legal Basis of Right .

Art 1157
=
Obligations basis

G.R. No. 138814 April 16, 2009

MAKATI STOCK EXCHANGE, INC., MA. VIVIAN YUCHENGCO, ADOLFO M. DUARTE, MYRON
* C. PAPA, NORBERTO C. NAZARENO, GEORGE UY-TIOCO, ANTONIO A. LOPA, RAMON B.
ARNAIZ, LUIS J.L. VIRATA, and ANTONIO GARCIA, JR. Petitioners,
vs.
MIGUEL V. CAMPOS, substituted by JULIA ORTIGAS VDA. DE CAMPOS, 1 Respondent.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 seeking the reversal of the Decision 2 dated
11 February 1997 and Resolution dated 18 May 1999 of the Court of Appeals in CA-G.R. SP No.
38455.

The facts of the case are as follows:

SEC Case No. 02-94-4678 was instituted on 10 February 1994 by respondent Miguel V. Campos, who
filed with the Securities, Investigation and Clearing Department (SICD) of the Securities and Exchange
Commission (SEC), a Petition against herein petitioners Makati Stock Exchange, Inc. (MKSE) and
MKSE directors, Ma. Vivian Yuchengco, Adolfo M. Duarte, Myron C. Papa, Norberto C. Nazareno,
George Uy-Tioco, Antonio A, Lopa, Ramon B. Arnaiz, Luis J.L. Virata, and Antonio Garcia, Jr.
Respondent, in said Petition, sought: (1) the nullification of the Resolution dated 3 June 1993 of the
MKSE Board of Directors, which allegedly deprived him of his right to participate equally in the
allocation of Initial Public Offerings (IPO) of corporations registered with MKSE; (2) the delivery of the
IPO shares he was allegedly deprived of, for which he would pay IPO prices; and (3) the payment of
₱2 million as moral damages, ₱1 million as exemplary damages, and ₱500,000.00 as attorney’s fees
and litigation expenses.
TRO
9
On 14 February 1994, the SICD issued an Order granting respondent’s prayer for the issuance of a
Temporary Restraining Order to enjoin petitioners from implementing or enforcing the 3 June 1993
WPI Resolution of the MKSE Board of Directors.

The SICD subsequently issued another Order on 10 March 1994 granting respondent’s application for
a Writ of Preliminary Injunction, to continuously enjoin, during the pendency of SEC Case No. 02-94-
4678, the implementation or enforcement of the MKSE Board Resolution in question. Petitioners
assailed this SICD Order dated 10 March 1994 in a Petition for Certiorari filed with the SEC en banc,
docketed as SEC-EB No. 393. Petitioners filed Pet certiorari w/ SEC →

On 11 March 1994, petitioners filed a Motion to Dismiss respondent’s Petition in SEC Case No. 02-
94-4678, based on the following grounds: (1) the Petition became moot due to the cancellation of the
license of MKSE; (2) the SICD had no jurisdiction over the Petition; and (3) the Petition failed to state
a cause of action. Denied by God o see en banc
-

The SICD denied petitioner’s Motion to Dismiss in an Order dated 4 May 1994. Petitioners again
SICD challenged the 4 May 1994 Order of SICD before the SEC en banc through another Petition for
Certiorari, docketed as SEC-EB No. 403.

In an Order dated 31 May 1995 in SEC-EB No. 393, the SEC en banc nullified the 10 March 1994
see =
Order of SICD in SEC Case No. 02-94-4678 granting a Writ of Preliminary Injunction in favor of
enhance stop
-

denied motion to Dismiss ipetitioner)

SEL en banc -
granted Prelim injure
 Ste en banc
-
nullified WPI of SKD

= and annulled order of sub tdenyiny MP

respondent. Likewise, in an Order dated 14 August 1995 in SEC-EB No. 403, the SEC en banc
annulled the 4 May 1994 Order of SICD in SEC Case No. 02-94-4678 denying petitioners’ Motion to
Dismiss, and accordingly ordered the dismissal of respondent’s Petition before the SICD.

Respondent filed a Petition for Certiorari with the Court of Appeals assailing the Orders of the SEC en
banc dated 31 May 1995 and 14 August 1995 in SEC-EB No. 393 and SEC-EB No. 403, respectively.
Respondent’s Petition before the appellate court was docketed as CA-G.R. SP No. 38455.

On 11 February 1997, the Court of Appeals promulgated its Decision in CA-G.R. SP No. 38455,
granting respondent’s Petition for Certiorari, thus:

WHEREFORE, the petition in so far as it prays for annulment of the Orders dated May 31, 1995 and
August 14, 1995 in SEC-EB Case Nos. 393 and 403 is GRANTED. The said orders are hereby
rendered null and void and set aside.

Petitioners filed a Motion for Reconsideration of the foregoing Decision but it was denied by the Court
of Appeals in a Resolution dated 18 May 1999.

Hence, the present Petition for Review raising the following arguments:

I.

THE SEC EN BANC DID NOT COMMIT GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION WHEN IT DISMISSED THE PETITION FILED BY RESPONDENT
BECAUSE ON ITS FACE, IT FAILED TO STATE A CAUSE OF ACTION.

II.

THE GRANT OF THE IPO ALLOCATIONS IN FAVOR OF RESPONDENT WAS A MERE

ACCOMMODATION GIVEN TO HIM BY THE BOARD OF [DIRECTORS] OF THE MAKATI STOCK
EXCHANGE, INC.

III.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE SEC EN BANC COMMITTED GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT MADE
AN EXTENDED INQUIRY AND PROCEEDED TO MAKE A DETERMINATION AS TO THE TRUTH
OF RESPONDENT’S ALLEGATIONS IN HIS PETITION AND USED AS BASIS THE EVIDENCE
ADDUCED DURING THE HEARING ON THE APPLICATION FOR THE WRIT OF PRELIMINARY
INJUNCTION TO DETERMINE THE EXISTENCE OR VALIDITY OF A STATED CAUSE OF ACTION.

IV.

IPO ALLOCATIONS GRANTED TO BROKERS ARE NOT TO BE BOUGHT BY THE BROKERS FOR
THEMSELVES BUT ARE TO BE DISTRIBUTED TO THE INVESTING PUBLIC. HENCE,
RESPONDENT’S CLAIM FOR DAMAGES IS ILLUSORY AND HIS PETITION A NUISANCE SUIT. 3

On 18 September 2001, counsel for respondent manifested to this Court that his client died on 7 May
2001. In a Resolution dated 24 October 2001, the Court directed the substitution of respondent by his
surviving spouse, Julia Ortigas vda. de Campos.
Petitioners want this Court to affirm the dismissal by the SEC en banc of respondent’s Petition in SEC
Case No. 02-94-4678 for failure to state a cause of action. On the other hand, respondent insists on
the sufficiency of his Petition and seeks the continuation of the proceedings before the SICD.

A cause of action is the act or omission by which a party violates a right of another.4 A complaint states
a cause of action where it contains three essential elements of a cause of action, namely: (1) the legal
right of the plaintiff, (2) the correlative obligation of the defendant, and (3) the act or omission of the
defendant in violation of said legal right. If these elements are absent, the complaint becomes
vulnerable to dismissal on the ground of failure to state a cause of action.

If a defendant moves to dismiss the complaint on the ground of lack of cause of action, he is regarded
as having hypothetically admitted all the averments thereof. The test of sufficiency of the facts found
in a complaint as constituting a cause of action is whether or not admitting the facts alleged, the court
can render a valid judgment upon the same in accordance with the prayer thereof. The hypothetical
admission extends to the relevant and material facts well pleaded in the complaint and inferences
fairly deducible therefrom. Hence, if the allegations in the complaint furnish sufficient basis by which
the complaint can be maintained, the same should not be dismissed regardless of the defense that
may be assessed by the defendant.5

Given the foregoing, the issue of whether respondent’s Petition in SEC Case No. 02-94-4678
sufficiently states a cause of action may be alternatively stated as whether, hypothetically admitting to
be true the allegations in respondent’s Petition in SEC Case No. 02-94-4678, the SICD may render a
valid judgment in accordance with the prayer of said Petition.

A reading of the exact text of respondent’s Petition in SEC Case No. 02-94-4678 is, therefore,
unavoidable. Pertinent portions of the said Petition reads:

7. In recognition of petitioner’s invaluable services, the general membership of respondent corporation

[MKSE] passed a resolution sometime in 1989 amending its Articles of Incorporation, to include the
following provision therein:

"ELEVENTH – WHEREAS, Mr. Miguel Campos is the only surviving incorporator of the Makati Stock
Exchange, Inc. who has maintained his membership;

"WHEREAS, he has unselfishly served the Exchange in various capacities, as governor from 1977 to
the present and as President from 1972 to 1976 and again as President from 1988 to the present;

"WHEREAS, such dedicated service and leadership which has contributed to the advancement and
well being not only of the Exchange and its members but also to the Securities industry, needs to be
recognized and appreciated;

"WHEREAS, as such, the Board of Governors in its meeting held on February 09, 1989 has
correspondingly adopted a resolution recognizing his valuable service to the Exchange, reward the
same, and preserve for posterity such recognition by proposing a resolution to the membership body
which would make him as Chairman Emeritus for life and install in the Exchange premises a
commemorative bronze plaque in his honor;

"NOW, THEREFORE, for and in consideration of the above premises, the position of the "Chairman
Emeritus" to be occupied by Mr. Miguel Campos during his lifetime and irregardless of his continued
membership in the Exchange with the Privilege to attend all membership meetings as well as the
meetings of the Board of Governors of the Exchange, is hereby created."
8. Hence, to this day, petitioner is not only an active member of the respondent corporation, but its
Chairman Emeritus as well.

9. Correspondingly, at all times material to this petition, as an active member and Chairman Emeritus
of respondent corporation, petitioner has always enjoyed the right given to all the other members to
participate equally in the Initial Public Offerings (IPOs for brevity) of corporations.

10. IPOs are shares of corporations offered for sale to the public, prior to the listing in the trading floor
of the country’s two stock exchanges. Normally, Twenty Five Percent (25%) of these shares are
divided equally between the two stock exchanges which in turn divide these equally among their
members, who pay therefor at the offering price.

11. However, on June 3, 1993, during a meeting of the Board of Directors of respondent-corporation,
individual respondents passed a resolution to stop giving petitioner the IPOs he is entitled to, based
on the ground that these shares were allegedly benefiting Gerardo O. Lanuza, Jr., who these individual
respondents wanted to get even with, for having filed cases before the Securities and Exchange (SEC)
for their disqualification as member of the Board of Directors of respondent corporation.

12. Hence, from June 3, 1993 up to the present time, petitioner has been deprived of his right to
subscribe to the IPOs of corporations listing in the stock market at their offering prices.

13. The collective act of the individual respondents in depriving petitioner of his right to a share in the
IPOs for the aforementioned reason, is unjust, dishonest and done in bad faith, causing petitioner
substantial financial damage.6

There is no question that the Petition in SEC Case No. 02-94-4678 asserts a right in favor of
respondent, particularly, respondent’s alleged right to subscribe to the IPOs of corporations listed in
the stock market at their offering prices; and stipulates the correlative obligation of petitioners to
respect respondent’s right, specifically, by continuing to allow respondent to subscribe to the IPOs of
corporations listed in the stock market at their offering prices.

However, the terms right and obligation in respondent’s Petition are not magic words that would
automatically lead to the conclusion that such Petition sufficiently states a cause of action. Right and
obligation are legal terms with specific legal meaning. A right is a claim or title to an interest in anything
whatsoever that is enforceable by law.7 An obligation is defined in the Civil Code as a juridical
necessity to give, to do or not to do.8 For every right enjoyed by any person, there is a corresponding
obligation on the part of another person to respect such right. Thus, Justice J.B.L. Reyes offers 9 the
definition given by Arias Ramos as a more complete definition:

An obligation is a juridical relation whereby a person (called the creditor) may demand from another
(called the debtor) the observance of a determinative conduct (the giving, doing or not doing), and in
case of breach, may demand satisfaction from the assets of the latter.

The Civil Code enumerates the sources of obligations:

Art. 1157. Obligations arise from:

(1) Law;

(2) Contracts;
 (3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Quasi-delicts.

Therefore, an obligation imposed on a person, and the corresponding right granted to another, must
be rooted in at least one of these five sources. The mere assertion of a right and claim of an obligation
in an initiatory pleading, whether a Complaint or Petition, without identifying the basis or source
thereof, is merely a conclusion of fact and law. A pleading should state the ultimate facts essential to
the rights of action or defense asserted, as distinguished from mere conclusions of fact or conclusions
of law.10 Thus, a Complaint or Petition filed by a person claiming a right to the Office of the President
of this Republic, but without stating the source of his purported right, cannot be said to have sufficiently
stated a cause of action. Also, a person claiming to be the owner of a parcel of land cannot merely
state that he has a right to the ownership thereof, but must likewise assert in the Complaint either a
mode of acquisition of ownership or at least a certificate of title in his name.

In the case at bar, although the Petition in SEC Case No. 02-94-4678 does allege respondent’s right
to subscribe to the IPOs of corporations listed in the stock market at their offering prices, and
petitioners’ obligation to continue respecting and observing such right, the Petition utterly failed to lay
down the source or basis of respondent’s right and/or petitioners’ obligation.

Respondent merely quoted in his Petition the MKSE Board Resolution, passed sometime in 1989,
granting him the position of Chairman Emeritus of MKSE for life. However, there is nothing in the said
Petition from which the Court can deduce that respondent, by virtue of his position as Chairman
Emeritus of MKSE, was granted by law, contract, or any other legal source, the right to subscribe to
the IPOs of corporations listed in the stock market at their offering prices.

A meticulous review of the Petition reveals that the allocation of IPO shares was merely alleged to
have been done in accord with a practice normally observed by the members of the stock exchange,
to wit:

IPOs are shares of corporations offered for sale to the public, prior to their listing in the trading floor of
the country’s two stock exchanges. Normally, Twenty-Five Percent (25%) of these shares are divided
equally between the two stock exchanges which in turn divide these equally among their members,
who pay therefor at the offering price.11 (Emphasis supplied)

A practice or custom is, as a general rule, not a source of a legally demandable or enforceable
right.12 Indeed, in labor cases, benefits which were voluntarily given by the employer, and which have
ripened into company practice, are considered as rights that cannot be diminished by the
employer.13 Nevertheless, even in such cases, the source of the employees’ right is not custom, but
ultimately, the law, since Article 100 of the Labor Code explicitly prohibits elimination or diminution of
benefits.

There is no such law in this case that converts the practice of allocating IPO shares to MKSE members,
for subscription at their offering prices, into an enforceable or demandable right. Thus, even if it is
hypothetically admitted that normally, twenty five percent (25%) of the IPOs are divided equally
between the two stock exchanges -- which, in turn, divide their respective allocation equally among
their members, including the Chairman Emeritus, who pay for IPO shares at the offering price -- the
Court cannot grant respondent’s prayer for damages which allegedly resulted from the MKSE Board
Resolution dated 3 June 1993 deviating from said practice by no longer allocating any shares to
respondent. 1avv phi1
Accordingly, the instant Petition should be granted. The Petition in SEC Case No. 02-94-4678 should
be dismissed for failure to state a cause of action. It does not matter that the SEC en banc, in its Order
dated 14 August 1995 in SEC-EB No. 403, overstepped its bounds by not limiting itself to the issue of
whether respondent’s Petition before the SICD sufficiently stated a cause of action. The SEC en banc
may have been mistaken in considering extraneous evidence in granting petitioners’ Motion to
Dismiss, but its discussion thereof are merely superfluous and obiter dictum. In the main, the SEC en
banc did correctly dismiss the Petition in SEC Case No. 02-94-4678 for its failure to state the basis for
respondent’s alleged right, to wit:

Private respondent Campos has failed to establish the basis or authority for his alleged right to
participate equally in the IPO allocations of the Exchange. He cited paragraph 11 of the amended
articles of incorporation of the Exchange in support of his position but a careful reading of the said
provision shows nothing therein that would bear out his claim. The provision merely created the
position of chairman emeritus of the Exchange but it mentioned nothing about conferring upon the
occupant thereof the right to receive IPO allocations.14

With the dismissal of respondent’s Petition in SEC Case No. 02-94-4678, there is no more need for
this Court to resolve the propriety of the issuance by SCID of a writ of preliminary injunction in said
case.

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 11 February
1997 and its Resolution dated 18 May 1999 in CA-G.R. SP No. 38455 are REVERSED and SET
ASIDE. The Orders dated 31 May 1995 and 14 August 1995 of the Securities and Exchange
Commission en banc in SEC-EB Case No. 393 and No. 403, respectively, are hereby reinstated. No
pronouncement as to costs.

SO ORDERED.
 G.R. No. 138814 April 16, 2009

P MAKATI STOCK EXCHANGE, INC., MA. VIVIAN YUCHENGCO, ADOLFO M. DUARTE, MYRON C. PAPA,
NORBERTO C. NAZARENO, GEORGE UY-TIOCO, ANTONIO A. LOPA, RAMON B. ARNAIZ, LUIS J.L. VIRATA, and
ANTONIO GARCIA, JR. Petitioners,
vs.
MIGUEL V. CAMPOS, substituted by JULIA ORTIGAS VDA. DE CAMPOS,1 Respondent.

CHICO-NAZARIO, J.:

Respondent Campos instituted an SEC Case against petitioners Makati Stock Exchange, Inc. (MKSE) and MKSE directors,
Ma. Vivian Yuchengco, Adolfo M. Duarte, Myron C. Papa, Norberto C. Nazareno, George Uy-Tioco, Antonio A, Lopa,
Ramon B. Arnaiz, Luis J.L. Virata, and Antonio Garcia, Jr.

Campos sought: (1) the nullification of the Resolution of the MKSE Board of Directors, which allegedly deprived him of his
right to participate equally in the allocation of Initial Public Offerings (IPO) of corporations registered with MKSE; (2) the
delivery of the IPO shares he was allegedly deprived of, for which he would pay IPO prices; and (3) the payment of ₱2
million as moral damages, ₱1 million as exemplary damages, and ₱500,000.00 as attorney’s fees and litigation expenses.

A TRO and subsequently a Writ of Preliminary Injunction was issued to enjoin the implementation of said Board Resolution.

Petitioners filed a Motion to Dismiss based on the following grounds: (1) the Petition became moot due to the cancellation
of the license of MKSE; (2) the SICD had no jurisdiction over the Petition; and (3) the Petition failed to state a cause of
action.

The SICD denied petitioner’s Motion to Dismiss. Petitioners again challenged Order of SICD before the SEC en banc
through another Petition for Certiorari.

The SEC en banc annulled the Order denying petitioners’ motion to dismiss and accordingly ordered the dismissal of
respondent’s Petition before the SICD.

Respondent filed a Petition for Certiorari with the Court of Appeals.

CA granted the petition for Certiorari. CA denied the MR filed by Petitioners.

ISSUE:

Whether or not the petition filed by respondent failed to state a cause of action. (YES)

Whether or not the grant of the IPO allocations in favor of Campos was a mere accommodation given to him by the Board.
(YES)

RULING:

A cause of action is the act or omission by which a party violates a right of another.4 A complaint states a cause of action
where it contains three essential elements of a cause of action, namely: (1) the legal right of the plaintiff, (2) the correlative
obligation of the defendant, and (3) the act or omission of the defendant in violation of said legal right. If these elements are
absent, the complaint becomes vulnerable to dismissal on the ground of failure to state a cause of action.

If a defendant moves to dismiss the complaint on the ground of lack of cause of action, he is regarded as having
hypothetically admitted all the averments thereof. The test of sufficiency of the facts found in a complaint as constituting a
cause of action is whether or not admitting the facts alleged, the court can render a valid judgment upon the same in
accordance with the prayer thereof. The hypothetical admission extends to the relevant and material facts well pleaded in
the complaint and inferences fairly deducible therefrom. Hence, if the allegations in the complaint furnish sufficient basis by
which the complaint can be maintained, the same should not be dismissed regardless of the defense that may be assessed
by the defendant.5
Given the foregoing, the issue of whether respondent’s Petition in SEC Case No. 02-94-4678 sufficiently states a cause of
action may be alternatively stated as whether, hypothetically admitting to be true the allegations in respondent’s Petition in
SEC Case No. 02-94-4678, the SICD may render a valid judgment in accordance with the prayer of said Petition.

A reading of the exact text of respondent’s Petition in SEC Case No. 02-94-4678 is, therefore, unavoidable.

There is no question that the Petition in SEC Case No. 02-94-4678 asserts a right in favor of respondent, particularly,
respondent’s alleged right to subscribe to the IPOs of corporations listed in the stock market at their offering prices; and
stipulates the correlative obligation of petitioners to respect respondent’s right, specifically, by continuing to allow respondent
to subscribe to the IPOs of corporations listed in the stock market at their offering prices.

However, the terms right and obligation in respondent’s Petition are not magic words that would automatically lead to the
conclusion that such Petition sufficiently states a cause of action. Right and obligation are legal terms with specific legal
meaning. A right is a claim or title to an interest in anything whatsoever that is enforceable by law.7 An obligation is defined
in the Civil Code as a juridical necessity to give, to do or not to do.8 For every right enjoyed by any person, there is a
corresponding obligation on the part of another person to respect such right. Thus, Justice J.B.L. Reyes offers9 the definition
given by Arias Ramos as a more complete definition:

An obligation is a juridical relation whereby a person (called the creditor) may demand from another (called the debtor) the
observance of a determinative conduct (the giving, doing or not doing), and in case of breach, may demand satisfaction
from the assets of the latter.

The Civil Code enumerates the sources of obligations:

Art. 1157. Obligations arise from:

(1) Law;

(2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Quasi-delicts.

Therefore, an obligation imposed on a person, and the corresponding right granted to another, must be rooted in at least
one of these five sources. The mere assertion of a right and claim of an obligation in an initiatory pleading, whether a
Complaint or Petition, without identifying the basis or source thereof, is merely a conclusion of fact and law. A pleading
should state the ultimate facts essential to the rights of action or defense asserted, as distinguished from mere conclusions
of fact or conclusions of law.10 Thus, a Complaint or Petition filed by a person claiming a right to the Office of the President
of this Republic, but without stating the source of his purported right, cannot be said to have sufficiently stated a cause of
action. Also, a person claiming to be the owner of a parcel of land cannot merely state that he has a right to the ownership
thereof, but must likewise assert in the Complaint either a mode of acquisition of ownership or at least a certificate of title in
his name.

In the case at bar, although the Petition in SEC Case No. 02-94-4678 does allege respondent’s right to subscribe to the
IPOs of corporations listed in the stock market at their offering prices, and petitioners’ obligation to continue respecting and
observing such right, the Petition utterly failed to lay down the source or basis of respondent’s right and/or petitioners’
obligation.

Respondent merely quoted in his Petition the MKSE Board Resolution, passed sometime in 1989, granting him the position
of Chairman Emeritus of MKSE for life. However, there is nothing in the said Petition from which the Court can deduce that
respondent, by virtue of his position as Chairman Emeritus of MKSE, was granted by law, contract, or any other legal source,
the right to subscribe to the IPOs of corporations listed in the stock market at their offering prices.

A meticulous review of the Petition reveals that the allocation of IPO shares was merely alleged to have been done in accord
with a practice normally observed by the members of the stock exchange, to wit:
IPOs are shares of corporations offered for sale to the public, prior to their listing in the trading floor of the country’s two
stock exchanges. Normally, Twenty-Five Percent (25%) of these shares are divided equally between the two stock
exchanges which in turn divide these equally among their members, who pay therefor at the offering price.11(Emphasis
supplied)

A practice or custom is, as a general rule, not a source of a legally demandable or enforceable right.12 Indeed, in labor
cases, benefits which were voluntarily given by the employer, and which have ripened into company practice, are considered
as rights that cannot be diminished by the employer.13 Nevertheless, even in such cases, the source of the employees’ right
is not custom, but ultimately, the law, since Article 100 of the Labor Code explicitly prohibits elimination or diminution of
benefits.

There is no such law in this case that converts the practice of allocating IPO shares to MKSE members, for subscription at
their offering prices, into an enforceable or demandable right. Thus, even if it is hypothetically admitted that normally, twenty
five percent (25%) of the IPOs are divided equally between the two stock exchanges -- which, in turn, divide their respective
allocation equally among their members, including the Chairman Emeritus, who pay for IPO shares at the offering price --
the Court cannot grant respondent’s prayer for damages which allegedly resulted from the MKSE Board Resolution dated
3 June 1993 deviating from said practice by no longer allocating any shares to respondent.1avvphi1

Accordingly, the instant Petition should be granted. The Petition in SEC Case No. 02-94-4678 should be dismissed for
failure to state a cause of action. It does not matter that the SEC en banc, in its Order dated 14 August 1995 in SEC-EB
No. 403, overstepped its bounds by not limiting itself to the issue of whether respondent’s Petition before the SICD
sufficiently stated a cause of action. The SEC en banc may have been mistaken in considering extraneous evidence in
granting petitioners’ Motion to Dismiss, but its discussion thereof are merely superfluous and obiter dictum. In the main, the
SEC en banc did correctly dismiss the Petition in SEC Case No. 02-94-4678 for its failure to state the basis for respondent’s
alleged right, to wit:

Private respondent Campos has failed to establish the basis or authority for his alleged right to participate equally in the
IPO allocations of the Exchange. He cited paragraph 11 of the amended articles of incorporation of the Exchange in support
of his position but a careful reading of the said provision shows nothing therein that would bear out his claim. The provision
merely created the position of chairman emeritus of the Exchange but it mentioned nothing about conferring upon the
occupant thereof the right to receive IPO allocations.14

With the dismissal of respondent’s Petition in SEC Case No. 02-94-4678, there is no more need for this Court to resolve
the propriety of the issuance by SCID of a writ of preliminary injunction in said case.

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 11 February 1997 and its Resolution
dated 18 May 1999 in CA-G.R. SP No. 38455 are REVERSED and SET ASIDE. The Orders dated 31 May 1995 and 14
August 1995 of the Securities and Exchange Commission en banc in SEC-EB Case No. 393 and No. 403, respectively, are
hereby reinstated. No pronouncement as to costs.

SO ORDERED.
terminologies war apply literally Professional
-

Foe
-
-

G.R. No. 83748 May 12, 1989

* FLAVIO K MACASAET & ASSOCIATES, INC., petitioner,

vs.
COMMISSION ON AUDIT and PHILIPPINE TOURISM AUTHORITY, respondents.

MELENCIO-HERRERA, J.:

In this Petition for Certiorari, pursuant to Section 7, Article IX of the 1987 Constitution, 1 petitioner, Flavio K. Macasaet &
Associates, Inc., prays that the ruling of public respondent Commission on Audit (COA) denying its claim for completion of
payment of professional fees be overturned. The facts follow. On 15 September 1977 respondent Philippine Tourism
Authority (PTA) entered into a Contract for "Project Design and Management Services for the development of the proposed
Zamboanga Golf and Country Club, Calarian, Zamboanga City" with petitioner company, but originally with Flavio K
Macasaet alone (hereinafter referred to simply as the "Contract").

Under the Contract, PTA obligated itself to pay petitioner a professional fee of seven (7%) of the actual construction cost,
as follows:

ARTICLE IV — PROFESSIONAL FEE

In consideration for the professional services to be performed by Designer under Article I of this Agreement,
the Authority shall pay seven percent (7%) of the actual construction cost.

In addition, a Schedule of Payments was provided for while the construction was in progress and up to its final completion,
thus:

ARTICLE V — SCHEDULE OF PAYMENTS

1. Upon the execution of the Agreement but not more than fifteen (15) days, a minimum payment equivalent
to 10 percent of the professional fee as provided in Art. IV computed upon a reasonable estimated
construction cost of the project.

2. Upon the completion of the schematic design services, but not more than 15 days after the submission
of the schematic design to the Authority, a sum equivalent to 15% of the professional fee as stated in Art.
IV computed upon the reasonable estimated construction cost of the project.

3. Upon completion of the design development services, but not more than 15 days after submission of the
design development to the authority, a sum equivalent to 20% of the professional fee as stated in Art. IV,
computed upon the reasonable estimated construction cost.

4. Upon completion of the contract document services but not more than 15 days after submission of the
contract document to the Authority, a sum equivalent to 25% of the professional fee as stated in Art. IV,
shall be paid computed on the same basis as above.

5. Upon completion of the work and acceptance thereof by the Authority, the balance of the professional
fee, computed on the final actual project cost shall be paid. (Emphasis supplied)

Pursuant to the foregoing Schedule, the PTA made periodic payments of the stipulated professional fees to petitioner. And,
upon completion of the project, PTA paid petitioners what it perceived to be the balance of the latter's professional fees.

It turned out, however, that after the project was completed, PTA paid Supra Construction Company, the main contractor,
the additional sum of P3,148,198.26 representing the escalation cost of the contract price due to the increase in the price
of construction materials.

Upon learning of the price escalation, petitioner requested payment of P219,302.47 additional professional fee representing
seven (7%) percent of P3,148,198.26.
On 3 July 1985 PTA denied payment on the ground that "the subject price escalation referred to increased cost of
construction materials and did not entail additional work on the part of petitioner as to entitle it to additional compensation
under Article VI of the contract." 2

Reconsiderations sought by the petitioner, up to respondent COA, were to no avail. The latter expressed the opinion that
"to allow subject claim in the absence of a showing that extra or additional services had been rendered by claimant would
certainly result in overpayment to him to the prejudice of the Government" (1st Indorsement, July 10, 1987, p. 3, Rollo, p.
42).

Hence this Petition, to which we gave due course.

The basic issue for resolution is petitioner's entitlement to additional professional fees, which, in turn, hinges on whether or
not the price escalation should be included in the "final actual project cost."

Public respondents, through the Solicitor General, maintain that petitioner had been paid its professional fee upon
completion of the project and that its claim for additional payment is without any legal and factual basis for, after all, no
additional architectural services were rendered other than the ones under the terms of the Contract. On the other hand,
petitioner anchors its claim to additional professional fees, not on any change in services rendered, but on Article IV, and
paragraph 5 of Article V, of the Contract, supra.

The very terminologies used in the Contract call for affirmative relief in petitioner's favor.

Under Article IV of said Contract, petitioner was to be entitled to seven (7%) of the "actual construction cost." Under
paragraphs 1, 2, 3, and 4, Article V, periodic payments were to be based on a "reasonable estimated construction cost."
ultimately, under paragraph 5, Article V, the balance of the professional fee was to be computed on the basis of "the final
actual project cost."

The use of the terms "actual construction cost", gradating into "final actual project cost" is not without significance. The real
intendment of the parties, as shown by paragraph 5, Article V, of their Contract was to base the ultimate balance of
petitioner's professional fees not on "actual construction cost" alone but on the final actual project cost; not on "construction
cost" alone but on "project cost." By so providing, the Contract allowed for flexibility based on actuality and as a matter of
equity for the contracting parties. For evidently, the final actual project cost would not necessarily tally with the actual
construction cost initially computed. The "final actual project cost" covers the totality of all costs as actually and finally
determined, and logically includes the escalation cost of the contract price.

It matters not that the price escalation awarded to the construction company did not entail additional work for petitioner. As
a matter of fact, neither did it for the main contractor. The increased cost of materials was not the doing of either contracting
party.

That an escalation clause was not specifically provided for in the Contract is of no moment either for it may be considered
as already "built-in" and understood from the very terms "actual construction cost," and eventually "final actual project cost."

Article VI of the Contract, supra, has no bearing on the present controversy either. It speaks of any major change in the
planning and engineering aspects necessitating the award and payment of additional compensation. Admittedly, there was
no additional work by petitioner, which required additional compensation. Rather, petitioner's claim is for payment of the
balance of its professional fees based on the "final actual project cost" and not for additional compensation based on Article
VI.

The terminologies in the contract being clear, leaving no doubt as to the intention of the contracting parties, their literal
meaning control (Article 1370, Civil Code). The price escalation cost must be deemed included in the final actual project
cost and petitioner held entitled to the payment of its additional professional fees. Obligations arising from contract have the
force of law between the contracting parties and should be complied with in good faith (Article 11 59, Civil Code).

WHEREFORE, the ruling of respondent Commission on Audit is hereby SET ASIDE and respondent Philippines Tourism
Authority is hereby ordered to pay petitioner the additional amount of P219,302.47 to complete the payment of its
professional fee under their Contract for Project Design and Management Services.

SO ORDERED.
 G.R. No. 140047 July 13, 2004

PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner,

vs.

*
V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO; SOLEDAD C.
EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST INTEGRATED BONDING AND INSURANCE
COMPANY, INC., respondents.

DAVIDE, JR., C.J.:

This case is an offshoot of a service contract entered into by a Filipino construction firm with the Iraqi Government for the
construction of the Institute of Physical Therapy-Medical Center, Phase II, in Baghdad, Iraq, at a time when the Iran-Iraq
war was ongoing.

In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No. 91-1906 and assigned to Branch
58, petitioner Philippine Export and Foreign Loan Guarantee Corporation1 (hereinafter Philguarantee) sought
reimbursement from the respondents of the sum of money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee it issued
for respondent V.P. Eusebio Construction, Inc. (VPECI).
Rehabilitation Center
The factual and procedural antecedents in this case are as follows: awarded to Ajyal
On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and Construction, Baghdad, Iraq,
awarded the construction of the Institute of Physical Therapy–Medical Rehabilitation Center, Phase II, in Baghdad, Iraq,
(hereinafter the Project) to Ajyal Trading and Contracting Company (hereinafter Ajyal), a firm duly licensed with the Kuwait
Chamber of Commerce for a total contract price of ID5,416,089/046 (or about US$18,739,668).2 not registered
ro with POOB
On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-Plex International, Inc.
(hereinafter 3-Plex), a local contractor engaged in construction business, entered into a joint venture agreement with Ajyal
wherein the former undertook the execution of the entire Project, while the latter would be entitled to a commission of 4%
of the contract price.3 Later, or on 8 April 1981, respondent 3-Plex, not being accredited by or registered with the Philippine
Overseas Construction Board (POCB), assigned and transferred all its rights and interests under the joint venture agreement
to VPECI, a construction and engineering firm duly registered with the POCB.4 However, on 2 May 1981, 3-Plex and VPECI
entered into an agreement that the execution of the Project would be under their joint management.5

The SOB required the contractors to submit (1) a performance bond of ID271,808/610 representing 5% of the total contract
price and (2) an advance payment bond of ID541,608/901 representing 10% of the advance payment to be released upon
signing of the contract.6 To comply with these requirements, respondents 3-Plex and VPECI applied for the issuance of a
guarantee with petitioner Philguarantee, a government financial institution empowered to issue guarantees for qualified
Filipino contractors to secure the performance of approved service contracts abroad.7

Petitioner Philguarantee approved respondents' application. Subsequently, letters of guarantee8 were issued by
Philguarantee to the Rafidain Bank of Baghdad covering 100% of the performance and advance payment bonds, but they
were not accepted by SOB. What SOB required was a letter-guarantee from Rafidain Bank, the government bank of Iraq.
Rafidain Bank then issued a performance bond in favor of SOB on the condition that another foreign bank, not Philguarantee,
would issue a counter-guarantee to cover its exposure. Al Ahli Bank of Kuwait was, therefore, engaged to provide a counter-
guarantee to Rafidain Bank, but it required a similar counter-guarantee in its favor from the petitioner. Thus, three layers of
guarantees had to be arranged.9

Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor of Al Ahli Bank of Kuwait
Letter of Guarantee No. 81-194-F 10 (Performance Bond Guarantee) in the amount of ID271,808/610 and Letter of
Guarantee No. 81-195-F11 (Advance Payment Guarantee) in the amount of ID541,608/901, both for a term of eighteen
months from 25 May 1981. These letters of guarantee were secured by (1) a Deed of Undertaking12 executed by
respondents VPECI, Spouses Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos and
Iluminada Santos; and (2) a surety bond13 issued by respondent First Integrated Bonding and Insurance Company, Inc.
(FIBICI). The Surety Bond was later amended on 23 June 1981 to increase the amount of coverage from P6.4 million
to P6.967 million and to change the bank in whose favor the petitioner's guarantee was issued, from Rafidain Bank to Al
Ahli Bank of Kuwait.14
 creation of Rehabilitation center

t
3- PLEX
Awarded to Ajyal
-0 Vv w/

3 Plex not accredited

by POCB assigned
and transferred Its rights to upto leusehio)

3 Plex and v PEU -

Joint venture

SOB -

required a bond
3.Pity I VPEU -

appliedfor the issuance of bond

w/ Phil guarantee C. petitioner)

Phil guarantee -
o Rafi dain Bank
t
P letter guantee
not accepted by so ,

Rafidaih - • At Ahli Bank

counter guarantee

At Ahli - o Phil guarantee

 On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract15 for the construction of the
Institute of Physical Therapy – Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, wherein the joint venture contractor
undertook to complete the Project within a period of 547 days or 18 months. Under the Contract, the Joint Venture would
supply manpower and materials, and SOB would refund to the former 25% of the project cost in Iraqi Dinar and the 75% in
US dollars at the exchange rate of 1 Dinar to 3.37777 US Dollars.16

The construction, which was supposed to start on 2 June 1981, commenced only on the last week of August 1981. Because
of this delay and the slow progress of the construction work due to some setbacks and difficulties, the Project was not
completed on 15 November 1982 as scheduled. But in October 1982, upon foreseeing the impossibility of meeting the
deadline and upon the request of Al Ahli Bank, the joint venture contractor worked for the renewal or extension of the
Performance Bond and Advance Payment Guarantee. Petitioner's Letters of Guarantee Nos. 81-194-F (Performance Bond)
and 81-195-F (Advance Payment Bond) with expiry date of 25 November 1982 were then renewed or extended to 9
February 1983 and 9 March 1983, respectively.17 The surety bond was also extended for another period of one year, from
12 May 1982 to 12 May 1983.18 The Performance Bond was further extended twelve times with validity of up to 8 December
1986,19 while the Advance Payment Guarantee was extended three times more up to 24 May 1984 when the latter was
cancelled after full refund or reimbursement by the joint venture contractor.20 The surety bond was likewise extended to 8
May 1987.21

As of March 1986, the status of the Project was 51% accomplished, meaning the structures were already finished. The
remaining 47% consisted in electro-mechanical works and the 2%, sanitary works, which both required importation of
equipment and materials.22

④ On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full payment of its performance
bond counter-guarantee.

Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI requested Iraq Trade and Economic
Development Minister Mohammad Fadhi Hussein to recall the telex call on the performance guarantee for being a drastic
action in contravention of its mutual agreement with the latter that (1) the imposition of penalty would be held in abeyance
until the completion of the project; and (2) the time extension would be open, depending on the developments on the
negotiations for a foreign loan to finance the completion of the project.23 It also wrote SOB protesting the call for lack of
factual or legal basis, since the failure to complete the Project was due to (1) the Iraqi government's lack of foreign exchange
with which to pay its (VPECI's) accomplishments and (2) SOB's noncompliance for the past several years with the provision
in the contract that 75% of the billings would be paid in US dollars.24 Subsequently, or on 19 November 1986, respondent
VPECI advised the petitioner not to pay yet Al Ahli Bank because efforts were being exerted for the amicable settlement of
the Project.25
Sabi mi respondent Nag Muna baya ran
On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that it had already paid to Rafidain
② Bank the sum of US$876,564 under its letter of guarantee, and demanding reimbursement by the petitioner of what it paid
to the latter bank plus interest thereon and related expenses.26

Both petitioner Philguarantee and respondent VPECI sought the assistance of some government agencies of the
Philippines. On 10 August 1987, VPECI requested the Central Bank to hold in abeyance the payment by the petitioner "to
allow the diplomatic machinery to take its course, for otherwise, the Philippine government , through the Philguarantee and
the Central Bank, would become instruments of the Iraqi Government in consummating a clear act of injustice and inequity
committed against a Filipino contractor."27

On 27 August 1987, the Central Bank authorized the remittance for its account of the amount of US$876,564 (equivalent to
ID271, 808/610) to Al Ahli Bank representing full payment of the performance counter-guarantee for VPECI's project in
Iraq. 28 pen inauthorize ni central Bank magbayad
On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank, and reiterated the
joint and solidary obligation of the respondents to reimburse the petitioner for the advances made on its counter-
guarantee.29
nagbayad si petitioner Kah Sabi
it Nag munabayaran
The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January 1988.30 Then, on 6 May 1988,
the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83 representing interest and penalty charges demanded by the
latter bank.31

On 19 June 1991, the petitioner sent to the respondents separate letters demanding full payment of the amount
of P47,872,373.98 plus accruing interest, penalty charges, and 10% attorney's fees pursuant to their joint and solidary
obligations under the deed of undertaking and surety bond.32 When the respondents failed to pay, the petitioner filed on 9
July 1991 a civil case for collection of a sum of money against the respondents before the RTC of Makati City.

After due trial, the trial court ruled against Philguarantee and held that the latter had no valid cause of action against the
respondents. It opined that at the time the call was made on the guarantee which was executed for a specific period, the
guarantee had already lapsed or expired. There was no valid renewal or extension of the guarantee for failure of the
petitioner to secure respondents' express consent thereto. The trial court also found that the joint venture contractor incurred
no delay in the execution of the Project. Considering the Project owner's violations of the contract which rendered impossible
the joint venture contractor's performance of its undertaking, no valid call on the guarantee could be made. Furthermore,
the trial court held that no valid notice was first made by the Project owner SOB to the joint venture contractor before the
call on the guarantee. Accordingly, it dismissed the complaint, as well as the counterclaims and cross-claim, and ordered
the petitioner to pay attorney's fees of P100,000 to respondents VPECI and Eusebio Spouses and P100,000 to 3-Plex and
the Santos Spouses, plus costs. 33

In its 14 June 1999 Decision,34 the Court of Appeals affirmed the trial court's decision, ratiocinating as follows:

First, appellant cannot deny the fact that it was fully aware of the status of project implementation as well as the
problems besetting the contractors, between 1982 to 1985, having sent some of its people to Baghdad during that
period. The successive renewals/extensions of the guarantees in fact, was prompted by delays, not solely
attributable to the contractors, and such extension understandably allowed by the SOB (project owner) which had
not anyway complied with its contractual commitment to tender 75% of payment in US Dollars, and which still
retained overdue amounts collectible by VPECI.

Second, appellant was very much aware of the violations committed by the SOB of its contractual undertakings with
VPECI, principally, the payment of foreign currency (US$) for 75% of the total contract price, as well as of the
complications and injustice that will result from its payment of the full amount of the performance guarantee, as
evident in PHILGUARANTEE's letter dated 13 May 1987 ….

Third, appellant was fully aware that SOB was in fact still obligated to the Joint Venture and there was still an amount
collectible from and still being retained by the project owner, which amount can be set-off with the sum covered by
the performance guarantee.

Fourth, well-apprised of the above conditions obtaining at the Project site and cognizant of the war situation at the
time in Iraq, appellant, though earlier has made representations with the SOB regarding a possible amicable
termination of the Project as suggested by VPECI, made a complete turn-around and insisted on acting in favor of
the unjustified "call" by the foreign banks.35

The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the Court of Appeals erred in affirming
the trial court's ruling that

…RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY EXECUTED IN FAVOR OF
PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF ITS COUNTER-GUARANTEE AND THAT
PETITIONER CANNOT PASS ON TO RESPONDENTS WHAT IT HAD PAID UNDER THE SAID COUNTER-
GUARANTEE.

II

…PETITIONER CANNOT CLAIM SUBROGATION.

III
 …IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE UNDER THEIR DEED
OF UNDERTAKING.36

The main issue in this case is whether the petitioner is entitled to reimbursement of what it paid under Letter of Guarantee
No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the deed of undertaking and surety bond from the respondents.

The petitioner asserts that since the guarantee it issued was absolute, unconditional, and irrevocable the nature and extent
of its liability are analogous to those of suretyship. Its liability accrued upon the failure of the respondents to finish the
construction of the Institute of Physical Therapy Buildings in Baghdad.

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case
the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the contract is called suretyship. 37

Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. In both contracts,
there is a promise to answer for the debt or default of another. However, in this jurisdiction, they may be distinguished thus:

1. A surety is usually bound with his principal by the same instrument executed at the same time and on the same
consideration. On the other hand, the contract of guaranty is the guarantor's own separate undertaking often
supported by a consideration separate from that supporting the contract of the principal; the original contract of his
principal is not his contract.

2. A surety assumes liability as a regular party to the undertaking; while the liability of a guarantor is conditional
depending on the failure of the primary debtor to pay the obligation.

3. The obligation of a surety is primary, while that of a guarantor is secondary.

4. A surety is an original promissor and debtor from the beginning, while a guarantor is charged on his own
undertaking.

5. A surety is, ordinarily, held to know every default of his principal; whereas a guarantor is not bound to take notice
of the non-performance of his principal.

6. Usually, a surety will not be discharged either by the mere indulgence of the creditor to the principal or by want
of notice of the default of the principal, no matter how much he may be injured thereby. A guarantor is often
discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified of the
default of the principal. 38

In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-194-F, which provides in part as follows:

In consideration of your issuing the above performance guarantee/counter-guarantee, we hereby unconditionally

and irrevocably guarantee, under our Ref. No. LG-81-194 F to pay you on your first written or telex demand Iraq
Dinars Two Hundred Seventy One Thousand Eight Hundred Eight and fils six hundred ten (ID271,808/610)
representing 100% of the performance bond required of V.P. EUSEBIO for the construction of the Physical Therapy
Institute, Phase II, Baghdad, Iraq, plus interest and other incidental expenses related thereto.

In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation unpaid but in no case shall
such amount exceed Iraq Dinars (ID) 271,808/610 plus interest and other incidental expenses…. (Emphasis
supplied)39

Guided by the abovementioned distinctions between a surety and a guaranty, as well as the factual milieu of this case, we
find that the Court of Appeals and the trial court were correct in ruling that the petitioner is a guarantor and not a surety.
That the guarantee issued by the petitioner is unconditional and irrevocable does not make the petitioner a surety. As a
guaranty, it is still characterized by its subsidiary and conditional quality because it does not take effect until the fulfillment
of the condition, namely, that the principal obligor should fail in his obligation at the time and in the form he bound himself.40 In
other words, an unconditional guarantee is still subject to the condition that the principal debtor should default in his
obligation first before resort to the guarantor could be had. A conditional guaranty, as opposed to an unconditional guaranty,
is one which depends upon some extraneous event, beyond the mere default of the principal, and generally upon notice of
the principal's default and reasonable diligence in exhausting proper remedies against the principal.41
 SURETY GUARANTY

1 .
Bond w/ the principal ,
i. separate undertaking ,

w/ the same contract original: contract is not

and same consideration his contract

2. liability of surety is a liability is conditional

as a regular party to on failure of the debtor
the contract
is 3 Obligation is secondary
Obligation primary
.

3 .

Charged onhis
y Debtor from the Y .

undertaking
.

start own

e. Ordinarily should
, e. Not bound to take
know the default of notice of nonperformance
the debtor principal

6. Cannot be discharged
6. can be discharged
by mere indulgence
of the creditor to
the principal
It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default by respondent VPECI the
petitioner shall pay, the obligation assumed by the petitioner was simply that of an unconditional guaranty, not conditional
guaranty. But as earlier ruled the fact that petitioner's guaranty is unconditional does not make it a surety. Besides, surety
is never presumed. A party should not be considered a surety where the contract itself stipulates that he is acting only as a
guarantor. It is only when the guarantor binds himself solidarily with the principal debtor that the contract becomes one of
suretyship.42
Petitioner -

guarantor
Having determined petitioner's liability as guarantor, the next question we have to grapple with is whether the respondent
contractor has defaulted in its obligations that would justify resort to the guaranty. This is a mixed question of fact and law
that is better addressed by the lower courts, since this Court is not a trier of facts.

It is a fundamental and settled rule that the findings of fact of the trial court and the Court of Appeals are binding or conclusive
upon this Court unless they are not supported by the evidence or unless strong and cogent reasons dictate otherwise.43 The
factual findings of the Court of Appeals are normally not reviewable by us under Rule 45 of the Rules of Court except when
they are at variance with those of the trial court. 44 The trial court and the Court of Appeals were in unison that the respondent
contractor cannot be considered to have defaulted in its obligations because the cause of the delay was not primarily
attributable to it.

A corollary issue is what law should be applied in determining whether the respondent contractor has defaulted in the
performance of its obligations under the service contract. The question of whether there is a breach of an agreement, which
includes default or mora,45 pertains to the essential or intrinsic validity of a contract. 46

No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule followed by most legal
systems, however, is that the intrinsic validity of a contract must be governed by the lex contractus or "proper law of the
contract." This is the law voluntarily agreed upon by the parties (the lex loci voluntatis) or the law intended by them either
expressly or implicitly (the lex loci intentionis). The law selected may be implied from such factors as substantial connection
with the transaction, or the nationality or domicile of the parties.47 Philippine courts would do well to adopt the first and most
basic rule in most legal systems, namely, to allow the parties to select the law applicable to their contract, subject to the
limitation that it is not against the law, morals, or public policy of the forum and that the chosen law must bear a substantive
relationship to the transaction. 48

It must be noted that the service contract between SOB and VPECI contains no express choice of the law that would govern
it. In the United States and Europe, the two rules that now seem to have emerged as "kings of the hill" are (1) the parties
may choose the governing law; and (2) in the absence of such a choice, the applicable law is that of the State that "has the
most significant relationship to the transaction and the parties."49 Another authority proposed that all matters relating to the
time, place, and manner of performance and valid excuses for non-performance are determined by the law of the place of
performance or lex loci solutionis, which is useful because it is undoubtedly always connected to the contract in a significant
way.50

In this case, the laws of Iraq bear substantial connection to the transaction, since one of the parties is the Iraqi Government
and the place of performance is in Iraq. Hence, the issue of whether respondent VPECI defaulted in its obligations may be
determined by the laws of Iraq. However, since that foreign law was not properly pleaded or proved, the presumption of
identity or similarity, otherwise known as the processual presumption, comes into play. Where foreign law is not pleaded or,
even if pleaded, is not proved, the presumption is that foreign law is the same as ours.51

Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: "In reciprocal obligations, neither party incurs
in delay if the other party does not comply or is not ready to comply in a proper manner with what is incumbent upon him."

Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause imputable to
the former. 52 It is the non-fulfillment of an obligation with respect to time.53

It is undisputed that only 51.7% of the total work had been accomplished. The 48.3% unfinished portion consisted in the
purchase and installation of electro-mechanical equipment and materials, which were available from foreign suppliers, thus
requiring US Dollars for their importation. The monthly billings and payments made by SOB54 reveal that the agreement
between the parties was a periodic payment by the Project owner to the contractor depending on the percentage of
accomplishment within the period. 55 The payments were, in turn, to be used by the contractor to finance the subsequent
phase of the work. 56 However, as explained by VPECI in its letter to the Department of Foreign Affairs (DFA), the payment
by SOB purely in Dinars adversely affected the completion of the project; thus:
 4. Despite protests from the plaintiff, SOB continued paying the accomplishment billings of the Contractor purely in
Iraqi Dinars and which payment came only after some delays.

5. SOB is fully aware of the following:

5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign currency (US$), to finance the
purchase of various equipment, materials, supplies, tools and to pay for the cost of project management, supervision
and skilled labor not available in Iraq and therefore have to be imported and or obtained from the Philippines and
other sources outside Iraq.

5.3 That the Ministry of Labor and Employment of the Philippines requires the remittance into the Philippines of
70% of the salaries of Filipino workers working abroad in US Dollars;

5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot be used to purchase
equipment, materials, supplies, etc. outside of Iraq;

5.6 That most of the materials specified by SOB in the CONTRACT are not available in Iraq and therefore have to
be imported;

5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui Dinars) out of Iraq and hence,
imported materials, equipment, etc., cannot be purchased or obtained using Iraqui Dinars as medium of acquisition.

8. Following the approved construction program of the CONTRACT, upon completion of the civil works portion of
the installation of equipment for the building, should immediately follow, however, the CONTRACT specified that
these equipment which are to be installed and to form part of the PROJECT have to be procured outside Iraq since
these are not being locally manufactured. Copy f the relevant portion of the Technical Specification is hereto
attached as Annex "C" and made an integral part hereof;

10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist the Iraqi government in
completing the PROJECT, the Contractor without any obligation on its part to do so but with the knowledge and
consent of SOB and the Ministry of Housing & Construction of Iraq, offered to arrange on behalf of SOB, a foreign
currency loan, through the facilities of Circle International S.A., the Contractor's Sub-contractor and SACE MEDIO
CREDITO which will act as the guarantor for this foreign currency loan.

Arrangements were first made with Banco di Roma. Negotiation started in June 1985. SOB is informed of the
developments of this negotiation, attached is a copy of the draft of the loan Agreement between SOB as the
Borrower and Agent. The Several Banks, as Lender, and counter-guaranteed by Istituto Centrale Per II Credito A
Medio Termine (Mediocredito) Sezione Speciale Per L'Assicurazione Del Credito All'Exportazione (Sace).
Negotiations went on and continued until it suddenly collapsed due to the reported default by Iraq in the payment
of its obligations with Italian government, copy of the news clipping dated June 18, 1986 is hereto attached as
Annex "D" to form an integral part hereof;

15. On September 15, 1986, Contractor received information from Circle International S.A. that because of the news
report that Iraq defaulted in its obligations with European banks, the approval by Banco di Roma of the loan to SOB
shall be deferred indefinitely, a copy of the letter of Circle International together with the news clippings are hereto
attached as Annexes "F" and "F-1", respectively.57

As found by both the Court of Appeals and the trial court, the delay or the non-completion of the Project was caused by
factors not imputable to the respondent contractor. It was rather due mainly to the persistent violations by SOB of the terms
and conditions of the contract, particularly its failure to pay 75% of the accomplished work in US Dollars. Indeed, where
one of the parties to a contract does not perform in a proper manner the prestation which he is bound to perform under the
contract, he is not entitled to demand the performance of the other party. A party does not incur in delay if the other party
fails to perform the obligation incumbent upon him.

The petitioner, however, maintains that the payments by SOB of the monthly billings in purely Iraqi Dinars did not render
impossible the performance of the Project by VPECI. Such posture is quite contrary to its previous representations. In his
26 March 1987 letter to the Office of the Middle Eastern and African Affairs (OMEAA), DFA, Manila, petitioner's Executive
Vice-President Jesus M. Tañedo stated that while VPECI had taken every possible measure to complete the Project, the
war situation in Iraq, particularly the lack of foreign exchange, was proving to be a great obstacle; thus:

VPECI has taken every possible measure for the completion of the project but the war situation in Iraq particularly
the lack of foreign exchange is proving to be a great obstacle. Our performance counterguarantee was called last
26 October 1986 when the negotiations for a foreign currency loan with the Italian government through Banco de
Roma bogged down following news report that Iraq has defaulted in its obligation with major European banks.
Unless the situation in Iraq is improved as to allay the bank's apprehension, there is no assurance that the project
will ever be completed. 58

In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the
performance because it must appear that the tolerance or benevolence of the creditor must have ended. 59

As stated earlier, SOB cannot yet demand complete performance from VPECI because it has not yet itself performed its
obligation in a proper manner, particularly the payment of the 75% of the cost of the Project in US Dollars. The VPECI
cannot yet be said to have incurred in delay. Even assuming that there was delay and that the delay was attributable to
VPECI, still the effects of that delay ceased upon the renunciation by the creditor, SOB, which could be implied when the
latter granted several extensions of time to the former. 60 Besides, no demand has yet been made by SOB against the
respondent contractor. Demand is generally necessary even if a period has been fixed in the obligation. And default
generally begins from the moment the creditor demands judicially or extra-judicially the performance of the obligation.
Without such demand, the effects of default will not arise.61

Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot be compelled to pay the
creditor SOB unless the property of the debtor VPECI has been exhausted and all legal remedies against the said debtor
have been resorted to by the creditor.62 It could also set up compensation as regards what the creditor SOB may owe the
principal debtor VPECI.63 In this case, however, the petitioner has clearly waived these rights and remedies by making the
payment of an obligation that was yet to be shown to be rightfully due the creditor and demandable of the principal debtor.

As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor had collectibles from SOB which
could be set off with the amount covered by the performance guarantee. In February 1987, the OMEAA transmitted to the
petitioner a copy of a telex dated 10 February 1987 of the Philippine Ambassador in Baghdad, Iraq, informing it of the note
verbale sent by the Iraqi Ministry of Foreign Affairs stating that the past due obligations of the joint venture contractor from
the petitioner would "be deducted from the dues of the two contractors."64

Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the petitioner raised as among
the arguments to be presented in support of the cancellation of the counter-guarantee the fact that the amount of
ID281,414/066 retained by SOB from the Project was more than enough to cover the counter-guarantee of ID271,808/610;
thus:

6.1 Present the following arguments in cancelling the counterguarantee:

· The Iraqi Government does not have the foreign exchange to fulfill its contractual obligations of paying
75% of progress billings in US dollars.

· It could also be argued that the amount of ID281,414/066 retained by SOB from the proposed project is
more than the amount of the outstanding counterguarantee.65

In a nutshell, since the petitioner was aware of the contractor's outstanding receivables from SOB, it should have set up
compensation as was proposed in its project situationer.
 Moreover, the petitioner was very much aware of the predicament of the respondents. In fact, in its 13 May 1987 letter to
the OMEAA, DFA, Manila, it stated:

VPECI also maintains that the delay in the completion of the project was mainly due to SOB's violation of contract
terms and as such, call on the guarantee has no basis.

While PHILGUARANTEE is prepared to honor its commitment under the guarantee, PHILGUARANTEE does not
want to be an instrument in any case of inequity committed against a Filipino contractor. It is for this reason that we
are constrained to seek your assistance not only in ascertaining the veracity of Al Ahli Bank's claim that it has paid
Rafidain Bank but possibly averting such an event. As any payment effected by the banks will complicate matters,
we cannot help underscore the urgency of VPECI's bid for government intervention for the amicable termination of
the contract and release of the performance guarantee. 66

But surprisingly, though fully cognizant of SOB's violations of the service contract and VPECI's outstanding receivables from

☒ SOB, as well as the situation obtaining in the Project site compounded by the Iran-Iraq war, the petitioner opted to pay the
second layer guarantor not only the full amount of the performance bond counter-guarantee but also interests and penalty
charges.

This brings us to the next question: May the petitioner as a guarantor secure reimbursement from the respondents for what
it has paid under Letter of Guarantee No. 81-194-F?

As a rule, a guarantor who pays for a debtor should be indemnified by the latter67 and would be legally subrogated to the
rights which the creditor has against the debtor.68 However, a person who makes payment without the knowledge or against
the will of the debtor has the right to recover only insofar as the payment has been beneficial to the debtor.69 If the obligation
was subject to defenses on the part of the debtor, the same defenses which could have been set up against the creditor
can be set up against the paying guarantor.70

From the findings of the Court of Appeals and the trial court, it is clear that the payment made by the petitioner guarantor
did not in any way benefit the principal debtor, given the project status and the conditions obtaining at the Project site at
that time. Moreover, the respondent contractor was found to have valid defenses against SOB, which are fully supported
by evidence and which have been meritoriously set up against the paying guarantor, the petitioner in this case. And even if
the deed of undertaking and the surety bond secured petitioner's guaranty, the petitioner is precluded from enforcing the
same by reason of the petitioner's undue payment on the guaranty. Rights under the deed of undertaking and the surety
bond do not arise because these contracts depend on the validity of the enforcement of the guaranty.

The petitioner guarantor should have waited for the natural course of guaranty: the debtor VPECI should have, in the first
place, defaulted in its obligation and that the creditor SOB should have first made a demand from the principal debtor. It is
only when the debtor does not or cannot pay, in whole or in part, that the guarantor should pay.71 When the petitioner
guarantor in this case paid against the will of the debtor VPECI, the debtor VPECI may set up against it defenses available
against the creditor SOB at the time of payment. This is the hard lesson that the petitioner must learn.

As the government arm in pursuing its objective of providing "the necessary support and assistance in order to enable …
[Filipino exporters and contractors to operate viably under the prevailing economic and business conditions,"72 the petitioner
should have exercised prudence and caution under the circumstances. As aptly put by the Court of Appeals, it would be the
height of inequity to allow the petitioner to pass on its losses to the Filipino contractor VPECI which had sternly warned
against paying the Al Ahli Bank and constantly apprised it of the developments in the Project implementation.

WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the decision of the Court of
appeals in CA-G.R. CV No. 39302 is AFFIRMED.

No pronouncement as to costs.

SO ORDERED.
construction of deep well I balance on contract
G.R. No. 117190 January 2, 1997

JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND GENERAL

↳ to
MERCHANDISING, petitioner,
vs.

ordered COURT OF APPEALS and VICENTE HERCE JR., respondents.

balance
commit BELLOSILLO, J.: ↳ ordered to pay
This case involves the proper interpretation of the contract entered into between the parties.

Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the name and style J.M.T. Engineering and
General Merchandising proposed to respondent Vicente Herce Jr. to construct a windmill system for him. After some
negotiations they agreed on the construction of the windmill for a consideration of P60,000.00 with a one-year guaranty
from the date of completion and acceptance by respondent Herce Jr. of the project. Pursuant to the agreement respondent
paid petitioner a down payment of P30,000.00 and an installment payment of P15,000.00, leaving a balance of P15,000.00.

On 14 March 1988, due to the refusal and failure of respondent to pay the balance, petitioner filed a complaint to collect the
amount. In his Answer before the trial court respondent denied the claim saying that he had already paid this amount to the
San Pedro General Merchandising Inc. (SPGMI) which constructed the deep well to which the windmill system was to be
connected. According to respondent, since the deep well formed part of the system the payment he tendered to SPGMI
should be credited to his account by petitioner. Moreover, assuming that he owed petitioner a balance of P15,000.00, this
should be offset by the defects in the windmill system which caused the structure to collapse after a strong wind hit their
place.1

Petitioner denied that the construction of a deep well was included in the agreement to build the windmill system, for the
contract price of P60,000.00 was solely for the windmill assembly and its installation, exclusive of other incidental materials
needed for the project. He also disowned any obligation to repair or reconstruct the system and insisted that he delivered it
in good and working condition to respondent who accepted the same without protest. Besides, its collapse was attributable
to a typhoon, a force majeure, which relieved him of any liability.

In finding for plaintiff, the trial court held that the construction of the deep well was not part of the windmill project as
evidenced clearly by the letter proposals submitted by petitioner to respondent.2 It noted that "[i]f the intention of the parties
is to include the construction of the deep well in the project, the same should be stated in the proposals. In the absence of
such an agreement, it could be safely concluded that the construction of the deep well is not a part of the project undertaken
by the plaintiff."3 With respect to the repair of the windmill, the trial court found that "there is no clear and convincing proof
that the windmill system fell down due to the defect of the construction."4

The Court of Appeals reversed the trial court. It ruled that the construction of the deep well was included in the agreement
of the parties because the term "deep well" was mentioned in both proposals. It also gave credence to the testimony of
respondent's witness Guillermo Pili, the proprietor of SPGMI which installed the deep well, that petitioner Tanguilig told him
that the cost of constructing the deep well would be deducted from the contract price of P60,000.00. Upon these premises
the appellate court concluded that respondent's payment of P15,000.00 to SPGMI should be applied to his remaining
balance with petitioner thus effectively extinguishing his contractual obligation. However, it rejected petitioner's claim of force
majeure and ordered the latter to reconstruct the windmill in accordance with the stipulated one-year guaranty.

His motion for reconsideration having been denied by the Court of Appeals, petitioner now seeks relief from this Court. He
raises two issues: firstly, whether the agreement to construct the windmill system included the installation of a deep well
and, secondly, whether petitioner is under obligation to reconstruct the windmill after it collapsed.

We reverse the appellate court on the first issue but sustain it on the second.

The preponderance of evidence supports the finding of the trial court that the installation of a deep well was not included in
the proposals of petitioner to construct a windmill system for respondent. There were in fact two (2) proposals: one dated
19 May 1987 which pegged the contract price at P87,000.00 (Exh. "1"). This was rejected by respondent. The other was
submitted three days later, i.e., on 22 May 1987 which contained more specifications but proposed a lower contract price
of P60,000.00 (Exh. "A"). The latter proposal was accepted by respondent and the construction immediately followed. The
pertinent portions of the first letter-proposal (Exh. "1") are reproduced hereunder —

In connection with your Windmill System and Installation, we would like to quote to you as follows:
 One (1) Set — Windmill suitable for 2 inches diameter deepwell, 2 HP, capacity, 14 feet in diameter,
with 20 pieces blade, Tower 40 feet high, including mechanism which is not advisable to operate
during extra-intensity wind. Excluding cylinder pump.

UNIT CONTRACT PRICE P87,000.00

The second letter-proposal (Exh. "A") provides as follows:

In connection with your Windmill system, Supply of Labor Materials and Installation, operated water pump, we would
like to quote to you as
follows —

One (1) set — Windmill assembly for 2 inches or 3 inches deep-well pump, 6 Stroke, 14 feet
diameter, 1-lot blade materials, 40 feet Tower complete with standard appurtenances up to Cylinder
pump, shafting U.S. adjustable International Metal.

One (1) lot — Angle bar, G.I. pipe, Reducer Coupling, Elbow Gate valve, cross Tee coupling.

One (1) lot — Float valve.

One (1) lot — Concreting materials foundation.

F. O. B. Laguna
Contract Price P60,000.00

Notably, nowhere in either proposal is the installation of a deep well mentioned, even remotely. Neither is there an
itemization or description of the materials to be used in constructing the deep well. There is absolutely no mention in the
two (2) documents that a deep well pump is a component of the proposed windmill system. The contract prices fixed in both
proposals cover only the features specifically described therein and no other. While the words "deep well" and "deep well
pump" are mentioned in both, these do not indicate that a deep well is part of the windmill system. They merely describe
the type of deep well pump for which the proposed windmill would be suitable. As correctly pointed out by petitioner, the
words "deep well" preceded by the prepositions "for" and "suitable for" were meant only to convey the idea that the proposed
windmill would be appropriate for a deep well pump with a diameter of 2 to 3 inches. For if the real intent of petitioner was
to include a deep well in the agreement to construct a windmill, he would have used instead the conjunctions "and" or "with."
Since the terms of the instruments are clear and leave no doubt as to their meaning they should not be disturbed.

Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the parties shall be accorded primordial
consideration5 and, in case
of doubt, their contemporaneous and subsequent acts shall be principally considered.6 An examination of such
contemporaneous and subsequent acts of respondent as well as the attendant circumstances does not persuade us to
uphold him.

Respondent insists that petitioner verbally agreed that the contract price of P60,000.00 covered the installation of a deep
well pump. He contends that since petitioner did not have the capacity to install the pump the latter agreed to have a third
party do the work the cost of which was to be deducted from the contract price. To prove his point, he presented Guillermo
Pili of SPGMI who declared that petitioner Tanguilig approached him with a letter from respondent Herce Jr. asking him to
build a deep well pump as "part of the price/contract which Engineer (Herce) had with Mr. Tanguilig."7

We are disinclined to accept the version of respondent. The claim of Pili that Herce Jr. wrote him a letter is unsubstantiated.
The alleged letter was never presented in court by private respondent for reasons known only to him. But granting that this
written communication existed, it could not have simply contained a request for Pili to install a deep well; it would have also
mentioned the party who would pay for the undertaking. It strains credulity that respondent would keep silent on this matter
and leave it all to petitioner Tanguilig to verbally convey to Pili that the deep well was part of the windmill construction and
that its payment would come from the contract price of P60,000.00.

We find it also unusual that Pili would readily consent to build a deep well the payment for which would come supposedly
from the windmill contract price on the mere representation of petitioner, whom he had never met before, without a written
commitment at least from the former. For if indeed the deep well were part of the windmill project, the contract for its
installation would have been strictly a matter between petitioner and Pili himself with the former assuming the obligation to
pay the price. That it was respondent Herce Jr. himself who paid for the deep well by handing over to Pili the amount of
P15,000.00 clearly indicates that the contract for the deep well was not part of the windmill project but a separate agreement
between respondent and Pili. Besides, if the price of P60,000.00 included the deep well, the obligation of respondent was
to pay the entire amount to petitioner without prejudice to any action that Guillermo Pili or SPGMI may take, if any, against
the latter. Significantly, when asked why he tendered payment directly to Pili and not to petitioner, respondent explained,
rather lamely, that he did it "because he has (sic) the money, so (he) just paid the money in his possession."8

Can respondent claim that Pili accepted his payment on behalf of petitioner? No. While the law is clear that "payment shall
be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person
authorized to receive it,"9 it does not appear from the record that Pili and/or SPGMI was so authorized.

Respondent cannot claim the benefit of the law concerning "payments made by a third person."10 The Civil Code provisions
do not apply in the instant case because no creditor-debtor relationship between petitioner and Guillermo Pili and/or SPGMI
has been established regarding the construction of the deep well. Specifically, witness Pili did not testify that he entered
into a contract with petitioner for the construction of respondent's deep well. If SPGMI was really commissioned by petitioner
to construct the deep well, an agreement particularly to this effect should have been entered into.

The contemporaneous and subsequent acts of the parties concerned effectively belie respondent's assertions.
These circumstances only show that the construction of the well by SPGMI was for the sole account of respondent
and that petitioner merely supervised the installation of the well because the windmill was to be connected to it.
There is no legal nor factual basis by which this Court can impose upon petitioner an obligation he did not expressly
assume nor ratify.

The second issue is not a novel one. In a long line of cases 11 this Court has consistently held that in order for a
party to claim exemption from liability by reason of fortuitous event under Art. 1174 of the Civil Code the event
should be the sole and proximate cause of the loss or destruction of the object of the contract. In Nakpil vs. Court
of Appeals,12 four (4) requisites must concur: (a) the cause of the breach of the obligation must be independent of
the will of the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event must be such as to
render it impossible for the debtor to fulfill his obligation in a normal manner; and, (d) the debtor must be free from
any participation in or aggravation of the injury to the creditor.

Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous event. Interestingly, the
evidence does not disclose that there was actually a typhoon on the day the windmill collapsed. Petitioner merely
stated that there was a "strong wind." But a strong wind in this case cannot be fortuitous — unforeseeable nor
unavoidable. On the contrary, a strong wind should be present in places where windmills are constructed, otherwise
the windmills will not turn.

The appellate court correctly observed that "given the newly-constructed windmill system, the same would not have
collapsed had there been no inherent defect in it which could only be attributable to the appellee."13 It emphasized
that respondent had in his favor the presumption that "things have happened according to the ordinary course of
nature and the ordinary habits of life."14 This presumption has not been rebutted by petitioner.

Finally, petitioner's argument that private respondent was already in default in the payment of his outstanding
balance of P15,000.00 and hence should bear his own loss, is untenable. In reciprocal obligations, neither party
incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent
upon him.15 When the windmill failed to function properly it became incumbent upon petitioner to institute the proper
repairs in accordance with the guaranty stated in the contract. Thus, respondent cannot be said to have incurred in
delay; instead, it is petitioner who should bear the expenses for the reconstruction of the windmill. Article 1167 of
the Civil Code is explicit on this point that if a person obliged to do something fails to do it, the same shall be
executed at his cost.

WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE HERCE JR. is directed to pay petitioner
JACINTO M. TANGUILIG the balance of P15,000.00 with interest at the legal rate from the date of the filing of the
complaint. In return, petitioner is ordered to "reconstruct subject defective windmill system, in accordance with the
one-year guaranty"16 and to complete the same within three (3) months from the finality of this decision.

SO ORDERED.
 construction of niche of late wife , materials arrived late
G.R. No. 115129 February 12, 1997

* IGNACIO BARZAGA, petitioner,

vs.
COURT OF APPEALS and ANGELITO ALVIAR, respondents.

BELLOSILLO, J.:

The Fates ordained that Christmas 1990 be bleak for Ignacio Barzaga and his family. On the nineteenth of December
Ignacio's wife succumbed to a debilitating ailment after prolonged pain and suffering. Forewarned by her attending
physicians of her impending death, she expressed her wish to be laid to rest before Christmas day to spare her family from
keeping lonely vigil over her remains while the whole of Christendom celebrate the Nativity of their Redeemer.

Drained to the bone from the tragedy that befell his family yet preoccupied with overseeing the wake for his departed wife,
Ignacio Barzaga set out to arrange for her interment on the twenty-fourth of December in obedience semper fidelis to her
dying wish. But her final entreaty, unfortunately, could not be carried out. Dire events conspired to block his plans that
forthwith gave him and his family their gloomiest Christmas ever.

This is Barzaga's story. On 21 December 1990, at about three o'clock in the afternoon, he went to the hardware store of
respondent Angelito Alviar to inquire about the availability of certain materials to be used in the construction of a niche for
his wife. He also asked if the materials could be delivered at once. Marina Boncales, Alviar's storekeeper, replied that she
had yet to verify if the store had pending deliveries that afternoon because if there were then all subsequent purchases
would have to be delivered the following day. With that reply petitioner left.

At seven o'clock the following morning, 22 December, Barzaga returned to Alviar's hardware store to follow up his purchase
of construction materials. He told the store employees that the materials he was buying would have to be delivered at the
Memorial Cemetery in Dasmarinas, Cavite, by eight o'clock that morning since his hired workers were already at the burial
site and time was of the essence. Marina Boncales agreed to deliver the items at the designated time, date and place. With
this assurance, Barzaga purchased the materials and paid in full the amount of P2,110.00. Thereafter he joined his workers
at the cemetery, which was only a kilometer away, to await the delivery.

The construction materials did not arrive at eight o'clock as promised. At nine o'clock, the delivery was still nowhere in sight.
Barzaga returned to the hardware store to inquire about the delay. Boncales assured him that although the delivery truck
was not yet around it had already left the garage and that as soon as it arrived the materials would be brought over to the
cemetery in no time at all. That left petitioner no choice but to rejoin his workers at the memorial park and wait for the
materials.

By ten o'clock, there was still no delivery. This prompted petitioner to return to the store to inquire about the materials. But
he received the same answer from respondent's employees who even cajoled him to go back to the burial place as they
would just follow with his construction materials.

After hours of waiting — which seemed interminable to him — Barzaga became extremely upset. He decided to dismiss his
laborers for the day. He proceeded to the police station, which was just nearby, and lodged a complaint against Alviar. He
had his complaint entered in the police blotter. When he returned again to the store he saw the delivery truck already there
but the materials he purchased were not yet ready for loading. Distressed that Alviar's employees were not the least
concerned, despite his impassioned pleas, Barzaga decided to cancel his transaction with the store and look for construction
materials elsewhere.

In the afternoon of that day, petitioner was able to buy from another store. But since darkness was already setting in and
his workers had left, he made up his mind to start his project the following morning, 23 December. But he knew that the
niche would not be finish in time for the scheduled burial the following day. His laborers had to take a break on Christmas
Day and they could only resume in the morning of the twenty-sixth. The niche was completed in the afternoon and Barzaga's
wife was finally laid to rest. However, it was two-and-a-half (2-1/2) days behind schedule.

On 21 January 1991, tormented perhaps by his inability to fulfill his wife's dying wish, Barzaga wrote private respondent
Alviar demanding recompense for the damage he suffered. Alviar did not respond. Consequently, petitioner sued him before
the Regional Trial Court.1

Resisting petitioner's claim, private respondent contended that legal delay could not be validly ascribed to him because no
specific time of delivery was agreed upon between them. He pointed out that the invoices evidencing the sale did not contain
 any stipulation as to the exact time of delivery and that assuming that the materials were not delivered within the period
desired by petitioner, the delivery truck suffered a flat tire on the way to the store to pick up the materials. Besides, his men
were ready to make the delivery by ten-thirty in the morning of 22 December but petitioner refused to accept them. According
to Alviar, it was this obstinate refusal of petitioner to accept delivery that caused the delay in the construction of the niche
and the consequent failure of the family to inter their loved one on the twenty-fourth of December, and that, if at all, it was
petitioner and no other who brought about all his personal woes.

Upholding the proposition that respondent incurred in delay in the delivery of the construction materials resulting in undue
prejudice to petitioner, the trial court ordered respondent Alviar to pay petitioner (a) P2,110.00 as refund for the purchase
RTC price of the materials with interest per annum computed at the legal rate from the date of the filing of the complaint, (b)
P5,000.00 as temperate damages, (c) P20,000.00 as moral damages, (d) P5,000.00 as litigation expenses, and (e)
P5,000.00 as attorney's fees.

On appeal, respondent Court of Appeals reversed the lower court and ruled that there was no contractual commitment as
CA to the exact time of delivery since this was not indicated in the invoice receipts covering the sale.2

The arrangement to deliver the materials merely implied that delivery should be made within a reasonable time but that the
conclusion that since petitioner's workers were already at the graveyard the delivery had to be made at that precise moment,
is non-sequitur. The Court of Appeals also held that assuming that there was delay, petitioner still had sufficient time to
construct the tomb and hold his wife's burial as she wished.

We sustain the trial court. An assiduous scrutiny of the record convinces us that respondent Angelito Alviar was negligent
and incurred in delay in the performance of his contractual obligation. This sufficiently entitles petitioner Ignacio Barzaga to
be indemnified for the damage he suffered as a consequence of delay or a contractual breach. The law expressly provides
that those who in the performance of their obligation are guilty of fraud, negligence, or delay and those who in any manner
contravene the tenor thereof, are liable for damages.3

Contrary to the appellate court's factual determination, there was a specific time agreed upon for the delivery of the materials
to the cemetery. Petitioner went to private respondent's store on 21 December precisely to inquire if the materials he
intended to purchase could be delivered immediately. But he was told by the storekeeper that if there were still deliveries to
be made that afternoon his order would be delivered the following day. With this in mind Barzaga decided to buy the
construction materials the following morning after he was assured of immediate delivery according to his time frame. The
argument that the invoices never indicated a specific delivery time must fall in the face of the positive verbal commitment of
respondent's storekeeper. Consequently it was no longer necessary to indicate in the invoices the exact time the purchased
items were to be brought to the cemetery. In fact, storekeeper Boncales admitted that it was her custom not to indicate the
time of delivery whenever she prepared invoices.4

Private respondent invokes fortuitous event as his handy excuse for that "bit of delay" in the delivery of petitioner's
purchases. He maintains that Barzaga should have allowed his delivery men a little more time to bring the construction
materials over to the cemetery since a few hours more would not really matter and considering that his truck had a flat tire.
Besides, according to him, Barzaga still had sufficient time to build the tomb for his wife.

This is a gratuitous assertion that borders on callousness. Private respondent had no right to manipulate petitioner's
timetable and substitute it with his own. Petitioner had a deadline to meet. A few hours of delay was no piddling matter to
him who in his bereavement had yet to attend to other pressing family concerns. Despite this, respondent's employees still
made light of his earnest importunings for an immediate delivery. As petitioner bitterly declared in court " . . . they
(respondent's employees) were making a fool out of me."5

We also find unacceptable respondent's justification that his truck had a flat tire, for this event, if indeed it happened, was
forseeable according to the trial court, and as such should have been reasonably guarded against. The nature of private
respondent's business requires that he should be ready at all times to meet contingencies of this kind. One piece of
testimony by respondent's witness Marina Boncales has caught our attention - that the delivery truck arrived a little late than
usual because it came from a delivery of materials in Langcaan, Dasmarinas, Cavite.6Significantly, this information was
withheld by Boncales from petitioner when the latter was negotiating with her for the purchase of construction materials.
Consequently, it is not unreasonable to suppose that had she told petitioner of this fact and that the delivery of the materials
would consequently be delayed, petitioner would not have bought the materials from respondent's hardware store but
elsewhere which could meet his time requirement. The deliberate suppression of this information by itself manifests a certain
degree of bad faith on the part of respondent's storekeeper.
The appellate court appears to have belittled petitioner's submission that under the prevailing circumstances time was of
the essence in the delivery of the materials to the grave site. However, we find petitioner's assertion to be anchored on solid
ground. The niche had to be constructed at the very least on the twenty-second of December considering that it would take
about two (2) days to finish the job if the interment was to take place on the twenty-fourth of the month. Respondent's delay
in the delivery of the construction materials wasted so much time that construction of the tomb could start only on the twenty-
third. It could not be ready for the scheduled burial of petitioner's wife. This undoubtedly prolonged the wake, in addition to
the fact that work at the cemetery had to be put off on Christmas day.

This case is clearly one of non-performance of a reciprocal obligation.7 In their contract of purchase and sale, petitioner had
already complied fully with what was required of him as purchaser, i.e., the payment of the purchase price of P2,110.00. It
was incumbent upon respondent to immediately fulfill his obligation to deliver the goods otherwise delay would attach.

We therefore sustain the award of moral damages. It cannot be denied that petitioner and his family suffered wounded
feelings, mental anguish and serious anxiety while keeping watch on Christmas day over the remains of their loved one
who could not be laid to rest on the date she herself had chosen. There is no gainsaying the inexpressible pain and sorrow
Ignacio Barzaga and his family bore at that moment caused no less by the ineptitude, cavalier behavior and bad faith of
respondent and his employees in the performance of an obligation voluntarily entered into.

We also affirm the grant of exemplary damages. The lackadaisical and feckless attitude of the employees of respondent
over which he exercised supervisory authority indicates gross negligence in the fulfillment of his business obligations.
Respondent Alviar and his employees should have exercised fairness and good judgment in dealing with petitioner who
was then grieving over the loss of his wife. Instead of commiserating with him, respondent and his employees contributed
to petitioner's anguish by causing him to bear the agony resulting from his inability to fulfill his wife's dying wish.

We delete however the award of temperate damages. Under Art. 2224 of the Civil Code, temperate damages are more than
nominal but less than compensatory, and may be recovered when the court finds that some pecuniary loss has been
suffered but the amount cannot, from the nature of the case, be proved with certainty. In this case, the trial court found that
plaintiff suffered damages in the form of wages for the hired workers for 22 December 1990 and expenses incurred during
the extra two (2) days of the wake. The record however does not show that petitioner presented proof of the actual amount
of expenses he incurred which seems to be the reason the trial court awarded to him temperate damages instead. This is
an erroneous application of the concept of temperate damages. While petitioner may have indeed suffered pecuniary losses,
these by their very nature could be established with certainty by means of payment receipts. As such, the claim falls
unequivocally within the realm of actual or compensatory damages. Petitioner's failure to prove actual expenditure
consequently conduces to a failure of his claim. For in determining actual damages, the court cannot rely on mere assertions,
speculations, conjectures or guesswork but must depend on competent proof and on the best evidence obtainable regarding
the actual amount of loss.8

We affirm the award of attorney's fees and litigation expenses. Award of damages, attorney's fees and litigation costs is left
to the sound discretion of the court, and if such discretion be well exercised, as in this case, it will not be disturbed on
appeal.9

WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE except insofar as it GRANTED on a
motion for reconsideration the refund by private respondent of the amount of P2,110.00 paid by petitioner for the
construction materials. Consequently, except for the award of P5,000.00 as temperate damages which we delete, the
decision of the Regional Trial Court granting petitioner (a) P2,110.00 as refund for the value of materials with interest
computed at the legal rate per annum from the date of the filing of the case; (b) P20,000.00 as moral damages; (c)
P10,000.00 as exemplary damages; (d) P5,000.00 as litigation expenses; and (4) P5,000.00 as attorney's fees, is
AFFIRMED. No costs.

SO ORDERED.

G.R. No. L-47379 May 16, 1988

NATIONAL POWER CORPORATION, petitioner,

vs.
HONORABLE COURT OF APPEALS and ENGINEERING CONSTRUCTION, INC., respondents.
 G.R. No. L-47481 May 16, 1988

ENGINEERING CONSTRUCTION, INC., petitioner,

vs.
COUTRT OF APPEALS and NATIONAL POWER CORPORATION, respondents.

GUTIERREZ, JR., J.:

These consolidated petitions seek to set aside the decision of the respondent Court of Appeals which adjudged the National
Power Corporation liable for damages against Engineering Construction, Inc. The appellate court, however, reduced the
amount of damages awarded by the trial court. Hence, both parties filed their respective petitions: the National Power
Corporation (NPC) in G.R. No. 47379, questioning the decision of the Court of Appeals for holding it liable for damages and
the Engineering Construction, Inc. (ECI) in G.R. No. 47481, questioning the same decision for reducing the consequential
damages and attorney's fees and for eliminating the exemplary damages.

The facts are succinctly summarized by the respondent Court of Appeals, as follows:

On August 4, 1964, plaintiff Engineering Construction, Inc., being a successful bidder, executed a contract
in Manila with the National Waterworks and Sewerage Authority (NAWASA), whereby the former undertook
Engineering to furnish all tools, labor, equipment, and materials (not furnished by Owner), and to construct the proposed
2nd lpo-Bicti Tunnel, Intake and Outlet Structures, and Appurtenant Structures, and Appurtenant Features,
construction at Norzagaray, Bulacan, and to complete said works within eight hundred (800) calendar days from the
date the Contractor receives the formal notice to proceed (Exh. A).
WI
The project involved two (2) major phases: the first phase comprising, the tunnel work covering a distance
NAWASA of seven (7) kilometers, passing through the mountain, from the Ipo river, a part of Norzagaray, Bulacan,
where the Ipo Dam of the defendant National Power Corporation is located, to Bicti; the other phase
consisting of the outworks at both ends of the tunnel.
furnish tools
By September 1967, the plaintiff corporation already had completed the first major phase of the work,
namely, the tunnel excavation work. Some portions of the outworks at the Bicti site were still under
construction. As soon as the plaintiff corporation had finished the tunnel excavation work at the Bicti site,
all the equipment no longer needed there were transferred to the Ipo site where some projects were yet to
be completed.

The record shows that on November 4,1967, typhoon 'Welming' hit Central Luzon, passing through
defendant's Angat Hydro-electric Project and Dam at lpo, Norzagaray, Bulacan. Strong winds struck the
project area, and heavy rains intermittently fell. Due to the heavy downpour, the water in the reservoir of
the Angat Dam was rising perilously at the rate of sixty (60) centimeters per hour. To prevent an overflow
of water from the dam, since the water level had reached the danger height of 212 meters above sea level,
the defendant corporation caused the opening of the spillway gates." (pp. 45-46, L-47379, Rollo)

The appellate court sustained the findings of the trial court that the evidence preponlderantly established the fact that due
to the negligent manner with which the spillway gates of the Angat Dam were opened, an extraordinary large volume of
water rushed out of the gates, and hit the installations and construction works of ECI at the lpo site with terrific impact, as a
result of which the latter's stockpile of materials and supplies, camp facilities and permanent structures and accessories
either washed away, lost or destroyed.

The appellate court further found that:

It cannot be pretended that there was no negligence or that the appellant exercised extraordinary care in
the opening of the spillway gates of the Angat Dam. Maintainers of the dam knew very well that it was far
more safe to open them gradually. But the spillway gates were opened only when typhoon Welming was
already at its height, in a vain effort to race against time and prevent the overflow of water from the dam as
it 'was rising dangerously at the rate of sixty centimeters per hour. 'Action could have been taken as early
as November 3, 1967, when the water in the reservoir was still low. At that time, the gates of the dam could
have been opened in a regulated manner. Let it be stressed that the appellant knew of the coming of the
typhoon four days before it actually hit the project area. (p. 53, L-47379, Rollo)

As to the award of damages, the appellate court held:

 We come now to the award of damages. The appellee submitted a list of estimated losses and damages
to the tunnel project (Ipo side) caused by the instant flooding of the Angat River (Exh. J-1). The damages
were itemized in four categories, to wit: Camp Facilities P55,700.00; Equipment, Parts and Plant —
P375,659.51; Materials P107,175.80; and Permanent Structures and accessories — P137,250.00, with an
aggregate total amount of P675,785.31. The list is supported by several vouchers which were all submitted
as Exhibits K to M-38 a, N to O, P to U-2 and V to X- 60-a (Vide: Folders Nos. 1 to 4). The appellant did not
submit proofs to traverse the aforementioned documentary evidence. We hold that the lower court did not
commit any error in awarding P 675,785.31 as actual or compensatory damages.

However, We cannot sustain the award of P333,200.00 as consequential damages. This amount is broken
down as follows: P213,200.00 as and for the rentals of a crane to temporarily replace the one "destroyed
beyond repair," and P120,000.00 as one month bonus which the appellee failed to realize in accordance
with the contract which the appellee had with NAWASA. Said rental of the crane allegedly covered the
period of one year at the rate of P40.00 an hour for 16 hours a day. The evidence, however, shows that the
appellee bought a crane also a crawler type, on November 10, 1967, six (6) days after the incident in
question (Exh N) And according to the lower court, which finding was never assailed, the appellee resumed
its normal construction work on the Ipo- Bicti Project after a stoppage of only one month. There is no
evidence when the appellee received the crane from the seller, Asian Enterprise Limited. But there was an
agreement that the shipment of the goods would be effected within 60 days from the opening of the letter
of credit (Exh. N).<äre||anº•1àw> It appearing that the contract of sale was consummated, We must
conclude or at least assume that the crane was delivered to the appellee within 60 days as stipulated. The
appellee then could have availed of the services of another crane for a period of only one month (after a
work stoppage of one month) at the rate of P 40.00 an hour for 16 hours a day or a total of P 19,200.00 as
rental.

But the value of the new crane cannot be included as part of actual damages because the old was
reactivated after it was repaired. The cost of the repair was P 77,000.00 as shown in item No. 1 under the
Equipment, Parts and Plants category (Exh. J-1), which amount of repair was already included in the actual
or compensatory damages. (pp. 54-56, L-47379, Rollo)

The appellate court likewise rejected the award of unrealized bonus from NAWASA in the amount of P120,000.00 (computed
at P4,000.00 a day in case construction is finished before the specified time, i.e., within 800 calendar days), considering
that the incident occurred after more than three (3) years or one thousand one hundred seventy (1,170) days. The court
also eliminated the award of exemplary damages as there was no gross negligence on the part of NPC and reduced the
amount of attorney's fees from P50,000.00 to P30,000.00.

In these consolidated petitions, NPC assails the appellate court's decision as being erroneous on the ground that the
destruction and loss of the ECI's equipment and facilities were due to force majeure. It argues that the rapid rise of the water
level in the reservoir of its Angat Dam due to heavy rains brought about by the typhoon was an extraordinary occurrence
that could not have been foreseen, and thus, the subsequent release of water through the spillway gates and its resultant
effect, if any, on ECI's equipment and facilities may rightly be attributed to force majeure.

On the other hand, ECI assails the reduction of the consequential damages from P333,200.00 to P19,000.00 on the grounds
that the appellate court had no basis in concluding that ECI acquired a new Crawler-type crane and therefore, it only can
claim rentals for the temporary use of the leased crane for a period of one month; and that the award of P4,000.00 a day or
P120,000.00 a month bonus is justified since the period limitation on ECI's contract with NAWASA had dual effects, i.e.,
bonus for earlier completion and liquidated damages for delayed performance; and in either case at the rate of P4,000.00
daily. Thus, since NPC's negligence compelled work stoppage for a period of one month, the said award of P120,000.00 is
justified. ECI further assailes the reduction of attorney's fees and the total elimination of exemplary damages.

Both petitions are without merit.

It is clear from the appellate court's decision that based on its findings of fact and that of the trial court's, petitioner NPC was
undoubtedly negligent because it opened the spillway gates of the Angat Dam only at the height of typhoon "Welming" when
* it knew very well that it was safer to have opened the same gradually and earlier, as it was also undeniable that NPC knew
of the coming typhoon at least four days before it actually struck. And even though the typhoon was an act of God or what
we may call force majeure, NPC cannot escape liability because its negligence was the proximate cause of the loss and
damage. As we have ruled in Juan F. Nakpil & Sons v. Court of Appeals, (144 SCRA 596, 606-607):
 Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud,
negligence, delay or violation or contravention in any manner of the tenor of the obligation as provided for
in Article 1170 of the Civil Code, which results in loss or damage, the obligor cannot escape liability.

The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned
exclusively by the violence of nature and human agencies are to be excluded from creating or entering into
the cause of the mischief. When the effect, the cause of which is to be considered, is found to be in part
the result of the participation of man, whether it be from active intervention or neglect, or failure to act, the
whole occurrence is thereby humanized, as it was, and removed from the rules applicable to the acts of
God. (1 Corpus Juris, pp. 1174-1175).

Thus, it has been held that when the negligence of a person concurs with an act of God in producing a loss,
such person is not exempt from liability by showing that the immediate cause of the damage was the act of
God. To be exempt from liability for loss because of an act of God, he must be free from any previous
negligence or misconduct by which the loss or damage may have been occasioned. (Fish & Elective Co. v.
Phil. Motors, 55 Phil. 129; Tucker v. Milan 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34
Phil. 594, 604; Lasam v. Smith, 45 Phil. 657).

Furthermore, the question of whether or not there was negligence on the part of NPC is a question of fact which properly
falls within the jurisdiction of the Court of Appeals and will not be disturbed by this Court unless the same is clearly
unfounded. Thus, in Tolentino v. Court of appeals, (150 SCRA 26, 36) we ruled:

Moreover, the findings of fact of the Court of Appeals are generally final and conclusive upon the Supreme
Court (Leonardo v. Court of Appeals, 120 SCRA 890 [1983]. In fact it is settled that the Supreme Court is
not supposed to weigh evidence but only to determine its substantially (Nuñez v. Sandiganbayan, 100
SCRA 433 [1982] and will generally not disturb said findings of fact when supported by substantial evidence
(Aytona v. Court of Appeals, 113 SCRA 575 [1985]; Collector of Customs of Manila v. Intermediate
Appellate Court, 137 SCRA 3 [1985]. On the other hand substantial evidence is defined as such relevant
evidence as a reasonable mind might accept as adequate to support a conclusion (Philippine Metal
Products, Inc. v. Court of Industrial Relations, 90 SCRA 135 [1979]; Police Commission v. Lood, 127 SCRA
757 [1984]; Canete v. WCC, 136 SCRA 302 [1985])

Therefore, the respondent Court of Appeals did not err in holding the NPC liable for damages.

Likewise, it did not err in reducing the consequential damages from P333,200.00 to P19,000.00. As shown by the records,
while there was no categorical statement or admission on the part of ECI that it bought a new crane to replace the damaged
one, a sales contract was presented to the effect that the new crane would be delivered to it by Asian Enterprises within 60
days from the opening of the letter of credit at the cost of P106,336.75. The offer was made by Asian Enterprises a few
days after the flood. As compared to the amount of P106,336.75 for a brand new crane and paying the alleged amount of
P4,000.00 a day as rental for the use of a temporary crane, which use petitioner ECI alleged to have lasted for a period of
one year, thus, totalling P120,000.00, plus the fact that there was already a sales contract between it and Asian Enterprises,
there is no reason why ECI should opt to rent a temporary crane for a period of one year. The appellate court also found
that the damaged crane was subsequently repaired and reactivated and the cost of repair was P77,000.00. Therefore, it
included the said amount in the award of of compensatory damages, but not the value of the new crane. We do not find
anything erroneous in the decision of the appellate court that the consequential damages should represent only the service
of the temporary crane for one month. A contrary ruling would result in the unjust enrichment of ECI.

The P120,000.00 bonus was also properly eliminated as the same was granted by the trial court on the premise that it
represented ECI's lost opportunity "to earn the one month bonus from NAWASA ... ." As stated earlier, the loss or damage
to ECI's equipment and facilities occurred long after the stipulated deadline to finish the construction. No bonus, therefore,
could have been possibly earned by ECI at that point in time. The supposed liquidated damages for failure to finish the
project within the stipulated period or the opposite of the claim for bonus is not clearly presented in the records of these
petitions. It is not shown that NAWASA imposed them.

As to the question of exemplary damages, we sustain the appellate court in eliminating the same since it found that there
was no bad faith on the part of NPC and that neither can the latter's negligence be considered gross. In Dee Hua Liong
Electrical Equipment Corp. v. Reyes, (145 SCRA 713, 719) we ruled:

Neither may private respondent recover exemplary damages since he is not entitled to moral or
compensatory damages, and again because the petitioner is not shown to have acted in a wanton,
 fraudulent, reckless or oppressive manner (Art. 2234, Civil Code; Yutuk v. Manila Electric Co., 2 SCRA
377; Francisco v. Government Service Insurance System, 7 SCRA 577; Gutierrez v. Villegas, 8 SCRA 527;
Air France v. Carrascoso, 18 SCRA 155; Pan Pacific (Phil.) v. Phil. Advertising Corp., 23 SCRA 977;
Marchan v. Mendoza, 24 SCRA 888).

We also affirm the reduction of attorney's fees from P50,000.00 to P30,000.00. There are no compelling reasons why we
should set aside the appellate court's finding that the latter amount suffices for the services rendered by ECI's counsel.

WHEREFORE, the petitions in G.R. No. 47379 and G.R. No. 47481 are both DISMISSED for LACK OF MERIT. The decision
appealed from is AFFIRMED.

SO ORDERED.

riding the pony

G.R. No. L-12219
y March 15, 1918

AMADO PICART, plaintiff-appellant,

vs.
FRANK SMITH, JR., defendant-appellee.

t riding the car

 STREET, J.:

In this action the plaintiff, Amado Picart, seeks to recover of the defendant, Frank Smith, jr., the sum of P31,000, as damages
alleged to have been caused by an automobile driven by the defendant. From a judgment of the Court of First Instance of
the Province of La Union absolving the defendant from liability the plaintiff has appealed.

The occurrence which gave rise to the institution of this action took place on December 12, 1912, on the Carlatan Bridge,
at San Fernando, La Union. It appears that upon the occasion in question the plaintiff was riding on his pony over said
bridge. Before he had gotten half way across, the defendant approached from the opposite direction in an automobile, going
at the rate of about ten or twelve miles per hour. As the defendant neared the bridge he saw a horseman on it and blew his
horn to give warning of his approach. He continued his course and after he had taken the bridge he gave two more
successive blasts, as it appeared to him that the man on horseback before him was not observing the rule of the road.

The plaintiff, it appears, saw the automobile coming and heard the warning signals. However, being perturbed by the novelty
of the apparition or the rapidity of the approach, he pulled the pony closely up against the railing on the right side of the
bridge instead of going to the left. He says that the reason he did this was that he thought he did not have sufficient time to
get over to the other side. The bridge is shown to have a length of about 75 meters and a width of 4.80 meters. As the
automobile approached, the defendant guided it toward his left, that being the proper side of the road for the machine. In
so doing the defendant assumed that the horseman would move to the other side. The pony had not as yet exhibited fright,
and the rider had made no sign for the automobile to stop. Seeing that the pony was apparently quiet, the defendant, instead
of veering to the right while yet some distance away or slowing down, continued to approach directly toward the horse
without diminution of speed. When he had gotten quite near, there being then no possibility of the horse getting across to
the other side, the defendant quickly turned his car sufficiently to the right to escape hitting the horse alongside of the railing
where it as then standing; but in so doing the automobile passed in such close proximity to the animal that it became
frightened and turned its body across the bridge with its head toward the railing. In so doing, it as struck on the hock of the
left hind leg by the flange of the car and the limb was broken. The horse fell and its rider was thrown off with some violence.
From the evidence adduced in the case we believe that when the accident occurred the free space where the pony stood
between the automobile and the railing of the bridge was probably less than one and one half meters. As a result of its
injuries the horse died. The plaintiff received contusions which caused temporary unconsciousness and required medical
attention for several days.

The question presented for decision is whether or not the defendant in maneuvering his car in the manner above described
was guilty of negligence such as gives rise to a civil obligation to repair the damage done; and we are of the opinion that he
is so liable. As the defendant started across the bridge, he had the right to assume that the horse and the rider would pass
over to the proper side; but as he moved toward the center of the bridge it was demonstrated to his eyes that this would not
be done; and he must in a moment have perceived that it was too late for the horse to cross with safety in front of the moving
vehicle. In the nature of things this change of situation occurred while the automobile was yet some distance away; and
from this moment it was not longer within the power of the plaintiff to escape being run down by going to a place of greater
safety. The control of the situation had then passed entirely to the defendant; and it was his duty either to bring his car to
an immediate stop or, seeing that there were no other persons on the bridge, to take the other side and pass sufficiently far
away from the horse to avoid the danger of collision. Instead of doing this, the defendant ran straight on until he was almost
upon the horse. He was, we think, deceived into doing this by the fact that the horse had not yet exhibited fright. But in view
of the known nature of horses, there was an appreciable risk that, if the animal in question was unacquainted with
automobiles, he might get exited and jump under the conditions which here confronted him. When the defendant exposed
the horse and rider to this danger he was, in our opinion, negligent in the eye of the law.

The test by which to determine the existence of negligence in a particular case may be stated as follows: Did the defendant
in doing the alleged negligent act use that person would have used in the same situation? If not, then he is guilty of
negligence. The law here in effect adopts the standard supposed to be supplied by the imaginary conduct of the discreet
paterfamilias of the Roman law. The existence of negligence in a given case is not determined by reference to the personal
judgment of the actor in the situation before him. The law considers what would be reckless, blameworthy, or negligent in
the man of ordinary intelligence and prudence and determines liability by that.

The question as to what would constitute the conduct of a prudent man in a given situation must of course be always
determined in the light of human experience and in view of the facts involved in the particular case. Abstract speculations
cannot here be of much value but this much can be profitably said: Reasonable men govern their conduct by the
circumstances which are before them or known to them. They are not, and are not supposed to be, omniscient of the future.
Hence they can be expected to take care only when there is something before them to suggest or warn of danger. Could a
prudent man, in the case under consideration, foresee harm as a result of the course actually pursued? If so, it was the duty
of the actor to take precautions to guard against that harm. Reasonable foresight of harm, followed by ignoring of the
suggestion born of this prevision, is always necessary before negligence can be held to exist. Stated in these terms, the
proper criterion for determining the existence of negligence in a given case is this: Conduct is said to be negligent when a
prudent man in the position of the tortfeasor would have foreseen that an effect harmful to another was sufficiently probable
to warrant his foregoing conduct or guarding against its consequences.

Applying this test to the conduct of the defendant in the present case we think that negligence is clearly established. A
prudent man, placed in the position of the defendant, would in our opinion, have recognized that the course which he was
pursuing was fraught with risk, and would therefore have foreseen harm to the horse and the rider as reasonable
consequence of that course. Under these circumstances the law imposed on the defendant the duty to guard against the
threatened harm.

It goes without saying that the plaintiff himself was not free from fault, for he was guilty of antecedent negligence in planting
himself on the wrong side of the road. But as we have already stated, the defendant was also negligent; and in such case
the problem always is to discover which agent is immediately and directly responsible. It will be noted that the negligent
acts of the two parties were not contemporaneous, since the negligence of the defendant succeeded the negligence of the
plaintiff by an appreciable interval. Under these circumstances the law is that the person who has the last fair chance to
avoid the impending harm and fails to do so is chargeable with the consequences, without reference to the prior negligence
of the other party.

The decision in the case of Rkes vs. Atlantic, Gulf and Pacific Co. (7 Phil. Rep., 359) should perhaps be mentioned in this
connection. This Court there held that while contributory negligence on the part of the person injured did not constitute a
bar to recovery, it could be received in evidence to reduce the damages which would otherwise have been assessed wholly
against the other party. The defendant company had there employed the plaintiff, as a laborer, to assist in transporting iron
rails from a barge in Manila harbor to the company's yards located not far away. The rails were conveyed upon cars which
were hauled along a narrow track. At certain spot near the water's edge the track gave way by reason of the combined
effect of the weight of the car and the insecurity of the road bed. The car was in consequence upset; the rails slid off; and
the plaintiff's leg was caught and broken. It appeared in evidence that the accident was due to the effects of the typhoon
which had dislodged one of the supports of the track. The court found that the defendant company was negligent in having
failed to repair the bed of the track and also that the plaintiff was, at the moment of the accident, guilty of contributory
negligence in walking at the side of the car instead of being in front or behind. It was held that while the defendant was liable
to the plaintiff by reason of its negligence in having failed to keep the track in proper repair nevertheless the amount of the
damages should be reduced on account of the contributory negligence in the plaintiff. As will be seen the defendant's
negligence in that case consisted in an omission only. The liability of the company arose from its responsibility for the
dangerous condition of its track. In a case like the one now before us, where the defendant was actually present and
operating the automobile which caused the damage, we do not feel constrained to attempt to weigh the negligence of the
respective parties in order to apportion the damage according to the degree of their relative fault. It is enough to say that
the negligence of the defendant was in this case the immediate and determining cause of the accident and that the
antecedent negligence of the plaintiff was a more remote factor in the case.

A point of minor importance in the case is indicated in the special defense pleaded in the defendant's answer, to the effect
that the subject matter of the action had been previously adjudicated in the court of a justice of the peace. In this connection
it appears that soon after the accident in question occurred, the plaintiff caused criminal proceedings to be instituted before
a justice of the peace charging the defendant with the infliction of serious injuries (lesiones graves). At the preliminary
investigation the defendant was discharged by the magistrate and the proceedings were dismissed. Conceding that the
acquittal of the defendant at the trial upon the merits in a criminal prosecution for the offense mentioned would be res
adjudicata upon the question of his civil liability arising from negligence -- a point upon which it is unnecessary to express
an opinion -- the action of the justice of the peace in dismissing the criminal proceeding upon the preliminary hearing can
have no effect. (See U. S. vs. Banzuela and Banzuela, 31 Phil. Rep., 564.)

From what has been said it results that the judgment of the lower court must be reversed, and judgment is her rendered
that the plaintiff recover of the defendant the sum of two hundred pesos (P200), with costs of other instances. The sum here
awarded is estimated to include the value of the horse, medical expenses of the plaintiff, the loss or damage occasioned to
articles of his apparel, and lawful interest on the whole to the date of this recovery. The other damages claimed by the
plaintiff are remote or otherwise of such character as not to be recoverable. So ordered.

G.R. No. 179337 April 30, 2008

 JOSEPH SALUDAGA, petitioner,
vs.
FAR EASTERN UNIVERSITY and EDILBERTO C. DE JESUS in his capacity as President of FEU, respondents.

YNARES-SANTIAGO, J.:

This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the June 29, 2007 Decision2 of the Court
of Appeals in CA-G.R. CV No. 87050, nullifying and setting aside the November 10, 2004 Decision3 of the Regional Trial
Court of Manila, Branch 2, in Civil Case No. 98-89483 and dismissing the complaint filed by petitioner; as well as its August
23, 2007 Resolution4 denying the Motion for Reconsideration.5

The antecedent facts are as follows:

Petitioner Joseph Saludaga was a sophomore law student of respondent Far Eastern University (FEU) when he was shot
by Alejandro Rosete (Rosete), one of the security guards on duty at the school premises on August 18, 1996. Petitioner
was rushed to FEU-Dr. Nicanor Reyes Medical Foundation (FEU-NRMF) due to the wound he sustained.6Meanwhile,
Rosete was brought to the police station where he explained that the shooting was accidental. He was eventually released
considering that no formal complaint was filed against him.

Petitioner thereafter filed a complaint for damages against respondents on the ground that they breached their obligation to
provide students with a safe and secure environment and an atmosphere conducive to learning. Respondents, in turn, filed
a Third-Party Complaint7 against Galaxy Development and Management Corporation (Galaxy), the agency contracted by
respondent FEU to provide security services within its premises and Mariano D. Imperial (Imperial), Galaxy's President, to
indemnify them for whatever would be adjudged in favor of petitioner, if any; and to pay attorney's fees and cost of the suit.
On the other hand, Galaxy and Imperial filed a Fourth-Party Complaint against AFP General Insurance.8

On November 10, 2004, the trial court rendered a decision in favor of petitioner, the dispositive portion of which reads:

WHEREFORE, from the foregoing, judgment is hereby rendered ordering:

1. FEU and Edilberto de Jesus, in his capacity as president of FEU to pay jointly and severally Joseph
Saludaga the amount of P35,298.25 for actual damages with 12% interest per annum from the filing of the
complaint until fully paid; moral damages of P300,000.00, exemplary damages of P500,000.00, attorney's
fees of P100,000.00 and cost of the suit;

2. Galaxy Management and Development Corp. and its president, Col. Mariano Imperial to indemnify
jointly and severally 3rd party plaintiffs (FEU and Edilberto de Jesus in his capacity as President of FEU)
for the above-mentioned amounts;

3. And the 4th party complaint is dismissed for lack of cause of action. No pronouncement as to costs.

SO ORDERED.9

Respondents appealed to the Court of Appeals which rendered the assailed Decision, the decretal portion of which
provides, viz:

WHEREFORE, the appeal is hereby GRANTED. The Decision dated November 10, 2004 is hereby REVERSED
and SET ASIDE. The complaint filed by Joseph Saludaga against appellant Far Eastern University and its President
in Civil Case No. 98-89483 is DISMISSED.

SO ORDERED.10

Petitioner filed a Motion for Reconsideration which was denied; hence, the instant petition based on the following grounds:

THE COURT OF APPEALS SERIOUSLY ERRED IN MANNER CONTRARY TO LAW AND JURISPRUDENCE IN
RULING THAT:

5.1. THE SHOOTING INCIDENT IS A FORTUITOUS EVENT;

 5.2. RESPONDENTS ARE NOT LIABLE FOR DAMAGES FOR THE INJURY RESULTING FROM A GUNSHOT
WOUND SUFFERED BY THE PETITIONER FROM THE HANDS OF NO LESS THAN THEIR OWN SECURITY
GUARD IN VIOLATION OF THEIR BUILT-IN CONTRACTUAL OBLIGATION TO PETITIONER, BEING THEIR LAW
STUDENT AT THAT TIME, TO PROVIDE HIM WITH A SAFE AND SECURE EDUCATIONAL ENVIRONMENT;

5.3. SECURITY GAURD, ALEJANDRO ROSETE, WHO SHOT PETITIONER WHILE HE WAS WALKING ON HIS
WAY TO THE LAW LIBRARY OF RESPONDENT FEU IS NOT THEIR EMPLOYEE BY VIRTUE OF THE
CONTRACT FOR SECURITY SERVICES BETWEEN GALAXY AND FEU NOTWITHSTANDING THE FACT THAT
PETITIONER, NOT BEING A PARTY TO IT, IS NOT BOUND BY THE SAME UNDER THE PRINCIPLE OF
RELATIVITY OF CONTRACTS; and

5.4. RESPONDENT EXERCISED DUE DILIGENCE IN SELECTING GALAXY AS THE AGENCY WHICH WOULD
PROVIDE SECURITY SERVICES WITHIN THE PREMISES OF RESPONDENT FEU.11

Petitioner is suing respondents for damages based on the alleged breach of student-school contract for a safe learning
environment. The pertinent portions of petitioner's Complaint read:

6.0. At the time of plaintiff's confinement, the defendants or any of their representative did not bother to visit and
inquire about his condition. This abject indifference on the part of the defendants continued even after plaintiff was
discharged from the hospital when not even a word of consolation was heard from them. Plaintiff waited for more
than one (1) year for the defendants to perform their moral obligation but the wait was fruitless. This indifference
and total lack of concern of defendants served to exacerbate plaintiff's miserable condition.

xxxx

11.0. Defendants are responsible for ensuring the safety of its students while the latter are within the University
premises. And that should anything untoward happens to any of its students while they are within the University's
premises shall be the responsibility of the defendants. In this case, defendants, despite being legally and morally
bound, miserably failed to protect plaintiff from injury and thereafter, to mitigate and compensate plaintiff for said
injury;

12.0. When plaintiff enrolled with defendant FEU, a contract was entered into between them. Under this contract,
defendants are supposed to ensure that adequate steps are taken to provide an atmosphere conducive to study
and ensure the safety of the plaintiff while inside defendant FEU's premises. In the instant case, the latter breached
this contract when defendant allowed harm to befall upon the plaintiff when he was shot at by, of all people, their
security guard who was tasked to maintain peace inside the campus.12

In Philippine School of Business Administration v. Court of Appeals,13 we held that:

When an academic institution accepts students for enrollment, there is established a contract between them,
resulting in bilateral obligations which both parties are bound to comply with. For its part, the school undertakes to
provide the student with an education that would presumably suffice to equip him with the necessary tools and skills
to pursue higher education or a profession. On the other hand, the student covenants to abide by the school's
academic requirements and observe its rules and regulations.

Institutions of learning must also meet the implicit or "built-in" obligation of providing their students with an
atmosphere that promotes or assists in attaining its primary undertaking of imparting knowledge. Certainly, no
student can absorb the intricacies of physics or higher mathematics or explore the realm of the arts and other
sciences when bullets are flying or grenades exploding in the air or where there looms around the school premises
a constant threat to life and limb. Necessarily, the school must ensure that adequate steps are taken to maintain
peace and order within the campus premises and to prevent the breakdown thereof.14

It is undisputed that petitioner was enrolled as a sophomore law student in respondent FEU. As such, there was created a
contractual obligation between the two parties. On petitioner's part, he was obliged to comply with the rules and regulations
of the school. On the other hand, respondent FEU, as a learning institution is mandated to impart knowledge and equip its
students with the necessary skills to pursue higher education or a profession. At the same time, it is obliged to ensure and
take adequate steps to maintain peace and order within the campus.

It is settled that in culpa contractual, the mere proof of the existence of the contract and the failure of its compliance justify,
prima facie, a corresponding right of relief.15 In the instant case, we find that, when petitioner was shot inside the campus
by no less the security guard who was hired to maintain peace and secure the premises, there is a prima facie showing that
respondents failed to comply with its obligation to provide a safe and secure environment to its students.

In order to avoid liability, however, respondents aver that the shooting incident was a fortuitous event because they could
not have reasonably foreseen nor avoided the accident caused by Rosete as he was not their employee;16and that they
complied with their obligation to ensure a safe learning environment for their students by having exercised due diligence in
selecting the security services of Galaxy.

After a thorough review of the records, we find that respondents failed to discharge the burden of proving that they exercised
due diligence in providing a safe learning environment for their students. They failed to prove that they ensured that the
guards assigned in the campus met the requirements stipulated in the Security Service Agreement. Indeed, certain
documents about Galaxy were presented during trial; however, no evidence as to the qualifications of Rosete as a security
guard for the university was offered.

Respondents also failed to show that they undertook steps to ascertain and confirm that the security guards assigned to
them actually possess the qualifications required in the Security Service Agreement. It was not proven that they examined
the clearances, psychiatric test results, 201 files, and other vital documents enumerated in its contract with Galaxy. Total
reliance on the security agency about these matters or failure to check the papers stating the qualifications of the guards is
negligence on the part of respondents. A learning institution should not be allowed to completely relinquish or abdicate
security matters in its premises to the security agency it hired. To do so would result to contracting away its inherent
obligation to ensure a safe learning environment for its students.

Consequently, respondents' defense of force majeure must fail. In order for force majeure to be considered, respondents
must show that no negligence or misconduct was committed that may have occasioned the loss. An act of God cannot be
invoked to protect a person who has failed to take steps to forestall the possible adverse consequences of such a loss.
One's negligence may have concurred with an act of God in producing damage and injury to another; nonetheless, showing
that the immediate or proximate cause of the damage or injury was a fortuitous event would not exempt one from liability.
When the effect is found to be partly the result of a person's participation - whether by active intervention, neglect or failure
to act - the whole occurrence is humanized and removed from the rules applicable to acts of God.17

Article 1170 of the Civil Code provides that those who are negligent in the performance of their obligations are liable for
damages. Accordingly, for breach of contract due to negligence in providing a safe learning environment, respondent FEU
is liable to petitioner for damages. It is essential in the award of damages that the claimant must have satisfactorily proven
during the trial the existence of the factual basis of the damages and its causal connection to defendant's acts.18

In the instant case, it was established that petitioner spent P35,298.25 for his hospitalization and other medical
expenses.19 While the trial court correctly imposed interest on said amount, however, the case at bar involves an obligation
arising from a contract and not a loan or forbearance of money. As such, the proper rate of legal interest is six percent (6%)
per annum of the amount demanded. Such interest shall continue to run from the filing of the complaint until the finality of
this Decision.20 After this Decision becomes final and executory, the applicable rate shall be twelve percent (12%) per
annum until its satisfaction.

The other expenses being claimed by petitioner, such as transportation expenses and those incurred in hiring a personal
assistant while recuperating were however not duly supported by receipts.21 In the absence thereof, no actual damages
may be awarded. Nonetheless, temperate damages under Art. 2224 of the Civil Code may be recovered where it has been
shown that the claimant suffered some pecuniary loss but the amount thereof cannot be proved with certainty. Hence, the
amount of P20,000.00 as temperate damages is awarded to petitioner.

As regards the award of moral damages, there is no hard and fast rule in the determination of what would be a fair amount
of moral damages since each case must be governed by its own peculiar circumstances.22 The testimony of petitioner about
his physical suffering, mental anguish, fright, serious anxiety, and moral shock resulting from the shooting incident23 justify
the award of moral damages. However, moral damages are in the category of an award designed to compensate the
claimant for actual injury suffered and not to impose a penalty on the wrongdoer. The award is not meant to enrich the
complainant at the expense of the defendant, but to enable the injured party to obtain means, diversion, or amusements
that will serve to obviate the moral suffering he has undergone. It is aimed at the restoration, within the limits of the possible,
of the spiritual status quo ante, and should be proportionate to the suffering inflicted. Trial courts must then guard against
the award of exorbitant damages; they should exercise balanced restrained and measured objectivity to avoid suspicion
that it was due to passion, prejudice, or corruption on the part of the trial court.24 We deem it just and reasonable under the
circumstances to award petitioner moral damages in the amount of P100,000.00.
Likewise, attorney's fees and litigation expenses in the amount of P50,000.00 as part of damages is reasonable in view of
Article 2208 of the Civil Code.25 However, the award of exemplary damages is deleted considering the absence of proof
that respondents acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

We note that the trial court held respondent De Jesus solidarily liable with respondent FEU. In Powton Conglomerate, Inc.
v. Agcolicol,26 we held that:

[A] corporation is invested by law with a personality separate and distinct from those of the persons composing it,
such that, save for certain exceptions, corporate officers who entered into contracts in behalf of the corporation
cannot be held personally liable for the liabilities of the latter. Personal liability of a corporate director, trustee or
officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when - (1) he
assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in directing
its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other
persons; (2) he consents to the issuance of watered down stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto; (3) he agrees to hold himself personally and
solidarily liable with the corporation; or (4) he is made by a specific provision of law personally answerable for his
corporate action.27

None of the foregoing exceptions was established in the instant case; hence, respondent De Jesus should not be held
solidarily liable with respondent FEU.

Incidentally, although the main cause of action in the instant case is the breach of the school-student contract, petitioner, in
the alternative, also holds respondents vicariously liable under Article 2180 of the Civil Code, which provides:

Art. 2180. The obligation imposed by Article 2176 is demandable not only for one's own acts or omissions, but also
for those of persons for whom one is responsible.

xxxx

Employers shall be liable for the damages caused by their employees and household helpers acting within the scope
of their assigned tasks, even though the former are not engaged in any business or industry.

xxxx

The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed
all the diligence of a good father of a family to prevent damage.

We agree with the findings of the Court of Appeals that respondents cannot be held liable for damages under Art. 2180 of
the Civil Code because respondents are not the employers of Rosete. The latter was employed by Galaxy. The instructions
issued by respondents' Security Consultant to Galaxy and its security guards are ordinarily no more than requests commonly
envisaged in the contract for services entered into by a principal and a security agency. They cannot be construed as the
element of control as to treat respondents as the employers of Rosete.28

As held in Mercury Drug Corporation v. Libunao:29

In Soliman, Jr. v. Tuazon,30 we held that where the security agency recruits, hires and assigns the works of its
watchmen or security guards to a client, the employer of such guards or watchmen is such agency, and not the
client, since the latter has no hand in selecting the security guards. Thus, the duty to observe the diligence of a
good father of a family cannot be demanded from the said client:

… [I]t is settled in our jurisdiction that where the security agency, as here, recruits, hires and assigns the
work of its watchmen or security guards, the agency is the employer of such guards or watchmen. Liability
for illegal or harmful acts committed by the security guards attaches to the employer agency, and not to the
clients or customers of such agency. As a general rule, a client or customer of a security agency has no
hand in selecting who among the pool of security guards or watchmen employed by the agency shall be
assigned to it; the duty to observe the diligence of a good father of a family in the selection of the guards
cannot, in the ordinary course of events, be demanded from the client whose premises or property are
protected by the security guards.
 xxxx

The fact that a client company may give instructions or directions to the security guards assigned to it, does not, by
itself, render the client responsible as an employer of the security guards concerned and liable for their wrongful
acts or omissions.31

We now come to respondents' Third Party Claim against Galaxy. In Firestone Tire and Rubber Company of the Philippines
v. Tempengko,32 we held that:

The third-party complaint is, therefore, a procedural device whereby a 'third party' who is neither a party nor privy
to the act or deed complained of by the plaintiff, may be brought into the case with leave of court, by the defendant,
who acts as third-party plaintiff to enforce against such third-party defendant a right for contribution, indemnity,
subrogation or any other relief, in respect of the plaintiff's claim. The third-party complaint is actually independent
of and separate and distinct from the plaintiff's complaint. Were it not for this provision of the Rules of Court, it would
have to be filed independently and separately from the original complaint by the defendant against the third-party.
But the Rules permit defendant to bring in a third-party defendant or so to speak, to litigate his separate cause of
action in respect of plaintiff's claim against a third-party in the original and principal case with the object of avoiding
circuitry of action and unnecessary proliferation of law suits and of disposing expeditiously in one litigation the entire
subject matter arising from one particular set of facts.33

Respondents and Galaxy were able to litigate their respective claims and defenses in the course of the trial of petitioner's
complaint. Evidence duly supports the findings of the trial court that Galaxy is negligent not only in the selection of its
employees but also in their supervision. Indeed, no administrative sanction was imposed against Rosete despite the
shooting incident; moreover, he was even allowed to go on leave of absence which led eventually to his
disappearance.34 Galaxy also failed to monitor petitioner's condition or extend the necessary assistance, other than the
P5,000.00 initially given to petitioner. Galaxy and Imperial failed to make good their pledge to reimburse petitioner's medical
expenses.

For these acts of negligence and for having supplied respondent FEU with an unqualified security guard, which resulted to
the latter's breach of obligation to petitioner, it is proper to hold Galaxy liable to respondent FEU for such damages equivalent
to the above-mentioned amounts awarded to petitioner.

Unlike respondent De Jesus, we deem Imperial to be solidarily liable with Galaxy for being grossly negligent in directing the
affairs of the security agency. It was Imperial who assured petitioner that his medical expenses will be shouldered by Galaxy
but said representations were not fulfilled because they presumed that petitioner and his family were no longer interested
in filing a formal complaint against them.35

WHEREFORE, the petition is GRANTED. The June 29, 2007 Decision of the Court of Appeals in CA-G.R. CV No. 87050
nullifying the Decision of the trial court and dismissing the complaint as well as the August 23, 2007 Resolution denying the
Motion for Reconsideration are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Manila, Branch
2, in Civil Case No. 98-89483 finding respondent FEU liable for damages for breach of its obligation to provide students
with a safe and secure learning atmosphere, is AFFIRMED with the following MODIFICATIONS: x x x

The Complaint against respondent Edilberto C. De Jesus is DISMISSED. The counterclaims of respondents are
likewise DISMISSED.

Galaxy Development and Management Corporation (Galaxy) and its president, Mariano D. Imperial are ORDEREDto jointly
and severally pay respondent FEU damages equivalent to the above-mentioned amounts awarded to petitioner.

SO ORDERED.

[G.R. No. 138569. September 11, 2003.]

THE CONSOLIDATED BANK and TRUST CORPORATION, Petitioner, v. COURT OF APPEALS and
L.C. DIAZ and COMPANY, CPA’s, Respondents.

DECISION
 CARPIO, J.:

The Case

Before us is a petition for review of the Decision 1 of the Court of Appeals dated 27 October 1998 and its
Resolution dated 11 May 1999. The assailed decision reversed the Decision 2 of the Regional Trial Court of
Manila, Branch 8, absolving petitioner Consolidated. Bank and Trust Corporation, now known as Solidbank
Corporation ("Solidbank"), of any liability. The questioned resolution of the appellate court denied the motion
for reconsideration of Solidbank but modified the decision by deleting the award of exemplary damages,
attorney’s fees, expenses of litigation and cost of suit.chanrob1es virtua1 1aw 1ibrary

The Facts

Solidbank is a domestic banking corporation organized and existing under Philippine laws. Private
respondent L.C. Diaz and Company, CPA’s ("L.C. Diaz"), is a professional partnership engaged in the practice
of accounting.

Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as Savings Account
No. S/A 200-16872-6.

On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya ("Macaraya"), filled up a savings
(cash) deposit slip for P990 and a savings (checks) deposit slip for P50. Macaraya instructed the messenger
of L.C. Diaz, Ismael Calapre ("Calapre"), to deposit the money with Solidbank. Macaraya also gave Calapre
the Solidbank passbook.

Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the passbook. The teller
acknowledged receipt of the deposit by returning to Calapre the duplicate copies of the two deposit slips.
Teller No. 6 stamped the deposit slips with the words "DUPLICATE" and "SAVING TELLER 6 SOLIDBANK
HEAD OFFICE." Since the transaction took time and Calapre had to make another deposit for L.C. Diaz with
Allied Bank, he left the passbook with Solidbank. Calapre then went to Allied Bank. When Calapre returned
to Solidbank to retrieve the passbook, Teller No. 6 informed him that "somebody got the passbook. 3 Calapre
went back to L.C. Diaz and reported the incident to Macaraya.

Macaraya immediately prepared a deposit slip in duplicate copies with a check of P200,000. Macaraya,
together with Calapre, went to Solidbank and presented to Teller No. 6 the deposit slip and check. The teller
stamped the words "DUPLICATE" and "SAVING TELLER 6 SOLIDBANK HEAD OFFICE" on the duplicate copy
of the deposit slip. When Macaraya asked for the passbook, Teller No. 6 told Macaraya that someone got
the passbook but she could not remember to whom she gave the passbook. When Macaraya asked Teller
No. 6 if Calapre got the passbook, Teller No. 6 answered that someone shorter than Calapre got the
passbook. Calapre was then standing beside Macaraya.

Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check for P90,000
drawn on Philippine Banking Corporation ("PBC"). This PBC check of L.C. Diaz was a check that it had "long
closed." 4 PBC subsequently dishonored the check because of insufficient funds and because the signature
in the check differed from PBC’s specimen signature. Failing to get back the passbook, Macaraya went back
to her office and reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel Alvarez.

The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz ("Diaz"), called
up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open a new account. 5
On the same day, Diaz formally wrote Solidbank to make the same request. It was also on the same day
that L.C. Diaz learned of the unauthorized withdrawal the day before, 14 August 1991, of P300,000 from its
savings account. The withdrawal slip for the P300,000 bore the signatures of the authorized signatories of
L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however, denied signing the withdrawal slip.
A certain Noel Tamayo received the P300,000.cralaw : red
In an Information 6 dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan ("Ilagan")
and one Roscon Verdazola with Estafa through Falsification of Commercial Document. The Regional Trial
Court of Manila dismissed the criminal case after the City Prosecutor filed a Motion to Dismiss on 4 August
1992.

On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its money.
Solidbank refused.

On 25 August 1992, L.C. Diaz filed a Complaint 7 for Recovery of a Sum of Money against Solidbank with
the Regional Trial Court of Manila, Branch 8. After trial, the trial court rendered on 28 December 1994 a
decision absolving Solidbank and dismissing the complaint.

L.C. Diaz then appealed 8 to the Court of Appeals. On 27 October 1998, the Court of Appeals issued its
Decision reversing the decision of the trial court.

On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for reconsideration of
Solidbank. The appellate court, however, modified its decision by deleting the award of exemplary damages
and attorney’s fees.

The Ruling of the Trial Court

In absolving Solidbank, the trial court applied the rules on savings account written on the passbook. The
rules state that "possession of this book shall raise the presumption of ownership and any payment or
payments made by the bank upon the production of the said book and entry therein of the withdrawal shall
have the same effect as if made to the depositor personally." 9

At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook, he also
presented a withdrawal slip with the signatures of the authorized signatories of L.C. Diaz. The specimen
signatures of these persons were in the signature cards. The teller stamped the withdrawal slip with the
words "Saving Teller No. 5." The teller then passed on the withdrawal slip to Genere Manuel ("Manuel") for
authentication. Manuel verified the signatures on the withdrawal slip. The withdrawal slip was then given to
another officer who compared the signatures on the withdrawal slip with the specimen on the signature
cards. The trial court concluded that Solidbank acted with care and observed the rules on savings account
when it allowed the withdrawal of P300,000 from the savings account of L.C. Diaz.

The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the signatures on
the withdrawal slip were forged. The trial court admonished L.C. Diaz for not offering in evidence the National
Bureau of Investigation ("NBI") report on the authenticity of the signatures on the withdrawal slip for
P300,000. The trial court believed that L.C. Diaz did not offer this evidence because it is derogatory to its
action.

Another provision of the rules on savings account states that the depositor must keep the passbook "under
lock and key." 10 When another person presents the passbook for withdrawal prior to Solidbank’s receipt of
the notice of loss of the passbook, that person is considered as the owner of the passbook. The trial court
ruled that the passbook presented during the questioned transaction was "now out of the lock and key and
presumptively ready for a business transaction." 11

Solidbank did not have any participation in the custody and care of the passbook. The trial court believed
that Solidbank’s act of allowing the withdrawal of P300,000 was not the direct and proximate cause of the
loss. The trial court held that L.C. Diaz’s negligence caused the unauthorized withdrawal. Three facts
establish L.C. Diaz’s negligence: (1) the possession of the passbook by a person other than the depositor
L.C. Diaz; (2) the presentation of a signed withdrawal receipt by an unauthorized person; and (3) the
possession by an unauthorized person of a PBC check "long closed" by L.C. Diaz, which check was deposited
on the day of the fraudulent withdrawal.

The trial court debunked L.C. Diaz’s contention that Solidbank did not follow the precautionary procedures
observed by the two parties whenever L.C. Diaz withdrew significant amounts from its account. L.C. Diaz
claimed that a letter must accompany withdrawals of more than P20,000. The letter must request Solidbank
to allow the withdrawal and convert the amount to a manager’s check. The bearer must also have a letter
authorizing him to withdraw the same amount. Another person driving a car must accompany the bearer so
that he would not walk from Solidbank to the office in making the withdrawal. The trial court pointed out
that L.C. Diaz disregarded these precautions in its past withdrawal. On 16 July 1991, L.C. Diaz withdrew
P82,554 without any separate letter of authorization or any communication with Solidbank that the money
be converted into a manager’s check.

The trial court further justified the dismissal of the complaint by holding that the case was a last ditch effort
of L.C. Diaz to recover P300,000 after the dismissal of the criminal case against Ilagan.

The Ruling of the Court of Appeals

The Court of Appeals ruled that Solidbank’s negligence was the proximate cause of the unauthorized
withdrawal of P300,000 from the savings account of L.C. Diaz. The appellate court reached this conclusion
after applying the provision of the Civil Code on quasi-delict, to wit:chanrob1es virtual 1aw library

Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation
between the parties, is called a quasi-delict and is governed by the provisions of this chapter.

The appellate court held that the three elements of a quasi-delict are present in this case, namely: (a)
damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person for whose
acts he must respond; and (c) the connection of cause and effect between the fault or negligence of the
defendant and the damage incurred by the plaintiff.

The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip for P300,000
allowed the withdrawal without making the necessary inquiry. The appellate court stated that the teller, who
was not presented by Solidbank during trial, should have called up the depositor because the money to be
withdrawn was a significant amount. Had the teller called up L.C. Diaz, Solidbank would have known that
the withdrawal was unauthorized. The teller did not even verify the identity of the impostor who made the
withdrawal. Thus, the appellate court found Solidbank liable for its negligence in the selection and
supervision of its employees.

The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its messenger
and its messenger in leaving the passbook with the teller, Solidbank could not escape liability because of
the doctrine of "last clear chance." Solidbank could have averted the injury suffered by L.C. Diaz had it
called up L.C. Diaz to verify the withdrawal.

The appellate court ruled that the degree of diligence required from Solidbank is more than that of a good
father of a family. The business and functions of banks are affected with public interest. Banks are obligated
to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of
their relationship with their clients. The Court of Appeals found Solidbank remiss in its duty, violating its
fiduciary relationship with L.C. Diaz.

Hence, this petition.

The Issues

Solidbank seeks the review of the decision and resolution of the Court of Appeals on these
grounds:chanrob1es virtual 1aw library

I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK SHOULD SUFFER THE LOSS
BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED PRIVATE RESPONDENT BY TELEPHONE BEFORE IT
ALLOWED THE WITHDRAWAL OF P300,000.00 TO RESPONDENT’S MESSENGER EMERANO ILAGAN, SINCE
THERE IS NO AGREEMENT BETWEEN THE PARTIES IN THE OPERATION OF THE SAVINGS ACCOUNT, NOR
IS THERE ANY BANKING LAW, WHICH MANDATES THAT A BANK TELLER SHOULD FIRST CALL UP THE
DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT IN A SAVINGS ACCOUNT.
II. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST CLEAR CHANCE AND IN HOLDING
THAT PETITIONER BANK’S TELLER HAD THE LAST OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN
IT IS UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON THE WITHDRAWAL SLIP ARE
GENUINE AND PRIVATE RESPONDENT’S PASSBOOK WAS DULY PRESENTED, AND CONTRARIWISE
RESPONDENT WAS NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS MESSENGER EMERANO
ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND OTHER FINANCIAL DOCUMENTS.

III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE IS A LAST DITCH EFFORT
OF PRIVATE RESPONDENT TO RECOVER ITS P300,000.00 AFTER FAILING IN ITS EFFORTS TO RECOVER
THE SAME FROM ITS EMPLOYEE EMERANO ILAGAN.

IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES AWARDED AGAINST PETITIONER
UNDER ARTICLE 2197 OF THE CIVIL CODE, NOTWITHSTANDING ITS FINDING THAT PETITIONER BANK’S
NEGLIGENCE WAS ONLY CONTRIBUTORY. 16

The Ruling of the Court

The petition is partly meritorious.

Solidbank’s Fiduciary Duty under the Law

The rulings of the trial court and the Court of Appeals conflict on the application of the law. The trial court
pinned the liability on L.C. Diaz based on the provisions of the rules on savings account, a recognition of the
contractual relationship between Solidbank and L.C. Diaz, the latter being a depositor of the former. On the
other hand, the Court of Appeals applied the law on quasi-delict to determine who between the two parties
was ultimately negligent. The law on quasi-delict or culpa aquiliana is generally applicable when there is no
pre-existing contractual relationship between the parties.

We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual.

The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple
loan. 17 Article 1980 of the Civil Code expressly provides that." . . savings . . . deposits of money in banks
and similar institutions shall be governed by the provisions concerning simple loan." There is a debtor-
creditor relationship between the bank and its depositor. The bank is the debtor and the depositor is the
creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. The
savings deposit agreement between the bank and the depositor is the contract that determines the rights
and obligations of the parties.

The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic
Act No. 8791 ("RA 8791"), 18 which took effect on 13 June 2000, declares that the State recognizes the
"fiduciary nature of banking that requires high standards of integrity and performance." 19 This new
provision in the general banking law, introduced in 2000, is a statutory affirmation of Supreme Court
decisions, starting with the 1990 case of Simex International v. Court of Appeals, 20 holding that "the bank
is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship. 21

This fiduciary relationship means that the bank’s obligation to observe "high standards of integrity and
performance" is deemed written into every deposit agreement between a bank and its depositor. The
fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father
of a family. Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that
prescribed by law or contract, and absent such stipulation then the diligence of a good father of a family.
22 Section 2 of RA 8791 prescribes the statutory diligence required from banks — that banks must observe
"high standards of integrity and performance" in servicing their depositors. Although RA 8791 took effect
almost nine years after the unauthorized withdrawal of the P300,000 from L.C. Diaz’s savings account,
jurisprudence 23 at the time of the withdrawal already imposed on banks the same high standard of diligence
required under RA No. 8791.

However, the fiduciary nature of a bank-depositor relationship does not convert the contract between the
bank and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the
bank to pay the depositor is failure to pay a simple loan, and not a breach of trust. 24 The law simply
imposes on the bank a higher standard of integrity and performance in complying with its obligations under
the contract of simple loan, beyond those required of non-bank debtors under a similar contract of simple
loan.

The fiduciary nature of banking does not convert a simple loan into a trust agreement because banks do not
accept deposits to enrich depositors but to earn money for themselves. The law allows banks to offer the
lowest possible interest rate to depositors while charging the highest possible interest rate on their own
borrowers. The interest spread or differential belongs to the bank and not to the depositors who are not
cestui que trust of banks. If depositors are cestui que trust of banks, then the interest spread or income
belongs to the depositors, a situation that Congress certainly did not intend in enacting Section 2 of RA
8791.

Solidbank’s Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that "responsibility arising from negligence in the performance of
every kind of obligation is demandable." For breach of the savings deposit agreement due to negligence, or
culpa contractual, the bank is liable to its depositor.

Calapre left the passbook with Solidbank because the "transaction took time" and he had to go to Allied
Bank for another transaction. The passbook was still in the hands of the employees of Solidbank for the
processing of the deposit when Calapre left Solidbank. Solidbank’s rules on savings account require that the
"deposit book should be carefully guarded by the depositor and kept under lock and key, if possible." When
the passbook is in the possession of Solidbank’s tellers during withdrawals, the law imposes on Solidbank
and its tellers an even higher degree of diligence in safeguarding the passbook.

Likewise, Solidbank’s tellers must exercise a high degree of diligence in insuring that they return the
passbook only to the depositor or his authorized representative. The tellers know, or should know, that the
rules on savings account provide that any person in possession of the passbook is presumptively its owner.
If the tellers give the passbook to the wrong person, they would be clothing that person presumptive
ownership of the passbook, facilitating unauthorized withdrawals by that person. For failing to return the
passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank and Teller No. 6 presumptively
failed to observe such high degree of diligence in safeguarding the passbook, and in insuring its return to
the party authorized to receive the same.

In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the defendant
was at fault or negligent. The burden is on the defendant to prove that he was not at fault or negligent. In
contrast, in culpa aquiliana the plaintiff has the burden of proving that the defendant was negligent. In the
present case, L.C. Diaz has established that Solidbank breached its contractual obligation to return the
passbook only to the authorized representative of L.C. Diaz. There is thus a presumption that Solidbank was
at fault and its teller was negligent in not returning the passbook to Calapre. The burden was on Solidbank
to prove that there was no negligence on its part or its employees.

Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No. 6, the teller
with whom Calapre left the passbook and who was supposed to return the passbook to him. The record does
not indicate that Teller No. 6 verified the identity of the person who retrieved the passbook. Solidbank also
failed to adduce in evidence its standard procedure in verifying the identity of the person retrieving the
passbook, if there is such a procedure, and that Teller No. 6 implemented this procedure in the present
case.

Solidbank is bound by the negligence of its employees under the principle of respondeat superior or
command responsibility. The defense of exercising the required diligence in the selection and supervision of
employees is not a complete defense in culpa contractual, unlike in culpa aquiliana.25cralaw:red

The bank must not only exercise "high standards of integrity and performance," it must also insure that its
employees do likewise because this is the only way to insure that the bank will comply with its fiduciary
duty. Solidbank failed to present the teller who had the duty to return to Calapre the passbook, and thus
failed to prove that this teller exercised the "high standards of integrity and performance" required of
Solidbank’s employees.chanrob1es virtua1 1aw 1ibrary
Proximate Cause of the Unauthorized Withdrawal

Another point of disagreement between the trial and appellate courts is the proximate cause of the
unauthorized withdrawal. The trial court believed that L.C. Diaz’s negligence in not securing its passbook
under lock and key was the proximate cause that allowed the impostor to withdraw the P300,000. For the
appellate court, the proximate cause was the teller’s negligence in processing the withdrawal without first
verifying with L.C. Diaz. We do not agree with either court.

Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient
intervening cause, produces the injury and without which the result would not have occurred. 26 Proximate
cause is determined by the facts of each case upon mixed considerations of logic, common sense, policy
and precedent.

L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in possession
of the passbook while it was processing the deposit. After completion of the transaction, Solidbank had the
contractual obligation to return the passbook only to Calapre, the authorized representative of L.C. Diaz.
Solidbank failed to fulfill its contractual obligation because it gave the passbook to another person.

Solidbank’s failure to return the passbook to Calapre made possible the withdrawal of the P300,000 by the
impostor who took possession of the passbook. Under Solidbank’s rules on savings account, mere possession
of the passbook raises the presumption of ownership. It was the negligent act of Solidbank’s Teller No. 6
that gave the impostor presumptive ownership of the passbook. Had the passbook not fallen into the hands
of the impostor, the loss of P300,000 would not have happened. Thus, the proximate cause of the
unauthorized withdrawal was Solidbank’s negligence in not returning the passbook to Calapre.

We do not subscribe to the appellate court’s theory that the proximate cause of the unauthorized withdrawal
was the teller’s failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have the duty to call
up L.C. Diaz to confirm the withdrawal. There is no arrangement between Solidbank and L.C. Diaz to this
effect. Even the agreement between Solidbank and L.C. Diaz pertaining to measures that the parties must
observe whenever withdrawals of large amounts are made does not direct Solidbank to call up L.C. Diaz.

There is no law mandating banks to call up their clients whenever their representatives withdraw significant
amounts from their accounts. L.C. Diaz therefore had the burden to prove that it is the usual practice of
Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz failed to do so.

Teller No. 5 who processed the withdrawal could not have been put on guard to verify the withdrawal. Prior
to the withdrawal of P300,000, the impostor deposited with Teller No. 6 the P90,000 PBC check, which later
bounced. The impostor apparently deposited a large amount of money to deflect suspicion from the
withdrawal of a much bigger amount of money. The appellate court thus erred when it imposed on Solidbank
the duty to call up L.C. Diaz to confirm the withdrawal when no law requires this from banks and when the
teller had no reason to be suspicious of the transaction.

Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims that since Ilagan
was also a messenger of L.C. Diaz, he was familiar with its teller so that there was no more need for the
teller to verify the withdrawal. Solidbank relies on the following statements in the Booking and Information
Sheet of Emerano Ilagan:chanrob1es virtual 1aw library

. . . Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the amount of
P90,000 which he deposited in favor of L.C. Diaz and Company. After successfully withdrawing this large
sum of money, AccusedIlagan gave alias Rey (Noel Tamayo) his share of the loot. Ilagan then hired a taxicab
in the amount of P1,000 to transport him (Ilagan) to his home province at Bauan, Batangas. Ilagan
extravagantly and lavishly spent his money but a big part of his loot was wasted in cockfight and horse
racing. Ilagan was apprehended and meekly admitted his guilt. 28 (Emphasis supplied.)

L.C. Diaz refutes Solidbank’s contention by pointing out that the person who withdrew the P300,000 was a
certain Noel Tamayo. Both the trial and appellate courts stated that this Noel Tamayo presented the
passbook with the withdrawal slip.
We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew the P300,000.
The Court is not a trier of facts. We find no justifiable reason to reverse the factual finding of the trial court
and the Court of Appeals. The tellers who processed the deposit of the P90,000 check and the withdrawal
of the P300,000 were not presented during trial to substantiate Solidbank’s claim that Ilagan deposited the
check and made the questioned withdrawal. Moreover, the entry quoted by Solidbank does not categorically
state that Ilagan presented the withdrawal slip and the passbook.

Doctrine of Last Clear Chance

The doctrine of last clear chance states that where both parties are negligent but the negligent act of one is
appreciably later than that of the other, or where it is impossible to determine whose fault or negligence
caused the loss, the one who had the last clear opportunity to avoid the loss but failed to do so, is chargeable
with the loss. 29 Stated differently, the antecedent negligence of the plaintiff does not preclude him from
recovering damages caused by the supervening negligence of the defendant, who had the last fair chance
to prevent the impending harm by the exercise of due diligence. 30

We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach of
contract due to negligence in the performance of its contractual obligation to L.C. Diaz. This is a case of
culpa contractual, where neither the contributory negligence of the plaintiff nor his last clear chance to avoid
the loss, would exonerate the defendant from liability. 31 Such contributory negligence or last clear chance
by the plaintiff merely serves to reduce the recovery of damages by the plaintiff but does not exculpate the
defendant from his breach of contract. 32

Mitigated Damages

Under Article 1172, "liability (for culpa contractual) may be regulated by the courts, according to the
circumstances." This means that if the defendant exercised the proper diligence in the selection and
supervision of its employee, or if the plaintiff was guilty of contributory negligence, then the courts may
reduce the award of damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing a
withdrawal slip signed by its authorized signatories to fall into the hands of an impostor. Thus, the liability
of Solidbank should be reduced.

In Philippine Bank of Commerce v. Court of Appeals, 33 where the Court held the depositor guilty of
contributory negligence, we allocated the damages between the depositor and the bank on a 40-60 ratio.
Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual damages
awarded by the appellate court. Solidbank must pay he other 60% of the actual damages.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION. Petitioner Solidbank
Corporation shall pay private respondent L.C. Diaz and Company, CPA’s only 60% of the actual damages
awarded by the Court of Appeals. The remaining 40% of the actual damages shall be borne by private
respondent L.C. Diaz and Company, CPA’s. Proportionate costs.chanrob1es virtua1 1aw 1ibrary

SO ORDERED.

[G.R. NO. 150255. April 22, 2005]

SCHMITZ TRANSPORT & BROKERAGE CORPORATION, Petitioners, v.TRANSPORT VENTURE, INC.,

INDUSTRIAL INSURANCE COMPANY, LTD., and BLACK SEA SHIPPING AND DODWELL now
INCHCAPE SHIPPING SERVICES, Respondents.
 DECISION

CARPIO-MORALES, J.:

On Petition for Review is the June 27, 2001 Decision1 of the Court of Appeals, as well as its Resolution2 dated
September 28, 2001 denying the motion for reconsideration, which affirmed that of Branch 21 of the
Regional Trial Court (RTC) of Manila in Civil Case No. 92-631323 holding petitioner Schmitz Transport
Brokerage Corporation (Schmitz Transport), together with Black Sea Shipping Corporation (Black Sea),
represented by its ship agent Inchcape Shipping Inc. (Inchcape), and Transport Venture (TVI), solidarily
liable for the loss of 37 hot rolled steel sheets in coil that were washed overboard a barge.

On September 25, 1991, SYTCO Pte Ltd. Singapore shipped from the port of Ilyichevsk, Russia on board
M/V "Alexander Saveliev" (a vessel of Russian registry and owned by Black Sea) 545 hot rolled steel sheets
in coil weighing 6,992,450 metric tons.

The cargoes, which were to be discharged at the port of Manila in favor of the consignee, Little Giant Steel
Pipe Corporation (Little Giant),4 were insured against all risks with Industrial Insurance Company Ltd.
(Industrial Insurance) under Marine Policy No. M-91-3747-TIS.5

The vessel arrived at the port of Manila on October 24, 1991 and the Philippine Ports Authority (PPA)
assigned it a place of berth at the outside breakwater at the Manila South Harbor.6

Schmitz Transport, whose services the consignee engaged to secure the requisite clearances, to receive the
cargoes from the shipside, and to deliver them to its (the consignee's) warehouse at Cainta, Rizal,7 in turn
engaged the services of TVI to send a barge and tugboat at shipside.

On October 26, 1991, around 4:30 p.m., TVI's tugboat "Lailani" towed the barge "Erika V" to shipside.8

By 7:00 p.m. also of October 26, 1991, the tugboat, after positioning the barge alongside the vessel, left
and returned to the port terminal.9 At 9:00 p.m., arrastre operator Ocean Terminal Services Inc. commenced
to unload 37 of the 545 coils from the vessel unto the barge.

By 12:30 a.m. of October 27, 1991 during which the weather condition had become inclement due to an
approaching storm, the unloading unto the barge of the 37 coils was accomplished.10 No tugboat pulled the
barge back to the pier, however.

At around 5:30 a.m. of October 27, 1991, due to strong waves,11 the crew of the barge abandoned it and
transferred to the vessel. The barge pitched and rolled with the waves and eventually capsized, washing the
37 coils into the sea.12 At 7:00 a.m., a tugboat finally arrived to pull the already empty and damaged barge
back to the pier.13

Earnest efforts on the part of both the consignee Little Giant and Industrial Insurance to recover the lost
cargoes proved futile.14

Little Giant thus filed a formal claim against Industrial Insurance which paid it the amount of P5,246,113.11.
Little Giant thereupon executed a subrogation receipt15 in favor of Industrial Insurance.

Industrial Insurance later filed a complaint against Schmitz Transport, TVI, and Black Sea through its
representative Inchcape (the defendants) before the RTC of Manila, for the recovery of the amount it paid
to Little Giant plus adjustment fees, attorney's fees, and litigation expenses.16

Industrial Insurance faulted the defendants for undertaking the unloading of the cargoes while typhoon
signal No. 1 was raised in Metro Manila.17
By Decision of November 24, 1997, Branch 21 of the RTC held all the defendants negligent for unloading
the cargoes outside of the breakwater notwithstanding the storm signal.18 The dispositive portion of the
decision reads:

WHEREFORE, premises considered, the Court renders judgment in favor of the plaintiff, ordering the
defendants to pay plaintiff jointly and severally the sum of P5,246,113.11 with interest from the date the
complaint was filed until fully satisfied, as well as the sum of P5,000.00 representing the adjustment fee
plus the sum of 20% of the amount recoverable from the defendants as attorney's fees plus the costs of
suit. The counterclaims and cross claims of defendants are hereby DISMISSED for lack of [m]erit.19

To the trial court's decision, the defendants Schmitz Transport and TVI filed a joint motion for
reconsideration assailing the finding that they are common carriers and the award of excessive attorney's
fees of more than P1,000,000. And they argued that they were not motivated by gross or evident bad faith
and that the incident was caused by a fortuitous event.20

By resolution of February 4, 1998, the trial court denied the motion for reconsideration.21

All the defendants appealed to the Court of Appeals which, by decision of June 27, 2001, affirmed in toto
the decision of the trial court, 22 it finding that all the defendants were common carriers - Black Sea and TVI
for engaging in the transport of goods and cargoes over the seas as a regular business and not as an isolated
transaction,23 and Schmitz Transport for entering into a contract with Little Giant to transport the cargoes
from ship to port for a fee.24

In holding all the defendants solidarily liable, the appellate court ruled that "each one was essential such
that without each other's contributory negligence the incident would not have happened and so much so
that the person principally liable cannot be distinguished with sufficient accuracy."25

In discrediting the defense of fortuitous event, the appellate court held that "although defendants obviously
had nothing to do with the force of nature, they however had control of where to anchor the vessel, where
discharge will take place and even when the discharging will commence."26

The defendants' respective motions for reconsideration having been denied by Resolution27 of September
28, 2001, Schmitz Transport (hereinafter referred to as petitioner) filed the present petition against TVI,
Industrial Insurance and Black Sea.

Petitioner asserts that in chartering the barge and tugboat of TVI, it was acting for its principal, consignee
Little Giant, hence, the transportation contract was by and between Little Giant and TVI.28

By Resolution of January 23, 2002, herein respondents Industrial Insurance, Black Sea, and TVI were
required to file their respective Comments.29

By its Comment, Black Sea argued that the cargoes were received by the consignee through petitioner in
good order, hence, it cannot be faulted, it having had no control and supervision thereover.30

For its part, TVI maintained that it acted as a passive party as it merely received the cargoes and transferred
them unto the barge upon the instruction of petitioner.31

In issue then are:

(1) Whether the loss of the cargoes was due to a fortuitous event, independent of any act of negligence on
the part of petitioner Black Sea and TVI, and

(2) If there was negligence, whether liability for the loss may attach to Black Sea, petitioner and TVI.

When a fortuitous event occurs, Article 1174 of the Civil Code absolves any party from any and all liability
arising therefrom:
ART. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation,
or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those
events which could not be foreseen, or which though foreseen, were inevitable.

In order, to be considered a fortuitous event, however, (1) the cause of the unforeseen and unexpected
occurrence, or the failure of the debtor to comply with his obligation, must be independent of human will;
(2) it must be impossible to foresee the event which constitute the caso fortuito, or if it can be foreseen it
must be impossible to avoid; (3) the occurrence must be such as to render it impossible for the debtor to
fulfill his obligation in any manner; and (4) the obligor must be free from any participation in the aggravation
of the injury resulting to the creditor.32

[T]he principle embodied in the act of God doctrine strictly requires that the act must be occasioned solely
by the violence of nature. Human intervention is to be excluded from creating or entering into the cause of
the mischief. When the effect is found to be in part the result of the participation of man, whether due to
his active intervention or neglect or failure to act, the whole occurrence is then humanized and removed
from the rules applicable to the acts of God.33

The appellate court, in affirming the finding of the trial court that human intervention in the form of
contributory negligence by all the defendants resulted to the loss of the cargoes,34 held that unloading
outside the breakwater, instead of inside the breakwater, while a storm signal was up constitutes
negligence.35 It thus concluded that the proximate cause of the loss was Black Sea's negligence in deciding
to unload the cargoes at an unsafe place and while a typhoon was approaching.36

From a review of the records of the case, there is no indication that there was greater risk in loading the
cargoes outside the breakwater. As the defendants proffered, the weather on October 26, 1991 remained
normal with moderate sea condition such that port operations continued and proceeded normally.37

The weather data report,38 furnished and verified by the Chief of the Climate Data Section of PAG-ASA and
marked as a common exhibit of the parties, states that while typhoon signal No. 1 was hoisted over Metro
Manila on October 23-31, 1991, the sea condition at the port of Manila at 5:00 p.m. - 11:00 p.m. of October
26, 1991 was moderate. It cannot, therefore, be said that the defendants were negligent in not unloading
the cargoes upon the barge on October 26, 1991 inside the breakwater.

That no tugboat towed back the barge to the pier after the cargoes were completely loaded by 12:30 in the
morning39 is, however, a material fact which the appellate court failed to properly consider and
appreciate40 - the proximate cause of the loss of the cargoes. Had the barge been towed back promptly to
the pier, the deteriorating sea conditions notwithstanding, the loss could have been avoided. But the barge
was left floating in open sea until big waves set in at 5:30 a.m., causing it to sink along with the
cargoes.41 The loss thus falls outside the "act of God doctrine."

The proximate cause of the loss having been determined, who among the parties is/are responsible
therefor?chanroblesvirtualawlibrary

Contrary to petitioner's insistence, this Court, as did the appellate court, finds that petitioner is a common
carrier. For it undertook to transport the cargoes from the shipside of "M/V Alexander Saveliev" to the
consignee's warehouse at Cainta, Rizal. As the appellate court put it, "as long as a person or corporation
holds [itself] to the public for the purpose of transporting goods as [a] business, [it] is already considered
a common carrier regardless if [it] owns the vehicle to be used or has to hire one."42 That petitioner is a
common carrier, the testimony of its own Vice-President and General Manager Noel Aro that part of the
services it offers to its clients as a brokerage firm includes the transportation of cargoes reflects so.

Atty. Jubay: Will you please tell us what [are you] functions x x x as Executive Vice-President and General
Manager of said Company?chanroblesvirtualawlibrary

Mr. Aro: Well, I oversee the entire operation of the brokerage and transport business of the company. I also
handle the various division heads of the company for operation matters, and all other related functions that
the President may assign to me from time to time, Sir.
Q: Now, in connection [with] your duties and functions as you mentioned, will you please tell the Honorable
Court if you came to know the company by the name Little Giant Steel Pipe
Corporation?chanroblesvirtualawlibrary

A: Yes, Sir. Actually, we are the brokerage firm of that Company.

Q: And since when have you been the brokerage firm of that company, if you can
recall?chanroblesvirtualawlibrary

A: Since 1990, Sir.

Q: Now, you said that you are the brokerage firm of this Company. What work or duty did you perform in
behalf of this company?chanroblesvirtualawlibrary

A: We handled the releases (sic) of their cargo[es] from the Bureau of Customs. We [are] also in-charged
of the delivery of the goods to their warehouses. We also handled the clearances of their shipment at the
Bureau of Customs, Sir.

xxx

Q: Now, what precisely [was] your agreement with this Little Giant Steel Pipe Corporation with regards to
this shipment? What work did you do with this shipment?chanroblesvirtualawlibrary

A: We handled the unloading of the cargo[es] from vessel to lighter and then the delivery of [the] cargo[es]
from lighter to BASECO then to the truck and to the warehouse, Sir.

Q: Now, in connection with this work which you are doing, Mr. Witness, you are supposed to perform, what
equipment do (sic) you require or did you use in order to effect this unloading, transfer and delivery to the
warehouse?chanroblesvirtualawlibrary

A: Actually, we used the barges for the ship side operations, this unloading [from] vessel to lighter, and on
this we hired or we sub-contracted with [T]ransport Ventures, Inc. which [was] in-charged (sic) of the
barges. Also, in BASECO compound we are leasing cranes to have the cargo unloaded from the barge to
trucks, [and] then we used trucks to deliver [the cargoes] to the consignee's warehouse, Sir.

Q: And whose trucks do you use from BASECO compound to the consignee's
warehouse?chanroblesvirtualawlibrary

A: We utilized of (sic) our own trucks and we have some other contracted trucks, Sir.

xxx

ATTY. JUBAY: Will you please explain to us, to the Honorable Court why is it you have to contract for the
barges of Transport Ventures Incorporated in this particular operation?chanroblesvirtualawlibrary

A: Firstly, we don't own any barges. That is why we hired the services of another firm whom we know
[al]ready for quite sometime, which is Transport Ventures, Inc. (Emphasis supplied)43

It is settled that under a given set of facts, a customs broker may be regarded as a common carrier. Thus,
this Court, in A.F. Sanchez Brokerage, Inc. v. The Honorable Court of Appeals,44 held:

The appellate court did not err in finding petitioner, a customs broker, to be also a common carrier, as
defined under Article 1732 of the Civil Code, to wit,
Art. 1732. Common carriers are persons, corporations, firms or associations engaged in the business of
carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their
services to the public.

xxx

Article 1732 does not distinguish between one whose principal business activity is the carrying of goods and
one who does such carrying only as an ancillary activity. The contention, therefore, of petitioner that it is
not a common carrier but a customs broker whose principal function is to prepare the correct customs
declaration and proper shipping documents as required by law is bereft of merit. It suffices that petitioner
undertakes to deliver the goods for pecuniary consideration.45

And in Calvo v. UCPB General Insurance Co. Inc.,46 this Court held that as the transportation of goods is an
integral part of a customs broker, the customs broker is also a common carrier. For to declare otherwise
"would be to deprive those with whom [it] contracts the protection which the law affords them
notwithstanding the fact that the obligation to carry goods for [its] customers, is part and parcel of
petitioner's business."47

As for petitioner's argument that being the agent of Little Giant, any negligence it committed was deemed
the negligence of its principal, it does not persuade.

True, petitioner was the broker-agent of Little Giant in securing the release of the cargoes. In effecting the
transportation of the cargoes from the shipside and into Little Giant's warehouse, however, petitioner was
discharging its own personal obligation under a contact of carriage.

Petitioner, which did not have any barge or tugboat, engaged the services of TVI as handler48 to provide the
barge and the tugboat. In their Service Contract,49while Little Giant was named as the consignee, petitioner
did not disclose that it was acting on commission and was chartering the vessel for Little Giant.50 Little Giant
did not thus automatically become a party to the Service Contract and was not, therefore, bound by the
terms and conditions therein.

Not being a party to the service contract, Little Giant cannot directly sue TVI based thereon but it can
maintain a cause of action for negligence.51

In the case of TVI, while it acted as a private carrier for which it was under no duty to observe extraordinary
diligence, it was still required to observe ordinary diligence to ensure the proper and careful handling, care
and discharge of the carried goods.

Thus, Articles 1170 and 1173 of the Civil Code provide:

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, are liable for damages.

ART. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required
by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of
the place. When negligence shows bad faith, the provisions of articles 1171 and 2202, paragraph 2, shall
apply.

If the law or contract does not state the diligence which is to be observed in the performance, that which is
expected of a good father of a family shall be required.

Was the reasonable care and caution which an ordinarily prudent person would have used in the same
situation exercised by TVI?52

This Court holds not.

TVI's failure to promptly provide a tugboat did not only increase the risk that might have been reasonably
anticipated during the shipside operation, but was the proximate cause of the loss. A man of ordinary
prudence would not leave a heavily loaded barge floating for a considerable number of hours, at such a
precarious time, and in the open sea, knowing that the barge does not have any power of its own and is
totally defenseless from the ravages of the sea. That it was nighttime and, therefore, the members of the
crew of a tugboat would be charging overtime pay did not excuse TVI from calling for one such tugboat.

As for petitioner, for it to be relieved of liability, it should, following Article 173953 of the Civil Code, prove
that it exercised due diligence to prevent or minimize the loss, before, during and after the occurrence of
the storm in order that it may be exempted from liability for the loss of the goods.

While petitioner sent checkers54 and a supervisor55 on board the vessel to counter-check the operations of
TVI, it failed to take all available and reasonable precautions to avoid the loss. After noting that TVI failed
to arrange for the prompt towage of the barge despite the deteriorating sea conditions, it should have
summoned the same or another tugboat to extend help, but it did not.

This Court holds then that petitioner and TVI are solidarily liable56 for the loss of the cargoes. The following
pronouncement of the Supreme Court is instructive:

The foundation of LRTA's liability is the contract of carriage and its obligation to indemnify the victim arises
from the breach of that contract by reason of its failure to exercise the high diligence required of the common
carrier. In the discharge of its commitment to ensure the safety of passengers, a carrier may choose to hire
its own employees or avail itself of the services of an outsider or an independent firm to undertake the task.
In either case, the common carrier is not relieved of its responsibilities under the contract of carriage.

Should Prudent be made likewise liable? If at all, that liability could only be for tort under the provisions of
Article 2176 and related provisions, in conjunction with Article 2180 of the Civil Code. x x x [O]ne might ask
further, how then must the liability of the common carrier, on one hand, and an independent contractor, on
the other hand, be described? It would be solidary. A contractual obligation can be breached by tort and
when the same act or omission causes the injury, one resulting in culpa contractual and the other in culpa
aquiliana, Article 2194 of the Civil Code can well apply. In fine, a liability for tort may arise even under a
contract, where tort is that which breaches the contract. Stated differently, when an act which constitutes
a breach of contract would have itself constituted the source of a quasi-delictual liability had no contract
existed between the parties, the contract can be said to have been breached by tort, thereby allowing the
rules on tort to apply.57

As for Black Sea, its duty as a common carrier extended only from the time the goods were surrendered or
unconditionally placed in its possession and received for transportation until they were delivered actually or
constructively to consignee Little Giant.58

Parties to a contract of carriage may, however, agree upon a definition of delivery that extends the services
rendered by the carrier. In the case at bar, Bill of Lading No. 2 covering the shipment provides that delivery
be made "to the port of discharge or so near thereto as she may safely get, always afloat."59 The delivery
of the goods to the consignee was not from "pier to pier" but from the shipside of "M/V Alexander Saveliev"
and into barges, for which reason the consignee contracted the services of petitioner. Since Black Sea had
constructively delivered the cargoes to Little Giant, through petitioner, it had discharged its duty.60

In fine, no liability may thus attach to Black Sea.

Respecting the award of attorney's fees in an amount over P1,000,000.00 to Industrial Insurance, for lack
of factual and legal basis, this Court sets it aside. While Industrial Insurance was compelled to litigate its
rights, such fact by itself does not justify the award of attorney's fees under Article 2208 of the Civil Code.
For no sufficient showing of bad faith would be reflected in a party's persistence in a case other than an
erroneous conviction of the righteousness of his cause.61To award attorney's fees to a party just because
the judgment is rendered in its favor would be tantamount to imposing a premium on one's right to litigate
or seek judicial redress of legitimate grievances.62
On the award of adjustment fees: The adjustment fees and expense of divers were incurred by Industrial
Insurance in its voluntary but unsuccessful efforts to locate and retrieve the lost cargo. They do not
constitute actual damages.63

As for the court a quo's award of interest on the amount claimed, the same calls for modification following
the ruling in Eastern Shipping Lines, Inc. v. Court of Appeals64 that when the demand cannot be reasonably
established at the time the demand is made, the interest shall begin to run not from the time the claim is
made judicially or extrajudicially but from the date the judgment of the court is made (at which the time
the quantification of damages may be deemed to have been reasonably ascertained).65

WHEREFORE, judgment is hereby rendered ordering petitioner Schmitz Transport & Brokerage Corporation,
and Transport Venture Incorporation jointly and severally liable for the amount of P5,246,113.11 with the
MODIFICATION that interest at SIX PERCENT per annum of the amount due should be computed from the
promulgation on November 24, 1997 of the decision of the trial court.

Costs against petitioner.

SO ORDERED.

G.R. NO. 146224 January 26, 2007

 o wa
Sabe fast-food
VIRGINIA REAL, Petitioner, -

Masters Fast-food
vs.
SISENANDO H. BELO, Respondent. → BS

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Revised Rules of Court assailing the
Resolution1 dated June 16, 2000 of the Court of Appeals (CA) which dismissed outright the petition for review of Virginia
Real (petitioner) in CA-G.R. SP No. 58799, and the CA Resolution2 dated November 27, 2000 which denied her Motion for
Reconsideration.

The facts of the case:

Petitioner owned and operated the Wasabe Fastfood stall located at the Food Center of the Philippine Women's University
(PWU) along Taft Avenue, Malate, Manila. Sisenando H. Belo (respondent) owned and operated the BS Masters fastfood
stall, also located at the Food Center of PWU.

Around 7:00 o'clock in the morning of January 25, 1996, a fire broke out at petitioner's Wasabe Fastfood stall. The fire
spread and gutted other fastfood stalls in the area, including respondent's stall. An investigation on the cause of the fire by
Fire Investigator SFO1 Arnel C. Pinca (Pinca) revealed that the fire broke out due to the leaking fumes coming from the
Liquefied Petroleum Gas (LPG) stove and tank installed at petitioner's stall. For the loss of his fastfood stall due to the fire,
respondent demanded compensation from petitioner. However, petitioner refused to accede to respondent's demand.

Hence, respondent filed a complaint for damages against petitioner before the Metropolitan Trial Court, Branch 24, Manila
(MeTC), docketed as Civil Case No. 152822.3 Respondent alleged that petitioner failed to exercise due diligence in the
upkeep and maintenance of her cooking equipments, as well as the selection and supervision of her employees; that
petitioner's negligence was the proximate cause of the fire that gutted the fastfood stalls.4

In her Answer dated September 23, 1996, petitioner denied liability on the grounds that the fire was a fortuitous event and
that she exercised due diligence in the selection and supervision of her employees.5

After trial, the MeTC rendered its Decision6 dated April 5, 1999 in favor of the respondent, the dispositive portion of which
reads:
pay respondent
WHEREFORE, in light of the foregoing, judgment is hereby rendered in favor of the plaintiff and against the defendant
ordering the latter:

1) To pay the plaintiff the sum of P50,000.00 representing temperate or moderate damages; and

2) To pay the plaintiff the sum of P25,000.00 as and for attorney's fees and litigation expenses.

The counterclaim filed by the defendant is hereby DENIED FOR LACK OF MERIT.

SO ORDERED.7

The MeTC held that the investigation conducted by the appropriate authority revealed that the fire broke out due to the
leaking fumes coming from the LPG stove and tank installed at petitioner's fastfood stall; that factual circumstances did not
show any sign of interference by any force of nature to infer that the fire occurred due to fortuitous event; that the petitioner
failed to exercise due diligence, precaution, and vigilance in the conduct of her business, particularly, in maintaining the
safety of her cooking equipment as well as in the selection and supervision of her employees; that even if petitioner passes
the fault to her employees, Article 2180 of the Civil Code finds application; that in the absence of supporting evidence, the
amount of actual damages and unrealized profits prayed for by respondent cannot be granted; that, nonetheless, respondent
is entitled to temperate damages since respondent sustained pecuniary loss, though its true value cannot, from the very
nature of the case, be proved with certainty.
Dissatisfied, petitioner filed an appeal with the Regional Trial Court, Branch 43, Manila (RTC), docketed as Civil Case No.
99-94606, insisting that the fire was a fortuitous event. On November 26, 1999, the RTC affirmed the Decision of the MeTC
but increased the amount of temperate damages awarded to the respondent from P50,000.00 to P80,000.00.8

Petitioner filed a Motion for Reconsideration contending that the increase in the award of temperate damages is
unreasonable since she also incurred losses from the fire.

In its Order dated April 12, 2000, the RTC denied petitioner's Motion for Reconsideration holding that it cannot disregard
evidence showing that the fire originated from petitioner's fastfood stall; that the increased amount of temperate damages
awarded to respondent is not a full compensation but only a fair approximate of what he lost due to the negligence of
petitioner's workers.9

Petitioner then filed a Petition for Review with the CA, docketed as CA-G.R. SP No. 58799.10 On June 16, 2000, the CA
issued a Resolution dismissing the petition for being "procedurally flawed/deficient."11 The CA held that the attached RTC
Decision was not certified as a true copy by the Clerk of Court; that a certified true copy of the MeTC Decision was not
attached; that material portions of the record, such as the position papers of the parties and affidavits of witnesses, as would
support the material allegations of the petition were also not attached.12

On July 14, 2000, petitioner filed her Motion for Reconsideration,13 attaching photocopies of the Decisions of the RTC and
MeTC as certified correct by the Clerk of Court.14

On November 27, 2000, the CA issued its Resolution denying petitioner's Motion for Reconsideration.15

Hence, the present petition raising the following issues:

1. Whether the submitted certified true copy of the appealed decision of the Regional Trial Court as authenticated
by a court employee other than the Clerk of Court who was not around at that time said copy was secured constitutes
compliance with the Rules?

2. Whether the submission of a certified true copy of the Metropolitan Trial Court's judgment is still an indispensable
requirement in filing a petition for review before the Court of Appeals despite the fact that said judgment was already
modified by the above decision of the Regional Trial Court and it is the latter decision that is the proper subject of
the petition for review?

3. Whether the submission of copies of the respective position papers of the contending parties is still an
indispensable requirement in filing a petition for review before the Court of Appeals despite the fact that the contents
thereof are already quoted in the body of the verified petition and in the subject judgment of the Metropolitan Trial
Court?

4. Whether the herein petitioner could be held liable for damages as a result of the fire that razed not only her own
food kiosk but also the adjacent foodstalls at the Food Center premises of the Philippine Women's University,
including that of the respondent?

5. Whether the Regional Trial Court could increase the amount of damages awarded by the Metropolitan Trial Court
in favor of the respondent who has not even filed an appeal therefrom?16

Petitioner submits that rules of procedure should not be applied in a very harsh, inflexible and technically unreasonable
sense.

While admitting that the RTC Decision and Order were not certified by the Clerk of Court himself, petitioner insists that they
were certified as authentic copies by Administrative Officer IV Gregorio B. Paraon of the RTC.

As to the MeTC Decision, petitioner contends that the submission of a certified true copy thereof is not an indispensable
requirement because that judgment is not the subject of the petition for review.

In any case, petitioner submits that she had substantially complied with the requirements of the rule when she attached with
her Motion for Reconsideration the copies of the Decisions of the RTC and MeTC as certified correct by the Clerk of Court.
Anent the non-submission of the position papers of the parties, petitioner maintains that the contents of said position papers
were lengthily quoted verbatim in the petition and in the attached copy of the MeTC Decision.

On the submission of affidavits of witnesses, petitioner contends that it was not necessary because the case before the
MeTC was not covered by summary proceedings.

On the merits of her petition before the CA, petitioner avers that she should not be held liable for a fire which was a fortuitous
event since the fire could not be foreseen and the spread of the fire to the adjacent fastfood stalls was inevitable.

Lastly, she argues that the RTC cannot increase the amount of temperate damages since the respondent did not appeal
from the judgment of the MeTC.

Respondent opted not to file a Comment, manifesting that the petition contains no new arguments which would require a
comment since the arguments are but a rehash of those raised and decided by the lower courts.17

The Court gave due course to the petition and required both parties to submit their respective memoranda.18 In compliance
therewith, petitioner submitted her Memorandum.19 On the other hand, respondent filed a Manifestation stating that since
no new issues have been raised by the petitioner in her petition and in order not to be redundant, he adopts as his
memorandum the memoranda he filed in the MeTC and the RTC.20

In his Memoranda before the MeTC and RTC, respondent emphasized the evidence he presented to establish his cause of
action against petitioner, principally the testimony of Fire Investigator SFO1 Arnel G. Pinca stating that the fire originated
from the LPG stove and tank in petitioner's fastfood stall.

The requirements as to form and content of a petition for review of a decision of the RTC are laid down in Section 2 of Rule
42 of the Revised Rules of Court, thus:

Sec. 2. Form and contents. - The petition shall be filed in seven (7) legible copies, with the original copy intended for the
court being indicated as such by the petitioner, and shall (a) state the full names of the parties to the case, without impleading
the lower courts or judges thereof either as petitioners or respondents; (b) indicate the specific material dates showing that
it was filed on time; (c) set forth concisely a statement of the matters involved, the issues raised, the specification of errors
of fact or law, or both, allegedly committed by the Regional Trial Court, and the reasons or arguments relied upon for the
allowance of the appeal; (d) be accompanied by clearly legible duplicate originals or true copies of the judgments or final
orders of both lower courts, certified correct by the clerk of court of the Regional Trial Court, the requisite number of plain
copies thereof and of the pleadings and other material portions of the record as would support the allegations of the petition.
(Emphasis supplied)

xxxx

Under Section 3 of the same Rule, failure to comply with the above requirements "shall be sufficient ground for the dismissal
thereof."

However, Section 6, Rule 1 of the Revised Rules of Court also provides that rules shall be liberally construed in order to
promote their objective of securing a just, speedy and inexpensive disposition of every action and proceeding. Indeed, rules
of procedure should be used to promote, not frustrate justice.21

In the present case, petitioner's submission of copies of the RTC Decision and Order certified as correct by the
Administrative Officer IV of the RTC is insufficient compliance with the requirements of the rule. Petitioner failed to show
that the Clerk of Court was officially on leave and the Administrative Officer was officially designated as officer-in-charge.
The rule is explicit in its mandate that the legible duplicate originals or true copies of the judgments or final orders of both
lower courts must be certified correct by the Clerk of Court.

Nonetheless, a strict application of the rule in this case is not called for. This Court has ruled against the dismissal of appeals
based solely on technicalities in several cases, especially when the appellant had substantially complied with the formal
requirements.22 There is ample jurisprudence holding that the subsequent and substantial compliance of a party may call
for the relaxation of the rules of procedure.23 When the CA dismisses a petition outright and the petitioner files a motion for
the reconsideration of such dismissal, appending thereto the requisite pleadings, documents or order/resolution, this would
constitute substantial compliance with the Revised Rules of Court.24
 Thus, in the present case, there was substantial compliance when petitioner attached in her Motion for Reconsideration a
photocopy of the Decision of the RTC as certified correct by the Clerk of Court of the RTC. In like manner, there was
substantial compliance when petitioner attached, in her Motion for Reconsideration, a photocopy of the Decision of the
MeTC as certified correct by the Clerk of Court of the RTC.

On the necessity of attaching position papers and affidavits of witnesses, Section 2 of Rule 42 of the Revised Rules of Court
requires attachments if these would support the allegations of the petition.25 In the present case, there was no compelling
need to attach the position papers of the parties since the Decisions of the MeTC and RTC already stated their respective
arguments. As to the affidavits, the Court notes that they were presented by the respondent as part of the testimony of his
witness Fire Investigator Pinca and therefore would not support the allegations of the petitioner.

Truly, in dismissing the petition for review, the CA had committed grave abuse of discretion amounting to lack of jurisdiction
in putting a premium on technicalities at the expense of a just resolution of the case.

The Court's pronouncement in Republic of the Philippines v. Court of Appeals26 is worth echoing: "cases should be
determined on the merits, after full opportunity to all parties for ventilation of their causes and defenses, rather than on
technicality or some procedural imperfections. In that way, the ends of justice would be better served."27 Thus, what should
guide judicial action is that a party litigant is given the fullest opportunity to establish the merits of his action or defense
rather than for him to lose life, honor or property on mere technicalities.28

The next most logical step would then be for the Court to simply set aside the challenged resolutions, remand the case to
the CA and direct the latter to resolve on the merits of the petition in CA-G.R. SP No. 58799. But, that would further delay
the case. Considering the issues raised which can be resolved on the basis of the pleadings and documents filed, and the
fact that petitioner herself has asked the Court to decide her petition on the merits, the Court deems it more practical and in
the greater interest of justice not to remand the case to the CA but, instead, to resolve the controversy once and for all.29

The Court shall now address the issue of whether the fire was a fortuitous event.

Jurisprudence defines the elements of a "fortuitous event" as follows: (a) the cause of the unforeseen and unexpected
occurrence must be independent of human will; (b) it must be impossible to foresee the event which constitutes the caso
fortuito, or if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to render it impossible
for the debtor to fulfill his obligation in a normal manner; and (d) the obligor must be free from any participation in the
aggravation of the injury resulting to the creditor. 30

Article 1174 of the Civil Code provides that no person shall be responsible for a fortuitous event which could not be foreseen,
* or which, though foreseen, was inevitable. In other words, there must be an entire exclusion of human agency from the
cause of injury or loss.31

It is established by evidence that the fire originated from leaking fumes from the LPG stove and tank installed at petitioner's
fastfood stall and her employees failed to prevent the fire from spreading and destroying the other fastfood stalls, including
respondent's fastfood stall. Such circumstances do not support petitioner's theory of fortuitous event.

Petitioner's bare allegation is far from sufficient proof for the Court to rule in her favor. It is basic in the rule of evidence that
bare allegations, unsubstantiated by evidence, are not equivalent to proof.32 In short, mere allegations are not evidence.33

The Civil Code provides:

Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the
damage done. x x x

Art. 2180. The obligation imposed by Article 2176 is demandable not only for one's own acts or omissions, but also for those
of persons for whom one is responsible.

xxxx

The owners and managers of an establishment or enterprise are likewise responsible for damages caused by their
employees in the service of the branches in which the latter are employed or on the occasion of their functions.
Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of
their assigned tasks, even though the former are not engaged in any business or industry.

xxxx

The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the
diligence of a good father of a family to prevent damage.

Whenever an employee's negligence causes damage or injury to another, there instantly arises a presumption juris
tantum that the employer failed to exercise diligentissimi patris families in the selection (culpa in eligiendo) or supervision
(culpa in vigilando) of its employees.34 To avoid liability for a quasi-delict committed by his employee, an employer must
overcome the presumption by presenting convincing proof that he exercised the care and diligence of a good father of a
family in the selection and supervision of his employee.35

In this case, petitioner not only failed to show that she submitted proof that the LPG stove and tank in her fastfood stall were
maintained in good condition and periodically checked for defects but she also failed to submit proof that she exercised the
diligence of a good father of a family in the selection and supervision of her employees. For failing to prove care and
diligence in the maintenance of her cooking equipment and in the selection and supervision of her employees, the necessary
inference was that petitioner had been negligent.36

As to the award of temperate damages, the increase in the amount thereof by the RTC is improper. The RTC could no
longer examine the amounts awarded by the MeTC since respondent did not appeal from the Decision of the MeTC.37 It is
well-settled that a party who does not appeal from the decision may not obtain any affirmative relief from the appellate court
other than what he has obtained from the lower court, if any, whose decision is brought up on appeal.38 While there are
exceptions to this rule, such as if they involve (1) errors affecting the lower court's jurisdiction over the subject matter, (2)
plain errors not specified, and (3) clerical errors,39 none apply here.

WHEREFORE, the petition is GRANTED. The assailed Resolutions dated June 16, 2000 and November 27, 2000 of the
Court of Appeals are REVERSED and SET ASIDE. The Decision dated November 26, 1999 of the Regional Trial Court,
Branch 43, Manila is AFFIRMED with MODIFICATION that the temperate damages awarded is reduced from P80,000.00
to P50,000.00 as awarded by the Metropolitan Trial Court, Branch 24, Manila in its Decision dated April 5, 1999.

No costs.

SO ORDERED.
 [G.R. NO. 147324 : May 25, 2004]

PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION,Petitioner, v. GLOBE TELECOM, INC.

(formerly and Globe Mckay Cable and Radio Corporation), Respondents.

[G.R. NO. 147334 : May 25, 2004]

GLOBE TELECOM, INC., Petitioner, v. PHILIPPINE COMMUNICATION SATELLITE

CORPORATION, Respondent.

DECISION

TINGA, J.:

Before the Court are two Petitions for Review assailing the Decision of the Court of Appeals, dated 27
February 2001, in CA-G.R. CV No. 63619.1 ςrνll

The facts of the case are undisputed.

For several years prior to 1991, Globe Mckay Cable and Radio Corporation, now Globe Telecom, Inc. (Globe),
had been engaged in the coordination of the provision of various communication facilities for the military
bases of the United States of America (US) in Clark Air Base, Angeles, Pampanga and Subic Naval Base in
Cubi Point, Zambales. The said communication facilities were installed and configured for the exclusive use
of the US Defense Communications Agency (USDCA), and for security reasons, were operated only by its
personnel or those of American companies contracted by it to operate said facilities. The USDCA contracted
with said American companies, and the latter, in turn, contracted with Globe for the use of the
communication facilities. Globe, on the other hand, contracted with local service providers such as the
Philippine Communications Satellite Corporation (Philcomsat) for the provision of the communication
facilities.

On 07 May 1991, Philcomsat and Globe entered into an Agreement whereby Philcomsat obligated itself to
establish, operate and provide an IBS Standard B earth station (earth station) within Cubi Point for the
exclusive use of the USDCA.2 The term of the contract was for 60 months, or five (5) years.3 In turn, Globe
promised to pay Philcomsat monthly rentals for each leased circuit involved.4 ςrνll

At the time of the execution of the Agreement, both parties knew that the Military Bases Agreement between
the Republic of the Philippines and the US (RP-US Military Bases Agreement), which was the basis for the
occupancy of the Clark Air Base and Subic Naval Base in Cubi Point, was to expire in 1991. Under Section
25, Article XVIII of the 1987 Constitution, foreign military bases, troops or facilities, which include those
located at the US Naval Facility in Cubi Point, shall not be allowed in the Philippines unless a new treaty is
duly concurred in by the Senate and ratified by a majority of the votes cast by the people in a national
referendum when the Congress so requires, and such new treaty is recognized as such by the US
Government.

Subsequently, Philcomsat installed and established the earth station at Cubi Point and the USDCA made use
of the same.

On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141, expressing its decision
not to concur in the ratification of the Treaty of Friendship, Cooperation and Security and its Supplementary
Agreements that was supposed to extend the term of the use by the US of Subic Naval Base, among
others.5 The last two paragraphs of the Resolution state:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

FINDING that the Treaty constitutes a defective framework for the continuing relationship between the two
countries in the spirit of friendship, cooperation and sovereign equality: Now, therefore, be it

Resolved by the Senate, as it is hereby resolved, To express its decision not to concur in the ratification of
the Treaty of Friendship, Cooperation and Security and its Supplementary Agreements, at the same time
reaffirming its desire to continue friendly relations with the government and people of the United States of
America.6 ςrνll

On 31 December 1991, the Philippine Government sent a Note Verbaleto the US Government through the
US Embassy, notifying it of the Philippines termination of the RP-US Military Bases Agreement. The Note
Verbale stated that since the RP-US Military Bases Agreement, as amended, shall terminate on 31 December
1992, the withdrawal of all US military forces from Subic Naval Base should be completed by said date.

In a letter dated 06 August 1992, Globe notified Philcomsat of its intention to discontinue the use of the
earth station effective 08 November 1992 in view of the withdrawal of US military personnel from Subic
Naval Base after the termination of the RP-US Military Bases Agreement. Globe invoked as basis for the
letter of termination Section 8 (Default) of the Agreement, which provides:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Neither party shall be held liable or deemed to be in default for any failure to perform its obligation under
this Agreement if such failure results directly or indirectly from force majeure or fortuitous event. Either
party is thus precluded from performing its obligation until such force majeure or fortuitous event shall
terminate. For the purpose of this paragraph, force majeure shall mean circumstances beyond the control
of the party involved including, but not limited to, any law, order, regulation, direction or request of the
Government of the Philippines, strikes or other labor difficulties, insurrection riots, national emergencies,
war, acts of public enemies, fire, floods, typhoons or other catastrophies or acts of God.

Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that we expect [Globe] to know its
commitment to pay the stipulated rentals for the remaining terms of the Agreement even after [Globe] shall
have discontinue[d] the use of the earth station after November 08, 1992.7 Philcomsat referred to Section
7 of the Agreement, stating as follows:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

7.DISCONTINUANCE OF SERVICE

Should [Globe] decide to discontinue with the use of the earth station after it has been put into operation,
a written notice shall be served to PHILCOMSAT at least sixty (60) days prior to the expected date of
termination. Notwithstanding the non-use of the earth station, [Globe] shall continue to pay PHILCOMSAT
for the rental of the actual number of T1 circuits in use, but in no case shall be less than the first two (2)
T1 circuits, for the remaining life of the agreement. However, should PHILCOMSAT make use or sell the
earth station subject to this agreement, the obligation of [Globe] to pay the rental for the remaining life of
the agreement shall be at such monthly rate as may be agreed upon by the parties.8 ςrνll

After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter dated 24 November 1993
demanding payment of its outstanding obligations under the Agreement amounting to US$4,910,136.00
plus interest and attorneys fees. However, Globe refused to heed Philcomsats demand.

On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati a Complaint against Globe,
praying that the latter be ordered to pay liquidated damages under the Agreement, with legal interest,
exemplary damages, attorneys fees and costs of suit. The case was raffled to Branch 59 of said court.

Globe filed an Answer to the Complaint, insisting that it was constrained to end the Agreement due to the
termination of the RP-US Military Bases Agreement and the non-ratification by the Senate of the Treaty of
Friendship and Cooperation, which events constituted force majeureunder the Agreement. Globe explained
that the occurrence of said events exempted it from paying rentals for the remaining period of the
Agreement.

On 05 January 1999, the trial court rendered its Decision, the dispositive portion of which
reads:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

WHEREFORE, premises considered, judgment is hereby rendered as follows:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

1.Ordering the defendant to pay the plaintiff the amount of Ninety Two Thousand Two Hundred Thirty Eight
US Dollars (US$92,238.00) or its equivalent in Philippine Currency (computed at the exchange rate
prevailing at the time of compliance or payment) representing rentals for the month of December 1992 with
interest thereon at the legal rate of twelve percent (12%) per annum starting December 1992 until the
amount is fully paid;chanroblesvirtuallawlibrary

2.Ordering the defendant to pay the plaintiff the amount of Three Hundred Thousand (P300,000.00) Pesos
as and for attorneys fees;chanroblesvirtuallawlibrary

3.Ordering the DISMISSAL of defendants counterclaim for lack of merit; andcralawlibrary

4.With costs against the defendant.

SO ORDERED.9 ςrνll

Both parties appealed the trial courts Decision to the Court of Appeals.

Philcomsat claimed that the trial court erred in ruling that: (1) the non-ratification by the Senate of the
Treaty of Friendship, Cooperation and Security and its Supplementary Agreements constitutes force
majeurewhich exempts Globe from complying with its obligations under the Agreement; (2) Globe is not
liable to pay the rentals for the remainder of the term of the Agreement; and (3) Globe is not liable to
Philcomsat for exemplary damages.

Globe, on the other hand, contended that the RTC erred in holding it liable for payment of rent of the earth
station for December 1992 and of attorneys fees. It explained that it terminated Philcomsats services on 08
November 1992; hence, it had no reason to pay for rentals beyond that date.

On 27 February 2001, the Court of Appeals promulgated its Decisiondismissing Philcomsats appeal for lack
of merit and affirming the trial courts finding that certain events constituting force majeure under Section 8
the Agreement occurred and justified the non-payment by Globe of rentals for the remainder of the term of
the Agreement.

The appellate court ruled that the non-ratification by the Senate of the Treaty of Friendship, Cooperation
and Security, and its Supplementary Agreements, and the termination by the Philippine Government of the
RP-US Military Bases Agreement effective 31 December 1991 as stated in the Philippine Governments Note
Verbale to the US Government, are acts, directions, or requests of the Government of the Philippines which
constitute force majeure. In addition, there were circumstances beyond the control of the parties, such as
the issuance of a formal order by Cdr. Walter Corliss of the US Navy, the issuance of the letter notification
from ATT and the complete withdrawal of all US military forces and personnel from Cubi Point, which
prevented further use of the earth station under the Agreement.

However, the Court of Appeals ruled that although Globe sought to terminate Philcomsats services by 08
November 1992, it is still liable to pay rentals for the December 1992, amounting to US$92,238.00 plus
interest, considering that the US military forces and personnel completely withdrew from Cubi Point only on
31 December 1992.10 ςrνll

Both parties filed their respective Petitions for Review assailing the Decision of the Court of Appeals.

In G.R. No. 147324,11 petitioner Philcomsat raises the following assignments of error:

A.THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING A DEFINITION OF FORCE

MAJEURE DIFFERENT FROM WHAT ITS LEGAL DEFINITION FOUND IN ARTICLE 1174 OF THE CIVIL CODE,
PROVIDES, SO AS TO EXEMPT GLOBE TELECOM FROM COMPLYING WITH ITS OBLIGATIONS UNDER THE
SUBJECT AGREEMENT.

B.THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT LIABLE TO
PHILCOMSAT FOR RENTALS FOR THE REMAINING TERM OF THE AGREEMENT, DESPITE THE CLEAR TENOR
OF SECTION 7 OF THE AGREEMENT.
C.THE HONORABLE OCURT OF APPEALS ERRED IN DELETING THE TRIAL COURTS AWARD OF ATTORNEYS
FEES IN FAVOR OF PHILCOMSAT.

D.THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT LIABLE TO
PHILCOMSAT FOR EXEMPLARY DAMAGES.12 ςrνll

Philcomsat argues that the termination of the RP-US Military Bases Agreement cannot be considered a
fortuitous event because the happening thereof was foreseeable. Although the Agreement was freely entered
into by both parties, Section 8 should be deemed ineffective because it is contrary to Article 1174 of the
Civil Code. Philcomsat posits the view that the validity of the parties definition of force majeure in Section
8 of the Agreement as circumstances beyond the control of the party involved including, but not limited to,
any law, order, regulation, direction or request of the Government of the Philippines, strikes or other labor
difficulties, insurrection riots, national emergencies, war, acts of public enemies, fire, floods, typhoons or
other catastrophies or acts of God, should be deemed subject to Article 1174 which defines fortuitous events
as events which could not be foreseen, or which, though foreseen, were inevitable.13 ςrνll

Philcomsat further claims that the Court of Appeals erred in holding that Globe is not liable to pay for the
rental of the earth station for the entire term of the Agreement because it runs counter to what was plainly
stipulated by the parties in Section 7 thereof.Moreover, said ruling is inconsistent with the appellate courts
pronouncement that Globe is liable to pay rentals for December 1992 even though it terminated Philcomsats
services effective 08 November 1992, because the US military and personnel completely withdrew from Cubi
Point only in December 1992. Philcomsat points out that it was Globe which proposed the five-year term of
the Agreement, and that the other provisions of the Agreement, such as Section 4.114 thereof, evince the
intent of Globe to be bound to pay rentals for the entire five-year term.15 ςrνll

Philcomsat also maintains that contrary to the appellate courts findings, it is entitled to attorneys fees and
exemplary damages.16 ςrνll

In its Comment to Philcomsats Petition, Globe asserts that Section 8 of the Agreement is not contrary to
Article 1174 of the Civil Code because said provision does not prohibit parties to a contract from providing
for other instances when they would be exempt from fulfilling their contractual obligations. Globe also claims
that the termination of the RP-US Military Bases Agreement constitutes force majeure and exempts it from
complying with its obligations under the Agreement.17 On the issue of the propriety of awarding attorneys
fees and exemplary damages to Philcomsat, Globe maintains that Philcomsat is not entitled thereto because
in refusing to pay rentals for the remainder of the term of the Agreement, Globe only acted in accordance
with its rights.18 ςrνll

In G.R. No. 147334,19 Globe, the petitioner therein, contends that the Court of Appeals erred in finding it
liable for the amount of US$92,238.00, representing rentals for December 1992, since Philcomsats services
were actually terminated on 08 November 1992.20ςrνll

In its Comment, Philcomsat claims that Globes petition should be dismissed as it raises a factual issue which
is not cognizable by the Court in a Petition for Review on Certiorari .21 ςrνll

On 15 August 2001, the Court issued a Resolution giving due course to Philcomsats Petition in G.R.
No. 147324 and required the parties to submit their respective memoranda.22 ςrνll

Similarly, on 20 August 2001, the Court issued a Resolution giving due course to the Petition filed by Globe
in G.R. No. 147334and required both parties to submit their memoranda.23 ςrνll

Philcomsat and Globe thereafter filed their respective Consolidated Memoranda in the two cases, reiterating
their arguments in their respective petitions.

The Court is tasked to resolve the following issues: (1) whether the termination of the RP-US Military Bases
Agreement, the non-ratification of the Treaty of Friendship, Cooperation and Security, and the consequent
withdrawal of US military forces and personnel from Cubi Point constitute force majeure which would exempt
Globe from complying with its obligation to pay rentals under its Agreement with Philcomsat; (2) whether
Globe is liable to pay rentals under the Agreement for the month of December 1992; and (3) whether
Philcomsat is entitled to attorneys fees and exemplary damages.

No reversible error was committed by the Court of Appeals in issuing the assailed Decision; hence the
petitions are denied.

There is no merit is Philcomsats argument that Section 8 of the Agreement cannot be given effect because
the enumeration of events constituting force majeure therein unduly expands the concept of a fortuitous
event under Article 1174 of the Civil Code and is therefore invalid.

In support of its position, Philcomsat contends that under Article 1174 of the Civil Code, an event must be
unforeseen in order to exempt a party to a contract from complying with its obligations therein. It insists
that since the expiration of the RP-US Military Bases Agreement, the non-ratification of the Treaty of
Friendship, Cooperation and Security and the withdrawal of US military forces and personnel from Cubi Point
were not unforeseeable, but were possibilities known to it and Globe at the time they entered into the
Agreement, such events cannot exempt Globe from performing its obligation of paying rentals for the entire
five-year term thereof.

However, Article 1174, which exempts an obligor from liability on account of fortuitous events or force
majeure, refers not only to events that are unforeseeable, but also to those which are foreseeable, but
inevitable:

Art. 1174. Except in cases specified by the law, or when it is otherwise declared by stipulation, or when the
nature of the obligation requires the assumption of risk, no person shall be responsible for those events
which, could not be foreseen, or which, though foreseen were inevitable.

A fortuitous event under Article 1174 may either be an act of God, or natural occurrences such as floods or
typhoons,24 or an act of man, such as riots, strikes or wars.25 ςrνll

Philcomsat and Globe agreed in Section 8 of the Agreement that the following events shall be deemed events
constituting force majeure:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

1.Any law, order, regulation, direction or request of the Philippine Government;chanroblesvirtuallawlibrary

2.Strikes or other labor difficulties;chanroblesvirtuallawlibrary

3.Insurrection;chanroblesvirtuallawlibrary

4.Riots;chanroblesvirtuallawlibrary

5.National emergencies;chanroblesvirtuallawlibrary

6.War;chanroblesvirtuallawlibrary

7.Acts of public enemies;chanroblesvirtuallawlibrary

8.Fire, floods, typhoons or other catastrophies or acts of God;chanroblesvirtuallawlibrary

9.Other circumstances beyond the control of the parties.

Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of the parties. There
is nothing in the enumeration that runs contrary to, or expands, the concept of a fortuitous event under
Article 1174.
Furthermore, under Article 130626 of the Civil Code, parties to a contract may establish such stipulations,
clauses, terms and conditions as they may deem fit, as long as the same do not run counter to the law,
morals, good customs, public order or public policy.27 ςrνll

Article 1159 of the Civil Code also provides that [o]bligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith.28 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.29 ςrνll

Not being contrary to law, morals, good customs, public order, or public policy, Section 8 of the Agreement
which Philcomsat and Globe freely agreed upon has the force of law between them.30 ςrνll

In order that Globe may be exempt from non-compliance with its obligation to pay rentals under Section 8,
the concurrence of the following elements must be established: (1) the event must be independent of the
human will; (2) the occurrence must render it impossible for the debtor to fulfill the obligation in a normal
manner; and (3) the obligor must be free of participation in, or aggravation of, the injury to the
creditor.31 ςrνll

The Court agrees with the Court of Appeals and the trial court that the abovementioned requisites are
present in the instant case. Philcomsat and Globe had no control over the non-renewal of the term of the
RP-US Military Bases Agreement when the same expired in 1991, because the prerogative to ratify the
treaty extending the life thereof belonged to the Senate. Neither did the parties have control over the
subsequent withdrawal of the US military forces and personnel from Cubi Point in December
1992:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Obviously the non-ratification by the Senate of the RP-US Military Bases Agreement (and its Supplemental
Agreements) under its Resolution No. 141. (Exhibit 2) on September 16, 1991 is beyond the control of the
parties. This resolution was followed by the sending on December 31, 1991 o[f] a Note Verbale (Exhibit
3) by the Philippine Government to the US Government notifying the latter of the formers termination of
the RP-US Military Bases Agreement (as amended) on 31 December 1992 and that accordingly, the
withdrawal of all U.S. military forces from Subic Naval Base should be completed by said date. Subsequently,
defendant [Globe] received a formal order from Cdr. Walter F. Corliss II Commander USN dated July 31,
1992 and a notification from ATT dated July 29, 1992 to terminate the provision of T1s services (via an IBS
Standard B Earth Station) effective November 08, 1992. Plaintiff [Philcomsat] was furnished with copies of
the said order and letter by the defendant on August 06, 1992.

Resolution No. 141 of the Philippine Senate and the Note Verbale of the Philippine Government to the US
Government are acts, direction or request of the Government of the Philippines and circumstances beyond
the control of the defendant. The formal order from Cdr. Walter Corliss of the USN, the letter notification
from ATT and the complete withdrawal of all the military forces and personnel from Cubi Point in the year-
end 1992 are also acts and circumstances beyond the control of the defendant.

Considering the foregoing, the Court finds and so holds that the afore-narrated circumstances constitute
force majeure or fortuitous event(s) as defined under paragraph 8 of the Agreement.

From the foregoing, the Court finds that the defendant is exempted from paying the rentals for the facility
for the remaining term of the contract.

As a consequence of the termination of the RP-US Military Bases Agreement (as amended) the continued
stay of all US Military forces and personnel from Subic Naval Base would no longer be allowed, hence,
plaintiff would no longer be in any position to render the service it was obligated under the Agreement. To
put it blantly (sic), since the US military forces and personnel left or withdrew from Cubi Point in the year
end December 1992, there was no longer any necessity for the plaintiff to continue maintaining the IBS
facility.32 (Emphasis in the original.)
The aforementioned events made impossible the continuation of the Agreement until the end of its five-year
term without fault on the part of either party. The Court of Appeals was thus correct in ruling that the
happening of such fortuitous events rendered Globe exempt from payment of rentals for the remainder of
the term of the Agreement.

Moreover, it would be unjust to require Globe to continue paying rentals even though Philcomsat cannot be
compelled to perform its corresponding obligation under the Agreement. As noted by the appellate
court:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

We also point out the sheer inequity of PHILCOMSATs position. PHILCOMSAT would like to charge GLOBE
rentals for the balance of the lease term without there being any corresponding telecommunications service
subject of the lease.It will be grossly unfair and iniquitous to hold GLOBE liable for lease charges for a
service that was not and could not have been rendered due to an act of the government which was clearly
beyond GLOBEs control. The binding effect of a contract on both parties is based on the principle that the
obligations arising from contracts have the force of law between the contracting parties, and there must be
mutuality between them based essentially on their equality under which it is repugnant to have one party
bound by the contract while leaving the other party free therefrom (Allied Banking Corporation v. Court
of Appeals, 284 SCRA 357 ). 33 ςrνll

With respect to the issue of whether Globe is liable for payment of rentals for the month of December 1992,
the Court likewise affirms the appellate courts ruling that Globe should pay the same.

Although Globe alleged that it terminated the Agreement with Philcomsat effective 08 November 1992
pursuant to the formal order issued by Cdr. Corliss of the US Navy, the date when they actually ceased
using the earth station subject of the Agreement was not established during the trial.34 However, the trial
court found that the US military forces and personnel completely withdrew from Cubi Point only on 31
December 1992.35 Thus, until that date, the USDCA had control over the earth station and had the option
of using the same. Furthermore, Philcomsat could not have removed or rendered ineffective said
communication facility until after 31 December 1992 because Cubi Point was accessible only to US naval
personnel up to that time. Hence, the Court of Appeals did not err when it affirmed the trial courts ruling
that Globe is liable for payment of rentals until December 1992.

Neither did the appellate court commit any error in holding that Philcomsat is not entitled to attorneys fees
and exemplary damages.

The award of attorneys fees is the exception rather than the rule, and must be supported by factual, legal
and equitable justifications.36 In previously decided cases, the Court awarded attorneys fees where a party
acted in gross and evident bad faith in refusing to satisfy the other partys claims and compelled the former
to litigate to protect his rights;37 when the action filed is clearly unfounded,38 or where moral or exemplary
damages are awarded.39 However, in cases where both parties have legitimate claims against each other
and no party actually prevailed, such as in the present case where the claims of both parties were sustained
in part, an award of attorneys fees would not be warranted.40 ςrνll

Exemplary damages may be awarded in cases involving contracts or quasi-contracts, if the erring party
acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.41 In the present case, it was not
shown that Globe acted wantonly or oppressively in not heeding Philcomsats demands for payment of
rentals. It was established during the trial of the case before the trial court that Globe had valid grounds for
refusing to comply with its contractual obligations after 1992.

WHEREFORE, the Petitions are DENIED for lack of merit. The assailed Decision of the Court of Appeals in
CA-G.R. CV No. 63619 is AFFIRMED.

SO ORDERED.
 G.R. No. 117009 October 11, 1995

SECURITY BANK & TRUST COMPANY and ROSITO C. MANHIT, petitioners,

vs.
COURT OF APPEALS and YSMAEL C. FERRER, respondents.

PADILLA, J.:

In this petition for review under Rule 45 of the Rules of Court, petitioners seek a review and reversal of the decision * of
respondent Court of Appeals in CA-G.R. CV No. 40450, entitled "Ysmael C. Ferrer v. Security Bank and Trust Company,
et. al." dated 31 August 1994, which affirmed the decision ** of the Regional Trial Court, Branch 63, Makati in Civil Case
No. 42712, a complaint for breach of contract with damages.

Private respondent Ysmael C. Ferrer was contracted by herein petitioners Security Bank and Trust Company (SBTC) and
Rosito C. Manhit to construct the building of SBTC in Davao City for the price of P1,760,000.00. The contract dated 4
February 1980 provided that Ferrer would finish the construction in two hundred (200) working days. Respondent Ferrer
was able to complete the construction of the building on 15 August 1980 (within the contracted period) but he was compelled
by a drastic increase in the cost of construction materials to incur expenses of about P300,000.00 on top of the original cost.
The additional expenses were made known to petitioner SBTC thru its Vice-President Fely Sebastian and Supervising
Architect Rudy de la Rama as early as March 1980. Respondent Ferrer made timely demands for payment of the increased
cost. Said demands were supported by receipts, invoices, payrolls and other documents proving the additional expenses.

In March 1981, SBTC thru Assistant Vice-President Susan Guanio and a representative of an architectural firm consulted
by SBTC, verified Ferrer's claims for additional cost. A recommendation was then made to settle Ferrer's claim but only for
P200,000.00. SBTC, instead of paying the recommended additional amount, denied ever authorizing payment of any
amount beyond the original contract price. SBTC likewise denied any liability for the additional cost based on Article IX of
the building contract which states:

If at any time prior to the completion of the work to be performed hereunder, increase in prices of
construction materials and/or labor shall supervene through no fault on the part of the contractor whatsoever
or any act of the government and its instrumentalities which directly or indirectly affects the increase of the
cost of the project, OWNER shall equitably make the appropriate adjustment on mutual agreement of both
parties.

Ysmael C. Ferrer then filed a complaint for breach of contract with damages. The trial court ruled for Ferrer and ordered
defendants SBTC and Rosito C. Manhit to pay:

a) P259,417.23 for the increase in price of labor and materials plus 12% interest thereon per annumfrom
15 August 1980 until fully paid;

b) P24,000.00 as actual damages;

c) P20,000.00 as moral damages;

d) P20,000.00 as exemplary damages;

e) attorney's fees equivalent to 25% of the principal amount due; and

f) costs of suit.

On appeal, the Court of Appeals affirmed the trial court decision.

In the present petition for review, petitioners assign the following errors to the appellate court:

. . . IN HOLDING THAT PLAINTIFF-APPELLEE HAS, BY PREPONDERANCE OF EVIDENCE

SUFFICIENTLY PROVEN HIS CLAIM AGAINST THE DEFENDANTS-APPELLANTS.
 . . . IN INTERPRETING AN OTHERWISE CLEAR AND UNAMBIGUOUS PROVISION OF THE
CONSTRUCTION CONTRACT.

. . . IN DISREGARDING THE EXPRESS PROVISION OF THE CONSTRUCTION CONTRACT, THE

LOWER COURT VIOLATED DEFENDANTS-APPELLANTS' CONSTITUTIONAL GUARANTY OF NON
IMPAIRMENT OF THE OBLIGATION OF CONTRACT.1

Petitioners argue that under the aforequoted Article IX of the building contract, any increase in the price of labor and/or
materials resulting in an increase in construction cost above the stipulated contract price will not automatically make
petitioners liable to pay for such increased cost, as any payment above the stipulated contract price has been made subject
to the condition that the "appropriate adjustment" will be made "upon mutual agreement of both parties". It is contended that
since there was no mutual agreement between the parties, petitioners' obligation to pay amounts above the original contract
price never materialized.

Respondent Ysmael C. Ferrer, through counsel, on the other hand, opposed the arguments raised by petitioners. It is of
note however that the pleadings filed with this Court by counsel for Ferrer hardly refute the arguments raised by petitioners,
as the contents of said pleadings are mostly quoted portions of the decision of the Court of Appeals, devoid of adequate
discussion of the merits of respondent's case. The Court, to be sure, expects more diligence and legal know-how from
lawyers than what has been exhibited by counsel for respondent in the present case. Under these circumstances, the Court
had to review the entire records of this case to evaluate the merits of the issues raised by the contending parties.

Article 22 of the Civil Code which embodies the maxim, Nemo ex alterius incommodo debet lecupletari (no man ought to be
made rich out of another's injury) states:

Art. 22. Every person who through an act of performance by another, or any other means, acquires or
comes into possession of something at the expense of the latter without just or legal ground, shall return
the same to him.

The above-quoted article is part of the chapter of the Civil Code on Human Relations, the provisions of which were
formulated as "basic principles to be observed for the rightful relationship between human beings and for the stability of the
social order, . . . designed to indicate certain norms that spring from the fountain of good conscience, . . . guides for human
conduct [that] should run as golden threads through society to the end that law may approach its supreme ideal which is
the sway and dominance of justice." 2

In the present case, petitioners' arguments to support absence of liability for the cost of construction beyond the original
contract price are not persuasive.

Under the previously quoted Article IX of the construction contract, petitioners would make the appropriate adjustment to
the contract price in case the cost of the project increases through no fault of the contractor (private respondent). Private
respondent informed petitioners of the drastic increase in construction cost as early as March 1980.

Petitioners in turn had the increased cost evaluated and audited. When private respondent demanded payment of
P259,417.23, petitioner bank's Vice-President Rosito C. Manhit and the bank's architectural consultant were directed by the
bank to verify and compute private respondent's claims of increased cost. A recommendation was then made to settle
private respondent's claim for P200,000.00. Despite this recommendation and several demands from private respondent,
SBTC failed to make payment. It denied authorizing anyone to make a settlement of private respondent's claim and likewise
denied any liability, contending that the absence of a mutual agreement made private respondent's demand premature and
baseless.

Petitioners' arguments are specious.

It is not denied that private respondent incurred additional expenses in constructing petitioner bank's building due to a drastic
and unexpected increase in construction cost. In fact, petitioner bank admitted liability for increased cost when a
recommendation was made to settle private respondent's claim for P200,000.00. Private respondent's claim for the
increased amount was adequately proven during the trial by receipts, invoices and other supporting documents.

Under Article 1182 of the Civil Code, a conditional obligation shall be void if its fulfillment depends upon the sole will of the
debtor. In the present case, the mutual agreement, the absence of which petitioner bank relies upon to support its non-
liability for the increased construction cost, is in effect a condition dependent on petitioner bank's sole will, since private
respondent would naturally and logically give consent to such an agreement which would allow him recovery of the
increased cost.

Further, it cannot be denied that petitioner bank derived benefits when private respondent completed the construction even
at an increased cost.

Hence, to allow petitioner bank to acquire the constructed building at a price far below its actual construction cost would
undoubtedly constitute unjust enrichment for the bank to the prejudice of private respondent. Such unjust enrichment, as
previously discussed, is not allowed by law.

Finally, with respect to the award of attorney's fees to respondent, the Court has previously held that, "even with the
presence of an agreement between the parties, the court may nevertheless reduce attorney's fees though fixed in the
contract when the amount thereof appears to be unconscionable or unreasonable."3 As previously noted, the diligence and
legal know-how exhibited by counsel for private respondent hardly justify an award of 25% of the principal amount due,
which would be at least P60,000.00. Besides, the issues in this case are far from complex and intricate. The award of
attorney's fees is thus reduced to P10,000.00.

WHEREFORE, with the above modification in respect of the amount of attorney's fees, the appealed decision of the Court
of Appeals in CA G.R. CV No. 40450 is AFFIRMED.

SO ORDERED.
 G.R. No. 174012 November 14, 2008

MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs.
BENJAMIN TUDTUD, BIENVENIDO TUDTUD, DAVID TUDTUD, JUSTINIANO BORGA, JOSE BORGA, and FE DEL
ROSARIO, represented by LYDIA ADLAWAN, Attorney-in-fact, respondents.

DECISION

CARPIO MORALES, J.:

The predecessors-in-interest of respondents Benjamin Tudtud et al. were the owners of a parcel of land in Cebu City,
identified as Lot No. 988 of the Banilad Estate and covered by Transfer Certificate of Title (TCT) No. 27692.

In 1949, the National Airports Corporation (NAC), a public corporation of the Republic of the Philippines, embarked on a
program to expand the Cebu Lahug Airport. For this purpose, it sought to acquire, by negotiated sale or expropriation,
several lots adjoining the then existing airport.

By virtue of a judgment rendered by the third branch of the Court of First Instance in Civil Case No. R-1881, the NAC
acquired Lot No. 988, among other lots. TCT No. 26792 covering Lot No. 988 was thus cancelled and TCT No. 27919 was
issued in its stead in the name of the Republic of the Philippines. No structures related to the operation of the Cebu Lahug
Airport were constructed on Lot No. 988.

Lot No. 988 was later transferred to the Air Transport Office (ATO), and still later to petitioner Mactan Cebu International
Airport Authority (MCIAA) in 1990 via Republic Act No. 6958.

When the Mactan International Airport at Lapu Lapu City was opened for commercial flights, the Cebu Lahug Airport was
closed and abandoned and a significant area thereof was purchased by the Cebu Property Ventures, Inc. for development
as a commercial complex.

By letter of October 7, 1996 to the general manager of the MCIAA, Lydia Adlawan, acting as attorney-in-fact of the original
owners of Lot No. 988, demanded to repurchase the lot at the same price paid at the time of the taking, without interest, no
structures or improvements having been erected thereon and the Cebu Lahug Airport having been closed and abandoned,
hence, the purpose for which the lot was acquired no longer existed.1

As the demand remained unheeded, respondents, represented by their attorney-in-fact Lydia Adlawan, filed a
Complaint2before the Regional Trial Court (RTC) of Cebu City, docketed as Civil Case No. CEB-19464, for reconveyance
and damageswith application for preliminary injunction/restraining order against the MCIAA.

Respondents anchored their complaint on the assurance they claimed was made by the NAC that the original owners and/or
their successors-in-interest would be entitled to repurchase the lot when and in the event that it was no longer used for
airport purposes.3

In its Answer with Counterclaim,4 the MCIAA countered that, inter alia, the decision in Civil Case No. R-1881 did not lay any
condition that the lots subject of expropriation would revert to their owners in case the expansion of the Cebu Lahug Airport
would not materialize.5

To prove their claim, respondents presented witnesses who testified that the NAC promised their predecessors-in-interest-
original owners of Lot No. 988 that it would be returned to them should the expansion of the Cebu Lahug Airport not
materialize.6 And respondents invoked this Court's ruling in MCIAA v. Court of Appeals7 involving another lot acquired by
the NAC for the expansion of the Cebu Lahug Airport. In that case, although the deed of sale between the therein respondent
Melba Limbaco's predecessor-in-interest and NAC did not contain a provision for the repurchase of the therein subject lot
should the purpose for its acquisition ceased to exist, this Court allowed Melba Limbaco to recover the lot based on parole
evidence that the NAC promised the right of repurchase to her predecessor-in-interest.8

The MCIAA disputed the applicability to the present case of the immediately-cited MCIAA ruling, the NAC having acquired
Lot No. 988 not by a deed of sale but by virtue of a final judicial decree of expropriation which cannot be modified by parole
evidence.9
After trial, Branch 20 of the Cebu City RTC rendered judgment in favor of respondents, disposing as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiffs as against

defendant ordering the latter to reconvey the entire subject real property covered by T.C.T. No. 27919 within 15
days from receipt of this decision.

SO ORDERED.10 (Underscoring supplied)

On appeal,11 the Court of Appeals, by Decision of May 8, 200612 affirmed the RTC decision. Its Motion for
Reconsideration13having been denied,14 the MCIAA filed the present petition,15 faulting the appellate court in "disregarding"
the following considerations:

I.

THE JUDGMENT OF EXPROPRIATION IN CIVIL CASE NO. R-1881 WAS ABSOLUTE AND UNCONDITIONAL.

II.

RESPONDENTS' CLAIM OF ALLEGED VERBAL ASSURANCES FROM THE GOVERNMENT VIOLATES THE
STATUTE OF FRAUDS.

III.

THE BEST EVIDENCE SHOWING THE UNCONDITIONAL ACQUISITION OF LOT 988 IS THE CERTIFICATE OF
TITLE.16 (Underscoring supplied)

In insisting that the judgment in Civil Case No. R-1881 was absolute and unconditional, the MCIAA cites Fery v. Municipality
of Cabanatuan17 which held that:

x x x If x x x the decree of expropriation gives to the entity a fee simple title, then, of course, the land becomes the
absolute property of the expropriator, whether it be the State, a province, or municipality, and in that case the non-
user does not have the effect of defeating the title acquired by the expropriation proceedings.

When land has been acquired for public use in fee simple, unconditionally, either by the exercise of eminent domain
or by purchase, the former owner retains no rights in the land, and the public use may be abandoned, or the land
may be devoted to a different use, without any impairment of the estate or title acquired, or any reversion to the
former owner.18 (Italics in the original; underscoring supplied)

MCIAA in fact offers the text of the trial court's decision in R-1881, inviting attention to the dispositive portion thereof, to
prove that the judgment of expropriation entered in favor of the government is absolute and unconditional, and that there is
nothing in the decision that would show that the government made any assurance or stipulation whatsoever to reconvey
the subject lot in case the expansion of the Lahug airport would not materialize.19

But also in Fery, this Court, passing on the question of whether a private land which is expropriated for a particular public
use, but which particular public use is abandoned, may be returned to its former owner, held:

The answer to that question depends upon the character of the title acquired by the expropriator x x x. If, for
example, land is expropriated for a particular purpose, with the condition that when that purpose is ended or
abandoned the property shall return to its former owner, then, of course, when the purpose is terminated or
abandoned, the former owner reacquires the property so expropriated. If, for example, land is expropriated for a
public street and the expropriation is granted upon conditions that the city can only use it for a public street, then,
of course, when the city abandons its use as a public street, it returns to the former owner, unless there is some
statutory provision to the contrary.20 (Underscoring supplied)

That nothing in the trial court's decision in Civil Case No. R-1881 indicates a condition attached to the expropriation of the
subject lot, this Court, in Heirs of Timoteo Moreno v. MCIAA21 involving the rights of another former owner of lots also
involved in Civil Case No. R-1881, noting the following portion of the body of the said trial court's decision:
 As for the public purpose of the expropriation proceeding, it cannot now be doubted. Although the Mactan Airport
is being constructed, it does not take away the actual usefulness and importance of the Lahug Airport: it is handling
the air traffic both civilian and military. From it aircrafts fly to Mindanao and Visayas and pass through it on their
return flights to the North and Manila. Then, no evidence was adduced to show how soon is the Mactan Airport to
be placed in operation and whether the Lahug Airport will be closed immediately thereafter. It is for the other
departments of the Government to determine said matters. The Court cannot substitute its judgment for those of
the said departments and agencies. In the absence of such a showing, the Court will presume that the Lahug Airport
will continue to be in operation,22

held:

While the trial court in Civil Case No. R-1881 could have simply acknowledged the presence of public purpose for
the exercise of eminent domain regardless of the survival of Lahug Airport, the trial court in its Decision chose not
to do so but instead prefixed its finding of public purpose upon its understanding that "Lahug Airport will continue to
be in operation." Verily, these meaningful statements in the body of the Decision warrant the conclusion that the
expropriated properties would remain to be so until it was confirmed that Lahug Airport was no longer "in operation".
This inference further implies two (2) things: (a) after the Lahug Airport ceased its undertaking as such and the
expropriated lots were not being used for any airport expansion project, the rights vis-à-vis the expropriated Lots
Nos. 916 and 920 as between the State and their former owners, petitioners herein, must be equitably adjusted;
and, (b) the foregoing unmistakable declarations in the body of the Decision should merge with and become
an intrinsic part of the fallo thereof which under the premises is clearly inadequate since the dispositive
portion is not in accord with the findings as contained in the body thereof.23

On the Heirs of Moreno's motion for reconsideration, this Court affirmed its decision, emphasizing that "the fallo of the
decision in Civil Case No. R-1881 must be read in reference to the other portions of the decision in which it forms a
part[,]"24and that "[a] reading of the Court's judgment must not be confined to the dispositive portion alone; rather, it should
be meaningfully construed in unanimity with the ratio decidendi thereof to grasp the true intent and meaning of a decision."25

The MCIAA goes on, however, to cite MCIAA v. Court of Appeals and Chiongbian26 wherein this Court rejected testimonial
evidence of an assurance of a right to repurchase property acquired by the NAC under the judgment in still the same Civil
Case No. R-1881. The MCIAA's reliance on this case is misplaced. As this Court noted in Heirs of Timoteo Moreno v.
MCIAA,27 the respondent Chiongbian put forth inadmissible and inconclusive evidence, Chiongbian's testimony as well as
that of her witness as to the existence of the agreement being hearsay.28

In contrast, in the case at bar, respondents' witness respondent Justiniano Borga himself, who represented his mother-one
of the original owners of subject lot during the negotiations between the NAC and the landowners, declared that the original
owners did not oppose the expropriation of the lot upon the assurance of the NAC that they would reacquire it if it is no
longer needed by the airport.29

Another witness for respondent, Eugenio Amores, an employee of the NAC, declared that in the course of some meetings
with the landowners when he accompanied the NAC legal team and was requested to jot down what transpired thereat, he
personally heard the NAC officials give the assurance claimed by respondents.30

The MCIAA nevertheless urges this Court to reject respondents' testimonial evidence, citing Article 1403 (2)(e) of the Civil
Code which places agreements for the sale of real property or an interest therein within the coverage of the Statute of
Frauds.

The Statute of Frauds applies, however, only to executory contracts.31 It does not apply to contracts which have been
completely or partially performed,32 the rationale thereof being as follows:

x x x In executory contracts there is a wide field for fraud because unless they be in writing there is no palpable
evidence of the intention of the contracting parties. The statute has precisely been enacted to prevent fraud.
However, if a contract has been totally or partially performed, the exclusion of parol evidence would promote fraud
or bad faith, for it would enable the defendant to keep the benefits already delivered by him from the transaction in
litigation, and, at the same time, evade the obligations, responsibilities or liabilities assumed or contracted by him
thereby.33(Underscoring supplied)

A word on MCIAA's argument that MCIAA v. Court of Appeals, supra, does not apply to the present case. As reflected in
the earlier-quoted ruling in Fery, the mode of acquisition for public purpose of a land - whether by expropriation or by
contract - is not material in determining whether the acquisition is with or without condition.
In fine, the decision in favor of respondents must be affirmed. The rights and duties between the MCIAA and respondents
are governed by Article 1190 of the Civil Code34 which provides:

When the conditions have for their purpose the extinguishment of an obligation to give, the parties, upon the
fulfillment of said conditions, shall return to each other what they have received.

In case of the loss, deterioration, or improvement of the thing, the provisions which, with respect to the debtor, are
laid down in the preceding article [Article 1189] shall be applied to the party who is bound to return.

xxxx

While the MCIAA is obliged to reconvey Lot No. 988 to respondents, respondents must return to the MCIAA what they
received as just compensation for the expropriation of Lot No. 988, plus legal interest to be computed from default,35 which
in this case runs from the time the MCIAA complies with its obligation to the respondents.36

Respondents must likewise pay the MCIAA the necessary expenses it may have incurred in sustaining Lot No. 988 and the
monetary value of its services in managing it to the extent that respondents were benefited thereby.

Following Article 118737 of the Civil Code, the MCIAA may keep whatever income or fruits it may have obtained from Lot
No. 988, and respondents need not account for the interests that the amounts they received as just compensation may
have earned in the meantime.

In accordance with the earlier-quoted Article 1190 of the Civil Code vis-à-vis Article 1189 which provides that "[i]f a thing is
improved by its nature, or by time, the improvement shall inure to the benefit of the creditor x x x," respondents, as creditors,
do not have to settle as part of the process of restitution the appreciation in value of Lot 988 which is a natural consequence
of nature and time.

WHEREFORE, the petition is, in light of the foregoing disquisition, DENIED. The May 8, 2006 Decision of the Court of
Appeals affirming that of Branch 20 of the Cebu City Regional Trial Court is AFFIRMED with MODIFICATION as follows:

1. Respondents are ORDERED to return to the MCIAA the just compensation they received for the expropriation of
Lot No. 988 plus legal interest in the case of default, to be computed from the time the MCIAA complies with its
obligation to reconvey Lot No. 988 to them;

2. Respondents are ORDERED to pay the MCIAA the necessary expenses it incurred in sustaining Lot No. 988
and the monetary value of its services to the extent that respondents were benefited thereby;

3. The MCIAA is ENTITLED to keep whatever fruits and income it may have obtained from Lot No. 988; and

4. Respondents are also ENTITLED to keep whatever interests the amounts they received as just compensation
may have earned in the meantime, as well as the appreciation in value of Lot No. 988 which is a natural
consequence of nature and time;

In light of the foregoing modifications, the case is REMANDED to Branch 20 the Regional Trial Court of Cebu City only for
the purpose of receiving evidence on the amounts that respondents will have to pay to the MCIAA in accordance with this
Court's decision.

SO ORDERED.
 [G.R. No. 23769. September 16, 1925. ]

SONG FO & COMPANY, Plaintiff-Appellee, v. HAWAIIAN PHILIPPINE CO., Defendant-Appellant.

Hilado & Hilado, Ross, Lawrence & Selph and Antonio T. Carrascoso, Jr., for Appellant.

Arroyo, Gurrea & Muller for Appellee.

SYLLABUS

1. CONTRACTS; SALES; INSTANT CASE. — The written contract examined and found to provide for the
delivery by the Hawaiian-Philippine Co. to Song Fo & Company of 300,000 gallons of molasses.

2. ID.; ID,.; ID.; PAYMENT. — The terms of payment fixed by the parties are controlling. The time of
payment stipulated for in the contract should be treated as of the essence of the contract.

3. ID.; ID.; ID.; ID.; RESCISSION. — The general rule is that rescission will not be permitted for a slight or
casual breach of the contract, but only for such breaches as are so substantial and fundamental as to defeat
the object of the parties in making the agreement.

4. ID.; ID.; ID.; ID.; ID. — A delay in payment for a small quantity of molasses for some twenty days is not
such a violation of an essential condition of the contract as warrants rescission for non-performance.

5. ID.; ID.; ID.; MEASURE OF DAMAGES FOR BREACH OF CONTRACT. — The facts examined and Song Fo
& Company allowed P3,000 on account of the greater expense to which it was put in being compelled to
secure molasses in the open market.

6. ID.; ID.; ID. — The facts examined and Song Fo & Company allowed nothing for lost profits on account
of the breach of the contract, because of failure of proof.

DECISION

MALCOLM, J. :

In the Court of First Instance of Iloilo, Song Fo & Company, plaintiff, presented a complaint with two causes
of action for breach of contract against the Hawaiian-Philippine Co., defendant, in which judgment was asked
for P70,369.50, with legal interest, and costs. In an amended answer and cross-complaint, the defendant
set up the special defense that since the plaintiff had defaulted in the payment for the molasses delivered
to it by the defendant under the contract between the parties, the latter was compelled to cancel and rescind
the said contract. The case was submitted for decision on a stipulation of facts and the exhibits therein
mentioned. The judgment of the trial court condemned the defendant to pay for the plaintiff a total of
P35,317.93, with legal interest from the date of the presentation of the complaint, and with costs.

From the judgment of the Court of First Instance the defendant only has appealed. In this court it has made
the following assignment of errors: "I. The lower court erred in finding that the appellant had agreed to sell
to the appellee 400,000, and not only 300,000, gallons of molasses. II. The lower court erred in finding that
the appellant rescinded without sufficient cause the contract for the sale of molasses executed by it and the
appellee. III. The lower court erred in rendering judgment in favor of the appellee and not in favor of the
appellant in accordance with the prayer of its answer and cross-complaint. IV. The lower court erred in
denying appellant’s motion for a new trial." The specified errors raise three questions which we will consider
in the order suggested by the Appellant.

1. Did the defendant agree to sell to the plaintiff 400,000 gallons of molasses or 300,000 gallons of
molasses? The trial court found the former amount to be correct. The appellant contends that the smaller
amount was the basis of the agreement.
The contract of the parties is in writing. It is found principally in the documents, Exhibits F and G. The first
mentioned exhibit is a letter addressed by the administrator of the Hawaiian-Philippine Co. to Song Fo &
Company on December 13, 1922. It reads:jgc:chanrobles.com.ph

"SILAY, OCC. NEGROS, P. I.

"December 13, 1922.

"MESSRS. SONG FO AND CO.

"Iloilo, Iloilo.

"DEAR SIRS: Confirming our conversation we had today with your Mr. Song Fo, who visited this Central, we
wish to state as follows:jgc:chanrobles.com.ph

"He agreed to the delivery of 300,000 gallons of molasses at the same price as last year under the same
condition, and the same to start after the completion of our grinding season. He requested if possible to let
you have molasses during January, February and March or in other words, while we are grinding, and we
agreed with him that we would to the best of our ability, altho we are somewhat handicapped. But we
believe we can let you have 25,000 gallons during each of the milling months, altho it interfere with the
shipping of our own and planters sugars to Iloilo. Mr. Song Fo also asked if we could supply him with another
100,000 gallons of molasses, and we stated we believe that this is possible and will do our best to let you
have these extra 100,000 gallons during the next year the same to be taken by you before November 1st,
1923, along with the 300,000, making 400,000 gallons in all.

"Regarding the payment for our molasses, Mr. Song Fo gave us to understand that you would pay us at the
end of each month for molasses delivered to you.

"Hoping that this is satisfactorily and awaiting your answer regarding this matter, we remain.

"Yours very truly,

"HAWAIIAN-PHILIPPINE COMPANY

"By: R.C. PITCAIRN

"Administrator."cralaw virtua1aw library

Exhibit G is the answer of the manager of Song Fo & Company to the Hawaiian-Philippine Co. on December
16, 1922. This letter reads:jgc:chanrobles.com.ph

"December 16th, 1922.

"MESSRS. HAWAIIAN-PHILIPPINE CO.,

"Silay, Neg. Occ., P. I.

"DEAR SIRS: We are in receipt of your favors dated the 9th and the 13th inst. and understood all their
contents.

"In connection to yours of the 13th inst, we regret to hear that you mentioned Mr. Song Fo the one who
visited your Central, but it was not for he was Mr. Song Heng, the representative and the manager of Messrs.
Song Fo & Co.

"With reference to the contents of your letter dated the 13th inst. we confirm all the arrangements you have
stated and in order to make the contract clear, we hereby quote below our old contract as amended, as per
our new arrangements.

"(a) Price, at 2 cents per gallon delivered at the central.

"(b) All handling charges and expenses at the central and at the dock at Mambaguid for our account.

"(c) For services of one locomotive and flat cars necessary for our six tanks at the rate of P48 for the round
trip dock to central and central to dock. This service to be restricted to one trip for the six tanks.

"Yours very truly,

"SONG FO & COMPANY

"By__________________

"Manager."cralaw virtua1aw library

We agree with appellant that the above quoted correspondence is susceptible of but one interpretation. The
Hawaiian-Philippine Co. agreed to deliver to Song Fo & Company 300,000 gallons of molasses. The Hawaiian-
Philippine Co. also believed it possible to accommodate Song Fo & Company by supplying the latter company
with an extra 100,000 gallons. But the language used with reference to the additional 100,000 gallons was
not a definite promise. Still less did it constitute an obligation.

If Exhibit T relied upon by the trial court shows anything, it is simply that the defendant did not consider
itself obliged to deliver to the plaintiff molasses in any amount. On the other hand, Exhibit A, a letter written
by the manager of Song Fo & Company on October 17, 1922, expressly mentions an understanding between
the parties of a contract for 300,000 gallons of molasses.

We sustain appellant’s point of view on the first question and rule that the contract between the parties
provided for the delivery by the Hawaiian-Philippine Co. to Song Fo & Company of 300,000 gallons of
molasses.

2. Had the Hawaiian-Philippine Co. the right to rescind the contract of sale made with Song Fo & Company?
The trial judge answers No, the appellant Yes.

Turning to Exhibit F, we note this sentence: "Regarding the payment for our molasses, Mr. Song Fo (Mr.
Song Heng) gave us to understand that you would pay us at the end of each month for molasses delivered
to you." In Exhibit G, we find Song Fo & Company stating that they understand the contents of Exhibit F,
and that they "confirm all the arrangements you have stated, and in order to make the contract clear, we
hereby quote below our old contract as amended, as per our new arrangements. (a) Price, at 2 cents per
gallon delivered at the central." In connection with the portion of the contract having reference to the
payment for the molasses, the parties have agreed on a table showing the date of delivery of the molasses,
the account and date thereof, the date of receipt of account by plaintiff, and date of payment. The table
mentioned is as follows:chanrob1es virtual 1aw library

xxx

Some doubt has risen as to when Song Fo & Company was expected to make payments for the molasses
delivered. Exhibit F speaks of payments "at the end of each month." Exhibit G is silent on the point. Exhibit
M, a letter of March 28, 1923, from Warner, Barnes & Co., Ltd., the agent of the Hawaiian-Philippine Co. to
Song Fo & Company, mentions "payment on presentation of bills for each delivery." Exhibit O, another letter
from Warner, Barnes & Co., Ltd. to Song Fo & Company dated April 2, 1923, is of a similar tenor. Exhibit P,
a communication sent direct by the Hawaiian-Philippine Co. to Song Fo & Company on April 2, 1923, by
which the Hawaiian-Philippine Co. gave notice of the termination of the contract, gave as the reason for the
rescission, the breach of Song Fo & Company of this condition: "You will recall that under the arrangements
made for taking our molasses, you were to meet our accounts upon presentation and at each delivery." Not
far removed from this statement, is the allegation of plaintiff in its complaint that "plaintiff agreed to pay
defendant, at the end of each month upon presentation of accounts."cralaw virtua1aw library

Resolving such ambiguity as exists and having in mind ordinary business practice, a reasonable deduction
is that Song Fo & Company was to pay the Hawaiian-Philippine Co. upon presentation of accounts at the
end of each month. Under this hypothesis, Song Fo & Company should have paid for the molasses delivered
in December, 1922, and for which accounts were received by it on January 5, 1923, not later than January
31 of that year. Instead, payment was not made until February 20, 1923. All the rest of the molasses was
paid for either on time or ahead of time.

The terms of payment fixed by the parties are controlling. The time of payment stipulated for in the contract
should be treated as of the essence of the contract. Theoretically, agreeable to certain conditions which
could easily be imagined, the Hawaiian-Philippine Co. would have had the right to rescind the contract
because of the breach of Song Fo & Company. But actually, there is her present no outstanding fact which
would legally sanction the rescission of the contract by the Hawaiian-Philippine Co.

The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only
for such breaches as are so substantial and fundamental as to defeat the object of the parties in making the
agreement. A delay in payment for a small quantity of molasses for some twenty days is not such a violation
of an essential condition of the contract as warrants rescission for non-performance. Not only this, but the
Hawaiian-Philippine Co. waived this condition when it arose by accepting payment of the overdue accounts
and continuing with the contract. Thereafter, Song Fo & Company was not in default in payment so that the
Hawaiian-Philippine Co. had in reality no excuse for writing its letter of April 2, 1923, cancelling the contract.
(Warner, Barnes & Co. v. Inza [1922], 43 Phil., 505.)

We rule that the appellant had no legal right to rescind the contract of sale because of the failure of Song
Fo & Company to pay for the molasses within the time agreed upon by the parties. We sustain the finding
of the trial judge in this respect.

3. On the basis first, of a contract for 300,000 gallons of molasses, and second, of a contract imprudently
breached by the Hawaiian-Philippine Co., what is the measure of damages? We again turn to the facts as
agreed upon by the parties.

The first cause of action of the plaintiff is based on the greater expense to which it was put in being compelled
to secure molasses from other sources. Three hundred thousand gallons of molasses was the total of the
agreement, as we have seen. As conceded by the plaintiff 55,006 gallons of molasses were delivered by the
defendant to the plaintiff before the breach. This leaves 244,994 gallons of molasses undelivered which the
plaintiff had to purchase in the open market. As expressly conceded by the plaintiff at page 25 of its brief
100,000 gallons of molasses were secured from the Central North Negros Sugar Co., Inc., at two centavos
a gallon. As this is the same price specified in the contract between the plaintiff and the defendant, the
plaintiff accordingly suffered no material loss in having to make this purchase. So 244,994 gallons minus
the 100,000 gallons just mentioned leaves as a result 144,994 gallons. As to this amount, the plaintiff
admits that it could have secured it and more than the Central Victorias Milling Company one and one-half
centavos per gallon. In other words, the plaintiff had to pay the Central Victorias Milling Company one and
one-half centavos a gallon more for the molasses than it would have had to pay the Hawaiian-Philippine Co.
Translated into pesos and centavos, this meant a loss to the plaintiff of approximately P2,174.91. As the
conditions existing at the central of the Hawaiian-Philippine Co. may have been different than those found
at the Central North Negros Sugar Co., Inc., and the Central Victorias Milling Company, and as not alone
through the delay but through expenses of transportation and incidental expenses, the plaintiff may have
been put to greater cost in making the purchase of the molasses in the open market, we would concede
under the first cause of action in round figures P3,000.

The second cause of action relates to lost profits on account of the breach of the contract. The only evidence
in the record on this question is the stipulation of counsel to the effect that had Mr. Song Heng, the manager
of Song Fo & Company, been called as a witness, he would have testified that the plaintiff would have
realized a profit of P14,948.43, if the contract of December 13, 1922, had been fulfilled by the defendant.
Indisputably, this statement falls far short of presenting proof on which to make a finding as to damages.

In the first place, the testimony which Mr. Song Heng would have given undoubtedly would follow the same
line of thought as found in the decision of the trial court, which we have found to be unsustainable. In the
second place, had Mr. Song Heng taken the witness-stand and made the statement attributed to him, it
would have been insufficient proof of the allegations of the complaint, and the fact that it is a part of the
stipulation by counsel does not change this result. And lastly, the testimony of the witness Song Heng, if
we may dignify it as such, is a mere conclusion, not a proven fact. As to what items make up the more than
P14,000 of alleged lost profits, whether loss of sales or loss of customers, or what not, we have no means
of knowing.

We rule that the plaintiff is entitled to recover damages from the defendant for breach of contract on the
first cause of action in the amount of P3,000 and on the second cause of action in no amount. Appellant’s
assignments of error are accordingly found to be well in taken in part and not well taken in part.

Agreeable to the foregoing, the judgment appealed from shall be modified and the plaintiff shall have and
recover from the defendant the sum of P3,000, with legal interest from October 2, 1923, until payment.
Without special finding as to costs in either instance, it is ordered.

G.R. No. 167519, January 14, 2015

THE WELLEX GROUP, INC., Petitioner, v. U-LAND AIRLINES, CO., LTD., Respondent.

DECISION

LEONEN, J.:

This is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court. The Wellex Group, Inc.
(Wellex) prays that the Decision2 dated July 30, 2004 of the Court of Appeals in CA-G.R. CV No. 74850 be
reversed and set aside.3

The Court of Appeals affirmed the Decision4 of the Regional Trial Court, Branch 62 of Makati City in Civil
Case No. 99-1407. The Regional Trial Court rendered judgment in favor of U-Land Airlines, Co., Ltd. (U-
Land) and ordered the rescission of the Memorandum of Agreement5 between Wellex and U-Land.6

Wellex is a corporation established under Philippine law and it maintains airline operations in the
Philippines.7 It owns shares of stock in several corporations including Air Philippines International
Corporation (APIC), Philippine Estates Corporation (PEC), and Express Savings Bank (ESB).8 Wellex alleges
that it owns all shares of stock of Air Philippines Corporation (APC).9

U-Land Airlines Co. Ltd. (U-Land) “is a corporation duly organized and existing under the laws of Taiwan,
registered to do business . . . in the Philippines.”10 It is engaged in the business of air transportation in
Taiwan and in other Asian countries.11

On May 16, 1998, Wellex and U-Land entered into a Memorandum of Agreement12 (First Memorandum of
Agreement) to expand their respective airline operations in Asia.13

Terms of the First Memorandum of Agreement

The preambular clauses of the First Memorandum of Agreement state:

WHEREAS, U-LAND is engaged in the business of airline transportation in Taiwan, Philippines and/or in other
countries in the Asian region, and desires to expand its operation and increase its market share by, among
others, pursuing a long-term involvement in the growing Philippine airline industry;

WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its majority-
owned subsidiary Air Philippines International Corporation and the latter’s subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in the Asian regional markets, a
Memorandum of Agreement on ______, a certified copy of which is attached hereto as Annex “A” and is
hereby made an integral part hereof, which sets forth, among others, the basis for WELLEX’s present
ownership of shares in Air Philippines International Corporation.

WHEREAS, the parties recognize the opportunity to develop a long-term profitable relationship by combining
such of their respective resources in an expanded airline operation as well as in property development and
in other allied business activities in the Philippines, and desire to set forth herein the basic premises and
their understanding with respect to their joint cooperation and undertakings.14

In the First Memorandum of Agreement, Wellex and U-Land agreed to develop a long-term business
relationship through the creation of joint interest in airline operations and property development projects in
the Philippines.15 This long-term business relationship would be implemented through the following
transactions, stated in Section 1 of the First Memorandum of Agreement:

(a) U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES INTERNATIONAL CORPORATION
(“APIC”) equivalent to at least 35% of the outstanding capital stock of APIC, but in any case, not less than
1,050,000,000 shares . . . [;]

(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE ESTATES CORPORATION (“PEC”)
equivalent to at least 35% of the outstanding capital stock of PEC, but in any case, not less than 490,000,000
shares . . . [;]

(c) U-LAND shall enter into a joint development agreement with PEC . . . [; and]

(d) U-LAND shall be given the option to acquire from WELLEX shares of stock of EXPRESS SAVINGS BANK
(“ESB”) up to 40% of the outstanding capital stock of ESB . . . under terms to be mutually agreed.16

I. Acquisition of APIC and PEC shares

The First Memorandum of Agreement stated that within 40 days from its execution date, Wellex and U-Land
would execute a share purchase agreement covering U-Land’s acquisition of the shares of stock of both
APIC (APIC shares) and PEC (PEC shares).17 In this share purchase agreement, U-Land would purchase from
Wellex its APIC shares and PEC shares.18

Wellex and U-Land agreed to an initial purchase price of P0.30 per share of APIC and P0.65 per share of
PEC. However, they likewise agreed that the final price of the shares of stock would be reflected in the actual
share purchase agreement.19

Both parties agreed that the purchase price of APIC shares and PEC shares would be paid upon the execution
of the share purchase agreement and Wellex’s delivery of the stock certificates covering the shares of stock.
The transfer of APIC shares and PEC shares to U-Land was conditioned on the full remittance of the final
purchase price as reflected in the share purchase agreement. Further, the transfer was conditioned on the
approval of the Securities and Exchange Commission of the issuance of the shares of stock and the approval
by the Taiwanese government of U-Land’s acquisition of these shares of stock.20

Thus, Section 2 of the First Memorandum of Agreement reads:

2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless extended by mutual
agreement), U-LAND and WELLEX shall execute a Share Purchase Agreement (“SHPA”) covering the
acquisition by U-LAND of the APIC Shares and PEC Shares (collectively, the “Subject Shares”). Without
prejudice to any subsequent agreement between the parties, the purchase price for the APIC Shares to be
reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares at SIXTY
FIVE CENTAVOS (P0.65) per share.

The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full upon execution of
the SHPA against delivery of the Subject Shares. The parties may agree on such other terms and conditions
governing the acquisition of the Subject Shares to be provided in a separate instrument.

The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the purchase price reflected
in the SHPA has been fully paid; (ii) the Philippine Securities & Exchange Commission (SEC) shall have
approved the issuance of the Subject Shares; and (iii) any required approval by the Taiwanese government
of the acquisition by U-LAND of the Subject Shares shall likewise have been obtained.21

II. Operation and management of APIC/PEC/APC

U-Land was “entitled to a proportionate representation in the Board of Directors of APIC and PEC in
accordance with Philippine law.”22 Operational control of APIC and APC would be exercised jointly by Wellex
and U-Land “on the basis of mutual agreement and consultations.”23 The parties intended that U-Land would
gain primary control and responsibility for the international operations of APC.24Wellex manifested that APC
is a subsidiary of APIC in the second preambular clause of the First Memorandum of Agreement.25

Section 3 of the First Memorandum of Agreement reads:

3. Operation/Management of APIC/APC. - U-LAND shall be entitled to a proportionate representation in the

Board of Directors of APIC and PEC in accordance with Philippine law. For this purpose, WELLEX shall cause
the resignation of its nominated Directors in APIC and PEC to accommodate U-LAND’s pro rata number of
Directors. Subject to applicable Philippine law and regulations, operational control of APIC and Air Philippines
Corporation (“APC”) shall be lodged jointly to WELLEX and U-LAND on the basis of mutual agreement and
consultations. Further, U-LAND may second technical and other consultants into APIC and/or APC with the
view to increasing service, productivity and efficiency, identifying and implementing profit-service
opportunities, developing technical capability and resources, and installing adequate safety systems and
procedures. In addition, U-LAND shall arrange for the lease by APC of at least three (3) aircrafts owned by
U-LAND under such terms as the parties shall mutually agree upon. It is the intent of the parties that U-
LAND shall have primary control and responsibility for APC’s international operations.26

III. Entering into and funding a joint development agreement

Wellex and U-Land also agreed to enter into a joint development agreement simultaneous with the execution
of the share purchase agreement. The joint development agreement shall cover housing and other real
estate development projects.27

U-Land agreed to remit the sum of US$3 million not later than May 22, 1998. This sum was to serve as
initial funding for the development projects that Wellex and U-Land were to undertake pursuant to the joint
development agreement. In exchange for the US$3 million, Wellex would deliver stock certificates covering
57,000,000 PEC shares to U-Land.28

The execution of a joint development agreement was also conditioned on the execution of a share purchase
agreement.29

Section 4 of the First Memorandum of Agreement reads:

4. Joint Development Agreement with PEC. – Simultaneous with the execution of the SHPA, U-LAND and
PEC shall execute a joint development agreement (“JDA”) to pursue property development projects in the
Philippines. The JDA shall cover specific housing and other real estate development projects as the parties
shall agree. All profits derived from the projects covered by the JDA shall be shared equally between U-
LAND and PEC. U-LAND shall, not later than May 22, 1998, remit the sum of US$3.0 million as initial funding
for the aforesaid development projects against delivery by WELLEX of 57,000,000 shares of PEC as security
for said amount in accordance with Section 9 below.30

In case of conflict between the provisions of the First Memorandum of Agreement and the provisions of the
share purchase agreement or its implementing agreements, the terms of the First Memorandum of
Agreement would prevail, unless the parties specifically stated otherwise or the context of any agreement
between the parties would reveal a different intent.31 Thus, in Section 6 of the First Memorandum of
Agreement:

6. Primacy of Agreement. – It is agreed that in case of conflict between the provisions of this Agreement
and those of the SHPA and the implementing agreements of the SHPA, the provisions of this Agreement
shall prevail, unless the parties specifically state otherwise, or the context clearly reveal a contrary intent.32

Finally, Wellex and U-Land agreed that if they were unable to agree on the terms of the share purchase
agreement and the joint development agreement within 40 days from signing, then the First Memorandum
of Agreement would cease to be effective.33

In case no agreements were executed, the parties would be released from their respective undertakings,
except that Wellex would be required to refund within three (3) days the US$3 million given as initial funding
by U-Land for the development projects. If Wellex was unable to refund the US$3 million to U-Land, U-Land
would have the right to recover on the 57,000,000 PEC shares that would be delivered to it.34 Section 9 of
the First Memorandum of Agreement reads:

9. Validity. - In the event the parties are unable to agree on the terms of the SHPA and/or the JDA within
forty (40) days from date hereof (or such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their respective undertakings herein,
except that WELLEX shall refund the US$3.0 million provided under Section 4 within three (3) days
therefrom, otherwise U-LAND shall have the right to recover on the 57,000,000 PEC shares delivered to U-
LAND under Section 4.35

The First Memorandum of Agreement was signed by Wellex Chairman and President William T. Gatchalian
(Mr. Gatchalian) and U-Land Chairman Ker Gee Wang (Mr. Wang) on May 16, 1998.36

Annex “A” or the Second Memorandum of Agreement

Attached and made an integral part of the First Memorandum of Agreement was Annex “A,” as stated in the
second preambular clause. It is a document denoted as a “Memorandum of Agreement” entered into by
Wellex, APIC, and APC.37

The Second Memorandum of Agreement states:

This Memorandum of Agreement, made and executed this ___th day of ______ at Makati City, by and
between:

THE WELLEX GROUP, INC., a corporation duly organized and existing under the laws of the Philippines,
with offices at 22F Citibank Tower, 8741 Paseo de Roxas, Makati City (hereinafter referred to as “TWGI”),

AIR PHILIPPINES INTERNATIONAL CORPORATION(formerly FORUM PACIFIC, INC.), likewise a

corporation duly organized and existing under the laws of the Philippines, with offices at 8F Rufino Towers,
Ayala Avenue, Makati City (hereinafter referred to as “APIC”),

- and -

AIR PHILIPPINES CORPORATION, corporation duly organized and existing under the laws of the
Philippines, with offices at Multinational Building, Ayala Avenue, Makati City (hereinafter referred to as
“APC”).

W I T N E S S E T H: That -

WHEREAS, TWGI is the registered and beneficial owner, or has otherwise acquired _____ (illegible
in rollo) rights to the entire issued and outstanding capital stock (the “APC SHARES”) of AIR PHILIPPINES
CORPORATION (“APC”) and has made stockholder advances to APC for the _____ (illegible in rollo) of
aircraft, equipment and for working capital used in the latter’s operations (the“_____ (illegible
in rollo) ADVANCES”).

WHEREAS, APIC desires to obtain full ownership and control of APC, including all of _____ (illegible
in rollo) assets, franchise, goodwill and operations, and for this purpose has offered to acquire the _____
(illegible in rollo) SHARES of TWGI in APC, including the APC ADVANCES due to TWGI from APC, with _____
(illegible in rollo) of acquiring all the assets, franchise, goodwill and operations of APC; and TWGI has _____
(illegible in rollo) to the same in consideration of the conveyance by APIC to TWGI of certain
investments, _____ (illegible in rollo) issuance of TWGI of shares of stock of APIC in exchange for said APC
SHARES and the _____ (illegible in rollo) ADVANCES, as more particularly described hereunder.

NOW, THEREFORE, the parties agree as follows:

1. TWGI agrees to transfer the APC ADVANCES in APIC in exchange for the _____ (illegible in rollo) by
APIC to TWGI of investment shares of APIC in Express Bank, PetroChemical _____ (illegible in rollo) of Asia
Pacific, Republic Resources & Development Corporation and Philippine _____ (illegible in rollo) Corporation
(the “APIC INVESTMENTS”).

2. TWGI likewise agrees to transfer the APC SHARES to APIC in exchange solely _____ (illegible in rollo)
the issuance by APIC of One Billion Seven Hundred Ninety Seven Million Eight Hundred Fifty Seven Thousand
Three Hundred Sixty Four (1,797,857,364) shares of its capital stock of a _____ (illegible in rollo) value of
P1.00 per share (the “APIC SHARES”), taken from the currently authorized but _____ (illegible in rollo)
shares of the capital stock of APIC, as well as from the increase in the authorized capital _____ (illegible
in rollo) of APIC from P2.0 billion to P3.5 billion.

3. It is the basic understanding of the parties hereto that the transfer of the APC _____ (illegible in rollo)
as well as the APC ADVANCES to APIC shall be intended to enable APIC to obtain _____ (illegible in rollo)
and control of APC, including all of APC’s assets, franchise, goodwill and _____ (illegible in rollo).

4. Unless the parties agree otherwise, the effectivity of this Agreement and transfers _____ (illegible
in rollo) APC ADVANCES in exchange for the APIC INVESTMENTS, and the transfer of the _____ (illegible
in rollo) SHARES in exchange for the issuance of new APIC SHARES, shall be subject to _____ (illegible
in rollo) due diligence as the parties shall see fit, and the condition subsequent that the _____ (illegible in
rollo) for increase in the authorized capital stock of the APIC from P2.0 billion to P3.5 _____ (illegible in rollo)
shall have been approved by the Securities and Exchange Commission.

IN WITNESS WHEREOF, the parties have caused these presents to be signed on the date _____ (illegible
in rollo) first above written.38(Emphasis supplied)

This Second Memorandum of Agreement was allegedly incorporated into the First Memorandum of
Agreement as a “disclosure to [U-Land] [that] . . . [Wellex] was still in the process of acquiring and
consolidating its title to shares of stock of APIC.”39 It “included the terms of a share swap whereby [Wellex]
agreed to transfer to APIC its shareholdings and advances to APC in exchange for the issuance by APIC of
shares of stock to [Wellex].”40

The Second Memorandum of Agreement was signed by Mr. Gatchalian, APIC President Salud,41 and APC
President Augustus C. Paiso.42 It was not dated, and no place was indicated as the place of signing.43 It was
not notarized either, and no other witnesses signed the document.44

The 40-day period lapsed on June 25, 1998.45 Wellex and U-Land were not able to enter into any share
purchase agreement although drafts were exchanged between the two.

Despite the absence of a share purchase agreement, U-Land remitted to Wellex a total of
US$7,499,945.00.46 These were made in varying amounts and through the issuance of post-dated
checks.47 The dates of remittances were the following:

Date Amount (in US$)

June 30, 1998 990,000.00
July 2, 1998 990,000.00
20,000.00
July 30, 1998 990,000.00
490,000.00
490,000.00
August 1, 1998 990,000.00
490,000.00
490,000.00
August 3, 1998 990,000.00
70,000.00
September 25, 1998 399,972.50
99, 972.50
Total US$7,499,945.0048

Wellex acknowledged the receipt of these remittances in a confirmation letter addressed to U-Land dated
September 30, 1998.49

According to Wellex, the parties agreed to enter into a security arrangement. If the sale of the shares of
stock failed to push through, the partial payments or remittances U-Land made were to be secured by these
shares of stock and parcels of land.50 This meant that U-Land could recover the amount it paid to Wellex by
selling these shares of stock and land titles or using them to generate income.

Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land stock certificates representing
60,770,000 PEC shares and 72,601,000 APIC shares.51These were delivered to U-Land on July 1, 1998,
September 1, 1998, and October 1, 1998.52

In addition, Wellex delivered to U-Land Transfer Certificates of Title (TCT) Nos. T-216769, T-216771, T-
228231, T-228227, T-211250, and T-216775 covering properties owned by Westland Pacific Properties
Corporation in Bulacan; and TCT Nos. T-107306, T-115667, T-105910, T-120250, T-1114398, and T-
120772 covering properties owned by Rexlon Realty Group, Inc.53 On October 1, 1998,54U-Land received a
letter from Wellex, indicating a list of stock certificates that the latter was giving to the former by way of
“security.”55

Despite these transactions, Wellex and U-Land still failed to enter into the share purchase agreement and
the joint development agreement.

In the letter56 dated July 22, 1999, 10 months57 after the last formal communication between the two
parties, U-Land, through counsel, demanded the return of the US$7,499,945.00.58 This letter was sent 14
months after the signing of the First Memorandum of Agreement.

Counsel for U-Land claimed that “[Wellex] ha[d] unjustifiably refused to enter into the. . . Share Purchase
Agreement.”59 As far as U-Land was concerned, the First Memorandum of Agreement was no longer in effect,
pursuant to Section 9.60 As such, U-Land offered to return all the stock certificates covering APIC shares
and PEC shares as well as the titles to real property given by Wellex as security for the amount remitted by
U-Land.61

Wellex sent U-Land a letter62 dated August 2, 1999, which refuted U-Land’s claims. Counsel for Wellex
stated that the two parties carried out several negotiations that included finalizing the terms of the share
purchase agreement and the terms of the joint development agreement. Wellex asserted that under the
joint development agreement, U-Land agreed to remit the sum of US$3 million by May 22, 1998 as initial
funding for the development projects.63

Wellex further asserted that it conducted extended discussions with U-Land in the hope of arriving at the
final terms of the agreement despite the failure of the remittance of the US$3 million on May 22,
1998.64 That remittance pursuant to the joint development agreement “would have demonstrated [U-
Land’s] good faith in finalizing the agreements.”65

Wellex averred that, “[s]ave for a few items, [Wellex and U-Land] virtually agreed on the terms of both [the
share purchase agreement and the joint development agreement.]”66 Wellex believed that the parties had
already “gone beyond the ‘intent’ stage of the [First Memorandum of Agreement] and [had already] effected
partial implementation of an over-all agreement.”67 U-Land even delivered a total of 12 post-dated checks
to Wellex as payment for the APIC shares and PEC shares.68 “[Wellex] on the other hand, had [already]
delivered to [U-Land] certificates of stock of APEC [sic] and PEC as well as various land titles to cover actual
remittances.”69 Wellex alleged that the agreements were not finalized because U-Land was “forced to
suspend operations because of financial problems spawned by the regional economic turmoil.”70

Thus, Wellex maintained that “the inability of the parties to execute the [share purchase agreement] and
the [joint development agreement] principally arose from problems at [U-Land’s] side, and not due to
[Wellex’s] ‘unjustified refusal to enter into [the] [share purchase agreement][.]’”71

On July 30, 1999, U-Land filed a Complaint72 praying for rescission of the First Memorandum of Agreement
and damages against Wellex and for the issuance of a Writ of Preliminary Attachment.73 From U-Land’s point
of view, its primary reason for purchasing APIC shares from Wellex was APIC’s majority ownership of shares
of stock in APC (APC shares).74 After verification with the Securities and Exchange Commission, U-Land
discovered that “APIC did not own a single share of stock in APC.”75 U-Land alleged that it repeatedly
requested that the parties enter into the share purchase agreement.76 U-Land attached the demand letter
dated July 22, 1999 to the Complaint.77 However, the 40-day period lapsed, and no share purchase
agreement was finalized.78

U-Land alleged that, as of the date of filing of the Complaint, Wellex still refused to return the amount of
US$7,499,945.00 while refusing to enter into the share purchase agreement.79 U-Land stated that it was
induced by Wellex to enter into and execute the First Memorandum of Agreement, as well as release the
amount of US$7,499,945.00.80

In its Answer with Compulsory Counterclaim,81 Wellex countered that U-Land had no cause of
action.82 Wellex maintained that under the First Memorandum of Agreement, the parties agreed to enter
into a share purchase agreement and a joint development agreement.83 Wellex alleged that to bring the
share purchase agreement to fruition, it would have to acquire the corresponding shares in APIC.84 It claimed
that U-Land was fully aware that the former “still ha[d] to consolidate its title over these shares.”85 This was
the reason for Wellex’s attachment of the Second Memorandum of Agreement to the First Memorandum of
Agreement. Wellex attached the Second Memorandum of Agreement as evidence to refute U-Land’s claim
of misrepresentation.86

Wellex further alleged that U-Land breached the First Memorandum of Agreement since the payment for the
shares was to begin during the 40-day period, which began on May 16, 1998.87 In addition, U-Land failed
to remit the US$3 million by May 22, 1998 that would serve as initial funding for the development
projects.88Wellex claimed that the remittance of the US$3 million on May 22, 1998 was a mandatory
obligation on the part of U-Land.89

Wellex averred that it presented draft versions of the share purchase agreement, which were never
finalized.90 Thus, it believed that there was an implied extension of the 40-day period within which to enter
into the share purchase agreement and the joint development agreement since U-Land began remitting
sums of money in partial payment for the purchase of the shares of stock.91

In its counterclaim against U-Land, Wellex alleged that it had already set in motion building and development
of real estate projects on four (4) major sites in Cavite, Iloilo, and Davao. It started initial construction on
the basis of its agreement with U-Land to pursue real estate development projects.92

Wellex claims that, had the development projects pushed through, the parties would have shared equally in
the profits of these projects.93 These projects would have yielded an income of P2,404,948,000.00, as per
the study Wellex conducted, which was duly recognized by U-Land.94 Half of that amount,
P1,202,474,000.00, would have redounded to Wellex.95 Wellex, thus, prayed for the rescission of the First
Memorandum of Agreement and the payment of P1,202,474,000 in damages for loss of profit.96 It prayed
for the payment of moral damages, exemplary damages, attorney’s fees, and costs of suit.97

In its Reply,98 U-Land denied that there was an extension of the 40-day period within which to enter into
the share purchase agreement and the joint development agreement. It also denied requesting for an
extension of the 40-day period. It further raised that there was no provision in the First Memorandum of
Agreement that required it to remit payments for Wellex’s shares of stock in APIC and PEC within the 40-
day period. Rather, the remittances were supposed to begin upon the execution of the share purchase
agreement.99

As for the remittance of the US$3 million, U-Land stated that the issuance of this amount on May 22, 1998
was supposed to be simultaneously made with Wellex’s delivery of the stock certificates for 57,000,000 PEC
shares. These stock certificates were not delivered on that date.100

With regard to the drafting of the share purchase agreement, U-Land denied that it was Wellex that
presented versions of the agreement. U-Land averred that it was its own counsel who drafted versions of
the share purchase agreement and the joint development agreement, which Wellex refused to sign.101

U-Land specifically denied that it had any knowledge prior to or during the execution of the First
Memorandum of Agreement that Wellex still had to “consolidate its title over” its shares in APIC. U-Land
averred that it relied on Wellex’s representation that it was a majority owner of APIC shares and that APIC
owned a majority of APC shares.102

Moreover, U-Land denied any knowledge of the initial steps that Wellex undertook to pursue the
development projects and denied any awareness of a study conducted by Wellex regarding the potential
profit of these projects.103

The case proceeded to trial.

U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief Executive Officer, as its sole
witness.104 Mr. Tseng testified that “[s]ometime in 1997, Mr. William Gatchalian who was in Taiwan invited
[U-Land] to join in the operation of his airline company[.]”105 U-Land did not accept the offer at that
time.106 During the first quarter of 1998, Mr. Gatchalian “went to Taiwan and invited [U-Land] to invest in
Air Philippines[.]”107 This time, U-Land alleged that subsequent meetings were held where Mr. Gatchalian,
representing Wellex, “claimed ownership of a majority of the shares of APIC and ownership by APIC of a
majority of the shares of [APC,] a domestic carrier in the Philippines.”108 Wellex, through Mr. Gatchalian,
offered to sell to U-Land PEC shares as well.109

According to Mr. Tseng, the parties agreed to enter into the First Memorandum of Agreement after their
second meeting.110 Mr. Tseng testified that under this memorandum of agreement, the parties would enter
into a share purchase agreement “within forty (40) days from its execution which [would] put into effect
the sale of the shares [of stock] of APIC and PEC[.]”111 However, the “[s]hare [p]urchase [a]greement was
not executed within the forty-day period despite the draft . . . given [by U-Land to Wellex].”112

Mr. Tseng further testified that it was only after the lapse of the 40-day period that U-Land discovered that
Wellex needed money for the transfer of APC shares to APIC. This allegedly shocked U-Land since under the
First Memorandum of Agreement, APIC was supposed to own a majority of APC shares. Thus, U-Land
remitted to Wellex a total of US$7,499,945.00 because of its intent to become involved in the aviation
business in the Philippines. These remittances were confirmed by Wellex through a confirmation letter.
Despite the remittance of this amount, no share purchase agreement was entered into by the parties.113

Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice President of Wellex. She admitted her
knowledge of the First Memorandum of Agreement as she was involved in its drafting. She testified that the
First Memorandum of Agreement made reference, under its second preambular clause, to the Second
Memorandum of Agreement entered into by Wellex, APIC, and APC. She testified that under the First
Memorandum of Agreement, U-Land’s purchase of APIC shares and PEC shares from Wellex would take
place within 40 days, with the execution of a share purchase agreement.114

According to Ms. Ting, after the 40-day period lapsed, U-Land Chairman Mr. Wang requested sometime in
June of 1998 for an extension for the execution of the share purchase agreement and the remittance of the
US$3 million. As proof that Mr. Wang made this request, Ms. Ting testified that Mr. Wang sent several post-
dated checks to cover the payment of the APIC shares and PEC shares and the initial funding of US$3 million
for the joint development agreement. She testified that Mr. Wang presented a draft of the share purchase
agreement, which Wellex rejected. Wellex drafted a new version of the share purchase
agreement.115 However, the share purchase agreement was not executed because during the period of
negotiation, Wellex learned from other sources that U-Land “encountered difficulties starting October of
1998.”116 Ms. Ting admitted that U-Land made the remittances to Wellex in the amount of
US$7,499,945.00.117

Ms. Ting testified that U-Land was supposed to make an initial payment of US$19 million under the First
Memorandum of Agreement. However, U-Land only paid US$7,499,945.00. The total payments should have
amounted to US$41 million.118

Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a meeting to thresh out the problems
of the First Memorandum of Agreement, but U-Land did not reply. Instead, Wellex only received
communication from U-Land regarding their subsequent negotiations through the latter’s demand letter
dated July 22, 1999. In response, Wellex wrote to U-Land requesting another meeting to discuss the
demands. However, U-Land already filed the Complaint for rescission and caused the attachment against
the properties of Wellex, causing embarrassment to Wellex.119
In the Decision dated April 10, 2001, the Regional Trial Court of Makati City held that rescission of the First
Memorandum of Agreement was proper:

The first issue must be resolved in the negative. Preponderance of evidence leans in favor of plaintiff that it
is entitled to the issuance of the writ of preliminary attachment. Plaintiff’s evidence establishes the facts
that it is engaged in the airline business in Taiwan, was approached by defendant, through its Chairman
William Gatchalian, and was invited by the latter to invest in an airline business in the Philippines, Air
Philippines Corporation (APC); that plaintiff became interested in the invitation of defendant; that during
the negotiations between plaintiff and defendant, defendant induced plaintiff to buy shares in Air Philippines
International Corporation (APIC) since it owns majority of the shares of APC; that defendant also induced
plaintiff to buy shares of APIC in Philippine Estates Corporation (PEC); that the negotiations between plaintiff
and defendant culminated into the parties executing a MOA (Exhs. “C” to “C-3”, also Exh. “1”); that in the
second “Whereas” clause of the MOA, defendant represented that it has a current airline operation through
its majority-owned subsidiary APIC, that under the MOA, the parties were supposed to enter into a Share
Purchase Agreement (SPA) within forty (40) days from May 16, 1998, the date the MOA in order to effect
the transfer of APIC and PEC shares of defendant to plaintiff; that plaintiff learned from defendant that APIC
does not actually own a single share in APC; that plaintiff verified with the Securities and Exchange
Commission (SEC), by obtaining a General Information Sheet therefrom (Exh. “C-Attachment”); that APIC
does not in fact own APC; that defendant induced plaintiff to still remit its investment to defendant, which
plaintiff did as admitted by defendant per its Confirmation Letter (Exh. “D”) in order that APC shares could
be transferred to APIC; that plaintiff remitted a total of US$7,499,945.00 to defendant; and that during the
forty-day period stipulated in the MOA and even after the lapse of the said period, defendant has not entered
into the SPA, nor has defendant caused the transfer of APC shares to APIC.

In the second “Whereas” clause of the MOA (Exh. “C”), defendant’s misrepresentation that APIC owns APC
is made clear, as follows:
“WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its majority-
owned subsidiary Air Philippines International Corporation (Exh. “C”) and the latter’s subsidiary, Air
Philippines Corporation, and in like manner also desires to expand its operation in the Asian regional
markets; x x x” (Second Whereas of Exh. “C”)
On the other hand, defendant’s evidence failed to disprove plaintiff’s evidence. The testimony of defendant’s
sole witness Elvira Ting, that plaintiff knew at the time of the signing of the MOA that APIC does not own a
majority of the shares of APC because another Memorandum of Agreement was attached to the MOA (Exh
“1”) pertaining to the purchase of APC shares by APIC is unavailing. The second “Whereas” clause of the
MOA leaves no room for interpretation. . . . The second MOA purportedly attached as Annex “A” of this MOA
merely enlightens the parties on the manner by which APIC acquired the shares of APC. Besides, . . . the
second MOA was not a certified copy and did not contain a marking that it is an Annex “A” when it was
supposed to be an Annex “A” and a certified copy per the MOA between plaintiff and defendant. As can be
also gathered from her testimony, Ms. Ting does not have personal knowledge that plaintiff was not informed
that APIC did not own shares of APC during the negotiations as she was not present during the negotiations
between plaintiff and defendant’s William Gatchalian. Her participation in the agreement between the parties
[was] merely limited to the preparation of the documents to be signed. Ms. Ting testified, as follows:

“Q During the negotiation, you did not know anything about that?”

A I was not involved in the negotiation, sir.

Q And you are just making your statement that U-Land knew about the intended transfer of shares from
APC to APIC because of this WHEREAS CLAUSE and the Annex to this Memorandum of Agreement?

A Yes, it was part of the contract.”

(TSN, Elvira Ting, June 6, 2000, pp. 8-10)
Defendant’s fraud in the performance of its obligation under the MOA is further revealed when Ms. Ting
testified on cross-examination that notwithstanding the remittances made by plaintiff in the total amountn
[sic] of US$7,499, 945.00 to partially defray the cost of transferring APC shares to APIC even as of the
year 2000, as follows:

“Q Ms. Ting, can you please tell the Court if you know who owns shares of Air Philippines Corporation at
this time?
A Air Philippines Corporation right now is own [sic] by Wellex Group and certain individual.

Q How much shares of Air Philippines Corporation is owned by Wellex Group?

A Around twenty...at this moment around twenty five percent (25%).

Q Can you tell us if you know who are the other owners of the shares of Air Philippines?

A There are several individual owners, I cannot recall the names.

Q Could [sic] you know if Air Philippines Int’l. Corporation is one of the owners?

A As of this moment, no sir.”

(lbid, p. 16)

That defendant represented to plaintiff that it needed the remittances of plaintiff, even if no SPA was
executed yet between the parties, to effect the transfer of APC shares to APIC is admitted by its same
witness also in this wise:

“Q You said that remittances were made to the Wellex Group, Incorporated by plaintiff for the period from
June 1998 to September 1998[,] is that correct?

A Yes, Sir.

Q During all these times, that remittances were made in the total amount of more than seven million
dollars, did you ever know if plaintiff asked for evidence from your company that AIR PHILIPPINES
INTERNATIONAL CORPORATION has already acquired shares of AIR PHILIPPINES CORPORATION?

A There were queries on the matter.

Q And what was your answer to those queries, Madam Witness?

A We informed them that the decision was still in the process.

Q Even up to the time that plaintiff U-Land stopped the remittances sometime in September 1998 you
have not effected the transfer of shares of AIR PHILIPPINES CORPORATION to AIR PHILIPPINES
INTERNATIONCAL [sic] CORPORATION[,] am I correct?

A APC to APIC, well at that time it’s still in the process.

Q In fact, Madam Witness, is it not correct for me to say that one of the reasons why U-Land
Incorporated was convinced to remit the amounts of money totalling seven million dollars plus, was that
your company said that it needed funds to effect these transfers, is that correct?

A Yes, sir.”

(lbid, pp. 25-29)

As the evidence adduced by the parties stand, plaintiff has established the fact that it had made remittances
in the total amount of US$7,499,945.00 to defendant in order that defendant will make good its
representation that APC is a subsidiary of APIC. The said remittances are admitted by defendant.

Notwithstanding the said remittances, APIC does not own a single share of APC. On the other hand,
defendant could not even satisfactorily substantiate its claim that at least it had the intention to cause the
transfer of APC shares to APIC. [D]efendant obviously did not enter into the stipulated SPA because it did
not have the shares of APC transferred to APIC despite its representations. Under the circumstances, it is
clear that defendant fraudulently violated the provisions of the MOA.120 (Emphasis supplied)
On appeal, the Court of Appeals affirmed the ruling of the Regional Trial Court.121 In its July 30, 2004
Decision, the Court of Appeals held that the Regional Trial Court did not err in granting the rescission:

Records show that in the answer filed by defendant-appellant, the latter itself asked for the rescission of the
MOA. Thus, in effect, it prays for the return of what has been given or paid under the MOA, as the law
creates said obligation to return the things which were the object of the contract, and the same could be
carried out only when he who demands rescission can return whatever he may be obliged to restore. The
law says:
“Rescission creates the obligation to return the things which were the object of the contract, together with
their fruits, and the price with its interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore.”
Appellant, therefore, cannot ask for rescission of the MOA and yet refuse to return what has been paid to
it. Further, appellant’s claim that the lower court erred in ruling for the rescission of the MOA is absurd and
ridiculous because rescission thereof is prayed for by the former. . . .

This Court agrees with the lower court that appellee is the injured party in this case, and therefore is entitled
to rescission, because the rescission referred to here is predicated on the breach of faith by the appellant
which breach is violative of the reciprocity between the parties. It is noted that appellee has partly complied
with its own obligation, while the appellant has not. It is, therefore, the right of the injured party to ask for
rescission because the guilty party cannot ask for rescission.

The lower court . . . correctly ruled that:

“. . . This Court agrees with plaintiff that defendant’s misrepresentations regarding APIC’s not owning shares
in APC vitiates its consent to the MOA. Defendant’s continued misrepresentation that it will cause the transfer
of APC shares in APIC inducing plaintiff to remit money despite the lapse of the stipulated forty day period,
further establishes plaintiff’s right to have the MOA rescinded.

Section 9 of the MOA itself provides that in the event of the non-execution of an SPA within the 40 day
period, or within the extensions thereof, the payments made by plaintiff shall be returned to it, to wit:

“9 Validity.- In the event that the parties are unable to agree on the terms of the SHPA and/or JDA within
forty (40) days from the date hereof (or such period as the parties shall mutually agree), this Memorandum
of Agreement shall cease to be effective and the parties released from their respective undertakings herein,
except that WELLEX shall refund the US$3.0 million under Section 4 within three (3) days therefrom,
otherwise U-LAND shall have the right to recover the 57,000,000 PEC shares delivered to U-LAND under
Section 4.”

Clearly, the parties were not able to agree on the terms of the SPA within and even after the lapse of the
stipulated 40 day period. There being no SPA entered into by and between the plaintiff and defendant,
defendant’s return of the remittances [of] plaintiff in the total amount of US$7,499,945 is only proper, in
the same vein, plaintiff should return to defendant the titles and certificates of stock given to it by
defendant.122 (Citations omitted)

Hence, this Petition was filed.

Petitioner’s Arguments

Petitioner Wellex argues that contrary to the finding of the Court of Appeals, respondent U-Land was not
entitled to rescission because the latter itself violated the First Memorandum of Agreement. Petitioner Wellex
states that respondent U-Land was actually bound to pay US$17.5 million for all of APIC shares and PEC
shares under the First Memorandum of Agreement and the US$3 million to pursue the development projects
under the joint development agreement. In sum, respondent U-Land was liable to petitioner Wellex for the
total amount of US$20.5 million. Neither the Court of Appeals nor the Regional Trial Court made any mention
of the legal effect of respondent U-Land’s failure to pay the full purchase price.123

On the share purchase agreement, petitioner Wellex asserts that its obligation to deliver the totality of the
shares of stock would become demandable only upon remittance of the full purchase price of US$17.5
million.124 The full remittance of the purchase price of the shares of stock was a suspensive condition for
the execution of the share purchase agreement and delivery of the shares of stock. Petitioner Wellex argues
that the use of the term “upon” in Section 2 of the First Memorandum of Agreement clearly provides that
the full payment of the purchase price must be given “simultaneously” or “concurrent” with the execution
of the share purchase agreement.125

Petitioner Wellex raises that the Court of Appeals erred in saying that the rescission of the First Memorandum
of Agreement was proper because petitioner Wellex itself asked for this in its Answer before the trial
court.126 It asserts that “there can be no rescission of a non-existent obligation, such as [one] whose
suspensive condition has not yet happened[,]”127 as held in Padilla v. Spouses Paredes.128 Citing Villaflor v.
Court of Appeals129 and Spouses Agustin v. Court of Appeals,130 it argues that “the vendor. . . has no
obligation to deliver the thing sold. . . if the buyer. . . fails to fully pay the price as required by the
contract.”131In this case, petitioner Wellex maintains that respondent U-Land’s remittance of
US$7,499,945.00 constituted mere partial performance of a reciprocal obligation.132 Thus, respondent U-
Land was not entitled to rescission. The nature of this reciprocal obligation requires both parties’
simultaneous fulfillment of the totality of their reciprocal obligations and not only partial performance on the
part of the allegedly injured party.

As to the finding of misrepresentations, petitioner Wellex raises that a seller may sell a thing not yet
belonging to him at the time of the transaction, provided that he will become the owner at the time of
delivery so that he can transfer ownership to the buyer. Contrary to the finding of the lower courts, petitioner
Wellex was obliged to be the owner of the shares only when the time came to deliver these to respondent
U-Land and not during the perfection of the contract itself.133

Finally, petitioner Wellex argues that respondent U-Land could have recovered through the securities given
to the latter.134 Petitioner Wellex invokes Suria v. Intermediate Appellate Court,135 which held that an “action
for rescission is not a principal action that is retaliatory in character [under Article 1191 of the Civil Code,
but] a subsidiary one which. . . is available only in the absence of any other legal remedy [under Article
1384 of the Civil Code].”136

Respondent’s Arguments

Respondent U-Land argues that it was the execution of the share purchase agreement that would result in
its purchase of the APIC shares and PEC shares.137 It was not the full remittance of the purchase price of
the shares of stock as indicated in the First Memorandum of Agreement, as alleged by petitioner
Wellex.138 Respondent U-Land asserts that the First Memorandum of Agreement provides that the exact
number of APIC shares and PEC shares to be purchased under the share purchase agreement and the final
price of these shares were not yet determined by the parties.139

Respondent U-Land reiterates that it was petitioner Wellex that requested for the remittances amounting to
US$7,499,945.00 to facilitate APIC’s purchase of APC shares.140 Thus, it was petitioner Wellex’s refusal to
enter into the share purchase agreement that led to respondent U-Land demanding rescission of the First
Memorandum of Agreement and the return of the US$7,499,945.00.141Respondent U-Land further argues
before this court that petitioner Wellex failed to present evidence as to how the money was spent, stating
that Ms. Ting admitted that the Second Memorandum of Agreement “was not consummated at any time.”142

Respondent U-Land raises that petitioner Wellex was guilty of fraud by making it appear that APC was a
subsidiary of APIC.143 It reiterates that, as an airline company, its primary reason for entering into the First
Memorandum of Agreement was to acquire management of APC, another airline company.144Under Article
1191 of the Civil Code, respondent U-Land, as the injured party, was entitled to rescission due to the fatal
misrepresentations committed by petitioner Wellex.145

Respondent U-Land further asserts that the “shareholdings in APIC and APC were never in
question.”146 Rather, it was petitioner Wellex’s misrepresentation that APIC was a majority shareholder of
APC that compelled it to enter into the agreement.147

As for Suria, respondent U-land avers that this case was inapplicable because the pertinent provision
in Suria was not Article 1191 but rescission under Article 1383 of the Civil Code.148 The “rescission” referred
to in Article 1191 referred to “resolution” of a contract due to a breach of a mutual obligation, while Article
1384 spoke of “rescission” because of lesion and damage.149 Thus, the rescission that is relevant to the
present case is that of Article 1191, which involves breach in a reciprocal obligation. It is, in fact, resolution,
and not rescission as a result of fraud or lesion, as found in Articles 1381, 1383, and 1384 of the Civil
Code.150

The Issue

The question presented in this case is whether the Court of Appeals erred in affirming the Decision of the
Regional Trial Court that granted the rescission of the First Memorandum of Agreement prayed for by U-
Land.

The Petition must be denied.

The requirement of a share purchase agreement

The Civil Code provisions on the interpretation of contracts are

controlling to this case, particularly Article 1370, which reads:

ART. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control.

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the
former.

In Norton Resources and Development Corporation v. All Asia Bank Corporation:151

The cardinal rule in the interpretation of contracts is embodied in the first paragraph of Article 1370 of the
Civil Code: “[i]f the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control.” This provision is akin to the “plain meaning rule”
applied by Pennsylvania courts, which assumes that the intent of the parties to an instrument is “embodied
in the writing itself, and when the words are clear and unambiguous the intent is to be discovered only from
the express language of the agreement.” It also resembles the “four corners” rule, a principle which allows
courts in some cases to search beneath the semantic surface for clues to meaning. A court's purpose in
examining a contract is to interpret the intent of the contracting parties, as objectively manifested by them.
The process of interpreting a contract requires the court to make a preliminary inquiry as to whether the
contract before it is ambiguous. A contract provision is ambiguous if it is susceptible of two reasonable
alternative interpretations. Where the written terms of the contract are not ambiguous and can only be read
one way, the court will interpret the contract as a matter of law. If the contract is determined to be
ambiguous, then the interpretation of the contract is left to the court, to resolve the ambiguity in the light
of the intrinsic evidence.152 (Emphasis supplied)

As held in Norton, this court must first determine whether a provision or stipulation contained in a contract
is ambiguous. Absent any ambiguity, the provision on its face will be read as it is written and treated as the
binding law of the parties to the contract.

The parties have differing interpretations of the terms of the First Memorandum of Agreement. Petitioner
Wellex even admits that “the facts of the case are fairly undisputed [and that] [i]t is only the parties’
respective [understanding] of these facts that are not in harmony.”153

The second preambular clause of the First Memorandum of Agreement reads:

WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its majority-
owned subsidiary Air Philippines International Corporation and the latter’s subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in the Asian regional markets; a
Memorandum of Agreement on ______, a certified copy of which is attached hereto as Annex “A” and is
hereby made an integral part hereof, which sets forth, among others, the basis for WELLEX’s present
ownership of shares in Air Philippines International Corporation.154 (Emphasis supplied)

Section 1 of the First Memorandum of Agreement reads:

I. Basic Agreement. - The parties agree to develop a long-term business relationship initially through the
creation of joint interest in airline operations as well as in property development projects in the Philippines
to be implemented as follows:

(a) U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES INTERNATIONAL CORPORATION
(“APIC”) equivalent to at least 35% of the outstanding capital stock of APIC, but in any case, not less than
1,050,000,000 shares (the “APIC Shares”).

(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE ESTATES CORPORATION (“PEC”)
equivalent to at least 35% of the outstanding capital stock of PEC, but in any case, not less than 490,000,000
shares (the “PEC Shares”).

(c) U-LAND shall enter into a joint development agreement with PEC to jointly pursue property development
projects in the Philippines.

(d) U-LAND shall be given the option to acquire from WELLEX shares of stock of EXPRESS SAVINGS BANK
(“ESB”) up to 40% of the outstanding capital stock of ESB (the “ESB Shares”) under terms to be mutually
agreed.155

The First Memorandum of Agreement contained the following stipulations regarding the share purchase
agreement:

2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless extended by mutual
agreement), U-LAND and WELLEX shall execute a Share Purchase Agreement (“SHPA”) covering the
acquisition by U-LAND of the APIC Shares and PEC Shares (collectively, the “Subject Shares”). Without
prejudice to any subsequent agreement between the parties, the purchase price for the APIC Shares to be
reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares at SIXTY
FIVE CENTAVOS (P0.65) per share.

The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full upon execution of
the SHPA against delivery of the Subject Shares. The parties may agree on such other terms and conditions
governing the acquisition of the Subject Shares to be provided in a separate instrument.

The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the purchase price reflected
in the SHPA has been fully paid; (ii) the Philippine Securities & Exchange Commission (SEC) shall have
approved the issuance of the Subject Shares; and (iii) any required approval by the Taiwanese government
of the acquisition by U-LAND of the Subject Shares shall likewise have been obtained.156(Emphasis supplied)

As for the joint development agreement, the First Memorandum of Agreement contained the following
stipulation:

4. Joint Development Agreement with PEC. – Simultaneous with the execution of the SHPA, U-LAND and
PEC shall execute a joint development agreement (“JDA”) to pursue property development projects in the
Philippines. The JDA shall cover specific housing and other real estate development projects as the parties
shall agree. All profits derived from the projects covered by the JDA shall be shared equally between U-
LAND and PEC. U-LAND shall, not later than May 22, 1998, remit the sum of US$3.0 million as initial funding
for the aforesaid development projects against delivery by WELLEX of 57,000,000 shares of PEC as security
for said amount in accordance with Section 9 below.157 (Emphasis provided)

Finally, the parties included the following stipulation in case of a failure to agree on the terms of the share
purchase agreement or the joint development agreement:
9. Validity. - In the event the parties are unable to agree on the terms of the SHPA and/or the JDA within
forty (40) days from date hereof (or such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their respective undertakings herein,
except that WELLEX shall refund the US$3.0 million provided under Section 4 within three (3) days
therefrom, otherwise U-LAND shall have the right to recover on the 57,000,000 PEC shares delivered to U-
LAND under Section 4.158

Section 2 of the First Memorandum of Agreement clearly provides that the execution of a share purchase
agreement containing mutually agreeable terms and conditions must first be accomplished by the
parties before respondent U-Land purchases any of the shares owned by petitioner Wellex. A perusal of the
stipulation on its face allows for no other interpretation.

The need for a share purchase agreement to be entered into before payment of the full purchase price can
further be discerned from the other stipulations of the First Memorandum of Agreement.

In Section 1, the parties agreed to enter into a joint business venture, through entering into two (2)
agreements: a share purchase agreement and a joint development agreement. However, Section 1 provides
that in the share purchase agreement, “U-LAND shall acquire from WELLEX, shares of stock of AIR
PHILIPPINES INTERNATIONAL CORPORATION (‘APIC’) equivalent to at least 35% of the outstanding capital
stock of APIC, but in any case, not less than 1,050,000,000 shares (the ‘APIC Shares’).”159

As for the PEC shares, Section 1 provides that respondent U-Land shall purchase from petitioner Wellex
“shares of stock of PHILIPPINE ESTATES CORPORATION (‘PEC’) equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case, not less than 490,000,000 shares (the ‘PEC Shares’).”160

The use of the terms “at least 35% of the outstanding capital stock of APIC, but in any case, not less than
1,050,000,000 shares” and “at least 35% of the outstanding capital stock of PEC, but in any case, not less
than 490,000,000 shares” means that the parties had yet to agree on the number of shares of stock to be
purchased.

The need to execute a share purchase agreement before payment of the purchase price of the shares is
further shown by the clause, “[w]ithout prejudice to any subsequent agreement between the parties, the
purchase price for the APIC Shares to be reflected in the [share purchase agreement] shall be... P0.30 per
share and that for the PEC Shares at... P0.65 per share.”161 This phrase clearly shows that the final price of
the shares of stock was to be reflected in the share purchase agreement. There being no share purchase
agreement executed, respondent U-Land was under no obligation to begin payment or remittance of the
purchase price of the shares of stock.

Petitioner Wellex argues that the use of “upon” in Section 2162 of the First Memorandum of Agreement means
that respondent U-Land must pay the purchase price of the shares of stock in its entirety when they are
transferred. This argument has no merit.

Article 1373 of the Civil Code provides:

ART. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it effectual.

It is necessary for the parties to first agree on the final purchase price and the number of shares of stock to
be purchased before respondent U-Land is obligated to pay or remit the entirety of the purchase price. Thus,
petitioner Wellex’s argument cannot be sustained since the parties to the First Memorandum of Agreement
were clearly unable to agree on all the terms concerning the share purchase agreement. It would be absurd
for petitioner Wellex to expect payment when respondent U-Land did not yet agree to the final amount to
be paid for the totality of an indeterminate number of shares of stock.

The third paragraph of Section 2163 provides that the “transfer of the Subject Shares” shall take place upon
the fulfillment of certain conditions, such as full payment of the purchase price “as reflected in the [share
purchase agreement].” The transfer of the shares of stock is different from the execution of the share
purchase agreement. The transfer of the shares of stock requires full payment of the final purchase price.
However, that final purchase price must be reflected in the share purchase agreement. The execution of the
share purchase agreement will require the existence of a final agreement.

In its Answer with counterclaim before the trial court, petitioner Wellex argued that the payment of the
shares of stock was to begin within the 40-day period. Petitioner Wellex’s claim is not in any of the
stipulations of the contract. Its subsequent claim that respondent U-Land was actually required to remit a
total of US$20.5 million is likewise bereft of basis since there was no final purchase price of the shares of
stock that was agreed upon, due to the failure of the parties to execute a share purchase agreement. In
addition, the parties had yet to agree on the final number of APIC shares and PEC shares that respondent
U-Land would acquire from petitioner Wellex.

Therefore, the understanding of the parties captured in the First Memorandum of Agreement was to continue
their negotiation to determine the price and number of the shares to be purchased. Had it been otherwise,
the specific number or percentage of shares and its price should already have been provided clearly and
unambiguously. Thus, they agreed to a 40-day period of negotiation.

Section 9 of the First Memorandum of Agreement explicitly provides that:

In the event the parties are unable to agree on the terms of the SHPA and/or the JDA within forty (40) days
from date hereof (or such period as the parties shall mutually agree), this Memorandum of Agreement shall
cease to be effective and the parties released from their respective undertakings herein . . .164

The First Memorandum of Agreement was, thus, an agreement to enter into a share purchase agreement.
The share purchase agreement should have been executed by the parties within 40 days from May 16,
1998, the date of the signing of the First Memorandum of Agreement.

When the 40-day period provided for in Section 9 lapsed, the efficacy of the First Memorandum of Agreement
ceased. The parties were “released from their respective undertakings.” Thus, from June 25, 1998, the date
when the 40-day period lapsed, the parties were no longer obliged to negotiate with each other in order to
enter into a share purchase agreement.

However, Section 9 provides for another period within which the parties could still be required to negotiate.
The clause “or such period as the parties shall mutually agree” means that the parties should agree on a
period within which to continue negotiations for the execution of an agreement. This means that after the
40-day period, the parties were still allowed to negotiate, provided that they could mutually agree on a new
period of negotiation.

Based on the records and the findings of the lower courts, the parties were never able to arrive at a specific
period within which they would bind themselves to enter into an agreement. There being no other period
specified, the parties were no longer under any obligation to negotiate and enter into a share purchase
agreement. Section 9 clearly freed them from this undertaking.

II

There was no express or implied

novation of the First Memorandum
of Agreement

The subsequent acts of the parties after the 40-day period were, therefore, independent of the First
Memorandum of Agreement.

In its Appellant’s Brief before the Court of Appeals, petitioner Wellex mentioned that there was an “implied
partial objective or real novation”165 of the First Memorandum of Agreement. Petititoner did not raise this
argument of novation before this court. In Gayos v. Gayos,166 this court held that “it is a cherished rule of
procedure that a court should always strive to settle the entire controversy in a single proceeding leaving
no root or branch to bear the seeds of future litigation[.]”167

Articles 1291 and 1292 of the Civil Code provides how obligations may be modified:
Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor.

Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other.

In Arco Pulp and Paper Co. v. Lim,168 this court discussed the concept of novation:

Novation extinguishes an obligation between two parties when there is a substitution of objects or debtors
or when there is subrogation of the creditor. It occurs only when the new contract declares so “in unequivocal
terms” or that “the old and the new obligations be on every point incompatible with each other.”
....

For novation to take place, the following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation declares in unequivocal
terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with the
old one on every point. The test of incompatibility is whether the two obligations can stand together, each
one with its own independent existence. (Emphasis from the original omitted)
Because novation requires that it be clear and unequivocal, it is never presumed, thus:

I
n the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman
Law jurisprudence, the principle — novatio non praesumitur — that novation is never presumed. At bottom,
for novation to be a jural reality, its animus must be ever present, debitum pro debito — basically
extinguishing the old obligation for the new one.169 (Emphasis from the original omitted, citations omitted)

Applying Arco, it is clear that there was no novation of the original obligation.

After the 40-day period, the parties did not enter into any subsequent written agreement that was couched
in unequivocal terms. The transaction of the First Memorandum of Agreement involved large amounts of
money from both parties. The parties sought to participate in the air travel industry, which has always been
highly regulated and subject to the strictest commercial scrutiny. Both parties admitted that their counsels
participated in the crafting and execution of the First Memorandum of Agreement as well as in the efforts
to enter into the share purchase agreement. Any subsequent agreement would be expected to be clearly
agreed upon with their counsels’ assistance and in writing, as well.

Given these circumstances, there was no express novation.

There was also no implied novation of the original obligation. In Quinto v. People:170

[N]o specific form is required for an implied novation, and all that is prescribed by law would be an
incompatibility between the two contracts. While there is really no hard and fast rule to determine what
might constitute to be a sufficient change that can bring about novation, the touchstone for contrariety,
however, would be an irreconcilable incompatibility between the old and the new obligations.
. . . .

. . . The test of incompatibility is whether or not the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and the latter obligation novates the first.
Corollarily, changes that breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements of the obligation, such as its object, cause
or principal conditions thereof; otherwise, the change would be merely modificatory in nature and insufficient
to extinguish the original obligation.171 (Citations omitted)

There was no incompatibility between the original terms of the First Memorandum of Agreement and the
remittances made by respondent U-Land for the shares of stock. These remittances were actually made with
the view that both parties would subsequently enter into a share purchase agreement. It is clear that there
was no subsequent agreement inconsistent with the provisions of the First Memorandum of Agreement.

Thus, no implied novation took place. In previous cases,172 this court has consistently ruled that presumed
novation or implied novation is not deemed favorable. In United Pulp and Paper Co., Inc. v. Acropolis Central
Guaranty Corporation:173

Neither can novation be presumed in this case. As explained in Duñgo v. Lopena:

“Novation by presumption has never been favored. To be sustained, it need be established that the old and
new contracts are incompatible in all points, or that the will to novate appears by express agreement of the
parties or in acts of similar import.”174 (Emphasis supplied)

There being no novation of the First Memorandum of Agreement, respondent U-Land is entitled to the return
of the amount it remitted to petitioner Wellex. Petitioner Wellex is likewise entitled to the return of the
certificates of shares of stock and titles of land it delivered to respondent U-Land. This is simply an
enforcement of Section 9 of the First Memorandum of Agreement. Pursuant to Section 9, only the execution
of a final share purchase agreement within either of the periods contemplated by this stipulation will justify
the parties’ retention of what they received or would receive from each other.

III

Applying Article 1185 of the Civil

Code, the parties are obligated to
return to each other all they have
received

Article 1185 of the Civil Code provides that:

ART. 1185. The condition that some event will not happen at a determinate time shall render the obligation
effective from the moment the time indicated has elapsed, or if it has become evident that the event cannot
occur.

If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been
contemplated, bearing in mind the nature of the obligation.

Article 1185 provides that if an obligation is conditioned on the non-occurrence of a particular event at a
determinate time, that obligation arises (a) at the lapse of the indicated time, or (b) if it has become evident
that the event cannot occur.

Petitioner Wellex and respondent U-Land bound themselves to negotiate with each other within a 40-day
period to enter into a share purchase agreement. If no share purchase agreement was entered into, both
parties would be freed from their respective undertakings.

It is the non-occurrence or non-execution of the share purchase agreement that would give rise to the
obligation to both parties to free each other from their respective undertakings. This includes returning to
each other all that they received in pursuit of entering into the share purchase agreement.

At the lapse of the 40-day period, the parties failed to enter into a share purchase agreement. This lapse is
the first circumstance provided for in Article 1185 that gives rise to the obligation. Applying Article 1185,
the parties were then obligated to return to each other all that they had received in order to be freed from
their respective undertakings.

However, the parties continued their negotiations after the lapse of the 40-day period. They made
subsequent transactions with the intention to enter into the share purchase agreement. Despite that, they
still failed to enter into a share purchase agreement. Communication between the parties ceased, and no
further transactions took place.

It became evident that, once again, the parties would not enter into the share purchase agreement. This is
the second circumstance provided for in Article 1185. Thus, the obligation to free each other from their
respective undertakings remained.

As such, petitioner Wellex is obligated to return the remittances made by respondent U-Land, in the same
way that respondent U-Land is obligated to return the certificates of shares of stock and the land titles to
petitioner Wellex.

IV

Respondent U-Land is praying for

rescission or resolution under Article
1191, and not rescission under Article
1381

The arguments of the parties generally rest on the propriety of the rescission of the First Memorandum of
Agreement. This requires a clarification of rescission under Article 1191, and rescission under Article 1381
of the Civil Code.

Article 1191 of the Civil Code provides:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment
of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.

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

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.

Articles 1380 and 1381, on the other hand, provide an enumeration of rescissible contracts:

ART. 1380. Contracts validly agreed upon may be rescinded in the cases established by law.

ART. 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by
more than one-fourth of the value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding
number;

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims
due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without
the knowledge and approval of the litigants or of competent judicial authority;

(5) All other contracts specially declared by law to be subject to rescission.

Article 1383 expressly provides for the subsidiary nature of rescission:

ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for the same.

Rescission itself, however, is defined by Article 1385:

ART. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when he
who demands rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

Gotesco Properties v. Fajardo175 categorically stated that Article 1385 is applicable to Article 1191:

At this juncture, it is noteworthy to point out that rescission does not merely terminate the contract and
release the parties from further obligations to each other, but abrogates the contract from its inception and
restores the parties to their original positions as if no contract has been made. Consequently, mutual
restitution, which entails the return of the benefits that each party may have received as a result of the
contract, is thus required. To be sure, it has been settled that the effects of rescission as provided for in
Article 1385 of the Code are equally applicable to cases under Article 1191, to wit:

x x x x

Mutual restitution is required in cases involving rescission under Article 1191. This means bringing
the parties back to their original status prior to the inception of the contract. Article 1385 of the Civil Code
provides, thus:

ART. 1385. Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be carried
out only when he who demands rescission can return whatever he may be obligated to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

This Court has consistently ruled that this provision applies to rescission under Article 1191:

[S]ince Article 1385 of the Civil Code expressly and clearly states that “rescission creates the obligation to
return the things which were the object of the contract, together with their fruits, and the price with its
interest,” the Court finds no justification to sustain petitioners’ position that said Article 1385 does not apply
to rescission under Article 1191. x x x176 (Emphasis from the original, citations omitted)

Rescission, as defined by Article 1385, mandates that the parties must return to each other everything that
they may have received as a result of the contract. This pertains to rescission or resolution under Article
1191, as well as the provisions governing all forms of rescissible contracts.

For Article 1191 to be applicable, however, there must be reciprocal prestations as distinguished
from mutual obligations between or among the parties. A prestation is the object of an obligation, and it is
the conduct required by the parties to do or not to do, or to give.177 Parties may be mutually obligated to
each other, but the prestations of these obligations are not necessarily reciprocal. The reciprocal prestations
must necessarily emanate from the same cause that gave rise to the existence of the contract. This
distinction is best illustrated by an established authority in civil law, the late Arturo Tolentino:

This article applies only to reciprocal obligations. It has no application to every case where two persons are
mutually debtor and creditor of each other. There must be reciprocity between them. Both relations must
arise from the same cause, such that one obligation is correlative to the other. Thus, a person may be the
debtor of another by reason of an agency, and his creditor by reason of a loan. They are mutually obligated,
but the obligations are not reciprocal. Reciprocity arises from identity of cause, and necessarily the two
obligations are created at the same time.178 (Citation omitted)

Ang Yu Asuncion v. Court of Appeals179 provides a clear necessity of the cause in perfecting the existence
of an obligation:

An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation is
constituted upon the concurrence of the essential elements thereof, viz: (a) The vinculum juris or juridical
tie which is the efficient cause established by the various sources of obligations (law, contracts, quasi-
contracts, delicts and quasi-delicts); (b) the object which is the prestation or conduct, required to be
observed (to give, to do or not to do); and (c) the subject-persons who, viewed from the demandability of
the obligation, are the active (obligee) and the passive (obligor) subjects.180

The cause is the vinculum juris or juridical tie that essentially binds the parties to the obligation. This linkage
between the parties is a binding relation that is the result of their bilateral actions, which gave rise to the
existence of the contract.

The failure of one of the parties to comply with its reciprocal prestation allows the wronged party to seek
the remedy of Article 1191. The wronged party is entitled to rescission or resolution under Article 1191, and
even the payment of damages. It is a principal action precisely because it is a violation of the original
reciprocal prestation.

Article 1381 and Article 1383, on the other hand, pertain to rescission where creditors or even third persons
not privy to the contract can file an action due to lesion or damage as a result of the contract. In Ong v.
Court of Appeals,181 this court defined rescission:

Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by law to
the contracting parties and even to third persons, to secure the reparation of damages caused to them by
a contract, even if this should be valid, by restoration of things to their condition at the moment prior to the
celebration of the contract. It implies a contract, which even if initially valid, produces a lesion or a pecuniary
damage to someone.182 (Citations omitted)

Ong elaborated on the confusion between “rescission” or resolution under Article 1191 and rescission under
Article 1381:

On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal obligations.
Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and
a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They
are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous
fulfillment of the other. Rescission of reciprocal obligations under Article 1191 of the New Civil Code should
be distinguished from rescission of contracts under Article 1383. Although both presuppose contracts validly
entered into and subsisting and both require mutual restitution when proper, they are not entirely identical.

While Article 1191 uses the term “rescission,” the original term which was used in the old Civil Code, from
which the article was based, was “resolution.” Resolution is a principal action which is based on breach of a
party, while rescission under Article 1383 is a subsidiary action limited to cases of rescission for lesion under
Article 1381 of the New Civil Code, which expressly enumerates the following rescissible contracts:
 1. Those which are entered into by guardians whenever the wards whom they represent
suffer lesion by more than one fourth of the value of the things which are the object
thereof;

2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated
in the preceding number;

3. Those undertaken in fraud of creditors when the latter cannot in any manner collect
the claims due them;

4. Those which refer to things under litigation if they have been entered into by the
defendant without the knowledge and approval of the litigants or of competent judicial
authority; [and]

5. All other contracts specially declared by law to be subject to rescission.183 (Citations

omitted)

When a party seeks the relief of rescission as provided in Article 1381, there is no need for reciprocal
prestations to exist between or among the parties. All that is required is that the contract should be among
those enumerated in Article 1381 for the contract to be considered rescissible. Unlike Article 1191, rescission
under Article 1381 must be a subsidiary action because of Article 1383.

Contrary to petitioner Wellex’s argument, this is not rescission under Article 1381 of the Civil Code. This
case does not involve prejudicial transactions affecting guardians, absentees, or fraud of creditors. Article
1381(3) pertains in particular to a series of fraudulent actions on the part of the debtor who is in the process
of transferring or alienating property that can be used to satisfy the obligation of the debtor to the creditor.
There is no allegation of fraud for purposes of evading obligations to other creditors. The actions of the
parties involving the terms of the First Memorandum of Agreement do not fall under any of the enumerated
contracts that may be subject of rescission.

Further, respondent U-Land is pursuing rescission or resolution under Article 1191, which is a principal
action. Justice J.B.L. Reyes’ concurring opinion in the landmark case of Universal Food Corporation v. Court
of Appeals184 gave a definitive explanation on the principal character of resolution under Article 1191 and
the subsidiary nature of actions under Article 1381:

The rescission on account of breach of stipulations is not predicated on injury to economic interests of the
party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties.
It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action
for rescission thereunder is subordinated to anything other than the culpable breach of his obligations by
the defendant. This rescission is a principal action retaliatory in character, it being unjust that a party be
held bound to fulfill his promises when the other violates his. As expressed in the old Latin aphorism: “Non
servanti fidem, non est fides servanda.” Hence, the reparation of damages for the breach is purely
secondary.

On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison detre as well as the measure of the
right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be
maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of these two
articles is limited to the cases of rescission for lesiónenumerated in Article 1381 of the Civil Code of the
Philippines, and does not apply to cases under Article 1191.185

Rescission or resolution under Article 1191, therefore, is a principal action that is immediately available to
the party at the time that the reciprocal prestation was breached. Article 1383 mandating that rescission be
deemed a subsidiary action cannot be applicable to rescission or resolution under Article 1191.

Thus, respondent U-Land correctly sought the principal relief of rescission or resolution under Article 1191.
The obligations of the parties gave rise to reciprocal prestations, which arose from the same cause: the
desire of both parties to enter into a share purchase agreement that would allow both parties to expand
their respective airline operations in the Philippines and other neighboring countries.

The jurisprudence relied upon by

petitioner Wellex is not applicable

The cases that petitioner Wellex cited to advance its arguments against respondent U-Land’s right to
rescission are not in point.

Suria v. Intermediate Appellate Court is not applicable. In that case, this court specifically stated that the
parties entered into a contract of sale, and their reciprocal obligations had already been fulfilled:186

There is no dispute that the parties entered into a contract of sale as distinguished from a contract to sell.

By the contract of sale, the vendor obligates himself to transfer the ownership of and to deliver a determinate
thing to the buyer, who in turn, is obligated to pay a price certain in money or its equivalent (Art. 1458,
Civil Code). From the respondents’ own arguments, we note that they have fully complied with
their part of the reciprocal obligation. As a matter of fact, they have already parted with the title
as evidenced by the transfer certificate of title in the petitioners’ name as of June 27, 1975.

The buyer, in turn, fulfilled his end of the bargain when he executed the deed of mortgage. The payments
on an installment basis secured by the execution of a mortgage took the place of a cash payment. In other
words, the relationship between the parties is no longer one of buyer and seller because the contract of sale
has been perfected and consummated. It is already one of a mortgagor and a mortgagee. In consideration
of the petitioners’ promise to pay on installment basis the sum they owe the respondents, the latter have
accepted the mortgage as security for the obligation.

The situation in this case is, therefore, different from that envisioned in the cited opinion of Justice J.B.L.
Reyes. The petitioners’ breach of obligations is not with respect to the perfected contract of sale but in the
obligations created by the mortgage contract. The remedy of rescission is not a principal action retaliatory
in character but becomes a subsidiary one which by law is available only in the absence of any other legal
remedy. (Art. 1384, Civil Code).

Foreclosure here is not only a remedy accorded by law but, as earlier stated, is a specific provision found in
the contract between the parties.187 (Emphasis supplied)

In Suria, this court clearly applied rescission under Article 1384 and not rescission or resolution under Article
1191. In addition, the First Memorandum of Agreement is not a contract to sell shares of stock. It is an
agreement to negotiate with the view of entering into a share purchase agreement.

Villaflor v. Court of Appeals is not applicable either. In Villaflor, this court held that non-payment of
consideration of contracts only gave rise to the right to sue for collection, but this non-payment cannot
serve as proof of a simulated contract.188 The case did not rule that the vendor has no obligation to deliver
the thing sold if the buyer fails to fully pay the price required by the contract. In Villaflor:

Petitioner insists that nonpayment of the consideration in the contracts proves their simulation. We disagree.
Nonpayment, at most, gives him only the right to sue for collection. Generally, in a contract of sale, payment
of the price is a resolutory condition and the remedy of the seller is to exact fulfillment or, in case of a
substantial breach, to rescind the contract under Article 1191 of the Civil Code. However, failure to pay is
not even a breach, but merely an event which prevents the vendor’s obligation to convey title from acquiring
binding force.189 (Citations omitted)

This court’s statement in Villaflor regarding rescission under Article 1191 was a mere obiter dictum. In Land
Bank of the Philippines v. Suntay,190 this court discussed the nature of an obiter dictum:

An obiter dictum has been defined as an opinion expressed by a court upon some question of law that is not
necessary in the determination of the case before the court. It is a remark made, or opinion expressed, by
a judge, in his decision upon a cause by the way, that is, incidentally or collaterally, and not directly upon
the question before him, or upon a point not necessarily involved in the determination of the cause, or
introduced by way of illustration, or analogy or argument. It does not embody the resolution or
determination of the court, and is made without argument, or full consideration of the point. It lacks the
force of an adjudication, being a mere expression of an opinion with no binding force for purposes of res
judicata.191 (Citations omitted)

Petitioner Wellex’s reliance on Padilla v. Spouses Paredes and Spouses Agustin v. Court of Appeals is also
misplaced. In these cases, this court held that there can be no rescission for an obligation that is non-
existent, considering that the suspensive condition that will give rise to the obligation has not yet happened.
This is based on an allegation that the contract involved is a contract to sell. In a contract to sell, the failure
of the buyer to pay renders the contract without effect. A suspensive condition is one whose non-fulfillment
prevents the existence of the obligation.192 Payment of the purchase price, therefore, constitutes a
suspensive condition in a contract to sell. Thus, this court held that non-remittance of the full price allowed
the seller to withhold the transfer of the thing to be sold.

In this case, the First Memorandum of Agreement is not a contract to sell. Entering into the share purchase
agreement or the joint development agreement remained a stipulation that the parties themselves agreed
to pursue in the First Memorandum of Agreement.

Based on the First Memorandum of Agreement, the execution of the share purchase agreement was
necessary to put into effect respondent U-Land’s purchase of the shares of stock. This is the stipulation
indicated in this memorandum of agreement. There was no suspensive condition of full payment of the
purchase price needed to execute either the share purchase agreement or the joint development agreement.
Upon the execution of the share purchase, the obligation of petitioner Wellex to transfer the shares of stock
and of respondent U-Land to pay the price of these shares would have arisen.

Enforcement of Section 9 of the First Memorandum of Agreement has the same effect as rescission or
resolution under Article 1191 of the Civil Code. The parties are obligated to return to each other all that they
may have received as a result of the breach by petitioner Wellex of the reciprocal obligation. Therefore, the
Court of Appeals did not err in affirming the rescission granted by the trial court.

VI

Petitioner Wellex was not guilty of

fraud but of violating Article 1159
of the Civil Code

In the issuance of the Writ of Preliminary Attachment, the lower court found that petitioner Wellex
committed fraud by inducing respondent U-Land to purchase APIC shares and PEC shares and by leading
the latter to believe that APC was a subsidiary of APIC.

Determining the existence of fraud is not necessary in an action for rescission or resolution under Article
1191. The existence of fraud must be established if the rescission prayed for is the rescission under Article
1381.

However, the existence of fraud is a question that the parties have raised before this court. To settle this
question with finality, this court will examine the established facts and determine whether petitioner
Wellex indeed defrauded respondent U-Land.

In Tankeh v. Development Bank of the Philippines,193 this court enumerated the relevant provisions of the
Civil Code on fraud:

Fraud is defined in Article 1338 of the Civil Code as:

x x x fraud when, through insidious words or machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he would not have agreed to.
This is followed by the articles which provide legal examples and illustrations of fraud.
....
Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts,
are not in themselves fraudulent. (n)

Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other
party has relied on the former’s special knowledge. (n)

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has
created substantial mistake and the same is mutual. (n)

Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n)

The distinction between fraud as a ground for rendering a contract voidable or as basis for an award of
damages is provided in Article 1344:

In order that fraud may make a contract voidable, it should be serious and should not have been
employed by both contracting parties.

Incidental fraud only obliges the person employing it to pay damages. (1270)194

Tankeh further discussed the degree of evidence needed to prove the existence of fraud:

[T]he standard of proof required is clear and convincing evidence. This standard of proof is derived from
American common law. It is less than proof beyond reasonable doubt (for criminal cases) but greater than
preponderance of evidence (for civil cases). The degree of believability is higher than that of an ordinary
civil case. Civil cases only require a preponderance of evidence to meet the required burden of proof.
However, when fraud is alleged in an ordinary civil case involving contractual relations, an entirely different
standard of proof needs to be satisfied. The imputation of fraud in a civil case requires the presentation of
clear and convincing evidence. Mere allegations will not suffice to sustain the existence of fraud. The burden
of evidence rests on the part of the plaintiff or the party alleging fraud. The quantum of evidence is such
that fraud must be clearly and convincingly shown.195

To support its allegation of fraud, Mr. Tseng, respondent U-Land’s witness before the trial court, testified
that Mr. Gatchalian approached respondent U-Land on two (2) separate meetings to propose entering into
an agreement for joint airline operations in the Philippines. Thus, the parties entered into the First
Memorandum of Agreement. Respondent U-Land primarily anchors its allegation of fraud against petitioner
Wellex on the existence of the second preambular clause of the First Memorandum of Agreement.

In its Appellant’s Brief before the Court of Appeals, petitioner Wellex admitted that “[t]he amount of
US$7,499,945.00 was remitted for the purchase of APIC and PEC shares.”196 In that brief, it argued that the
parties were already in the process of partially executing the First Memorandum of Agreement.

As held in Tankeh, there must be clear and convincing evidence of fraud. Based on the established facts,
respondent U-Land was unable to clearly convince this court of the existence of fraud.

Respondent U-Land had every reasonable opportunity to ascertain whether APC was indeed a subsidiary of
APIC. This is a multimillion dollar transaction, and both parties admitted that the share purchase agreement
underwent several draft creations. Both parties admitted the participation of their respective counsels in the
drafting of the First Memorandum of Agreement. Respondent U-Land had every opportunity to ascertain the
ownership of the shares of stock.

Respondent U-Land itself admitted that it was not contesting petitioner Wellex’s ownership of the APIC
shares or APC shares; hence, it was not contesting the existence of the Second Memorandum of Agreement.
Upon becoming aware of petitioner Wellex’s representations concerning APIC’s ownership or control of APC
as a subsidiary, respondent U-Land continued to make remittances totalling the amount sought to be
rescinded. It had the option to opt out of negotiations after the lapse of the 40-day period. However, it
proceeded to make the remittances to petitioner Wellex and proceed with negotiations.

Respondent U-Land was not defrauded by petitioner Wellex to agree to the First Memorandum of Agreement.
To constitute fraud under Article 1338, the words and machinations must have been so insidious or deceptive
that the party induced to enter into the contract would not have agreed to be bound by its terms if that
party had an opportunity to be aware of the truth.197

Respondent U-Land was already aware that APC was not a subsidiary of APIC after the 40-day period. Still,
it agreed to be bound by the First Memorandum of Agreement by making the remittances from June 30 to
September 25, 1998.198Thus, petitioner Wellex’s failure to inform respondent U-Land that APC was not a
subsidiary of APIC when the First Memorandum of Agreement was being executed did not constitute fraud.

However, the absence of fraud does not mean that petitioner Wellex is free of culpability. By failing to inform
respondent U-Land that APC was not yet a subsidiary of APIC at the time of the execution of the First
Memorandum of Agreement, petitioner Wellex violated Article 1159 of the Civil Code. Article 1159 reads:

ART. 1159. Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.

In Ochoa v. Apeta,199 this court defined good faith:

Good faith is an intangible and abstract quality with no technical meaning or statutory definition, and it
encompasses, among other things, an honest belief, the absence of malice and the absence of design to
defraud or to seek an unconscionable advantage. It implies honesty of intention, and freedom from
knowledge of circumstances which ought to put the holder upon inquiry. The essence of good faith lies in
an honest belief in the validity of one’s right, ignorance of a superior claim and absence of intention to
overreach another.200(Citations omitted)

It was incumbent upon petitioner Wellex to negotiate the terms of the pending share purchase agreement
in good faith. This duty included providing a full disclosure of the nature of the ownership of APIC in APC.
Unilaterally compelling respondent U-Land to remit money to finalize the transactions indicated in the
Second Memorandum of Agreement cannot constitute good faith.

The absence of fraud in a transaction does not mean that rescission under Article 1191 is not proper. This
case is not an action to declare the First Memorandum of Agreement null and void due to fraud at the
inception of the contract or dolo causante. This case is not an action for fraud based on Article 1381 of the
Civil Code. Rescission or resolution under Article 1191 is predicated on the failure of one of the parties in a
reciprocal obligation to fulfill the prestation as required by that obligation. It is not based on vitiation of
consent through fraudulent misrepresentations.

VII

Respondent U-Land was not bound

to pay the US$3 million under the
joint development agreement

The alleged failure of respondent U-Land to pay the amount of US$3 million to petitioner Wellex does not
justify the actions of the latter in refusing to return the US$7,499,945.00.

Article 1374 of the Civil Code provides that:

ART. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly.

The execution of the joint development agreement was contingent on the execution of the share purchase
agreement. This is provided for in Section 4 of the First Memorandum of Agreement, which stated that the
execution of the two agreements is “[s]imultaneous.”201 Thus, the failure of the share purchase agreement’s
execution would necessarily mean the failure of the joint development agreement’s execution.

Section 9 of the First Memorandum of Agreement provides that should the parties fail to execute the
agreement, they would be released from their mutual obligations. Had respondent U-Land paid the US$3
million and petitioner Wellex delivered the 57,000,000 PEC shares for the purpose of the joint development
agreement, they would have been obligated to return these to each other.
Section 4 and Section 9 of the First Memorandum of Agreement must be interpreted together. Since the
parties were unable to agree on a final share purchase agreement and there was no exchange of money or
shares of stock due to the continuing negotiations, respondent U-Land was no longer obliged to provide the
money for the real estate development projects. The payment of the US$3 million was for pursuing the real
estate development projects under the joint development agreement. There being no joint development
agreement, the obligation to deliver the US$3 million and the delivery of the PEC shares for that purpose
were no longer incumbent upon the parties.

VIII

Respondent U-Land was not

obligated to exhaust the “securities”
given by petitioner Wellex

Contrary to petitioner Wellex’s assertion, there is no obligation on the part of respondent U-Land to
exhaust the “securities” given by petitioner Wellex. No such meeting of the minds to create a guarantee or
surety or any other form of security exists. The principal obligation is not a loan or an obligation subject to
the conditions of sureties or guarantors under the Civil Code. Thus, there is no need to exhaust the
securities given to respondent U-Land, and there is no need for a legal condition where respondent U-Land
should pursue other remedies.

Neither petitioner Wellex nor respondent U-Land stated that there was already a transfer of ownership of
the shares of stock or the land titles. Respondent U-Land itself maintained that the delivery of the shares
of stock and the land titles were not in the nature of a pledge or mortgage.202 It received the certificates
of shares of stock and the land titles with an understanding that the parties would subsequently enter a
share purchase agreement. There being no share purchase agreement, respondent U-Land is obligated to
return the certificates of shares of stock and the land titles to petitioner Wellex.

The parties are bound by the 40-day period provided for in the First Memorandum of Agreement.
Adherence by the parties to Section 9 of the First Memorandum of Agreement has the same effect as the
rescission or resolution prayed for and granted by the trial court.

Informal acts are prone to ambiguous legal interpretation. This will be based on the say-so of each party
and is a fragile setting for good business transactions. It will contribute to the unpredictability of the
market as it would provide courts with extraordinary expectations to determine the business actor’s
intentions. The parties appear to be responsible businessmen who know that their expectations and
obligations should be clearly articulated between them. They have the resources to engage legal
representation. Indeed, they have reduced their agreement in writing.

Petitioner Wellex now wants this court to define obligations that do not appear in these instruments. We
cannot do so. This court cannot interfere in the bargains, good or bad, entered into by the parties. Our
duty is to affirm legal expectations, not to guarantee good business judgments.

WHEREFORE, the petition is DENIED. The Decision of the Regional Trial Court in Civil Case No. 99-1407
and the Decision of the Court of Appeals in CA-G.R. CV No. 74850 are AFFIRMED. Costs against
petitioner The Wellex Group, Inc.

SO ORDERED.
 G.R. No. 185592, June 15, 2015

GEORGE C. FONG, Petitioner, v. JOSE V. DUEÑAS, Respondent.

DECISION

BRION, J.:

We resolve in this petition for review on certiorari1 the challenge to the September 16, 2008 decision2 and
the December 8, 2008 resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 88396.

These assailed CA rulings annulled the June 27, 2006 decision4 and October 30, 2006 order5 of the Regional
Trial Court of Makati, Branch 64 (trial court), which directed respondent Jose V. Dueñas (Dueñas) to pay
Five Million Pesos (P5 Million) to petitioner George C. Fong (Fong), and imposed a six percent (6%) annual
interest on this amount.

Factual Antecedents

Dueñas is engaged in the bakery, food manufacturing, and retailing business, which are all operated under
his two companies, D.C. DANTON, Inc. (Danton) and Bakcom Food Industries, Inc. (Bakcom). He was an
old acquaintance of Fong as they were former schoolmates at the De La Salle University.6chanrobleslaw

Sometime in November 1996, Dueñas and Fong entered into a verbal joint venture contract where they
agreed to engage in the food business and to incorporate a holding company under the name Alliance
Holdings, Inc. (Alliance or the proposed corporation). Its capitalization would be Sixty Five Million Pesos
(P65 Million), to which they would contribute in equal parts.7chanrobleslaw

The parties agreed that Fong would contribute Thirty Two Million and Five Hundred Thousand Pesos (P32.5
Million) in cash while Dueñas would contribute all his Danton and Bakcom shares which he valued at P32.5
Million.8 Fong required Dueñas to submit the financial documents supporting the valuation of these shares.

On November 25, 1996, Fong started remitting in tranches his share in the proposed corporation’s capital.
He made the remittances under the impression that his contribution would be applied as his subscription to
fifty percent (50%) of Alliance’s total shareholdings. On the other hand, Dueñas started processing the
Boboli9 international license that they would use in their food business. Fong’s cash contributions are
summarized below.10cralawred
Date Amount
November 25, 1996 P1,980,475.20
January 14, 1997 P1,000,000.00
February 8, 1997 P500,000.00
March 7, 1997 P100,000.00
April 28, 1997 P500,000.00
June 13, 1997 P919,524.80
Total P5,000,000.00

On June 13, 1997, Fong sent a letter to Dueñas informing him of his decision to limit his total
contribution from P32.5 Million to P5 Million.This letter reads:chanRoblesvirtualLawlibrary
June 13, 1997

Mr. Jose Dueñas

c/o Camira Industries

Re: Proposed JV in Bakcom, D.C. Danton and Boboli

Dear Jojit,

Enclosed is our check for P919,534.80 representing our additional advances to subject company in
process of incorporation. This will make our total advances to date amounting to P5 million.

Since we agreed in principal late last year to pursue subject matter, the delays in implementing the joint
venture have caused us to rethink our position. First, we were faced with the ‘personal’ factor which was
explained to you one time. This has caused us to turn down a number of business opportunities. Secondly,
since last year, the operation of Century 21 has been taking more time from us than anticipated. That is
why we decided to relinquish our original plan to manage and operate ‘Boboli’ knowing this limitation. For
us, it does not make sense anymore to go for a significant shareholding when we cannot be hands on and
participate actively as originally planned. For your information, we will probably be giving up our subway
franchise too.

Together with our business advisers and legal counsel, we came to a decision to hold our commitment
(from advances to investment) at P5 million only for now from the original plan of P32.5 million,
if this is acceptable to you.

We know that our decision will somewhat upset the overall plans. But it will probably be more problematic
for us in the long run if we continue full speed. We have put our money down in trust and good faith
despite the much delayed financials. We continue to believe in your game plan and capabilities to
achieve the desired goals for subject undertaking. Please permit us instead to be just a modest silent
investor now with a take out plan when time and price is right.

Thank you for your kind understanding and consideration.

With best regards.

(Signed) George Fong11

Fong observed that despite his P5 Million contribution, Dueñas still failed to give him the financial
documents on the valuation of the Danton and Bakcom shares. Thus, except for Dueñas’
representations, Fong had nothing to rely on to ensure that these shares were really valued at P32.5
Million. Moreover, Dueñas failed to incorporate and register Alliance with the Securities and
Exchange Commission (SEC).12chanrobleslaw

These circumstances convinced Fong that Dueñas would no longer honor his obligations in their joint venture
agreement.13 Thus, on October 30, 1997, Fong wrote Dueñas informing him of his decision to cancel the
joint venture agreement. He also asked for the refund of the P5 Million that he advanced.14In response,
Dueñas admitted that he could not immediately return the money since he used it to defray the
business expenses of Danton and Bakcom.15chanrobleslaw

To meet Fong’s demand, Dueñas proposed several schemes for payment of the P5 Million.16 However, Fong
did not accept any of these proposed schemes. On March 25, 1998, Fong wrote a final letter of
demand17 informing Dueñas that he would file a judicial action against him should he still fail to pay after
receipt of this written demand.

Since Dueñas did not pay, Fong filed a complaint against him for collection of a sum of money and
damages18 on April 24, 1998.

The Trial Court’s Ruling

In its June 27, 2006 decision, the trial court ruled in favor of Fong and held that a careful examination of
the complaint shows that although it was labeled as an action for collection of a sum of money, it was
actually an action for rescission.19chanrobleslaw

The trial court noted that Dueñas’ failure to furnish Fong with the financial documents on the valuation of
the Danton and Bakcom shares, as well as the almost one year delay in the incorporation of Alliance, caused
Fong to rescind the joint venture agreement.20 According to the trial court, these are adequate and
acceptable reasons for rescission.

The trial court also held that Dueñas erroneously invested Fong’s cash contributions in his two companies,
Danton and Bakcom. The signed receipts,21presented as evidence, expressly provided that each
remittance should be applied as advance subscription to Fong’s shareholding in Alliance. Thus,
Dueñas’ investment of the money in Danton and Bakcom was clearly unauthorized and contrary to the
parties’ agreement.

Since Dueñas was unjustly enriched by Fong’s advance capital contributions, the trial court ordered him to
return the money amounting to P5 Million and to pay ten percent (10%) of this amount in attorney’s fees,
as well as the cost of the suit.22chanrobleslaw

Fong filed a partial motion for reconsideration from the trial court’s June 27, 2006 decision and asked for
the imposition of a six percent (6%) annual interest, computed from the date of extrajudicial demand until
full payment of the award. The trial court granted this prayer in its October 30, 2006 order.23chanrobleslaw

The CA’s Ruling

Dueñas responded to the trial court’s ruling through an appeal with the CA, which granted the appeal and
annulled the trial court’s ruling.

The CA ruled that Fong’s June 13, 1997 letter evidenced his intention to convert his cash contributions from
“advances” to the proposed corporation’s shares, to mere “investments.” Thus, contrary to the trial court’s
ruling, Dueñas correctly invested Fong’s P5 Million contribution to Bakcom and Danton. This did not deviate
from the parties’ original agreement as eventually, the shares of these two companies would form part of
Alliance’s capital.24chanrobleslaw

Lastly, the CA held that the June 13, 1997 letter showed that Fong knew all along that he could not
immediately ask for the return of his P5 Million investment. Thus, whether the action filed was a complaint
for collection of a sum of money, or rescission, it must still fail.25chanrobleslaw

The Petition

Fong submits that the CA erred when it ruled that his June 13, 1997 letter showed his intent to convert his
contributions from advance subscriptions to Alliance’s shares, to investments in Dueñas’ two companies.
Contrary to the CA’s findings, the receipts and the letter expressly mentioned that his contributions should
all be treated as his share subscription to Alliance.26chanrobleslaw

Also, Fong argues that Dueñas’ unjustified retention of the P5 Million and its appropriation to his (Dueñas’)
own business, amounted to unjust enrichment; and that he contributed to fund Alliance’s capital and
incorporation, not to pay for Danton and Bakcom’s business expenses.27chanrobleslaw

The Case for Dueñas

Dueñas contends that he could no longer refund the P5 Million since he had already applied it to his two
companies; that this is proper since Danton and Bakcom’s shares would also form part of his capital
contribution to Alliance.28chanrobleslaw

Moreover, the incorporation did not push through because Fong unilaterally rescinded the joint venture
agreement by limiting his investment from P32.5 Million to P5 Million.29 Thus, it was Fong who first breached
the contract, not he. Consequently, Fong’s failure to comply with his undertaking disqualified him from
seeking the agreement’s rescission.30chanrobleslaw

The Court’s Ruling

We resolve to GRANT the petition.

At the outset, the Court notes that the parties’ joint venture agreement to incorporate a company that
would hold the shares of Danton and Bakcom and that would serve as the business vehicle for their food
enterprise, is a valid agreement. The failure to reduce the agreement to writing does not affect its validity
or enforceability as there is no law or regulation which provides that an agreement to incorporate must be
in writing.
With this as premise, we now address the related issues raised by the parties.

The body rather than the title of the complaint determines the nature of the action.

A well-settled rule in procedural law is that the allegations in the body of the pleading or the complaint,
and not its title, determine the nature of an action.31chanrobleslaw

An examination of Fong’s complaint shows that although it was labeled as an action for a sum of
money and damages, it was actually a complaint for rescission. The following allegations in the
complaint support this finding:chanRoblesvirtualLawlibrary
9. Notwithstanding the aforesaid remittances, defendant failed for an unreasonable length of
time to submit a valuation of the equipment of D.C. Danton and Bakcom x x x.

10. Worse, despite repeated reminders from plaintiff, defendant failed to accomplish the
organization and incorporation of the proposed holding company, contrary to his representation to
promptly do so.

xxxx

17. Considering that the incorporation of the proposed holding company failed to materialize,
despite the lapse of one year and four months from the time of subscription, plaintiff has
the right to revoke his pre-incorporation subscription. Such revocation entitles plaintiff to
a refund of the amount of P5,000,000.00 he remitted to defendant, representing advances made in
favor of defendant to be considered as payment on plaintiff’s subscription to the proposed holding
company upon its incorporation, plus interest from receipt by defendant of said amount until fully paid.
[Emphasis supplied.]
Fong’s allegations primarily pertained to his cancellation of their verbal agreement because
Dueñas failed to perform his obligations to provide verifiable documents on the valuation of the
Danton’s and Bakcom’s shares, and to incorporate the proposed corporation. These allegations
clearly show that what Fong sought was the joint venture agreement’s rescission.

As a contractual remedy, rescission is available when one of the parties substantially fails to do what he has
obligated himself to perform.32 It aims to address the breach of faith and the violation of reciprocity between
two parties in a contract.33 Under Article 1191 of the Civil Code, the right of rescission is inherent in
reciprocal obligations, viz:chanRoblesvirtualLawlibrary
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him. [Emphasis supplied.]
Dueñas submits that Fong’s prayer for the return of his cash contribution supports his claim that Fong’s
complaint is an action for collection of a sum of money. However, Dueñas failed to appreciate that the
ultimate effect of rescission is to restore the parties to their original status before they entered
in a contract. As the Court ruled in Unlad Resources v. Dragon:34cralawred
Rescission has the effect of “unmaking a contract, or its undoing from the beginning, and not merely its
termination.” Hence, rescission creates the obligation to return the object of the contract. It can
be carried out only when the one who demands rescission can return whatever he may be obliged to restore.
To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is
not merely to terminate it and release the parties from further obligations to each other, but to abrogate it
from the beginning and restore the parties to their relative positions as if no contract has been made.

Accordingly, when a decree for rescission is handed down, it is the duty of the court to require
both parties to surrender that which they have respectively received and to place each other as
far as practicable in his original situation.35 [Emphasis supplied.]
In this light, we rule that Fong’s prayer for the return of his contribution did not automatically convert the
action to a complaint for a sum of money. The mutual restitution of the parties’ original contributions
is only a necessary consequence of their agreement’s rescission.

Rescission under Art. 1191 is applicable in the present case

Reciprocal obligations are those which arise from the same cause, in which each party is a debtor and a
creditor of the other, such that the obligation of one is dependent on the obligation of the
other.36chanrobleslaw

Fong and Dueñas’ execution of a joint venture agreement created between them reciprocal obligations that
must be performed in order to fully consummate the contract and achieve the purpose for which it was
entered into.

Both parties verbally agreed to incorporate a company that would hold the shares of Danton and Bakcom
and which, in turn, would be the platform for their food business. Fong obligated himself to contribute half
of the capital or P32.5 Million in cash. On the other hand, Dueñas bound himself to shoulder the other half
by contributing his Danton and Bakcom shares, which were allegedly also valued at P32.5 Million. Aside
from this, Dueñas undertook to process Alliance’s incorporation and registration with the SEC.

When the proposed company remained unincorporated by October 30, 1997, Fong cancelled the joint
venture agreement and demanded the return of his P5 Million contribution.

For his part, Dueñas explained that he could not immediately return the P5 Million since he had invested it
in his two companies. He found nothing irregular in this as eventually, the Danton and Bakcom shares would
form part of Alliance’s capital.

Dueñas’ assertion is erroneous.

The parties never agreed that Fong would invest his money in Danton and Bakcom. Contrary to Dueñas’
submission, Fong’s understanding was that his money would be applied to his shareholdings in Alliance. As
shown in Fong’s June 13, 1997 letter, this fact remained to be true even after he limited his contribution to
P5 Million, viz:chanRoblesvirtualLawlibrary

Dear Jojit,

Enclosed is our check for P919,534.80 representing our additional advances to subject company in
process of incorporation. This will make our total advances to date amounting to P5 million.37[Emphasis
supplied.]
Moreover, under the Corporation Code, before a stock corporation may be incorporated and registered, it is
required that at least twenty five percent (25%) of its authorized capital stock as stated in the articles of
incorporation, be first subscribed at the time of incorporation, and at least twenty five percent (25%) of the
total subscription, be paid upon subscription.38chanrobleslaw

To prove compliance with this requirement, the SEC requires the incorporators to submit a treasurer’s
affidavit and a certificate of bank deposit, showing the existence of an amount compliant with the prescribed
capital subscription.39chanrobleslaw

In this light, we conclude that Fong’s cash contributions play an indispensable part in Alliance’s
incorporation. The process necessarily requires the money not only to fund Alliance’s registration with the
SEC but also its initial capital subscription. This is evident in the receipts which Dueñas himself executed,
one of which provides:chanRoblesvirtualLawlibrary

I, JOSE V. DUEÑAS, hereby acknowledge the receipt on January 14, 1997 of the amount of One Million
Pesos (Php 1,000,000.00) Check No. 118 118 7014 Metro Bank, Pasong Tamo branch dated January 13,
1997 from Mr. George Fong, which amount shall constitute an advance of the contribution or
investment of Mr. Fong in the joint venture which he and I are in the process of organizing.
Specifically, this amount will be considered as part of Mr. Fong’s subscription to the shares of stock of the
joint venture company which we will incorporate to embody and carry out our joint venture.40[Emphasis
supplied.]
Thus, Dueñas erred when he invested Fong’s contributions in his two companies. This money should have
been used in processing Alliance’s registration. Its incorporation would not materialize if there would be no
funds for its initial capital. Moreover, Dueñas represented that Danton and Bakcom’s shares were valued at
P32.5 Million. If this was true, then there was no need for Fong’s additional P5 Million investment, which
may possibly increase the value of the Danton and Bakcom shares.

Under these circumstances, the Court agrees with the trial court that Dueñas violated his agreement with
Fong. Aside from unilaterally applying Fong’s contributions to his two companies, Dueñas also
failed to deliver the valuation documents of the Danton and Bakcom shares to prove that the
combined values of their capital contributions actually amounted to P32.5 Million.

These acts led to Dueñas’ delay in incorporating the planned holding company, thus resulting in
his breach of the contract.

On this basis, Dueñas’ breach justified Fong’s rescission of the joint venture agreement under Article 1191.
As the Court ruled in Velarde v. Court of Appeals:41cralawred
The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on
a breach of faith by the other party who violates the reciprocity between them. The breach
contemplated in the said provision is the obligor’s failure to comply with an existing obligation. When the
obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and in the
absence of any just cause for the court to determine the period of compliance, the court shall decree the
rescission.

In the present case, private respondents validly exercised their right to rescind the contract,
because of the failure of petitioners to comply with their obligation to pay the balance of the
purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of sale, a
violation that consequently gave rise to private respondents’ right to rescind the same in accordance with
law.42 [Emphasis supplied.]
However, the Court notes that Fong also breached his obligation in the joint venture agreement.

In his June 13, 1997 letter, Fong expressly informed Dueñas that he would be limiting his cash contribution
from P32.5 Million to P5 Million because of the following reasons which we quote
verbatim:chanRoblesvirtualLawlibrary

1. First, we were faced with the ‘personal’ factor which was explained to you one time. This has
caused us to turn down a number of business opportunities;

2. Secondly, since last year, the operation of Century 21 has been taking more time from us
than anticipated. That is why we decided to relinquish our original plan to manage and operate
‘Boboli’ knowing this limitation. For us, it does not make sense anymore to go for a significant
shareholding when we cannot be hands on and participate actively as originally planned.43 x
x x.

Although these reasons appear to be valid, they do not erase the fact that Fong still reneged on
his original promise to contribute P32.5 Million. The joint venture agreement was not reduced to
writing and the evidence does not show if the parties agreed on valid causes that would justify the limitation
of the parties’ capital contributions. Their only admission was that they obligated themselves to contribute
P32.5 Million each.

Hence, Fong’s diminution of his capital share to P5 Million also amounted to a substantial breach
of the joint venture agreement, which breach occurred before Fong decided to rescind his
agreement with Dueñas.Thus, Fong also contributed to the non-incorporation of Alliance that needed P65
Million as capital to operate.

Fong cannot entirely blame Dueñas since the substantial reduction of his capital contribution also greatly
impeded the implementation of their agreement to engage in the food business and to incorporate a holding
company for it.

As both parties failed to comply with their respective reciprocal obligations, we apply Article 1192 of the
Civil Code, which provides:chanRoblesvirtualLawlibrary
Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor
shall be equitably tempered by the courts. If it cannot be determined which of the parties first
violated the contract, the same shall be deemed extinguished, and each shall bear his own
damages. [Emphasis supplied.]
Notably, the Court is not aware of the schedule of performance of the parties’ obligations since the joint
venture agreement was never reduced to writing. The facts, however, show that both parties began
performing their obligations after executing the joint venture agreement. Fong started remitting his share
while Dueñas started processing the Boboli international license for the proposed corporation’s food
business.

The absence of a written contract renders the Court unsure as to whose obligation must be performed first.
It is possible that the parties agreed that Fong would infuse capital first and Dueñas’ submission of the
documents on the Danton and Bakcom shares would just follow. It could also be the other way around.
Further, the parties could have even agreed to simultaneously perform their respective obligations.

Despite these gray areas, the fact that both Fong and Dueñas substantially contributed to the
non-incorporation of Alliance and to the failure of their food business plans remains certain.

As the Court cannot precisely determine who between the parties first violated the agreement, we apply the
second part of Article 1192 which states: “if it cannot be determined which of the parties first violated the
contract, the same shall be deemed extinguished, and each shall bear his own damages.”

In these lights, the Court holds that the joint venture agreement between Fong and Dueñas is deemed
extinguished through rescission under Article 1192 in relation with Article 1191 of the Civil Code.
Dueñas must therefore return the P5 Million that Fong initially contributed since rescission requires mutual
restitution.44After rescission, the parties must go back to their original status before they entered
into the agreement. Dueñas cannot keep Fong’s contribution as this would constitute unjust enrichment.

No damages shall be awarded to any party in accordance with the rule under Article 1192 of the Civil Code
that in case of mutual breach and the first infractor of the contract cannot exactly be determined, each party
shall bear his own damages.

WHEREFORE, premises considered, we hereby GRANT the petition and reverse the September 16, 2008
decision and December 8, 2008 resolution of the Court of Appeals in CA-G.R. CV No. 88396. Respondent
Jose V. Dueñas is ordered to RETURN Five Million Pesos to petitioner George C. Fong. This amount shall
incur an interest of six percent (6%) per annum from the date of finality of this judgment until fully
paid.45 The parties’ respective claims for damages are deemed EXTINGUISHED and each of them shall
bear his own damages.

SO ORDERED.cralawlawlibrary
 G.R. No. 196251 July 9, 2014

OLIVAREZ REALTY CORPORATION and DR. PABLO R. OLIVAREZ, Petitioner,

vs.
BENJAMIN CASTILLO, Respondent.

DECISION

LEONEN, J.:

Trial may be dispensed with and a summary judgment rendered if the case can be resolved judiciously by plain resort to
the pleadings, affidavits, depositions, and other papers filed by the parties.

This is a petition for review on certiorari1 of the Court of Appeals' decision2 dated July 20, 2010 and resolution3dated March
18, 2011 in CAG.R. CV No. 91244.

The facts as established from the pleadings of the parties are as follows:

Benjamin Castillo was the registered owner of a 346,918-squaremeter parcel of land located in Laurel, Batangas, covered
by Transfer Certificate of Title No. T-19972.4 The Philippine Tourism Authority allegedly claimed ownership of the
sameparcel of land based on Transfer Certificate of Title No. T-18493.5 On April 5, 2000, Castillo and Olivarez Realty
Corporation, represented by Dr. Pablo R. Olivarez, entered into a contract of conditional sale6 over the property. Under the
deed of conditional sale, Castillo agreed to sell his property to Olivarez Realty Corporation for ₱19,080,490.00. Olivarez
Realty Corporation agreed toa down payment of ₱5,000,000.00, to be paid according to the following schedule:

DATE AMOUNT

April 8, 2000 500,000.00

May 8, 2000 500,000.00

May 16, 2000 500,000.00

1,000,000.0
June 8, 2000
0

July 8, 2000 500,000.00

August 8, 2000 500,000.00

September 8, 2000 500,000.00

October 8, 2000 500,000.00

7
November 8, 2000 500,000.00

As to the balance of ₱14,080,490.00, Olivarez Realty Corporation agreed to pay in 30 equal monthly installments every
eighth day of the month beginning in the month that the parties would receive a decision voiding the Philippine Tourism
Authority’s title to the property.8 Under the deed of conditional sale, Olivarez RealtyCorporation shall file the action against
the Philippine Tourism Authority "with the full assistance of [Castillo]."9 Paragraph C of the deed of conditional sale provides:

C. [Olivarez Realty Corporation] assumes the responsibility of taking necessary legal action thru Court to have the claim/title
TCT T-18493 of Philippine Tourism Authority over the above-described property be nullified and voided; with the full
assistance of [Castillo][.]10

Should the action against the Philippine Tourism Authority be denied, Castillo agreed to reimburse all the amounts paid by
Olivarez Realty Corporation. Paragraph D of the deed of conditional sale provides:
D. In the event that the Court denie[s] the petition against the Philippine Tourism Authority, all sums received by [Castillo]
shall be reimbursed to [Olivarez Realty Corporation] without interest[.]11

As to the "legitimate tenants" occupying the property, Olivarez Realty Corporation undertook to pay them "disturbance
compensation," while Castillo undertook to clear the land of the tenants within six months from the signing of the deed of
conditional sale. Should Castillo fail to clear the land within six months, Olivarez Realty Corporation may suspend its monthly
down payment until the tenants vacate the property. Paragraphs E and F of the deed of conditional sale provide: E. That
[Olivarez Realty Corporation] shall pay the disturbance compensation to legitimate agricultural tenants and fishermen
occupants which in no case shall exceed ONE MILLION FIVE HUNDRED THOUSAND (₱1,500,000.00) PESOS. Said
amountshall not form part of the purchase price. In excess of this amount, all claims shall be for the account of [Castillo];

F. That [Castillo] shall clear the land of [the] legitimate tenants within a period of six (6) months upon signing of this Contract,
and in case [Castillo] fails, [Olivarez Realty Corporation] shall have the right to suspend the monthly down payment until
such time that the tenants [move] out of the land[.]12

The parties agreed thatOlivarez Realty Corporation may immediately occupy the property upon signing of the deed of
conditional sale. Should the contract be cancelled, Olivarez RealtyCorporation agreed to return the property’s possession
to Castillo and forfeit all the improvements it may have introduced on the property. Paragraph I of the deed of conditional
sale states:

I. Immediately upon signing thisContract, [Olivarez Realty Corporation] shall be entitled to occupy, possess and develop
the subject property. In case this Contract is canceled [sic], any improvement introduced by [the corporation] on the property
shall be forfeited in favor of [Castillo][.]13

On September 2, 2004, Castillo filed a complaint14 against Olivarez Realty Corporation and Dr. Olivarez with the Regional
Trial Court of Tanauan City, Batangas.

Castillo alleged that Dr. Olivarez convinced him into selling his property to Olivarez Realty Corporation on the representation
that the corporation shall be responsible in clearing the property of the tenants and in paying them disturbance
compensation. He further alleged that Dr. Olivarez solely prepared the deed of conditional sale and that he was made to
sign the contract with its terms "not adequately explained [to him] in Tagalog."15

After the parties had signed the deed of conditional sale, Olivarez Realty Corporation immediately took possession of the
property. However, the corporation only paid 2,500,000.00 ofthe purchase price. Contrary to the agreement, the corporation
did not file any action against the Philippine Tourism Authority to void the latter’s title to the property. The corporation neither
cleared the land of the tenants nor paid them disturbance compensation. Despite demand, Olivarez Realty Corporation
refused to fully pay the purchase price.16

Arguing that Olivarez Realty Corporation committed substantial breach of the contract of conditional sale and that the deed
of conditional sale was a contract of adhesion, Castillo prayed for rescission of contract under Article 1191 of the Civil Code
of the Philippines. He further prayed that Olivarez Realty Corporation and Dr. Olivarez be made solidarily liable for moral
damages, exemplary damages, attorney’s fees, and costs of suit.17

In their answer,18 Olivarez Realty Corporation and Dr. Olivarez admitted that the corporation only paid ₱2,500,000.00 ofthe
purchase price. In their defense, defendants alleged that Castillo failed to "fully assist"19 the corporation in filing an action
against the Philippine Tourism Authority. Neither did Castillo clear the property of the tenants within six months from the
signing of the deed of conditional sale. Thus, according to defendants, the corporation had "all the legal right to withhold the
subsequent payments to [fully pay] the purchase price."20

Olivarez Realty Corporation and Dr. Olivarez prayedthat Castillo’s complaint be dismissed. By way of compulsory
counterclaim, they prayed for ₱100,000.00 litigation expenses and ₱50,000.00 attorney’s fees.21

Castillo replied to the counterclaim,22 arguing that Olivarez Realty Corporation and Dr. Olivarez had no right to litigation
expenses and attorney’s fees. According to Castillo, the deed of conditional sale clearly states that the corporation
"assume[d] the responsibility of taking necessary legal action"23 against the Philippine Tourism Authority, yet the corporation
did not file any case. Also, the corporation did not pay the tenants disturbance compensation. For the corporation’s failure
to fully pay the purchase price, Castillo claimed that hehad "all the right to pray for the rescission of the [contract],"24 and he
"should not be held liable . . . for any alleged damages by way of litigation expenses and attorney’s fees." 25
On January 10, 2005, Castillo filed a request for admission,26 requesting Dr. Olivarez to admit under oath the genuineness
of the deed of conditional sale and Transfer Certificate of Title No. T-19972. He likewise requested Dr. Olivarez to admit the
truth of the following factual allegations:

1. That Dr. Olivarez is the president of Olivarez Realty Corporation;

2. That Dr. Olivarez offered to purchase the parcel of land from Castillo and that he undertook to clear the property
of the tenants and file the court action to void the Philippine Tourism Authority’s title to the property;

3. That Dr. Olivarez caused the preparation of the deed of conditional sale;

4. That Dr. Olivarez signed the deed of conditional sale for and on behalf of Olivarez Realty Corporation;

5. That Dr. Olivarez and the corporation did not file any action against the Philippine Tourism Authority;

6. That Dr. Olivarez and the corporation did not pay the tenants disturbance compensation and failed to clear the
property of the tenants; and

7. That Dr. Olivarez and the corporation only paid ₱2,500,000.00 of the agreed purchase price.27

On January 25, 2005, Dr. Olivarez and Olivarez Realty Corporation filed their objections to the request for
admission,28 stating that they "reiterate[d] the allegations [and denials] in their [answer]."29

The trial court conducted pre-trial conference on December 17, 2005.

On March 8, 2006, Castillo filed a motion for summary judgment and/or judgment on the pleadings.30 He argued that
Olivarez Realty Corporation and Dr. Olivarez "substantially admitted the material allegations of [his] complaint,"31specifically:

1. That the corporation failed to fully pay the purchase price for his property;32

2. That the corporation failed to file an action to void the Philippine Tourism Authority’s title to his property;33and

3. That the corporation failed to clear the property of the tenants and pay them disturbance compensation.34

Should judgment on the pleadings beimproper, Castillo argued that summary judgment may still be rendered asthere is no
genuine issue as to any material fact.35 He cited Philippine National Bank v. Noah’s Ark Sugar Refinery36 as authority.

Castillo attached to his motion for summary judgment and/or judgment on the pleadings his affidavit37 and the affidavit of a
Marissa Magsino38 attesting to the truth of the material allegations of his complaint.

Olivarez Realty Corporation and Dr. Olivarez opposed39 the motion for summary judgment and/or judgment on the
pleadings, arguing that the motion was "devoid of merit."40 They reiterated their claim that the corporation withheld further
payments of the purchase price because "there ha[d] been no favorable decision voiding the title of the Philippine Tourism
Authority."41 They added that Castillo sold the property to another person and that the sale was allegedly litigated in Quezon
City.42

Considering that a title adverse to that of Castillo’s existed, Olivarez Realty Corporation and Dr. Olivarez argued that the
case should proceed to trial and Castillo be required to prove that his title to the property is "not spurious or fake and that
he had not sold his property to another person."43

In reply to the opposition to the motion for summary judgment and/or judgment on the pleadings,44 Castillo maintained that
Olivarez Realty Corporation was responsible for the filing of an action against the Philippine Tourism Authority. Thus, the
corporation could not fault Castillo for not suing the PhilippineTourism Authority.45 The corporation illegally withheld
payments of the purchase price.

As to the claim that the case should proceed to trial because a title adverse to his title existed, Castillo argued that the
Philippine Tourism Authority’s title covered another lot, not his property.46
During the hearing on August 3, 2006, Olivarez Realty Corporation and Dr. Olivarez prayed that they be given 30 days to
file a supplemental memorandum on Castillo’s motion for summary judgment and/or judgment on the pleadings.47

The trial court granted the motion. Itgave Castillo 20 days to reply to the memorandum and the corporation and Dr. Olivarez
15 days to respond to Castillo’s reply.48

In their supplemental memorandum,49 Olivarez Realty Corporation and Dr. Olivarez argued that there was "an obvious
ambiguity"50 as to which should occur first — the payment of disturbance compensation to the tenants or the clearing of the
property of the tenants.51 This ambiguity, according to defendants, is a genuine issue and "oughtto be threshed out in a full
blown trial."52

Olivarez Realty Corporation and Dr. Olivarez added that Castillo prayed for irreconcilable reliefs of reformation of instrument
and rescission of contract.53 Thus, Castillo’s complaint should be dismissed.

Castillo replied54 to the memorandum, arguing that there was no genuine issue requiring trial of the case. According to
Castillo, "common sense dictates . . . that the legitimate tenants of the [property] shall not vacate the premises without being
paid any disturbance compensation . . ."55 Thus, the payment of disturbance compensation should occur first before clearing
the property of the tenants.

With respect to the other issuesraised in the supplemental memorandum, specifically, that Castillo sold the property to
another person, he argued that these issues should not be entertained for not having been presented during pre-trial.56

In their comment on the reply memorandum,57 Olivarez Realty Corporation and Dr. Olivarez reiterated their arguments that
certain provisions of the deed of conditional sale were ambiguous and that the complaint prayed for irreconcilable reliefs.58

As to the additional issues raised in the supplemental memorandum, defendants argued that issues not raised and evidence
not identified and premarked during pre-trial may still be raised and presented during trial for good cause shown. Olivarez
Realty Corporation and Dr. Olivarez prayed that Castillo’s complaint be dismissed for lack of merit.59

Ruling of the trial court

The trial court found that Olivarez Realty Corporation and Dr. Olivarez’s answer "substantially [admitted the material
allegations of Castillo’s] complaint and [did] not . . . raise any genuine issue [as to any material fact]."60

Defendants admitted that Castillo owned the parcel of land covered by Transfer Certificate of Title No. T-19972. They
likewise admitted the genuineness of the deed of conditional sale and that the corporation only paid ₱2,500,000.00 of the
agreed purchase price.61

According to the trial court, the corporation was responsible for suing the Philippine Tourism Authority and for paying the
tenants disturbance compensation. Since defendant corporation neither filed any case nor paid the tenants disturbance
compensation, the trial court ruled that defendant corporation had no right to withhold payments from Castillo.62

As to the alleged ambiguity of paragraphs E and F of the deed of conditional sale, the trial court ruled that Castillo and his
witness, Marissa Magsino, "clearly established"63 in their affidavits that the deed of conditional sale was a contract of
adhesion. The true agreement between the parties was that the corporation would both clear the land of the tenants and
pay them disturbance compensation.

With these findings, the trial court ruled that Olivarez Realty Corporation breached the contract ofconditional sale.1âwphi1 In
its decision64 dated April 23, 2007, the trial court ordered the deed of conditional sale rescinded and the ₱2,500,000.00
forfeited in favor of Castillo "as damages under Article 1191 of the Civil Code."65

The trial court declared Olivarez Realty Corporation and Dr. Olivarez solidarily liable to Castillo for 500,000.00 as moral
damages, ₱50,000.00 as exemplary damages, and ₱50,000.00 as costs of suit.66

Ruling of the Court of Appeals

Olivarez Realty Corporation and Dr. Olivarez appealed to the Court of Appeals.67
In its decision68 dated July 20, 2010, the Court of Appeals affirmed in totothe trial court’s decision. According to the appellate
court, the trial court "did not err in its finding that there is no genuine controversy as to the facts involved [in this case]."69 The
trial court, therefore, correctly rendered summary judgment.70

As to the trial court’s award of damages, the appellatecourt ruled that a court may award damages through summary
judgment "if the parties’ contract categorically [stipulates] the respective obligations of the parties in case of default."71 As
found by the trial court,paragraph I of the deed of conditional sale categorically states that "in case [the deed of conditional
sale] is cancelled, any improvementintroduced by [Olivarez Realty Corporation] on the property shall be forfeited infavor of
[Castillo]."72 Considering that Olivarez Realty Corporation illegally retained possession of the property, Castillo forewent
rentto the property and "lost business opportunities."73 The ₱2,500,000.00 down payment, according to the appellate court,
shouldbe forfeited in favor of Castillo. Moral and exemplary damages and costs ofsuit were properly awarded.

On August 11, 2010, Olivarez RealtyCorporation and Dr. Olivarez filed their motion for reconsideration,74 arguing that the
trial court exceeded its authority in forfeiting the ₱2,500,000.00 down payment and awarding ₱500,000.00 in moral damages
to Castillo. They argued that Castillo only prayed for a total of ₱500,000.00 as actual and moral damages in his
complaint.75 Appellants prayed that the Court of Appeals "take a second hard look"76 at the case and reconsider its decision.

In the resolution77 dated March 18, 2011, the Court of Appeals denied the motion for reconsideration.

Proceedings before this court

Olivarez Realty Corporation and Dr. Olivarez filed their petition for review on certiorari78 with this court. Petitionersargue
that the trial court and the Court of Appeals erred in awarding damages to Castillo. Under Section 3, Rule 35 of the 1997
Rules ofCivil Procedure, summary judgment may be rendered except as to the amountof damages. Thus, the Court of
Appeals "violated the procedural steps in rendering summary judgment."79

Petitioners reiterate that there are genuine issues ofmaterial fact to be resolved in this case. Thus, a full-blown trial is
required, and the trial court prematurely decided the case through summary judgment. They cite Torres v. Olivarez Realty
Corporation and Dr. Pablo Olivarez,80 a case decided by the Ninth Division of the Court of Appeals.

In Torres, Rosario Torres was the registeredowner of a parcel of land covered by Transfer Certificate of Title No. T-19971.
Under a deed of conditional sale, she sold her property to OlivarezRealty Corporation for ₱17,345,900.00. When the
corporation failed to fully pay the purchase price, she sued for rescission of contractwith damages. In their answer, the
corporation and Dr. Olivarez argued thatthey discontinued payment because Rosario Torres failed to clear the land of the
tenants.

Similar to Castillo, Torres filed a motion for summary judgment, which the trial court granted. On appeal, the Court of Appeals
set aside the trial court’s summary judgment and remanded the case to the trial court for further proceedings.81 The Court
of Appeals ruled that the material allegations of the complaint "were directly disputed by [the corporation and Dr. Olivarez]
in their answer"82 when they argued that they refused to pay because Torres failed to clear the land of the tenants.

With the Court of Appeals’ decision in Torres,Olivarez Realty Corporation and Dr. Olivarez argue that this case should
likewise be remanded to the trial court for further proceedings under the equipoise rule.

Petitioners maintain that Castillo availed himself of the irreconcilable reliefs of reformation of instrument and rescission of
contract.83 Thus, the trial court should have dismissed the case outright.

Petitioners likewise argue that the trial court had no jurisdiction to decide the case as Castillo failed topay the correct docket
fees.84 Petitioners argue that Castillo should have paid docket fees based on the property’s fair market value since Castillo’s
complaint is a real action.85

In his comment,86 Castillo maintains that there are no genuine issues as to any material fact inthis case. The trial court,
therefore, correctly rendered summary judgment.

As to petitioners’ claim that the trial court had no jurisdiction to decide the case, Castillo argues that he prayed for rescission
of contract in his complaint. This action is incapable of pecuniary estimation, and the Clerk of Court properly computed the
docket fees based on this prayer.87 Olivarez Realty Corporation and Dr. Olivarez replied,88reiterating their arguments in the
petition for review on certiorari.
The issues for our resolution are the following:

I. Whether the trial court erred in rendering summary judgment;

II. Whether proper docket fees were paid in this case.

The petition lacks merit.

I
The trial court correctly rendered
summary judgment, as there were no genuine issues of material fact in this case

Trial "is the judicial examination and determination of the issues between the parties to the action."89 During trial, parties
"present their respective evidence of their claims and defenses."90 Parties to an action have the right "to a plenary trial of
the case"91 to ensure that they were given a right to fully present evidence on their respective claims.

There are instances, however, whentrial may be dispensed with. Under Rule 35 of the 1997 Rules of Civil Procedure, a trial
court may dispense with trial and proceed to decide a case if from the pleadings, affidavits, depositions, and other papers
on file, there is no genuine issue as to any material fact. In such a case, the judgment issued is called a summary judgment.

A motion for summary judgment is filed either by the claimant or the defending party.92 The trial court then hears the motion
for summary judgment. If indeed there are no genuine issues of material fact, the trial court shall issue summary judgment.
Section 3, Rule 35 of the 1997 Rules of Civil Procedure provides:

SEC. 3. Motion and proceedings thereon. – The motion shall be served at least ten (10) days beforethe time specified for
the hearing. The adverse party may serve opposing affidavits, depositions, or admission at least three (3) days before the
hearing. After the hearing, the judgment sought shall be rendered forthwith ifthe pleadings, supporting affidavits, depositions,
and admissions on file, showthat, except as to the amount of damages, there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a matter of law.

An issue of material fact exists if the answer or responsive pleading filed specifically denies the material allegations of fact
set forth in the complaint or pleading. If the issue offact "requires the presentation of evidence, it is a genuine issue of
fact."93 However, if the issue "could be resolved judiciously by plain resort"94 to the pleadings, affidavits, depositions, and
other paperson file, the issue of fact raised is sham, and the trial court may resolve the action through summary judgment.

A summary judgment is usually distinguished from a judgment on the pleadings. Under Rule 34 of the 1997 Rules of Civil
Procedure, trial may likewise be dispensed with and a case decided through judgment on the pleadings if the answer filed
fails to tender an issue or otherwise admits the material allegations of the claimant’s pleading.95

Judgment on the pleadings is proper when the answer filed fails to tender any issue, or otherwise admitsthe material
allegations in the complaint.96 On the other hand, in a summary judgment, the answer filed tenders issues as specific denials
and affirmative defenses are pleaded, but the issues raised are sham, fictitious, or otherwise not genuine.97

In this case, Olivarez Realty Corporation admitted that it did not fully pay the purchase price as agreed upon inthe deed of
conditional sale. As to why it withheld payments from Castillo, it set up the following affirmative defenses: First, Castillo did
not filea case to void the Philippine Tourism Authority’s title to the property; second,Castillo did not clear the land of the
tenants; third, Castillo allegedly sold the property to a third person, and the subsequent sale is currently being litigated
beforea Quezon City court.

Considering that Olivarez RealtyCorporation and Dr. Olivarez’s answer tendered an issue, Castillo properly availed himself
of a motion for summary judgment.

However, the issues tendered by Olivarez Realty Corporation and Dr. Olivarez’s answer are not genuine issues of material
fact. These are issues that can be resolved judiciously by plain resort to the pleadings, affidavits, depositions, and other
papers on file; otherwise, these issues are sham, fictitious, or patently unsubstantial.

Petitioner corporation refused to fully pay the purchase price because no court case was filed to void the Philippine Tourism
Authority’s title on the property. However, paragraph C of the deed of conditional sale is clear that petitioner Olivarez Realty
Corporation is responsible for initiating court action against the Philippine Tourism Authority:
C. [Olivarez Realty Corporation] assumes the responsibility of taking necessary legal action thru Court to have the claim/title
TCT T-18493 of Philippine Tourism Authority over the above-described property be nullified and voided; with the full
assistance of [Castillo].98

Castillo’s alleged failureto "fully assist"99 the corporation in filing the case is not a defense. As the trial court said, "how can
[Castillo] assist [the corporation] when [the latter] did not file the action [in the first place?]"100

Neither can Olivarez Realty Corporation argue that it refused to fully pay the purchase price due to the Philippine Tourism
Authority’s adverse claim on the property. The corporation knew of this adverse claim when it entered into a contract of
conditional sale. It even obligated itself under paragraph C of the deed of conditional sale to sue the Philippine Tourism
Authority. This defense, therefore, is sham.

Contrary to petitioners’ claim, there is no "obvious ambiguity"101 as to which should occur first — the payment of the
disturbance compensation or the clearing of the land within six months from the signing of the deed of conditional sale. The
obligations must be performed simultaneously. In this case, the parties should have coordinated to ensure that tenants on
the property were paid disturbance compensation and were made to vacate the property six months after the signingof the
deed of conditional sale.

On one hand, pure obligations, or obligations whose performance do not depend upon a future or uncertainevent, or upon
a past event unknown to the parties, are demandable at once.102 On the other hand, obligations with a resolutory period
also take effect at once but terminate upon arrival of the day certain.103

Olivarez Realty Corporation’s obligation to pay disturbance compensation is a pure obligation. The performance of the
obligation to pay disturbance compensation did not depend on any condition. Moreover, the deed of conditional sale did not
give the corporation a period to perform the obligation. As such, the obligation to pay disturbance compensation was
demandable at once. Olivarez RealtyCorporation should have paid the tenants disturbance compensation upon execution
of the deed of conditional sale.

With respect to Castillo’s obligation to clear the land of the tenants within six months from the signing of the contract, his
obligation was an obligation with a resolutory period. The obligation to clear the land of the tenants took effect at once,
specifically, upon the parties’ signing of the deed of conditional sale. Castillo had until October 2, 2000, six months from
April 5, 2000 when the parties signed the deed of conditional sale, to clear the land of the tenants.

Olivarez Realty Corporation, therefore, had no right to withhold payments of the purchase price. As the trial court ruled,
Olivarez Realty Corporation "can only claim non-compliance [of the obligation to clear the land of the tenants in] October
2000."104 It said:

. . . it is clear that defendant [Olivarez Realty Corporation] should have paid the installments on the ₱5 million downpayment
up to October 8, 2000, or a total of ₱4,500,000.00. That is the agreement because the only time that defendant [corporation]
can claim non-compliance of the condition is after October, 2000 and so it has the clear obligation topay up to the October
2000 the agreed installments. Since it paid only 2,500,000.00, then a violation of the contract has already been committed.
. . .105

The claim that Castillo sold the property to another is fictitious and was made in bad faith to prevent the trial court from
rendering summary judgment. Petitioners did not elaborate on this defense and insisted on revealing the identity of the
buyer only during trial.106 Even in their petition for review on certiorari, petitioners never disclosed the name of this alleged
buyer. Thus, as the trial court ruled, this defense did not tender a genuine issue of fact, with the defense "bereft of details."107

Castillo’s alleged prayer for the irreconcilable reliefs of rescission of contract and reformation of instrument is not a ground
to dismiss his complaint. A plaintiff may allege two or more claims in the complaint alternatively or hypothetically, either in
one cause of action or in separate causes of action per Section 2, Rule 8 of the 1997 Rules of Civil Procedure.108 It is the
filing of two separatecases for each of the causes of action that is prohibited since the subsequently filed case may be
dismissed under Section 4, Rule 2 of the 1997 Rules of Civil Procedure109 on splitting causes of action.

As demonstrated, there are no genuineissues of material fact in this case. These are issues that can be resolved judiciously
by plain resort to the pleadings, affidavits, depositions, and other papers on file. As the trial court found, Olivarez Realty
Corporation illegally withheld payments of the purchase price. The trial court did not err in rendering summary judgment.
 II
Castillo is entitled to cancel the contract
of conditional sale

Since Olivarez Realty Corporation illegally withheld payments of the purchase price, Castillo is entitled to cancel his contract
with petitioner corporation. However, we properly characterize the parties’ contract as a contract to sell, not a contract of
conditional sale.

In both contracts to sell and contracts of conditional sale, title to the property remains with the seller until the buyer fully
pays the purchase price.110 Both contracts are subject to the positive suspensive condition of the buyer’s full payment of the
purchase price.111

In a contract of conditional sale, the buyer automatically acquires title to the property upon full payment of the purchase
price.112 This transfer of title is "by operation of law without any further act having to be performed by the seller."113 In a
contract to sell, transfer of title to the prospective buyer is not automatic.114 "The prospective seller [must] convey title to the
property [through] a deed of conditional sale."115

The distinction is important to determine the applicable laws and remedies in case a party does not fulfill his or her
obligations under the contract. In contracts of conditional sale, our laws on sales under the Civil Code of the Philippines
apply. On the other hand, contracts to sell are not governed by our law on sales116 but by the Civil Code provisions on
conditional obligations.

Specifically, Article 1191 of the Civil Code on the right to rescind reciprocal obligations does not apply to contracts to
sell.117 As this court explained in Ong v. Court of Appeals,118 failure to fully pay the purchase price in contracts to sell is not
the breach of contract under Article 1191.119 Failure to fully pay the purchase price is "merely an event which prevents the
[seller’s] obligation to convey title from acquiring binding force."120 This is because "there can be no rescission of an
obligation that is still nonexistent, the suspensive condition not having [happened]."121

In this case, Castillo reserved his title to the property and undertook to execute a deed of absolute sale upon Olivarez Realty
Corporation’s full payment of the purchase price.122 Since Castillo still has to execute a deed of absolute sale to Olivarez
RealtyCorporation upon full payment of the purchase price, the transfer of title is notautomatic. The contract in this case is
a contract to sell.

As this case involves a contract tosell, Article 1191 of the Civil Code of the Philippines does not apply. The contract to sell
is instead cancelled, and the parties shall stand as if the obligation to sell never existed.123

Olivarez Realty Corporation shall return the possession of the property to Castillo. Any improvement that Olivarez Realty
Corporation may have introduced on the property shall be forfeited in favor of Castillo per paragraph I of the deed of
conditional sale:

I. Immediately upon signing thisContract, [Olivarez Realty Corporation] shall be entitled to occupy, possess and develop
the subject property. In case this Contract is cancelled, any improvement introduced by [Olivarez Realty Corporation] on
the property shall be forfeited in favor of [Castillo.]124

As for prospective sellers, thiscourt generally orders the reimbursement of the installments paidfor the property when setting
aside contracts to sell.125 This is true especially ifthe property’s possession has not been delivered to the prospective buyer
prior to the transfer of title.

In this case, however, Castillo delivered the possession of the property to Olivarez Realty Corporation prior to the transfer
of title. We cannot order the reimbursement of the installments paid.

In Gomez v. Court of Appeals,126 the City of Manila and Luisa Gomez entered into a contract to sell over a parcel of land.
The city delivered the property’s possession to Gomez. She fully paid the purchase price for the property but violated the
terms of the contract to sell by renting out the property to other persons. This court set aside the contract to sell for her
violation of the terms of the contract to sell. It ordered the installments paid forfeited in favor of the City of Manila "as
reasonable compensation for [Gomez’s] use of the [property]"127 for eight years.
In this case, Olivarez Realty Corporation failed to fully pay the purchase price for the property. It only paid ₱2,500,000.00
out of the ₱19,080,490.00 agreed purchase price. Worse, petitioner corporation has been in possession of Castillo’s
property for 14 years since May 5, 2000 and has not paid for its use of the property.

Similar to the ruling in Gomez, we order the ₱2,500,000.00 forfeited in favor of Castillo as reasonable compensation for
Olivarez Realty Corporation’s use of the property.

III
Olivarez Realty Corporation is liable for
moral and exemplary damages and
attorney’s fees

We note that the trial court erred in rendering summary judgment on the amount of damages. Under Section 3, Rule 35 of
the 1997 Rules of Civil Procedure, summary judgment may be rendered, except as to the amount of damages.

In this case, the trial court erred in forfeiting the ₱2,500,000.00 in favor of Castillo as damages under Article 1191 of the
Civil Code of the Philippines. As discussed, there is nobreach of contract under Article 1191 in this case.

The trial court likewise erred inrendering summary judgment on the amount of moral and exemplary damages and attorney’s
fees.

Nonetheless, we hold that Castillois entitled to moral damages, exemplary damages, and attorney’s fees.

Moral damages may be awarded in case the claimant experienced physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury.128

As for exemplary damages, they are awarded in addition to moral damages by way of example or correction for the public
good.129 Specifically in contracts, exemplary damages may be awarded if the defendant acted in a wanton,
fraudulent,reckless, oppressive, or malevolent manner.130

Under the deed of conditional sale, Olivarez Realty Corporation may only suspend the monthly down payment in case
Castillo fails to clear the land of the tenants six months from the signing of the instrument. Yet, even before the sixth month
arrived, Olivarez Realty Corporation withheld payments for Castillo’s property. It evenused as a defense the fact that no
case was filed against the PhilippineTourism Authority when, under the deed of conditional sale, Olivarez Realty Corporation
was clearly responsible for initiating action against the Philippine Tourism Authority. These are oppressive and malevolent
acts, and we find Castillo entitled to ₱500,000.00 moral damages and ₱50,000.00 exemplary damages:

Plaintiff Castillo is entitled to moral damages because of the evident bad faith exhibited by defendants in dealing with him
regarding the sale of his lot to defendant [Olivarez Realty Corporation]. He suffered much prejudice due to the failure of
defendants to pay him the balance of purchase price which he expected touse for his needs which caused him wounded
feelings, sorrow, mental anxiety and sleepless nights for which defendants should pay ₱500,000.00 as moral damages
more than six (6) years had elapsed and defendants illegally and unfairly failed and refused to pay their legal obligations to
plaintiff, unjustly taking advantage of a poor uneducated man like plaintiff causing much sorrow and financial difficulties.
Moral damages in favor of plaintiff is clearly justified . . . [Castillo] is also entitled to ₱50,000.00 as exemplary damages to
serve as a deterrent to other parties to a contract to religiously comply with their prestations under the contract.131

We likewise agree that Castillo is entitled to attorney’s fees in addition to the exemplary damages.132 Considering that
Olivarez Realty Corporation refused to satisfy Castillo’splainly valid, just, and demandable claim,133 the award of ₱50,000.00
as attorney’s fees is in order. However, we find that Dr. Pablo R.Olivarez is not solidarily liable with Olivarez Realty
Corporation for the amount of damages.

Under Article 1207 of the Civil Code of the Philippines, there is solidary liability only when the obligation states it or when
the law or the nature of the obligation requires solidarity.134 In case of corporations, they are solely liable for their
obligations.135 The directors or trustees and officers are not liable with the corporation even if it is through their acts that the
corporation incurred the obligation. This is because a corporation is separate and distinct from the persons comprising it.136

As an exception to the rule, directors or trustees and corporate officers may be solidarily liable with the corporation for
corporate obligations if they acted "in bad faith or with gross negligence in directing the corporate affairs."137
In this case, we find that Castillo failed to prove with preponderant evidence that it was through Dr. Olivarez’s bad faith or
gross negligence that Olivarez Realty Corporation failed to fully pay the purchase price for the property. Dr. Olivarez’s
alleged act of making Castillo sign the deed of conditional sale without explaining to the latter the deed’s terms in Tagalog
is not reason to hold Dr. Olivarez solidarily liable with the corporation. Castillo had a choice not to sign the deed of conditional
sale. He could have asked that the deed of conditional sale be written in Tagalog. Thus, Olivarez Realty Corporation issolely
liable for the moral and exemplary damages and attorney’s fees to Castillo.

IV
The trial court acquired jurisdiction over
Castillo’s action as he paid the correct
docket fees

Olivarez Realty Corporation and Dr. Olivarez claimed that the trial court had no jurisdiction to take cognizance of the case.
In the reply/motion to dismiss the complaint138 they filed with the Court of Appeals, petitioners argued that Castillo failed to
pay the correct amount of docket fees. Stating that this action is a real action, petitioners argued that the docket fee Castillo
paid should have been based on the fair market value of the property. In this case, Castillo only paid 4,297.00, which is
insufficient "if the real nature of the action was admitted and the fair market value of the property was disclosed and made
the basis of the amount of docket fees to be paid to the court."139Thus, according to petitioners, the case should be dismissed
for lack of jurisdiction.

Castillo countered that his action for rescission is an action incapable of pecuniary estimation. Thus, the Clerk of Court of
the Regional Trial Court of Tanauan City did not err in assessing the docket fees based on his prayer.

We rule for Castillo. In De Leon v. Court of Appeals,140 this court held that an action for rescission of contract of sale of real
property is an action incapable of pecuniary estimation. In De Leon, the action involved a real property. Nevertheless, this
court held that "it is the nature of the action as one for rescission of contract which is controlling."141 Consequently, the
docket fees to be paid shall be for actions incapableof pecuniary estimation, regardless if the claimant may eventually
recover the real property. This court said:

. . . the Court in Bautista v.Lim, held that an action for rescission of contract is one which cannot be estimated and therefore
the docket fee for its filing should be the flat amount of ₱200.00 as then fixed in the former Rule 141, §141, §5(10). Said
this Court:

We hold that Judge Dalisay did not err in considering Civil Case No. V-144 as basically one for rescission or annulment of
contract which is not susceptible of pecuniary estimation (1 Moran's Comments on the Rules of Court, 1970 Ed, p. 55;
Lapitan vs. Scandia, Inc., L-24668, July 31, 1968, 24 SCRA 479, 781-483).

Consequently, the fee for docketing it is ₱200, an amount already paid by plaintiff, now respondent Matilda Lim.1âwphi1(She
should pay also the two pesos legal research fund fee, if she has not paid it, as required in Section 4 of Republic Act No.
3870, the charter of the U.P. Law Center).

Thus, although eventually the result may be the recovery of land, it is the nature of the action as one for rescission of
contract which is controlling. The Court of Appeals correctly applied these cases to the present one. As it said:

We would like to add the observations that since the action of petitioners [private respondents] against private respondents
[petitioners] is solely for annulment or rescission which is not susceptible of pecuniary estimation, the action should not be
confused and equated with the "value of the property" subject of the transaction; that by the very nature of the case, the
allegations, and specific prayer in the complaint, sans any prayer for recovery of money and/or value of the transaction, or
for actual or compensatory damages, the assessment and collection of the legal fees should not be intertwined with the
merits of the case and/or what may be its end result; and that to sustain private respondents' [petitioners'] position on what
the respondent court may decide after all, then the assessment should be deferred and finally assessed only after the court
had finally decided the case, which cannot be done because the rules require that filing fees should be based on what is
alleged and prayed for in the face of the complaint and paid upon the filing of the complaint.142

Although we discussed that there isno rescission of contract to speak of in contracts of conditional sale, we hold that an
action to cancel a contract to sell, similar to an action for rescission of contract of sale, is an action incapable of pecuniary
estimation. Like any action incapable of pecuniary estimation, an action to cancel a contract to sell "demands an inquiry into
other factors"143 aside from the amount of money to be awarded to the claimant. Specifically in this case, the trial court
principally determined whether Olivarez Realty Corporation failed to pay installments of the property’s purchase price as
the parties agreed upon in the deed of conditional sale. The principal natureof Castillo’s action, therefore, is incapable of
pecuniary estimation.

All told, there is no issue that the parties in this case entered into a contract to sell a parcel of land and that Olivarez Realty
Corporation failed to fully pay the installments agreed upon.Consequently, Castillo is entitled to cancel the contract to sell.

WHEREFORE, the petition for review on certiorari is DENIED. The Court of Appeals’ decision dated July 20, 2010 and in
CA-G.R. CV No. 91244 is AFFIRMEDwith MODIFICATION.

The deed of conditional sale dated April 5, 2000 is declared CANCELLED. Petitioner Olivarez Realty Corporation shall
RETURN to respondent Benjamin Castillo the possession of the property covered by Transfer Certificate of Title No. T-
19972 together with all the improvements that petitioner corporation introduced on the property. The amount of
₱2,500,000.00 is FORFEITED in favor of respondent Benjamin Castillo as reasonable compensation for the use of petitioner
Olivarez Realty Corporation of the property.

Petitioner Olivarez Realty Corporation shall PAY respondent Benjamin Castillo ₱500,000.00 as moral damages, ₱50,000.00
as exemplary damages, and ₱50,000.00 as attorney's fees with interest at 6% per annum from the time this decision
becomes final and executory until petitioner

corporation fully pays the amount of damages.144

SO ORDERED.
 G.R. No. 172652 November 26, 2014

METROPOLITAN BANK AND TRUST COMPANY, Petitioner,

vs.
WILFRED N. CHIOK, Respondent.

x-----------------------x

G.R. No. 175302

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
WILFRED N. CHIOK, Respondent.

x-----------------------x

G.R. No. 175394

GLOBAL BUSINESS BANK, INC., Petitioner,

vs.
WILFRED N. CHIOK, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

The three consolidated petitions herein all assail the Decision1 of the Court of Appeals in CA-G.R. CV No. 77508 dated May
5, 2006, and the Resolution2 in the same case dated November 6, 2006.

Respondent Wilfred N. Chiok (Chiok) had been engaged in dollar trading for several years. He usually buys dollars from
Gonzalo B. Nuguid (Nuguid) at the exchange rate prevailing on the date of the sale. Chiok pays Nuguid either in cash or
manager’s check, to be picked up by the latter or deposited in the latter’s bank account. Nuguid delivers the dollars either
on the same day or on a later date as may be agreed upon between them, up to a week later. Chiok and Nuguid had been
dealing in this manner for about six to eight years, with their transactions running into millions of pesos. For this purpose,
Chiok maintained accounts with petitioners Metropolitan Bank and Trust Company (Metrobank) and Global Business Bank,
Inc. (Global Bank), the latter being then referred to as the Asian Banking Corporation (Asian Bank). Chiok likewise entered
into a Bills Purchase Line Agreement (BPLA) with Asian Bank. Under the BPLA, checks drawn in favor of, or negotiated to,
Chiok may be purchased by Asian Bank. Upon such purchase, Chiok receives a discounted cash equivalent of the amount
of the check earlier than the normal clearing period.

On July 5, 1995, pursuant to the BPLA, Asian Bank "bills purchased" Security Bank & Trust Company (SBTC) Manager’s
Check (MC) No. 037364 in the amount of ₱25,500,000.00 issued in the name of Chiok, and credited the same amount to
the latter’s Savings Account No. 2-007-03-00201-3.

On the same day, July 5, 1995, Asian Bank issued MC No. 025935 in the amount of ₱7,550,000.00 and MC No. 025939 in
the amount of ₱10,905,350.00 to Gonzalo Bernardo, who is the same person as Gonzalo B. Nuguid. The two Asian Bank
manager’s checks, with a total value of ₱18,455,350.00 were issued pursuant toChiok’s instruction and was debited from
his account. Likewise upon Chiok’s application, Metrobank issued Cashier’s Check (CC) No. 003380 in the amount of
₱7,613,000.00 in the name of Gonzalo Bernardo. The same was debited from Chiok’s Savings Account No. 154-42504955.
The checks bought by Chiok for payee Gonzalo Bernardo are therefore summarized as follows:

Drawee Bank/Check
Amount (P) Source of fund
No.

Asian Bank MC No. 7,550,000.00 Chiok’s Asian Bank Savings

025935 Account No. 2-007-03-00201-3,
 Asian Bank MC No. 10,905,350.00 which had been credited with the
025939 value of SBTC MC No. 037364
(aggregate value (₱25,500,000.00) when the latter was purchased by
of Asian Bank from Chiok pursuant to their BPLA.
Asian Bank MCs:
18,455,350.00)

Metrobank CC No. 7,613,000.00 Chiok’s Metrobank Savings

003380 Account No. 154-425049553

TOTAL 26,068,350.00

Chiok then deposited the three checks (Asian Bank MC Nos. 025935 and 025939, and Metrobank CC No. 003380), with an
aggregate value of ₱26,068,350.00 in Nuguid’s account with Far East Bank & Trust Company (FEBTC), the predecessor-
in-interest of petitioner Bank of the Philippine Islands (BPI). Nuguid was supposed to deliver US$1,022,288.50,4 the dollar
equivalent of the three checks as agreed upon, in the afternoon of the same day. Nuguid, however, failed to do so, prompting
Chiok to request that payment on the three checks be stopped. Chiok was allegedly advised to secure a court order within
the 24-hour clearing period. On the following day, July 6, 1995, Chiok filed a Complaint for damages with application for ex
parte restraining order and/or preliminary injunction with the Regional Trial Court (RTC) of Quezon City against the spouses
Gonzalo and Marinella Nuguid, and the depositary banks, Asian Bank and Metrobank, represented by their respective
managers, Julius de la Fuente and Alice Rivera. The complaint was docketed as Civil Case No. Q-95-24299 and was raffled
to Branch 96. The complaint was later amended5 to include the prayer of Chiok to be declared the legal owner of the
proceeds of the subject checks and to be allowed to withdraw the entire proceeds thereof.

On the same day, July 6, 1995, the RTC issued a temporary restraining order (TRO) directing the spouses Nuguid to refrain
from presenting the said checks for payment and the depositary banks from honoring the sameuntil further orders from the
court.6

Asian Bank refused to honor MC Nos. 025935 and 025939 in deference to the TRO. Metrobank claimed that when it received
the TRO on July 6, 1995, it refused to honor CC No. 003380 and stopped payment thereon. However, in a letter also dated
July 6, 1995, Ms. Jocelyn T. Paz of FEBTC, Cubao-Araneta Branch informed Metrobank that the TRO was issued a day
after the check was presented for payment. Thus, according to Paz, the transaction was already consummated and FEBTC
had already validly accepted the same. In another letter, FEBTC informed Metrobank that "the restraining order indicates
the name of the payee of the check as GONZALO NUGUID, but the check isin fact payable to GONZALO BERNARDO. We
believe there is a defect in the restraining order and as such should not bind your bank."7 Alice Rivera of Metrobank replied
to said letters, reiterating Metrobank’s position tocomply with the TRO lest it be cited for contempt by the trial court. However,
as would later be alleged in Metrobank’s Answer before the trial court, Metrobank eventually acknowledged the check when
it became clear that nothing more can be done to retrieve the proceeds of the check. Metrobank furthermore claimed that
since it is the issuer of CC No. 003380, the check is its primary obligation and should not be affected by any prior transaction
between the purchaser (Chiok) and the payee (Nuguid).

In the meantime, FEBTC, as the collecting bank, filed a complaint against Asian Bank before the Philippine Clearing House
Corporation (PCHC) Arbitration Committee for the collection of the value of Asian Bank MC No. 025935 and 025939, which
FEBTC had allegedly allowed Nuguid to withdraw on July 5, 1995, the same day the checks were deposited. The case was
docketed as Arbicom Case No. 95-082. The PCHC Arbitration Committee later relayed, in a letter dated August 4, 1995, its
refusal to assume jurisdiction over the case on the ground that any step it may take might be misinterpreted as undermining
the jurisdiction of the RTC over the case or a violation of the July 6, 1995 TRO.

On July 25, 1995, the RTC issued an Order directing the issuance of a writ of preliminary prohibitory injunction:

WHEREFORE, upon filing by the plaintiff of a sufficient bond in the amount of ₱26,068,350.00, to be executed in favor of
the defendants under the condition that the same shall answer for whatever damages they may sustain by reason of this
injunction should the Court ultimately determine that he was not entitled thereto, let a writ of preliminary prohibitory injunction
issue restraining and preventing during the pendency of the case:

a) Defendant Asian Bank frompaying Manager’s Checks No. 025935 in the amount of ₱7,550,000.00 and No.
025939 in the amount of ₱10,905,350.00; and

b) Defendant Metro Bank frompaying Cashier’s Check No. 003380 in the amount of ₱7,613,000.00.
The application for preliminary mandatory injunctionis hereby denied and the order issued on July 7, 1995 directing
defendant Metro Bank (Annapolis, Greenhills Branch) to allow the plaintiff to withdraw the proceeds of Cashier’s Check No.
003380 in the amount of ₱7,613,000.00 is hereby set aside.

The plaintiff’s urgent motion todeclare defendants Asian Bank and Metro Bank in contempt of court filed last July 13, 1995
is hereby denied for lack of legal basis.

The writ of preliminary prohibitory injunction and a copy of this order shall be served on the defendants by Deputy Sheriff
Jose Martinez of this Branch.8

Upon the filing by Chiok of the requisite bond, the Writ was subsequently issued on July 26, 1995.

Before the RTC, Asian Bank pointed out that SBTC returned and issued a Stop Payment Order on SBTC MC No. 037364
(payable to Chiok in the amount of ₱25,500,000.00) on the basis of an Affidavit of Loss & Undertaking executed by a certain
Helen Tan. Under said Affidavit of Loss & Undertaking, Tan claims that she purchased SBTC MC No. 037364 from SBTC,
but the manager’s check got lost on that day. Asian Bank argued that Chiok would therefore be liable for the dishonor of
the manager’s check under the terms of the BPLA, which provides for recourse against the seller (Chiok) of the check when
it is dishonored by the drawee (SBTC) for any reason, whether valid or not.

On October 18, 1995, FEBTC filed a Complaint-in-Intervention in Civil Case No. Q-95-24299. On February6, 1996, the RTC
initially denied FEBTC’s intervention in the case. On Motion for Reconsideration, however, the RTC, on April 15, 1996,
reversed itself and allowed the same.

In the Complaint-in-Intervention, FEBTC claimed that it allowed the immediate withdrawal of the proceeds of Asian Bank
MC Nos. 025935 and 025939 on the ground that, as manager’schecks, they were the direct obligations of Asian Bank and
were accepted in advance by Asian Bank by the mere issuance thereof. FEBTC presented the checks for payment on July
5, 1995 through the PCHC. Asian Bank, as admitted in its Answer before the RTC, received the same on that day.
Consequently, Asian Bank was deemed to have confirmed and booked payment of the subject checks in favor of FEBTC
or, at the latest, during the first banking hour of July 6, 1995, when payment should have been made. FEBTC claimed that
Asian Bank exhibited bad faith when, in anticipation of the TRO, it opted to float the checks until it received the TRO at
12:00 noon of July 6, 1995 to justify the nonpayment thereof.

In their own Answer, the spouses Nuguid claimed that Gonzalo Nuguid had delivered much more dollars than what was
required for the three checks at the time of payment. By way of special affirmative defense, the spouses Nuguid also claims
that since the subject checks had already been paid to him, Chiok is no longer entitled to an injunction (to hold the payment
of the subject checks), and Civil Case No. Q-95-24299 has already become moot.

On August 29, 2002, the RTC rendered its Decision, the dispositive portion of which states:

WHEREFORE, judgment is rendered:

1. Declaring as permanent the writ of preliminary injunction issued under the Order of July 25, 1995;

2. Ordering Global Business Bank, Inc.to pay the plaintiff [Chiok]:

a.) The amount of ₱34,691,876.71 (less the attorney’s fees of ₱255,000.00 which shall remain with Global
Business Bank, Inc.), plus interest at the legal rate of 12%/p.a. from September 30, 1999 until fully paid;

b.) The amount of ₱215,000.00, representing the excess amount debited from the plaintiff’s deposit in his
account with Global Business Bank, Inc. on July 7, 1995, plus interest of 12%/p.a. from July 7, 1995, until
fully paid;

c.) Attorney’s fees equivalentof 5% of the total amount due; and

3. Ordering Metropolitan Bank & Trust Companyto pay the plaintiff:

a. The amount of his deposit of ₱7,613,000.00, plus interest of 12%/p.a. from July 5, 1995 until said amount
is fully paid; and
 b. Attorney’s fees of 5%of the total amount due;

4. Ordering Spouses Gonzalo B. Nuguid and Marinella O. Nuguid liable jointly and severally with Global Business
Bank, Inc. and Metropolitan Bank & Trust Company, Inc. for the respective attorney’s fees;

5. Dismissing the complaint-in-interventionof BPI for lack of merit;

6. Ordering the defendantsand the intervenorto pay, jointly and severally, the costs of suit.9

(Emphases supplied.)

The RTC held that Nuguid failed to prove the delivery of dollars to Chiok. According to the RTC, Nuguid’s claim that Chiok
was still liable for seven dishonored China Banking Corporation (CBC) checks with a total worth of ₱72,984,020.00 is highly
doubtful since such claim was not presented as a counterclaim in the case. Furthermore, the court ruled that the certification
of CBC stating the reasons10 for the stop payment order "are indicative of Chiok’s non-liability to Nuguid." The RTC further
noted that there was a criminal case filed by Chiok against Nuguid on March 29, 1996 for estafa and other deceit on account
of Nuguid’s alleged failure to return the originals of the seven CBC checks.11

The RTC went on to rule that manager’s checks and cashier’s checks may be the subject of a Stop Payment Order from
the purchaser on the basis of the payee’s contractual breach. As explanation for this ruling, the RTC adopted its
pronouncements when it issued the July 25, 1995 Order:

Defendant Nuguid’s argument that the injunction could render manager’s and cashier’schecks unworthy of the faith they
should have and could impair their nature as independent undertakings of the issuing banks is probably an undistinguished
simplification. While the argument may be applicable to such checks in general, it does not adequately address the situation,
as here, when specific manager’s and cashier’s checks are already covered by reciprocal undertakings between their
purchaser and their payee, in which the latter allegedly failed to perform. The agreement herein was supposedly one in
which Nuguid would deliver the equivalent amount in US dollars ($1,022,288.23) "on the same date" that the plaintiff
purchased and delivered the manager’s and cashier’s checks (₱26,068,350.00). Assuming that such a reciprocity was true,
the purchaser should have the legal protection of the injunctive writ (which, after all, the legal departments of the issuing
banks themselves allegedly advised the plaintiff to obtain), since the usual order or instruction to stop payment available in
case of ordinary checks did not avail. This was probably the reason that Asian Bank has expressly announced in its own
comment/opposition of July 14, 1995 that it was not opposing the application for the prohibitory injunction.

The dedication of such checks pursuantto specific reciprocal undertakings between their purchasers and payees authorizes
rescission by the former to prevent substantial and material damage to themselves, which authority includes stopping the
payment of the checks.12 According to the RTC, both manager’s and cashier’s checks are still subject to regular clearing
under the regulations of the Bangko Sentral ng Pilipinas. Since manager’s and cashier’s checks are the subject of regular
clearing, they may consequently be refused for cause by the drawee, which refusal is in fact provided for in the PCHC Rule
Book.

The RTC found the argument by BPI that the manager’s and cashier’s checks are pre-cleared untenable under Section 60
of the New Central Bank Act and Article 1249 of the Civil Code, which respectively provides:

Section 60. Legal Character. – Checks representing demand deposits do not have legal tender power and their acceptance
in the payment of debts, both public and private, is at the option of the creditor; Provided, however, that a check which has
been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount
equal to the amount credited to his account.

Art. 1249. The payment of debts inmoney shall be made in the currency stipulated, and if it is not possible to deliver such
currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or
bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or
when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in the abeyance. The RTC went on to rule that
due to the timely service of the TRO and the injunction, the value of the three checks remained with Global Bank and
Metrobank.13 The RTC concluded that since Nuguid did not have a valid title to the proceeds of the manager’s and cashier’s
checks, Chiok is entitled to be paid back everything he had paid to the drawees for the checks.14
With respect to Global Bank, the RTC ruled that the entire amount of ₱34,691,876.71 it recovered from SBTC from the
September 15, 1997 PCHC Decision, as reflected in the September 29, 1999 Charge Slip No. 114977, less the sum of
₱225,000.00 awarded by the arbitration committee’s decision as attorney’s fees, should be paidto Chiok, with interest at
12% per annum from September 30, 1999 until full payment. The RTC likewise ordered Global Bank to pay Chiok the
amount of ₱215,390.00, an amount debited from Chiok’s account as payment for outstanding bills purchase.15

With respect to Metrobank, the RTC ruled that it should pay Chiok ₱7,613,000.00, the amount paid by Chiok to purchase
the CC, plus interest of 12 percent per annum from July 5,1995 until full payment. The RTC explained this finding as follows:

The same conclusion is true with respect to Metro Bank, with whom the funds amounting to ₱7,613,000.00 for the purchase
of CC No. 003380 has remained. According to Chiok, Metro Bank used such funds in its operations.

In the hearing on May 17, 2001, Lita Salonga Tan was offered as a witness for Metro Bank, but in lieu ofher testimony, the
parties agreed to stipulate on the following as her testimony, to wit:

1. That Metro Bank paid the amount of CC No. 003280;

2. That the payment on July 12, 1995 was made while the TRO of July 5, 1995 was in force;

3. [That] the payment on July 12, 1995 was on the third clearing of CC No. 003380; and

4. That the PCHC Rule book was the authority on the rules and regulations on the clearing operations of banks.

The payment to FEBTC by Metro Bank of CC No. 003380 on July 12, 1995 was an open defiance of the TRO of July 6,
1995. Metro Bank’s Branch Manager Alice Rivera, through her letter of July 10, 1995 to FEBTC as the collecting bank,
returned the CC to FEBTC in compliance with the TRO which was received about 12:10 noon of July 6, 1999. Hence, Metro
Bank should not have paid because the TRO was served within the 24-hour period to clear checks. Moreover, the payment,
being made on third clearing, was unjustified for violating existing regulations, particularly paragraph 1 of the Clearing House
Operating Memo (CHOM), effective September 1, 1984, which prohibited the reclearing of a check after its first presentation
if it was returned for the reason of "stop payment" or "closed account."

It also seems that Metro Bank paid the CC without first checking whether, in fact, any actual payment of the 3 checks had
been made on July 5, 1995 to the payee when the checks were deposited in payee’s account with FEBTC on July 5, 1995.
The records show no such payment was ever made to render the TRO of July 6, 1995 or the writ of preliminary injunction
applied for moot and academic.

Jessy A. Degaños – adopted by Metro Bank as its own witness in injunction hearing of July 24, 1995 – stated that the
payment of the 3 checks consisted of the accounting entry made at the PCHC during the presenting process by debiting
the respective accounts of the drawees and crediting the account of collecting bank FEBTC. Yet, as already found
hereinabove, such process was reversed due to the return by the drawees of the checks which they dishonored on account
of the TRO.

Also, Degaños, testifying on January 17, 2002 for intervenor BPI, was asked in what form was the withdrawal of the amounts
of the checks made by Nuguid on July 5, 1995, that is, whether:- 1) cash withdrawal; or 2) credit to Nuguid’s account; or 3)
draft issued to Nuguid. His reply was that only the bank’s branch which serviced the payee’s account could provide the
answer. Yet, BPI did not present any competent personnel from the branch concerned to enlighten the Court on this material
point.

This amount of ₱7,613,000.00, having remained with Metro Bank since the service of the TRO of July 6, 1995 and the writ
of preliminary injunction issued under the Order of July 25, 1998, should be returned to Chiok with interest of 12%/p.a. from
July 7, 1995 until full payment.16

(Citations omitted.)

The RTC likewise denied BPI’s complaint-in-intervention to recover the value of the three checks from drawees Global Bank
and Metrobank for lack of merit. The RTC, after reprimanding Global Bank and Metrobank for siding with BPI on this issue,
held that BPI, as a mere collecting bank of the payee with a void title to the checks, had no valid claim as to the amounts of
such checks. The RTC explained:
Firstly: BPI, being a collecting bankin relation to the 3 checks, was merely performing collection services as an agent of
Nuguid, the payee. If, as found hereinbefore, Nuguid could not have legal title to the 3 checks, it follows that BPI could not
stake any claim for title better than Nuguid’s own void title. Consequently, BPI has no right to claim the amounts of the 3
checks from the drawee-banks.

Secondly: The purpose of the delivery of the 3 checks to BPI – which was not even accompanied by Nuguid’s endorsement
– was solely for deposit in the account of payee Nuguid. Assuming, for the sake of argument, that BPI as the collecting bank
paid the value of the checks – of which fact there has been no proof whatsoever – BPI was nonetheless, at best, a mere
transferee whose title was no better than the void title of the transferor, payee Nuguid. Under such circumstance, BPI has
no legal basis to demand payment of the amounts of the 3 checks from the draweebanks.

Thirdly: Under Sec. 49, Negotiable Instruments Law, BPI, as transferee without indorsement, was not considered a holder
of the instrument since it was neither a payee nor an indorsee. It would become so only when and if the indorsement is
actually made, and only as of then, but not before, is the issue whether BPI was a holder in due course or not is determined.

Consequently, any alleged payment by BPI as the collecting bank, through the supposed though unproved withdrawal of
the amounts of the 3 checks by Nuguid upon the deposit of the checks on July 5, 1995, is not the payment which discharges
liability under the 3 checks because BPI is neither the party primarily liable northe drawee.

Such a payment, if true, is akin to, if it is not, drawing against uncollected deposits (DAUD). In such a case, BPI was in duty
bound to send the 3 checks to the PCHC for clearing pursuant to Section 1603.c.1 of the BSP Manual of Regulations and
Sec. 60, R.A. No. 7653. It serves well to note herein that Global Bank and Metro Bank returned the checks through the
PCHC on July 6, 1995, well within the 24-hour clearing period, in compliance with the TRO of July 6, 1995. Finally: As earlier
noted and discussed, there is no evidence of any prior valid payment by the collecting bank to support its claim of the
amounts of the 3 checks against the defendant banks.17 (Citation omitted.)

The RTC held Global Bank and Metrobank liable for attorney’s fees equivalent to 5% of the total amountdue them, while
the spouses Nuguid were held solidarily liable for said fees.

Defendants Global Bank, Metrobank, and the spouses Nuguid, and intervenor BPI filed separate notices of appeal, which
were approved in the Order18 dated April 3, 2003. Chiok filed a Motion to Dismiss against the appeal of Global Bank, on the
ground that the latter had ceased to operate as a banking institution.

On May 26, 2004, the Court of Appeals dismissed the appeal of the spouses Nuguid pursuant to Section 1(e), Rule 50 of
the Rules of Court, on account of their failure to file their appellant’s brief. In the same Resolution, the Court of Appeals
denied Chiok’s Motion to Dismiss.

On May 5, 2006, the Court of Appeals rendered the assailed Decision affirming the RTC Decision with modifications. The
fallo of the Decision reads:

WHEREFORE, premises considered, the Decision dated August 29, 2000 of the RTC, Branch 96, Quezon City is
AFFIRMED with the following MODIFICATIONS:

1.) The contract to buy foreign currency in the amount of $1,022,288.50 between plaintiff-appellee Wilfred N. Chiok
and defendant Gonzalo B. Nuguid is hereby rescinded. Corollarily, Manager’s Check Nos. 025935 and 025939 and
Cashier’s Check No. 003380 are ordered cancelled.

2.) Global Business Holdings, Inc. is ordered to credit Savings Account No. 2-007-03-00201-3 with:

a) The amount of ₱25,500,000.00, plus interest at 4% from September 29, 1999 until withdrawn by plaintiff-
appellee;

b) The amount of ₱215,390.00, plus interest at 4% from July 7, 1995 until withdrawn by plaintiff-appellee.

3.) Metropolitan Bank & Trust Company is ordered to credit Savings Account No. 154-42504955 the amount of
₱7,613,000.00, with interest at 6% [per annum] from July 12, 1995 until the same is withdrawn;

4.) The Spouses Gonzalo B. Nuguid and Marinella O. Nuguid are ordered to pay attorney’s fees equivalent to 5%
of the total amount due to plaintiff-appellee from both depository banks, as well as the costs of suit.19
According to the Court of Appeals, Article 1191 of the Civil Code provides a legal basis of the right of purchasers of MCs
and CCs to make a stop payment order on the ground of the failure of the payee to perform his obligation to the purchaser.
The appellate court ruled that such claim was impliedly incorporated in Chiok’s complaint. The Court of Appeals held:

By depositing the subject checks to the account of Nuguid, Chiok had already performed his obligation under the contract,
and the subsequent failure of Nuguid to comply with what was incumbent upon him gave rise to an action for rescission
pursuant to Article 1191 of the Civil Code, which states:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

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

xxxx

Although the complaint a quowas entitled "DAMAGES, W/ EX PARTE RESTRAINING ORDER/INJUNCTION" when the
action was really one for rescission and damages, it is an elementary rule of procedure that what controls or determines the
nature of the action is not the caption of the complaint but the allegations contained therein. And even without the prayer
for a specific remedy, proper relief may nevertheless be granted by the court if the facts alleged in the complaint and the
evidence introduced so warrant.

That Chiok had intended rescission isevident from his prayer to be declared the legal owner of the proceeds of the subject
checks and to be allowed to withdraw the same. Therefore, the argument of BPI that the obligation on the part of Nuguid to
deliver the dollars still subsists is untenable. Article 1385 of the same Code provides that rescission creates the obligation
to return the things which were the object of the contract, together with their fruits, and the price with its interest. The object
of the contract herein to buy foreign currency is the peso-value of the dollars bought but in the form of negotiable instruments
– Manager’s Check/Cashier’s Check. Hence, respecting the negotiation thereof, and in order to afford complete relief to
Chiok, there arose the necessity for the issuance of the injunction restraining the payment of the subject checks with the
end in view of the eventual return of the proceeds to give effect to Article 1385. In other words, the injunctive relief was
necessary in order not to render ineffectual the judgment in the instant case. We quote with approval the following
disquisition of the trial court, to wit:

xxxx

There is no question about the nature of manager’s and cashier’s checks being as good as cash, being primary obligations
of the issuing bank and accepted in advanceby their mere issuance. But even as such nature of unconditional commitment
to pay on the part of the issuing bank may be conceded, the Court opines that the injunctive relief cannot be denied to a
party who purchased the manager’s or cashier’s check to stop its payment to the payee in a suit against the payee and the
issuing banks upon a claim that the payee himself had not performed his reciprocal obligation for which the issuance and
delivery of the self-same manager’sor cashier’s check were, in the first place, made x x x.

It bears stressing that the subject checks would not have been issued were it not for the contract between Chiok and Nuguid.
Therefore, they cannot be disassociated from the contract and given a distinct and exclusive signification, as the purchase
thereof is part and parcel of the series of transactions necessary to consummate the contract. Taken in this light, it cannot
be argued that the issuing banks are bound to honor only their unconditional undertakings on the subject checks vis-à-vis
the payee thereof regardless of the failed transaction between the purchaser of the checks and the payee on the ground
that the banks were not privy to the said transaction.

Lest it be forgotten, the purchase of the checks was funded by the account of Chiok with the banks. As such, the banks
were equally obligated to treat the account of their depositor with meticulous care bearing in mind the fiduciary nature of
their relationship with the depositor. Surely, the banks would not allow their depositor to sit idly by and watch the dissipation
of his livelihood considering that the business of foreign currency exchange is a highly volatile undertaking where the
probability of losing or gaining is counted by the ticking of the clock. With the millions of money involved in this transaction,
Chiok could not afford to be complacent and his vigilance for his rights could not have been more opportune under the
circumstances.20 (Citations omitted.)
The Court of Appeals proceeded to sustain the dismissal of BPI’s complaint-in-intervention, which sought to recover from
Global Bank the amounts allegedly paid to Nuguid. The Court of Appeals pointed out that BPI failed to prove the alleged
withdrawal by Nuguid of the proceeds of the two manager’s checks, as BPI’s representative, Jessy A. Degaños, failed to
answer the question on the form of the alleged withdrawal. Furthermore, BPI failed to prove that it was a holder in due
course of the subject manager’s checks, for two reasons: (1) the checks were not indorsed to it by Nuguid; and (2) BPI
never presented its alleged bills purchase agreement with Nuguid.21

The Court of Appeals likewise modified the order by the RTC for Global Bank and Metrobank to pay Chiok. The Court of
Appeals held that Chiok’s cause of action against Global Bank is limited to the proceeds of the two manager’s checks.
Hence, Global Bank was ordered to credit Chiok’s Savings Account No. 2-007-03-00201-3 with the amount of
₱25,500,000.00, the aggregate value of the two managers’ checks, instead of the entire ₱34,691,876.71 recovered from
SBTC from the September 15, 1997 PCHC Decision. The interest was also reduced from 12% per annum to that imposed
upon savings deposits, which was established during the trial as 4% per annum.22

As regards Metrobank, the appellate court noted that there was no evidence as to the interest rate imposed upon savings
deposits at Metrobank. Metrobank was ordered to credit the amount of ₱7,613,000.00 to Chiok’s Savings Account No. 154-
42504955, with interest at 6% per annum.23

Global Bank and BPI filed separate Motions for Reconsideration of the May 5, 2006 Court of Appeals’ Decision. On
November 6, 2006, the Court of Appeals denied the Motions for Reconsideration.

Metrobank (G.R. No. 172652), BPI (G.R. No. 175302), and Global Bank (G.R. No. 175394) filed with this Court separate
Petitions for Review on Certiorari. In Resolutions dated February 21, 200724 and March 12, 2007,25 this Court resolved to
consolidate the three petitions. Metrobank submitted the following issues for the consideration of this Court:

(A) WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT "IT IS LEGALLY
POSSIBLE FOR A PURCHASER OF A MANAGER’S CHECK OR CASHIER’S CHECK TO STOP PAYMENT
THEREON THROUGH A COURT ORDER ON THE GROUND OF THE PAYEE’S ALLEGED BREACH OF
CONTRACTUAL OBLIGATION AMOUNTING TO AN ABSENCE OF CONSIDERATION THEREFOR."

(B) GRANTING ARGUENDO THAT A MANAGER’S CHECK OR CASHIER’S CHECK, "IN VIEW OF THE
PECULIAR CIRCUMSTANCES OF THIS CASE" MAY BE SUBJECT TO A STOP PAYMENT ORDER BY THE
PURCHASER THEREOF THROUGH A COURT ORDER, WHETHER OR NOT THE HONORABLE COURT OF
APPEALS ERRED IN CONCLUDING THAT PETITIONER HEREIN "HAD KNOWLEDGE OF CIRCUMSTANCES
THAT WOULD DEFEAT THE TITLE OF THE PAYEE TO THE CHECKS" WITHOUT, HOWEVER, CITING ANY
SPECIFIC EVIDENCE WHICH WOULD PROVE THE EXISTENCE OF SUCH KNOWLEDGE. (C) WHETHER OR
NOT THE HONORABLE COURT OF APPEALS ERRED IN SUSTAINING THE TRIAL COURT’S ORDER FOR
PETITIONER HEREIN "TO PAY (TO CHIOK) THE VALUE OF CASHIER’S CHECK NO. 003380 IN THE AMOUNT
OF ₱7,613,000.00, WHICH WAS DEBITED AGAINST CHIOK’S SAVINGS ACCOUNT # 154-42504955 ON THE
OBSERVATION THAT THE PAYMENT TO FEBTC BY METROBANK OF CC NO. 003380ON JULY 12, 1995 WAS
AN OPEN DEFIANCE OF THE TRO OF JULY 6, 1995."26

BPI, on the other hand, presented the following issues:

I.

Whether or not the Court of Appeals detracted from well-settled concepts and principles in commercial law regarding the
nature, causes, and effects of a manager’s check and cashier’s checkin ruling that [the] power of the court can be invoked
by the purchaser [Chiok] in a proper action, which the Court su[b]stantially construed as a rescissory action or the power to
rescind obligations under Article 1191 of the Civil Code.

II.

Whether or not the Honorable Court of Appeals erred in ruling that where a purchaser invokes rescission due to an alleged
breach of the payee’s contractual obligation, it is deemed as "peculiar circumstance" which justifies a stop payment order
issued by the purchaser or a temporary restraining order/injunction from a Court to prevent payment of a Manager’s Check
or a Cashier’s Check.

III.
Whether or not the Honorable Court of Appeals erred in ruling that judicial admissions in the pleadings of Nuguid, BPI, Asian
Bank, Metrobank and even Chiok himself that Nuguid had withdrawn the proceeds of the checks will not defeat Chiok’s
"substantial right" to restrain the drawee bank from paying BPI, the collecting bank or presenting bank in this case who paid
the value of the Cashier’s/Manager’s Checks to the payee.27

Finally, Global Bank rely upon the following grounds in its petition with this Court:

A.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT PETITIONER GLOBAL BANK HAD NO JUSTIFICATION
FOR ITS RIGHT OF RECOURSE AGAINST RESPONDENT CHIOK NOTWITHSTANDING THE CLEAR AND
UNMISTAKABLE PROVISIONS OF THE BILLS PURCHASE AGREEMENT.

B.

THE COURT OF APPEALS GRAVELY ERRED IN MAKING PETITIONER GLOBAL BANK LIABLE FOR INTEREST OF
4% PER ANNUM DESPITE THE FACT THAT:

1. RESPONDENT DID NOT ASK FOR SUCH RELIEF IN HIS COMPLAINT;

2. RESPONDENT HAD WAIVED HIS RIGHT TO ANY INTEREST; AND

3. THERE IS NO EVIDENCE ON RECORD AS THE BASIS FOR ANY INTEREST.28

Before delving into the merits of these cases, we shall first dispose of a procedural development during their pendency with
the Court.

Joint Manifestation and Motion allegedly

filed by Metrobank, Global Bank and
respondent Chiok

On May 28, 2013, this Court received a Joint Manifestation and Motion allegedly filed by petitioners Metrobank, Global
Bank, and respondent Chiok, which reads:

PETITIONERS METROPOLITAN BANK & TRUST COMPANY & GLOBAL BUSINESS BANK, INC., and RESPONDENT
WILFRED N. CHIOK, by their respective counsels, unto this Honorable Court, respectfully state that after a thorough
consideration, the parties herein have decided to forego their respective claims against each other, including, past, present
and/or contingent, in relation to the above referenced cases.

PRAYER

WHEREFORE, it is respectfully prayed that no further action be taken by this Honorable Court on the foregoing petitions,
that the instant proceedings be declared CLOSED and TERMINATED, and that an Order be rendered dismissing the above-
referenced cases with prejudice.

In the above Joint Manifestation and Motion, respondent Chiok was not represented by his counsel of record, Cruz Durian
Alday and Cruz-Matters, but was assisted by Espiritu Vitales Espiritu Law Office, with Atty. Cesar D. Vitales as signatory,
by way of special appearance and assistance.

On June 19, 2013, this Court issued a Resolution requiring petitioner BPI to comment on the Joint Manifestation and Motion
filed by its copetitioners Metrobank, Global Bank, and respondent Chiok. The Resolution reads:

Considering the joint manifestation and motion of petitioners Metropolitan Bank and Trust Company and Global Business
Bank, Inc., and respondent, that after a thorough consideration, they have decided to forego their respective claims against
each other, including past, present and/or contingent, in these cases and praying that the instant proceedings in G.R. Nos.
172652 and 175394 be declared closed and terminated, the Court resolves to require petitioner Bank of the Philippine
Islands to COMMENT thereon within ten (10) days from notice thereof x x x.
On September 12, 2013, respondent Chiok, this time assisted by his counsel of record, Cruz Durian Alday & Cruz-Matters,
filed a Motion for Reconsideration of our Resolution dated June 19, 2013. The signatory to the Motion for Reconsideration,
Atty. Angel Cruz, grossly misread our Resolution requiring BPI to comment on the Joint Manifestation and Motion, and
apparently contemplated that we are already granting said Motion. Atty. Cruz objected to the Joint Manifestation and Motion,
labeling the same as tainted with fraud. According to Atty. Cruz, Espiritu Vitales and Espiritu’s failure to give prior notice to
him is in violation of Canon 8 of the Code of Professional Responsibility. Atty. Cruz prays that Metrobank and Global Bank
be ordered to submit a document of their settlement showing the amounts paid to Chiok, and for the June19, 2013
Resolution of this Court be reconsidered and set aside.

On October 9, 2013, BPI filed its comment to the Joint Manifestation and Motion, opposing the samefor being an implied
procedural shortcut to a Compromise Agreement. It averred that while the courts encourage parties to amicably settle cases,
such settlements are strictly scrutinized by the courts for approval. BPI also pointed out that the Joint Manifestation and
Motion was not supported by any required appropriate Board Resolution of Metrobank and Global Bank granting the
supposed signatories the authority to enter into a compromise. BPI prayed that the Joint Manifestation and Motion of
Metrobank, Global Bank, and Chiok be denied, and to render a full Decision on the merits reversing the Decision of the
Court of Appeals.

On January 20, 2014, Global Bank filed a Comment to Atty. Cruz’s Motion for Reconsideration on behalf of Chiok, praying
that said Motion be expunged from the records for failure of Atty. Cruz to indicate the number and date of issue of his MCLE
Certificate of Compliance or Certificate of Exemption for the immediately preceding compliance period.

As far as this Court is concerned, the counsel of record of respondent Chiok is still Cruz Durian Alday & Cruz-Matters. The
requisites of a proper substitution of counsel of record are stated and settled in jurisprudence:

No substitution of counsel of record is allowed unless the following essential requisites of a valid substitution of counsel
concur: (1) there must be a written request for substitution; (2) it must be filed with the written consent of the client; (3) it
must be with the written consent of the attorney to be substituted; and (4) in case the consent of the attorney to be substituted
cannot be obtained, there must be at least a proof of notice that the motion for substitution was served on him in the manner
prescribed by the Rules of Court.29 (Citation omitted.)

Therefore, while we should indeed require Atty. Cruz to indicate the number and date of issue of his MCLE Certificate of
Compliance or Certificate of Exemption for the immediately preceding compliance period, he is justified in pointing out the
violation of Canon 830 of the Code of Professional Responsibility, Rule 8.02 of which provides:

Rule 8.02. – A lawyer shall not, directly or indirectly, encroach upon the professional employment of another lawyer;
however, it is the right of any lawyer, without fear or favor, to give proper advice and assistance to those seeking relief
against unfaithful or neglectful counsel.

We should also give weight to the opposition of BPI to the supposed compromise agreement. As stated above, the
consolidated petitions filed by Metrobank, BPI, and Global Bank all assail the Decision of the Court of Appeals in CA-G.R.
CV No. 77508 dated May 5, 2006, and the Resolution on the same case dated November 6, 2006. BPI itself has a claim
against Global Bank, which appear to be intimately related to issues brought forth in the other consolidated petitions.

Furthermore, the failure of the parties to the Joint Manifestation and Motion to declare with particularity the terms of their
agreement prevents us from approving the same so as to allow it to attain the effect of res judicata. A judicial compromise
is not a mere contract between the parties. Thus, we have held that:

A compromise agreement intended to resolve a matter already under litigation is a judicial compromise. Having judicial
mandate and entered as its determination of the controversy, such judicial compromise has the force and effect of a
judgment. It transcends its identity as a mere contract between the parties, as it becomes a judgment that is subject to
execution in accordance with the Rules of Court. Thus, a compromise agreement that has been made and duly approved
by the court attains the effect and authority of res judicata, although no execution may be issued unless the agreement
receives the approval of the court where the litigation is pending and compliance with the terms of the agreement is
decreed.31 (Citation omitted.)

We are therefore constrained to deny the Joint Manifestation and Motion filed with this Court on May 28, 2013 and to hereby
decide the consolidated petitions on their merits.

The Court’s ruling on the merits of these

consolidated petitions
Whether or not payment of manager’s
and cashier’s checks are subject to the
condition that the payee thereof should
comply with his obligations to the
purchaser of the checks

The legal effects of a manager’s check and a cashier’s check are the same. A manager’s check, like a cashier’s check, is
an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity, and honor behind its
issuance. By its peculiar character and general use in commerce, a manager’s check or a cashier’s check is regarded
substantially to be as good as the money it represents.32 Thus, the succeeding discussions and jurisprudence on manager’s
checks, unless stated otherwise, are applicable to cashier’s checks, and vice versa. The RTC effectively ruled that payment
of manager’s and cashier’s checks are subject to the condition that the payee thereof complies with his obligations to the
purchaser of the checks:

The dedication of such checks pursuant to specific reciprocal undertakings between their purchasers and payees authorizes
rescission by the former to prevent substantial and material damage to themselves, which authority includes stopping the
payment of the checks.

Moreover, it seems to be fallacious to hold that the unconditional payment of manager’s and cashier’s checks is the rule.
To begin with, both manager’sand cashier’s checks are still subject to regular clearing under the regulations of the Bangko
Sentral ng Pilipinas, a fact borne out by the BSP manual for banks and intermediaries, which provides, among others, in its
Section 1603.1, c, as follows:

xxxx

c. Items for clearing. All checks and documents payable on demand and drawn against a bank/branch, institution or entity
allowed to clear may be exchanged through the Clearing Office inManila and the Regional Clearing Units in regional clearing
centers designated by the Central Bank x x x.33

The RTC added that since manager’s and cashier’s checks are the subject of regular clearing, they may consequently be
refused for cause by the drawee, which refusal is in fact provided for in Section 20 of the Rule Book of the PCHC:

Sec. 20 – REGULAR RETURN ITEM PROCEDURE

20.1 Any check/item sent for clearing through the PCHC on which payment should be refused by the Drawee Bank in
accordance with long standing and accepted banking practices, such as but not limited to the fact that:

(a) it bears the forged or unauthorized signature of the drawer(s); or

(b) it is drawn against a closed account; or

(c) it is drawn against insufficient funds; or

(d) payment thereof has been stopped; or

(e) it is post-dated or stale-dated; and

(f) it is a cashier’s/manager’s/treasurer’s check of the drawee which has been materially altered;

shall be returned through the PCHC not later than the next regular clearing for local exchanges and the acceptance of said
return by the Sending Bank shall be mandatory.

It goes without saying that under the aforecited clearing rule[,] the enumeration of causes to return checks is not exclusive
but may include other causes which are consistent with long standing and accepted banking practices. The reason of
plaintiffs can well constitute such a justifiable cause to enjoin payment.34

The RTC made an error at this point. While indeed, it cannot be said that manager’s and cashier’s checks are pre-cleared,
clearing should not be confused with acceptance. Manager’s and cashier’s checks are still the subject of clearing to ensure
that the same have not been materially altered or otherwise completely counterfeited. However, manager’s and cashier’s
checks are pre-accepted by the mere issuance thereof by the bank, which is both its drawer and drawee. Thus, while
manager’s and cashier’s checks are still subject to clearing, they cannot be countermanded for being drawn against a closed
account, for being drawn against insufficient funds, or for similar reasons such as a condition not appearing on the face of
the check. Long standing and accepted banking practicesdo not countenance the countermanding of manager’s and
cashier’s checks on the basis of a mere allegation of failure of the payee to comply with its obligations towards the purchaser.
On the contrary, the accepted banking practice is that such checks are as good as cash. Thus, in New Pacific Timber &
Supply Company, Inc. v. Hon. Seneris,35 we held:

It is a well-known and accepted practice in the business sector that a Cashier's Check is deemed as cash. Moreover, since
the said check had been certified by the drawee bank, by the certification, the funds represented by the check are transferred
from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter becomes the depositor
of the drawee bank, with rights and duties of one in such situation. Where a check is certified by the bank on which it is
drawn, the certification is equivalent to acceptance. Said certification "implies that the check is drawn upon sufficient funds
in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever the
check is presented for payment. It is an understanding that the check is good then, and shall continue good, and this
agreement is as binding on the bank as its notes in circulation, a certificate of deposit payable to the order of the depositor,
or any other obligation it can assume. The object of certifying a check, as regards both parties, is to enable the holder to
use it as money." When the holder procures the check to be certified, "the check operates as an assignment of a part of the
funds to the creditors." Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act to the effect
"that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the
creditor in cash in an amount equal to the amount credited to his account" shall apply in this case. x x x. (Emphases supplied,
citations omitted.)

Even more telling is the Court’s pronouncement in Tan v. Court of Appeals,36 which unequivocally settled the unconditional
nature of the credit created by the issuance of manager’s or cashier’s checks:

A cashier’s check is a primary obligation of the issuing bank and accepted in advanceby its mere issuance. By its very
nature, a cashier’s check is the bank’s order to pay drawn upon itself, committing in effect its total resources, integrity and
honor behind the check. A cashier’s check by its peculiar character and general use in the commercial world is regarded
substantially to be as good asthe money which it represents. In this case, therefore, PCIB by issuing the check created an
unconditional creditin favor of any collecting bank. (Emphases supplied, citations omitted.)

Furthermore, under the principle of ejusdem generis, where a statute describes things of a particular class or kind
accompanied by words of a generic character, the generic word willusually be limited to things of a similar nature with those
particularly enumerated, unless there be something in the context of the statute which would repel such inference.37 Thus,
any long standing and accepted banking practice which can be considered as a valid cause to return manager’s or cashier’s
checks should be of a similar nature to the enumerated cause applicable to manager’s or cashier’s checks: material
alteration. As stated above, an example ofa similar cause is the presentation of a counterfeit check.

Whether or not the purchaser of

manager’s and cashier’s checks has the
right to have the checks cancelled by
filing an action for rescission of its
contract with the payee

The Court of Appeals affirmed the order of the RTC for Global Bank and Metrobank to pay Chiok for the amounts of the
subject manager’s and cashier’s checks. However, since it isclear to the appellate court that the payment of manager’s and
cashier’s checks cannot be considered to be subject to the condition the payee thereof complies with his obligations to the
purchaser of the checks, the Court of Appeals provided another legal basis for such liability – rescission under Article 1191
of the Civil Code:

WHEREFORE, premises considered, the Decision dated August 29, 2000 of the RTC, Branch 96, Quezon City is
AFFIRMED with the following MODIFICATIONS:

1.) The contract to buy foreign currency in the amount of $1,022,288.50 between plaintiff-appellee Wilfred N. Chiok and
defendant Gonzalo B. Nuguid is hereby rescinded. Corollarily, Manager’s Check Nos. 025935 and 025939 and Cashier’s
Check No. 003380 are ordered cancelled.38
According to the Court of Appeals, while such rescission was not mentioned in Chiok’s Amended Complaint, the same was
evident from his prayer to be declared the legal owner of the proceeds of the subject checks and to be allowed to withdraw
the same. Since rescission creates the obligation to return the things which are the object of the contract, together with the
fruits, the price and the interest,39 injunctive relief was necessary to restrain the payment of the subject checks with the end
in view of the return of the proceeds to Chiok.40

Thus, as it was construed by the Court of Appeals, the Amended Complaint of Chiok was in reality an action for rescission
of the contract to buy foreign currency between Chiok and Nuguid. The Court of Appeals then proceeded to cancel the
manager’s and cashier’s checks as a consequence of the granting of the action for rescission, explaining that "the subject
checks would not have been issued were it not for the contract between Chiok and Nuguid. Therefore, they cannot be
disassociated from the contract and given a distinct and exclusive signification, as the purchase thereof is part and parcel
of the series of transactions necessary to consummate the contract."41

We disagree with the above ruling.

The right to rescind invoked by the Court of Appeals is provided by Article 1191 of the Civil Code, which reads:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

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

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with
Articles 1385 and 1388 and the Mortgage Law.

The cause of action supplied by the above article, however, is clearly predicated upon the reciprocity of the obligations of
the injured party and the guilty party. Reciprocal obligations are those which arise from the same cause, and in which each
party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other.
They are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment
of the other.42 When Nuguid failed to deliver the agreed amount to Chiok, the latter had a cause of action against Nuguid to
ask for the rescission of their contract. On the other hand, Chiok did not have a cause of action against Metrobank and
Global Bank that would allow him to rescind the contracts of sale of the manager’s or cashier’s checks, which would have
resulted in the crediting of the amounts thereof back to his accounts.

Otherwise stated, the right of rescission43 under Article 1191 of the Civil Code can only be exercised in accordance with the
principle of relativity of contracts under Article 1131 of the same code, which provides:

Art. 1311. 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. x x x.

In several cases, this Court has ruled that under the civil law principle of relativity of contracts under Article 1131, 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.44 Metrobank and Global Bank are not parties to the contract to buy foreign
currency between Chiok and Nuguid. Therefore, they are not bound by such contract and cannot be prejudiced by the failure
of Nuguid to comply with the terms thereof.

Neither could Chiok be validly granted a writ of injunction against Metrobank and Global Bank to enjoin said banks from
honoring the subject manager’s and cashier’s checks. It is elementary that "(a)n injunction should never issue when an
action for damages would adequately compensate the injuries caused. The very foundation of the jurisdiction to issue the
writ of injunction rests in the fact that the damages caused are irreparable and that damages would not adequately
compensate."45 Chiok could have and should have proceeded directly against Nuguid to claim damages for breach of
contract and to have the very account where he deposited the subject checks garnished under Section 7(d)46 and Section
8,47 Rule 57 of the Rules of Court. Instead, Chiok filed an action to enjoin Metrobank and Global Bank from complying with
their primary obligation under checks in which they are liable as both drawer and drawee.
It is undisputed that Chiok personally deposited the subject manager’s and cashier’s checks to Nuguid’s account.1âwphi1 If
the intention of Chiok was for Nuguid to be allowed to withdraw the proceeds of the checks after clearing, he could have
easily deposited personal checks, instead of going through the trouble of purchasing manager’s and cashier’s checks. Chiok
therefore knew, and actually intended, that Nuguid will be allowed to immediately withdraw the proceeds of the subject
checks. The deposit of the checks which were practically as good as cash was willingly and voluntarily made by Chiok,
without any assurance that Nuguid will comply with his end of the bargain on the same day. The explanation for such
apparently reckless action was admitted by Chiok in the Amended Complaint itself:

That plaintiff [Chiok] due to the numberof years (five to seven years) of business transactions with defendant [Nuguid] has
reposed utmost trust and confidence on the latterthat their transactions as of June 1995 reaches millions of pesos. x x
x.48 (Emphases supplied.)

As between two innocent persons, one of whom must suffer the consequences of a breach of trust, the one who made it
possible by his act of confidence must bear the loss.49 Evidently, it was the utmost trust and confidence reposed by Chiok
to Nuguid that caused this entire debacle, dragging three banks into the controversy, and having their resources threatened
because of an alleged default in a contract they were not privy to.

Whether or not the peculiar

circumstances of this case justify the
deviation from the general principles on
causes and effects of manager’s and
cashier’s checks

The Court of Appeals, while admitting that the general principles on the causes and effects of manager’s and cashier’s
checks do not allow the countermanding of such checks on the basis of an alleged failure of consideration of the payee to
the purchaser, nevertheless held that the peculiar circumstances of this case justify a deviation from said general principles,
applying the aforementioned case of Mesina. The Court of Appeals held:

At the core of the appeal interposed by the intervenor BPI, as well as the depository banks, Global Bank and Metrobank, is
the issue of whether or not it is legally possible for a purchaser of a Manager’s Check or Cashier’s Check to stop payment
thereon through a court order on the ground of the payee’s alleged breach of contractual obligation amounting to an absence
of consideration therefor.

In view of the peculiar circumstances of this case, and in the interest of substantial justice, We are constrained to rule in the
affirmative.

xxxx

In the case of Mesina v. Intermediate Appellate Court, cited by BPI in its appeal brief, the Supreme Court had the occasion
to rule that general principles on causes and effects of a cashier’s check, i.e., that it cannot be countermanded in the hands
of a holder in due course and that it is a bill of exchange drawn by the bank against itself, cannot be applied without
considering that the bank was aware of facts (in this case, the cashier’s check was stolen) that would not entitle the payee
thereof to collect on the check and, consequently, the bank has the right to refuse payment when the check is presented by
the payee.

While the factual milieu of the Mesinacase is different from the case at bench, the inference drawn therein by the High Court
is nevertheless applicable. The refusal of Nuguid to deliver the dollar equivalent of the three checks in the amount of
$1,022,288.50 in the afternoon of July 5, 1995 amounted to a failure of consideration that would not entitle Nuguid to collect
on the subject checks.

xxxx

Let it be emphasized that in resolving the matter before Us, We do not detract from well-settled concepts and principles in
commercial law regarding the nature, causes and effects of a manager’s check and cashier’s check. Such checks are
primary obligations of the issuing bank and accepted in advance by the mere issuance thereof. They are a bank’s order to
pay drawn upon itself, committing in effect its total resources, integrity, and honor. By their peculiar character and general
use in the commercial world, they are regarded substantially as good as the money they represent. However, in view of the
peculiar circumstances of the case at bench, We are constrained to set aside the foregoing concepts and principles in favor
of the exercise of the right to rescind a contract upon the failure of consideration thereof.50 (Emphases ours, citations
omitted.)
In deviating from general banking principles and disposing the case on the basis of equity, the courts a quo should have at
least ensured that their dispositions were indeed equitable. This Court observes that equity was not served in the
dispositions below wherein Nuguid, the very person found to have violated his contract by not delivering his dollar obligation,
was absolved from his liability, leaving the banks who are not parties to the contract to suffer the losses of millions of pesos.

The Court of Appeals’ reliance in the 1986 case of Mesina was likewise inappropriate. In Mesina, respondent Jose Go
purchased from Associated Bank a cashier’s check for ₱800,000.00, payable to bearer.51 Jose Go inadvertently left the
check on the top desk of the bank manager

when he left the bank. The bank manager entrusted the check for safekeeping to a certain bank official named Albert Uy,
who then had a certain Alexander Lim as visitor. Uy left his deskto answer a phone call and to go to the men’s room. When
Uy returned to his desk, Lim was gone. Jose Go inquired for his check from Uy, but the check was nowhereto be found. At
the advice of Uy, Jose Go accomplished a Stop Payment Order and executed an affidavit of loss. Uy reported the loss to
the police. Petitioner Marcelo Mesina tried to encash the check with Prudential Bank, but the check was dishonored by
Associated Bank by sending it back to Prudential Bank with the words "Payment Stopped" stamped on it. When the police
asked Mesina how he came to possess the check, he said it was paid to him by Alexander Lim in a "certain transaction"but
refused to elucidate further. Associated Bank filed an action for Interpleader against Jose Go and Mesina to determine
which of them is entitled to the proceeds of the check. It was in the appeal on said interpleader case that this Court allowed
the deviation from the general principles on cashier’s checks on account of the bank’s awareness of certain facts that would
prevent the payee to collect on the check.

There is no arguing that the peculiar circumstances in Mesina indeed called for such deviation on account of the drawee
bank’s awareness of certain relevant facts. There is, however, no comparable peculiar circumstance in the case at bar that
would justify applying the Mesina disposition. In Mesina, the cashier’s check was stolen while it was in the possession of
the drawee bank. In the case at bar, the manager’s and cashier’s checks were personally deposited by Chiok in the account
of Nuguid. The only knowledge that can be attributed to the drawee banks is whatever was relayed by Chiok himself when
he asked for a Stop Payment Order. Chiok testified on this matter, to wit:

Q: Now, Mr. witness, since according to you the defendant failed to deliver [this] amount of ₱1,023,288.23 what
action have you undertaken to protect yourinterest Mr. witness?

A: I immediately call my lawyer, Atty. Espiritu to seek his legal advise in this matter.

Q: Prior to that matter that you soughtthe advise of your lawyer, Atty. Espiritu insofar as the issuing bank is
concerned, namely, Asian Bank, what did you do in order to protect your interest? A: I immediately call the bank
asking them if what is the procedure for stop payment and the bank told me that you have to secure a court order
as soon as possible before the clearing of these checks.52 (Emphasis supplied.)

Asian Bank, which is now Global Bank, obeyed the TRO and denied the clearing of the manager’s checks. As such, Global
Bank may not be held liable on account of the knowledge of whatever else Chiok told them when he asked for the procedure
to secure a Stop Payment Order. On the other hand, there was no mention that Metrobank was ever notified of the alleged
failure of consideration. Only Asian Bank was notified of such fact. Furthermore, the mere allegation of breach on the part
of the payee of his personal contract with the purchaser should not be considered a sufficient cause to immediately nullify
such checks, thereby eroding their integrity and honor as being as good as cash.

In view of all the foregoing, we resolve that Chiok’s complaint should be denied insofar as it prayed for the withdrawal of the
proceeds of the subject manager’s and cashier’s checks. Accordingly, the writ of preliminary prohibitory injunction enjoining
Metrobank and Global Bank from honoring the subject manager’s and cashier’s checks should be lifted.

Since we have ruled that Chiok cannot claim the amounts of the checks from Metrobank and Global Bank, the issue
concerning the setting off of Global Bank’s judgment debt to Chiok with the outstanding obligations of Chiok is hereby
mooted. We furthermore note that Global Bank had not presented53 such issue as a counterclaim in the case at bar,
preventing us from ruling on the same.

BPI’s right to the proceeds of the

manager’s checks from Global Bank

While our ruling in Mesinais inapplicable to the case at bar, a much more relevant case as regards the effect of a Stop
Payment Order upon a manager’s check would be Security Bank and Trust Company v. Rizal Commercial Banking
Corporation,54 which was decided by this Court in 2009. In said case, SBTC issued a manager’s check for ₱8 million,
payable to "CASH," as proceeds of the loan granted to Guidon Construction and Development Corporation (GCDC). On the
same day, the manager’s check was deposited by Continental Manufacturing Corporation (CMC) in its current account with
Rizal Commercial Banking Corporation (RCBC). RCBC immediately honored the manager’s check and allowed CMC to
withdraw the same. GCDC issued a Stop Payment Order to SBTC on the next day, claiming that the check was released
to a third party by mistake. SBTC dishonored and returned the manager’s check to RCBC. The check was returned back
and forth between the two banks, resulting in automatic debits and credits in each bank’s clearing balance. RCBC filed a
complaint for damages against SBTC. When the case reached this Court, we held:

At the outset, it must be noted that the questioned check issued by SBTC is not just an ordinary check but a manager’s
check. A manager’s check is one drawn by a bank’s manager upon the bank itself. It stands on the same footing as a
certified check, which is deemed to have been accepted by the bank that certified it. As the bank’s own check, a manager’s
check becomes the primary obligation of the bank and is accepted in advance by the act of its issuance.

In this case, RCBC, in immediately crediting the amount of ₱8 million to CMC’s account, relied on the integrity and honor of
the check as it is regarded in commercial transactions. Where the questioned check, which was payable to"Cash," appeared
regular on its face, and the bank found nothing unusual in the transaction, as the drawer usually issued checks in big
amounts made payable to cash, RCBC cannot be faulted in paying the value of the questioned check.

In our considered view, SBTC cannot escape liability by invoking Monetary Board Resolution No. 2202 dated December
21, 1979, prohibiting drawings against uncollected deposits. For we must point out that the Central Bank at that timeissued
a Memorandum dated July 9, 1980, which interpreted said Monetary Board Resolution No. 2202. In its pertinent portion,
saidMemorandum reads:

MEMORANDUM TO ALL BANKS

July 9, 1980

For the guidance of all concerned, Monetary Board Resolution No. 2202 dated December 31, 1979 prohibiting, as a matter
of policy, drawing against uncollected deposit effective July 1, 1980, uncollected deposits representing
manager’s/cashier’s/treasurer’schecks, treasury warrants, postal money orders and duly funded "on us" checks which may
be permitted at the discretion of each bank, covers drawings against demand deposits as well as withdrawals from savings
deposits.

Thus, it is clear from the July 9, 1980 Memorandum that banks were given the discretion to allow immediate drawings on
uncollected deposits of manager’s checks, among others. Consequently, RCBC, in allowing the immediate withdrawal
against the subject manager’s check, only exercised a prerogative expressly granted to it bythe Monetary Board.

Moreover, neither Monetary Board Resolution No. 2202 nor the July 9, 1980 Memorandum alters the extraordinary nature
of the manager’s check and the relativerights of the parties thereto. SBTC’s liability as drawer remains the same— by
drawing the instrument, it admits the existence of the payee and his then capacity to indorse; and engages that on due
presentment, the instrument will be accepted, or paid, or both, according to its tenor.55(Emphases supplied, citations
omitted.)

As in SBTC, BPI in the case at bar relied on the integrity and honor of the manager’s and cashier’s checks asthey are
regarded in commercial transactions when it immediately credited their amounts to Nuguid’s account.

The Court of Appeals, however, sustained the dismissal of BPI’s complaint-in-intervention to recover the amounts of the
manager’s checks from Global Bank on account of BPI’s failure to prove the supposed withdrawal by Nuguid of the value
of the checks:

BPI’s cause of action against Asian Bank (now Global Bank) is derived from the supposed withdrawal by Nuguid of the
proceeds of the two Manager’s Checks it issued and the refusal of Asian Bank to make good the same. That the admissions
in the pleadings to the effect that Nuguid had withdrawn the said proceeds failed to satisfy the trial court is understandable.
Such withdrawal is anessential fact that, if properly substantiated, would have defeated Chiok’s right toan injunction. BPI
could so easily have presented withdrawal slips or, with Nuguid’s consent, statements of account orthe passbook itself,
which would indubitably show that money actually changed hands at the crucial period before the issuance of the TRO. But
it did not.56

We disagree with this ruling. As provided for in Section 4, Rule 129 of the Rules of Court, admissions in pleadings are
judicial admissions and do not require proof:
Section 4. Judicial admissions. – An admission, verbal or written, made by a party in the course of the proceedings in the
same case, does not require proof. The admission may be contradicted only by showing that it was made through palpable
mistake or that no such admission was made.

Nuguid has admitted that FEBTC (now BPI) has paid him the value of the subject checks.57 This statement by Nuguid is
certainly against his own interest as he can be held liable for said amounts. Unfortunately, Nuguid allowed his appeal with
the Court of Appeals to lapse, without taking steps to have it reinstated. This course of action, which is highly unlikely if
Nuguid had not withdrawn the value of the manager’s and cashier’s checks deposited into his account, likewise prevents
us from ordering Nuguid to deliver the amounts of the checks to Chiok. Parties who did not appeal will not be affected by
the decision of an appellate court rendered to appealing parties.58

Another reason given by the Court of Appeals for sustaining the dismissal of BPI’s complaint-in-intervention was that BPI
failed to prove that it was a holder in due course with respect to the manager’s checks.59

We agree with the finding of the Court of Appeals that BPI is not a holder in due course with respect to manager’s checks.
Said checks were never indorsed by Nuguid to FEBTC, the predecessor-in-interest of BPI, for the reason that they were
deposited by Chiok directly to Nuguid’s account with FEBTC. However, inview of our ruling that Nuguid has withdrawn the
value of the checks from his account, BPI has the rights of an equitable assignee for value under Section 49 of the
Negotiable Instruments Law, which provides:

Section 49. Transfer without indorsement; effect of. – Where the holder of an instrument payable to his order transfers it for
value without indorsing it, the transfer vests in the transferee suchtitle as the transferor had therein, and the transferee
acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the
transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made.

As an equitable assignee, BPI acquires the instrument subject to defenses and equities available among prior parties60 and,
in addition, the right to have the indorsement of Nuguid. Since the checks in question are manager’s checks, the drawer
and the drawee thereof are both Global Bank. Respondent Chiok cannot be considered a prior party as he is not the check’s
drawer, drawee, indorser, payee or indorsee. Global Bank is consequently primarily liable upon the instrument, and cannot
hide behind respondent Chiok’s defenses. As discussed above, manager’s checks are pre-accepted. By issuing the
manager’s check, therefore, Global Bank committed in effect its total resources, integrity and honor towards its payment.61

Resultantly, Global Bank should pay BPI the amount of ₱18,455,350.00, representing the aggregate face value ofMC No.
025935 and MC No. 025939. Since Global Bank was merely following the TRO and preliminary injunction issued by the
RTC, it cannot be held liable for legal interest during the time said amounts are in its possession. Instead, we are adopting
the formulation of the Court of Appeals that the amounts be treated as savings deposits in Global Bank. The interest rate,
however, should not be fixed at 4% as determined by the Court of Appeals, since said rates have fluctuated since July 7,
1995, the date Global Bank refused to honor the subject manager’s checks. Thus, Global Bank should pay BPI interest
based on the rates it actually paid its depositors from July 7, 1995 until the finality of this Decision, in accordance with the
same compounding rules it applies to its depositors. The legal rate of6% per annum shall apply after the finality of this
Decision.62

We have to stress that respondent Chiok is not left without recourse. Respondent Chiok’s cause of action to recover the
value of the checks is against Nuguid. Unfortunately, Nuguid allowed his appeal with the Court of Appeals to lapse, without
taking steps tohave it reinstated. As stated above, parties who did not appeal will not be affected by the decision of the
appellate court rendered to appealing parties.63 Moreover, since Nuguid was not impleaded as a party to the present
consolidated cases, he cannot be bound by our judgment herein. Respondent Chiok should therefore pursue his remedy
against Nuguid in a separate action to recover the amounts of the checks.

Despite the reversal of the Court of Appeals Decision, the liability of Nuguid therein to respondent Chiok for attorney’s fees
equivalent to 5% of the total amount due remains valid, computed from the amounts stated in said Decision. This is a
consequence of the finality of the Decision of the Court of Appeals with respect to him.

WHEREFORE, the Court resolves to DENY the Joint Manifestation and Motion filed with this Court on May 28, 2013.

The petitions in G.R. No. 172652 and G.R. No. 175302 are GRANTED. The Decision of the Court of Appeals in CA-G.R.
CV No. 77508 dated May 5, 2006, and the Resolution on the same case dated November 6, 2006 are hereby REVERSED
AND SET ASIDE, and a new one is issued ordering the DENIAL of the Amended Complaint in Civil Case No. Q-95-24299
in Branch 96 of the Regional Trial Court of Quezon City for lack of merit. The Writ of Preliminary Prohibitory Injunction
enjoining Asian Banking Corporation (now Global Business Bank, Inc.) from honoring MC No. 025935 and MC No. 025939,
and Metropolitan Bank & Trust Company from honoring CC No. 003380, is hereby LIFTED and SET ASIDE.

Global Business Bank, Inc. is ORDERED TO PAY the Bank of the Philippine Islands, as successor-in-interest of Far East
Bank & Trust Company, the amount of ₱18,455,350.00, representing the aggregate face value of MC No. 025935 and MC
No. 025939, with interest based on the rates it actually paid its depositors from July 7, 1995 until the finality of this Decision,
in accordance with the same compounding rules it applies to its depositors.

The petition in G.R. No. 175394 is hereby rendered MOOT.

The liabilities of spouses Gonzalo B. Nuguid and Marinella O. Nuguid under the Decision and Resolution of the Court of
Appeals in CAG.R. CV No. 77508 remain VALID and SUBSISTING, computed from the amounts adjudged by the Court of
Appeals, without prejudice to any further action that may be filed by Wilfred N. Chiok.

SO ORDERED.
 G.R. No. 126083 July 12, 2006

ANTONIO R. CORTES (in his capacity as Administrator of the estate of Claro S. Cortes), petitioner,
vs.
HON. COURT OF APPEALS and VILLA ESPERANZA DEVELOPMENT CORPORATION, respondents.

DECISION

YNARES-SANTIAGO, J.:

The instant petition for review seeks the reversal of the June 13, 1996 Decision1 of the Court of Appeals in CA-G.R. CV No.
47856, setting aside the June 24, 1993 Decision2 of the Regional Trial Court of Makati, Branch 138, which rescinded the
contract of sale entered into by petitioner Antonio Cortes (Cortes) and private respondent Villa Esperanza Development
Corporation (Corporation).

The antecedents show that for the purchase price of P3,700,000.00, the Corporation as buyer, and Cortes as seller, entered
into a contract of sale over the lots covered by Transfer Certificate of Title (TCT) No. 31113-A, TCT No. 31913-A and TCT
No. 32013-A, located at Baclaran, Parañaque, Metro Manila. On various dates in 1983, the Corporation advanced to Cortes
the total sum of P1,213,000.00. Sometime in September 1983, the parties executed a deed of absolute sale containing the
following terms:3

1. Upon execution of this instrument, the Vendee shall pay unto the Vendor sum of TWO MILLION AND TWO
HUNDRED THOUSAND (P2,200,000.00) PESOS, Philippine Currency, less all advances paid by the Vendee to
the Vendor in connection with the sale;

2. The balance of ONE MILLION AND FIVE HUNDRED THOUSAND [P1,500,000.00] PESOS, Phil. Currency shall
be payable within ONE (1) YEAR from date of execution of this instrument, payment of which shall be secured by
an irrevocable standby letter of credit to be issued by any reputable local banking institution acceptable to the
Vendor.

xxxx

4. All expense for the registration of this document with the Register of Deeds concerned, including the transfer tax,
shall be divided equally between the Vendor and the Vendee. Payment of the capital gains shall be exclusively for
the account of the Vendor; 5% commission of Marcosa Sanchez to be deducted upon signing of sale.4

Said Deed was retained by Cortes for notarization.

On January 14, 1985, the Corporation filed the instant case5 for specific performance seeking to compel Cortes to deliver
the TCTs and the original copy of the Deed of Absolute Sale. According to the Corporation, despite its readiness and ability
to pay the purchase price, Cortes refused delivery of the sought documents. It thus prayed for the award of damages,
attorney's fees and litigation expenses arising from Cortes' refusal to deliver the same documents.

In his Answer with counterclaim,6 Cortes claimed that the owner's duplicate copy of the three TCTs were surrendered to the
Corporation and it is the latter which refused to pay in full the agreed down payment. He added that portion of the subject
property is occupied by his lessee who agreed to vacate the premises upon payment of disturbance fee. However, due to
the Corporation's failure to pay in full the sum of P2,200,000.00, he in turn failed to fully pay the disturbance fee of the
lessee who now refused to pay monthly rentals. He thus prayed that the Corporation be ordered to pay the outstanding
balance plus interest and in the alternative, to cancel the sale and forfeit the P1,213,000.00 partial down payment, with
damages in either case.

On June 24, 1993, the trial court rendered a decision rescinding the sale and directed Cortes to return to the Corporation
the amount of P1,213,000.00, plus interest. It ruled that pursuant to the contract of the parties, the Corporation should have
fully paid the amount of P2,200,000.00 upon the execution of the contract. It stressed that such is the law between the
parties because the Corporation failed to present evidence that there was another agreement that modified the terms of
payment as stated in the contract. And, having failed to pay in full the amount of P2,200,000.00 despite Cortes' delivery of
the Deed of Absolute Sale and the TCTs, rescission of the contract is proper.
In its motion for reconsideration, the Corporation contended that the trial court failed to consider their agreement that it
would pay the balance of the down payment when Cortes delivers the TCTs. The motion was, however, denied by the trial
court holding that the rescission should stand because the Corporation did not act on the offer of Cortes' counsel to deliver
the TCTs upon payment of the balance of the down payment. Thus:

The Court finds no merit in the [Corporation's] Motion for Reconsideration. As stated in the decision sought to be
reconsidered, [Cortes'] counsel at the pre-trial of this case, proposed that if [the Corporation] completes the down
payment agreed upon and make arrangement for the payment of the balances of the purchase price, [Cortes] would
sign the Deed of Sale and turn over the certificate of title to the [Corporation]. [The Corporation] did nothing to
comply with its undertaking under the agreement between the parties.

WHEREFORE, in view of the foregoing considerations, the Motion for Reconsideration is hereby DENIED.

SO ORDERED.7

On appeal, the Court of Appeals reversed the decision of the trial court and directed Cortes to execute a Deed of Absolute
Sale conveying the properties and to deliver the same to the Corporation together with the TCTs, simultaneous with the
Corporation's payment of the balance of the purchase price of P2,487,000.00. It found that the parties agreed that the
Corporation will fully pay the balance of the down payment upon Cortes' delivery of the three TCTs to the Corporation. The
records show that no such delivery was made, hence, the Corporation was not remiss in the performance of its obligation
and therefore justified in not paying the balance. The decretal portion thereof, provides:

WHEREFORE, premises considered, [the Corporation's] appeal is GRANTED. The decision appealed from is
hereby REVERSED and SET ASIDE and a new judgment rendered ordering [Cortes] to execute a deed of absolute
sale conveying to [the Corporation] the parcels of land subject of and described in the deed of absolute sale, Exhibit
D. Simultaneously with the execution of the deed of absolute sale and the delivery of the corresponding owner's
duplicate copies of TCT Nos. 31113-A, 31931-A and 32013-A of the Registry of Deeds for the Province of Rizal,
Metro Manila, District IV, [the Corporation] shall pay [Cortes] the balance of the purchase price of P2,487,000.00.
As agreed upon in paragraph 4 of the Deed of Absolute Sale, Exhibit D, under terms and conditions, "All expenses
for the registration of this document (the deed of sale) with the Register of Deeds concerned, including the transfer
tax, shall be divided equally between [Cortes and the Corporation]. Payment of the capital gains shall be exclusively
for the account of the Vendor; 5% commission of Marcosa Sanchez to be deducted upon signing of sale." There is
no pronouncement as to costs.

SO ORDERED.8

Cortes filed the instant petition praying that the decision of the trial court rescinding the sale be reinstated.

There is no doubt that the contract of sale in question gave rise to a reciprocal obligation of the parties. Reciprocal obligations
are those which arise from the same cause, and which each party is a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously, so that the
performance of one is conditioned upon the simultaneous fulfillment of the other.9

Article 1191 of the Civil Code, states:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

xxxx

As to when said failure or delay in performance arise, Article 1169 of the same Code provides that –

ART. 1169

xxxx

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation,
delay by the other begins. (Emphasis supplied)
The issue therefore is whether there is delay in the performance of the parties' obligation that would justify the rescission of
the contract of sale. To resolve this issue, we must first determine the true agreement of the parties.

The settled rule is that the decisive factor in evaluating an agreement is the intention of the parties, as shown not necessarily
by the terminology used in the contract but by their conduct, words, actions and deeds prior to, during and immediately after
executing the agreement. As such, therefore, documentary and parol evidence may be submitted and admitted to prove
such intention.10

In the case at bar, the stipulation in the Deed of Absolute Sale was that the Corporation shall pay in full the P2,200,000.00
down payment upon execution of the contract. However, as correctly noted by the Court of Appeals, the transcript of
stenographic notes reveal Cortes' admission that he agreed that the Corporation's full payment of the sum of P2,200,000.00
would depend upon his delivery of the TCTs of the three lots. In fact, his main defense in the Answer is that, he performed
what is incumbent upon him by delivering to the Corporation the TCTs and the carbon duplicate of the Deed of Absolute
Sale, but the latter refused to pay in full the down payment.11 Pertinent portion of the transcript, reads:

[Q] Now, why did you deliver these three titles to the plaintiff despite the fact that it has not been paid in full the
agreed down payment?

A Well, the broker told me that the down payment will be given if I surrender the titles.

Q Do you mean to say that the plaintiff agreed to pay in full the down payment of P2,200,000.00 provided you
surrender or entrust to the plaintiff the titles?

A Yes, sir.12

What further confirmed the agreement to deliver the TCTs is the testimony of Cortes that the title of the lots will be transferred
in the name of the Corporation upon full payment of the P2,200,000.00 down payment. Thus –

ATTY. ANTARAN

Q Of course, you have it transferred in the name of the plaintiff, the title?

A Upon full payment.

xxxx

ATTY. SARTE

Q When you said upon full payment, are you referring to the agreed down payment of P2,200,000.00?

A Yes, sir.13

By agreeing to transfer title upon full payment of P2,200,000.00, Cortes' impliedly agreed to deliver the TCTs to the
Corporation in order to effect said transfer. Hence, the phrase "execution of this instrument" 14 as appearing in the Deed of
Absolute Sale, and which event would give rise to the Corporation's obligation to pay in full the amount of P2,200,000.00,
can not be construed as referring solely to the signing of the deed. The meaning of "execution" in the instant case is not
limited to the signing of a contract but includes as well the performance or implementation or accomplishment of the parties'
agreement.15 With the transfer of titles as the corresponding reciprocal obligation of payment, Cortes' obligation is not only
to affix his signature in the Deed, but to set into motion the process that would facilitate the transfer of title of the lots, i.e.,
to have the Deed notarized and to surrender the original copy thereof to the Corporation together with the TCTs.

Having established the true agreement of the parties, the Court must now determine whether Cortes delivered the TCTs
and the original Deed to the Corporation. The Court of Appeals found that Cortes never surrendered said documents to the
Corporation. Cortes testified that he delivered the same to Manny Sanchez, the son of the broker, and that Manny told him
that her mother, Marcosa Sanchez, delivered the same to the Corporation.

Q Do you have any proof to show that you have indeed surrendered these titles to the plaintiff?
 A Yes, sir.

Q I am showing to you a receipt dated October 29, 1983, what relation has this receipt with that receipt that you
have mentioned?

A That is the receipt of the real estate broker when she received the titles.

Q On top of the printed name is Manny Sanchez, there is a signature, do you know who is that Manny Sanchez?

A That is the son of the broker.

xxxx

Q May we know the full name of the real estate broker?

A Marcosa Sanchez

xxxx

Q Do you know if the broker or Marcosa Sanchez indeed delivered the titles to the plaintiff?

A That is what [s]he told me. She gave them to the plaintiff.

x x x x.16

ATTY. ANTARAN

Q Are you really sure that the title is in the hands of the plaintiff?

xxxx

Q It is in the hands of the broker but there is no showing that it is in the hands of the plaintiff?

A Yes, sir.

COURT

Q How do you know that it was delivered to the plaintiff by the son of the broker?

A The broker told me that she delivered the title to the plaintiff.

ATTY. ANTARAN

Q Did she not show you any receipt that she delivered to [Mr.] Dragon17 the title without any receipt?

A I have not seen any receipt.

Q So, therefore, you are not sure whether the title has been delivered to the plaintiff or not. It is only upon the
allegation of the broker?

A Yes, sir.18

However, Marcosa Sanchez's unrebutted testimony is that, she did not receive the TCTs. She also denied knowledge of
delivery thereof to her son, Manny, thus:
 Q The defendant, Antonio Cortes testified during the hearing on March 11, 1986 that he allegedly gave you the title
to the property in question, is it true?

A I did not receive the title.

Q He likewise said that the title was delivered to your son, do you know about that?

A I do not know anything about that.19

What further strengthened the findings of the Court of Appeals that Cortes did not surrender the subject documents was the
offer of Cortes' counsel at the pre-trial to deliver the TCTs and the Deed of Absolute Sale if the Corporation will pay the
balance of the down payment. Indeed, if the said documents were already in the hands of the Corporation, there was no
need for Cortes' counsel to make such offer.

Since Cortes did not perform his obligation to have the Deed notarized and to surrender the same together with the TCTs,
the trial court erred in concluding that he performed his part in the contract of sale and that it is the Corporation alone that
was remiss in the performance of its obligation. Actually, both parties were in delay. Considering that their obligation was
reciprocal, performance thereof must be simultaneous. The mutual inaction of Cortes and the Corporation therefore gave
rise to a compensation morae or default on the part of both parties because neither has completed their part in their
reciprocal obligation.20 Cortes is yet to deliver the original copy of the notarized Deed and the TCTs, while the Corporation
is yet to pay in full the agreed down payment of P2,200,000.00. This mutual delay of the parties cancels out the effects of
default,21 such that it is as if no one is guilty of delay.22

We find no merit in Cortes' contention that the failure of the Corporation to act on the proposed settlement at the pre-trial
must be construed against the latter. Cortes argued that with his counsel's offer to surrender the original Deed and the
TCTs, the Corporation should have consigned the balance of the down payment. This argument would have been correct
if Cortes actually surrendered the Deed and the TCTs to the Corporation. With such delivery, the Corporation would have
been placed in default if it chose not to pay in full the required down payment. Under Article 1169 of the Civil Code, from
the moment one of the parties fulfills his obligation, delay by the other begins. Since Cortes did not perform his part, the
provision of the contract requiring the Corporation to pay in full the down payment never acquired obligatory force. Moreover,
the Corporation could not be faulted for not automatically heeding to the offer of Cortes. For one, its complaint has a prayer
for damages which it may not want to waive by agreeing to the offer of Cortes' counsel. For another, the previous
representation of Cortes that the TCTs were already delivered to the Corporation when no such delivery was in fact made,
is enough reason for the Corporation to be more cautious in dealing with him.

The Court of Appeals therefore correctly ordered the parties to perform their respective obligation in the contract of
sale, i.e., for Cortes to, among others, deliver the necessary documents to the Corporation and for the latter to pay in full,
not only the down payment, but the entire purchase price. And since the Corporation did not question the Court of Appeal's
decision and even prayed for its affirmance, its payment should rightfully consist not only of the amount of P987,000.00,
representing the balance of the P2,200,000.00 down payment, but the total amount of P2,487,000.00, the remaining balance
in the P3,700,000.00 purchase price.

WHEREFORE, the petition is DENIED and the June 13, 1996 Decision of the Court of Appeals in CA-G.R. CV No. 47856,
is AFFIRMED.

SO ORDERED.
 G.R. No. L-32811 March 31, 1980

FELIPE C. ROQUE, petitioner,

vs.
NICANOR LAPUZ and THE COURT OF APPEALS, respondents.

GUERRERO, J.:

Appeal by certiorari from the Resolution of the respondent court 1 dated October 12, 1970 in CA-G.R. No. L-33998-R
entitled "Felipe C. Roque, plaintiff-appellee, versus Nicanor Lapuz, defendant-appellant" amending its original decision of
April 23, 1970 which affirmed the decision of the Court of First Instance of Rizal (Quezon City Branch) in Civil Case No. Q-
4922 in favor of petitioner, and the Resolution of the respondent court denying petitioner's motion for reconsideration.

The facts of this case are as recited in the decision of the Trial Court which was adopted and affirmed by the Court of
Appeals:

Sometime in 1964, prior to the approval by the National Planning Commission of the consolidation and
subdivision plan of plaintiff's property known as the Rockville Subdivision, situated in Balintawak, Quezon
City, plaintiff and defendant entered into an agreement of sale covering Lots 1, 2 and 9, Block 1, of said
property, with an aggregate area of 1,200 square meters, payable in 120 equal monthly installments at the
rate of P16.00, P15.00 per square meter, respectively. In accordance with said agreement, defendant paid
to plaintiff the sum of P150.00 as deposit and the further sum of P740.56 to complete the payment of four
monthly installments covering the months of July, August, September, and October, 1954. (Exhs. A and B).
When the document Exhibit "A" was executed on June 25, 1954, the plan covering plaintiff's property was
merely tentative, and the plaintiff referred to the proposed lots appearing in the tentative plan.

After the approval of the subdivision plan by the Bureau of Lands on January 24, 1955, defendant requested
plaintiff that he be allowed to abandon and substitute Lots 1, 2 and 9, the subject matter of their previous
agreement, with Lots 4 and 12, Block 2 of the approved subdivision plan, of the Rockville Subdivision, with
a total area of 725 square meters, which are corner lots, to which request plaintiff graciously acceded.

The evidence discloses that defendant proposed to plaintiff modification of their previous contract to sell
because he found it quite difficult to pay the monthly installments on the three lots, and besides the two lots
he had chosen were better lots, being corner lots. In addition, it was agreed that the purchase price of these
two lots would be at the uniform rate of P17.00 per square (meter) payable in 120 equal monthly
installments, with interest at 8% annually on the balance unpaid. Pursuant to this new agreement, defendant
occupied and possessed Lots 4 and 12, Block 2 of the approved subdivision plan, and enclosed them,
including the portion where his house now stands, with barbed wires and adobe walls.

However, aside from the deposit of P150.00 and the amount of P740.56 which were paid under their
previous agreement, defendant failed to make any further payment on account of the agreed monthly
installments for the two lots in dispute, under the new contract to sell. Plaintiff demanded upon defendant
not only to pay the stipulated monthly installments in arrears, but also to make up-to-date his payments,
but defendant, instead of complying with the demands, kept on asking for extensions, promising at first that
he would pay not only the installments in arrears but also make up-to-date his payment, but later on refused
altogether to comply with plaintiff's demands.

Defendant was likewise requested by the plaintiff to sign the corresponding contract to sell in accordance
with his previous commitment. Again, defendant promised that he would sign the required contract to sell
when he shall have made up-to-date the stipulated monthly installments on the lots in question, but
subsequently backed out of his promise and refused to sign any contract in noncompliance with what he
had represented on several occasions. And plaintiff relied on the good faith of defendant to make good his
promise because defendant is a professional and had been rather good to him (plaintiff).

On or about November 3, 1957, in a formal letter, plaintiff demanded upon defendant to vacate the lots in
question and to pay the reasonable rentals thereon at the rate of P60.00 per month from August, 1955.
(Exh. "B"). Notwithstanding the receipt of said letter, defendant did not deem it wise nor proper to answer
the same.

In reference to the mode of payment, the Honorable Court of Appeals found —

 Both parties are agreed that the period within which to pay the lots in question is ten years. They however,
disagree on the mode of payment. While the appellant claims that he could pay the purchase price at any
time within a period of ten years with a gradual proportionate discount on the price, the appellee maintains
that the appellant was bound to pay monthly installments.

On this point, the trial court correctly held that —

It is further argued by defendant that under the agreement to sell in question, he has the right or option to
pay the purchase price at anytime within a period of ten years from 1954, he being entitled, at the same
time, to a graduated reduction of the price. The Court is constrained to reject this version not only because
it is contradicted by the weight of evidence but also because it is not consistent with what is reasonable,
plausible and credible. It is highly improbable to expect plaintiff, or any real estate subdivision owner for
that matter, to agree to a sale of his land which would be payable anytime in ten years at the exclusive
option of the purchaser. There is no showing that defendant is a friend, a relative, or someone to whom
plaintiff had to be grateful, as would justify an assumption that he would have agreed to extend to defendant
such an extra- ordinary concession. Furthermore, the context of the document, Exhibit "B", not to mention
the other evidences on records is indicative that the real intention of the parties is for the payment of the
purchase price of the lot in question on an equal monthly installment basis for a period of ten years (Exhibits
"A", "II", "J" and "K").

On January 22, 1960, petitioner Felipe C, Roque (plaintiff below) filed the complaint against defendant Nicanor Lapuz
(private respondent herein) with the Court of First Instance of Rizal, Quezon City Branch, for rescission and cancellation of
the agreement of sale between them involving the two lots in question and prayed that judgment be rendered ordering the
rescission and cancellation of the agreement of sale, the defendant to vacate the two parcels of land and remove his house
therefrom and to pay to the plaintiff the reasonable rental thereof at the rate of P60.00 a month from August 1955 until such
time as he shall have vacated the premises, and to pay the sum of P2,000.00 as attorney's fees, costs of the suit and award
such other relief or remedy as may be deemed just and equitable in the premises.

Defendant filed a Motion to Dismiss on the ground that the complaint states no cause of action, which motion was denied
by the court. Thereafter, defendant filed his Answer alleging that he bought three lots from the plaintiff containing an
aggregate area of 1,200 sq. meters and previously known as Lots 1, 2 and 9 of Block 1 of Rockville Subdivision at P16.00,
P15.00 and P15.00, respectively, payable at any time within ten years. Defendant admits having occupied the lots in
question.

As affirmative and special defenses, defendant alleges that the complaint states no cause of action; that the present action
for rescission has prescribed; that no demand for payment of the balance was ever made; and that the action being based
on reciprocal obligations, before one party may compel performance, he must first comply what is incumbent upon him.

As counterclaim, defendant alleges that because of the acts of the plaintiff, he lost two lots containing an area of 800 sq.
meters and as a consequence, he suffered moral damages in the amount of P200.000.00; that due to the filing of the present
action, he suffered moral damages amounting to P100,000.00 and incurred expenses for attorney's fees in the sum of
P5,000.00.

Plaintiff filed his Answer to the Counterclaim and denied the material averments thereof.

After due hearing, the trial court rendered judgment, the dispositive portion of which reads:

WHEREFORE, the Court renders judgment in favor of plain. plaintiff and against the defendant, as follows:

(a) Declaring the agreement of sale between plaintiff and defendant involving the lots in question (Lots 4
and 12, Block 2 of the approved subdivision plan of the Rockville Subdivision) rescinded, resolved and
cancelled;

(b) Ordering defendant to vacate the said lots and to remove his house therefrom and also to pay plaintiff
the reasonable rental thereof at the rate of P60.00 per month from August, 1955 until he shall have actually
vacated the premises; and

(c) Condemning defendant to pay plaintiff the sum of P2,000.00 as attorney's fees, as well as the costs of
the suit. (Record on Appeal, p. 118)
 (a) Declaring the agreement of sale between plaintiff and defendant involving the lots in question (Lots 4
and 12, Block 2 of the approved subdivision plan of the Rockville Subdivision) rescinded, resolved and
cancelled;

(b) Ordering defendant to vacate the said lots and to remove his house therefrom and also to pay plaintiff
the reasonable rental thereof at the rate of P60.00 per month from August, 1955 until he shall have actually
vacated premises; and

(c) Condemning defendant to pay plaintiff the sum of P2,000.00 as attorney's fees, as well as the costs of
the suit. (Record on Appeal. p. 118)

Not satisfied with the decision of the trial court, defendant appealed to the Court of Appeals. The latter court, finding the
judgment appealed from being in accordance with law and evidence, affirmed the same.

In its decision, the appellate court, after holding that the findings of fact of the trial court are fully supported by the evidence,
found and held that the real intention of the parties is for the payment of the purchase price of the lots in question on an
equal monthly installment basis for the period of ten years; that there was modification of the original agreement when
defendant actually occupied Lots Nos. 4 and 12 of Block 2 which were corner lots that commanded a better price instead
of the original Lots Nos. 1, 2 and 9, Block I of the Rockville Subdivision; that appellant's bare assertion that the agreement
is not rescindable because the appellee did not comply with his obligation to put up the requisite facilities in the subdivision
was insufficient to overcome the presumption that the law has been obeyed by the appellee; that the present action has not
prescribed since Article 1191 of the New Civil Code authorizing rescission in reciprocal obligations upon noncompliance by
one of the obligors is the applicable provision in relation to Article 1149 of the New Civil Code; and that the present action
was filed within five years from the time the right of action accrued.

Defendant filed a Motion for Reconsideration of the appellate court's decision on the following grounds:

First — Neither the pleadings nor the evidence, testimonial, documentary or circumstantial, justify the
conclusion as to the existence of an alleged subsequent agreement novatory of the original contract
admittedly entered into between the parties:

Second — There is nothing so unusual or extraordinary, as would render improbable the fixing of ten ears
as the period within which payment of the stipulated price was to be payable by appellant;

Third — Appellee has no right, under the circumstances on the case at bar, to demand and be entitled to
the rescission of the contract had with appellant;

Fourth — Assuming that any action for rescission is availability to appellee, the same, contrary to the
findings of the decision herein, has prescribed;

Fifth — Assumming further that appellee's action for rescission, if any, has not yet prescribed, the same is
at least barred by laches;

Sixth — Assuming furthermore that a cause of action for rescission exists, appellant should nevertheless
be entitled to tile fixing of a period within which to comply with his obligation; and

Seventh — At all events, the affirmance of the judgment for the payment of rentals on the premises from
August, 1955 and he taxing of attorney's fees against appellant are not warranted b the circumstances at
bar. (Rollo, pp. 87-88)

Acting on the Motion for Reconsideration, the Court of Appeals sustained the sixth ground raised by the appellant, that
assuming that a cause of action for rescission exists, he should nevertheless be entitled to the fixing of a period within which
to comply with his obligation. The Court of Appeals, therefore, amended its original decision in the following wise and
manner:

WHEREFORE, our decision dated April 23, 1970 is hereby amended in the sense that the defendant
Nicanor Lapuz is hereby granted a period of ninety (90) days from entry hereof within which to pay the
balance of the purchase price in the amount of P11,434,44 with interest thereon at the rate of 8% per annum
 from August 17, 1955 until fully paid. In the event that the defendant fails to comply with his obligation as
above stated within the period fixed herein, our original judgment stands.

Petitioner Roque, as plaintiff-appellee below, filed a Motion for Reconsideration; the Court of Appeals denied it. He now
comes and appeals to this Court on a writ of certiorari.

The respondent Court of Appeals rationalizes its amending decision by considering that the house presently erected on the
land subject of the contract is worth P45,000.00, which improvements introduced by defendant on the lots subject of the
contract are very substantial, and thus being the case, "as a matter of justice and equity, considering that the removal of
defendant's house would amount to a virtual forfeiture of the value of the house, the defendant should be granted a period
within which to fulfill his obligations under the agreement." Cited as authorities are the cases of Kapisanan Banahaw vs.
Dejarme and Alvero, 55 Phil. 338, 344, where it is held that the discretionary power of the court to allow a period within
which a person in default may be permitted to perform the stipulation upon which the claim for resolution of the contract is
based should be exercised without hesitation in a case where a virtual forfeiture of valuable rights is sought to be enforced
as an act of mere reprisal for a refusal of the debtor to submit to a usurious charge, and the case of Puerto vs. Go Ye Pin, 47
O.G. 264, holding that to oust the defendant from the lots without giving him a chance to recover what his father and he
himself had spent may amount to a virtual forfeiture of valuable rights.

As further reasons for allowing a period within which defendant could fulfill his obligation, the respondent court held that
there exists good reasons therefor, having in mind that which affords greater reciprocity of rights (Ramos vs. Blas, 51 O.G.
1920); that after appellant had testified that plaintiff failed to comply with his part of the contract to put up the requisite
facilities in the subdivision, plaintiff did not introduce any evidence to rebut defendant's testimony but simply relied. upon
the presumption that the law has been obeyed, thus said presumption had been successfully rebutted as Exhibit "5-D"
shows that the road therein shown is not paved The Court, however, concedes that plaintiff's failure to comply with his
obligation to put up the necessary facilities in the subdivision will not deter him from asking f r the rescission of the
agreement since this obligation is not correlative with defendant's obligation to buy the property.

Petitioner assails the decision of the Court of Appeals for the following alleged errors:

I. The Honorable Court of Appeals erred in applying paragraph 3, Article 1191 of the Civil Code which refers
to reciprocal obligations in general and, pursuant thereto, in granting respondent Lapuz a period of ninety
(90) days from entry of judgment within which to pay the balance of the purchase price.

II. The Honorable Court of Appeals erred in not holding that Article 1592 of the same Code, which
specifically covers sales of immovable property and which constitutes an exception to the third paragraph
of Article 1191 of said Code, is applicable to the present case.

III. The Honorable Court of Appeals erred in not holding that respondent Lapuz cannot avail of the provisions
of Article 1191, paragraph 3 of the Civil Code aforesaid because he did not raise in his answer or in any of
the pleadings he filed in the trial court the question of whether or not he is entitled, by reason of a just
cause, to a fixing of a new period.

IV. Assuming arguendo that the agreement entered into by and between petitioner and respondent Lapuz
was a mere promise to sell or contract to sell, under which title to the lots in question did not pass from
petitioner to respondent, still the Honorable Court of Appeals erred in not holding that aforesaid respondent
is not entitled to a new period within which to pay petitioner the balance of P11,434.44 interest due on the
purchase price of P12.325.00 of the lots.

V. Assuming arguendo that paragraph 3, Article 1191 of the Civil Code is applicable and may be availed of
by respondent, the Honorable Court of Appeals nonetheless erred in not declaring that aid respondent has
not shown the existence of a just cause which would authorize said Court to fix a new period within which
to pay the balance aforesaid.

VI. The Honorable Court of Appeals erred in reconsidering its original decision promulgated on April 23,
1970 which affirmed the decision of the trial court.

The above errors may, however, be synthesized into one issue and that is, whether private respondent is entitled to the
Benefits of the third paragraph of Article 1191, New Civil Code, for the fixing of period within which he should comply with
what is incumbent upon him, and that is to pay the balance of P11,434,44 with interest thereon at the rate of 8% 1et annum
from August 17, 1955 until fully paid since private respondent had paid only P150.00 as deposit and 4 months intallments
amounting to P740.46, or a total of P890.46, the total price of the two lots agreed upon being P12,325.00.

For his part, petitioner maintains that respondent is not entitled to the Benefits of paragraph 3, Article 1191, NCC and that
instead, Article 1592 of the New Civil Code which specifically covers sales of immovable property and which constitute an
exception to the third paragraph of Art. 1191 of aid Code, is the applicable law to the case at bar.

In resolving petitioner's assignment of errors, it is well that We lay clown the oda provisions and pertinent rulings of the
Supreme Court bearing on the crucial issue of whether Art. 1191, paragraph 3 of the New Civil Code applies to the case at
Bar as held by the appellate court and supported by the private respondent, or Art. 1592 of the same Code which petitioner
strongly argues in view of the peculiar facts and circumstances attending this case. Article 1191, New Civil Code, provides:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one at the obligors should
not comply with hat is incumbent upon him

The injured partner may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if
the latter should become impossible.

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

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.

Article 1592 also provides:

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

The controlling and latest jurisprudence is established and settled in the celebrated case of Luzon Brokerage Co., Inc. vs.
Maritime Building Co., Inc. and Myers Building Co., G.R. No. L-25885, January 31, 1972, 43 SCRA 93, originally decided
in 1972, reiterated in the Resolution on Motion to Reconsider dated August 18, 1972, 46 SCRA 381 and emphatically
repeated in the Resolution on Second Motion for Reconsideration promulgated November 16, 1978, 86 SCRA 309, which
once more denied Maritimes Second Motion for Reconsideration of October 7, 1972. In the original decision, the Supreme
Court speaking thru Justice J.B.L. Reyes said:

Under the circumstances, the action of Maritime in suspending payments to Myers Corporation was a
breach of contract tainted with fraud or malice (dolo), as distinguished from mere negligence (culpa), "dolo"
being succinctly defined as a "conscious and intention design to evade the normal fulfillment of existing
obligations" (Capistrano, Civil Code of the Philippines, Vol. 3, page 38), and therefore incompatible with
good faith (Castan, Derecho Civil, 7th Ed., Vol. 3, page 129; Diaz Pairo, Teoria de Obligaciones, Vol. 1,
page 116).

Maritime having acted in bad faith, it was not entitled to ask the court to give it further time to make payment
and thereby erase the default or breach that it had deliberately incurred. Thus the lower court committed
no error in refusing to extend the periods for payment. To do otherwise would be to sanction a deliberate
and reiterated infringement of the contractual obligations incurred by Maritime, an attitude repugnant to the
stability and obligatory force of contracts.

The decision reiterated the rule pointed out by the Supreme Court in Manuel vs. Rodriguez, 109 Phil. 1, p. 10, that:

In contracts to sell, where ownership is retained by the seller and is not to pass until the fun payment of the
price, such payment, as we said is a positive suspensive condition, the failure of which is not a breach,
casual or serious, but simply an event that prevented the obligation of the vendor to convey title from
acquiring binding i force in accordance with Article 1117 of the Old Civil Code. To argue that there was only
 a casual breach is to proceed from the assumption that the contract is one of absolute sale, where non-
payment is a resolutory condition, which is not the case." Continuing, the Supreme Court declared:

... appellant overlooks that its contract with appellee Myers s not the ordinary sale envisaged by Article
1592, transferring ownership simultaneously with the delivery of the real property sold, but one in which the
vendor retained ownership of the immovable object of the sale, merely undertaking to convey it provided
the buyer strictly complied with the terms of the contract (see paragraph [d], ante page 5). In suing to
recover possession of the building from Maritime appellee Myers is not after the resolution or setting aside
of the contract and the restoration of the parties to the status quo ante as contemplated by Article 1592, but
precisely enforcing the Provisions of the agreement that it is no longer obligated to part with the ownership
or possession of the property because Maritime failed to comply with the specific condition precedent, which
is to pay the installments as they fell due.

The distinction between contracts of sale and contracts to sell with reserved title has been recognized by
this Court in repeated decisions upholding the power of promisors under contracts to sell in case of failure
of the other party to complete payment, to extrajudicially terminate the operation of the contract, refuse
conveyance and retain the sums or installments already received, where such rights are expressly provided
for, as in the case at bar.

In the Resolution denying the first Motion for Reconsideration, 46 SCRA 381, the Court again speaking thru Justice J.B.L.
Reyes, reiterated the rule that in a contract to sell, the full payment of the price through the punctual performance of the
monthly payments is a condition precedent to the execution of the final sale 4nd to the transfer of the property from the
owner to the proposed buyer; so that there will be no actual sale until and unless full payment is made.

The Court further ruled that in seeking to oust Maritime for failure to pay the price as agreed upon, Myers was not rescinding
(or more properly, resolving) the contract but precisely enforcing it according to its expressed terms. In its suit, Myers was
not seeking restitution to it of the ownership of the thing sold (since it was never disposed of), such restoration being the
logical consequence of the fulfillment of a resolutory condition, expressed or implied (Art. 1190); neither was it seeking a
declaration that its obligation to sell was extinguished. What is sought was a judicial declaration that because the suspensive
condition (full and punctual payment) had not been fulfilled, its obligation to sell to Maritime never arose or never became
effective and, therefore, it (Myers) was entitled to repossess the property object of the contract, possession being a mere
incident to its right of ownership.

The decision also stressed that "there can be no rescission or resolution of an obligation as yet non-existent, because the
suspensive condition did not happen. Article 1592 of the New Civil Code (Art. 1504 of Old Civil Code) requiring demand by
suit or notarial act in case the vendor of realty wants to rescind does not apply to a contract to sell or promise to sell, where
title remains with the vendor until fulfillment to a positive condition, such as full payment of the price." (Manuel vs, Rodriguez,
109 Phil. 9)

Maritime's Second Motion for Reconsideration was denied in the Resolution of the Court dated November 16, 1978, 86
SCRA 305, where the governing law and precedents were briefly summarized in the strong and emphatic language of
Justice Teehankee, thus:

(a) The contract between the parties was a contract to sell or conditional sale with title expressly reserved
in the vendor Myers Building Co., Inc. Myers until the suspensive condition of full and punctual payment of
the full price shall have been met on pain of automatic cancellation of the contract upon failure to pay any
of the monthly installments when due and retention of the sums theretofore paid as rentals. When the
vendee, appellant Maritime, willfully and in bad faith failed since March, 1961 to pay the P5,000. — monthly
installments notwithstanding that it was punctually collecting P10,000. — monthly rentals from the lessee
Luzon Brokerage Co., Myers was entitled, as it did in law and fact, to enforce the terms of the contract to
sell and to declare the same terminated and cancelled.

(b) Article 1592 (formerly Article 1504) of the new Civil Code is not applicable to such contracts to self or
conditional sales and no error was committed by the trial court in refusing to extend the periods for
payment.

(c) As stressed in the Court's decision, "it is irrelevant whether appellant Maritime's infringement of its
contract was casual or serious" for as pointed out in Manuel vs. Rodriguez, '(I)n contracts to self. whether
ownership is retained by the seller and is not to pass until the full payment of the price, such payment, as
 we said, is a positive suspensive condition, the failure of which is not a breach, casual or serious, but simply
an event that prevented the obligation of the vendor to convey title from acquiring binding force ...

(d) It should be noted, however, that Maritimes breach was far from casual but a most serious breach of
contract ...

(e) Even if the contract were considered an unconditional sale so that Article 1592 of the Civil Code could
be deemed applicable, Myers' answer to the complaint for interpleaded in the court below constituted a
judicial demand for rescission of the contract and by the very provision of the cited codal article, 'after the
demand, the court may not grant him a new term for payment; and

(f) Assumming further that Article 1191 of the new Civil Code governing rescission of reciprocal obligations
could be applied (although Article 1592 of the same Code is controlling since it deals specifically with sales
of real property), said article provides that '(T)he court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period' and there exists to "just cause" as shown above for the fixing
of a further period. ...

Under the first and second assignments of error which petitioner jointly discusses, he argues that the agreement entered
into between him and the respondent is a perfected contract of purchase and sale within the meaning of Article 1475 of the
New Civil Code which provides that "the contract of sale is perfected at the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally demand
performance, subject to the provisions of the law governing the form of contract."

Petitioner contends that "(n)othing in the decision of the courts below would show that ownership of the property remained
with plaintiff for so long as the installments have not been fully paid. Which yields the conclusion that, by the delivery of the
lots to defendant, ownership likewise was transferred to the latter." (Brief for the Petitioner, p. 15) And he concludes that
the sale was consummated by the delivery of the two lots, the subject thereof, by him to the respondent.

Under the findings of facts by the appellate court, it appears that the two lots subject of the agreement between the parties
herein were delivered by the petitioner to the private respondent who took possession thereof and occupied the same and
thereafter built his house thereon, enclosing the lots with adobe stone walls and barbed wires. But the property being
registered under the Land Registration Act, it is the act of registration of the Deed of Sale which could legally effect the
transfer of title of ownership to the transferee, pursuant to Section 50 of Act 496. (Manuel vs. Rodriguez, et al., 109 Phil. 1;
Buzon vs. Lichauco, 13 Phil. 354; Tuazon vs. Raymundo, 28 Phil. 635: Worcestor vs. Ocampo, 34 Phil. 646). Hence, We
hold that the contract between the petitioner and the respondent was a contract to sell where the ownership or title is
retained by the seller and is not to pass until the full payment of the price, such payment being a positive suspensive
condition and failure of which is not a breach, casual or serious, but simply an event that prevented the obligation of the
vendor to convey title from acquiring binding force.

In the case at bar, there is no writing or document evidencing the agreement originally entered into between petitioner and
private respondent except the receipt showing the initial deposit of P150.00 as shown in Exh. "A" and the payment of the
4- months installment made by respondent corresponding to July, 1954 to October, 1954 in the sum of P740.56 as shown
in Exh. "B". Neither is there any writing or document evidencing the modified agreement when the 3 lots were changed to
Lots 4 and 12 with a reduced area of 725 sq. meters, which are corner lots. This absence of a formal deed of conveyance
is a very strong indication that the parties did not intend immediate transfer of ownership and title, but only a transfer after
full payment of the price. Parenthetically, We must say that the standard printed contracts for the sale of the lots in the
Rockville Subdivision on a monthly installment basis showing the terms and conditions thereof are immaterial to the case
at bar since they have not been signed by either of the parties to this case.

Upon the law and jurisprudence hereinabove cited and considering the nature of the transaction or agreement between
petitioner and respondent which We affirm and sustain to be a contract to sell, the following resolutions of petitioner's
assignment of errors necessarily arise, and so We hold that:

1. The first and second assignments of errors are without merit.

The overwhelming weight of authority culminating in the Luzon Brokerage vs. Maritime cases has laid down the rule that
Article 1592 of the New Civil Code does not apply to a contract to sell where title remains with the vendor until full payment
of the price as in the case at bar. This is the ruling in Caridad Estates vs. Santero, 71 Phil. 120; Aldea vs. Inquimboy 86
Phil. 1601; Jocon vs. Capitol Subdivision, Inc., L-6573, Feb. 28, 1955; Miranda vs. Caridad Estates, L-2077 and Aspuria vs.
Caridad Estates, L-2121 Oct. 3, 1950, all reiterated in Manuel vs. Rodriguez, et al.109 Phil. 1, L-13435, July 27, 1960. We
agree with the respondent Court of Appeals that Art, 1191 of the New Civil Code is the applicable provision where the
obligee, like petitioner herein, elects to rescind or cancel his obligation to deliver the ownership of the two lots in question
for failure of the respondent to pay in fun the purchase price on the basis of 120 monthly equal installments, promptly and
punctually for a period of 10 years.

2. We hold that respondent as obligor is not entitled to the benefits of paragraph 3 of Art. 1191, NCC Having been in default,
he is not entitled to the new period of 90 days from entry of judgment within which to pay petitioner the balance of P11,434.44
with interest due on the purchase price of P12,325.00 for the two lots.

Respondent a paid P150.00 as deposit under Exh. "A" and P740.56 for the 4-months installments corresponding to the
months of July to October, 1954. The judgment of the lower court and the Court of Appeals held that respondent was under
the obligation to pay the purchase price of the lots m question on an equal monthly installment basis for a period of ten
years, or 120 equal monthly installments. Beginning November, 1954, respondent began to default in complying with his
obligation and continued to do so for the remaining 116 monthly interest. His refusal to pay further installments on the
purchase price, his insistence that he had the option to pay the purchase price any time in ten years inspire of the clearness
and certainty of his agreement with the petitioner as evidenced further by the receipt, Exh. "B", his dilatory tactic of refusing
to sign the necessary contract of sale on the pretext that he will sign later when he shall have updated his monthly payments
in arrears but which he never attempted to update, and his failure to deposit or make available any amount since the
execution of Exh "B" on June 28, 1954 up to the present or a period of 26 years, are all unreasonable and unjustified which
altogether manifest clear bad faith and malice on the part of respondent puzzle making inapplicable and unwarranted the
benefits of paragraph 3, Art. 1191, N.C.C. To allow and grant respondent an additional period for him to pay the balance of
the purchase price, which balance is about 92% of the agreed price, would be tantamount to excusing his bad faith and
sanctioning the deliberate infringement of a contractual obligation that is repugnant and contrary to the stability, security
and obligatory force of contracts. Moreover, respondent's failure to pay the succeeding 116 monthly installments after paying
only 4 monthly installments is a substantial and material breach on his part, not merely casual, which takes the case out of
the application of the benefits of pa paragraph 3, Art. 1191, N.C.C.

At any rate, the fact that respondent failed to comply with the suspensive condition which is the full payment of the price
through the punctual performance of the monthly payments rendered petitioner's obligation to sell ineffective and, therefore,
petitioner was entitled to repossess the property object of the contract, possession being a mere incident to his right of
ownership (Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., et al. 46 SCRA 381).

3. We further rule that there exists no just cause authorizing the fixing of a new period within which private respondent may
pay the balance of the purchase price. The equitable grounds or considerations which are the basis of the respondent court
in the fixing of an additional period because respondent had constructed valuable improvements on the land, that he has
built his house on the property worth P45,000.00 and placed adobe stone walls with barbed wires around, do not warrant
the fixing of an additional period. We cannot sanction this claim for equity of the respondent for to grant the same would
place the vendor at the mercy of the vendee who can easily construct substantial improvements on the land but beyond the
capacity of the vendor to reimburse in case he elects to rescind the contract by reason of the vendee's default or deliberate
refusal to pay or continue paying the purchase price of the land. Under this design, strategem or scheme, the vendee can
cleverly and easily "improve out" the vendor of his land.

More than that, respondent has not been honest, fair and reciprocal with the petitioner, hence it would not be fair and
reasonable to the petitioner to apply a solution that affords greater reciprocity of rights which the appealed decision tried to
effect between the parties. As matters stand, respondent has been enjoying the possession and occupancy of the land
without paying the other 116 monthly installments as they fall due. The scales of justice are already tipped in respondent,s
favor under the amended decision of the respondent court. It is only right that We strive and search for the application of
the law whereby every person must, in the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith (Art. 19, New Civil Code)

In the case at bar, respondent has not acted in good faith. With malice and deliberate intent, he has twisted the clear import
of his agreement with the petitioner in order to suit his ends and delay the fulfillment of his obligation to pay the land he had
enjoyed for the last 26 years, more than twice the period of ten years that he obliged himself to complete payment of the
price.

4. Respondent's contention that petitioner has not complied with his obligation to put up the necessary facilities in the
Rockville Subdivision is not sufficient nor does it constitute good reason to justify the grant of an additional period of 90 days
from entry of judgment within which respondent may pay the balance of the purchase price agreed upon. The Judgment of
the appellate court concedes that petitioner's failure to comply with his obligation to put up the necessary facilities in the
subdivision will not deter him from asking for the rescission of the agreement since his obligation is not correlative with
respondent's obligation to buy the property. Since this is so conceded, then the right of the petitioner to rescind the
agreement upon the happening or in the event that respondent fails or defaults in any of the monthly installments would be
rendered nugatory and ineffective. The right of rescission would then depend upon an extraneous consideration which the
law does not contemplate.

Besides, at the rate the two lots were sold to respondent with a combined area of 725 sq. meters at the uniform price of
P17.00 per sq. meter making a total price of P12,325.00, it is highly doubtful if not improbable that aside from his obligation
to deliver title and transfer ownership to the respondent as a reciprocal obligation to that of the respondent in paying the
price in full and promptly as the installments fall due, petitioner would have assumed the additional obligation "to provide
the subdivision with streets ... provide said streets with street pavements concrete curbs and gutters, fillings as required by
regulations, adequate drainage facilities, tree plantings, adequate water facilities" as required under Ordinance No. 2969 of
Quezon City approved on May 11, 1956 (Answer of Defendant, Record on Appeal, pp. 35-36) which was two years after
the agreement in question was entered into June, 1y54.

The fact remains, however, that respondent has not protested to the petitioner nor to the authorities concerned the alleged
failure of petitioner to put up and provide such facilities in the subdivision because he knew too well that he has paid only
the aggregate sum of P890.56 which represents more or less 7% of the agreed price of P12,325.00 and that he has not
paid the real estate taxes assessed by the government on his house erected on the property under litigation. Neither has
respondent made any allegation in his Answer and in all his pleadings before the court up to the promulgation of the
Resolution dated October 12, 1970 by the Court of Appeals, to the effect that he was entitled to a new period within which
to comply with his obligation, hence the Court could not proceed to do so unless the Answer is first amended. (Gregorio
Araneta, Inc. vs. Philippine Sugar Estates Development Co., Ltd., G.R. No. L-22558, May 31, 1967, 20 SCRA 330, 335). It
is quite clear that it is already too late in the day for respondent to claim an additional period within which to comply with his
obligation.

Precedents there are in Philippine jurisprudence where the Supreme Court granted the buyer of real property additional
period within which to complete payment of the purchase price on grounds of equity and justice as in (1) J.M. Tuazon Co.,
Inc. vs. Javier, 31 SCRA 829 where the vendee religiously satisfied the monthly installments for eight years and paid a total
of P4,134.08 including interests on the principal obligation of only P3,691.20, the price of the land; after default, the vendee
was willing to pay all arrears, in fact offered the same to the vendor; the court granted an additional period of 60 days -from
receipt of judgment for the vendee to make all installment in arrears plus interest; (2) in Legarda Hermanos vs. Saldaña, 55
SCRA 324, the Court ruled that where one purchase, from a subdivision owner two lots and has paid more than the value
of one lot, the former is entitled to a certificate of title to one lot in case of default.

On the other hand there are also cases where rescission was not granted and no new or additional period was authorized.
Thus, in Caridad Estates vs. Santero, 71 Phil. 114, the vendee paid, totalling P7,590.00 or about 25% of the purchase price
of P30,000.00 for the three lots involved and when the vendor demanded revocation upon the vendee's default two years
after, the vendee offered to pay the arears in check which the vendor refused; and the Court sustained the revocation and
ordered the vendee ousted from the possession of the land. In Ayala y Cia vs. Arcache, 98 Phil. 273, the total price of the
land was P457,404.00 payable in installments; the buyer initially paid P100,000.00 or about 25% of the agreed price; the
Court ordered rescission in view of the substantial breach and granted no extension to the vendee to comply with his
obligation.

The doctrinal rulings that "a slight or casual breach of contract is not a ground for rescission. It must be so substantial and
fundamental to defeat the object of the parties" (Gregorio Araneta Inc. vs. Tuazon de Paterno, L-2886, August 22, 1962;
Villanueva vs. Yulo, L-12985, Dec. 29,1959); that "where time is not of the essence of t agreement, a slight delay on the
part of one party in the performance of his obligation is not a sufficient ground for the rescission of the agreement"( Biando
vs. Embestro L-11919, July 27, 1959; cases cited in Notes appended to Universal Foods Corporation vs. Court of Appeals,
33 SCRA 1), convince and persuade Us that in the case at bar where the breach, delay or default was committed as early
as in the payment of the fifth monthly installment for November, 1954, that such failure continued and persisted the next
month and every month thereafter in 1955, 1956, 1957 and year after year to the end of the ten-year period in 1964 (10
years is respondent's contention) and even to this time, now more than twice as long a time as the original period without
respondent adding, or even offering to add a single centavo to the sum he had originally paid in 1954 which represents a
mere 7% of the total price agreed upon, equity and justice may not be invoked and applied. One who seeks equity and
justice must come to court with clean hands, which can hardly be said of the private respondent.

One final point, on the supposed substantial improvements erected on the land, respondent's house. To grant the period to
the respondent because of the substantial value of his house is to make the land an accessory to the house. This is unjust
and unconscionable since it is a rule in Our Law that buildings and constructions are regarded as mere accessories to the
land which is the principal, following the Roman maxim "omne quod solo inadeficatur solo cedit" (Everything that is built on
the soil yields to the soil).
Pursuant to Art. 1191, New Civil Code, petitioner is entitled to rescission with payment of damages which the trial court and
the appellate court, in the latter's original decision, granted in the form of rental at the rate of P60.00 per month from August,
1955 until respondent shall have actually vacated the premises, plus P2,000.00 as attorney's fees. We affirm the same to
be fair and reasonable. We also sustain the right of the petitioner to the possession of the land, ordering thereby respondent
to vacate the same and remove his house therefrom.

WHEREFORE, IN VIEW OF THE FOREGOING, the Resolution appealed from dated October 12, 1970 is hereby
REVERSED. The decision of the respondent court dated April 23, 1970 is hereby REINSTATED and AFFIRMED, with costs
against private respondent.

SO ORDERED.
 G.R. No. 127206 : September 12, 2003

PERLA PALMA GIL, VICENTE HIZON, JR., and ANGEL PALMA GIL, petitioners, vs. HON. COURT
OF APPEALS, HEIRS OF EMILIO MATULAC, CONSTANCIO MAGLANA, AGAPITO PACETES & The
REGISTER OF DEEDS OF DAVAO CITY, Respondents.

DECISION

CALLEJO, SR., J.:

For review on appeal by certiorari are the Decision1 of the Court of Appeals in CA-G.R. CV. No. 43188
promulgated on March 19, 1996, and its Resolution2 dated October 17, 1996, denying the petitioners Motion
for Reconsideration of the said decision.

The appealed decision affirmed in toto the judgment of the Regional Trial Court, Davao City, Branch 16, in
Civil Case No. 15,356 which dismissed the complaint of the herein petitioners.

The Antecedents

Concepcion Palma Gil, and her sister, Nieves Palma Gil, married to Angel Villarica, were the co-owners of a
parcel of commercial land with an area of 829 square meters, identified as Lot No. 59-C, covered by Transfer
Certificate of Title (TCT) No. 432 located in Davao City. The spouses Angel and Nieves Villarica had
constructed a two-storey commercial building on the property. On October 13, 1953, Concepcion filed a
complaint against her sister Nieves with the then Court of First Instance of Davao City, docketed as Civil
Case No. 1160 for specific performance, to compel the defendant to cede and deliver to her an undivided
portion of the said property with an area of 256.2 square meters. After due proceedings, the court rendered
judgment on April 7, 1954 in favor of Concepcion, ordering the defendant to deliver to the plaintiff an
undivided portion of the said property with an area of 256.2 square meters:

A la vista de los datos expuestos, el Juzgado dicta sentencia condenando a la demanda, Nieves Palma Gil
de Villarica, cumpla con los terminos deldocumento (Exh. A) ordenando a aquella que otogue los
documentos necesarios traspasando a favor de la demandante (CONCEPCION PALMA GIL), 256 metros
cuadrados con 20 centimetros del Lote No. 56-C descrito mas particularmente en el Certificado de Titulo
No. 432.3cräläwvirtualibräry

Nieves appealed to the Court of Appeals which affirmed the assailed decision. In due course, the decision
became final and executory. On motion of the plaintiff (Concepcion), the court issued a writ of execution.
Nieves, however, refused to execute the requisite deed in favor of her sister. On April 27, 1956, the court
issued an order authorizing ex-officioSheriff Eriberto Unson to execute the requisite deed of transfer to the
plaintiff over an undivided portion of the property with a total area of 256.2 square meters. Instead of doing
so, the sheriff had the property subdivided into four lots namely, Lot 59-C-1, with an area of 218 square
meters; Lot 59-C-2, with an area of 38 square meters; Lot 59-C-3, with an area of 14 square meters; and
Lot 59-C-4, with an area of 560 square meters, all covered by a subdivision plan. The sheriff thereafter
executed a Deed of Transfer to Concepcion over Lot 59-C-1 and Lot 59-C-2 with a total area of 256.2 square
meters.

On October 24, 1956, Concepcion executed a deed of absolute sale over Lot 59-C-1 in favor of Iluminada
Pacetes. In the said deed, the area of Lot 59-C-1 appeared as 256 square meters although under the
subdivision plan, the area of the property was only 218 square meters. The vendee obliged herself to pay
the said amount, to wit:

1. The purchase price of P21,600.00 shall be paid as follows: P7,500.00 to be paid upon the signing of this
instrument; and the balance of P14,100.00 to be paid upon the delivery of the corresponding Certificate of
Title in the name of the VENDEE.4cräläwvirtualibräry

Under the deed of absolute sale, the parties further agreed as follows:
2. That the VENDOR shall, within the period of ONE HUNDRED TWENTY (120) DAYS, from the signing of this
agreement, undertake and work for the issuance of the corresponding Certificate of Title of the said Lot No.
59-C-1 in her favor with the proper government office or offices, to the end that the same can be duly
transferred in the name of the herein VENDEE, by virtue thereof.

3. That pending the full and complete payment of the purchase price to the VENDOR, the VENDEE shall
collect and receive any and all rentals and such other income from the land above-described for her own
account and benefit, this right of the VENDEE to begin from December 1, 1956.5cräläwvirtualibräry

In the meantime, Nieves filed a motion in Civil Case No. 1160 to compel the sheriff to report on his
compliance with the courts Order dated April 27, 1956. The motion was denied. A motion for reconsideration
of the denial met the same fate. Nieves appealed to the Court of Appeals, which appeal was docketed as
CA-G.R. No. 22438-R.

In a parallel development, Concepcion filed a complaint for unlawful detainer against the spouses Angel and
Nieves Villarica with the Municipal Trial Court docketed as Civil Case No. 2246. On October 4, 1956, the
court rendered judgment in favor of the plaintiff and against the defendants, the decretal portion of which
reads as follows:

From the foregoing, it is indeed evident and clear that the herein defendants have been unlawfully
withholding possession of the land from the plaintiff, and hereby finds in favor of the plaintiff, and against
the defendants, ordering the latter to vacate the premises described in the complaint, removing whatever
improvements they have constructed thereon. The defendants are further judged to pay the plaintiff the
amount of ONE HUNDRED FIFTY PESOS (P150.00) a month from the time of the filing of this complaint until
the lot is finally vacated in concept of rentals, deprived of the plaintiff due to the unlawful possession of the
defendants, and to pay the costs of this suit.6cräläwvirtualibräry

The decision became final and executory but the plaintiff did not file any motion for a writ of execution.

The spouses Angel and Nieves Villarica filed a complaint on October 24, 1956 against the sheriff and
Concepcion with the Court of First Instance of Davao City, docketed as Civil Case No. 2151 for the
nullification of the deed of transfer executed by the sheriff.7cräläwvirtualibräry

On December 21, 1956, Iluminada Pacetes filed a motion to intervene in Civil Case No. 2151, as vendee of
the property subject of the case, which was granted by the court. She then filed a motion to dismiss the
complaint. The court granted the motion. Nieves appealed to the Court of Appeals which appeal was
docketed as CA-G.R. No. 22008-R. Nieves appeals in Civil Cases Nos. 1160 and 2151 were certified by the
CA to this Court, docketed as G.R. No. L-15799 and G.R. No. L-15801.

On the basis of the deed of transfer executed by Sheriff Iriberto A. Unson, the Register of Deeds issued TCT
No. 7450 over Lot 59-C-1 and 59-C-2 on July 17, 1957 in the name of Concepcion, with a total area of
256.2 square meters. However, the latter failed to transfer title to the property to and under the name of
Iluminada Pacetes. Consequently, the latter did not remit the balance of the purchase price of the property
to Concepcion.

In the interim, the spouses Angel and Nieves Villarica executed a real estate mortgage over Lot 59-C-4 in
favor of Prudential Bank as security for a loan. On August 4, 1959, Concepcion died intestate and was
survived by Nieves Villarica and her nephews and nieces. Iluminada filed a motion in Civil Case No. 1160
for her substitution as party-plaintiff in lieu of the deceased Concepcion. On August 2, 1961, the court issued
an order granting the motion.

On August 31, 1961, this Court rendered judgment in G.R. Nos. L-15799 and L-15801 setting aside the
deed of transfer executed by the sheriff in favor of Concepcion Palma Gil, and remanding the records to the
trial court for further proceedings.8 In compliance with the Decision of this Court in G.R. No. L-15801, the
trial court conducted further proceedings in Civil Case No. 1160 and discovered that the defendant had
mortgaged Lot 59-C-4 to the Prudential Bank. Consequently, the court issued an order on February 17,
1964, declaring that the defendant had waived the benefits of the Decision of the Court on August 31, 1961
in G.R. No. L-15801; thus, the conveyance of the property made by Concepcion in favor of Iluminada
on October 24, 1956 must stand. Nieves filed a motion for the reconsideration of the said order but the
court denied the same in an Order dated February 29, 1964. Nieves appealed the order to the CA which
dismissed the appeal for her failure to file a record on appeal. Nieves filed a petition for review with this
Court docketed as G.R. No. L-28363.

More than five years having elapsed without the decision in Civil Case No. 2246 being enforced, Iluminada
filed a complaint docketed as Civil Case No. 4413 in the Court of First Instance of Davao City, for the revival
and execution of the decision of the Municipal Trial Court in Civil Case No. 2246 (the unlawful detainer case).
The plaintiff therein averred that, as Concepcions successor-in-interest, she acquired the right of action to
enforce the decision in Civil Case No. 2246. The defendants, on the other hand, averred that Iluminada had
not yet paid the balance of the purchase price of Lot 59-C-1; hence, she had not acquired title over the lot
and the right to evict the defendant. The deed of absolute sale executed by Concepcion in favor of the
plaintiff was an executory, not an executed deed. On January 26, 1965, the court rendered judgment in
favor of the defendants and dismissed the complaint. The decretal portion reads:

IN VIEW OF THE FOREGOING, the Court believes that the plaintiff herein has not been properly and legally
subrogated to the rights and action of deceased Concepcion Palma Gil and, hence, for these reasons the
Court dismisses this case without pronouncement as to costs.

The counterclaim is also hereby ordered dismissed.9cräläwvirtualibräry

On March 16, 1966, Iluminada Pacetes and Agapito Pacetes executed a deed of absolute sale over Lot 59-
C-1 and Lot 59-C-2 in favor of Constancio B. Maglana for P110,000.00, covered by TCT No. 7450.10The
spouses-vendors undertook to secure title over the lots under the name of the vendee within ninety days.

On May 15, 1974, this Court denied the petition for certiorari filed by Nieves in G.R. No. L-28363.11 The
Court, in part, ruled:

But while the issue at bar exclusively involves the timeliness of the appeal of the petitioners to the Court of
Appeals, this Court has nonetheless examined and analyzed the substantive aspects of this case and is
satisfied that the ORDERS of the trial court complained of are morally just.

Accordingly, the instant appeal is dismissed and the resolution of the Court of Appeals dated July 31, 1967
and its resolution dated October 18, 1967 are affirmed.12cräläwvirtualibräry

The decision of the Court became final and executory.

On May 5, 1975, the spouses Agapito and Iluminada Pacetes filed a complaint against Nieves in the Court
of First Instance of Davao City, docketed as Civil Case No. 8836 for the recovery of possession of Lot 59-C-
1 and Lot 59-C-2. The Pacetes spouses claimed that Lot 59-C-2 was included in TCT No. 7450 under the
name of Concepcion. The spouses prayed that judgment be rendered in their favor after due proceedings
thus:

PRAYER

PREMISES CONSIDERED, it is most respectfully prayed that:

1. During the pendency of this case, Defendant be ordered:

a. To refrain from collecting rentals from the tenants or occupants of the building erected in said Lot 59-C-
1; in that the tenants be directed to pay their rental to the plaintiff;

b. To demolish her aforesaid building of strong materials and vacate the premises of Lot 59-C-1 and Lot 59-
C-2.
2. After hearing, Defendant be ordered to:

a. Pay the Plaintiffs the amount consisting of compensation for the use of the land they have been depribed
(sic) of to receive and enjoy since October 24, 1956 due to the unwarranted and illegal occupation of the
said lots by defendant;

b. Pay Plaintiffs moral and exemplary damages in such amount as the Honorable Court may fix considering
the facts and the law;

c. Pay Plaintiffs such expenses of litigation as may be proven during the trial, and

d. Pay Plaintiffs expenses for services of counsel they had to incurr (sic) in this complaint.

3. OTHER RELIEFS consonant with justice and equity are prayed for.13cräläwvirtualibräry

On May 10, 1977, Nieves Villarica executed a lease agreement with Virginia Jorge and Anita Vergara over
Lots 59-C-1 and 59-C-2. The lessees took actual possession of the leased property.

In their Answer to the complaint in Civil Case No. 8836, the defendants averred, by way of defense, that
the complaint was barred by the decision of the CFI in Civil Case No. 4413, which ruled that the Deed of
Absolute Sale executed by Concepcion in favor of Iluminada was merely an executory, but not an executed
contract. After the plaintiffs had rested their case, the defendants filed a motion to dismiss (demurrer to
evidence). On October 29, 1975, the court issued an order dismissing the complaint on the ground that the
action was barred by the decision of the court in Civil Case No. 4413.14 Thus, Virginia Jorge and Anita
Vergara continued to be in physical possession of the property.

In the meantime, on August 8, 1977, Iluminada consigned with the court in Civil Case No. 1160 the amount
of P11,983.00 only as payment of the purchase price of the property. Iluminada was issued receipts for the
amount.15 As successor-in-interest of Concepcion, she likewise filed a motion for execution in Civil Case No.
1160 for the eviction of the defendant Nieves Villarica and all those acting for and in her behalf. The court
issued an order on August 19, 1977 granting the motion. The defendants filed a motion for reconsideration
of the order claiming that Iluminada was not a party to the case which the court denied on September 2,
1977. The defendant filed another motion for reconsideration which was likewise denied on September 16,
1977. The defendant filed a petition for certiorari with the Court of Appeals docketed as CA-G.R. No. 62957-
R, which petition was dismissed on August 26, 1980. The CA ruled that Iluminada Pacetes was the real
party-in-interest as the vendee of the property. The defendant filed a petition with this Court docketed as
G.R. No. L-56399.

In the meantime, Iluminada filed a petition with the RTC docketed as Miscellaneous Case No. 4715 for the
issuance of an owners duplicate of TCT No. 7450. On March 22, 1978, the court granted the petition and
ordered the Register of Deeds to issue an owners duplicate of the said title under the name of Concepcion
Gil. Iluminada presented the said order and the deed of absolute sale executed by Concepcion in her favor.
On May 9, 1978, the Register of Deeds issued TCT No. 61514 over Lot 59-C-1, with an area of 218 square
meters, in the name of Iluminada Pacetes.16cräläwvirtualibräry

On April 21, 1980, TCT No. 73412 was issued by the Register of Deeds of Davao City in favor of Constancio
Maglana over Lot 59-C-1 only.17The next day, Constancio Maglana executed a deed of sale not only over
Lot 59-C-1 but also Lot 59-C-2, in favor of Emilio Matulac for the purchase price of P150,000.00.18 On the
basis of the said deed, the Register of Deeds issued TCT No. 80631 to and under the name of Emilio Matulac
over the two lots.

In the meantime, Angel Villarica had died on April 20, 1974. On July 7, 1981, his heirs, including his widow
Nieves, executed an Extra-Judicial Settlement of Estate of Deceased in which the latter waived, ceded and
transferred to her children Teresita Magpantay, Antero P.G. Villarica, Zenaida V. Alovera, Emperatriz V.
Garcia, Napoleon P.G. Villarica and Rupendo P.G. Villarica her rights and interests over the property covered
by TCT No. 7450.19cräläwvirtualibräry
On January 13, 1982, this Court affirmed the resolution of the Court of Appeals, in CA-G.R. No. 62975-R
and dismissed the petition for certiorari in G.R. No. L-56399, thus, paving the way for the execution of the
decision of the trial court in Civil Case No. 1160, per its Order dated August 19, 1977. Emilio Matulac filed
a motion for the issuance of a writ of execution. The Court granted the motion on February 18, 1982. Nieves
filed a motion for the reconsideration of the order which the court denied in its Order dated March 17, 1982.
Virginia Jorge and Anita Vergara, the lessees, filed a motion for reconsideration but the court denied the
motion. Nonetheless, the lessees were allowed to stay in the property until April 9, 1982. However, the
lessees refused to vacate the property after said date.

On April 10, 1982, Emilio Matulac filed a motion in Civil Case No. 1160 for the issuance of a writ of execution
and an order of demolition. On April 20, 1982, the trial court issued an order granting the motion for a writ
of execution on April 30, 1982. The court also issued a special order for the demolition of the buildings on
the property. The buildings on the property, including the properties owned by Virginia Jorge and Anita
Vergara, were demolished on June 14, 1982. Emilio Matulac thereafter commenced the construction of a
building thereon. The defendant Nieves Villarica, in the meantime, filed a motion in Civil Case No. 1160 to
annul the proceedings, including the writ of execution issued by the court, and the issuance of a restraining
order.

For their part, Virginia Jorge and Anita Vergara filed a petition for certiorari with this Court docketed as G.R.
No. L-60690 for the nullification of the aforesaid orders and the writ of demolition issued by the trial court
in Civil Case No. 1160.

Three of the surviving heirs of Concepcion Gil, namely, Perla Palma Gil, Vicente Hizon, Jr. and Angel Palma
Gil, through their first cousin, Atty. Vicente Villarica, one of Nieves Villaricas children, filed on June 17, 1982,
a complaint against Emilio Matulac, Constancio Maglana, Agapito Pacetes, and the Register of Deeds, with
the Court of First Instance, docketed as Civil Case No. 15,356 for the cancellation of the deed of sale
executed by Concepcion in favor of Iliminada Pacetes; the deed of sale executed by the latter in favor of
Constancio Maglana; the deed of sale executed by the latter in favor of Emilio Matulac, as well as TCT Nos.
61514, 73412 and 80631 under the respective names of the vendees.

The plaintiffs alleged, inter alia, that the deed of absolute sale executed by Concepcion in favor of Iluminada
over Lots 59-C-1 and 59-C-2 was a contract to sell, an executory contract, as declared by the Court of First
Instance in Civil Cases Nos. 4413 and 8836, and not an executed contract; the defendant spouses Agapito
and Iluminada Pacetes failed to pay the balance of the purchase price of the property during the lifetime of
Concepcion; hence, what was embodied in the said deed was not fulfilled by the vendee. Consequently, the
sale is null and void.

The plaintiffs prayed for the issuance of a temporary restraining order and a writ of preliminary injunction
to enjoin the defendant Emilio Matulac from continuing with the construction of a building on the property.
The plaintiffs likewise prayed that after due proceedings, judgment be rendered in their favor and against
the defendants, thus:

WHEREFORE, in view of the aforecited reasons it is most respectfully prayed that:

1) An order be rendered immediately enjoining defendant Matulac from doing further work in
the construction of the building and enjoining him from entering the premises and the land
subject of this complaint and after trial making the injunction above-mentioned permanent,
ordering the removal of any structure and other construction within the plaintiffs above-
described property and thereafter, upon said defendants failure to do so authorizing plaintiffs
to order said removal at defendants expense.

2) Judgment be rendered ordering:

a. Defendant Register of Deeds to cancel TCT No. T-61514, T-73412 and T-80631 and issued
(sic) a new Transfer Certificate of Title in the name of the above-mentioned heirs of the late
Concepcion Palma Gil nullifying the deeds of sale, Annexes B, C, and D hereof;
 b. Defendants Pacetes, Maglana and Matulac jointly and solidarily liable to plaintiffs for moral
and exemplary damages as may be granted by this Honorable Court and the amount
of P25,000.00 as attorneys fees; and

c. Litigation expenses and other reliefs as may be justified under this case.20cräläwvirtualibräry

In his answer to the complaint, defendant Emilio Matulac interposed the following special and affirmative
defenses: (a) he is the lawful owner of the property; (b) the action is barred by the Decision of this Court
in G.R. No. L-56399; (c) the plaintiffs are estopped from assailing the sale to him of the property; and (d)
he is a purchaser in good faith.

On November 29, 1982, the court issued an order in Civil Case No. 1160, denying the motion for the
nullification of the proceedings and for a writ of preliminary injunction. Nieves filed a motion for
reconsideration of the order. On February 18, 1983, the court issued an order denying the motion. Nieves
filed a petition with the Court of Appeals for the nullification of the same.

In the meantime, Emilio Matulac died intestate and was substituted by his heirs Sonia Matulac, Josephine
Matulac and Gregorio Matulac.21 A petition was filed with the RTC of Davao City for the settlement of his
estate docketed as SP-No. 2747. The Court appointed Sonia Matulac as administratrix of the estate.

The CA rendered a decision granting the petition and ordering the trial court to conduct further proceedings
to implement the August 19, 1977 Order. Sonia Matulac filed a petition for review on certiorari with this
Court docketed as G.R. No. 85538 for the nullification of the decision of the CA.

On November 24, 1989, this Court rendered a Decision dismissing the petition in G.R. No. L-60690. This
Court said:

When We dismissed on September 16, 1974, the petition for certiorari filed by defendants questioning the
orders, dated December 7, 1961 and December 17, 1964, in effect We had confirmed the sale by plaintiff
in Civil case No. 1160, Concepcion Palma Gil, of Lot 59-C-1 and 59-C-2 to Illuminada Pacetes and affirmed
the ruling of the trial court that defendants had waived the benefit of Our Resolution rendered on August
31, 1961.22cräläwvirtualibräry

Meanwhile, one of the plaintiffs, Perla Palma Gil in Civil Case No. 15,356, was appointed by the court as
administratrix of the estate of Concepcion on December 29, 1989,23 and filed in the said case a motion to
intervene as plaintiff in her capacity as administratrix in behalf of all the heirs of Concepcion.24 The heirs of
Emilio Matulac opposed the motion considering that they, and not the estate of Concepcion, owned the
subject property; thus the claim of the plaintiff should be filed in SP-No. 2747. On April 7, 1990, the said
motion was denied by the trial court.25The said court declared:

Being already a plaintiff together with the other plaintiffs in thise (sic) case, said intervention by plaintiff
Perla Palma Gil is not absolutely necessary and imperative. It would only delay the early disposition of the
case if allowed.

On January 8, 1990, this Court dismissed the petition in G.R. No. 85538. The petitioners filed a motion for
reconsideration and on July 2, 1992, this Court granted the motion and reversed the decision of the CA.
This Court ruled in the said case as follows:

When Concepcion Palma Gil, plaintiff in Civil Case No. 1160 sold the land in question to Iluminada Pacetes
on October 24, 1956, the latter became the new owner of the property. By virtue of the order of substitution
issued by the court, said new owner (Pacetes) became a formal party---the party plaintiff. As the new party
plaintiff, Pacetes had the right to move for the issuance of a writ of execution, which was correctly granted
by the trial court in the questioned Order dated August 19, 1977.

The subsequent transfers of the property from Pacetes to Maglana, and then from Maglana to herein movant
Matulac, was acquired pendente lite. The latter (Matulac) as the latest owner of the property, was, as aptly
put by the trial court, subrogated to all the rights and obligations of Pacetes. He is thus the party who now
has a substantial interest in the property. Matulac is a real party-in- interest subrogated to all the rights of
Iluminada Pacetes, including the right to the issuance of a writ of execution in his name. Hence, the
questioned orders of the lower court dated November 29, 1982 and February 18, 1983 as well as the Writ
of Possession issued pursuant to the aforementioned orders are valid. They do not in any way run counter
to the order of the lower court dated August 19, 1977, which granted the motion for execution filed by
Pacetes, who, as earlier pointed out, was succeeded in all his rights and interests, by herein petitioner,
Matulac.

Although the dispositive portion of the judgment rendered in Civil Case No. 1160 did not award the parties
their respective shares in the property, the power of the court to issue the order of execution cannot be
limited to what is stated in the dispositive portion of the judgment. As held in Paylago vs. Nicolas (189 SCRA
728 [1990]), the body of the decision must be consulted in case of ambiguity in the dispositive portion.
Hence, in Jorge vs. Consolacion (supra), we ruled that the execution of the judgment cannot be limited to
its dispositive portion, considering the continued failure of the defendant Nieves Palma Gil-Villarica, to
comply with what was required of her in the judgment. Respondents deprived petitioner Concepcion Palma
Gil and her successors-in-interest of their legal right to possess the land.26(Underscoring supplied)

On June 11, 1993, the trial court rendered judgment in Civil Case No. 15,356 in favor of the defendants.
The trial court ruled that this Court had affirmed, in G.R. No. 85538 and G.R. No. L-60690, the sales of the
property from Concepcion Palma Gil to Iluminada Pacetes, then to Constancio Maglana and to Emilio
Matulac; hence, the trial court was barred by the rulings of this Court. The plaintiffs appealed to the CA with
the following assignment of errors:

I. The trial court erred in not holding that Iluminada Pacetes had no right to sell or transfer the two (2)
parcels of land to Constancio Maglana;

II. That the trial court erred in not declaring the sale of the properties in question from Iluminada Pacetes
to Constancio Maglana, thence, from Constancio Maglana to Emilio Matulac NULL and VOID;

III. That the trial court erred in dismissing the complaint;

IV. That the trial court erred in not ordering the cancellation of transfer Certificate of Title No. T-80631 in
the name of Emilio Matulac and the issuance of a new title in the name of Concepcion Palma Gil;

V. That the trial court erred in not holding the appellees liable for damages to the
appellants.27cräläwvirtualibräry

In the meantime, on June 29, 1994, the estate of Emilio Matulac executed a deed of sale of real estate in
which the estate sold Lots 59-C-1 and 59-C-2 and the building thereon to the Prudential Education Plan,
Inc. for P7,000,000.00.28 On March 19, 1996, the CA rendered a decision affirming the decision assailed
therein and dismissing the appeal. The CA ruled that the deed of absolute sale executed by Concepcion in
favor of Iluminada Pacetes was a deed of absolute sale over Lots 59-C-1 and 59-C-2, under which the
ownership over the property subject thereof was transferred to the vendee. Moreover, the validity of the
sales of the subject lots by Concepcion to Iluminada, by the latter to Constancio Maglana, and by the latter
to Emilio Matulac, had been confirmed by this Court in G.R. No. L-60690 and G.R. No. 85538. Although
Iluminada paid the balance of the purchase price of the property only on August 8, 1977, the payment was
still timely, in light of Article 1592 of the New Civil Code. Besides, the property had already been sold to the
respondents Constancio Maglana and Emilio Matulac.

The appellants, now petitioners in this case, assert that private respondents Agapito and Iluminada Pacetes
failed to pay the balance of the purchase price in the amount of P14,100.00. They did consign and deposit
the amount of P11,983.00, but only on August 8, 1977, twenty one years from the execution of the Deed
of Absolute Sale in favor of the said spouses, without the latter instituting an action for the cancellation of
their obligation. According to the petitioners, the consignation made by Iluminada Pacetes of the amount
did not produce any legal effect. Furthermore, private respondents Constancio Maglana and Emilio Matulac
were not purchasers in good faith because at the time they purchased the respective properties, the two-
storey building constructed by the spouses Angel and Nieves Villarica on the said property was still existing.
Hence, the decision of the CA should be reversed and set aside.

In their Comment on the petition, private respondents Constancio Maglana and Agapito Pacetes averred
that the action of the petitioners in the court a quo was barred by the Decision of this Court in G.R. No. L-
60690 on November 24, 1989.

THE RULING OF THE COURT

The petition is denied due course.

We note that the petitioners failed to implead all the compulsory heirs of the deceased Concepcion Gil in
their complaint. When she died intestate, Concepcion Gil, a spinster, was survived by her sister Nieves, and
her nephews and nieces, three of whom are the petitioners herein.

Upon Concepcions demise, all her rights and interests over her properties, and the rights and obligations
under the Deed of Absolute Sale executed in favor of Iluminada Pacetes, were transmitted to her sister, and
her nephews and nieces29 by way of succession, a mode of acquiring the property, rights and obligation of
the decedent to the extent of the value of the inheritance of the heirs. The heirs stepped into the shoes of
the decedent upon the latters death.30cräläwvirtualibräry

In their complaint, the petitioners alleged that:

7. That upon the death of the late Concepcion Palma Gil, her heirs namely: A. Children of the deceased Pilar
Palma Gil Rodriguez; B. Children of the deceased Asuncion Palma Gil Hizon one of whom is plaintiff Vicente
Hizon, Jr.; C. Nieves Palma Gil Villarica; D. David Palma Gil one of whom is plaintiff Angel Palma Gil; E. Perla
Palma Gil; and F. Children of the deceased Jose Palma Gil, ipso facto became co-owners of the said subject
property by operation of law;31cräläwvirtualibräry

When she testified, petitioner Palma Gil stated that:

ATTY. GALLARDO:

With the Courts permission.

Q You said that you are one of the 3 plaintiffs in this case?

A Yes, sir.

Q Now, aside from these 3 plaintiffs who are supposed to be the heirs of the late Concepcion Palma Gil,
there are also other heirs who were not included as plaintiffs in this case?

A Yes, because that time when they demolished the building and I accompanied Atty. Villarica at the site
where they had the demolition, we found out that during the confrontation that we have to hurry and file
the case right away. So we were not able to contact all the heirs and I have contacted . . .since 3 of us were
there during the demolition, so we decided that I will be one, and Angel Palma Gil was also there and also
Vicente Hizon Jr. whom I contacted at the Apo View Hotel and I contacted also Julian Rodriguez, another
cousin thru telephone and he told us to go ahead and file the case. We cannot get all the heirs. We cannot
gather all of them and we will have a hard time asking them to sign, so we just filed the case.

Q You are telling the court that the other heirs were not included because they were not available to sign
the complaint?

A They were not there during the demolition.

Q When was the case filed?

A June 14, the demolition was on June 14, 1982.

ATTY. QUITAIN:

The best evidence would be the complaint, Your Honor.

ATTY. GALLARDO:

Q It appears in the complaint that it was filed sometime on June 16, 1982?

A We had it on June 14 the demolition, and we filed it right away because we were in a hurry.

Q Since June 16, 1982 up to the present the other heirs did not do anything to be included in the complaint?

ATTY. QUITAIN:

The best evidence would be the motion for intervention and it would seem that compaero is contending that
there is a need to include all heirs. Under the civil law on property even one co-owner may file a
case.32cräläwvirtualibräry

Although the petitioners sought leave from the trial court to amend their complaint to implead the intestate
estate of the deceased Concepcion Gil through her administratrix Perla Palma Gil, as party plaintiff, the trial
court denied the petitioners plea. The petitioners manifested to the trial court that they would assign the
denial of their plea as one of the assigned errors in case of appeal to the CA. They failed to do so. The
petitioners were duty bound to implead all their cousins as parties-plaintiffs; otherwise, the trial court could
not validly grant relief as to the present parties and as to those who were not impleaded.33cräläwvirtualibräry

Being indispensable parties, the absence of the surviving sister, nephews and nieces of the decedent in the
complaint as parties-plaintiffs, and in this case, as parties-petitioners, renders all subsequent actions of the
trial court null and void for want of authority to act, not only as to the absent parties, but even as to those
present. Hence, the petition at bar should be dismissed.34cräläwvirtualibräry

Even if we were to brush aside this procedural lapse and delve into the merits of the case, a denial in due
course is inevitable.

Article 119135 in tandem with Article 159236 of the New Civil Code are central to the issues at bar. Under
the last paragraph of Article 1169 of the New Civil Code, in reciprocal obligations, neither party incurs in
delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent
upon him. From the moment one of the parties fulfills his obligation, delay in the other begins. Thus,
reciprocal obligations are to be performed simultaneously so that the performance of one is conditioned
upon the simultaneous fulfillment of the other.37The right of rescission of a party to an obligation under
Article 1191 of the New Civil Code is predicated on a breach of faith by the other party that violates the
reciprocity between them.38cräläwvirtualibräry

That the deed of absolute sale executed by Concepcion Gil in favor of Iluminada Pacetes is an executory
contract and not an executed contract is a settled matter. In a perfected contract of sale of realty, the right
to rescind the said contract depends upon the fulfillment or non-fulfillment of the prescribed condition. We
ruled that the condition pertains in reality to the compliance by one party of an undertaking the fulfillment
of which would give rise to the demandability of the reciprocal obligation pertaining to the other party.39 The
reciprocal obligation envisaged would normally be, in the case of the vendee, the payment by the vendee
of the agreed purchase price and in the case of the vendor, the fulfillment of certain express
warranties.40cräläwvirtualibräry

In another case, we ruled that the non-payment of the purchase price of property constitutes a very good
reason to rescind a sale for it violates the very essence of the contract of sale. In Central Bank of the
Philippines v. Bichara,41 we held that the non-payment of the purchase price of property is a resolutory
condition for which the remedy is either rescission or specific performance under Article 1191 of the New
Civil Code. This is true for reciprocal obligations where the obligation is a resolutory condition of the
other.42 The vendee is entitled to retain the purchase price or a part of the purchase price of realty if the
vendor fails to perform any essential obligation of the contract. Such right is premised on the general
principles of reciprocal obligations.43cräläwvirtualibräry

In this case, Concepcion Gil sold Lot 59-C-1 to Iluminada Pacetes for P21,600.00 payable as follows:

1. The purchase price of P21,600.00 shall be paid as follows: P7,500.00, to be paid upon the signing of this
instrument; and the balance of P14,100.00, to be paid upon the delivery of the corresponding Certificate of
Title in the name of the VENDEE.

Concepcion Gil obliged herself to transfer title over the property to and under the name of the vendee within
120 days from the execution of the deed.

2. That the VENDOR shall, within the period of ONE HUNDRED TWENTY (120) DAYS, from the signing of this
agreement, undertake and work for the issuance of the corresponding Certificate of Title of the said Lot No.
59-C-1 in her favor with the proper government office or offices, to the end that the same can be duly
transferred in the name of the herein VENDEE, by virtue thereof.

3. That pending the full and complete payment of the purchase price to the VENDOR, the VENDEE shall
collect and receive any and all rentals and such other income from the land above-described for her own
account and benefit, this right of the VENDEE to begin from December 1, 1956.

That it is further stipulated that this contract shall be binding upon the heirs, executors and administrators
of the respective parties hereof.

And I, CONCEPCION PALMA GIL, with all the personal circumstances above-stated, hereby confirm all the
terms and conditions stipulated in this instrument.44cräläwvirtualibräry

The vendee paid the downpayment of P7,500.00. By the terms of the contract, the obligation of the vendee
to pay the balance of the purchase price ensued only upon the issuance of the certificate of title by the
Register of Deeds over the property sold to and under the name of the vendee, and the delivery thereof by
the vendor Concepcion Gil to the latter. Concepcion failed to secure a certificate of title over the property.
When she died intestate on August 4, 1959, her obligation to deliver the said title to the vendee devolved
upon her heirs, including the petitioners. The said heirs, including the petitioners failed to do so, despite the
lapse of eighteen years since Concepcions death.

Iluminada was not yet obliged on August 8, 1977 to pay the balance of the purchase price of the property,
but as a sign of good faith, she nevertheless consigned the amount of P11,983.00, part of the balance of
the purchase price of P14,000.00, with the court in Civil Case No. 1160. The court accepted the consignation
and she was issued receipts therefor. Still, the heirs of Concepcion Gil, including the petitioners, failed to
deliver the said title to the vendee. Iluminada was compelled to file, at her expense, a petition with the RTC
docketed as Miscellaneous Case No. 4715 for the issuance of an owners duplicate of TCT No. 7450 covering
the property sold which was granted by the court on March 22, 1978. It was only on May 9, 1978 that
Iluminada managed to secure TCT No. 61514 over the property under her name. Upon the failure of the
heirs to comply with the decedents prestation, Iluminada Pacetes was impelled to resort to legal means to
protect her rights and interests.

The petitioners, as successors-in-interest of the vendor, are not the injured parties entitled to a rescission
of the deed of absolute sale. It was Concepcions heirs, including the petitioners, who were obliged to deliver
to the vendee a certificate of title over the property under the latters name, free from all liens and
encumbrances within 120 days from the execution of the deed of absolute sale on October 24, 1956, but
had failed to comply with the obligation.

The consignation by the vendee of the purchase price of the property is sufficient to defeat the right of the
petitioners to demand for a rescission of the said deed of absolute sale.45cräläwvirtualibräry
It bears stressing that when the vendee consigned part of the purchase price with the Court and secured
title over the property in her name, the heirs of Concepcion, including the petitioners, had not yet sent any
notarial demand for the rescission of the deed of absolute sale to the vendee, or filed any action for the
rescission of the said deed with the appropriate court.

Although the vendee consigned with the Court only the amount of P11,983.00, P2,017.00 short of the
purchase price of P14,000.00, it cannot be claimed that Concepcion was an unpaid seller because under the
deed of sale, she was still obligated to transfer the property in the name of the vendee, which she failed to
do so. According to Article 1167 of the New Civil Code:

Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost.

This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore,
it may be decreed that what has been poorly done be undone. (1098)

The vendee (Iluminada) had to obtain the owners duplicate of TCT No. 7450 and thereafter secure its
transfer in her name. Pursuant to Article 1167, the expenses incurred by the vendee should be charged
against the amount of P2,617.00 due to the heirs of Concepcion Gil as the vendors successors-in-interest.

In sum, the decision of the CA affirming the decision of the RTC dismissing the complaint of the petitioners
is affirmed.

IN LIGHT OF ALL THE FOREGOING, the petition for review is DENIED for lack of merit.

SO ORDERED.
 G.R. No. 135528 July 14, 2004

SPOUSES ORLANDO A. RAYOS and MERCEDES T. RAYOS, petitioners,

vs.
THE COURT OF APPEALS and SPOUSES ROGELIO and VENUS MIRANDA, respondents.

CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision1 of the Court of Appeals2 in CA-G.R. CV No. 46727 which affirmed
the Decision3 of the Regional Trial Court of Makati, Branch 62, in Civil Case No. 15639 for specific performance and
damages, and Civil Case No. 15984 for sum of money and damages.

The two (2) cases stemmed from the following antecedent facts:

On December 24, 1985, petitioner Orlando A. Rayos, a practicing lawyer, and his wife, petitioner Mercedes T. Rayos,
secured a short-term loan from the Philippine Savings Bank (PSB) payable within a period of one (1) year in quarterly
installments of P29,190.28, the first quarterly payment to start on March 24, 1986. The loan was evidenced by a promissory
note which the petitioners executed on December 24, 1985.4 To secure the payment of the loan, the petitioners-spouses
executed, on the same date, a Real Estate Mortgage over their property covered by Transfer Certificate of Title (TCT) No.
100156 located in Las Piñas, Metro Manila.5

On December 26, 1985, the petitioners, as vendors, and the respondents, Spouses Miranda, as vendees, executed a Deed
of Sale with Assumption of Mortgage over the subject property for the price of P214,000.00. However, on January 29, 1986,
the petitioners-spouses, likewise, executed a Contract to Sell the said property in favor of the respondents for P250,000.00
with the following condition:

3. That upon full payment of the consideration hereof, the SELLER shall execute a Deed of Absolute Sale in favor
of the BUYER that the payment of capital gains tax shall be for the account of the SELLER and that documentary
stamps, transfer tax, registration expenses for the transfer of title including the notarization and preparation of this
Contract and subsequent documents if any are to be executed, real estate taxes from January 1, 1986 and other
miscellaneous expenses shall be for the account of the BUYER; the SELLER hereby represents that all association
dues has been paid but that subsequent to the execution of this Contract the payment of the same shall devolve
upon the BUYER.6

The petitioners obliged themselves to execute a deed of absolute sale over the property in favor of the respondents upon
the full payment of the purchase price thereof.

Respondent Rogelio Miranda filed an application dated May 4, 1986 with the PSB to secure the approval of his assumption
of the petitioners' obligation on the loan, and appended thereto a General Information sheet.7 Respondent Rogelio Miranda
stated therein that he was the Acting Municipal Treasurer of Las Piñas and had an unpaid account with the Manila Banking
Corporation in the amount of P18,777.31. The PSB disapproved his application. Nevertheless, respondent Rogelio Miranda
paid the first quarterly installment on the petitioners' loan on March 21, 1986 in the amount of P29,190.28. The said amount
was paid for the account of the petitioners. Respondent Rogelio Miranda, likewise, paid the second quarterly installment in
the amount of P29,459.00 on June 23, 1986, also for the account of the petitioners.8

In the meantime, respondent Rogelio Miranda secured the services of petitioner Orlando Rayos as his counsel in a suit he
filed against the Manila Banking Corporation, relative to a loan from the bank in the amount of P100,000.00. Both parties
agreed to the payment of attorney's fees, as follows:

Our agreement is as follows:

1. You will pay me P700.00 as filing fee and other miscellaneous expenses which I personally received
from you this morning;

2. Award to you of any amount in terms of moral, exemplary or actual and other forms of damages shall
accrue to you in the amount of 70% thereof;

3. 30% of the award to you in the concept of No. 2 hereof shall pertain to me as my contingent fee;
 4. All attorney's fees that the court shall award to me or by the management of TMBC if they agree to
extrajudicially settle shall pertain exclusively to me;

5. Execution of judgment expenses shall be for your account;

6. Should the case be appealed, my contingent fee shall increase by 10% if the appeal is to the Intermediate
Appellate Court on questions of facts and law, and if appealed from there to the Supreme Court, then
another 10% shall accrue to me.9

On May 14, 1986, petitioner Orlando Rayos filed respondent Rogelio Miranda's complaint against the bank with the Regional
Trial Court of Makati, docketed as Civil Case No. 13670.10 In the meantime, the latter paid the third quarterly installment on
the PSB loan account amounting to P29,215.66, for which the bank issued a receipt for the account of the petitioners.

The parties executed a Compromise Agreement in Civil Case No. 13670 in which they agreed that each party shall pay for
the respective fees of their respective counsels.11 The trial court rendered judgment on October 23, 1986 based on the said
compromise agreement.12 Petitioner Orlando Rayos demanded the payment of attorney's fees in the amount of P5,631.93,
but respondent Rogelio Miranda refused to pay.

On November 12, 1986, petitioner Orlando Rayos wrote to respondent Rogelio Miranda and enclosed a copy of his motion
in Civil Case No. 13670 for the annotation of his attorney's lien at the dorsal portion of the latter's title used as security for
the loan with the Manila Banking Corporation.13 The respondent opposed the motion, claiming that the petitioner agreed to
render professional services on a contingent basis.14

Petitioner Orlando Rayos again wrote respondent Rogelio Miranda on November 30, 1986, reminding the latter of the last
quarterly payment of his loan with the PSB. He also advised the respondent to thereafter request the bank for the
cancellation of the mortgage on his property and to receive the owner's duplicate of his title over the same. Petitioner
Orlando Rayos also wrote that their dispute over his attorney's fees in Civil Case No. 13670 should be treated differently.15

Petitioner Orlando Rayos then received a Letter dated November 27, 1986 from the PSB, reminding him that his loan with
the bank would mature on December 24, 1986, and that it expected him to pay his loan on or before the said date.16 Fearing
that the respondents would not be able to pay the amount due, petitioner Orlando Rayos paid P27,981.4117 to the bank on
December 12, 1986, leaving the balance of P1,048.04. In a Letter dated December 18, 1986, the petitioner advised the
PSB not to turn over to the respondents the owner's duplicate of the title over the subject property, even if the latter paid
the last quarterly installment on the loan, as they had not assumed the payment of the same.18

On December 24, 1986, respondent Rogelio Miranda arrived at the PSB to pay the last installment on the petitioners' loan
in the amount of P29,223.67. He informed the bank that the petitioners had executed a deed of sale with assumption of
mortgage in their favor, and that he was paying the balance of the loan, conformably to said deed. On the other hand, the
bank informed the respondent that it was not bound by said deed, and showed petitioner Orlando Rayos' Letter dated
December 18, 1986. The respondent was also informed that the petitioners had earlier paid the amount of P27,981.41 on
the loan. The bank refused respondent Rogelio Miranda's offer to pay the loan, and confirmed its refusal in a Letter dated
December 24, 1986.19

On even date, respondent Rogelio Miranda wrote the PSB, tendering the amount of P29,223.67 and enclosed Interbank
Check No. 01193344 payable to PSB.20 Thereafter, on December 29, 1986, the petitioners paid the balance of their loan
with the bank in the amount of P1,081.39 and were issued a receipt therefor.21 On January 2, 1987, the PSB wrote
respondent Rogelio Miranda that it was returning his check.22

On January 2, 1987, respondent Rogelio Miranda filed a complaint against the petitioners and the PSB for damages with a
prayer for a writ of preliminary attachment with the RTC of Makati. The case was docketed as Civil Case No. 15639 and
raffled to Branch 61 of the court. The respondent alleged inter alia that the petitioners and the PSB conspired to prevent
him from paying the last quarterly payment of the petitioners' loan with the bank, despite the existence of the deed of sale
with assumption of mortgage executed by him and the petitioners, and in refusing to turn over the owner's duplicate of TCT
No. 100156, thereby preventing the transfer of the title to the property in his name. Respondent Rogelio Miranda prayed
that:

WHEREFORE, it is respectfully prayed that judgment be rendered in favor of plaintiff and against defendants,
ordering the latter, jointly and severally, as follows:
 (a) To pay to plaintiff the sum of P267,197.33, with legal interest from date of demand, as actual or compensatory
damages representing the unreturned price of the land;

(b) To pay to plaintiff the sum of P500,000.00 as consequential damages;

(c) To pay to plaintiff the sum of P1,000,000.00 as moral damages;

(d) To pay to plaintiff the sum of P100,000.00 as exemplary damages by way of example or correction for the public
good;

(e) To pay to plaintiff the sum of P100,000.00 for and as attorney's fees;

(f) To pay for the costs of suit; and

(g) That a Writ of Attachment be issued against the properties of defendant Rayos spouses as security for the
satisfaction of any judgment that may be recovered.

PLAINTIFF FURTHER PRAYS for such other remedies and relief as are just or equitable in the premises.23

The trial court granted the respondent's plea for a writ of preliminary attachment on a bond of P260,000.00. After posting
the requisite bond, the respondent also filed a criminal complaint against petitioner Orlando Rayos for estafa with the Office
of the Provincial Prosecutor of Makati, docketed as I.S. No. 87-150. He, likewise, filed a complaint for disbarment in this
Court against petitioner Orlando Rayos, docketed as Administrative Case No. 2974. Unaware of the said complaint, the
petitioner wrote the respondent on January 3, 1986 that as soon as his payment to the PSB of P29,223.67 was refunded,
the owner's duplicate of the title would be released to him.24 On January 5, 1986, petitioner Orlando Rayos wrote respondent
Rogelio Miranda, reiterating that he would release the title in exchange for his cash settlement of P29,421.41.25 The
respondent failed to respond.

In the meantime, the PSB executed on January 8, 1987 a Release of Real Estate Mortgage in favor of the petitioners,26 and
released the owner's duplicate of title of TCT No. 100156.27 On January 17, 1987, petitioner Orlando Rayos wrote
respondent Rogelio Miranda, reiterating his stance in his Letters of January 3 and 5, 1987.

In the meantime, the petitioners received the complaint in Civil Case No. 15639 and filed their Answer with Counterclaim in
which they alleged that:

14. That plaintiff has no cause of action against defendants Rayos, the latter are willing to deliver the title sought
by plaintiff under the terms set out in their letters dated January 3, 5, 17, and 20, hereto marked as Annexes "1,"
"1-A," "1-B" and "1-C;"28

Petitioner Orlando Rayos filed a complaint on February 1, 1987 against respondent Rogelio Miranda with the Regional Trial
Court of Makati, docketed as Civil Case No. 15984 for Specific Performance with Damages for the collection of the amount
of P29,223.67 which he had paid to the PSB on December 12 and 19, 1986, and his attorney's fees in Civil Case No. 13670.
The trial court consolidated the cases in Branch 62 of the RTC.

Respondent Rogelio Miranda filed an Amended Complaint in Civil Case No. 15639 for specific performance with damages,
impleading the officers of the PSB as parties-defendants. He alleged that of the purchase price of the property
of P214,000.00, he had paid the entirety thereof to the petitioners, and that petitioner Orlando Rayos acted unethically in
trying to collect P5,631.93 from him as his attorney's fees in Civil Case No. 13670, and in having such claim annotated at
the dorsal portion of his title over the property he mortgaged to the Manila Banking Corporation.

Respondent Rogelio Miranda prayed that, after due proceedings, judgment be rendered in his favor, thus:

WHEREFORE, it is respectfully prayed that judgment be rendered in favor of plaintiff and against defendants, as
follows:

(a) Ordering defendants spouses Orlando A. Rayos and Mercedes T. Rayos to deliver forthwith to plaintiff the
Owner's Duplicate of Transfer Certificate of Title No. 100156, Registry of Deeds for Pasay City;
 (b) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P1,000,000.00 as moral damages;

(c) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P867,197.33 as exemplary damages by
way of example or correction for the public good;

(d) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P100,000.00 for and as attorney's fees;

(e) Ordering defendants, jointly, to pay the costs of suit; and

(f) Ordering the issuance of a Writ of Attachment against the properties of defendants Rayos spouses as security
for the satisfaction of any judgment that may be recovered.

PLAINTIFF further prays for such other remedies and relief as are just or equitable in the premises.29

In the meantime, petitioner Orlando Rayos filed an Amended Complaint in Civil Case No. 15984 impleading his wife and
that of respondent Rogelio Miranda as parties to the case. On March 4, 1987, the trial court issued an Order granting the
petitioners' motion in Civil Case No. 15639 for the discharge of the attachment on their property.30 The court also denied the
respondents' motion for reconsideration of the Order of the court. The respondents, thereafter, filed a petition for review
with the Court of Appeals for the nullification of the said Order.

On July 9, 1987, the public prosecutor dismissed the charge of estafa against petitioner Orlando Rayos.31 The respondents
appealed the resolution to the Department of Justice.

On May 26, 1987, the PSB and its officers filed their Answer in Civil Case No. 15639, and alleged the following by way of
special and/or affirmative defenses, thus:

27. The application for the plaintiff to assume the mortgage loan of the defendants Spouses Rayos was not
approved, and it was NOT even recommended by the Marketing Group of defendant PSBank for approval by its
Top Management, because the credit standing of the plaintiff was found out to be not good;

28. The acceptance of the payments made by the plaintiff for three (3) amortizations on the loan of defendants
Spouses Rayos was merely allowed upon the insistence of the plaintiff, which payments were duly and accordingly
receipted, and said acceptance was in accordance with the terms of the Real Estate Mortgage executed by the
defendants Spouses Rayos in favor of the defendant PSBank and is also allowed by law;32

The parties in Civil Case No. 15639 agreed to submit the case for the trial court's decision on the basis of their pleadings
and their respective affidavits. In a Resolution dated July 26, 1988, then Undersecretary of Justice Silvestre Bello III affirmed
the Public Prosecutor's resolution in I.S. No. 87-150.33

On January 30, 1989, the petitioners sold the property to Spouses Mario and Enriqueta Ercia for P144,000.00. The said
spouses were not impleaded as parties-defendants in Civil Case No. 15639. On May 18, 1989, the petitioners filed an
amended complaint in Civil Case No. 15984, appending thereto a copy of the Contract to Sell in favor of the respondents.
The trial court admitted the said complaint.

On November 15, 1989, this Court rendered its Decision dismissing the complaint for disbarment against Rayos.34

On January 29, 1993, the trial court rendered judgment, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered, as follows:

I. (a) In Civil Case No. 15639, this Court orders plaintiff Rogelio Miranda to refund to spouses Orlando and Mercedes
T. Rayos the total sum of P29,069.45, Rayos paid to PS Bank as the last amortization and as release of mortgage
fee, without any interest; and upon receipt of the sum of P29,069.45 from Rogelio Miranda, Spouses Orlando and
Mercedes T. Rayos shall deliver to Rogelio Miranda Transfer Certificate of Title No. 100156 of the Registry of Deeds
of Pasay City; and, deliver to Rogelio Miranda the possession of the parcel of land described in the said title;

(b) Dismissing the complaint for damages of Plaintiff Rogelio Miranda against Spouses Orlando and Remedios (sic)
T. Rayos, Philippine Savings Bank, Jose Araullo, Cesar I. Valenzuela, Dionisio Hernandez, Nestor E. Valenzuela,
 Raul T. Totanes, and Belinda Lim, for insufficiency of evidence; while the counterclaims of PS Bank, Jose Araullo,
Cesar Valenzuela, Dionisio Hernandez, Nestor E. Valenzuela, Raul Totanes, and Belinda Lim, are likewise
dismissed for insufficiency of evidence.

(c) The counterclaims of Spouses Orlando and Mercedes T. Rayos will be treated in Civil Case No. 15984;

II. In Civil Case No. 15984, this Court orders Defendant Rogelio Miranda to pay to Plaintiff Orlando Rayos the sum
of P4,133.19 at 12% interest per annum, from the date of the filing of the complaint on Feb. 11, 1987 until fully paid.

No costs in both cases.

SO ORDERED.35

The petitioners appealed the decision to the Court of Appeals contending that:

I. THE COURT A QUO COMMITTED A GRAVE ERROR IN NOT FINDING THAT ROGELIO A. MIRANDA
COMMITTED A BREACH OF CONTRACT IN NOT PAYING THE FULL CONTINGENT FEE OF 30% IN WRITING
IN THE MANILABANK CASE AND BECAUSE OF THAT BREACH, HE CANNOT NOW DEMAND SPECIFIC
PERFORMANCE AND THE COURT A QUO SHOULD HAVE LEFT THE PARTIES AS THEY ARE;

II. THE COURT A QUO SIMILARLY COMMITTED AN ERROR IN NOT FINDING THAT THE DECISION IN "SEVA
VS. ALFREDO BERWIN & CO. & MEDEL" IS APPLICABLE FOUR SQUARE WHEREBY HE WHO BREACHES
HIS CONTRACT IS NOT ENTITLED TO SPECIFIC PERFORMANCE;36

On July 27, 1998, the Court of Appeals rendered judgment affirming with modification the decision of the RTC, thus:

WHEREFORE, premises considered, the appealed decision of the Regional Trial Court of Makati City, is hereby
AFFIRMED, with the modification abovestated.37

The petitioners filed the instant petition, and ascribed the following errors on the appellate court:

I. THE COURT OF APPEALS (CA) COMMITTED AN ERROR IN NOT FINDING THAT THE PRIVATE
RESPONDENT MIRANDA COMMITTED THE FIRST BREACH FOR FAILURE TO ASSUME THE LOAN THUS
HE FAILED TO SURROGATE (sic) HIMSELF TO PSB.

II. THE CA COMMITTED AN ERROR IN FINDING THAT PETITIONERS PRE-EMPTED PRIVATE RESPONDENT
MIRANDA IN DEPOSITING THE LAST AMORTIZATION WHEN MIRANDA HAD NO LEGAL STANDING WITH
PSB DUE TO THE LATTER'S NON-APPROVAL OF THE ASSUMPTION OF THE LOAN.

III. THE CA COMMITTED AN ERROR IN FINDING BOTH PARTIES GUILTY OF FIRST VIOLATING THE
OBLIGATIONS INCUMBENT UPON THEM EVEN INFERRING THAT PETITIONERS COMMITTED THE BREACH
FIRST BUT LATER CONCLUDING THAT THE BREACH WAS COMMITTED BY BOTH PARTIES. IT DID NOT
MAKE A CORRECT ASSESSMENT OF WHO ACTUALLY COMMITTED THE FIRST BREACH.

IV. THE CA COMMITTED AN ERROR IN NOT ALLOWING THE OFFSET IF ITS DECISION STOOD OF THE
AMOUNT OF P4,133.19 PLUS 12% INT. P.A. FROM THE FILING OF THE COMPLAINT (CV 15984), THUS,
ENTIRELY DISREGARDING THE DECISION OF THE TRIAL COURT IN SAID CASE ALLOWING ONLY THE
DECISION IN CV 15639.

V. THE CA COMMITTED AN ERROR IN NOT APPLYING THE DECSION (sic) LAID DOWN IN "SEVA VS.
ALFRED BERWIN & CO. AND MEDEL" THAT A PERSON HIMSELF AT FAULT CANNOT ENFORCE SPECIFIC
PERFORMANCE.38

The petitioners assert that the Court of Appeals erred in not finding that the respondents first committed a breach of their
contract to sell upon their failure to pay the amount due for the last quarterly installment of their loan from the PSB. The
petitioners fault the Court of Appeals for not relying on the resolution of Undersecretary Silvestre Bello III affirming the
dismissal of the criminal complaint for estafa in I.S. No. 87-150, as cited by this Court in its decision in Miranda v.
Rayos,39 where it was also held that petitioner Orlando Rayos paid the last quarterly installment because he thought that
the respondents would not be able to pay the same. The petitioners argue that they had no other alternative but to pay the
last quarterly installment due on their loan with the PSB, considering that they received a demand letter from the bank on
November 28, 1986, coupled by its denial of the respondents' request to assume the payment of the loan. They insist that
they did not block the respondents' payment of the balance of the loan with the bank. The petitioners contend that even if
the parties committed a breach of their respective obligations under the contract to sell, it behooved the Court of Appeals
to apply Article 1192 of the Civil Code in the instant case, which reads:

… The power to rescind obligation is implied in reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.

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

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance
with articles 1385 and 1388 and the Mortgage Law.

The petition has no merit.

The assailed ruling of the Court of Appeals reads:

After due study, the Court finds that there was no basis in fact and law for the appellants to usurp the payment of
the last amortization on the mortgage upon the parcel of land it had conveyed to the Mirandas. Even if the appellants
wanted to keep their good credit standing, they should not have preempted Miranda in paying the final amortization.
There is no sufficient showing that Miranda was in danger of defaulting on the said payment. In fact, it appears that
he approached the bank to tender payment, but he was refused by the bank, because he was beaten to the draw,
so to speak, by the appellants. Appellants were able to do so because, for some reasons, the Mirandas' assumption
of the mortgage has not been approved by the bank. In doing so, the appellants had unilaterally cancelled the deed
of sale with assumption of mortgage, without the consent of the Mirandas. This conduct by the appellants is, to say
the least, injudicious as under Article 1308 of the Civil Code, contracts must bind both contracting parties and their
validity or compliance cannot be left to the will of one of them.

Just as nobody can be forced to enter into a contract, in the same manner, once a contract is entered into, no party
can renounce it unilaterally or without the consent of the other. It is a general principle of law that no one may be
permitted to change his mind or disavow and go back upon his own acts, or to proceed contrary thereto, to the
prejudice of the other party. In a regime of law and order, repudiation of an agreement validly entered into cannot
be made without any ground or reason in law or in fact for such repudiation.

In the same way that the Rayos spouses must respect their contract with the Mirandas for the sale of real property
and assumption of mortgage, Rogelio Miranda has to recognize his obligations under his agreement to pay
contingent attorney's fees to Orlando Rayos.40

The Court of Appeals erred in so ruling.

The findings and disquisitions of the Court of Appeals cannot prevail over our findings in Miranda v. Rayos,41 a case which
involves the same parties, and where we held that the petitioners cannot be faulted for paying the amortization due for the
last quarterly installment on their loan with the PSB:

It is difficult to imagine that complainant would be so naïve as to be totally unaware of the provisions of the original
contract between the PSB and the spouses Rayos. He is a degree holder (A.B. Pre-Law and B.S.C.) and Acting
Municipal Treasurer of Las Piñas. In short, he is not an ordinary layman. As a buyer with a knowledge of law, it was
unnatural for him to read the provisions of the real estate mortgage wherein it is provided, among others, that the
sale of the property covered by the mortgage does not in any manner relieve the mortgagor of his obligation but
that "on the contrary, both the vendor and the vendee, or the party in whose favor the alienation or encumbrance is
made shall be, jointly and severally, liable for said mortgage obligations." There is every reason to believe that it
was pursuant to the said provision in the real estate mortgage that complainant tried to assume the loan obligation
of the Rayoses by filling up and submitted the loan application (page 30, records) sent by Orland Rayos. By signing
the loan application and the general information sheet (page 31, records) in connection with said application,
 complainant showed that he knew that there was a need to formally apply to the bank in order for him to assume
the mortgage.

We find respondent spouses' version that when complainant's application to assume the mortgage loan was
disapproved he begged that he be allowed to pay the quarterly amortization credible, owing to the fact that
complainant made the payments for the account of the Rayoses. Hence, complainant knew that since his application
to the PSB was not approved, there was no substitution of parties and so he had to pay for the account of respondent
spouses as shown by the receipts issued by the PSB.

As for the charge that Rayos paid the last installment to block complainant from getting the title and transferring the
same to his name, respondents' version is more satisfactory and convincing. Respondent Orland Rayos paid the
last amortization when it became apparent that complainant would not be able to give the payment on the due date
as he was still trying to sell his Lancer car. Even if complainant was able to pay the last installment of the mortgage
loan, the title would not be released to him as he knew very well that his application to assume the mortgage was
disapproved and he had no personality as far as PSB was concerned.42

Contrary to the ruling of the Court of Appeals, the petitioners did not unilaterally cancel their contract to sell with the
respondents when they paid the total amount of P29,062.80 to the PSB in December 1986.43 In fact, the petitioners wrote
the respondents on January 3, 5 and 17, 1987, that they were ready to execute the deed of absolute sale and turn over the
owner's duplicate of TCT No. 100156 upon the respondents' remittance of the amount of P29,223.67. The petitioners
reiterated the same stance in their Answer with Counterclaim in Civil Case No. 15639. The petitioners cannot, likewise, be
faulted for refusing to execute a deed of absolute sale over the property in favor of the respondents, and in refusing to turn
over the owner's duplicate of TCT No. 100156 unless the respondents refunded the said amount. The respondents were
obliged under the contract to sell to pay the said amount to the PSB as part of the purchase price of the property. On the
other hand, it cannot be argued by the petitioners that the respondents committed a breach of their obligation when they
refused to refund the said amount.

It bears stressing that the petitioners and the respondents executed two interrelated contracts, viz: the Deed of Sale with
Assumption of Mortgage dated December 26, 1985, and the Contract to Sell dated January 29, 1986. To determine the
intention of the parties, the two contracts must be read and interpreted together.44 Under the two contracts, the petitioners
bound and obliged themselves to execute a deed of absolute sale over the property and transfer title thereon to the
respondents after the payment of the full purchase price of the property, inclusive of the quarterly installments due on the
petitioners' loan with the PSB:

3. That upon full payment of the consideration hereof, the SELLER shall execute a Deed of Absolute Sale in favor
of the BUYER that the payment of capital gains tax shall be for the account of the SELLER and that documentary
stamps, transfer tax, registration expenses for the transfer of title including the notarization and preparation of this
Contract and subsequent documents if any are to be executed, real estate taxes from January 1, 1986 and other
miscellaneous expenses shall be for the account of the BUYER; the SELLER hereby represents that all association
dues has been paid but that subsequent to the execution of this Contract the payment of the same shall devolve
upon the BUYER.45

Construing the contracts together, it is evident that the parties executed a contract to sell and not a contract of sale. The
petitioners retained ownership without further remedies by the respondents46 until the payment of the purchase price of the
property in full. Such payment is a positive suspensive condition, failure of which is not really a breach, serious or otherwise,
but an event that prevents the obligation of the petitioners to convey title from arising, in accordance with Article 1184 of the
Civil Code.47 In Lacanilao v. Court of Appeals,48 we held that:

It is well established that where the seller promised to execute a deed of absolute sale upon completion of payment
of the purchase price by the buyer, the agreement is a contract to sell. In contracts to sell, where ownership is
retained by the seller until payment of the price in full, such payment is a positive suspensive condition, failure of
which is not really a breach but an event that prevents the obligation of the vendor to convey title in accordance
with Article 1184 of the Civil Code.

The non-fulfillment by the respondent of his obligation to pay, which is a suspensive condition to the obligation of the
petitioners to sell and deliver the title to the property, rendered the contract to sell ineffective and without force and
effect.49 The parties stand as if the conditional obligation had never existed. Article 1191 of the New Civil Code will not apply
because it presupposes an obligation already extant.50 There can be no rescission of an obligation that is still non-existing,
the suspensive condition not having happened.51
However, the respondents may reinstate the contract to sell by paying the P29,223.67, and the petitioners may agree thereto
and accept the respondents' late payment.52 In this case, the petitioners had decided before and after the respondents filed
this complaint in Civil Case No. 15639 to accept the payment of P29,223.67, to execute the deed of absolute sale over the
property and cause the transfer of the title of the subject property to the respondents. The petitioners even filed its amended
complaint in Civil Case No. 15984 for the collection of the said amount. The Court of Appeals cannot, thus, be faulted for
affirming the decision of the trial court and ordering the petitioners to convey the property to the respondents upon the
latter's payment of the amount of P29,223.67, provided that the property has not been sold to a third-party who acted in
good faith.

IN VIEW OF ALL THE FOREGOING, the petition is DENIED DUE COURSE. The Decision of the Court of Appeals in CA-
G.R. CV No. 46727 is AFFIRMED, except as to the factual finding that the petitioners "usurped the payment of the last
amortization on the mortgage upon the parcel of land." Costs against the petitioners.

SO ORDERED.