ARCO PULP AND PAPER CO., INC. versus (2) As to moral damages.
Under Article 2220 of
DAN T. LIM, doing business under the name
and style of QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES
FACTS
Dan T. Lim delivered scrap papers to Arco Pulp
and Paper Company, Inc. The parties allegedly
agreed that Arco Pulp and Paper would either pay
Dan T. Lim the value of the raw materials or
deliver to him their finished products of
equivalent value.
Dan T. Lim alleged that when he delivered the
raw materials, Arco Pulp and Paper issued a post-
dated check as partial payment, with the
assurance that the check would not bounce. When
he deposited the check, it was dishonored for
being drawn against a closed account. On the
same day, Arco Pulp and Paper and a certain Eric
Sy executed a memorandum of agreement where
Arco Pulp and Paper bound themselves to deliver
their finished products to Megapack Container
Corporation, owned by Eric Sy, for his account.
According to the memorandum, the raw materials
would be supplied by Dan T. Lim, through his
company, Quality Paper.
ISSUES
(1) Whether or not the obligation between the
parties was extinguished by novation. (NO)
(2) Whether or not Arco Pulp is liable for moral
damages, exemplary damages, and attorney’s
fees. (YES)
RULING
(1) Novation must be stated in clear and
unequivocal terms to extinguish an obligation.
It cannot be presumed and may be implied only if
the old and new contracts are incompatible on
every point.
There is nothing in the memorandum of
agreement that states that with its execution, the
obligation of petitioner Arco Pulp and Paper to
respondent would be extinguished. It also does
not state that Eric Sy somehow substituted
petitioner Arco Pulp and Paper as respondent’s
debtor.
Furthermore, in novation, the consent of the
creditor is indispensable. Here, respondent was
never a privy to the memorandum of agreement.
the Civil Code, moral damages may be awarded
in case of breach of contract where the breach is
due to fraud or bad faith.
Bad faith does not simply connote bad judgment
or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of a
wrong.
Here, petitioner Arco Pulp and Paper issued a
unfunded check. Worse, it attempted to shift their
obligations to a third person without the consent
of respondent. Petitioner Arco Pulp and Paper’s
actions clearly show a dishonest purpose or some
moral obliquity and conscious doing of a wrong.
As to exemplary damages. The purpose of
exemplary damages is to serve as a deterrent to
future and subsequent parties from the
commission of a similar offense.
Business owners must always be forthright in
their dealings. They cannot be allowed to renege
on their obligations. Thus, exemplary damages
may be awarded in this case to serve as a
deterrent to those who use fraudulent means to
evade their liabilities.
As to attorney’s fees. Since the award of
exemplary damages is proper, attorney’s fees and
cost of the suit may also be recovered pursuant to
Article 2208 of the Civil Code.
SPOUSES SALVADOR ABELLA AND ALMA
ABELLA v. SPOUSES ROMEO ABELLA
AND ANNIE ABELLA.
FACTS
Petitioners alleged that respondents obtained a
loan from them in the amount of P500,000.00 as
evidenced by an acknowledged receipt.
Petitioners added that respondents were able to
pay a total of P200,000.00—P100,000.00 paid on
two separate occasions—leaving an unpaid
balance of P300,000.00.
The acknowledgement receipt reads: “This is to
acknowledge receipt of the Amount of Five
Hundred Thousand (P500,000.00) Pesos from
Mrs. Alma R. Abella, payable within one (1) year
from date hereof with interest.”

 ISSUE
Whether interest accrued on respondents' loan
from petitioners, If so, at what rate? (YES. 12%
per annum until June 30, 2013 and 6% per
annum starting July 1, 2013 onwards)
RULING
Article 1956 of the Civil Code spells out the basic
rule that "no interest shall be due unless it has
been expressly stipulated in writing."
On the matter of interest, the text of the
acknowledgment receipt is simple, plain, and
unequivocal. The controversy, however, stems
from the acknowledgment receipt's failure to state
the exact rate of interest.
When the obligation is breached, and it consists in
the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article
1169 of the Civil Code.
However, the Supreme Court, in Nacar vs.
Gallery Frames, reduced the legal rate of interest
to 6% per annum. However, this reduced interest
rate starts only July 1, 2013.
CARAVAN TRAVEL AND TOURS
INTERNATIONAL, INC. v. ERMILINDA R.
ABEJAR
FACTS
Jesmariane R. Reyes (Reyes) was walking along
the west-bound lane of Sampaguita Street. A
Mitsubishi L-300 van was travelling along the
east-bound lane, opposite Reyes. To avoid an
incoming vehicle, the van swerved to its left and
hit Reyes. Alex Espinosa (Espinosa), a witness to
the accident, went to her aid and loaded her in the
back of the van. Espinosa told the driver of the
van, Jimmy Bautista (Bautista), to bring Reyes to
the hospital. Instead of doing so, Bautista
appeared to have left the van parked inside a
nearby subdivision with Reyes still in the van.
Fortunately for Reyes, an unidentified civilian
came to help and drove Reyes to the hospital
Upon investigation, it was found that the
registered owner of the van was Caravan. Caravan
is a corporation engaged in the business of
organizing travels and tours. Bautista was
Caravan's employee assigned to drive the van as
its service driver.
Respondent Ermilinda R. Abejar (Abejar), Reyes'
paternal aunt and the person who raised her since
she was nine (9) years old, filed before the
Regional Trial Court of Parañaque a Complaint
for damages against Bautista and Caravan.
ISSUES
(1) Whether respondent Ermilinda R. Abejar is a
real party in interest who may bring an action for
damages against petitioner Caravan Travel and
Tours International, Inc. on account of Jesmariane
R. Reyes' death. (YES)
(2) Whether petitioner should be held liable as an
employer, pursuant to Article 2180 of the Civil
Code. (YES)
RULING
(1) Having exercised substitute parental authority,
respondent suffered actual loss and is, thus, a real
party in interest in this case.
(2) The resolution of this case must consider two
rules — Article 2180 and the Registered Owner
Rule.
These rules appear to be in conflict when it comes
to cases in which the employer is also the
registered owner of a vehicle. Article 2180
requires proof of two things: first, an employment
relationship between the driver and the owner;
and second, that the driver acted within the scope
of his or her assigned tasks. On the other hand,
applying the registered-owner rule only requires
the plaintiff to prove that the defendant-employer
is the registered owner of the vehicle.
In this case, the Court harmonized these two
concepts. In harmonizing these two, the Court
held that the appropriate approach is for the
plaintiff to prove the employer's ownership of
the vehicle involved in a mishap by presenting
the vehicle's registration in evidence. Once the
plaintiff successfully proves ownership, a
disputable presumption that the requirements
for an employer's liability under Article 2180
of the Civil Code have been satisfied will arise.
As a consequence, the burden of evidence then

 shifts to the defendant to show that no liability
under Article 2180 has ensued.
Q. How can the defendant evade liability under
Article 2180? (Anecdote sa book ni Rabuya)
A. The defendant can evade liability upon
presenting proof that: first, that it has no EER
with the alleged employee; second, that the
employee acted outside the scope of his assigned
tasks; or third, that it exercised diligence of a
good father of a family in the selection and
supervision of the employee.
Nevertheless, the Court held that regardless of
petitioner's employer-employee relationship with
Bautista, liability attaches to petitioner on account
of its being the registered owner of a vehicle that
figures in a mishap. This alone suffices.
LARA'S GIFTS & DECORS, INC., vs.
MIDTOWN INDUSTRIAL SALES, INC.
ISSUE
Whether or not the interest rate fixed at 24%
annum is void. (NO)
RULING
If the rate of interest is stipulated, such stipulated
interest shall apply and not the legal interest,
provided the stipulated interest is not excessive
and unconscionable. The stipulated interest
shall be applied until full payment of the
obligation because that is the law between the
parties. The legal interest only applies in the
absence of stipulated interest.
NACAR vs. GALLERY FRAMES
RULING: The Supreme Court has laid down the
following guidelines to with regard to the rate of
legal interest:
With regard particularly to an award of interest in
the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof,
is imposed, as follows:
1. When the obligation is breached, and it consists
in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall
be 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of
the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged
on unliquidated claims or damages, except when
or until the demand can be established with
reasonable certainty.
Accordingly, where the demand is established
with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially
or extrajudicially (Art. 1169, Civil Code), but
when such certainty cannot be so reasonably
established at the time the demand is made, the
interest shall begin to run only from the date the
judgment of the court is made (at which time the
quantification of damages may be deemed to have
been reasonably ascertained). The actual base for
the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a
sum of money becomes final and executory, the
rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6%
per annum from such finality until its satisfaction,
this interim period being deemed to be by then an
equivalent to a forbearance of credit. And, in
addition to the above, judgments that have
become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be
implemented applying the rate of interest fixed
therein.
Note: While parties are free to stipulate the rate of
interest to be imposed in the event that the
obligation is breached, courts may struck such a
stipulation when it is excessive, iniquitous,
exorbitant, and unconscionable.