air Cargo and
Secondly, for this very special reason, We win uphold the actuation of the lower Travel Corporation (ACTC) have sufficiently argued the legal question involved in
court in determining the conflicting interests of the parties in the registration this case, the Court has resolved to give due course to the Petition, with private
proceedings before it. This case has been languishing in our courts for thirteen tong respondent's Comment being its Answer, and to consider this case submitted for
years. To require that it be remanded to the lower court for another proceeding decision.
under its general jurisdiction is not in consonance with our avowed policy of speedy The basic relevant facts have been stated by respondent Appellate Court as
justice. It would not be amiss to note that if this case be remanded to the lower follows:
court, and should appeal again be made, the name issues will once more be raised
before us hence, Our decision to resolve at once the issues in the instant petition. Shorn of non-essentials, the facts are: Plaintiff Air Cargo and Travel Corporation is
the owner of Account Number 19842-01-2 with defendant Bank of America.
IN VIEW OF THE FOREGOING, the decision of the Court of First Instance of Ilocos Defendant Toshiyuki Minami, President of plaintiff corporation in Japan, is the
Sur in Land Registration Case No. N-310 is affirmed but modified to allow the owner of Account Number 24506-01-7 with defendant Bank.
annotation of Exhibit O-1 as an encumbrance on the face of the title to be finally
issued in favor of all the applications (herein appellants and herein appellees) in On March 10, 1981, the Bank received a tested telex advise from Kyowa Bank of
the registration proceedings below. Japan stating,

No pronouncement as to cost. ADVISE PAY USDLS 23,595. — TO YOUR A/C NBR 24506-01-7 OF A. C. TRAVEL
CORPORATION MR. TOSHIYUKO MINAMI.
SO ORDERED.
and the Bank Credited the amount of US$23,595.00 to Account Number 24506-07-
1 (should be 24506-01-7) owned, as aforesaid, by Minami.

Page | 93
On March 12, 1981, Minami withdrew the sum of P180,000.00 the equivalent in
Philippine Pesos of the sum of US$23,595.00 from the Bank on his Account Number
24506-07-1 (should be 24506-01-7)
It may be explained that the "tested" telex advice is a message signed
in "code". Evidently, there was a previous contractual agreement between Kyowa
Bank of Japan (KYOWA) and Petitioner (BANKAMERICA) that, from time to time,
KYOWA can ask BANKAMERICA to pay amounts to a third party (beneficiary) with
BANKAMERICA afterwards billing KYOWA the indicated amount given to the
beneficiary. To assure itself that an Order received from KYOWA really comes from
KYOWA, it is usually agreed that KYOWA's signature will be in accordance with a
confidential code.
According to ACTC in its Comment, in the early part of 1981, it was Tokyo Tourist
Corporation in Japan which applied with Kyowa Bank, Ltd. also based in Tokyo,
Japan, for telegraphic transfer of the sum of US$23,595.00 payable to ACTC's
account with BANKAMERICA, Manila.
When the tested telex was received on May 10, 1981, employees of BANKAMERICA
noted its patent ambiguity. Notwithstanding, on the following day, BANKAMERICA
credited the amount of US$23,595.00 to the account of Minami. ACTC claimed that
the amount should have been credited to its account and demanded restitution,
but BANKAMERICA refused.
On February 18, 1982, ACTC filed suit for damages against BANKAMERICA and
Minami before the Trial Court in Pasig for the failure of BANKAMERICA to restitute.
Minami was declared in default. Thereafter, judgment was rendered with the
following dispositive part:
IN VIEW OF THE FOREGOING CONSIDERATIONS, the Court upon a judicious and fair
assessment of the testimonial and documentary evidences submitted by the
parties is of the opinion and so holds that defendant Bank and defendant Minami
must pay plaintiff, jointly and severally the following.
1. The sum of US$23,595.00 or in Philippine Currency at the current guiding rate of
exchange which is P14.00 to the dollar, as and by way of actual damages with
interest at the rate of twelve (12%) per cent per annum from the filing of the
complaint until fully paid;
2. The sum of P50,000.00 as temperate and exemplary damages;
3. The sum of P10,000.00 as attorney's fees;;
4. The costs of this suit.
SO ORDERED.
Upon appeal taken by BANKAMERICA, Respondent Court "affirmed in toto, "
except that the dollar-peso rate of ex-change would be that "at the time of
payment." Said respondent Court:
We must say that the Bank personnel were in fact confused or in doubts as to the
real payee.
The Senior Clerk who initially received the tested telex had called up Mr. Colegado,
Mr. Ichiban, Miss Mayagama and Atty. Villanueva, all of plaintiff-appellee, but he
received "no answer."(Exh. 3; pp. 9-10, t.s.n., Dec. 2, 1982).
Thereupon, the processor checked the alphabetical listings and he saw that the
payee, Account Number 24506-01-7, matched the name appearing in the tested
telex advise (p. 10, t.s.n., Dec. 2, 1981).
The gross negligence then of appellant Bank may be sum (sic) up as follows; The
words "A.C. TRAVEL CORPORATION MR. TOSHIYUKO MINAMI" engendered or cast
doubt
on the part of the Senior Clerk as to the real payee despite the "A.C. NBR 24506-
01-7" and
should have consulted higher officials of plaintiff before giving the advise to the
processor who sent the same to the computer center for ultimate processing (p.
11, Appellant's Brief).
The processor verified that Account Number 24506-01-7 belonged to TOSHIYUKO
MINAMI' only and not to "A.C. TRAVEL CORPORATION MR. TOSHIYUKO MINAMI"
Page | 94
and this circumstance should have moved the processor to be more prudent and BANKAMERICA (see Manila Railroad Co. vs. Compañia Trasatlantica, 38 Phil. 875
to consult higher officials instead of sending the advise to the computer center for [1918]).
processing or crediting the remittance to the account of Toshiyuko Minami,
WHEREFORE, the Decision of Respondent Court, in its case AC-G.R. CV No. 03985,
(Emphasis supplied)
is hereby reversed in so far as Bank of America, NT & SA is concerned.
We are constrained to reverse.
Without pronouncement as to costs.
It is our considered opinion that, in the tested telex, considered either as a patent
SO ORDERED.
ambiguity or as a latent ambiguity, the beneficiary is Minami. The mention of
Account No. 24506-01-7, as well as the name of Minami, has to be given more
weight than the mention of the name of ACTC. BANKAMERICA could not have very
well disregarded that account number. It could also be that the mention of ACTC's
name was a further identification of Minami, to prevent payment to a possible
another "Toshiyuko Minami" who may not be connected with ACTC. On the other
hand, it should be difficult to concede that, in the tested telex, Account No. 24506-
01-7 was erroneously written and should be substituted by Account No. 19842-01-
2 in the name of ACTC.

In Vargas Plow Factory, Inc. vs. Central Bank, it was held that "the opening of a
letter of credit in favor of the exporter becomes ultimately but the result of a
stipulation pour autrui" (27 SCRA 84 [1969]). Similarly, when KYOWA asked BANK-
AMERICA to pay an amount to a beneficiary (either ACTC or Minami), the contract
was between KYOWA and BANK-AMERICA and it had a stipulation pour autrui.

It should be recalled that the tested telex originated from KYOWA at the behest of
Tokyo Tourist Corporation with whom ACTC had business dealings. Minami, on the
other hand, was the liaison officer of ACTC in Japan. As the entity responsible for
the tested telex was Tokyo Tourist Corporation, it can reasonably be concluded that
if it had intended that the US$23,595.00 should be credited to ACTC, upon learning
that the amount was credited to Minami, it should have gone, together with the
representatives of ACTC, in protest to KYOWA and lodged a protest. Since that was
not done, it could well be that Tokyo Tourist Corporation had really intended its
remittance to be credited to Minami. The identity of the beneficiary should be in
accordance with the identification made by KYOWA, and ACTC cannot question
that identification as it is not a party to the arrangement between KYOWA and

Page | 95
G.R. No. L-40234 December 14, 1987
MARIMPERIO COMPAÑIA NAVIERA, S.A., petitioner,
vs.
COURT OF APPEALS and UNION IMPORT & EXPORT CORPORATION and
PHILIPPINES TRADERS CORPORATION, respondents.
PARAS, J.:
This is a petition for certiorari under Section 1, Rule 65 of the Rules of Court seeking
the annulment and setting aside of the decision of the Court of Appeals * and
promulgated on September 2, 1974 in CA-G.R. No. 48521-R entitled "Union Import
and Export Corporation, et al., Plaintiffs-Appellees v. Marimperio Compañia
Naviera, S.A., Defendant-Appellant", ordering petitioner to pay respondent the
total sum of US $265,482.72 plus attorney's fees of US$100,000.00 and (b) the
resolution of the said Court of Appeals in the same case, dated February 17, 1975
fixing the amount of attorney, s fees to Pl00,000.00 instead of $100,000.00 as
erroneously stated in the decision but denying petitioner's motion for
reconsideration and/or new trial.
The dispositive portion of the decision sought to be annulled (Rollo, p. 215) reads
as follows:
For all the foregoing, and in accordance therewith, let judgment be entered (a)
affirming the decision appealed from insofar as it directs the defendant-appellant:
(1) to pay plaintiffs the sum of US $22,500.00 representing the remittance of
plaintiffs to said defendant for the first 15-day hire of the vessel "SS PAXOI"
including overtime and an overpayment of US $254.00; (2) to pay plaintiffs the sum
of US $16,000.00, corresponding to the remittance of plaintiffs to defendant for
the second 15-day hire of the aforesaid vessel; (3) to pay plaintiffs the sum of US
$6,982.72, representing the cost of bunker oil, survey and watering of the said
vessel; (4) to pay plaintiffs the sum of US $100,000.00 as and for attorney's fees;
and, (b) reversing the portion granting commission to the intervenor-appellee and
hereby dismissing the complaint-in-intervention. The order of the court a quo
denying the plaintiffs' Motion for Partial Reconsideration, is likewise, affirmed,
without any special pronouncement as to costs.
The facts of the case as gathered from the amended decision of the lower court
(Amended Record on Appeal, p. 352), are as follows:
In 1964 Philippine Traders Corporation and Union Import and Export Corporation
entered into a joint business venture for the purchase of copra from Indonesia for
sale in Europe. James Liu President and General Manager of the Union took charge
of the European market and the chartering of a vessel to take the copra to Europe.
Peter Yap of Philippine on the other hand, found one P.T. Karkam in Dumai Sumatra
who had around 4,000 tons of copra for sale. Exequiel Toeg of Interocean was
commissioned to look for a vessel and he found the vessel "SS Paxoi" of Marimperio
available. Philippine and Union authorized Toeg to negotiate for its charter but with
instructions to keep confidential the fact that they are the real charterers.
Consequently on March 21, 1965, in London England, a "Uniform Time Charter" for
the hire of vessel "Paxoi" was entered into by the owner, Marimperio Compania
Naviera, S.A. through its agents N. & J. Vlassopulos Ltd. and Matthews Wrightson,
Burbridge, Ltd. to be referred to simply as Matthews, representing Interocean
Shipping Corporation, which was made to appear as charterer, although it merely
acted in behalf of the real charterers, private respondents herein.
The pertinent provisions or clauses of the Charter Party read:
1. The owners let, and the Charterers hire the Vessel for a period of 1 (one) trip via
safe port or ports Hong Kong, Philippine Islands and/or INDONESIA from the time
the Vessel is delivered and placed at the disposal of the Charterers on sailing
HSINKANG ... .
4. The Charterers are to provide and pay for oil-fuel, water for boilers, port charges,
pilotages ... .
6. The Charterers to pay as hire s.21 (Twenty-one Shillings per deadweights ton per
30 days or pro rata commencing in accordance with Clause 1 until her redelivery to
the owners.
Page | 96
Payment of hire to be made in cash as per Clause 40 without discount, every 15
days in advance.
In default of payment of the Owners to have the right of withdrawing the vessel
from the services of the Charterers, without noting any protest and without
interference by any court or any formality whatsoever and without prejudice the
Owners may otherwise have on the Charterers under the Charter.
7. The Vessel to be redelivered on the expiration of the Charter in the same good
order as when delivered to the Charterers (fair wear and tear expected) in the
Charterer's option in ANTWERP HAMBURG RANGE.
20. The Charterers to have the option of subletting the Vessel, giving due notice to
the Owners, but the original Charterers always to remain responsible to the
Owners for due performance of the Charter.
29. Export and/or import permits for Charterers'cargo to the Charterers'risk and
expense. Charterers to obtain and be responsible for all the necessary permits to
enter and/or trade in and out of all ports during the currency of the Charter at their
risk and expense. ...
33. Charterers to pay as overtime, bonus and premiums to Master, Officers and
crew, the sum of 200 (Two Hundred Pounds) per month to be paid together with
hire.
37. Bunkers on delivery as on board. Bunkers on redelivery maximum 110 tons.
Prices of bunkers at 107' per long ton at both ends.
38. Upon sailing from each loading port, Master to cable SEASHIPS MANILA advising
the quantity loaded and the time of completion.
40. The hire shall be payable in external sterling or at Charterers' option in U.S.
dollars in London; - Williams Deacon's Vlassopulos Ltd., Account No. 861769.
In view of the aforesaid Charter, on March 30, 1965 plaintiff Charterer cabled a firm
offer to P.T. Karkam to buy the 4,000 tons of copra for U.S.$180.00 per ton, the
same to be loaded either in April or May, 1965. The offer was accepted and
plaintiffs opened two irrevocable letters of Credit in favor of P.T. Karkam
On March 29, 1965, the Charterer was notified by letter by Vlassopulos through
Matthews that the vessel "PAXOI" had sailed from Hsinkang at noontime on March
27, 196-5 and that it had left on hire at that time and date under the Uniform Time-
Charter.
The Charterer was however twice in default in its payments which were supposed
to have been done in advance. The first 15-day hire comprising the period from
March 27 to April 1-1, 1965 was paid despite follow-ups only on April 6, 1965 and
the second 15-day hire for the period from April 12 to April 27, 1965 was paid also
despite follow-ups only on April 26, 1965. On April 14, 1965 upon representation
of Toeg, the Esso Standard Oil (Hongkong) Company supplied the vessel with 400
tons of bunker oil at a cost of US $6,982.73.
Although the late payments for the charter of the vessel were received and
acknowledged by Vlassopulos without comment or protest, said agent notified
Matthews, by telex on April 23, 1965 that the shipowners in accordance with
Clause 6 of the Charter Party were withdrawing the vessel from Charterer's service
and holding said Charterer responsible for unpaid hirings and all legal claims.
On April 29, 1965, the shipowners entered into another charter agreement with
another Charterer, the Nederlansche Stoomvart of Amsterdam, the delivery date
of which was around May 3, 1965 for a trip via Indonesia to Antwep/Hamburg at
an increase charter cost.
Meanwhile, the original Charterer again remitted on April 30, 1965, the amount
corresponding to the 3rd 15-day hire of the vessel "PAXOI" but this time the
remittance was refused.
On May 3,1965, respondents Union Import and Export Corporation and Philippine
Traders Corporation filed a complaint with the Court of First Instance of Manila,
Branch VIII, against the Unknown Owners of the Vessel "SS Paxoi" for specific
performance with prayer for preliminary attachment, alleging, among other things,
that the defendants (unknown owners) through their duly authorized agent in
London, the N & J Vlassopulos Ltd., ship brokers, entered into a contract of Uniform
Time-Charter with the Interocean Shipping Company of Manila through the latter's
duly authorized broker, the Overseas Steamship Co., Inc., for the Charter of the
Page | 97
vessel SS PAXOI' under the terms and conditions appearing therein ...; that,
immediately thereafter, the Interocean Shipping Company sublet,the said vessel to
the plaintiff Union Import & Export, Corporation which in turn sublet the same to
the other plaintiff, the Philippine Traders Corporation (Amended Record on Appeal,
p. 17). Respondents as plaintiffs in the complaint obtained a writ of preliminary
attachment of vessel PAXOI' " which was anchored at Davao on May 5, 1969, upon
the filing of the corresponding bond of P1,663,030.00 (Amended Record on Appeal,
p. 27). However, the attachment was lifted on May 15, 1969 upon defendant's
motion and filing of a counterbond for P1,663,030 (Amended Record on Appeal, p.
62).
On May 11, 1965, the complaint was amended to Identify the defendant as
Marimperio Compania Naviera S.A., petitioner herein (Amended Record on Appeal,
p. 38). In answer to the amended complaint, by way of special defenses defendant
(petitioner herein) alleged among others that the Charter Party covering its vessel
"SS PAXOI" was entered into by defendant with Interocean Shipping Co. which is
not a party in the complaint; that defendant has no agreement or relationship
whatsoever with the plaintiffs; that plaintiffs are unknown to defendant; that the
charter party entered into by defendant with the Interocean Shipping Co. over the
vessel "SS PAXOI" does not authorize a sub-charter of said vessel to other parties;
and that at any rate, any such sub-charter was without the knowledge or consent
of defendant or defendant's agent, and therefore, has no effect and/or is not
binding upon defendant. By way of counterclaim, defendant prayed that plaintiffs
be ordered to pay defendant (1) the sum of 5,085.133d or its equivalent, in
Philippine currency of P54,929.60, which the defendant failed to realize under the
substitute charter, from May 3, 1965 to May 16, 1965, while the vessel was under
attachment; (2) the sum of E68.7.10 or its equivalent of P7,132.83, Philippine
currency, as premium for defendant's counterbond for the first year, and such
other additional premiums that will have to be paid by defendant for additional
premiums while the case is pending; and (3) a sum of not less than P200,000.00 for
and as attomey's fees and expenses of litigations (Amended Record on Appeal, p.
64).
On March 16, 1966, respondent Interocean Shipping Corporation filed a complaint-
in-intervention to collect what it claims to be its loss of income by way of
commission and expenses in the amount of P15,000.00 and the sum of P2,000.00
for attorney's fees (Amended Record on Appeal, p. 87). In its amended answer to
the complaint-in-intervention petitioner, by way of special defenses alleged that
(1) the plaintiff-in-intervention, being the charterer, did not notify the defendant
shipowner, petitioner, herein, about any alleged sub-charter of the vessel "SS
PAXOI" to the plaintiffs; consequently, there is no privity of contract between
defendant and plaintiffs and it follows that plaintiff-in-intervention, as charterer, is
responsible for defendant shipowner for the proper performance of the charter
party; (2) that the charter party provides that any dispute arising from the charter
party should be referred to arbitration in London; that Charterer plaintiff-in-
intervention has not complied with this provision of the charter party;
consequently its complaint-in intervention is premature; and (3) that the alleged
commission of 2 1/2 and not become due for the reason, among others, that the
charterer violated the contract, and the full hiring fee due the shipowner was not
paid in accordance with the terms and conditions of the charter party. By way of
counterclaim defendant shipowner charged the plaintiff-in-intervention attorney's
fees and expenses of litigation in the sum of P10,000.00 (Amended Record on
Appeal, p. 123).
On November 22, 1969 the Court of First Instance of Manila, Branch VIII rendered
its decision ** in favor of defendant Marimperio Compania Naviera, S.A., petitioner
herein, and against plaintiffs Union Import and Export Corporation and Philippine
Traders Corporation, respondents herein, dismissing the amended complaint, and
ordering said plaintiff on the counterclaim to pay defendant, jointly and severally,
the amount of f 8,011.38 or its equivalent in Philippine currency of P75,303.40, at
the exchange rate of P9.40 to 1 for the unearned charter hire due to the
attachment of the vessel "PAXOI" in Davao, plus premiums paid on the
counterbond as of April 22, 1968 plus the telex and cable charges and the sum of
P10,000.00 as attorney's fees and costs. The trial court dismissed the complaint-in-
intervention, ordering the intervenor, on the counterclaim, to pay defendant the
sum of P10,000.00 as attorney's fees, and the costs (Amended Record on Appeal,
p. 315).
Plaintiffs filed a Motion for Reconsideration and/or new trial of the decision of the
trial court on December 23, 1969 (Amended Record on Appeal, p. 286); the
Page | 98
intervenor filed its motion for reconsideration and/or new trial on January 7, 1970
(Amended Record on Appeal, p. 315).
Acting on the two motions for reconsideration, the trial court reversed its stand in
its amended decision dated January 24, 1978. The dispositive portion of the
amended decision states:
FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment for the
plaintiffs Union Import & Export Corporation and Philin Traders Corporation, and
plaintiff-in-intervention, Interocean Shipping Corporation, and consequently
orders the defendant, Marimperio Compania Naveria S.A.:
(1) To pay plaintiffs the sum of US$22,500.00 representing the remittance of
plaintiffs to said defendant for the first 15-day hire of the vessel "SS PAXOI"
including overtime and an overpayment of US$254.00;
(2) To pay plaintiffs the sum of US$16,000.00 corresponding to the remittance of
plaintiffs to defendant for the second 15-day hire of the aforesaid vessel;
(3) To pay plaintiffs the sum of US$6,982.72 representing the cost of bunker oil,
survey and watering of the said vessel;
(4) To pay plaintiffs the sum of US$220,0,00.00 representing the unrealized profits;
and
(5) To pay plaintiffs the sum of P100,000.00, as and for attorney's fees (Moran,
Comments on the Rules of Court, Vol. III, 1957 5d 644, citing Haussermann vs.
Rahmayer, 12 Phil. 350; and others)" (Francisco vs. Matias, G.R. No. L-16349,
January 31, 1964; Sison vs. Suntay, G.R. No. L-1000 . December 28, 1957).
The Court further orders defendant to pay plaintiff-in-intervention the amount of
P15,450.44, representing the latter's commission as broker, with interest thereon
at 6% per annum from the date of the filing of the complaint-in-intervention, until
fully paid, plus the sum of P2,000.00 as attorney's fees.
The Court finally orders the defendant to pay the costs.
In view of the above conclusion, the Court orders the dismissal of the counterclaims
filed by defendant against the plaintiffs and plaintiff-in- intervention, as wen as its
motion for the award of damages in connection with the issuance of the writ of
preliminary attachment.
Defendant (petitioner herein), filed a motion for reconsideration and/or new trial
of the amended decision on February 19, 1970 (Amended Record on Appeal, p.
382). Meanwhile a new Judge was assigned to the Trial Court (Amended Record on
Appeal, p. 541). On September 10, 1970 the trial court issued its order of
September 10, 1970 *** denying defendant's motion for reconsideration
(Amended Record on Appeal, p. 583).
On Appeal, the Court of Appeals affirmed the amended decision of the lower court
except the portion granting commission to the intervenor- appellee, which it
reversed thereby dismissing the complaint-in- intervention. Its two motions (1) for
reconsideration and/or new trial and (2) for new trial having been denied by the
Court of Appeals in its Resolution of February 17, 1975 which, however, fixed the
amount of attorney's fees at P100,000.00 instead of $100,000.00 (Rollo, p. 81),
petitioner filed with this Court its petition for review on certiorari on March 19, 197
5 (Rollo, p. 86).
After deliberating on the petition, the Court resolved to require the respondents
to comment thereon, in its resolution dated April 2, 1975 (rollo, p. 225).
The comment on petition for review by certiorari was filed by respondents on April
21, 1975, praying that the petition for review by certiorari dated March 18, 1975
be dismissed for lack of merit Rollo p. 226). The reply to comment was filed on May
8, 1975 (Rollo, p. 259). The rejoinder to reply to comment was filed on May 13, 197
5 (Rollo, p. 264).
On October 20, 1975, the Court resolved (a) to give due course to the petition; (b)
to treat the petition for review as a special civil action; and (c) to require both
parties to submit their respective memoranda within thirty (30) days from notice
hereof (Rollo, p. 27).
Respondents filed their memoranda on January 27, 1976 (Rollo, p. 290); petitioner,
on February 26, 1976 (Rollo, p. 338). Respondents' reply memorandum was filed
Page | 99
on April 14, 1976 (Rollo, p. 413) and Rejoinder to respondents' reply memorandum
was filed on May 28, 1976 (Rollo, p. 460).
On June 11, 1976, the Court resolved to admit petitioner's rejoinder to
respondents' reply memorandum and to declare this case submitted for decision
(Rollo, p. 489).
The main issues raised by petitioner are:
1. Whether or not respondents have the legal capacity to bring the suit for specific
performance against petitioner based on the charter party, and
2. Whether or not the default of Charterer in the payment of the charter hire within
the time agreed upon gives petitioner a right to rescind the charter party extra
judicially.
I.
According to Article 1311 of the Civil Code, a contract takes effect between the
parties who made it, and also their assigns and heirs, except in cases where the
rights and obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. Since a contract may be violated
only by the parties, thereto as against each other, in an action upon that contract,
the real parties in interest, either as plaintiff or as defendant, must be parties to
said contract. Therefore, a party who has not taken part in it cannot sue or be sued
for performance or for cancellation thereof, unless he shows that he has a real
interest affected thereby (Macias & Co. v. Warner Barners & Co., 43 Phil. 155 [1922]
and Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125 [1951]; Coquia v. Fieldmen's
Insurance Co., Inc., 26 SCRA 178 [1968]).
It is undisputed that the charter party, basis of the complaint, was entered into
between petitioner Marimperio Compañia Naviera, S.A., through its duly
authorized agent in London, the N & J Vlassopulos Ltd., and the Interocean Shipping
Company of Manila through the latter's duly authorized broker, the Overseas
Steamship Co., Inc., represented by Matthews, Wrightson Burbridge Ltd., for the
Charter of the 'SS PAXOI' (Amended Complaint, Amended Record on Appeal, p. 33;
Complaint-in-Intervention, Amended Record on Appeal, p. 87). It is also alleged in
both the Complaint (Amended Record on Appeal 18) and the Amended Complaint
(Amended Record on Appeal, p. 39) that the Interocean Shipping Company sublet
the said vessel to respondent Union Import and Export Corporation which in turn
sublet the same to respondent Philippine Traders Corporation. It is admitted by
respondents that the charterer is the Interocean Shipping Company. Even
paragraph 3 of the complaint-in-intervention alleges that respondents were given
the use of the vessel "pursuant to paragraph 20 of the Uniform Time Charter ..."
which precisely provides for the subletting of the vessel by the charterer (Rollo, p.
24). Furthermore, Article 652 of the Code of Commerce provides that the charter
party shall contain, among others, the name, surname, and domicile of the
charterer, and if he states that he is acting by commission, that of the person for
whose account he makes the contract. It is obvious from the disclosure made in the
charter party by the authorized broker, the Overseas Steamship Co., Inc., that the
real charterer is the Interocean Shipping Company (which sublet the vessel to
Union Import and Export Corporation which in turn sublet it to Philippine Traders
Corporation).
In a sub-lease, there are two leases and two distinct judicial relations although
intimately connected and related to each other, unlike in a case of assignment of
lease, where the lessee transmits absolutely his right, and his personality
disappears; there only remains in the juridical relation two persons, the lessor and
the assignee who is converted into a lessee (Moreno, Philippine Law Dictionary,
2nd ed., p. 594). In other words, in a contract of sub-lease, the personality of the
lessee does not disappear; he does not transmit absolutely his rights and
obligations to the sub-lessee; and the sub-lessee generally does not have any direct
action against the owner of the premises as lessor, to require the compliance of
the obligations contracted with the plaintiff as lessee, or vice versa (10 Manresa,
Spanish Civil Code, 438).
However, there are at least two instances in the Civil Code which allow the lessor
to bring an action directly (accion directa) against the sub-lessee (use and
preservation of the premises under Art. 1651, and rentals under Article 1652).
Art. 1651 reads:
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Without prejudice to his obligation toward the sub-lessor, the sub-lessee is bound
to the lessor for all acts which refer to the use and preservation of the thing leased
in the manner stipulated between the lessor and the lessee.
Article 1652 reads:
The sub-lessee is subsidiarily liable to the lessor for any rent due from the lessee.
However, the sub-lessee shall not be responsible beyond the amount of rent due
from him, in accordance with the terms of the sub-lease, at the time of the extra-
judicial demand by the lessor.
Payments of rent in advance by the sub-lessee shall be deemed not to have been
made, so far as the lessor's claim is concerned, unless said payments were effected
in virtue of the custom of the place.
It will be noted however that in said two Articles it is not the sub-lessee, but the
lessor, who can bring the action. In the instant case, it is clear that the sub-lessee
as such cannot maintain the suit they filed with the trial court (See A. Maluenda
and Co. v. Enriquez, 46 Phil. 916).
In the law of agency "with an undisclosed principal, the Civil Code in Article 1883
reads:
If an agent acts in his own name, the principal has no right of action against the
persons with whom the agent has contracted; neither have such persons against
the principal.
In such case the agent is the one directly bound in favor of the person with whom
he has contracted, as if the transaction were his own, except when the contract
involves things belonging to the principal.
The provisions of this article shag be understood to be without prejudice to the
actions between the principal and agent.
While in the instant case, the true charterers of the vessel were the private
respondents herein and they chartered the vessel through an intermediary which
upon instructions from them did not disclose their names. Article 1883 cannot help
the private respondents, because although they were the actual principals in the
charter of the vessel, the law does not allow them to bring any action against the
adverse party and vice, versa.
II.
The answer to the question of whether or not the default of charterer in the
payment of the charter hire within the time agreed upon gives petitioner a right to
rescind the charter party extrajudicially, is undoubtedly in the affirmative.
Clause 6 of the Charter party specifically provides that the petitioner has the right
to withdraw the vessel fromthe service of the charterers, without noting any
protest and without interference of any court or any formality in the event that the
charterer defaults in the payment of hire. The payment of hire was to be made
every fifteen (1 5) days in advance.
It is undisputed that the vessel "SS PAXOI" came on hire on March 27, 1965. On
March 29, Vlassopulos notified by letter the charterer through Matthews of that
fact, enclosing therein owner's debit note for a 15-day hire payable in advance. On
March 30, 1965 the shipowner again notified Matthews that the payment for the
first 15-day hire was overdue. Again on April 2 the shipowner telexed Matthews
insisting on the payment, but it was only on April 7 that the amount of US
$22,500.00 was remitted to Williams Deacons Bank, Ltd. through the Rizal
Commercial Banking Corporation for the account of Vlassopulos, agent of
petitioner, corresponding to the first 15-day hire from March 27 to April 11, 1965.
On April 8, 1965, Vlassopulos acknowledged receipt of the payment, again with a
debit note for the second 15-day hire and overtime which was due on April 11,
1965. On April 23, 1965, Vlassopulos notified Matthews by telex that charterers
were in default and in accordance with Clause 6 of the charter party, the vessel was
being withdrawn from charterer's service, holding them responsible for unpaid hire
and all other legal claims of the owner. Respondents remitted the sum of
US$6,000.00 and US$10,000.00 to the bank only on April 26, 1965 representing
payment for the second 15-day hire from April 12 to April 27, 1965, received and
accepted by the payee, Vlassopulos without any comment or protest.
Unquestionably, as of April 23, 1965, when Vlassopulos notified Matthews of the
withdrawal of the vessel from the Charterers' service, the latter was already in
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default. Accordingly, under Clause 6 of the charter party the owners had the right G.R. No. L-13505 February 4, 1919
to withdraw " SS PAXO I " from the service of charterers, which withdrawal they
GEO. W. DAYWALT, plaintiff-appellant,
did.
vs.
The question that now arises is whether or not petitioner can rescind the charter LA CORPORACION DE LOS PADRES AGUSTINOS RECOLETOS, ET AL., defendants-
party extra-judicially. The answer is also in the affirmative. A contract is the law appellees.
between the contracting parties, and when there is nothing in it which is contrary
C. C. Cohn and Thos. D. Aitken for appellant.
to law, morals, good customs, public policy or public order, the validity of the
Crossfield & O'Brien for appellee.
contract must be sustained (Consolidated Textile Mills, Inc. v. Reparations
Commission, 22 SCRA 674 [19681; Lazo v. Republic Surety & Insurance Co., Inc., 31 STREET, J.:
SCRA 329 [1970]; Castro v. Court of Appeals, 99 SCRA 722 [1980]; Escano v. Court
of Appeals, 100 SCRA 197 [1980]). A judicial action for the rescission of a contract In the year 1902, Teodorica Endencia, an unmarried woman, resident in the
is not necessary where the contract provides that it may be revoked and cancelled Province of Mindoro, executed a contract whereby she obligated herself to convey
for violation of any of its terms and conditions (Enrile v. Court of Appeals, 29 SCRA to Geo. W. Daywalt, a tract of land situated in the barrio of Mangarin, municipality
504 [1969]; University of the Philippines v. De los Angeles, 35 SCRA 102 [1970]; of Bulalacao, now San Jose, in said province. It was agreed that a deed should be
Palay, Inc. v. Clave, 124 SCRA 638 [1983]). executed as soon as the title to the land should be perfected by proceedings in the
Court of Land Registration and a Torrens certificate should be produced therefore
PREMISES CONSIDERED, (1) the decision of the Court of Appeals affirming the in the name of Teodorica Endencia. A decree recognizing the right of Teodorica as
amended decision of the Court of First Instance of Manila, Branch VIII, is hereby owner was entered in said court in August 1906, but the Torrens certificate was not
REVERSED and SET ASIDE except for that portion of the decision dismissing the issued until later. The parties, however, met immediately upon the entering of this
complaint-in-intervention; and (2) the original decision of the trial court is hereby decree and made a new contract with a view to carrying their original agreement
REINSTATED. into effect. This new contract was executed in the form of a deed of conveyance
and bears date of August 16, 1906. The stipulated price was fixed at P4,000, and
SO ORDERED.
the area of the land enclosed in the boundaries defined in the contract was stated
to be 452 hectares and a fraction.

The second contract was not immediately carried into effect for the reason that
the Torrens certificate was not yet obtainable and in fact said certificate was not
issued until the period of performance contemplated in the contract had expired.
Accordingly, upon October 3, 1908, the parties entered into still another
agreement, superseding the old, by which Teodorica Endencia agreed upon
receiving the Torrens title to the land in question, to deliver the same to the
Hongkong and Shanghai Bank in Manila, to be forwarded to the Crocker National
Bank in San Francisco, where it was to be delivered to the plaintiff upon payment
of a balance of P3,100.

Page | 102
The Torrens certificate was in time issued to Teodorica Endencia, but in the course
of the proceedings relative to the registration of the land, it was found by official
survey that the area of the tract inclosed in the boundaries stated in the contract
was about 1.248 hectares of 452 hectares as stated in the contract. In view of this
development Teodorica Endencia became reluctant to transfer the whole tract to
the purchaser, asserting that she never intended to sell so large an amount of land
and that she had been misinformed as to its area.
This attitude of hers led to litigation in which Daywalt finally succeeded, upon
appeal to the Supreme Court, in obtaining a decree for specific performance; and
Teodorica Endencia was ordered to convey the entire tract of land to Daywalt
pursuant to the contract of October 3, 1908, which contract was declared to be in
full force and effect. This decree appears to have become finally effective in the
early part of the year 1914.1
The defendant, La Corporacion de los Padres Recoletos, is a religious corporation,
with its domicile in the city of Manila. Said corporation was formerly the owner of
a large tract of land, known as the San Jose Estate, on the island of Mindoro, which
was sold to the Government of the Philippine Islands in the year 1909. The same
corporation was at this time also the owner of another estate on the same island
immediately adjacent to the land which Teodorica Endencia had sold to Geo. W.
Daywalt; and for many years the Recoletos Fathers had maintained large herds of
cattle on the farms referred to. Their representative, charged with management of
these farms, was father Isidoro Sanz, himself a members of the order. Father Sanz
had long been well acquainted with Teodorica Endencia and exerted over her an
influence and ascendency due to his religious character as well as to the personal
friendship which existed between them. Teodorica appears to be a woman of little
personal force, easily subject to influence, and upon all the important matters of
business was accustomed to seek, and was given, the advice of father Sanz and
other members of his order with whom she came in contact.
Father Sanz was fully aware of the existence of the contract of 1902 by which
Teodorica Endencia agreed to sell her land to the plaintiff as well as of the later
important developments connected with the history of that contract and the
contract substituted successively for it; and in particular Father Sanz, as well as
other members of the defendant corporation, knew of the existence of the contract
of October 3, 1908, which, as we have already seen finally fixed the rights of the
parties to the property in question. When the Torrens certificate was finally issued
in 1909 in favor of Teodorica Endencia, she delivered it for safekeeping to the
defendant corporation, and it was then taken to Manila where it remained in the
custody and under the control of P. Juan Labarga the procurador and chief official
of the defendant corporation, until the deliver thereof to the plaintiff was made
compulsory by reason of the decree of the Supreme Court in 1914.
When the defendant corporation sold the San Jose Estate, it was necessary to bring
the cattle off of that property; and, in the first half of 1909, some 2,368 head were
removed to the estate of the corporation immediately adjacent to the property
which the plaintiff had purchased from Teodorica Endencia. As Teodorica still
retained possession of said property Father Sanz entered into an arrangement with
her whereby large numbers of cattle belonging to the defendant corporation were
pastured upon said land during a period extending from June 1, 1909, to May 1,
1914.
Under the first cause stated in the complaint in the present action the plaintiff
seeks to recover from the defendant corporation the sum of P24,000, as damages
for the use and occupation of the land in question by reason of the pasturing of
cattle thereon during the period stated. The trial court came to the conclusion that
the defendant corporation was liable for damages by reason of the use and
occupation of the premises in the manner stated; and fixed the amount to be
recovered at P2,497. The plaintiff appealed and has assigned error to this part of
the judgment of the court below, insisting that damages should have been awarded
in a much larger sum and at least to the full extent of P24,000, the amount claimed
in the complaint.
As the defendant did not appeal, the property of allowing damages for the use and
occupation of the land to the extent o P2,497, the amount awarded, is not now in
question an the only thing here to be considered, in connection with this branch of
the case, is whether the damages allowed under this head should be increased. The
trial court rightly ignored the fact that the defendant corporation had paid
Teodorica Endencia of ruse and occupation of the same land during the period in
Page | 103
question at the rate of P425 per annum, inasmuch as the final decree of this court
in the action for specific performance is conclusive against her right, and as the
defendant corporation had notice of the rights of the plaintiff under this contract
of purchase, it can not be permitted that the corporation should escape liability in
this action by proving payment of rent to a person other than the true owner.
With reference to the rate of which compensation should be estimated the trial
court came to the following conclusion:
As to the rate of the compensation, the plaintiff contends that the defendant
corporation maintained at leas one thousand head of cattle on the land and that
the pasturage was of the value of forty centavos per head monthly, or P4,800
annually, for the whole tract. The court can not accept this view. It is rather
improbable that 1,248 hectares of wild Mindoro land would furnish sufficient
pasturage for one thousand head of cattle during the entire year, and, considering
the locality, the rate of forty centavos per head monthly seems too high. The
evidence shows that after having recovered possession of the land the plaintiff
rented it to the defendant corporation for fifty centavos per hectares annually, the
tenant to pay the taxes on the land, and this appears to be a reasonable rent. There
is no reason to suppose that the land was worth more for grazing purposes during
the period from 1909 to 1913, than it was at the later period. Upon this basis the
plaintiff is entitled to damages in the sum of p2,497, and is under no obligation to
reimburse the defendants for the land taxes paid by either of them during the
period the land was occupied by the defendant corporation. It may be mentioned
in this connection that the Lontok tract adjoining the land in question and
containing over three thousand hectares appears to have been leased for only
P1,000 a year, plus the taxes.
From this it will be seen that the trial court estimated the rental value of the land
for grazing purposes at 50 centavos per hectare per annum, and roughly adopted
the period of four years as the time for which compensation at that rate should be
made. As the court had already found that the defendant was liable for these
damages from June, 1, 1909, to May 1, 1914, or a period of four years and eleven
months, there seems some ground for the contention made in the appellant's first
assignment of error that the court's computation was erroneous, even accepting
the rule upon which the damages were assessed, as it is manifest that at the rate
of 50 centavos per hectare per annum, the damages for four years and eleven
months would be P3,090.
Notwithstanding this circumstance, we are of the opinion that the damages
assessed are sufficient to compensate the plaintiff for the use and occupation of
the land during the whole time it was used. There is evidence in the record strongly
tending to show that the wrongful use of the land by the defendant was not
continuous throughout the year but was confined mostly to the reason when the
forage obtainable on the land of the defendant corporation was not sufficient to
maintain its cattle, for which reason it became necessary to allow them to go over
to pasture on the land in question; and it is not clear that the whole of the land was
used for pasturage at any time. Considerations of this character probably led the
trial court to adopt four years as roughly being the period during which
compensation should be allowed. But whether this was advertently done or not,
we see no sufficient reason, in the uncertainty of the record with reference to the
number of the cattle grazed and the period when the land was used, for
substituting our guess for the estimate made by the trial court.
In the second cause of action stated in the complaint the plaintiff seeks to recover
from the defendant corporation the sum of P500,000, as damages, on the ground
that said corporation, for its own selfish purposes, unlawfully induced Teodorica
Endencia to refrain from the performance of her contract for the sale of the land
in question and to withhold delivery to the plaintiff of the Torrens title, and further,
maliciously and without reasonable cause, maintained her in her defense to the
action of specific performance which was finally decided in favor of the plaintiff in
this court. The cause of action here stated is based on liability derived from the
wrongful interference of the defendant in the performance of the contract
between the plaintiff and Teodorica Endencia; and the large damages laid in the
complaint were, according to the proof submitted by the plaintiff, incurred as a
result of a combination of circumstances of the following nature: In 1911, it
appears, the plaintiff, as the owner of the land which he had bought from Teodorica
Endencia entered into a contract (Exhibit C) with S. B. Wakefield, of San Francisco,
for the sale and disposal of said lands to a sugar growing and milling enterprise, the
successful launching of which depended on the ability of Daywalt to get possession
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of the land and the Torrens certificate of title. In order to accomplish this end, the
plaintiff returned to the Philippine Islands, communicated his arrangement to the
defendant,, and made repeated efforts to secure the registered title for delivery in
compliance with said agreement with Wakefield. Teodorica Endencia seems to
have yielded her consent to the consummation of her contract, but the Torrens
title was then in the possession of Padre Juan Labarga in Manila, who refused to
deliver the document. Teodorica also was in the end contract with the plaintiff,
with the result that the plaintiff was kept out of possession until the Wakefield
project for the establishment of a large sugar growing and milling enterprise fell
through. In the light of what has happened in recent years in the sugar industry, we
feel justified in saying that the project above referred to, if carried into effect, must
inevitably have proved a great success.
The determination of the issue presented in this second cause of action requires a
consideration of two points. The first is whether a person who is not a party to a
contract for the sale of land makes himself liable for damages to the vendee,
beyond the value of the use and occupation, by colluding with the vendor and
maintaining him in the effort to resist an action for specific performance. The
second is whether the damages which the plaintiff seeks to recover under this head
are too remote and speculative to be the subject of recovery.
As preliminary to a consideration of the first of these questions, we deem it well it
dispose of the contention that the members of the defendants corporation, in
advising and prompting Teodorica Endencia not to comply with the contract of sale,
were actuated by improper and malicious motives. The trial court found that this
contention was not sustained, observing that while it was true that the
circumstances pointed to an entire sympathy on the part of the defendant
corporation with the efforts of Teodorica Endencia to defeat the plaintiff's claim to
the land, the fact that its officials may have advised her not to carry the contract
into effect would not constitute actionable interference with such contract. It may
be added that when one considers the hardship that the ultimate performance of
that contract entailed on the vendor, and the doubt in which the issue was involved
— to the extent that the decision of the Court of the First Instance was unfavorable
to the plaintiff and the Supreme Court itself was divided — the attitude of the
defendant corporation, as exhibited in the conduct of its procurador, Juan Labarga,
and other members of the order of the Recollect Fathers, is not difficult to
understand. To our mind a fair conclusion on this feature of the case is that father
Juan Labarga and his associates believed in good faith that the contract cold not be
enforced and that Teodorica would be wronged if it should be carried into effect.
Any advice or assistance which they may have given was, therefore, prompted by
no mean or improper motive. It is not, in our opinion, to be denied that Teodorica
would have surrendered the documents of title and given possession of the land
but for the influence and promptings of members of the defendants corporation.
But we do not credit the idea that they were in any degree influenced to the giving
of such advice by the desire to secure to themselves the paltry privilege of grazing
their cattle upon the land in question to the prejudice of the just rights of the
plaintiff.
The attorney for the plaintiff maintains that, by interfering in the performance of
the contract in question and obstructing the plaintiff in his efforts to secure the
certificate of tittle to the land, the defendant corporation made itself a co-
participant with Teodorica Endencia in the breach of said contract; and inasmuch
as father Juan Labarga, at the time of said unlawful intervention between the
contracting parties, was fully aware of the existence of the contract (Exhibit C)
which the plaintiff had made with S. B. Wakefield, of San Francisco, it is insisted
that the defendant corporation is liable for the loss consequent upon the failure of
the project outlined in said contract.
In this connection reliance is placed by the plaintiff upon certain American and
English decisions in which it is held that a person who is a stranger to contract may,
by an unjustifiable interference in the performance thereof, render himself liable
for the damages consequent upon non-performance. It is said that the doctrine of
these cases was recognized by this court in Gilchrist vs. Cuddy (29 Phil. Rep., 542);
and we have been earnestly pressed to extend the rule there enunciated to the
situation here presente.
Somewhat more than half a century ago the English Court of the Queen's Bench
saw its way clear to permit an action for damages to be maintained against a
stranger to a contract wrongfully interfering in its performance. The leading case
on this subject is Lumley vs. Gye ([1853], 2 El. & Bl., 216). It there appeared that the
Page | 105
plaintiff, as manager of a theatre, had entered into a contract with Miss Johanna
Wagner, an opera singer,, whereby she bound herself for a period to sing in the
plaintiff's theatre and nowhere else. The defendant, knowing of the existence of
this contract, and, as the declaration alleged, "maliciously intending to injure the
plaintiff," enticed and produced Miss Wagner to leave the plaintiff's employment.
It was held that the plaintiff was entitled to recover damages. The right which was
here recognized had its origin in a rule, long familiar to the courts of the common
law, to the effect that any person who entices a servant from his employment is
liable in damages to the master. The master's interest in the service rendered by
his employee is here considered as a distinct subject of juridical right. It being thus
accepted that it is a legal wrong to break up a relation of personal service, the
question now arose whether it is illegal for one person to interfere with any
contract relation subsisting between others. Prior to the decision of Lumley vs. Gye
[supra] it had been supposed that the liability here under consideration was limited
to the cases of the enticement of menial servants, apprentices, and others to whom
the English Statutes of Laborers were applicable. But in the case cited the majority
of the judges concurred in the opinion that the principle extended to all cases of
hiring. This doctrine was followed by the Court of Appeal in Bowen vs. Hall ([1881],
6 Q. B., Div., 333); and in Temperton vs. Russell ([1893], Q. B., 715), it was held that
the right of action for maliciously procuring a breach of contract is not confined to
contracts for personal services, but extends to contracts in general. In that case the
contract which the defendant had procured to be breached was a contract for the
supply of building material.
Malice in some form is generally supposed to be an essential ingredient in cases of
interference with contract relations. But upon the authorities it is enough if the
wrong-doer, having knowledge of the existence of the contract relations, in bad
faith sets about to break it up. Whether his motive is to benefit himself or gratify
his spite by working mischief to the employer is immaterial. Malice in the sense of
ill-will or spite is not essential.
Upon the question as to what constitutes legal justification, a good illustration was
put in the leading case. If a party enters into contract to go for another upon a
journey to a remote and unhealthful climate, and a third person, with a bona
fide purpose of benefiting the one who is under contract to go, dissuades him from
the step, no action will lie. But if the advice is not disinterested and the persuasion
is used for "the indirect purpose of benefiting the defendant at the expense of the
plaintiff," the intermedler is liable if his advice is taken and the contract broken.
The doctrine embodied in the cases just cited has sometimes been found useful, in
the complicated relations of modern industry, as a means of restraining the
activities of labor unions and industrial societies when improperly engaged in the
promotion of strikes. An illustration of the application of the doctrine in question
in a case of this kind is found in South Wales Miners Federation vs. Glamorgan Coal
Co. ([1905]), A. C., 239). It there appeared that certain miners employed in the
plaintiff's collieries, acting under the order of the executive council of the
defendant federation, violated their contract with the plaintiff by abstaining from
work on certain days. The federation and council acted without any actual malice
or ill-will towards the plaintiff, and the only object of the order in question was that
the price of coal might thereby be kept up, a factor which affected the miner's wage
scale. It was held that no sufficient justification was shown and that the federation
was liable.
In the United States, the rule established in England by Lumley vs. Gye [supra] and
subsequent cases is commonly accepted, though in a few of the States the broad
idea that a stranger to a contract can be held liable upon its is rejected, and in these
jurisdictions the doctrine, if accepted at all, is limited to the situation where the
contract is strictly for personal service. (Boyson vs. Thorn, 98 Cal., 578; Chambers
& Marshall vs. Baldwin 91 Ky., 121; Bourlier vs. Macauley, 91 Ky., 135; Glencoe
Land & Gravel Co. vs. Hudson Bros. Com. Co., 138 Mo., 439.)
It should be observed in this connection that, according to the English and
American authorities, no question can be made as to the liability to one who
interferes with a contract existing between others by means which, under known
legal cannons, can be denominated an unlawful means. Thus, if performance is
prevented by force, intimidation, coercion, or threats, or by false or defamatory
statements, or by nuisance or riot, the person using such unlawful means is, under
all the authorities, liable for the damage which ensues. And in jurisdictions where
the doctrine of Lumley vs. Gye [supra] is rejected, no liability can arise from a
Page | 106
meddlesome and malicious interference with a contract relation unless some such
unlawful means as those just indicated are used. (See cases last above cited.)
This brings us to the decision made by this court in Gilchrist vs. Cuddy (29 Phil. Rep.,
542). It there appeared that one Cuddy, the owner of a cinematographic film, let it
under a rental contract to the plaintiff Gilchrist for a specified period of time. In
violation of the terms of this agreement, Cuddy proceeded to turn over the film
also under a rental contract, to the defendants Espejo and Zaldarriaga. Gilchrist
thereupon restored to the Court of First Instance and produced an injunction
restraining the defendants from exhibiting the film in question in their theater
during the period specified in the contract of Cuddy with Gilchrist. Upon appeal to
this court it was in effect held that the injunction was not improperly granted,
although the defendants did not, at the time their contract was made, know the
identity of the plaintiff as the person holding the prior contract but did know of the
existence of a contract in favor of someone. It was also said arguendo, that the
defendants would have been liable in damages under article 1902 of the Civil Code,
if the action had been brought by the plaintiff to recover damages. The force of the
opinion is, we think, somewhat weakened by the criticism contain in the concurring
opinion, where it is said that the question of breach of contract by inducement was
not really involved in the case. Taking the decision upon the point which was rally
decided, it is authority for the proposition that one who buys something which he
knows has been sold to some other person can be restrained from using that thing
to the prejudice of the person having the prior and better right.
Translated into terms applicable to the case at bar, the decision in
Gilchrist vs. Cuddy (29 Phil. Rep., 542), indicates that the defendant corporation,
having notice of the sale of the land in question to Daywalt, might have been
enjoined by the latter from using the property for grazing its cattle thereon. That
the defendant corporation is also liable in this action for the damage resulting to
the plaintiff from the wrongful use and occupation of the property has also been
already determined. But it will be observed that in order to sustain this liability it is
not necessary to resort to any subtle exegesis relative to the liability of a stranger
to a contract for unlawful interference in the performance thereof. It is enough that
defendant use the property with notice that the plaintiff had a prior and better
right.
Article 1902 of the Civil Code declares that any person who by an act or omission,
characterized by fault or negligence, causes damage to another shall be liable for
the damage so done. Ignoring so much of this article as relates to liability for
negligence, we take the rule to be that a person is liable for damage done to
another by any culpable act; and by "culpable act" we mean any act which is
blameworthy when judged by accepted legal standards. The idea thus expressed is
undoubtedly broad enough to include any rational conception of liability for the
tortious acts likely to be developed in any society. Thus considered, it cannot be
said that the doctrine of Lumley vs. Gye [supra] and related cases is repugnant to
the principles of the civil law.
Nevertheless, it must be admitted that the codes and jurisprudence of the civil law
furnish a somewhat uncongenial field in which to propagate the idea that a
stranger to a contract may sued for the breach thereof. Article 1257 of the Civil
Code declares that contracts are binding only between the parties and their privies.
In conformity with this it has been held that a stranger to a contract has no right of
action for the nonfulfillment of the contract except in the case especially
contemplated in the second paragraph of the same article. (Uy Tam and Uy
Yet vs. Leonard, 30 Phil. Rep., 471.) As observed by this court in Manila Railroad
Co. vs. Compañia Transatlantica, R. G. No. 11318 (38 Phil. Rep., 875), a contract,
when effectually entered into between certain parties, determines not only the
character and extent of the liability of the contracting parties but also the person
or entity by whom the obligation is exigible. The same idea should apparently be
applicable with respect to the person against whom the obligation of the contract
may be enforced; for it is evident that there must be a certain mutuality in the
obligation, and if the stranger to a contract is not permitted to sue to enforce it, he
cannot consistently be held liable upon it.
If the two antagonistic ideas which we have just brought into juxtaposition are
capable of reconciliation, the process must be accomplished by distinguishing
clearly between the right of action arising from the improper interference with the
contract by a stranger thereto, considered as an independent act generate of civil
liability, and the right of action ex contractu against a party to the contract resulting
from the breach thereof. However, we do not propose here to pursue the matter
further, inasmuch as, for reasons presently to be stated, we are of the opinion that
Page | 107
neither the doctrine of Lumley vs. Gye [supra] nor the application made of it by this
court in Gilchrist vs. Cuddy (29 Phil. Rep., 542), affords any basis for the recovery
of the damages which the plaintiff is supposed to have suffered by reason of his
inability to comply with the terms of the Wakefield contract.
Whatever may be the character of the liability which a stranger to a contract may
incur by advising or assisting one of the parties to evade performance, there is one
proposition upon which all must agree. This is, that the stranger cannot become
more extensively liable in damages for the nonperformance of the contract than
the party in whose behalf he intermeddles. To hold the stranger liable for damages
in excess of those that could be recovered against the immediate party to the
contract would lead to results at once grotesque and unjust. In the case at bar, as
Teodorica Endencia was the party directly bound by the contract, it is obvious that
the liability of the defendant corporation, even admitting that it has made itself
coparticipant in the breach of the contract, can in no even exceed hers. This leads
us to consider at this point the extent of the liability of Teodorica Endencia to the
plaintiff by reason of her failure to surrender the certificate of title and to place the
plaintiff in possession.
It should in the first place be noted that the liability of Teodorica Endencia for
damages resulting from the breach of her contract with Daywalt was a proper
subject for adjudication in the action for specific performance which Daywalt
instituted against her in 1909 and which was litigated by him to a successful
conclusion in this court, but without obtaining any special adjudication with
reference to damages. Indemnification for damages resulting from the breach of a
contract is a right inseparably annexed to every action for the fulfillment of the
obligation (art. 1124, Civil Code); and its is clear that if damages are not sought or
recovered in the action to enforce performance they cannot be recovered in an
independent action. As to Teodorica Endencia, therefore, it should be considered
that the right of action to recover damages for the breach of the contract in
question was exhausted in the prior suit. However, her attorneys have not seen fit
to interpose the defense of res judicata in her behalf; and as the defendant
corporation was not a party to that action, and such defense could not in any event
be of any avail to it, we proceed to consider the question of the liability of Teodorica
Endencia for damages without refernce to this point.
The most that can be said with refernce to the conduct of Teodorica Endencia is
that she refused to carry out a contract for the sale of certain land and resisted to
the last an action for specific performance in court. The result was that the plaintiff
was prevented during a period of several years from exerting that control over the
property which he was entitled to exert and was meanwhile unable to dispose of
the property advantageously. Now, what is the measure of damages for the
wrongful detention of real property by the vender after the time has come for him
to place the purchaser in possession?
The damages ordinarily and normally recoverable against a vendor for failure to
deliver land which he has contracted to deliver is the value of the use and
occupation of the land for the time during which it is wrongfully withheld. And of
course where the purchaser has not paid the purchaser money, a deduction may
be made in respect to the interest on the money which constitutes the purchase
price. Substantially the same rule holds with respect to the liability of a landlord
who fails to put his tenant in possession pursuant to contract of lease. The measure
of damages is the value of the leasehold interest, or use and occupation, less the
stipulated rent, where this has not been paid. The rule that the measure of
damages for the wrongful detention of land is normally to be found in the value of
use and occupation is, we believe, one of the things that may be considered certain
in the law (39 cyc., 1630; 24 Cyc., 1052 Sedgewick on Damages, Ninth ed., sec. 185.)
— almost as wellsettled, indeed, as the rule that the measure of damages for the
wrongful detention of money is to be found in the interest.
We recognize the possibility that more extensive damages may be recovered
where, at the time of the creation of the contractual obligation, the vendor, or
lessor, is aware of the use to which the purchaser or lessee desires to put the
property which is the subject of the contract, and the contract is made with the
eyes of the vendor or lessor open to the possibility of the damage which may result
to the other party from his own failure to give possession. The case before us is not
this character, inasmuch as at the time when the rights of the parties under the
contract were determined, nothing was known to any to them about the San
Francisco capitalist who would be willing to back the project portrayed in Exhibit C.
Page | 108
The extent of the liability for the breach of a contract must be determined in the
light of the situation in existence at the time the contract is made; and the damages
ordinarily recoverable are in all events limited to such as might be reasonable are
in all events limited to such as might be reasonably foreseen in the light of the facts
then known to the contracting parties. Where the purchaser desires to protect
himself, in the contingency of the failure of the vendor promptly to give possession,
from the possibility of incurring other damages than such as the incident to the
normal value of the use and occupation, he should cause to be inserted in the
contract a clause providing for stipulated amount to the paid upon failure of the
vendor to give possession; and not case has been called to our attention where, in
the absence of such a stipulation, damages have been held to be recoverable by
the purchaser in excess of the normal value of use and occupation. On the contrary,
the most fundamental conceptions of the law relative to the assessment of
damages are inconsistent with such idea.
The principles governing this branch of the law were profoundly considered in the
case Hadley vs. Baxendale (9 Exch., 341), decided in the English Court of Exchequer
in 1854; and a few words relative to the principles governing will here be found
instructive. The decision in that case is considered a leading authority in the
jurisprudence of the common law. The plaintiffs in that case were proprietors of a
mill in Gloucester, which was propelled by steam, and which was engaged in
grinding and supplying meal and flour to customers. The shaft of the engine got
broken, and it became necessarily that the broken shaft be sent to an engineer or
foundry man at Greenwich, to serve as a model for casting or manufacturing
another that would fit into the machinery. The broken shaft could be delivered at
Greenwich on the second day after its receipts by the carrier it. It was delivered to
the defendants, who were common carriers engaged in that business between
these points, and who had told plaintiffs it would be delivered at Greenwich on the
second day after its delivery to them, if delivered at a given hour. The carriers were
informed that the mill was stopped, but were not informed of the special purpose
for which the broken shaft was desired to forwarded, They were not told the mill
would remain idle until the new shaft would be returned, or that the new shaft
could not be manufactured at Greenwich until the broken one arrived to serve as
a model. There was delay beyond the two days in delivering the broken shaft at
Greenwich, and a corresponding delay in starting the mill. No explanation of the
delay was offered by the carriers. The suit was brought to recover damages for the
lost profits of the mill, cause by the delay in delivering the broken shaft. It was held
that the plaintiff could not recover.
The discussion contained in the opinion of the court in that case leads to the
conclusion that the damages recoverable in case of the breach of a contract are
two sorts, namely, (1) the ordinary, natural, and in a sense necessary damage; and
(2) special damages.
Ordinary damages is found in all breaches of contract where the are no special
circumstances to distinguish the case specially from other contracts. The
consideration paid for an unperformed promise is an instance of this sort of
damage. In all such cases the damages recoverable are such as naturally and
generally would result from such a breach, "according to the usual course of
things." In case involving only ordinary damage no discussion is ever indulged as to
whether that damage was contemplated or not. This is conclusively presumed from
the immediateness and inevitableness of the damage, and the recovery of such
damage follows as a necessary legal consequence of the breach. Ordinary damage
is assumed as a matter of law to be within the contemplation of the parties.
Special damage, on the other hand, is such as follows less directly from the breach
than ordinary damage. It is only found in case where some external condition, apart
from the actual terms to the contract exists or intervenes, as it were, to give a turn
to affairs and to increase damage in a way that the promisor, without actual notice
of that external condition, could not reasonably be expected to foresee.
Concerning this sort of damage, Hadley vs. Baxendale (1854) [supra] lays down the
definite and just rule that before such damage can be recovered the plaintiff must
show that the particular condition which made the damage a possible and likely
consequence of the breach was known to the defendant at the time the contract
was made.
The statement that special damages may be recovered where the likelihood of such
damages flowing from the breach of the contract is contemplated and foreseen by
the parties needs to be supplemented by a proposition which, though not
enunciated in Hadley vs. Baxendale, is yet clearly to be drawn from subsequent
Page | 109
cases. This is that where the damage which a plaintiff seeks to recover as special Our conclusion is that the judgment of the trial court should be affirmed, and it is
damage is so far speculative as to be in contemplation of law remote, notification so ordered, with costs against the appellant.
of the special conditions which make that damage possible cannot render the
Arellano, C.J., Torres, Carson, Araullo, Malcolm, Avanceña and Moir, JJ., concur.
defendant liable therefor. To bring damages which would ordinarily be treated as
remote within the category of recoverable special damages, it is necessary that the
condition should be made the subject of contract in such sense as to become an
express or implied term of the engagement. Horne vs. Midland R. Co. (L. R., 8 C. P.,
131) is a case where the damage which was sought to be recovered as special
damage was really remote, and some of the judges rightly places the disallowance
of the damage on the ground that to make such damage recoverable, it must so far
have been within the contemplation of the parties as to form at least an implied
term of the contract. But others proceeded on the idea that the notice given to the
defendant was not sufficiently full and definite. The result was the same in either
view. The facts in that case were as follows: The plaintiffs, shoe manufacturers at
K, were under contract to supply by a certain day shoes to a firm in London for the
French government. They delivered the shoes to a carrier in sufficient time for the
goods to reach London at the time stipulated in the contract and informed the
railroad agent that the shoes would be thrown back upon their hands if they did
not reach the destination in time. The defendants negligently failed to forward the
good in due season. The sale was therefore lost, and the market having fallen, the
plaintiffs had to sell at a loss.

In the preceding discussion we have considered the plaintiff's right chiefly against
Teodorica Endencia; and what has been said suffices in our opinion to demonstrate
that the damages laid under the second cause of action in the complaint could not
be recovered from her, first, because the damages laid under the second cause of
action in the complaint could not be recovered from her, first, because the
damages in question are special damages which were not within contemplation of
the parties when the contract was made, and secondly, because said damages are
too remote to be the subject of recovery. This conclusion is also necessarily fatal to
the right of the plaintiff to recover such damages from the defendant corporation,
for, as already suggested, by advising Teodorica not to perform the contract, said
corporation could in no event render itself more extensively liable than the
principle in the contract.

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G.R. No. L-9356 February 18, 1915
C. S. GILCHRIST, plaintiff-appellee,
vs.
E. A. CUDDY, ET AL., defendants.
JOSE FERNANDEZ ESPEJO and MARIANO ZALDARRIAGA, appellants.
C. Lozano for appellants.
Bruce, Lawrence, Ross and Block for appellee.
TRENT, J.:
An appeal by the defendants, Jose Fernandez Espejo and Mariano Zaldarriaga, from
a judgment of the Court of First Instance of Iloilo, dismissing their cross-complaint
upon the merits for damages against the plaintiff for the alleged wrongful issuance
of a mandatory and a preliminary injunction.
Upon the application of the appellee an ex parte mandatory injunction was issued
on the 22d of May, 1913, directing the defendant, E. A. Cuddy, to send to the
appellee a certain cinematograph film called "Zigomar" in compliance with an
alleged contract which had been entered into between these two parties, and at
the time an ex parte preliminary injunction was issued restraining the appellants
from receiving and exhibiting in their theater the Zigomar until further orders of
the court. On the 26th of that month the appellants appeared and moved the court
to dissolve the preliminary injunction. When the case was called for trial on August
6, the appellee moved for the dismissal of the complaint "for the reason that there
is no further necessity for the maintenance of the injunction." The motion was
granted without objection as to Cuddy and denied as to the appellants in order to
give them an opportunity to prove that the injunction were wrongfully issued and
the amount of damages suffered by reason thereof.
The pertinent part of the trial court's findings of fact in this case is as follows:
It appears in this case that Cuddy was the owner of the film Zigomar and that on
the 24th of April he rented it to C. S. Gilchrist for a week for P125, and it was to be
delivered on the 26th of May, the week beginning that day. A few days prior to this
Cuddy sent the money back to Gilchrist, which he had forwarded to him in Manila,
saying that he had made other arrangements with his film. The other arrangements
was the rental to these defendants Espejo and his partner for P350 for the week
and the injunction was asked by Gilchrist against these parties from showing it for
the week beginning the 26th of May.
It appears from the testimony in this case, conclusively, that Cuddy willfully violated
his contract, he being the owner of the picture, with Gilchrist because the
defendants had offered him more for the same period. Mr. Espejo at the trial on
the permanent injunction on the 26th of May admitted that he knew that Cuddy
was the owner of the film. He was trying to get it through his agents Pathe Brothers
in Manila. He is the agent of the same concern in Iloilo. There is in evidence in this
case on the trial today as well as on the 26th of May, letters showing that the Pathe
Brothers in Manila advised this man on two different occasions not to contend for
this film Zigomar because the rental price was prohibitive and assured him also that
he could not get the film for about six weeks. The last of these letters was written
on the 26th of April, which showed conclusively that he knew they had to get this
film from Cuddy and from this letter that the agent in Manila could not get it, but
he made Cuddy an offer himself and Cuddy accepted it because he was paying
about three times as much as he had contracted with Gilchrist for. Therefore, in
the opinion of this court, the defendants failed signally to show the injunction
against the defendant was wrongfully procured.
The appellants duly excepted to the order of the court denying their motion for
new trial on the ground that the evidence was insufficient to justify the decision
rendered. There is lacking from the record before us the deposition of the
defendant Cuddy, which apparently throws light upon a contract entered into
between him and the plaintiff Gilchrist. The contents of this deposition are
discussed at length in the brief of the appellants and an endeavor is made to show
that no such contract was entered into. The trial court, which had this deposition
before it, found that there was a contract between Cuddy and Gilchrist. Not having
the deposition in question before us, it is impossible to say how strongly it militates
against this findings of fact. By a series of decisions we have construed section 143
and 497 (2) of the Code of Civil Procedure to require the production of all the
evidence in this court. This is the duty of the appellant and, upon his failure to
perform it, we decline to proceed with a review of the evidence. In such cases we
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rely entirely upon the pleadings and the findings of fact of the trial court and
examine only such assigned errors as raise questions of law. (Ferrer vs. Neri
Abejuela, 9 Phil. Rep., 324; Valle vs. Galera, 10 Phil. Rep., 619;
Salvacion vs. Salvacion, 13 Phil. Rep., 366; Breta vs. Smith, Bell & Co., 15 Phil. Rep.,
446; Arroyo vs. Yulo, 18 Phil. Rep., 236; Olsen & Co. vs. Matson, Lord & Belser Co.,
19 Phil. Rep., 102; Blum vs. Barretto, 19 Phil. Rep., 161; Cuyugan vs. Aguas, 19 Phil.
Rep., 379; Mapa vs. Chaves, 20 Phil. Rep., 147; Mans vs. Garry, 20 Phil. Rep., 134.)
It is true that some of the more recent of these cases make exceptions to the
general rule. Thus, in Olsen & Co. vs. Matson, Lord & Belser Co., (19 Phil. Rep., 102),
that portion of the evidence before us tended to show that grave injustice might
result from a strict reliance upon the findings of fact contained in the judgment
appealed from. We, therefore, gave the appellant an opportunity to explain the
omission. But we required that such explanation must show a satisfactory reason
for the omission, and that the missing portion of the evidence must be submitted
within sixty days or cause shown for failing to do so. The other cases making
exceptions to the rule are based upon peculiar circumstances which will seldom
arise in practice and need not here be set forth, for the reason that they are wholly
inapplicable to the present case. The appellants would be entitled to indulgence
only under the doctrine of the Olsen case. But from that portion of the record
before us, we are not inclined to believe that the missing deposition would be
sufficient to justify us in reversing the findings of fact of the trial court that the
contract in question had been made. There is in the record not only the positive
and detailed testimony of Gilchrist to this effect, but there is also a letter of apology
from Cuddy to Gilchrist in which the former enters into a lengthy explanation of his
reasons for leasing the film to another party. The latter could only have been called
forth by a broken contract with Gilchrist to lease the film to him. We, therefore, fail
to find any reason for overlooking the omission of the defendants to bring up the
missing portion of the evidence and, adhering to the general rule above referred
to, proceed to examine the questions of law raised by the appellants.
From the above-quoted findings of fact it is clear that Cuddy, a resident of Manila,
was the owner of the "Zigomar;" that Gilchrist was the owner of a cinematograph
theater in Iloilo; that in accordance with the terms of the contract entered into
between Cuddy and Gilchrist the former leased to the latter the "Zigomar" for
exhibition in his (Gilchrist's) theater for the week beginning May 26, 1913; and that
Cuddy willfully violate his contract in order that he might accept the appellant's
offer of P350 for the film for the same period. Did the appellants know that they
were inducing Cuddy to violate his contract with a third party when they induced
him to accept the P350? Espejo admitted that he knew that Cuddy was the owner
of the film. He received a letter from his agents in Manila dated April 26, assuring
him that he could not get the film for about six weeks. The arrangement between
Cuddy and the appellants for the exhibition of the film by the latter on the 26th of
May were perfected after April 26, so that the six weeks would include and extend
beyond May 26. The appellants must necessarily have known at the time they
made their offer to Cuddy that the latter had booked or contracted the film for six
weeks from April 26. Therefore, the inevitable conclusion is that the appellants
knowingly induced Cuddy to violate his contract with another person. But there is
no specific finding that the appellants knew the identity of the other party. So we
must assume that they did not know that Gilchrist was the person who had
contracted for the film.
The appellants take the position that if the preliminary injunction had not been
issued against them they could have exhibited the film in their theater for a number
of days beginning May 26, and could have also subleased it to other theater owners
in the nearby towns and, by so doing, could have cleared, during the life of their
contract with Cuddy, the amount claimed as damages. Taking this view of the case,
it will be unnecessary for us to inquire whether the mandatory injunction against
Cuddy was properly issued or not. No question is raised with reference to the
issuance of that injunction.
The right on the part of Gilchrist to enter into a contract with Cuddy for the lease
of the film must be fully recognized and admitted by all. That Cuddy was liable in
an action for damages for the breach of that contract, there can be no doubt. Were
the appellants likewise liable for interfering with the contract between Gilchrist
and Cuddy, they not knowing at the time the identity of one of the contracting
parties? The appellants claim that they had a right to do what they did. The ground
upon which the appellants base this contention is, that there was no valid and
binding contract between Cuddy and Gilchrist and that, therefore, they had a right
to compete with Gilchrist for the lease of the film, the right to compete being a
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justification for their acts. If there had been no contract between Cuddy and
Gilchrist this defense would be tenable, but the mere right to compete could not
justify the appellants in intentionally inducing Cuddy to take away the appellee's
contractual rights.
Chief Justice Wells in Walker vs. Cronin (107 Mass., 555), said: "Everyone has a right
to enjoy the fruits and advantages of his own enterprise, industry, skill and credit.
He has no right to be free from malicious and wanton interference, disturbance or
annoyance. If disturbance or loss come as a result of competition, or the exercise
of like rights by others, it is damnum absque injuria, unless some superior right by
contract or otherwise is interfered with."
In Read vs. Friendly Society of Operative Stonemasons ([1902] 2 K. B., 88), Darling,
J., said: "I think the plaintiff has a cause of action against the defendants, unless the
court is satisfied that, when they interfered with the contractual rights of plaintiff,
the defendants had a sufficient justification for their interference; . . . for it is not a
justification that `they acted bona fide in the best interests of the society of
masons,' i. e., in their own interests. Nor is it enough that `they were not actuated
by improper motives.' I think their sufficient justification for interference with
plaintiff's right must be an equal or superior right in themselves, and that no one
can legally excuse himself to a man, of whose contract he has procured the breach,
on the ground that he acted on a wrong understanding of his own rights, or without
malice, or bona fide, or in the best interests of himself, or even that he acted as an
altruist, seeking only good of another and careless of his own advantage." (Quoted
with approval in Beekman vs. Marsters, 195 Mass., 205.)
It is said that the ground on which the liability of a third party for interfering with a
contract between others rests, is that the interference was malicious. The contrary
view, however, is taken by the Supreme Court of the United States in the case of
Angle vs. Railway Co. (151 U. S., 1). The only motive for interference by the third
party in that case was the desire to make a profit to the injury of one of the parties
of the contract. There was no malice in the case beyond the desire to make an
unlawful gain to the detriment of one of the contracting parties.
In the case at bar the only motive for the interference with the Gilchrist — Cuddy
contract on the part of the appellants was a desire to make a profit by exhibiting
the film in their theater. There was no malice beyond this desire; but this fact does
not relieve them of the legal liability for interfering with that contract and causing
its breach. It is, therefore, clear, under the above authorities, that they were liable
to Gilchrist for the damages caused by their acts, unless they are relieved from such
liability by reason of the fact that they did not know at the time the identity of the
original lessee (Gilchrist) of the film.
The liability of the appellants arises from unlawful acts and not from contractual
obligations, as they were under no such obligations to induce Cuddy to violate his
contract with Gilchrist. So that if the action of Gilchrist had been one for damages,
it would be governed by chapter 2, title 16, book 4 of the Civil Code. Article 1902
of that code provides that a person who, by act or omission, causes damages to
another when there is fault or negligence, shall be obliged to repair the damage do
done. There is nothing in this article which requires as a condition precedent to the
liability of a tort-feasor that he must know the identity of a person to whom he
causes damages. In fact, the chapter wherein this article is found clearly shows that
no such knowledge is required in order that the injured party may recover for the
damage suffered.
But the fact that the appellants' interference with the Gilchrist contract was
actionable did not of itself entitle Gilchrist to sue out an injunction against them.
The allowance of this remedy must be justified under section 164 of the Code of
Civil Procedure, which specifies the circumstance under which an injunction may
issue. Upon the general doctrine of injunction we said in Devesa vs. Arbes (13 Phil.
Rep., 273):
An injunction is a "special remedy" adopted in that code (Act No. 190) from
American practice, and originally borrowed from English legal procedure, which
was there issued by the authority and under the seal of a court of equity, and
limited, as in order cases where equitable relief is sought, to cases where there is
no "plain, adequate, and complete remedy at law," which "will not be granted
while the rights between the parties are undetermined, except in extraordinary
cases where material and irreparable injury will be done," which cannot be
compensated in damages, and where there will be no adequate remedy, and which
Page | 113
will not, as a rule, be granted, to take property out of the possession of one party "By `irreparable injury' is not meant such injury as is beyond the possibility of
and put it into that of another whose title has not been established by law. repair, or beyond possible compensation in damages, nor necessarily great injury
or great damage, but that species of injury, whether great or small, that ought not
We subsequently affirmed the doctrine of the Devesa case in Palafox vs. Madamba
to be submitted to on the one hand or inflicted on the other; and, because it is so
(19 Phil., Rep., 444), and we take this occasion of again affirming it, believing, as we
large on the one hand, or so small on the other, is of such constant and frequent
do, that the indiscriminate use of injunctions should be discouraged.
recurrence that no fair or reasonable redress can be had therefor in a court of law."
Does the fact that the appellants did not know at the time the identity of the (Quoted with approval in Nashville R. R. Co. vs. McConnell, 82 Fed., 65.)
original lessee of the film militate against Gilchrist's right to a preliminary
The case at bar is somewhat novel, as the only contract which was broken was that
injunction, although the appellant's incurred civil liability for damages for such
between Cuddy and Gilchrist, and the profits of the appellee depended upon the
interference? In the examination of the adjudicated cases, where in injunctions
patronage of the public, for which it is conceded the appellants were at liberty to
have been issued to restrain wrongful interference with contracts by strangers to
complete by all fair does not deter the application of remarked in the case of the
such contracts, we have been unable to find any case where this precise question
"ticket scalpers" (82 Fed., 65), the novelty of the facts does not deter the
was involved, as in all of those cases which we have examined, the identity of both
application of equitable principles. This court takes judicial notice of the general
of the contracting parties was known to the tort-feasors. We might say, however,
character of a cinematograph or motion-picture theater. It is a quite modern form
that this fact does not seem to have a controlling feature in those cases. There is
of the play house, wherein, by means of an apparatus known as a cinematograph
nothing in section 164 of the Code of Civil Procedure which indicates, even
or cinematograph, a series of views representing closely successive phases of a
remotely, that before an injunction may issue restraining the wrongful interference
moving object, are exhibited in rapid sequence, giving a picture which, owing to
with contrast by strangers, the strangers must know the identity of both parties. It
the persistence of vision, appears to the observer to be in continuous motion. (The
would seem that this is not essential, as injunctions frequently issue against
Encyclopedia Britanica, vol. 6, p. 374.) The subjects which have lent themselves to
municipal corporations, public service corporations, public officers, and others to
the art of the photographer in this manner have increased enormously in recent
restrain the commission of acts which would tend to injuriously affect the rights of
years, as well as have the places where such exhibition are given. The attendance,
person whose identity the respondents could not possibly have known beforehand.
and, consequently, the receipts, at one of these cinematograph or motion-picture
This court has held that in a proper case injunction will issue at the instance of a
theaters depends in no small degree upon the excellence of the photographs, and
private citizen to restrain ultra vires acts of public officials. (Severino vs. Governor-
it is quite common for the proprietor of the theater to secure an especially
General, 16 Phil. Rep., 366.) So we proceed to the determination of the main
attractive exhibit as his "feature film" and advertise it as such in order to attract
question of whether or not the preliminary injunction ought to have been issued in
the public. This feature film is depended upon to secure a larger attendance that if
this case.
its place on the program were filled by other films of mediocre quality. It is evident
As a rule, injunctions are denied to those who have an adequate remedy at law. that the failure to exhibit the feature film will reduce the receipts of the theater.
Where the choice is between the ordinary and the extraordinary processes of law,
Hence, Gilchrist was facing the immediate prospect of diminished profits by reason
and the former are sufficient, the rule will not permit the use of the latter. (In
of the fact that the appellants had induced Cuddy to rent to them the film Gilchrist
re Debs, 158 U. S., 564.) If the injury is irreparable, the ordinary process is
had counted upon as his feature film. It is quite apparent that to estimate with any
inadequate. In Wahle vs. Reinbach (76 Ill., 322), the supreme court of Illinois
decree of accuracy the damages which Gilchrist would likely suffer from such an
approved a definition of the term "irreparable injury" in the following language:
event would be quite difficult if not impossible. If he allowed the appellants to
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exhibit the film in Iloilo, it would be useless for him to exhibit it again, as the desire
of the public to witness the production would have been already satisfied. In this
extremity, the appellee applied for and was granted, as we have indicated, a
mandatory injunction against Cuddy requiring him to deliver the Zigomar to
Gilchrist, and a preliminary injunction against the appellants restraining them from
exhibiting that film in their theater during the weeks he (Gilchrist) had a right to
exhibit it. These injunction saved the plaintiff harmless from damages due to the
unwarranted interference of the defendants, as well as the difficult task which
would have been set for the court of estimating them in case the appellants had
been allowed to carry out their illegal plans. As to whether or not the mandatory
injunction should have been issued, we are not, as we have said, called upon to
determine. So far as the preliminary injunction issued against the appellants is
concerned, which prohibited them from exhibiting the Zigomar during the week
which Gilchrist desired to exhibit it, we are of the opinion that the circumstances
justified the issuance of that injunction in the discretion of the court.
We are not lacking in authority to support our conclusion that the court was
justified in issuing the preliminary injunction against the appellants. Upon the
precise question as to whether injunction will issue to restrain wrongful
interference with contracts by strangers to such contracts, it may be said that
courts in the United States have usually granted such relief where the profits of the
injured person are derived from his contractual relations with a large and indefinite
number of individuals, thus reducing him to the necessity of proving in an action
against the tort-feasor that the latter was responsible in each case for the broken
contract, or else obliging him to institute individual suits against each contracting
party and so exposing him to a multiplicity of suits. Sperry & Hutchinson
Co. vs. Mechanics' Clothing Co. (128 Fed., 800); Sperry & Hutchinson Co. vs. Louis
Weber & Co. (161 Fed., 219); Sperry & Hutchinson Co. vs. Pommer (199 Fed., 309);
were all cases wherein the respondents were inducing retail merchants to break
their contracts with the company for the sale of the latters' trading stamps.
Injunction issued in each case restraining the respondents from interfering with
such contracts.
In the case of the Nashville R. R. Co. vs. McConnell (82 Fed., 65), the court, among
other things, said: "One who wrongfully interferes in a contract between others,
and, for the purpose of gain to himself induces one of the parties to break it, is
liable to the party injured thereby; and his continued interference may be ground
for an injunction where the injuries resulting will be irreparable."
In Hamby & Toomer vs. Georgia Iron & Coal Co. (127 Ga., 792), it appears that the
respondents were interfering in a contract for prison labor, and the result would
be, if they were successful, the shutting down of the petitioner's plant for an
indefinite time. The court held that although there was no contention that the
respondents were insolvent, the trial court did not abuse its discretion in granting
a preliminary injunction against the respondents.
In Beekman vs. Marsters (195 Mass., 205), the plaintiff had obtained from the
Jamestown Hotel Corporation, conducting a hotel within the grounds of the
Jamestown Exposition, a contract whereby he was made their exclusive agent for
the New England States to solicit patronage for the hotel. The defendant induced
the hotel corporation to break their contract with the plaintiff in order to allow him
to act also as their agent in the New England States. The court held that an action
for damages would not have afforded the plaintiff adequate relief, and that an
injunction was proper compelling the defendant to desist from further interference
with the plaintiff's exclusive contract with the hotel company.
In Citizens' Light, Heat & Power Co. vs. Montgomery Light & Water Power Co. (171
Fed., 553), the court, while admitting that there are some authorities to the
contrary, held that the current authority in the United States and England is that:
The violation of a legal right committed knowingly is a cause of action, and that it
is a violation of a legal right to interfere with contractual relations recognized by
law, if there be no sufficient justification for the interference.
(Quinn vs. Leatham, supra, 510; Angle vs. Chicago, etc., Ry. Co., 151 U. S., 1; 14 Sup.
Ct., 240; 38 L. Ed., 55; Martens vs. Reilly, 109 Wis., 464, 84 N. W., 840;
Rice vs. Manley, 66 N. Y., 82; 23 Am. Rep., 30; Bitterman vs. L. & N. R. R. Co., 207 U.
S., 205; 28 Sup. Ct., 91; 52 L. Ed., 171; Beekman vs. Marsters, 195 Mass., 205; 80 N.
E., 817; 11 L. R. A. [N. S.] 201; 122 Am. St. Rep., 232; South Wales Miners'
Fed. vs. Glamorgan Coal Co., Appeal Cases, 1905, p. 239.)
See also Nims on Unfair Business Competition, pp. 351- 371.
Page | 115
In 3 Elliot on Contracts, section 2511, it is said: "Injunction is the proper remedy to
prevent a wrongful interference with contract by strangers to such contracts where
the legal remedy is insufficient and the resulting injury is irreparable. And where
there is a malicious interference with lawful and valid contracts a permanent
injunction will ordinarily issue without proof of express malice. So, an injunction
may be issued where the complainant to break their contracts with him by agreeing
to indemnify who breaks his contracts of employment may be adjoined from
including other employees to break their contracts and enter into new contracts
with a new employer of the servant who first broke his contract. But the remedy
by injunction cannot be used to restrain a legitimate competition, though such
competition would involve the violation of a contract. Nor will equity ordinarily
enjoin employees who have quit the service of their employer from attempting by
proper argument to persuade others from taking their places so long as they do not
resort to force or intimidations on obstruct the public thoroughfares."
Beekman vs. Marster, supra, is practically on all fours with the case at bar in that
there was only one contract in question and the profits of the injured person
depended upon the patronage of the public. Hamby & Toomer vs. Georgia Iron &
Coal Co., supra, is also similar to the case at bar in that there was only one contract,
the interference of which was stopped by injunction.
For the foregoing reasons the judgment is affirmed, with costs, against the
appellants.
Arellano, C.J., Torres, Carson and Araullo, JJ., concur.
[G.R. No. L-8437. November 28, 1956.]
ESTATE OF K. H. HEMADY, deceased, vs. LUZON SURETY CO., INC., claimant-
Appellant.
DECISION
REYES, J. B. L., J.:
Appeal by Luzon Surety Co., Inc., from an order of the Court of First Instance of
Rizal, presided by Judge Hermogenes Caluag, dismissing its claim against the Estate
of K. H. Hemady (Special Proceeding No. Q-293) for failure to state a cause of
action.
The Luzon Surety Co. had filed a claim against the Estate based on twenty different
indemnity agreements, or counter bonds, each subscribed by a distinct principal
and by the deceased K. H. Hemady, a surety solidary guarantor) in all of them, in
consideration of the Luzon Surety Co.’s of having guaranteed, the various principals
in favor of different creditors. The twenty counterbonds, or indemnity agreements,
all contained the following stipulations:chanroblesvirtuallawlibrary
“Premiums. — As consideration for this suretyship, the undersigned jointly and
severally, agree to pay the COMPANY the sum of ________________ (P______)
pesos, Philippines Currency, in advance as premium there of for every __________
months or fractions thereof, this ________ or any renewal or substitution thereof
is in effect.
Indemnity. — The undersigned, jointly and severally, agree at all times to indemnify
the COMPANY and keep it indemnified and hold and save it harmless from and
against any and all damages, losses, costs, stamps, taxes, penalties, charges, and
expenses of whatsoever kind and nature which the COMPANY shall or may, at any
time sustain or incur in consequence of having become surety upon this bond or
any extension, renewal, substitution or alteration thereof made at the instance of
the undersigned or any of them or any order executed on behalf of the undersigned
or any of them; chan roblesvirtualawlibraryand to pay, reimburse and make good
to the COMPANY, its successors and assigns, all sums and amount of money which
it or its representatives shall pay or cause to be paid, or become liable to pay, on
Page | 116
account of the undersigned or any of them, of whatsoever kind and nature,
including 15% of the amount involved in the litigation or other matters growing out
of or connected therewith for counsel or attorney’s fees, but in no case less than
P25. It is hereby further agreed that in case of extension or renewal of this
________ we equally bind ourselves for the payment thereof under the same terms
and conditions as above mentioned without the necessity of executing another
indemnity agreement for the purpose and that we hereby equally waive our right
to be notified of any renewal or extension of this ________ which may be granted
under this indemnity agreement.
Interest on amount paid by the Company. — Any and all sums of money so paid by
the company shall bear interest at the rate of 12% per annum which interest, if not
paid, will be accummulated and added to the capital quarterly order to earn the
same interests as the capital and the total sum thereof, the capital and interest,
shall be paid to the COMPANY as soon as the COMPANY shall have become liable
therefore, whether it shall have paid out such sums of money or any part thereof
or not.
xxx xxx xxx
Waiver. — It is hereby agreed upon by and between the undersigned that any
question which may arise between them by reason of this document and which has
to be submitted for decision to Courts of Justice shall be brought before the Court
of competent jurisdiction in the City of Manila, waiving for this purpose any other
venue. Our right to be notified of the acceptance and approval of this indemnity
agreement is hereby likewise waived.
xxx xxx xxx
Our Liability Hereunder. — It shall not be necessary for the COMPANY to bring suit
against the principal upon his default, or to exhaust the property of the principal,
but the liability hereunder of the undersigned indemnitor shall be jointly and
severally, a primary one, the same as that of the principal, and shall be exigible
immediately upon the occurrence of such default.” (Rec. App. pp. 98- 102.)
The Luzon Surety Co., prayed for allowance, as a contingent claim, of the value of
the twenty bonds it had executed in consideration of the counterbonds, and
further asked for judgment for the unpaid premiums and documentary stamps
affixed to the bonds, with 12 per cent interest thereon.
Before answer was filed, and upon motion of the administratrix of Hemady’s
estate, the lower court, by order of September 23, 1953, dismissed the claims of
Luzon Surety Co., on two grounds:chanroblesvirtuallawlibrary (1) that the
premiums due and cost of documentary stamps were not contemplated under the
indemnity agreements to be a part of the undertaking of the guarantor (Hemady),
since they were not liabilities incurred after the execution of the
counterbonds; chan roblesvirtualawlibraryand (2) that “whatever losses may occur
after Hemady’s death, are not chargeable to his estate, because upon his death he
ceased to be guarantor.”
Taking up the latter point first, since it is the one more far reaching in effects, the
reasoning of the court below ran as follows:chanroblesvirtuallawlibrary
“The administratrix further contends that upon the death of Hemady, his liability
as a guarantor terminated, and therefore, in the absence of a showing that a loss
or damage was suffered, the claim cannot be considered contingent. This Court
believes that there is merit in this contention and finds support in Article 2046 of
the new Civil Code. It should be noted that a new requirement has been added for
a person to qualify as a guarantor, that is:chanroblesvirtuallawlibrary integrity. As
correctly pointed out by the Administratrix, integrity is something purely personal
and is not transmissible. Upon the death of Hemady, his integrity was not
transmitted to his estate or successors. Whatever loss therefore, may occur after
Hemady’s death, are not chargeable to his estate because upon his death he ceased
to be a guarantor.
Another clear and strong indication that the surety company has exclusively relied
on the personality, character, honesty and integrity of the now deceased K. H.
Hemady, was the fact that in the printed form of the indemnity agreement there is
a paragraph entitled ‘Security by way of first mortgage, which was expressly waived
and renounced by the security company. The security company has not demanded
from K. H. Hemady to comply with this requirement of giving security by way of
first mortgage. In the supporting papers of the claim presented by Luzon Surety
Page | 117
Company, no real property was mentioned in the list of properties mortgaged
which appears at the back of the indemnity agreement.” (Rec. App., pp. 407-408).
We find this reasoning untenable. Under the present Civil Code (Article 1311), as
well as under the Civil Code of 1889 (Article 1257), the rule is that —
“Contracts take effect only as between the parties, their assigns and heirs, except
in the case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law.”
While in our successional system the responsibility of the heirs for the debts of
their decedent cannot exceed the value of the inheritance they receive from him,
the principle remains intact that these heirs succeed not only to the rights of the
deceased but also to his obligations. Articles 774 and 776 of the New Civil Code
(and Articles 659 and 661 of the preceding one) expressly so provide, thereby
confirming Article 1311 already quoted.
“ART. 774. — Succession is a mode of acquisition by virtue of which the property,
rights and obligations to the extent of the value of the inheritance, of a person are
transmitted through his death to another or others either by his will or by operation
of law.”
“ART. 776. — The inheritance includes all the property, rights and obligations of a
person which are not extinguished by his death.”
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court
ruled:chanroblesvirtuallawlibrary
“Under the Civil Code the heirs, by virtue of the rights of succession are subrogated
to all the rights and obligations of the deceased (Article 661) and cannot be
regarded as third parties with respect to a contract to which the deceased was a
party, touching the estate of the deceased (Barrios vs. Dolor, 2 Phil. 44).
xxx xxx xxx
“The principle on which these decisions rest is not affected by the provisions of the
new Code of Civil Procedure, and, in accordance with that principle, the heirs of a
deceased person cannot be held to be “third persons” in relation to any contracts
touching the real estate of their decedent which comes in to their hands by right
of inheritance; chan roblesvirtualawlibrarythey take such property subject to all
the obligations resting thereon in the hands of him from whom they derive their
rights.”
(See also Galasinao vs. Austria, 51 Off. Gaz. (No. 6) p. 2874 and de Guzman vs. Salak,
91 Phil., 265).
The binding effect of contracts upon the heirs of the deceased party is not altered
by the provision in our Rules of Court that money debts of a deceased must be
liquidated and paid from his estate before the residue is distributed among said
heirs (Rule 89). The reason is that whatever payment is thus made from the estate
is ultimately a payment by the heirs and distributees, since the amount of the paid
claim in fact diminishes or reduces the shares that the heirs would have been
entitled to receive.
Under our law, therefore, the general rule is that a party’s contractual rights and
obligations are transmissible to the successors. The rule is a consequence of the
progressive “depersonalization” of patrimonial rights and duties that, as observed
by Victorio Polacco, has characterized the history of these institutions. From the
Roman concept of a relation from person to person, the obligation has evolved into
a relation from patrimony to patrimony, with the persons occupying only a
representative position, barring those rare cases where the obligation is strictly
personal, i.e., is contracted intuitu personae, in consideration of its performance
by a specific person and by no other. The transition is marked by the disappearance
of the imprisonment for debt.
Of the three exceptions fixed by Article 1311, the nature of the obligation of the
surety or guarantor does not warrant the conclusion that his peculiar individual
qualities are contemplated as a principal inducement for the contract. What did
the creditor Luzon Surety Co. expect of K. H. Hemady when it accepted the latter
as surety in the counterbonds? Nothing but the reimbursement of the moneys that
the Luzon Surety Co. might have to disburse on account of the obligations of the
principal debtors. This reimbursement is a payment of a sum of money, resulting
from an obligation to give; chan roblesvirtualawlibraryand to the Luzon Surety Co.,
Page | 118
it was indifferent that the reimbursement should be made by Hemady himself or
by some one else in his behalf, so long as the money was paid to it.
The second exception of Article 1311, p. 1, is intransmissibility by stipulation of the
parties. Being exceptional and contrary to the general rule, this intransmissibility
should not be easily implied, but must be expressly established, or at the very least,
clearly inferable from the provisions of the contract itself, and the text of the
agreements sued upon nowhere indicate that they are non-transferable.
“(b) Intransmisibilidad por pacto. — Lo general es la transmisibilidad de darechos
y obligaciones; chan roblesvirtualawlibraryle excepcion, la intransmisibilidad.
Mientras nada se diga en contrario impera el principio de la transmision, como
elemento natural a toda relacion juridica, salvo las personalisimas. Asi, para la no
transmision, es menester el pacto expreso, porque si no, lo convenido entre partes
trasciende a sus herederos.
Siendo estos los continuadores de la personalidad del causante, sobre ellos recaen
los efectos de los vinculos juridicos creados por sus antecesores, y para evitarlo, si
asi se quiere, es indespensable convension terminante en tal sentido.
Por su esencia, el derecho y la obligacion tienden a ir más allá de las personas que
les dieron vida, y a ejercer presion sobre los sucesores de esa persona; chan
roblesvirtualawlibrarycuando no se quiera esto, se impone una estipulacion
limitativa expresamente de la transmisibilidad o de cuyos tirminos claramente se
deduzca la concresion del concreto a las mismas personas que lo otorgon.”
(Scaevola, Codigo Civil, Tomo XX, p. 541-542) (Emphasis supplied.)
Because under the law (Article 1311), a person who enters into a contract is
deemed to have contracted for himself and his heirs and assigns, it is unnecessary
for him to expressly stipulate to that effect; chan roblesvirtualawlibraryhence, his
failure to do so is no sign that he intended his bargain to terminate upon his death.
Similarly, that the Luzon Surety Co., did not require bondsman Hemady to execute
a mortgage indicates nothing more than the company’s faith and confidence in the
financial stability of the surety, but not that his obligation was strictly personal.
The third exception to the transmissibility of obligations under Article 1311 exists
when they are “not transmissible by operation of law”. The provision makes
reference to those cases where the law expresses that the rights or obligations are
extinguished by death, as is the case in legal support (Article 300), parental
authority (Article 327), usufruct (Article 603), contracts for a piece of work (Article
1726), partnership (Article 1830 and agency (Article 1919). By contract, the articles
of the Civil Code that regulate guaranty or suretyship (Articles 2047 to 2084)
contain no provision that the guaranty is extinguished upon the death of the
guarantor or the surety.
The lower court sought to infer such a limitation from Art. 2056, to the effect that
“one who is obliged to furnish a guarantor must present a person who possesses
integrity, capacity to bind himself, and sufficient property to answer for the
obligation which he guarantees”. It will be noted, however, that the law requires
these qualities to be present only at the time of the perfection of the contract of
guaranty. It is self-evident that once the contract has become perfected and
binding, the supervening incapacity of the guarantor would not operate to
exonerate him of the eventual liability he has contracted; chan
roblesvirtualawlibraryand if that be true of his capacity to bind himself, it should
also be true of his integrity, which is a quality mentioned in the article alongside
the capacity.
The foregoing concept is confirmed by the next Article 2057, that runs as
follows:chanroblesvirtuallawlibrary
“ART. 2057. — If the guarantor should be convicted in first instance of a crime
involving dishonesty or should become insolvent, the creditor may demand
another who has all the qualifications required in the preceding article. The case is
excepted where the creditor has required and stipulated that a specified person
should be guarantor.”
From this article it should be immediately apparent that the supervening
dishonesty of the guarantor (that is to say, the disappearance of his integrity after
he has become bound) does not terminate the contract but merely entitles the
creditor to demand a replacement of the guarantor. But the step remains optional
in the creditor:chanroblesvirtuallawlibrary it is his right, not his duty; chan
roblesvirtualawlibraryhe may waive it if he chooses, and hold the guarantor to his
bargain. Hence Article 2057 of the present Civil Code is incompatible with the trial
Page | 119
court’s stand that the requirement of integrity in the guarantor or surety makes in view of the existing solidarity, the latter does not even enjoy the benefit of
the latter’s undertaking strictly personal, so linked to his individuality that the exhaustion of the assets of the principal debtor.
guaranty automatically terminates upon his death.
The foregoing ruling is of course without prejudice to the remedies of the
The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety administratrix against the principal debtors under Articles 2071 and 2067 of the
Co. not being rendered intransmissible due to the nature of the undertaking, nor New Civil Code.
by the stipulations of the contracts themselves, nor by provision of law, his
Our conclusion is that the solidary guarantor’s liability is not extinguished by his
eventual liability thereunder necessarily passed upon his death to his heirs. The
death, and that in such event, the Luzon Surety Co., had the right to file against the
contracts, therefore, give rise to contingent claims provable against his estate
estate a contingent claim for reimbursement. It becomes unnecessary now to
under section 5, Rule 87 (2 Moran, 1952 ed., p. 437; chan
discuss the estate’s liability for premiums and stamp taxes, because irrespective of
roblesvirtualawlibraryGaskell & Co. vs. Tan Sit, 43 Phil. 810, 814).
the solution to this question, the Luzon Surety’s claim did state a cause of action,
“The most common example of the contigent claim is that which arises when a and its dismissal was erroneous.
person is bound as surety or guarantor for a principal who is insolvent or dead.
Wherefore, the order appealed from is reversed, and the records are ordered
Under the ordinary contract of suretyship the surety has no claim whatever against
remanded to the court of origin, with instructions to proceed in accordance with
his principal until he himself pays something by way of satisfaction upon the
law. Costs against the Administratrix- Appellee. SO ORDERED.
obligation which is secured. When he does this, there instantly arises in favor of
the surety the right to compel the principal to exonerate the surety. But until the Paras, C.J., Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador,
surety has contributed something to the payment of the debt, or has performed Concepcion, Endencia and Felix, JJ., concur.
the secured obligation in whole or in part, he has no right of action against anybody
— no claim that could be reduced to judgment. (May vs. Vann, 15 Pla., 553; chan
roblesvirtualawlibraryGibson vs. Mithell, 16 Pla., 519; chan
roblesvirtualawlibraryMaxey vs. Carter, 10 Yarg. [Tenn.], 521 Reeves vs. Pulliam, 7
Baxt. [Tenn.], 119; chan roblesvirtualawlibraryErnst vs. Nou, 63 Wis., 134.)”

For Defendant administratrix it is averred that the above doctrine refers to a case
where the surety files claims against the estate of the principal debtor; chan
roblesvirtualawlibraryand it is urged that the rule does not apply to the case before
us, where the late Hemady was a surety, not a principal debtor. The argument
evinces a superficial view of the relations between parties. If under the Gaskell
ruling, the Luzon Surety Co., as guarantor, could file a contingent claim against the
estate of the principal debtors if the latter should die, there is absolutely no reason
why it could not file such a claim against the estate of Hemady, since Hemady is a
solidary co-debtor of his principals. What the Luzon Surety Co. may claim from the
estate of a principal debtor it may equally claim from the estate of Hemady, since,

Page | 120
G.R. No. 120554 September 21, 1999
SO PING BUN, petitioner,
vs.
COURT OF APPEALS, TEK HUA ENTERPRISES CORP. and MANUEL C.
TIONG, respondents.
QUISUMBING, J.:
This petition for certiorari challenges the Decision 1 of the Court of Appeals dated
October 10, 1994, and the Resolution 2 dated June 5, 1995, in CA-G.R. CV No.
38784. The appellate court affirmed the decision of the Regional Trial Court of
Manila, Branch 35, except for the award of attorney's fees, as follows:
WHEREFORE, foregoing considered, the appeal of respondent-appellant So Ping
Bun for lack of merit is DISMISSED. The appealed decision dated April 20, 1992 of
the court a quo is modified by reducing the attorney's fees awarded to plaintiff Tek
Hua Enterprising Corporation from P500,000.00 to P200,000.00. 3
The facts are as follows:
In 1963, Tek Hua Trading Co, through its managing partner, So Pek Giok, entered
into lease agreements with lessor Dee C. Chuan & Sons Inc. (DCCSI). Subjects of
four (4) lease contracts were premises located at Nos. 930, 930-Int., 924-B and 924-
C, Soler Street, Binondo, Manila. Tek Hua used the areas to store its textiles. The
contracts each had a one-year term. They provided that should the lessee continue
to occupy the premises after the term, the lease shall be on a month-to-month
basis.
When the contracts expired, the parties did not renew the contracts, but Tek Hua
continued to occupy the premises. In 1976, Tek Hua Trading Co. was dissolved.
Later, the original members of Tek Hua Trading Co. including Manuel C. Tiong,
formed Tek Hua Enterprising Corp., herein respondent corporation.
So Pek Giok, managing partner of Tek Hua Trading, died in 1986. So Pek Giok's
grandson, petitioner So Ping Bun, occupied the warehouse for his own textile
business, Trendsetter Marketing.
On August 1, 1989, lessor DCCSI sent letters addressed to Tek Hua Enterprises,
informing the latter of the 25% increase in rent effective September 1, 1989. The
rent increase was later on reduced to 20% effective January 1, 1990, upon other
lessees' demand. Again on December 1, 1990, the lessor implemented a 30% rent
increase. Enclosed in these letters were new lease contracts for signing. DCCSI
warned that failure of the lessee to accomplish the contracts shall be deemed as
lack of interest on the lessee's part, and agreement to the termination of the lease.
Private respondents did not answer any of these letters. Still, the lease contracts
were not rescinded.
On March 1, 1991, private respondent Tiong sent a letter to petitioner which reads
as follows:
March 1, 1991
Mr. So Ping Bun
930 Soler Street
Binondo, Manila
Dear Mr. So,
Due to my closed (sic) business associate (sic) for three decades with your late
grandfather Mr. So Pek Giok and late father, Mr. So Chong Bon, I allowed you
temporarily to use the warehouse of Tek Hua Enterprising Corp. for several years
to generate your personal business.
Since I decided to go back into textile business, I need a warehouse immediately
for my stocks. Therefore, please be advised to vacate all your stocks in Tek Hua
Enterprising Corp. Warehouse. You are hereby given 14 days to vacate the premises
unless you have good reasons that you have the right to stay. Otherwise, I will be
constrained to take measure to protect my interest.
Page | 121
Please give this urgent matter your preferential attention to avoid inconvenience
on your part.
Very truly yours,
(Sgd) Manuel C. Tiong
MANUEL C. TIONG
President 4
Petitioner refused to vacate. On March 4, 1992, petitioner requested formal
contracts of lease with DCCSI in favor Trendsetter Marketing. So Ping Bun claimed
that after the death of his grandfather, So Pek Giok, he had been occupying the
premises for his textile business and religiously paid rent. DCCSI acceded to
petitioner's request. The lease contracts in favor of Trendsetter were executed.
In the suit for injunction, private respondents pressed for the nullification of the
lease contracts between DCCSI and petitioner. They also claimed damages.
After trial, the trial court ruled:
WHEREFORE, judgment is rendered:
1. Annulling the four Contracts of Lease (Exhibits A, A-1 to A-3, inclusive) all dated
March 11, 1991, between defendant So Ping Bun, doing business under the name
and style of "Trendsetter Marketing", and defendant Dee C. Chuan & Sons, Inc. over
the premises located at Nos. 924-B, 924-C, 930 and 930, Int., respectively, Soler
Street, Binondo Manila;
2. Making permanent the writ of preliminary injunction issued by this Court on June
21, 1991;
3. Ordering defendant So Ping Bun to pay the aggrieved party, plaintiff Tek Hua
Enterprising Corporation, the sum of P500,000.00, for attorney's fees;
4. Dismissing the complaint, insofar as plaintiff Manuel C. Tiong is concerned, and
the respective counterclaims of the defendant;
5. Ordering defendant So Ping Bun to pay the costs of this lawsuit;
This judgment is without prejudice to the rights of plaintiff Tek Hua Enterprising
Corporation and defendant Dee C. Chuan & Sons, Inc. to negotiate for the renewal
of their lease contracts over the premises located at Nos. 930, 930-Int., 924-B and
924-C Soler Street, Binondo, Manila, under such terms and conditions as they agree
upon, provided they are not contrary to law, public policy, public order, and morals.
SO ORDERED. 5
Petitioner's motion for reconsideration of the above decision was denied.
On appeal by So Ping Bun, the Court of Appeals upheld the trial court. On motion
for reconsideration, the appellate court modified the decision by reducing the
award of attorney's fees from five hundred thousand (P500,000.00) pesos to two
hundred thousand (P200,000.00) pesos.
Petitioner is now before the Court raising the following issues:
I. WHETHER THE APPELLATE COURT ERRED IN AFFIRMING THE TRIAL COURT'S
DECISION FINDING SO PING BUN GUILTY OF TORTUOUS INTERFERENCE OF
CONTRACT?
II. WHETHER THE APPELLATE COURT ERRED IN AWARDING ATTORNEY'S FEES OF
P200,000.00 IN FAVOR OF PRIVATE RESPONDENTS.
The foregoing issues involve, essentially, the correct interpretation of the
applicable law on tortuous conduct, particularly unlawful interference with
contract. We have to begin, obviously, with certain fundamental principles on torts
and damages.
Damage is the loss, hurt, or harm which results from injury, and damages are the
recompense or compensation awarded for the damage suffered. 6 One becomes
liable in an action for damages for a nontrespassory invasion of another's interest
in the private use and enjoyment of asset if (a) the other has property rights and
privileges with respect to the use or enjoyment interfered with, (b) the invasion is
substantial, (c) the defendant's conduct is a legal cause of the invasion, and (d) the
invasion is either intentional and unreasonable or unintentional and actionable
under general negligence rules. 7
Page | 122
The elements of tort interference are: (1) existence of a valid contract; (2)
knowledge on the part of the third person of the existence of contract; and (3)
interference of the third person is without legal justification or excuse. 8
A duty which the law of torts is concerned with is respect for the property of others,
and a cause of action ex delicto may be predicated upon an unlawful interference
by one person of the enjoyment by the other of his private
property.9 This may pertain to a situation where a third person induces a party to
renege on or violate his undertaking under a contract. In the case before us,
petitioner's Trendsetter Marketing asked DCCSI to execute lease contracts in its
favor, and as a result petitioner deprived respondent corporation of the latter's
property right. Clearly, and as correctly viewed by the appellate court, the three
elements of tort interference above-mentioned are present in the instant case.
Authorities debate on whether interference may be justified where the defendant
acts for the sole purpose of furthering his own financial or economic
interest. 10 One view is that, as a general rule, justification for interfering with the
business relations of another exists where the actor's motive is to benefit himself.
Such justification does not exist where his sole motive is to cause harm to the other.
Added to this, some authorities believe that it is not necessary that the interferer's
interest outweigh that of the party whose rights are invaded, and that an individual
acts under an economic interest that is substantial, not merely de minimis, such
that wrongful and malicious motives are negatived, for he acts in self-
protection. 11 Moreover justification for protecting one's financial position should
not be made to depend on a comparison of his economic interest in the subject
matter with that of others. 12 It is sufficient if the impetus of his conduct lies in a
proper business interest rather than in wrongful motives. 13
As early as Gilchrist vs. Cuddy, 14 we held that where there was no malice in the
interference of a contract, and the impulse behind one's conduct lies in a proper
business interest rather than in wrongful motives, a party cannot be a malicious
interferer. Where the alleged interferer is financially interested, and such interest
motivates his conduct, it cannot be said that he is an officious or malicious
intermeddler. 15
In the instant case, it is clear that petitioner So Ping Bun prevailed upon DCCSI to
lease the warehouse to his enterprise at the expense of respondent corporation.
Though petitioner took interest in the property of respondent corporation and
benefited from it, nothing on record imputes deliberate wrongful motives or malice
on him.
Sec. 1314 of the Civil Code categorically provides also that, "Any third person who
induces another to violate his contract shall be liable for damages to the other
contracting party." Petitioner argues that damage is an essential element of tort
interference, and since the trial court and the appellate court ruled that private
respondents were not entitled to actual, moral or exemplary damages, it follows
that he ought to be absolved of any liability, including attorney's fees.
It is true that the lower courts did not award damages, but this was only because
the extent of damages was not quantifiable. We had a similar situation in Gilchrist,
where it was difficult or impossible to determine the extent of damage and there
was nothing on record to serve as basis thereof. In that case we refrained from
awarding damages. We believe the same conclusion applies in this case.
While we do not encourage tort interferers seeking their economic interest to
intrude into existing contracts at the expense of others, however, we find that the
conduct herein complained of did not transcend the limits forbidding an obligatory
award for damages in the absence of any malice. The business desire is there to
make some gain to the detriment of the contracting parties. Lack of malice,
however, precludes damages. But it does not relieve petitioner of the legal liability
for entering into contracts and causing breach of existing ones. The respondent
appellate court correctly confirmed the permanent injunction and nullification of
the lease contracts between DCCSI and Trendsetter Marketing, without awarding
damages. The injunction saved the respondents from further damage or injury
caused by petitioner's interference.
Lastly, the recovery of attorney's fees in the concept of actual or compensatory
damages, is allowed under the circumstances provided for in Article 2208 of the
Civil Code. 16 One such occasion is when the defendant's act or omission has
compelled the plaintiff to litigate with third persons or to incur expenses to protect
his interest. 17 But we have consistently held that the award of considerable
Page | 123
damages should have clear factual and legal bases. 18 In connection with attorney's
fees, the award should be commensurate to the benefits that would have been
derived from a favorable judgment. Settled is the rule that fairness of the award of
damages by the trial court calls for appellate review such that the award if far too
excessive can be reduced. 19 This ruling applies with equal force on the award of
attorney's fees. In a long line of cases we said, "It is not sound policy to place in
penalty on the right to litigate. To compel the defeated party to pay the fees of
counsel for his successful opponent would throw wide open the door of temptation
to the opposing party and his counsel to swell the fees to undue proportions."20
Considering that the respondent corporation's lease contract, at the time when the
cause of action accrued, ran only on a month-to-month basis whence before it was
on a yearly basis, we find even the reduced amount of attorney's fees ordered by
the Court of Appeals still exorbitant in the light of prevailing
jurisprudence. 21 Consequently, the amount of two hundred thousand
(P200,000.00) awarded by respondent appellate court should be reduced to one
hundred thousand (P100,000.00) pesos as the reasonable award or attorney's fees
in favor of private respondent corporation.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution
of the Court of Appeals in CA-G.R. CV No. 38784 are hereby AFFIRMED, with
MODIFICATION that the award of attorney's fees is reduced from two hundred
thousand (P200,000.00) to one hundred thousand (P100,000.00) pesos. No
pronouncement as to costs.1âwphi1.nêt
SO ORDERED.
[ G.R. No. 209969, September 27, 2017 ]
JOSE SANICO AND VICENTE CASTRO, PETITIONERS, VS. WERHERLINA P.
COLIPANO, RESPONDENT.
DECISION
CAGUIOA, J:
Before the Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules
of Court filed by petitioners Jose Sanico (Sanico) and Vicente Castro (Castro),
assailing the Decision[2] dated September 30, 2013 of the Court of Appeals (CA) in
CA-G.R. CEB-CV No. 01889. The CA affirmed with modification the Decision[3] dated
October 27, 2006 of the Regional Trial Court, Branch 25, Danao City (RTC) which
found Sanico and Castro liable for breach of' contract of carriage and awarded
actual and compensatory damages for loss of income in favor of respondent
Werherlina P. Colipano (Colipano). The CA reduced the compensatory damages
that the RTC awarded.
Antecedents
Colipano filed a complaint on January 7, 1997 for breach of contract of carriage and
damages against Sanico and Castro.[4] In her complaint, Colipano claimed that at
4:00 P.M. more or less of December 25, 1993, Christmas Day, she and her daughter
were; paying passengers in the jeepney operated by Sanico, which was driven by
Castro.[5] Colipano claimed she was made to sit on an empty beer case at the edge
of the rear entrance/exit of the jeepney with her sleeping child on her lap.[6] And,
at an uphill incline in the road to Natimao-an, Carmen, Cebu, the jeepney slid
backwards because it did not have the power to reach the top.[7] Colipano pushed
both her feet against the step board to prevent herself and her child from being
thrown out of the exit, but because the step board was wet, her left foot slipped
and got crushed between the step board and a coconut tree which the jeepney
bumped, causing the jeepney to stop its backward movement.[8] Colipano's leg was
badly injured and was eventually amputated.[9] Colipano prayed for actual
damages, loss of income, moral damages, exemplary damages, and attorney's
Page | 124
fees.[10] Without moving for the reconsideration of the CA Decision, Sanico and Castro filed
this petition before the Court assailing the CA Decision.
In their answer, Sanico and Castro admitted that Colipano's leg was crushed and
Issues
amputated but claimed that it! was Colipano's fault that her leg was
crushed.[11] They admitted that the jeepney slid backwards because the jeepney a. Whether the CA erred in finding that Sanico and Castro breached the
lost power.[12] The conductor then instructed everyone not to panic but Colipano contract of carriage with Colipano;
tried to disembark and her foot got caught in between the step board and the
coconut tree.[13] Sanico claimed that he paid for all the hospital and medical b. Whether the Affidavit of Desistance and Release of Claim is binding on
expenses of Colipano,[14] and that Colipano eventually freely and voluntarily Colipano; and
executed an Affidavit of Desistance and Release of Claim.[15] c. Whether the CA erred in the amount of damages awarded.

After trial, the RTC found that Sanico and Castro breached the contract of carriage The Court's Ruling
between them and Colipano but only awarded actual and compensatory damages
in favor of Colipano. The dispositive portion of the RTC Decision states: The Court partly grants the petition.
WHEREFORE, premises considered, this Court finds the defendants LIABLE for
breach of contract of carriage and are solidarily liable to pay plaintiff: Only Sanico breached the contract of carriage.

1. Actual damages in the amount of P2,098.80; and Here, it is beyond dispute that Colipano was injured while she was a passenger in
2. Compensatory damages for loss of income in the amount of P360,000.00. the jeepney owned and operated by Sanico that was being driven by Castro. Both
the CA and RTC found Sanico and Castro jointly and severally liable. This, however,
No costs. is erroneous because only Sanico was the party to the contract of carriage with
Colipano.
SO ORDERED.[16]
Since the cause of action is based on a breach of a contract of carriage, the liability
Only Sanico and Castro appealed to the CA, which affirmed with modification the
of Sanico is direct as the contract is between him and Colipano. Castro, being
RTC Decision. The dispositive portion of the CA Decision states:
merely the driver of Sanico's jeepney, cannot be made liable as he is not a party to
IN LIGHT OF ALL THE FOREGOING, the instant appeal is PARTIALLY GRANTED. The the contract of carriage.
Decision dated October 27, 2006 of the Regional Trial Court, Branch 25, Danao City,
in Civil Case No. DNA-418, is AFFIRMED with MODIFICATION in that the award for In Soberano v. Manila Railroad Co.,[18] the Court ruled that a complaint for breach
compensatory damages for loss of income in paragraph 2 of the dispositive portion of a contract of carriage is dismissible as against the employee who was driving the
of the RTC's decision, is reduced to P200,000.00. bus because the parties to the contract of carriage are only the passenger, the bus
owner, and the operator, viz.:
SO ORDERED.[17]

Page | 125
The complaint against Caccam was therefore properly dismissed. He was not a
party to the contract; he was a mere employee of the BAL. The parties to that
contract are Juana Soberano, the passenger, and the MRR and its subsidiary, the
BAL, the bus owner and operator, respectively; and consequent to the inability of
the defendant companies to carry Juana Soberano and her baggage arid personal
effects securely and safely to her destination as imposed by law (art. 1733, in
relation to arts. 1736 and 1755, N.C.C.), their liability to her becomes direct and
immediate.[19]
Since Castro was not a party to the contract of carriage, Colipano had no cause of
action against him and the pomplaint against him should be dismissed. Although
he was driving the jeepney, he was a mere employee of Sanico, who was the
operator and owner of the jeepney. The obligation to carry Colipano safely to her
destination was with Sanico. In fact, the elements of a contract of carriage existeid
between Colipano and Sanico: consent, as shown when Castro, as employee of
Sanico, accepted Colipano as a passenger when he allowed Colipano to board the
jeepney, and as to Colipano, when she boarded the jeepney; cause or
consideration, when Colipano, for her part, paid her fare; and, object, the
transportation of Colipano from the place of departure to the place of
destination.[20]
Having established that the contract of carriage was only between Sanico and
Colipano and that therefore Colipano had no cause of action against Castro, the
Court next determines whether Sanico breached his obligations to Colipano under
the contract.
Sanico is liable as operator and owner of a common carrier.
Specific to a contract of carriage, ithe Civil Code requires common carriers to
observe extraordinary diligence in safely transporting their passengers. Article
1733 of the Civil Code states:
ART. 1733. Common carriers, fijpm the nature of their business and for reasons of
public policy, are bbund to observe extraordinary diligence in the vigilance over the
goods and for the safety of the passengers transported by them, according to all
the circumstances of each case.
Such extraordinary diligence in the vigilance over the goods is further expressed in
Articles 1734, 1735 and 1745, Nos. 5, 6, and 7, while the extraordinary diligence for
the safety of the passengers is further set forth in Articles 1755 and 1756.
This extraordinary diligence, following Article 1755 of the Civil Code, means that
common carriers have the obligation to carry passengers safely as far as human
care and foresight can provide, using the utmost diligence of very cautious persons,
with due regard for all the circumstances.
In case of death of or injury to their passengers, Article 1756 of the Civil Code
provides that common carriers are presumed to have been at fault or negligent,
and this presumption can be overcome only by proof of the extraordinary diligence
exercised to ensure the safety of the passengers.[21]
Being an operator and owner of a common carrier, Sanico was required to observe
extraordinary diligence in safely transporting Colipano. When Colipano's leg was
injured while she was a passenger in Sanico's jeepney, the presumption of fault or
negligence on Sanico's part arose and he had the burden to prove that he exercised
the extraordinary diligence required of him. He failed to do this.
In Calalas v. Court of Appeals,[22] the Court found that allowing the respondent in
that case to be seated in an extension seat, which was a wooden stool at the rear
of the jeepney, "placed [the respondent] in a peril greater than that to which the
other passengers were exposed."[23] The Court further ruled that the petitioner
in Calalas was not only "unable to overcome the presumption of negligence
imposed on him for the injury sustained by [the respondent], but also, the evidence
shows he was actually negligent in transporting passengers."[24]
Calalas squarely applies here. Sanico failed to rebut the presumption of fault or
negligence under the Civil Code. More than this, the evidence indubitably
established Sanico's negligence when Castro made Colipano sit on an empty beer
case at the edge of the rear entrance/exit of the jeepney with her sleeping child on
Page | 126
her lap, which put her and her child in greater peril than the other passengers. As obligation to safely transport Colipano from the place of departure to the place of
the CA correctly held: destination as far as human care and foresight can provide, using the utmost
diligence of very cautious persons, and with due regard for all the circumstances.
For the driver, Vicente Castro, to allow a seat extension made of an empty case of
beer clearly indicates lack of prudence. Permitting Werherlina to occupy an
Sanico's attempt to evade liability by arguing that he exercised extraordinary
improvised seat in the rear portion of the jeepney, with a child on her lap to boot,
diligence when he hired; Castro, who was allegedly an experienced and time-tested
exposed her and her child in a peril greater than that to which the other passengers
driver, whom he had even accompanied on a test-drive and in whom he was
were exposed. The use of an improvised seat extension is undeniable, in view of
personally convinced of the driving skills,[30] are not enough to exonerate him from
the testimony of plaintiffs witness, which is consistent with Werherlina's
liability - because the liability of common carriers does not cease upon p!roof that
testimonial assertion. Werherlina and her witness's testimony were accorded
they exercised all the diligence of a good father of a family irii the selection. and
belief by the RTC. Factual findings of the trial court are entitled to great weight on
supervision of their employees. This is the express mandate of Article 1759 of the
appeal and should not be disturbed except for strong and valid reasons, because
Civil Code:
the trial court ip in a better position to examine the demeanor of the witnesses
while testifying.[25] ART. 1759. Common carriers are liable for the death of or injuries to passengers
through the negligence or willful acts of the former's employees, although such
The CA also correctly held that the!defense of engine failure, instead of exonerating
employees may have acted beyond the scope of their authority or in violation of
Sanico, only aggravated his already precarious position.[26] The engine failure
the orders of the common carriers.
"hinted lack of regular check and maintenance to ensure that the engine is at its
best, considering that the jeepney regularly passes through a mountainous
This liability of the common carriers does not cease upon proof that they exercised
area."[27] This failure to ensure that the jeepney can safely transport passengers
all the diligence of a good father of a family in the selection and supervision of their
through its route which required navigation through a mountainous area is proof
employees.
of fault on Sanico's part. In the face of such evidence, there is no question as to
Sanico's fault or negligence. The only defenses available to common carriers are (1) proof that they observed
extraordinary diligence as prescribed in Article 1756,[31] and (2) following Article
Further, common carriers may also be liable for damages when they contravene 1174 of the Civil Code, proof that the injury or death was brought about by an event
the tenor of their obligations. Article 1170 of the Civil Code states: which "could not be foreseen, or which, though foreseen, were inevitable," or a
fortuitous event.
ART. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof,
The Court finds that neither of these defenses obtain. Thus, Sanico is liable for
are liable for damages.
damages to Colipano because of the injury that Colipano suffered as a passenger
In Magat v. Medialdea,[28] the Court ruled: "The phrase 'in any manner contravene of Sanico's jeepney.
the tenor' of the obligation includes any illicit act or omission which impairs the
strict and faithful fulfillment of the obligation and every kind of defective The Affidavit of Desistance and Release of Claim is void.
performance."[29] There is no question here that making Colipano sit on the empty
beer case was a clear showing of how Sanico contravened the tenor of his Sanico cannot be exonerated from liability under the Affidavit of Desistance and
Page | 127
Release of Claim[32]and his payment of the hospital and medical bills of Colipano
amounting to P44,900.00.[33]
The RTC ruled that "the Affidavit of Desistance and Release of Claim is not binding
on plaintiff [Colipano] in the absence of proof that the contents thereof were
sufficiently translated and explained to her."[34] The CA affirmed the findings of the
RTC and ruled that the document was not binding on Colipano, as follows:
Finally, We sustain the RTC's finding that the affidavit of desistance and release of
claim, offered by defendants-appellants, are not binding on Werherlina, quoting
with approval its reflection on the matter, saying:
xxx this Court finds that the Affidavit of Desistance and Release of Claim is not
binding on plaintiff in the absence of proof that the contents thereof were
sufficiently explained to her. It is clear from the plaintiffs circumstances that she is
not able to understand English, more so stipulations stated in the said Affidavit and
Release. It is understandable that in her pressing need, the plaintiff may have been
easily convinced to sign the document with the promise that she will be
compensated for her injuries.[35]
The Court finds no reason to depart from these findings of the CA and the RTC.
For there to be a valid waiver, the following requisites are essential:
(1) that the person making the waiver possesses the right, (2) that he has the
capacity and power to dispose of the right, (3) that the waiver must be clear and
unequivocal although it may be made expressly or impliedly, and (4) that the waiver
is not contrary to law, public policy, public order, morals, good customs or
prejudicial to a third person with a right recognized by law.[36]
While the first two requirements can be said to exist in this case, the third and
fourth requirements are, however, lacking.
For the waiver to be clear and unequivocal, the person waiving the right should
understand what she is waiving and the effect of such waiver. Both the CA and RTC
made the factual deitermination that Colipano was not able to understand English
and that there was no proof that the documents and their contents and effects
were explained to her. These findings of the RTC, affirmed by the CA, are entitled
to great weight and respect.[37] As this Court held in Philippine National Railways
Corp. v. Vizcara[38]:
It is a well-established rule that factual fill dings by the CA are conclusive on the
parties and are not reviewable byj this Court. They are entitled to great weight and
respect, even finality, especially when, as in this case, the CA affirmed the factual
findings arrived at by the trial court.[39]
Although there are exceptions to this rule,[40] the exceptions are absent here.
Colipano could not have clearly and unequivocally waived her right to claim
damages when she had no understanding of the right she was waiving and the
extent of that right. Worse, she was made to sign a document written in a language
she did not understand.
The fourth requirement for a valid waiver is also lacking as the waiver, based on
the attendant facts, can only be construed as contrary to public policy. The doctrine
in Gatchalian v. Delim,[41] which the CA correctly cited,[42] is applicable here:
Finally, because what is involved here is the liability of a common carrier for injuries
sustained by passengers in respect of whose safety a common carrier must
exercise extraordinary diligence, we must construe any such purported waiver
most strictly against the common carrier. For a waiver to be valid and effective, it
must not be contrary to law, morals, public policy or good customs. To uphold a
supposed waiver of any right to claim damages by an injured passenger, under
circumstances like those exhibited in this case, would be to dilute and weaken the
standard of extraordinary diligence exacted by the law from common carriers and
hence to render that standard unenforceable. We believe such a purported waiver
is offensive to public policy.[43]
"[P]ublic policy refers to the aims of the state to promote the social and general
well-being of the inhabitants."[44] The Civil Code requires extraordinary diligence
from common carriers because the nature of their business requires the public to
put their safety and lives in the hands of these common carriers. The State imposes
Page | 128
this extraordinary diligence to promote the well-being of the public who avail income at the rate of P12,000.00/year for thirty years in the amount of
themselves of the services of common carriers. Thus, in instances of injury or death, P360,000.00.[49]
a waiver of the right to claim damages is strictly construed against the common
The CA, on the other hand, modified the award of the RTC by reducing the
carrier so as not to dilute or weaken the public policy behind the required standard
compensatory damages from P360,000.00 to P200,000.00, thus:
of extraordinary diligence.
By virtue of their negligence, defendants-appellants are liable to pay Werheiiina
It was for this reason that in Gatchalian, the waiver was considered offensive to compensatory damages for loss of earning capacity. In arriving at the proper
public policy because it was shown that the passenger was still in the hospital and amount, the Supremip Court has consistently used the following formula:
was dizzy when she signed the document. It was also shown that when she saw the
other passengers signing the document, she signed it without reading it. . Net Earning Life Expectancy x [Gross Annual Income - Living Expenses (50%
=
Capacity of gross annual income)]
Similar to Gatchalian, Colipano testified that she did not understand the document
she signed.[45] She also did not understand the nature and extent of her waiver as
the content of the document was not explained to her.[46] The waiver is therefore where life
= 2/3 (80 - the age of the deceased).
void because it is contrary to public policy.[47] expectancy

Based on the stated formula, the damages due to Werherlina for loss of earning
The Court reiterates that waivers executed under similar circumstances are indeed capacity is:
contrary to public policy and are void.[48] To uphold waivers taken from injured
passengers who have no knowledge of their entitlement under the law and the Net Earning
= [2/3 x (80-30)] x (P12,000.00 x (50%)
extent of liability of common carriers would indeed dilute the extraordinary Capacity
diligence required from common carriers, and contravene a public policy reflected
in the Civil Code.
= (2/3 x 50) x P6,000.00
Amount of compensatory damages granted is incorrect.

On the amount of damages, the RiTC awarded P2,098.80 as actual damages and = 33.33 x P6,000.00
P360,000.00 as compensatoiy damages for loss of income, as follows:

[T]his Court can only award actual damages in the amount that is duly supported
by receipts, that is, P2,098.80 mid not P7,277.80 as prayed for by plaintiff as there
is no basis for the amount prayed for. However, considering that plaintiff has
suffered the loss of one leg which has caused her to be limited in her movement
thus resulting in loss of livelihood, she is entitled to compensatory damages for lost
= P200,000.00
The award of the sum of P200,000.00 as compensatory damages for loss of earning
capacity is in order, notwithstanding the objections of defendants-appellants with
respect to lack of evidence on Werherlina's age and annual income.[50]

Page | 129
Sanico argues that Colipano failed to present documentary evidence to support her
age and her income, so that her testimony is self-serving and that there was no
basis for the award of compensatory damages in her favor.[51] Sanico is gravely
mistaken.
The Court has held in Heirs of Pedro Clemeña y Zurbano v. Heirs of Irene B.
Bien[52] that testimonial evidence cannot be objected to on the ground of being self-
serving, thus:
"Self-serving evidence" is not to be taken literally to mean any evidence that serves
its proponent's interest. The term, if used with any legal sense, refers only to acts
or declarations made by a party in his own interest at some place and time out of
court, and it does not include testimony that he gives as a witness in court. Evidence
of this sort is excluded on the same ground as any hearsay evidence, that is, lack of
opportunity for cross-examination by the adverse party and on the consideration
that its admission would open the door to fraud and fabrication. In contrast, a
party's testimony in court is sworn and subject to cross-examination by the other
party, and therefore, not susceptible to an objection on the ground that it is self-
serving.[53]
Colipano was subjected to cross-examination and both the RTC and CA believed
her testimony on her age and annual income. In fact, as these are questions of
facts, these findings of the RTC and CA are likewise binding on the Court.[54]
Further, although as a general rule, documentary evidence is required to prove loss
of earning capacity, Colipano's testimony on her annual earnings of P12,000.00 is
an allowed exception. There are two exceptions to the general rule and Colipano's
testimonial evidence falls under the second exception, viz.:
By way of exception, damages for loss of earning capacity may be awarded despite
the absence of documentary evidence when (1) the deceased is self-employed
earning less than the minimum wage under current labor laws, and judicial notice
may be taken of the fact that in the deceased's line of work no documentary
evidence is available; or (2) the deceased is employed as a daily wage worker
earning less than the minimum wage under current labor laws.[55]
The CA applied the correct formula for computing the loss of Colipano's earning
capacity:
Net earning capacity = Life expectancy x [Gross Annual Income - Living Expenses
(50% of gross annual income)], where life expectancy = 2/3 (80-the age of the
deceased).[56]
However, the CA erred when it used Colipano's age at the time she testified as basis
for computing the loss of earning capacity.[57] The loss of earning capacity
commenced when Colipano's leg was crushed on December 25, 1993. Given that
Colipano was 30 years old when she testified on October 14, 1997, she was roughly
27 years old on December 25, 1993 when the injury was sustained. Following the
foregoing formula, the net earning capacity of Colipano is P212,000.00.[58]
Sanico is liable to pay interest.
Interest is a form of actual or compensatory damages as it belongs to Chapter
2[59] of Title XVIII on Damages of the Civil Code. Under Article 2210 of the Civil Code,
"[i]nterest may, in the discretion of the court, be allowed upon damages awarded
for breach of contract." Here, given the gravity of the breach of the contract of
carriage causing the serious injury to the leg of Colipano that resulted in its
amputation, the Court deems it just and equitable to award interest from the date
of the RTC decision. Since the award of damages was given by the RTC in its
Decision dated October 27, 2006, the interest on the amount awarded shall be
deemed to run beginning October 27, 2006.
As to the rate of interest, in Eastern Shipping Lines, Inc. v. Court of Appeals,[60] the
Court ruled that "[w]hen 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 court at the rate of 6% per annum."[61] Further,
upon finality of the judgment awarding a sum of money, the rate of interest shall
be 12% per annum from such finality until satisfaction because the interim period
is considered a forbearance of credit.[62] Subsequently, in Nacar v. Gallery
Frames,[63] the rate of legal interest for loans or forbearance of any money, goods
or credits and the rate allowed in judgments was lowered from 12% to 6%. Thus,
Page | 130
the applicable rate of interest to the award of damages to Colipano is 6%.
WHEREFORE, premises considered, the petition for review is hereby PARTLY
GRANTED. As to petitioner Vicente Castro, the Decision of the Court of Appeals
dated September 30, 2013 is REVERSED and SET ASIDE and the complaint against
him is dismissed for lack of cause of action. As to petitioner Jose Sanico, the
Decision of the Court of Appeals is hereby AFFIRMED with MODIFICATIONS,
Petitioner Jose Sanico is liable and ordered to pay respondent Werherlina Colipano
the following amounts:
1. Actual damages in the amount of P2,098.80;
2. Compensatory damages for loss of income in the amount of P212,000.00;
3. Interest on the total amount of the damages awarded in 1 and 2 at the rate
of 6% per annum reckoned from October 27, 2006 until finality of this
Decision.
The total amount of the foregoing shall, in turn, earn interest at the rate of 6% per
annum from finality of this Decision until full payment thereof.
SO ORDERED.
G.R. No. L-25494 June 14, 1972
NICOLAS SANCHEZ, Plaintiff-Appellee, vs. SEVERINA RIGOS, Defendant-Appellant.
Santiago F. Bautista for plaintiff-appellee.
Jesus G. Villamar for defendant-appellant.
CONCEPCION, C.J.:
Appeal from a decision of the Court of First Instance of Nueva Ecija to the Court of
Appeals, which certified the case to Us, upon the ground that it involves a question
purely of law.chanroblesvirtualawlibrarychanrobles virtual law library
The record shows that, on April 3, 1961, plaintiff Nicolas Sanchez and defendant
Severina Rigos executed an instrument entitled "Option to Purchase," whereby
Mrs. Rigos "agreed, promised and committed ... to sell" to Sanchez the sum of
P1,510.00, a parcel of land situated in the barrios of Abar and Sibot, municipality
of San Jose, province of Nueva Ecija, and more particularly described in Transfer
Certificate of Title No. NT-12528 of said province, within two (2) years from said
date with the understanding that said option shall be deemed "terminated and
elapsed," if "Sanchez shall fail to exercise his right to buy the property" within the
stipulated period. Inasmuch as several tenders of payment of the sum of Pl,510.00,
made by Sanchez within said period, were rejected by Mrs. Rigos, on March 12,
1963, the former deposited said amount with the Court of First Instance of Nueva
Ecija and commenced against the latter the present action, for specific
performance and damages.chanroblesvirtualawlibrarychanrobles virtual law
library
After the filing of defendant's answer - admitting some allegations of the
complaint, denying other allegations thereof, and alleging, as special defense, that
the contract between the parties "is a unilateral promise to sell, and the same being
unsupported by any valuable consideration, by force of the New Civil Code, is null
and void" - on February 11, 1964, both parties, assisted by their respective counsel,
jointly moved for a judgment on the pleadings. Accordingly, on February 28, 1964,
the lower court rendered judgment for Sanchez, ordering Mrs. Rigos to accept the
sum judicially consigned by him and to execute, in his favor, the requisite deed of
Page | 131
conveyance. Mrs. Rigos was, likewise, sentenced to pay P200.00, as attorney's fees,
and other costs. Hence, this appeal by Mrs.
Rigos.chanroblesvirtualawlibrarychanrobles virtual law library
This case admittedly hinges on the proper application of Article 1479 of our Civil
Code, which provides:
ART. 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.chanroblesvirtualawlibrarychanrobles virtual law library
An accepted unilateral promise to buy or to sell a determinate thing for a price
certain is binding upon the promissor if the promise is supported by a consideration
distinct from the price.
In his complaint, plaintiff alleges that, by virtue of the option under consideration,
"defendant agreed and committed to sell" and "the plaintiff agreed and committed
to buy" the land described in the option, copy of which was annexed to said
pleading as Annex A thereof and is quoted on the margin. 1Hence, plaintiff
maintains that the promise contained in the contract is "reciprocally demandable,"
pursuant to the first paragraph of said Article 1479. Although defendant had really
"agreed, promised and committed" herself to sell the land to the plaintiff, it is not
true that the latter had, in turn, "agreed and committed himself " to buy said
property. Said Annex A does not bear out plaintiff's allegation to this effect. What
is more, since Annex A has been made "an integral part" of his complaint, the
provisions of said instrument form part "and parcel" 2of said
pleading.chanroblesvirtualawlibrarychanrobles virtual law library
The option did not impose upon plaintiff the obligation to purchase defendant's
property. Annex A is not a "contract to buy and sell." It merely granted plaintiff an
"option" to buy. And both parties so understood it, as indicated by the caption,
"Option to Purchase," given by them to said instrument. Under the provisions
thereof, the defendant "agreed, promised and committed" herself to sell the land
therein described to the plaintiff for P1,510.00, but there is nothing in the contract
to indicate that her aforementioned agreement, promise and undertaking is
supported by a consideration "distinct from the price" stipulated for the sale of the
land.chanroblesvirtualawlibrarychanrobles virtual law library
Relying upon Article 1354 of our Civil Code, the lower court presumed the existence
of said consideration, and this would seem to be the main factor that influenced its
decision in plaintiff's favor. It should be noted, however, that:chanrobles virtual
law library
(1) Article 1354 applies to contracts in general, whereas the second paragraph of
Article 1479 refers to "sales" in particular, and, more specifically, to "an accepted
unilateral promise to buy or to sell." In other words, Article 1479 is controlling in
the case at bar.chanroblesvirtualawlibrarychanrobles virtual law library
(2) In order that said unilateral promise may be "binding upon the promisor, Article
1479 requires the concurrence of a condition, namely, that the promise be
"supported by a consideration distinct from the price." Accordingly, the promisee
can not compel the promisor to comply with the promise, unless the former
establishes the existence of said distinct consideration. In other words,
the promisee has the burden of proving such consideration. Plaintiff herein has not
even alleged the existence thereof in his
complaint.chanroblesvirtualawlibrarychanrobles virtual law library
(3) Upon the other hand, defendant explicitly averred in her answer, and pleaded
as a special defense, the absence of said consideration for her promise to sell and,
by joining in the petition for a judgment on the pleadings, plaintiff has impliedly
admitted the truth of said averment in defendant's answer. Indeed as early as
March 14, 1908, it had been held, in Bauermann v. Casas, 3that:
One who prays for judgment on the pleadings without offering proof as to the truth
of his own allegations, and without giving the opposing party an opportunity to
introduce evidence, must be understood to admit the truth of all the material and
relevant allegations of the opposing party, and to rest his motion for judgment on
those allegations taken together with such of his own as are admitted in the
pleadings. (La Yebana Company vs. Sevilla, 9 Phil. 210). (Emphasis supplied.)
This view was reiterated in Evangelista v. De la Rosa 4and Mercy's Incorporated v.
Herminia Verde. 5chanrobles virtual law library
Squarely in point is Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific
Co., 6from which We quote:
Page | 132
The main contention of appellant is that the option granted to appellee to sell to it
barge No. 10 for the sum of P30,000 under the terms stated above has no legal
effect because it is not supported by any consideration and in support thereof it
invokes article 1479 of the new Civil Code. The article provides:
"ART. 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.chanroblesvirtualawlibrarychanrobles virtual law library
An accepted unilateral promise to buy or sell a determinate thing for a price certain
is binding upon the promisor if the promise is supported by a consideration distinct
from the price."
On the other hand, Appellee contends that, even granting that the "offer of option"
is not supported by any consideration, that option became binding on appellant
when the appellee gave notice to it of its acceptance, and that having accepted it
within the period of option, the offer can no longer be withdrawn and in any event
such withdrawal is ineffective. In support this contention, appellee invokes article
1324 of the Civil Code which provides:
"ART. 1324. When the offerer has allowed the offeree a certain period to accept,
the offer may be withdrawn any time before acceptance by communicating such
withdrawal, except when the option is founded upon consideration as something
paid or promised."
There is no question that under article 1479 of the new Civil Code "an option to
sell," or "a promise to buy or to sell," as used in said article, to be valid must be
"supported by a consideration distinct from the price." This is clearly inferred from
the context of said article that a unilateral promise to buy or to sell, even if
accepted, is only binding if supported by consideration. In other words, "an
accepted unilateral promise can only have a binding effect if supported by a
consideration which means that the option can still be withdrawn, even if accepted,
if the same is not supported by any consideration. It is not disputed that the option
is without consideration. It can therefore be withdrawn notwithstanding the
acceptance of it by appellee.chanroblesvirtualawlibrarychanrobles virtual law
library
It is true that under article 1324 of the new Civil Code, the general rule regarding
offer and acceptance is that, when the offerer gives to the offeree a certain period
to accept, "the offer may be withdrawn at any time before acceptance" except
when the option is founded upon consideration, but this general rule must be
interpreted as modified by the provision of article 1479 above referred to, which
applies to "a promise to buy and sell" specifically. As already stated, this rule
requires that a promise to sell to be valid must be supported by a consideration
distinct from the price.chanroblesvirtualawlibrarychanrobles virtual law library
We are not oblivious of the existence of American authorities which hold that an
offer, once accepted, cannot be withdrawn, regardless of whether it is supported
or not by a consideration (12 Am. Jur. 528). These authorities, we note, uphold
the general rule applicable to offer and acceptance as contained in our new Civil
Code. But we are prevented from applying them in view of the specific provision
embodied in article 1479. While under the "offer of option" in question appellant
has assumed a clear obligation to sell its barge to appellee and the option has been
exercised in accordance with its terms, and there appears to be no valid or
justifiable reason for appellant to withdraw its offer, this Court cannot adopt a
different attitude because the law on the matter is clear. Our imperative duty is to
apply it unless modified by Congress.
However, this Court itself, in the case of Atkins, Kroll and Co., Inc. v. Cua Hian
Tek, 8decided later that Southwestern Sugar & Molasses Co. v. Atlantic Gulf &
Pacific Co., 9saw no distinction between Articles 1324 and 1479 of the Civil Code
and applied the former where a unilateral promise to sell similar to the one sued
upon here was involved, treating such promise as an option which, although not
binding as a contract in itself for lack of a separate consideration, nevertheless
generated a bilateral contract of purchase and sale upon acceptance. Speaking
through Associate Justice, later Chief Justice, Cesar Bengzon, this Court said:
Furthermore, an option is unilateral: a promise to sell at the price fixed whenever
the offeree should decide to exercise his option within the specified time. After
accepting the promise and before he exercises his option, the holder of the option
is not bound to buy. He is free either to buy or not to buy later. In this case,
however, upon accepting herein petitioner's offer a bilateral promise to sell and to
Page | 133
buy ensued, and the respondent ipso facto assumed the obligation of a purchaser. an exception to the former, and exceptions are not favored, unless the intention to
He did not just get the right subsequently to buy or not to buy. It was not a mere the contrary is clear, and it is not so, insofar as said two (2) articles are concerned.
option then; it was a bilateral contract of What is more, the reference, in both the second paragraph of Art. 1479 and Art.
sale.chanroblesvirtualawlibrarychanrobles virtual law library 1324, to an option or promise supported by or founded upon a consideration,
strongly suggests that the two (2) provisions intended to enforce or implement the
Lastly, even supposing that Exh. A granted an option which is not binding for lack
same principle.chanroblesvirtualawlibrarychanrobles virtual law library
of consideration, the authorities hold that:
Upon mature deliberation, the Court is of the considered opinion that it should, as
"If the option is given without a consideration, it is a mere offer of a contract of
it hereby reiterates the doctrine laid down in the Atkins, Kroll & Co. case, and that,
sale, which is not binding until accepted. If, however, acceptance is made before a
insofar as inconsistent therewith, the view adhered to in the Southwestern Sugar
withdrawal, it constitutes a binding contract of sale, even though the option was
& Molasses Co. case should be deemed abandoned or
not supported by a sufficient consideration. ... . (77 Corpus Juris Secundum, p. 652.
modified.chanroblesvirtualawlibrarychanrobles virtual law library
See also 27 Ruling Case Law 339 and cases cited.)chanrobles virtual law library
WHEREFORE, the decision appealed from is hereby affirmed, with costs against
"It can be taken for granted, as contended by the defendant, that the option
defendant-appellant Severina Rigos. It is so ordered.
contract was not valid for lack of consideration. But it was, at least, an offer to sell,
which was accepted by letter, and of the acceptance the offerer had knowledge Reyes, J.B.L., Makalintal, Zaldivar, Teehankee, Barredo and Makasiar, JJ., concur.
before said offer was withdrawn. The concurrence of both acts - the offer and the
acceptance - could at all events have generated a contract, if none there was before Castro, J., took no part.
(arts. 1254 and 1262 of the Civil Code)." (Zayco vs. Serra, 44 Phil. 331.)

In other words, since there may be no valid contract without a cause or

consideration, the promisor is not bound by his promise and may, accordingly,
withdraw it. Pending notice of its withdrawal, his accepted promise partakes,
however, of the nature of an offer to sell which, if accepted, results in a perfected
contract of sale.chanroblesvirtualawlibrarychanrobles virtual law library

This view has the advantage of avoiding a conflict between Articles 1324 - on the
general principles on contracts - and 1479 - on sales - of the Civil Code, in line with
the cardinal rule of statutory construction that, in construing different provisions
of one and the same law or code, such interpretation should be favored as will
reconcile or harmonize said provisions and avoid a conflict between the same.
Indeed, the presumption is that, in the process of drafting the Code, its author has
maintained a consistent philosophy or position. Moreover, the decision
in Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co., 10holding that
Art. 1324 is modified by Art. 1479 of the Civil Code, in effect, considers the latter as

Page | 134
G.R. No. 73918 December 21, 1987
TONG BROTHERS CO., petitioner,
vs.
INTERMEDIATE APPELLATE COURT and JULIANO AND COMPANY, respondents.
GUTIERREZ, JR., J.:
This is a petition to review on certiorari the decision and order of the then
Intermediate Appellate Court, now Court of Appeals, in AC-G.R. No. 68505 which
awarded a total amount of P907,220.66 as damages, including attorney's fees, in
favor of the private respondent.
The petitioner is a registered general partnership engaged in the construction and
repair of vessels with drydocking facilities at Recodo Zamboanga del Sur while the
private respondent is a domestic corporation engaged in the coastwise shipping
industry operating for that purpose the vessel M/S Zamboanga-J.
Sometime in December, 1974, the private respondent allegedly contracted with
the petitioner the annual drydocking and repair of the Zamboanga-J. On the ground
that the petitioner did not complete and execute all the work necessary, essential
and indispensable to rendering the vessel seaworthy resulting in its deterioration
and total loss, the private respondent filed a complaint against the petitioner for
specific performance and damages with the Court of First Instance of Cotabato.
The petitioner denied that there was a perfected contract to repair Zamboanga-J
between the two parties.
To prove its case against the petitioner, the private respondent tried to establish
the following facts:
xxx xxx xxx
... As the need arose, the plaintiff had its vessels drydocked for repairs at the
dockyard of the defendant-appellant in Zamboanga City. This business relationship
started in 1960's (t.s.n., March 11, 1980, p. 7). The procedure was for these vessels
to be drydocked and repaired and after each job, a statement of account would be
sent to the plaintiff-appellee, which remitted payments to the defendant-appellant
in varying amounts (Exh. 9). Although Exhibit 9 consolidates the accounts
pertaining to the Cotabato J and the Zamboanga-J, in point of fact, statements were
separately prepared for said vessels.
Because the business relationship between the parties herein had continued for
over 10 years, the plaintiff-appellee enjoyed credit facilities from the defendant-
appellant and the defendant performed repair work on the plaintiff's vessel
without need of a formal written contract. On the strength of this relationship, the
plaintiff, sometime in December, 1974 brought the Zamboanga-J to the defendant-
appellant's dockyard. The defendant- appellant asked for a deposit of P15,000.00
but even without having received this amount that it had requested, the
defendant-appellant drydocked the vessel on December 27, 1974 (t.s.n., March 11,
1980, p. 8). The sum of P15,000.00 was received by the defendant on December
28, 1974 for which it issued two receipts, one for P5,000.00 and the other for
P10,000.00 (Exhs. "A" and "B").
With this payment, the defendant commenced work on the Zamboanga-J by
removing the rudders, pulled out tail shafts with propellers, etc., removed bottom
hull planking in way of inspecting ribs, and replaced same with new plankings, etc.
(t. s. n. Ibid, pp. 112, 126,134,135)
The plaintiff, even before the Zamboanga-J was drydocked, also shipped various
lumber materials to Zamboanga City to the defendant-appellant, through Luis
Canto in accordance with instructions from, and based on specifications of the
defendant (Exhs. D, E, F, G, and all submarkings, t.s.n., February 14, 1978, pp. 25-
30, pp. 31-34).
For some excuse or other, the defendant did not continue the job on the
Zamboanga-J. Instead, it undocked the vessel on February 4, 1975 and left it
exposed to the elements where it remained until it became a total loss. This suit
was therefore filed to call the defendant- appellant to account for its failure to
comply with its obligation to repair the plaintiff-appellee's vessel which failure
resulted in damages to the plaintiff- appellee. (pp. 36-37, Rollo)
Page | 135
On the other hand, the petitioner denied responsibility for the total loss of the
vessel M/S Zamboanga-J and stated the facts as follows:
xxx xxx xxx
... Its business name is VARADERO DE RECODO. It used to repair the vessels owned
by plaintiff-appellee. The last vessel of plaintiff-appellee which was drydocked at
the VARADERO DE RECODO was Zamboanga- J. It was drydocked on December 27,
1974, after plaintiff-appellee paid P15,000.00, representing partial payment of its
old accounts. Conformably with the written application filed by plaintiff-appellee
with the Coast Guard, Zamboanga City, inspector Anton Casimero inspected the
vessel Zamboanga-J on January 2, 1975. Present during the inspection were
Messrs. Ricardo Tong and Joaquin Tong, representatives of defendant- appellant
and Mr. Luis Canto representative of plaintiff-appellee. While admittedly the man
of plaintiff-appellee in Zamboanga City, Mr. Luis Canto had no authority to enter
into a contract with defendant-appellant for the repair of Zamboanga-J. Because of
the extensive repair to be done on the vessel, defendant-appellant prepared a
written contract for the signature of plaintiff-appellee's authorized representative.
In said written contract, plaintiff-appellee was to have deposited with defendant-
appellant the amount of P50,000.00, among others. Mr. Luis Canto man of plaintiff-
appellee's in Zamboanga City, was informed on several occasions by defendant-
appellant to get in touch with his employer in Cotabato City, the purpose being was
(sic) for plaintiff-appellee's representative to see for himself the extent of the
deterioration of the vessel and to sign the written contract prepared by defendant-
appellant. No authorized representative of plaintiff-appellee came to Zamboanga
City. It sent, however, several telegrams to defendant-appellant demanding,
among others, that defendant-appellant repair the Zamboanga-J, there being an
earlier agreement between defendant-appellant and Mr. Protacio Juliano,
authorized representative of plaintiff-appellee. On the other hand, defendant-
appellant advised plaintiff- appellee to send its authorized representative to
Zamboanga City to see for himself the extent of the deterioration of the vessel
Zamboanga-J, and insisted, among others, that it had no contract with plaintiff-
appellee for the repair of Zamboanga-J. In addition thereto, plaintiff- appellee
never bothered to secure the JOB ORDER from the Coast Guard, it being its duty to
do so. The vessel was undocked on February 4, 1975, and the following day,
defendant-appellant sent plaintiff-appellee a Statement of Account in the amount
of P13,134.95. Of this amount P9,800.00 represented expenses for dock rental and
for the docking and undocking of the vessel. The balance of the amount
represented expenses for labor and materials used in closing the open sections of
the vessel. Without these latter expenses, the vessel Zamboanga-J could not have
been REFLOATED. Zamboanga-J was not repaired and it is now a total loss. (pp. 2-
4, Appellant's Brief).
The lower court ruled in favor of the private respondent. The dispositive portion of
the decision reads:
WHEREFORE, the judgment is hereby entered in favor of JULIANO & COMPANY
INCORPORATED and against the defendant TONG BROTHERS AND COMPANY who
(sic) is ordered to pay the plaintiff the following:
1. To pay plaintiff the sum of FOUR HUNDRED AND FIFTY THOUSAND PESOS
(P450,000.00), which is the value of the Zamboanga-J which is now a total loss;
2. To pay the plaintiff the sum of FIVE HUNDRED FORTY TWO THOUSAND TWO
HUNDRED AND TWENTY PESOS AND SIXTY SIX CENTAVOS (P 542,220.66) which is
the unrealized net income of the ZAMBOANGA-J had the defendant repaired the
same and finished the job;
3. To reimburse plaintiff the sum of TEN THOUSAND PESOS (P10,000.00) as
reimbursement for what plaintiff had paid its counsel;
4. To reimburse plaintiff the sum of FIVE THOUSAND PESOS (P5,000.00) as
reimbursement for the expenses incurred by the plaintiff in prosecuting the case
and
5. To pay the costs of this suit. (Rollo,pp.34-35)
Upon appeal, the then Intermediate Appellate Court affirmed the lower court's
decision but reduced the value of the boat to P350,000.00.
We initially denied the petition in a resolution dated May 5, 1986. Upon a motion
for reconsideration, we set aside the resolution and gave due course to the
petition.
Page | 136
The petitioner assigns the following errors:
I
THE RESPONDENT INTERMEDIATE APPELLATE COURT ERRED IN FINDING THAT
THERE WAS A PERFECTED CONTRACT FOR THE REPAIR OF THE VESSEL
ZAMBOANGA-J AND THAT THE PROXIMATE CAUSE OF THE LOSS OF THE VESSEL
WAS PETITIONER'S VIOLATION THEREOF.
II
THE RESPONDENT INTERMEDIATE APPELLATE COURT ERRED IN AWARDING
EXCESSIVE DAMAGES TO PRIVATE RESPONDENT CONSIDERING THAT THE SUBJECT
VESSEL WAS A WORLD WAR 11 DERELICT AND CONSIDERING FURTHER THAT THE
RESPONDENT APPELLATE COURT FOUND AS A FACT THAT THE OWNER OF THE
VESSEL WAS ALSO AT FAULT IN NOT MINIMIZING ITS LOSSES.
III
THE RESPONDENT INTERMEDIATE APPELLATE COURT ERRED IN FINDING THAT
PETITIONER FAILED TO CONSIGN THE VESSEL UPON THE REFUSAL OF ITS OWNER
TO ACCEPT ITS RETURN INSPITE OF THE EVIDENCE THAT THE VESSEL HAD ALWAYS
BEEN UNDER THE FULL CONTROL AND DIRECTION OF ITS OWNER. (Rollo, pp. 17-
18).
The decisive issue is whether or not there was a perfected contract between the
petitioner and the private respondent to repair the vessel Zamboanga-J.
The applicable laws on work done upon a vessel are the general rules on contract.
A contract may be entered into in whatever form except where the law requires a
document or other special form as in the contracts enumerated in Article 1388 of
the Civil Code. The general rule, therefore, is that a contract may be oral or written.
(Royal Lines, Inc. v. Court of Appeals, 143 SCRA 608).
The appellate court, adopting the findings and conclusions of the lower court, ruled
that there was a perfected contract for the repair of the vessel Zamboanga-J. It
based its ruling on the following circumstances: 1) The previous transactions and
business relationship between the two parties showed that they never executed
written contracts for the repair of vessels owned by the private respondent; 2) The
procedure for necessary repairs of the private respondent's vessels consisted only
in the drydocking of the vessel at the petitioner's shipyard to be repaired by the
latter after which the bill would be sent to the former for the payment; 3) In the
case of the contract to repair Zamboanga-J, this vessel was accepted by the
petitioner and it was drydocked on December 27, 1974; 4) A day after, or on
December 28, 1974, the private respondent paid P15,000.00 in the form of two (2)
checks as initial deposit for the repair of Zamboanga-J; 5) There was a job order
from the Coast Guard as evidenced by the application for drydocking (Exhibit C)
and the admitted inspection of the vessel by the Coast Guard in the presence of
Mr. Joaquin Tong, a managing partner of the Veradero de Recodo the business
name of the petitioner, and 6) The petitioner actually commenced the repair of the
vessel when it removed the rudders and pulled out the tail shafts and did other
things.
The general rule is that the "jurisdiction of this Court in cases brought to us from
the Court of Appeals is limited to reviewing and revising the errors of law imputed
to it, its findings of facts being conclusive. (Community Savings and Loan
Association, Inc., et al. v. Court of Appeals, et al., G.R. No. 75786, August 31, 1987,
citing De Gala-Sison v. Manalo, 8 SCRA 595; Goduco v. Court of Appeals, 14 SCRA
282; Ramirez Telephone Corporation v. Bank of America, 29 SCRA 171; Chua v.
Court of Appeals, 33 SCRA 373.) There are, however, exceptions to this rule as
when:
... (1) the conclusion is a finding grounded entirely on speculation, surmise and
conjectures; (2) the inference made is manifestly mistaken; (3) there is grave abuse
of discretion; (4) the judgment is based on misapprehension of facts; (5) the Court
of Appeals went beyond the issues of the case and its findings are contrary to the
admission of both appellant and appellees [Roque v. Buan, L-22459, Oct. 31, 1967,
21 SCRA 6481; (6) the findings of facto of the Court of Appeals are contrary to those
of the trial court; (7) said findings of facts are conclusions without citation of
specific evidence on which they are based; (8) the facts set forth in the petition as
wen as in the petitioner's main and reply briefs are not disputed by the respondents
[Garcia v. CA, L-26490, June 30, 1970, 33 SCRA 6221; and (9) when the finding of
facts of the Court of Appeals is premised on the absence of evidence and is
Page | 137
contradicted by evidence on record [Salazar v. Gutierrez, L-21727, May 29, 1970,
33 SCRA 2431. (Tolentino v. De Jesus, 56 SCRA 167)
The fact that the parties' previous contracts for the repair of the private
respondent's vessels were an oral and that the procedure consisted merely in the
vessels being drydocked at the petitioner's shipyard and after repair the petitioner
would just send the bin to the private respondent, does not necessarily result in a
conclusive presumption that all subsequent contracts between the parties of
similar or allied nature should also be oral and the procedure be the same.
An examination of the records reveals that there are circumstances overlooked by
the appellate court which support the petitioner's contentions that — 1) there was
no perfected contract between the parties to repair Zamboanga-J, and 2) the
proximate cause of the total loss of Zamboanga-J was the abandonment of the
vessel by the private respondent.
On January 2, 1975, during the inspection made by the Coast Guard inspector,
Anton Casimero in the presence of Mr. Luis Canto the private respondent's
representative, and Mr. Joaquin Tong, managing partner of the petitioner, it was
found that the wooden boat had so deteriorated that in order to repair it, all the
original ribs of the boat and the plankings must be removed and that, in effect, the
repair would be a construction of a new boat. It was also established that the
private respondent never paid on time during the parties' previous transactions
and when the Zamboanga-J was drydocked at the petitioner's shipyard, the private
respondent still owed P28,000.00 for previous jobs. In fact, the petitioner had filed
a collection suit, Civil Case No. 281 (1728), against the private respondent with the
Court of First Instance of Cotabato.
These undisputed facts give credence to the petitioner's contention that before
accepting the job request to repair Zamboanga-J, it wanted to have the private
respondent sign a written contract with an initial downpayment of P50,000.00.
According to the petitioner, the P15,000.00 was partial settlement of previous
accounts. Taking into consideration the petitioner's previous experiences together
with the private respondent's allegations, it is equally likely that the P15,000.00
paid by the latter on December 28, 1974 was only a condition precedent to the
acceptance of Zamboanga-J for drydocking and not a downpayment for its repair.
We agree with the petitioner in its contentions:
... That the payment of P15,000 on December 28, 1974 could not have possibly
been for the repairs of the Zamboanga-J is confirmed no less than by the very
findings of the trial court when it stated that 'the procedure that was followed was
for the vessels of plaintiff (herein private respondent) to be drydocked and repaired
and after (sic) job, the statements of account will be sent to plaintiff and in turn,
the plaintiff will remit payment to the defendant (herein petitioner) in varying
amounts' (p. 182, R.A.) Following this reasoning, and concededly since the work on
the Zamboanga-J had not yet even commenced, then the P15,000 payment on
December 28, 1974 could only pertain to the partial settlement of private
respondent's previous unpaid accounts. It is for this reason that the two receipts
marked as Exhibits A and B issued on December 28,1974 for P15,000 made no
specific mention that these were in payment for the repairs of the Zamboanga-J. As
a matter of fact, private respondent admits that no such downpayment had been
required for past repairs with the shipyard.
Petitioner's submission is further strengthened when we consider that no estimate
of the expenses for repairs to be incurred had as yet been made on the vessel
Zamboanga-J on December 28, 1974 (one day after the vessel was admitted for
drydocking) and petitioner would have no basis for requesting an immediate
downpayment. The evidence shows that it was only on January 2, 1975 when a
Coast Guard inspector conducted an ocular inspection of the vessel in the presence
of Luis Canto private respondent's representative. Logically it was only at that time
(January 2, 1975) that the shipyard was appraised of the work to be done on the
vessel and for this reason, said petitioner demanded for a P50,000 downpayment,
not P15,000 as claimed by private respondent. (p. 24, Rollo)
Contrary to the findings of the appellate court, there was actually no job order
issued by the Coast Guard. Exhibit "C" is merely the petitioner's application for an
inspection of the boat addressed to the Coast Guard. Moreover, the removal of the
rudders and pulling out of the tail shafts with propellers, done even before January
2, 1975, were standard operating procedures on the part of the petitioner to
inspect the condition of the tail shafts and also the state of the rudders. This did
Page | 138
not amount to a commencement of the repair of the vessel or a partial compliance WE CANNOT START THE JOB ORDER WITHOUT YOUR PRESENCE TO DETERMINE
with a contract to repair the vessel. THE EXTENT OF WORK

Between January 14, 1975 to January 28, 1975, the two parties communicated with VARADERO DE RECODO (Exhibit J-4,
each other through telegrams.
p. 21, Folder of Exhibits)
On January 14, 1975, Protacio Juliano, owner of the respondent company sent the
On January 22, 1975, the petitioner sent another telegram to Protacio Juliano as
following telegram to the petitioner:
follows:
PLEASE ADVISE EXTENT OF REPAIR FOR DRYDOCK ZAMBOANGA-J PER OUR
YOUR PRESENCE BADLY NEEDED UP TO FRIDAY IF NOT ARRIVED PRESUME NOT
AGREEMENT WIRE REPLY
INTERESTED WITH THE REPAIR OF ZBGA-J STOP WILL COVER OPENED SECTION AND
JULIANO (Exhibit J-2, p. 20, UNDOCK

Folder of Exhibits) VARADERO DE RECODO (Exhibit 5-B, p. 23,

On January 16, 1975 Juliano again sent the following telegram to the petitioner: Folder of Exhibits

URGENTLY REQUIRE STATUS REPAIR ZAMBOANGA-J ADVISE COLLECT In reply, Atty. Badoy, representing the private respondent, sent a telegram to the
petitioner on January 23, 1975, to wit:
JULIANO (Exhibit J-3, p. 20,
RE-ZAMBOANGA-J PARTY CONCERNED OUT OF CITY ANYTHING YOU DO NOT IN
Folder of Exhibits)
ACCORDANCE WITH AGREEMENT IS SOLELY AT YOUR OWN RISK REGARDS
On January 17, 1975, the petitioner in turn sent the following telegram to Juliano
ATTY. BADOY (Exhibit A, p. 23,
NEED YOUR PRESENCE BEFORE WE START THE REPAIR FOR EVALUATION REGARDS
Folder of Exhibits)
VARADERO (Exhibit J-4, p. 20,
On January 28, 1975, the petitioner sent another telegram to Juliano, to wit:
Folder of Exhibits)
REURTEL JANUARY 23 NO AGREEMENT AS TO THE EXTENT OF REPAIRS AND
On January 18, 1975, Juliano sent the following telegram to the petitioner: PAYMENT WILL UNDOCK VESSEL

"REUR JAN 17 INSISTING ON PREVIOUS AGREEMENT MY PRESENCE NO LONGER VARADERO DE RECODO (Exhibit J-7, p. 21,
NECESSARY PLEASE REPLY
Folder of Exhibits)
TOTO JULIANO (Exhibit J-5, p. 20,
These series of communications show that there was no perfected contract to
Folder of Exhibits) repair the vessel Zamboanga-J. The parties were aware of where they stood.

In reply to Juliano, the petitioner sent the following telegram in January 20, 1975: Article 1315 of the Civil Code provides:
Page | 139
Contracts are perfected by mere consent, and from that moment the parties are
bound not only to the fulfillment of what has been expressly stipulated but also to
all the consequences which, according to their nature, may be in keeping with good
faith, usage and law.
while Article 1319 thereof provides:
Consent is manifested by the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the contract. The offer must be certain
and the acceptance absolute. A qualified acceptance constitutes a counter-offer.
As can be gleaned from the exchange of telegrams between the two parties, there
was not yet a meeting of the minds as to the cause of the contract. The cause of a
contract has been defined "as the essential reason which moves the contracting
parties to enter into it (8 Manresa, 5th Edition, p. 450). In other words, the cause
is the immediate, direct and proximate reason which justifies the creation of an
obligation thru the will of the contracting parties (3 Castan, 4th Edition, p. 347)."
(General Enterprises, Inc. v. Lianga Bay Logging Co., Inc., 11 SCRA 733, 739). For the
private respondent, the cause of the contract was the repair of its vessel
Zamboanga-J while for the petitioner the cause would be its commitment to repair
the vessel and make it seaworthy. The telegrams dated January 17, January 20, and
January 28, 1975 sent by the petitioner to the private respondent, however,
indicate that the former had not accepted the repair of Zamboanga-J, the reason
being that the extent of the repair to be made necessitated a major expense so
that the petitioner insisted on the presence of the private respondent for
evaluation before it accepted the repair of the wooden vessel. That the petitioner
had not yet consented to the contract is evident when on January 28, 1975, it sent
a telegram stating: "... NO AGREEMENT AS TO THE EX TENT OF REPAIRS AND
PAYMENT WILL UNDOCK VESSEL." The fact that the private respondent who
received this telegram ignored it, confirms that there was no perfected contract to
repair Zamboanga-J.
It is to be noted that despite its knowledge of Zamboanga-J having been undocked
as early as February 7, 1975 when the petitioner sent a telegram advising that
Zamboanga-J undocked already, " the private respondent took no action to save its
vessel. Instead, its officers and crew were ordered ashore and the vessel was left
to rot and decay in the sea of Zamboanga. It was only on July 28, 1975, after the
lapse of almost six months, that the private respondent tried to recover the value
of its vessel from the petitioner. This prompted the petitioner to send another
telegram to the private respondent on August 1, 1975, to wit:
AS EARLY AS JANUARY VARADERO DEMANDED ZAMBOANGA-J OFFICERS YOUR MR
CANTO TAKE ZAMBOANGA J OUT VARADERO PREMISES BUT YOUR OFFICERS CREW
ABANDONED SAME PRESENTLY VARADERO PAYING SECURITY GUARDS AND
DEMANDING REIMBURSEMENT
ATTORNEY JESUS AQUINO
COUNSEL VARADERO RECODO
(Exhibit 5-C, p. 23, Folder of Exhibits)
Under the circumstances, we rule that the proximate cause of the total loss of
Zamboanga-J was the negligence of the private respondent. Breach of contract by
the appellant could not have been the proximate cause as there was no perfected
contract between the parties to repair Zamboanga-J. Hence, the private
respondent is not entitled to recover damages against the private respondent.
We agree with the petitioner that:
The loss of the vessel can be attributed only to the immediate and proximate
negligence of private respondent who failed to exercise the diligence of a good
father of a family. Because after the undocking on February 4, 1974: (1) the officers
and the crew were allowed to depart; (2) no measures were taken to have the
vessel repaired; (3) the vessel was left to the elements; (4) a marine surveyor was
hired only six months later when the ship was already beyond repair, the
subsequent loss can be attributed solely to the negligence of the owner.
Consequently, petitioner should be totally absolved of any liability for the loss of
Zamboanga-J as so provided under Article 2179 of the Civil Code.
ART. 2179. When the plaintiff's own negligence was the immediate and proximate
cause of his injury, he cannot recover damages. But if his negligence was only
contributory, the immediate and proximate cause of the injury being the
Page | 140
defendant's lack of due care, shall mitigate the damages to be awarded. (Emphasis
supplied)
The private respondent, as the shipowner, was in actual possession of the vessel
all along even when it was on drydock and after it had been undocked. This is
shown by the affidavit dated September 20, 1985 of the petitioner attached as
Annex A to the Supplement to Motion for Reconsideration dated September 25,
1985 (Annex 1, Petition) and by the fact that the vessel had a thousand items by
value to be safeguarded such as nautical instruments, bedding, kitchen utensil and
the like. As a matter of fact, the crew of the vessel was on board when the
Zamboanga-J was released from petitioner's shipyard on February 4, 1975.
Respondent's witness Luis Canto even admitted that the subject vessel was afloat.
For several months, private respondent allowed the Zamboanga-J to rot and
deteriorate by exposing it to the elements. The private respondent did not take any
measure to save the ship but even ordered its crew to abandon it. The marine
surveyor was dispatched only on September 1976 to inspect the Zamboanga-J
which at that time was already a total loss. (p. 27, Rollo)
The private respondent did not bother from January, 1975 to September, 1976 or
for almost two years, to find out what happened to its vessel inspite of its full
knowledge that the boat had been undocked and to take concrete steps to save
and rehabilitate it. It relied completely on an alleged verbal understanding in order
to get from the petitioner the full value of a functioning vessel and the income it
claimed would have been earned for the next five years. Not only was a written
agreement for the repair of the vessel, missing in this case but the petitioner
formally refused to accept the job and to enter into the contract unless certain
terms were met. Under the circumstances, we are constrained to rule that the
respondent court committed reversible error.
WHEREFORE, the instant petition is hereby GRANTED. The questioned decision is
REVERSED AND SET ASIDE. The complaint in Civil Case No. 2446 of the then Court
of First Instance of Cotabato is DISMISSED.
SO ORDERED.
G.R. No. L-31018 June 29, 1973
LORENZO VELASCO AND SOCORRO J. VELASCO, petitioners,
vs.
HONORABLE COURT OF APPEALS and MAGDALENA ESTATE, INC., respondents.
Napoleon G. Rama for petitioners.
Dominador L. Reyes for private respondent.
CASTRO, J.:
This is a petition for certiorari and mandamus filed by Lorenzo Velasco and Socorro
J. Velasco (hereinafter referred to as the petitioners) against the resolution of the
Court of Appeals dated June 28, 1969 in CA-G.R. 42376, which ordered the
dismissal of the appeal interposed by the petitioners from a decision of the Court
of First Instance of Quezon City on the ground that they had failed seasonably to
file their printed record on appeal.
Under date of November 3, 1968, the Court of First Instance of Quezon City, after
hearing on the merits, rendered a decision in civil case 7761, dismissing the
complaint filed by the petitioners against the Magdalena Estate, Inc. (hereinafter
referred to as the respondent) for the purpose of compelling specific performance
by the respondent of an alleged deed of sale of a parcel of residential land in favor
of the petitioners. The basis for the dismissal of the complaint was that the alleged
purchase and sale agreement "was not perfected".
On November 18, 1968, after the perfection of their appeal to the Court of Appeals,
the petitioners received a notice from the said court requiring them to file their
printed record on appeal within sixty (60) days from receipt of said notice. This 60-
day term was to expire on January 17, 1969.
Allegedly under date of January 15, 1969, the petitioners allegedly sent to the Court
of Appeals and to counsel for the respondent, by registered mail allegedly
deposited personally by its mailing clerk, one Juanito D. Quiachon, at the Makati
Post Office, a "Motion For Extension of Time To File Printed Record on Appeal." The
Page | 141
extension of time was sought on the ground "of mechanical failures of the printing and the respondent, respectively. After several other pleadings and manifestations
machines, and the voluminous printing jobs now pending with the Vera Printing were filed by the parties relative to the issue raised by the respondent's above-
Press. ..." mentioned motion for reconsideration, the Court of Appeals promulgated on June
28, 1969, its questioned resolution, the dispositive portion of which reads as
On February 10, 1969, the petitioners filed their printed record on appeal in the
follows:
Court of Appeals. Thereafter, the petitioners received from the respondent a
motion filed on February 8, 1969 praying for the dismissal of the appeal on the WHEREFORE, the motion for reconsideration filed on March 11, 1969 is granted
ground that the petitioners had failed to file their printed record on appeal on time. and appeal interposed by plaintiff-appellants from the judgment of the court below
Acting on the said motion to dismiss the appeal, the Court of Appeals, on February is hereby dismissed for their failure to file their printed Record on Appeal within
25, 1969, issued the following resolution: the period authorized by this Court. Atty. Patrocino R. Corpuz [counsel of the
petitioner] is required to show cause within ten (10) days from notice why he
Upon consideration of the motion of counsel for defendant-appellee praying on
should not be suspended from the practice of his necessary investigation against
the grounds therein stated that the appeal be dismissed in accordance with Rules
Juanito D. Quiachon of the Salonga, Ordoñez, Yap, Sicat & Associates Law Office,
of Court, and of the opposition thereto filed by counsel for plaintiff-appellants, the
Suite 319 337 Rufino Building, Ayala Avenue, Makati Post Office, to file the
Court RESOLVED to DENY the said motion to dismiss.
appropriate criminal action against them as may be warranted in the premises, and
Upon consideration of the registry-mailed motion of counsel for plaintiffs to report to this Court within thirty (30) days the action he has taken thereon.
appellants praying on the grounds therein stated for an extension of 30 days from
The foregoing desposition was based on the following findings of the Court of
January 15, 1969 within which to file the printed record on appeal, the Court
Appeals:
RESOLVED to GRANT the said motion and the printed record on appeal which has
already been filed is ADMITTED. An examination of the Rollo of this case, particularly the letter envelope on page
26 thereof, reveals that on January 15, 1969, plaintiffs supposedly mailed via
On March 11, 1969, the respondent prayed for a reconsideration of the above-
registered mail from the Post Office of Makati, Rizal their motion for extension of
mentioned resolution, averring that the Court of Appeals had been misled bythe
30 days from that date to file their printed Record on Appeal, under registered
petitioners' "deceitful allegation that they filed the printed record on appeal within
letter No. 0216. However, in an official certification, the Postmaster of Makati
the reglementary period," because according to a certification issued by the
states that the records of his office disclose: (a) that there were no registered
postmaster of Makati, Rizal, the records of the said post office failed to reveal that
letters Nos. 0215 and 0216 from the Salonga, Ordoñez, Yap, Sicat & Associates
on January 15, 1969 — the date when their motion for extension of time to file the
addressed to Atty. Abraham F. Sarmiento, 202 Magdalena Building, España Ext.,
printed record on appeal was supposedly mailed by the petitioners — there was
Quezon City, and to the Court of Appeals, Manila, respectively, that were posted in
any letter deposited there by the petitioners' counsel. The petitioners opposed the
the Post Office of Makati, Rizal, on January 15, 1969; (b) that there is a registered
motion for reconsideration. They submitted to the appellate court the registry
letter numbered 215 but that the same was posted on January 3, 1969 by Enriqueta
receipts (numbered 0215 and 0216), both stampled January 15, 1969, which were
Amada of 7 Angel, Pasillo F-2, Cartimar, Pasay City, as sender, and Giral Amasan of
issued by the receiving clerk of the registry section of the Makati Post Office
Barrio Cabuniga-an, Sto. Niño, Samar, as addressee; and that there is also a
covering the mails for the disputed motion for extension of time to file their printed
registered letter numbered 216; but that the same was likewise posted on January
record on appeal and the affidavit of its mailing clerk Juanito D. Quiachon, to prove
3, 1969 with E.B.A. Construction of 1049 Belbar Building, Metropolitan, Pasong
that their motion for extension was timely filed and served on the Court of Appeals
Page | 142
Tamo, Makati, as sender, and Pres. R. Nakaya of the United Pacific Trading Co., Ltd.,
79, 6 Chamo, Nakatu, Yokohari, Japan, as addressee; (c) that on January 15, 1969,
the registered letters posted at the Makati Post Office were numbered
consecutively from 1001-2225, inclusive, and none of these letters was addressed
to Atty. Abraham F. Sarmiento of to the Court of Appeals; (d) that in Registry Bill
Book No. 30 for Quezon City as well as that Manila, corresponding to February 7,
1969, there are entries covering registered letters Nos. 0215 and 0216 for dispatch
to Quezon City and Manila, respectively; however, such registry book for February
7, 1969 shows no letters with such numbers posted on the said date.
The Acting Postmaster of the Commercial Center Post Office of Makati, Rizal,
further certifies that "Registry Receipts Nos. 0215 and 0216 addressed to Atty.
Abraham F. Sarmiento of the Magdalena Estate, Quezon City and the Honorable
Court of Appeals, respectively, does not appear in our Registry Record Book which
was allegedly posted at this office on January 15, 1969."
From the foregoing, it is immediately apparent that the motion for extension of
time to file their Record on Appeal supposedly mailed by the plaintiffs on January
15, 1969 was not really mailed on that date but evidently on a date much later than
January 15, 1969. This is further confirmed by the affidavit of Flaviano Malindog, a
letter carrier of the Makati Post Office, which defendant attached as Annex 1 to its
supplemental reply to plaintiffs' opposition to the motion for reconsideration. In
his said affidavit, Malindog swore among others:
'That on February 7, 1969, between 12:00 o'clock noon and 1:00 o'clock in the
afternoon, JUANITO D. QUIACHON approached me at the Makati Post Office and
talked to me about certain letters which his employer had asked him to mail and
that I should help him do something about the matter; but I asked him what they
were all about, and he told me that they were letters for the Court of Appeals and
for Atty. Abraham Sarmiento and that his purpose was to show that they were
posted on January 15, 1969; that I inquired further, and he said that the letters
were not so important and that his only concern was to have them post maker
January 15, 1969;
'That believing the word of JUANITO D. QUIACHON that the letters were not really
important I agreed to his request; whereupon, I got two (2) registry receipts from
an old registry receipt booklet which is no longer being used and I numbered them
0215 for the letter addressed to Atty. Abraham Sarmiento in Quezon City and 0216
for the letter addressed to the Court of Appeals, Manila; that I placed the same
numbering on the respective envelopes containing the letters; and that I also post
maker them January 15, 1969;
'That to the best of my recollection I wrote the correct date of posting, February 7,
1969, on the back of one or both of the registry receipts above mentioned;
'That the correct date of posting, February 7, 1969 also appears in the Registry Bill
Books for Quezon City and Manila where I entered the subject registered letters;
Of course, plaintiff's counsel denies the sworn statement of Malindog and even
presented the counter-affidavit of one of his clerk by the name of Juanito D.
Quiachon. But between Malindog, whose sworn statement is manifestly a
declaration against interest since he can be criminally prosecuted for falsification
on the basis thereof, and that of Quiachon, whose statement is self-serving, we are
very much inclined to give greater weight and credit to the former. Besides,
plaintiffs have not refuted the facts disclosed in the two (2) official certifications
above mentioned by the Postmakers of Makati, Rizal. These two (2) certifications
alone, even without to move this Court to reconsider its resolution of February 25,
1969 and order the dismissal of this appeal.
On September 5, 1969, after the rendition of the foregoing resolution, the Court of
Appeals promulgated another, denying the motion for reconsideration of the
petitioner, but, at the same time, accepting as satisfactory the explanation of Atty.
Patrocino R. Corpuz why he should not be suspended from the practice of the legal
profession.
On September 20, 1969, the First Assistant Fiscal of Rizal notified the Court of
Appeals that he had found a prima facie case against Flaviano C. Malindog and
would file the corresponding information for falsification of public documents
against him. The said fiscal, however, dismissed the complaint against Quiachon for
lack of sufficient evidence. The information subsequently filed against Malindog by
the first Assistance Fiscal of Rizal reads as follow:
Page | 143
That on or about the 7th day of February 1969, in the municipality of Makati,
province of Rizal, and a place within the jurisdiction of this Honorable Court, the
above-named accused, conspiring and confederating together and mutually
helping and aiding with John Doe, whose true identity and present whereabout is
still unknown, did then and there willfully, unlawfully and feloniously falsify two
registry receipts which are public documents by reason of the fact that said registry
receipts are printed in accordance with the standard forms prescribed by the
Bureau of Posts, committed as follows: the above-named accused John Doe, on the
date above-mentioned approached and induced the accused Malindog, a letter-
carrier at the Makati Post Office, to postmark on Abraham Sarmiento in Quezon
City, and the other to the Court of Appeals, Manila, and the accused Malindog,
acceding to the inducement of, and in conspiracy with, his co-accused John Doe,
did then and there willfully and feloniously falsify said registry receipts of the
Makati Post Office on January 15, 1969, thereby making it appear that the said
sealed envelopes addressed to Atty. Sarmiento and the Court of Appeals were
actually posted, and causing it to appear that the Postmaster of Makati participated
therein by posting said mail matters on January 15, 1969, when in truth and in fact
he did not so participate.
The petitioner contend that in promulgating its questioned resolution, the Court of
Appeals acted without or in excess of jurisdiction, or with such whimsical and grave
abuse of discretion as to amount to lack of jurisdiction, because (a) it declared that
the motion for extension of time to file the printed record on appeal was not mailed
on January 15, 1969, when, in fact, it was mailed on the record on appeal was filed
only on February 10, 1969, beyond the time authorized by the appellate court,
when the truth is that the said date of filing was within the 30-day extension
granted by it; (c) the adverse conclusion of the appellate court are not supported
by the records of the case, because the said court ignored the affidavit of the
mailing clerk of the petitioners' counsel, the registry receipts and postmarked
envelopes (citing Henning v. Western Equipment, 62 Phil. 579, and Caltex Phil., Inc.
v. Katipunan Labor Union, 52 O.G. 6209), and, instead, chose to rely upon the
affidavit of the mail carrier Malindog, which affidavit was prepared by counsel for
the respondent at the affiant himself so declared at the preliminary investigation
at the Fiscal's office which absolved the petitioners' counsel mailing clerk Quiachon
from any criminal liability; (d) section 1, Rule 50 of the Rules of Court, which
enumerates the grounds upon which the Court of Appeals may dismiss an appeal,
does not include as a ground the failure to file a printed record on appeal; (e) the
said section does not state either that the mismailing of a motion to extend the
time to file the printed record on appeal, assuming this to be the case, may be a
basis for the dismissal of the appeal; (f) the Court of Appeals has no jurisdiction to
revoke the extention of time to file the printed record on appeal it had granted to
the petitioners based on a ground not specified in section 1, Rule 50 of the Rules
of Court; and (g) the objection to an appeal may be waived as when the appellee
has allowed the record on appeal to be printed and approved (citing Moran, Vol. II,
p. 519).
Some of the objections raised by the petitioners to the questioned resolution of
the Court of Appeals are obviously matters involving the correct construction of
our rules of procedure and, consequently, are proper subjects of an appeal by way
of certiorari under Rule 45 of the Rules of Court, rather than a special civil action
for certiorari under Rule 65. The petitioners, however, have correctly appreciated
the nature of its objections and have asked this Court to treat the instant petition
as an appeal by way of certiorari under Rule 45 "in the event ... that this Honorable
Supreme Court should deem that an appeal is an adequate remedy ..." The nature
of the case at bar permits, in our view, a disquisition of both types of assignments.
We do not share the view of the petitioners that the Court of Appeals acted without
or in excess of jurisdiction or gravely abused its discretion in promulgating the
questioned resolution.
While it is true that stamped on the registry receipts 0215 and 0215 as well as on
the envelopes covering the mails in question is the date "January 15, 1969," this,
by itself, does not establish an unrebuttable presumption of the fact of date of
mailing. Henning and Caltex, cited by the petitioners, are not in point because the
specific adjective issue resolved in those cases was whether or not the date of
mailing a pleading is to be considered as the date of its filing. The issue in the case
at bar is whether or not the motion of the petitioners for extension of time to file
the printed record on appeal was, in point of fact, mailed (and, therefore, filed) on
January 15, 1969.
Page | 144
In resolving this issue in favor of the respondent, this Court finds, after a careful
study and appraisal of the pleadings, admissions and denials respectively adduced
and made by the parties, that the Court of Appeals did not gravely abuse its
discretion and did not act without or in excess of its jurisdiction. We share the view
of the appellate court that the certifications issued by the two postmasters of
Makati, Rizal and the sworn declaration of the mail carrier Malindog describing how
the said registry receipts came to be issued, are worthy of belief. It will be observed
that the said certifications explain clearly and in detail how it was improbable that
the petitioners' counsel in the ordinary course of official business, while Malindog's
sworn statement, which constitutes a very grave admission against his own
interest, provides ample basis for a finding that where official duty was not
performed it was at the behest of a person interested in the petitioners' side of the
action below. That at the preliminary investigation at the Fiscal's office, Malindog
failed to identify Quiachon as the person who induced him to issue falsified
receipts, contrary to what he declared in his affidavit, is of no moment since the
findings of the inquest fiscal as reflected in the information for falsification filed
against Malindog indicate that someone did induce Malindog to make and issue
false registry receipts to the counsel for the petitioners.
This Court held in Bello vs. Fernando1 that the right to appeal is nota natural right
nor a part of due process; it is merely a statutory privilege, and may be exercised
only in the manner provided by law. In this connection, the Rule of Court expressly
makes it the duty of an appellant to file a printed record on appeal with the Court
of Appeals within sixty (60) record on appeal approved by the trial court has already
been received by the said court. Thus, section 5 of Rule 46 states:
Sec. 5. Duty of appellant upon receipt of notice. — It shall be the duty of the
appellant within fifteen (15) days from the date of the notice referred to in the
preceding section, to pay the clerk of the Court of Appeals the fee for the docketing
of the appeal, and within sixty (60) days from such notice to submit to the court
forty (40) printed copies of the record on appeal, together with proof of service of
fifteen (15) printed copies thereof upon the appelee.
As the petitioners failed to comply with the above-mentioned duty which the Rules
of Court enjoins, and considering that, as found by the Court of Appeals, there was
a deliberate effort on their part to mislead the said Court in grating them an
extension of time within which to file their printed record on appeal, it stands to
reason that the appellate court cannot be said to have abused its discretion or to
have acted without or in excess of its jurisdiction in ordering the dismissal of their
appeal.
Our jurisprudence is replete with cases in which this Court dismissed an appeal on
grounds not mentioned specifically in Section 1, Rule 50 of the Rules of Court. (See,
for example, De la Cruz vs. Blanco, 73 Phil. 596 (1942); Government of the
Philippines vs. Court of Appeals, 108 Phil. 86 (1960); Ferinion vs. Sta. Romana, L-
25521, February 28, 1966, 16 SCRA 370, 375).
It will likewise be noted that inasmuch as the petitioners' motion for extension of
the period to file the printed record on appeal was belated filed, then, it is as
though the same were non-existent, since as this Court has already stated
in Baquiran vs. Court of Appeals,2 "The motion for extension of the period for filing
pleadings and papers in court must be made before the expiration of the period to
be extended." The soundness of this dictum in matters of procedure is self-evident.
For, were the doctrine otherwise, the uncertainties that would follow when
litigants are left to determine and redetermine for themselves whether to seek
further redress in court forthwith or take their own sweet time will result in
litigations becoming more unreable than the very grievances they are intended to
redness.
The argument raised by the petitioner — that the objection to an appeal maybe
waived, as when the appellee allows the record on appeal to be printed and
approved — is likewise not meritorious considering that the respondent did file a
motion in the Court of Appeals on February 8, 1969 praying for the dismissal of the
below of the petitioners had not yet filed their record on appeal and, therefore,
must be considered to have abandoned their appeal.
In further assailing the questioned resolution of the Court of Appeals, the
petitioners also point out that on the merits the equities of the instant case are in
their favor. A reading of the record, however, persuades us that the judgment a
quo is substantially correct and morally just.
Page | 145
The appealed decision of the court a quo narrates both the alleged and proven facts ten years at the rate of P5,381.32 on June 30 and December of every year until the
of the dispute between the petitioners and the respondent, as follows: same shall have been fully paid; that on November 29, 1962 Socorro Velasco
offered to pay P10,000.00 as initial payment instead of the agreed P20,000.00 but
This is a suit for specific performance filed by Lorenzo Velasco against the
because the amount was short of the alleged P20,000.00 the same was accepted
Magdalena Estate, Inc. on the allegation that on November 29, 1962 the plaintiff
merely as deposited and upon request of Socorro Velasco the receipt was made in
and the defendant had entered into a contract of sale (Annex A of the complaint)
the name of her brother-in-law the plaintiff herein; that Socorro Velasco failed to
by virtue of which the defendant offered to sell the plaintiff and the plaintiff in turn
complete the down payment of P30,000.00 and neither has she paid any
agreed to buy a parcel of land with an area of 2,059 square meters more
installments on the balance of P70,000.00 up to the present time; that it was only
particularly described as Lot 15, Block 7, Psd-6129, located at No. 39 corner 6th
on January 8, 1964 that Socorro Velasco tendered payment of P20,000.00, which
Street and Pacific Avenue, New Manila, this City, for the total purchase price of
offer the defendant refused to accept because it had considered the offer to sell
P100,000.00.
rescinded on account of her failure to complete the down payment on or before
It is alleged by the plaintiff that the agreement was that the plaintiff was to give a December 31, 1962.
down payment of P10,000.00 to be followed by P20,000.00 and the balance of
The lone witness for the plaintiff is Lorenzo Velasco, who exhibits the receipt,
P70,000.00 would be paid in installments, the equal monthly amortization of which
Exhibits A, issued in his favor by the Magdalena Estate, Inc., in the sum of
was to be determined as soon as the P30,000.00 down payment had been
P10,000.00 dated November 29, 1962. He also identifies a letter (Exh. B)of the
completed. It is further alleged that the plaintiff paid down payment of P10,000.00
Magdalena Estate, Inc. addressed to him and his reply thereto. He testifies that
on November 29, 1962 as per receipt No. 207848 (Exh. "A")and that when on
Socorro Velasco is his sister-in-law and that he had requested her to make the
January 8, 1964 he tendered to the defendant the payment of the additional
necessary contacts with defendant referring to the purchase of the property in
P20,000.00 to complete the P30,000.00 the defendant refused to accept and that
question. Because he does not understand English well, he had authorized her to
eventually it likewise refused to execute a formal deed of sale obviously agreed
negotiate with the defendant in her whenever she went to the office of the
upon. The plaintiff demands P25,000.00 exemplary damages, P2,000.00 actual
defendant, and as a matter of fact, the receipt for the P10,000.00 down payment
damages and P7,000.00 attorney's fees.
was issued in his favor. The plaintiff also depends on Exhibit A to prove that there
The defendant, in its Answer, denies that it has had any direct dealings, much less, was a perfected follows: "Earnest money for the purchase of Lot 15, Block 7, Psd-
contractual relations with the plaintiff regarding the property in question, and 6129, Area 2,059 square meters including improvements thereon — P10,000.00."
contends that the alleged contract described in the document attached to the At the bottom of Exhibit A the following appears: "Agreed price: P100,000.00,
complaint as Annex A is entirely unenforceable under the Statute of Frauds; that P30,000.00 down payment, bal. in 10 years."
the truth of the matter is that a portion of the property in question was being
To prove that the Magdalena Estate, Inc. had been dealing all along with him and
leased by a certain Socorro Velasco who, on November 29, 1962, went to the office
not with his sister-in-law and that the Magdalena Estate, Inc. knew very well that
of the defendant indicated her desire to purchase the lot; that the defendant
he was the person interested in the lot in question and not his sister-in-law, the
indicated its willingness to sell the property to her at the price of P100,000.00
plaintiff offers in evidence five checks all drawn by him in favor of Magdalena
under the condition that a down payment of P30,000.00 be made, P20,000.00 of
Estate, Inc. for payment of the lease of the property. ....
which was to be paid on November 31, 1962, and that the balance of P70,000.00
including interest a 9% per annum was to be paid on installments for a period of

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There does not seem to be any dispute regarding the fact that the Velasco family Indeed, this Court has already ruled before that a definite agreement on the
was leasing this property from the Magdalena Estate, Inc. since December 29, manner of payment of the purchase price is an essential element in the formation
1961; that the Velasco family sometime in 1962 offered to purchase the lot as a of a binding and unforceable contract of sale.3 The fact, therefore, that the
result of which Lorenzo Velasco thru Socorro Velasco made the P10,000.00 deposit petitioners delivered to the respondent the sum of P10,000 as part of the down-
or, in the language of the defendant 'earnest money or down payment' as payment that they had to pay cannot be considered as sufficient proof of the
evidenced by Exhibit A. The only matter that remains to be decided is whether the perfection of any purchase and sale agreement between the parties herein under
talks between the Magdalena Estate, Inc. and Lorenzo Velasco either directly or article 1482 of the new Civil Code, as the petitioners themselves admit that some
thru his sister-in-law Socorro Velasco ever ripened into a consummated sale. It is essential matter — the terms of payment — still had to be mutually covenanted.
the position of the defendant (1) that the sale was never consummated and (2) that
ACCORDINGLY, the instant petitioner is hereby denied. No pronouncement as to
the contract is unenforceable under the Statute of Frauds.
costs.
The court a quo agreed with the respondent's (defendant therein) contention that
no contract of sale was perfected because the minds of the parties did not meet
"in regard to the manner of payment." The court a quo appraisal of this aspect of
the action below is correct. The material averments contained in the petitioners'
complaint themselves disclose a lack of complete "agreement in regard to the
manner of payment" of the lot in question. The complaint states pertinently:

4. That plaintiff and defendant further agreed that the total down payment shall
by P30,000.00, including the P10,000.00 partial payment mentioned in paragraph
3 hereof, and that upon completion of the said down payment of P30,000.00, the
balance of P70,000.00 shall be said by the plaintiff to the defendant in 10 years
from November 29, 1962;

5. That the time within the full down payment of the P30,000.00 was to be
completed was not specified by the parties but the defendant was duly
compensated during the said time prior to completion of the down payment of
P30,000.00 by way of lease rentals on the house existing thereon which was earlier
leased by defendant to the plaintiff's sister-in-law, Socorro J. Velasco, and which
were duly paid to the defendant by checks drawn by plaintiff.

It is not difficult to glean from the aforequoted averments that the petitioners
themselves admit that they and the respondent still had to meet and agree on how
and when the down-payment and the installment payments were to be paid. Such
being the situation, it cannot, therefore, be said that a definite and firm sales
agreement between the parties had been perfected over the lot in question.
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