Breach of obligation

a. Concept

G.R. No. 108346 July 11, 2001

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners,
vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.

FACTS:
David Raymundo is the absolute and registered owner of a parcel of land, together with
the house and other improvements thereon, located at 1918 Kamias St., Dasmariñas
Village, Makati and covered by TCT No. 142177. Defendant George Raymundo is David's
father who negotiated with plaintiffs Avelina and Mariano Velarde for the sale of said
property, which was, however, under lease (Exh. '6', p. 232, Record of Civil Case No.
15952).
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage was executed by
defendant David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as vendee,
with the terms and conditions to continue paying the said loan in accordance with the
terms and conditions of the Deed of Real Estate Mortgage in the name of Mr. David A.
Raymundo, the original Mortgagor. That, in the event Velarde will violate any of the
terms and conditions of the said Deed of Real Estate Mortgage, she agreed that her
downpayment of P800,000.00, plus all payments made with the Bank of the Philippine
Islands on the mortgage loan, shall be forfeited in favor of Mr. David A. Raymundo, as
and by way of liquidated damages, without necessity of notice or any judicial
declaration to that effect, and Mr. David A. Raymundo shall resume total and complete
ownership and possession of the property sold by way of Deed of Sale with Assumption
of Mortgage, and the same shall be deemed automatically cancelled and be of no further
force or effect, in the same manner as it the same had never been executed or entered
into. However, on December 15, 1986, plaintiffs Sps. Velarde were advised that the
Application for Assumption of Mortgage with BPI, was not approved and this prompted
plaintiffs not to make any further payment. Then, on January 5, 1987, defendants, thru
counsel, wrote plaintiffs informing the latter that their non-payment to the mortgage
bank constituted non-performance of their obligation. In a Letter dated January 7, 1987,
plaintiffs, thru counsel, responded that she is willing to pay in cash but with 3
conditions which are to deliver actual possession of the property to her not later than
January 15, 1987 for her immediate occupancy; the private respondent cause the re-
lease of title and mortgage from the Bank of P.I. and make the title available and free
from any liens and encumbrances; and private respondent will execute an absolute
deed of sale in her favor free from any liens or encumbrances not later than January 21,
1987. On January 8, 1987 defendants sent plaintiffs a notarial notice of
cancellation/rescission of the intended sale of the subject property allegedly due to the
latter's failure to comply with the terms and conditions of the Deed of Sale with
Assumption of Mortgage and the Undertaking. Consequently, petitioners filed on
February 9, 1987 a Complaint against private respondents for specific performance,
nullity of cancellation, writ of possession and damages. This was docketed as Civil Case
No. 15952 at the Regional Trial Court of Makati, Branch 149. The case was tried and
heard by then Judge Consuelo Ynares-Santiago (now an associate justice of this Court),
who dismissed the Complaint in a Decision dated November 14, 1990.7 Thereafter,
petitioners filed a Motion for Reconsideration.
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and
Judge Salvador S. A. Abad Santos was assigned to the sala she vacated. In an Order dated
May 15, 1991,9 Judge Abad Santos granted petitioner's Motion for Reconsideration and
directed the parties to proceed with the sale. He instructed petitioners to pay the
balance of P1.8 million to private respondents who, in turn, were ordered to execute a
deed of absolute sale and to surrender possession of the disputed property to
petitioners.
The Court of Appeals ruled that the disapproval by BPI of the application for assumption
of mortgage cannot be used as an excuse for Velarde's non-payment of the balance of
the purchase price. As borne out by the evidence, Velarde had to pay in full in case of
BPI's disapproval of the application for assumption of mortgage. What Velarde should
have done was to pay the balance of P1.8 million. It was likewise agreed that in case of
violation of the mortgage obligation, the Deed of Sale with Assumption of Mortgage
would be deemed 'automatically cancelled and of no further force and effect, as if the
same had never been executed or entered into.' While it is true that even if the contract
expressly provided for automatic rescission upon failure to pay the price, the vendee
may still pay, he may do so only for as long as no demand for rescission of the contract
has been made upon him either judicially or by a notarial act (Article 1592, Civil Code) .
In the case at bar, Raymundo sent Velarde notarial notice dated January 8, 1987 of
cancellation/rescission of the contract due to the latter's failure to comply with their
obligation. The rescission was justified in view of Velarde's failure to pay the price
(balance) which is substantial and fundamental as to defeat the object of the parties in
making the agreement. As adverted to above, the agreement of the parties involved a
reciprocal obligation wherein the obligation of one is a resolutory condition of the
obligation of the other, the non-fulfillment of which entitles the other party to rescind
the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage
obligation by appellees Velarde would create a right to demand payment or to rescind
the contract, or to criminal prosecution (Edca Publishing & Distribution Corporation vs.
Santos, 184 SCRA 614). Upon appellee's failure, therefore, to pay the balance, the
contract was properly rescinded (Ruiz vs. IAC, 184 SCRA 720). Consequently, appellees
Velarde having violated the contract, they have lost their right to its enforcement and
hence, cannot avail of the action for specific performance.

ISSUE:
Whether or not petitioner’s non-payment of the mortgage obligation resulted in a
breach of the contract.

RULING:
No, the breach committed by petitioners was NOT so much their nonpayment of the
mortgage obligations, as their nonperformance of their reciprocal obligation to pay the
purchase price under the contract of sale. Private respondents' right to rescind the
contract finds basis in Article 1191 of the Civil Code. 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 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." As admitted by both parties, their agreement mandated that petitioners
should pay the purchase price balance of P1.8 million to private respondents in case the
request to assume the mortgage would be disapproved. Thus, on December 15, 1986,
when petitioners received notice of the bank's disapproval of their application to
assume respondents' mortgage, they should have paid the balance of the P1.8 million
loan. Instead of doing so, petitioners sent a letter to private respondents offering to
make such payment only upon the fulfillment of certain conditions not originally agreed
upon in the contract of sale. Such conditional offer to pay cannot take the place of actual
payment as would discharge the obligation of a buyer under a contract of sale. In a
contract of sale, the seller obligates itself to transfer the ownership of and deliver a
determinate thing, and the buyer to pay therefor a price certain in money or its
equivalent. Private respondents had already performed their obligation through the
execution of the Deed of Sale, which effectively transferred ownership of the property to
petitioner through constructive delivery. Prior physical delivery or possession is not
legally required, and the execution of the Deed of Sale is deemed equivalent to delivery.
Petitioners, on the other hand, did not perform their correlative obligation of paying the
contract price in the manner agreed upon. Worse, they wanted private respondents to
perform obligations beyond those stipulated in the contract before fulfilling their own
obligation to pay the full purchase price.
In the instant case, the breach committed did not merely consist of a slight delay in
payment or an irregularity; such breach would not normally defeat the intention of the
parties to the contract. Here, petitioners not only failed to pay the P1.8 million balance,
but they also imposed upon private respondents new obligations as preconditions to
the performance of their own obligation. In effect, the qualified offer to pay was a
repudiation of an existing obligation, which was legally due and demandable under the
contract of sale. Hence, private respondents were left with the legal option of seeking
rescission to protect their own interest.
As discussed earlier, the breach committed by petitioners was the nonperformance of a
reciprocal obligation, not a violation of the terms and conditions of the mortgage
contract. Therefore, the automatic rescission and forfeiture of payment clauses
stipulated in the contract does not apply. Instead, Civil Code provisions shall govern and
regulate the resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil Code,
mutual restitution is required to bring back the parties to their original situation prior
to the inception of the contract. Accordingly, the initial payment of P800,000 and the
corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925
(totaling P874,150.00) advanced by petitioners should be returned by private
respondents, lest the latter unjustly enrich themselves at the expense of the former.
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.
Private respondents are ordered to return to petitioners the amount of P874,150, which
the latter paid as a consequence of the rescinded contract, with legal interest thereon
from January 8, 1987, the date of rescission.
 G.R. No. 23769 September 16, 1925
SONG FO & COMPANY, plaintiff-appellee,
vs.
HAWAIIAN PHILIPPINE CO., defendant-appellant.

Doctrine:
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 was warrants rescission for non-performance.

Facts:
Hawaiian-Philippine Co (HPC) entered into a contract with Song Fo and Co (SFC) where
it would deliver molasses to the latter evidenced by a letter containing their contract.
The same states that Mr. Song Fo agreed to the delivery of 300,000 gallons of molasses
and the same requested for an additional 100,000 molasses which the HPC promised
that it will do its best to comply with the additional shipment. However, the HPC was
only able to deliver 55,006 gallons. SFC thereafter filed a complaint with two causes of
action for breach of contract against the HPC and asked for P70,369.50. HPC answered
that there was a delay in the payment from SFC and that HPC has the right to rescind the
contract because of the same· The trial court condemned HPC to pay SFC a total of
P35,317.93, with legal interest.

Issues:
Does Hawaiian Philippines Co. have a right to rescind the contract?

RULING:
No. HPC has no right to rescind the contract. The court provided that 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. It should be noted that the time of payment
stipulated for in the contract should be treated as of the essence of the contract. There
was only a slight breach of contract when the payment was delayed for 20 days and
does not violate essential condition of the contract which warrants rescission for non-
performance. Furthermore, HPC accepted the payment of the overdue accounts and
continued with the contract, waiving its right to rescind the same. Petition of partly
granted, and the judgment appealed is modified. Plaintiff shall have and recover from
the defendant the sum of P3,000, with legal interest from date of judgment, no special
costs.
 G.R. No. 101762 July 6, 1993
VERMEN REALTY and DEVELOPMENT CORPORATION, petitioner,
vs.
THE COURT OF APPEALS and SENECA HARDWARE CO., INC., respondents.

FACTS:
On March 2, 1981, petitioner Vermen Realty and Development Corporation and private
respondent Seneca Hardware Co., Inc. entered into a contract denominated as
"Offsetting Agreement". The said agreement contained the following stipulations:

1. That the petitioner, owner/developer of VERMEN PINES CONDOMINIUM located at

Bakakeng Road, Baguio City;

2. That the private respondent Seneca Hardware Co., Inc is in business of construction
materials and other hardware items;

3. That the Seneca Hardware Co., Inc desires to buy from the FIRST PARTY two (2)
residential condominium units, studio type, with a total floor area of 76.22 square meter
(sic) more or less worth TWO HUNDRED SEVENTY-SIX THOUSAND (P276,000.00)
PESOS only;

4. That the VERMEN PINES CONDOMINIUM desires to but from the Seneca Hardware
Co., Inc construction materials mostly steel bars, electrical materials and other related
items worth FIVE HUNDRED FIFTY-TWO THOUSAND (P552,000.00) PESOS only;

5. That the VERMEN PINES CONDOMINIUM shall pay Seneca Hardware Co., Inc TWO
HUNDRED SEVENTY SIX THOUSAND (P276,000.00) PESOS in cash upon delivery of said
construction materials and the other TWO HUNDRED SEVENTY SIX THOUSAND
(P276,000.00) PESOS shall be paid in the form of two (2) residential condominium
units, studio type, with a total floor area of 76.22 square meter (sic) more or less also
worth P276,000.00;

6. That, for every staggered delivery of construction materials, fifty percent (50%) shall
be paid by the VERMEN PINES CONDOMINIUM to the Seneca Hardware Co., Inc C.O.D.
and, fifty percent (50%) shall be credited to the said condominium unit in favor of the
Seneca Hardware Co., Inc;

7. That the Seneca Hardware Co., Inc shall deliver to the VERMEN PINES
CONDOMINIUM said construction materials under the agreed price and conditions
stated in the price quotation approved by both parties and made an integral part of this
document;

8. That the Seneca Hardware Co., Inc is obliged to start delivering to the VERMEN PINES
CONDOMINIUM all items in the purchase order seven (7) days from receipt of said
purchase order until such time that the whole amount of P552,000.00 is settled;
9. That the place of delivery shall be Vermen Pines Condominium at Bakakeng Road,
Baguio City;

10. That the freight cost of said materials shall be borne fifty percent (50%) by the
FIRST PARTY and fifty percent (50%) by the SECOND PARTY;

11. That the VERMEN PINES CONDOMINIUM pending completion of the VERMEN PINES
CONDOMINIUM PHASE II which is the subject of this contract, shall deliver to the
Seneca Hardware Co., Inc the possession of residential condominium, Phase I, Unit Nos.
601 and 602, studio type with a total area of 76.22 square meters or less, worth
P276,000.00;

12. That after the completion of Vermen Pines Condominium Phase II, the Seneca
Hardware Co., Inc shall be given by the VERMEN PINES CONDOMINIUM the first option
to transfer from Phase I to Phase II under the same price, terms and conditions. (Rollo,
pp. 26-28).

As found by the appellate court and admitted by both parties, Seneca Hardware Co., Inc
had paid petitioner the amount of P110,151.75, and at the same time delivered
construction materials worth P219,727.00. Pending completion of Phase II of the
Vermen Pines Condominiums, petitioner delivered to private respondent units 601 and
602 at Phase I of the Vermen Pines Condominiums (Rollo, p. 28). In 1982, the petitioner
repossessed unit 602. As a consequence of the repossession, the officers of the private
respondent corporation had to rent another unit for their use when they went to Baguio
on April 8, 1982. On May 10, 1982, the officers of the private respondent corporation
requested for a clarification of the petitioner's action of preventing them and their
families from occupying condominium unit 602.
In its reply dated May 24, 1982, the Vermen Pines Condominiums corporation averred
that Room 602 was leased to another tenant because private respondent corporation
had not paid anything for purchase of the condominium unit. Vermen Pines
Condominiums corporation demanded payment of P27,848.25 representing the balance
of the purchase price of Room 601. In 1983, the loan application for the construction of
the Vermen Pines Condominium Phase II was denied. Consequently, construction of the
condominium project stopped and has not been resumed since then.
On June 21, 1985, Seneca Hardware Co., Inc filed a complaint with the Regional Trial
Court of Quezon City (Branch 92) for rescission of the Offsetting Agreement with
damages. In said complaint, private respondent alleged that petitioner Vermen Realty
Corporation had stopped issuing purchase orders of construction materials after April,
1982, without valid reason, thus resulting in the stoppage of deliveries of construction
materials on its (Seneca Hardware) part, in violation of the Offsetting Agreement.
In its Answer filed on August 15, 1985, petitioner alleged that the fault lay with private
respondent (plaintiff therein): although petitioner issued purchase orders, it was
private respondent who could not deliver the supplies ordered, alleging that they were
out of stock. (However, during a hearing on January 28, 1987, the Treasurer of
petitioner corporation, when asked where the purchase orders were, alleged that she
was going to produce the same in court, but the same was never produced (Rollo, p. 30).
Moreover, private respondent quoted higher prices for the construction materials
which were available. Thus, petitioner had to resort to its other suppliers. Anent the
query as to why Unit 602 was leased to another tenant, petitioner averred that this was
done because private respondent had not paid anything for it.
As of December 16, 1986, private respondent had paid petitioner P110,151.75 in cash,
made deliveries of construction materials worth P219,727.00, leaving a balance of
P27,848.25 representing the purchase price of unit 601 (Rollo, p. 28). The price of one
condominium unit was P138,000.00.
After conducting hearings, the trial court rendered a decision dismissing the complaint
and ordering the plaintiff (private respondent in this petition) SENECA HARDWARE to
pay defendant VERMEN REALTY (petitioner in this petition) on its counterclaim in the
amount of P27,848.25 representing the balance due on the purchase price of
condominium unit 601.
On appeal, respondent court reversed the trial court's decision as adverted to above.

ISSUE:
Whether or not the circumstances of the case warrant rescission of the Offsetting
Agreement as prayed for by SENECA HARDWARE

RULING:
YES, the circumstances of the case warrant rescission of the Offsetting Agreement as
prayed for by SENECA HARDWARE. There is no controversy that the provisions of the
Offsetting Agreement are reciprocal in nature. Reciprocal obligations are those created
or established at the same time, out of the same cause, and which results in a mutual
relationship of creditor and debtor between parties. In reciprocal obligations, the
performance of one is conditioned on the simultaneous fulfillment of the other
obligation (Abaya vs. Standard Vacuum Oil Co., 101 Phil. 1262 [1957]). Under the
agreement, SENECA HARDWARE shall deliver to VERMEN REALTY construction
materials worth P552,000.00 under the conditions set forth in the Offsetting
Agreement. Seneca Hardware’s obligation under the agreement is three-fold: he shall
pay private respondent P276,000.00 in cash; he shall deliver possession of units 601
and 602, Phase I, Vermen Pines Condominiums (with total value of P276,000.00) to
private respondent; upon completion of Vermen Pines Condominiums Phase II, private
respondent shall be given option to transfer to similar units therein. Article 1191 of the
Civil Code provides the remedy of rescission in (more appropriately, the term is
"resolution") in case of reciprocal obligations, where one of the obligors fails to comply
with that is incumbent upon him.
The general rule is that RESCISSION OF A CONTRACT WILL NOT BE PERMITTED FOR A
SLIGHT OR CASUAL BREACH, but ONLY FOR SUCH SUBSTANTIAL AND FUNDAMENTAL
BREACH as would defeat the very object of the parties in executing the agreement. The
question of whether a breach of contract is substantial depends upon the attendant
circumstances (Universal Food Corp. vs. Court of Appeals, 33 SCRA 1, [1970]).
In the case at bar, petitioner argues that it was private respondent who failed to
perform its obligation in the Offsetting Agreement. It averred that contrary to the
appellate court's ruling, the mere stoppage of the loan for the construction of Phase II of
the Vermen Pines Condominiums should not have had any effect on the fulfillment of
the obligations set forth in the Offsetting Agreement. Petitioner moreover stresses that
contrary to private respondent's averments, purchase orders were sent, but there was
failure to deliver the materials ordered because they were allegedly out of stock.
Petitioner points out that, as admitted by private respondent's witness, petitioner had
the discretion to order or not to order constructions materials, and that it was only after
petitioner approved the price, after making a canvass from other suppliers, that the
latter would issue a purchase order. Petitioner argues that this was the agreement, and
therefore the law between the parties, hence, when no purchase orders were issued, no
provision of the agreement was violated.
Private respondent, on the other hand, points out that the subject of the Offsetting
Agreement is Phase II of the Vermen Pines Condominiums. It alleges that since
construction of Phase II of the Vermen Pines Condominiums has failed to begin (Rollo, p.
104), it has reason to move for rescission of the Offsetting Agreement, as it cannot
forever wait for the delivery of the condominium units to it.
It is evident from the facts of the case that private respondent did not fail to fulfill its
obligation in the Offsetting Agreement. The discontinuance of delivery of construction
materials to petitioner stemmed from the failure of petitioner to send purchase orders
to private respondent. The allegation that petitioner had been sending purchase orders
to private respondent, which the latter could not fill, cannot be given credence. Perhaps
in the beginning, it would send purchase orders to private respondent (as evidenced by
the purchase orders presented in court), and the latter would deliver the construction
materials ordered. However, according to private respondent, after April, 1982,
petitioner stopped sending purchase orders. Petitioner failed to refute this allegation.
When petitioner's witness, Treasurer of the petitioner corporation, was asked to
produce the purchase orders in court, the latter promised to do so, but this was never
complied with.
On the other hand, petitioner would never able to fulfill its obligation in allowing private
respondent to exercise the option to transfer from Phase I to Phase II, as the
construction of Phase II has ceased and the subject condominium units will never be
available.
The impossibility of fulfillment of the obligation on the part of petitioner necessitates
resolution of the contract for indeed, THE NON-FULFILLMENT OF THE OBLIGATION
AFOREMENTIONED CONSTITUTES SUBSTANTIAL BREACH OF THE OFFSETTING
AGREEMENT. The possibility of exercising the option of whether or not to transfer to
condominium units in Phase II was one of the factors which were considered by private
respondent when it entered into the agreement. Since the construction of the Vermen
Pines Condominium Phase II has stopped, petitioner would be in no position to perform
its obligation to give private respondent the option to transfer to Phase II. It would be
the height of injustice to make private respondent wait for something that may never
come.
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner.

b. Modes of Breach
i. Delay (Art. 1169)

MORA SOLVENDI – DELAY ON THE PART OF THE DEBTOR/OBLIGOR

 MORA SOLVENDI IS NOT APPLICABLE if there is NO CAUSE OF ACTION

 There was no delay

CETUS DEVELOPMENT, INC. vs. COURT OF APPEALS

 G.R. No. 77648, 1989 Medialdea J., PRF
SUBJECT

SUMMARY: The private respondents, Ederlina Navalta, Ong Teng, Jose Liwanag, Leandro
Canlas, Victoria Sudario, and Flora Nagbuya, were unable to pay their lease for three
months because the new owner of premises, Cetus Devt. Inc., did not sent a collector.
Cetus demanded that the respondents should vacate the premises and pay their
overdue debt. The respondents immediately tendered their payments, which were
accepted by the petitioner with the condition that the acceptance was without prejudice
to the filing of ejectment suit. The ejectment suit was filed but it was dismissed by the
courts because records show that the time of filing of the complaint, the rentals had all
been paid therefore there is no cause of action for the ejectment case.

FACTS:
The private respondents (Ederlina Navalta, Ong Teng, Jose Liwanag, Leandro Canlas,
Victoria Sudario, andFlora Nagbuya) were lessees of the premises located in Quiapo,
Manila. Each month, the respondents pay to a collector of Susana Realty based on their
individual verbal leases (P40.35-P96.10). In March 1984, Susana Realty sold the leased
premises to the petitioner, Cetus Development, Inc. In the succeeding months of July,
August and September 1984, the respondents failed to pay their monthly individual
rentals as no collector came. In October, 1984, the petitioner, Cetus Development, Inc.,
sent a letter to each of the private respondents demanding that they vacate the subject
premises and to pay the back rentals for the months of July, August and September,
1984, within fifteen (15) days from the receipt thereof. Immediately upon the receipt of
the said demand letters on October 10, 1984, the private respondents paid their
respective arrearages in rent which were accepted by the petitioner subject to the
unilateral condition that the acceptance was without prejudice to the filing of an
ejectment suit. Subsequent monthly rental payments were likewise accepted by the
petitioner under the same condition. The Metropolitan Trial Court of Manila, RTC and
CA dismissed the ejectment suit.

ISSUE:
WON there exists a delay of payment considering the fact that upon demand by
petitioner Cetus from private respondents for payment of their back rentals, the private
respondents immediately tendered payment which was accepted by petitioner.

RULING:
NO. There was no failure yet on the part of private respondents to pay rents for three
consecutive months. As the terms of the individual verbal leases which were on a
month-to-month basis were not alleged and proved, the general rule on necessity of
demand applies when there is default in the fulfillment of an obligation when the
creditor demands payment at the maturity of the obligation or at any time thereafter.
The facts on record fail to show proof that petitioner demanded the payment of the
rentals when the obligation matured. Coupled with the fact that no collector was sent as
previously done in the past, the private respondents cannot be held guilty of mora
solvendi or delay in the payment of rentals. When petitioner first demanded the
payment of the 3-month arrearages and private respondents lost no time in making
tender and payment, which petitioner accepted, no cause of action for ejectment
accrued. Hence, its demand to vacate was premature as it was an exercise of a non-
existing right to rescind. Petition for review is denied. Decision of CA is affirmed

MORA SOLVENDI – DELAY ON THE PART OF THE DEBTOR/OBLIGOR

 Reciprocal Obligation

[G.R. No. 32336. December 20, 1930.]

JULIO C. ABELLA, Plaintiff-Appellant, v. GUILLERMO B. GONZAGA, Defendant-Appellee.
Antonio T. Carrascoso jr., for Appellant.
Camus & Delgado for Mooney.

Defendant Guillermo B. Gonzaga purchased from the Government on installments, lots

937 to 945 of the Tala Estate in Novaliches, Caloocan, Rizal. They made an agreement.
Later, the defendant, being in the Province of Cebu, wrote to Roman Mabanta, attaching
a power of attorney authorizing him to sign in behalf of the defendant GUILLERMO B.
Gonzaga all the documents required by the Bureau of Lands for the transfer of the lots
to the plaintiff Julio C. Abella. In that letter the defendant instructed Roman Mabanta, in
the event that the plaintiff Julio C. Abella failed to pay the remainder of the selling price,
to inform him that the option would be considered cancelled, and to return to him the
amount of P915.31 already delivered. The plaintiff Abella asked for a few days' time, but
Mabanta, following the instructions he had received from the defendant, only gave him
until the 5th of that month. The plaintiff did not pay the rest of the price on the 5th of
January, but on the 9th of the month attempted to do so; Mabanta, however, refused to
accept it, and gave him to understand that he regarded the contract as rescinded. On the
same day, Mabanta returned by check the sum of P915.31 which the plaintiff had paid.

ISSUE:
WON period of time is an essential element to the agreement.

RULING:
Yes. In rendering that judgment, the court relied on the fact that the plaintiff had failed
to pay the price of the lots within the stipulated time; and that SINCE THE CONTRACT
BETWEEN PLAINTIFF AND DEFENDANT WAS AN OPTION FOR THE PURCHASE OF THE
LOTS, TIME WAS AN ESSENTIAL ELEMENT IN IT. It is to be noted that in the document
signed by the defendant, the 15th of December was fixed as the date, extendible for
fifteen days, for the payment by the plaintiff of the balance of the selling price. It has
been admitted that the plaintiff did not offer to complete the payment until January 9,
1929. He contends that Mabanta, as attorney-in-fact for the defendant in this
transaction, granted him an extension of time until the 9th of January. But Mabanta has
stated that he only extended the time until the 5th of that month. Mabanta's testimony
on this point is corroborated by that of Paz Vicente and by the plaintiff's own admission
to Narciso Javier that his option to purchase those lots expired on January 5, 1929. In
holding that the period was an essential element of the transaction between plaintiff
and defendant, the trial court considered that the contract in question was an option for
the purchase of the lots, and that in an agreement of this nature the period is deemed
essential. The court holds that time was an essential element in the transaction. The
time fixed for the payment of the price was therefore essential for the defendant, and
this view is borne out by his letter to his representative Mabanta instructing him to
consider the contract rescinded if the price was not completed in time.

MORA ACCIPIENDI – delay on the part of creditor/obligee

G.R. No. L-10394 December 13, 1958

CLAUDINA VDA. DE VILLARUEL, ET AL., plaintiffs-appellees,
vs.
MANILA MOTOR CO., INC. and ARTURO COLMENARES, defendants-appellants.

FACTS:
On May 31, 1940, the plaintiffs Villaruel and defendant Manila Motor Co. Inc. entered
into a contract whereby the defendant MANILA MOTOR CO., INC. and ARTURO
COLMENARES agreed to lease plaintiffs building premises.The leased premises were
placed in the possession of the defendant until the invasion of 1941. The Japanese
military occupied and used the property leased as part of their quarters from June, 1942
to March, 1945, in which no payment of rentals was made. Upon the liberation of the
said city, the American forces occupied the same buildings then the United States gave
up the occupancy of the premises, defendant MANILA MOTOR CO., INC. and ARTURO
COLMENARES decided to exercise their option to renew the contract, in which they
agreed. However, before resuming the collection of rentals, Dr. Alfredo Villaruel upon
advice demanded payment of rentals corresponding to the time the Japanese military
occupied the leased premises, but the defendant refused to pay . As a result, plaintiff
Villaruel gave notice seeking the rescission of the contract and the payment of rentals
from June, 1942 to March, 1945; this was rejected by the defendant. Despite the fact the
defendant under new branch manager paid to plaintiff the sum of P350 for the rent, the
plaintiff Villaruel still demanded for rents in arrears and for the rescission of the
contract of lease. During the pendency of the case, the leased building was burned
down. Because of the occurrence, plaintiffs demanded reimbursement from the
defendants, but having been refused, they filed a supplemental complaint to include a
3rd cause of action, the recovery of the value of the burned building. The trial court
rendered judgment in favor of the plaintiff. Hence the defendants appeal.

ISSUE:
WON defendant Manila Motor Co. Inc. liable for the loss of the leased premises.

RULING:
No. Clearly, the lessor's insistence upon collecting the occupation rentals for 1942-1945
was unwarranted in law. Hence, their refusal to accept the current rentals without
qualification placed them in default (mora creditoris or accipiendi) with the result that
thereafter, they had to bear all supervening risks of accidental injury or destruction of
the leased premises. While not expressly declared by the Code of 1889, this result is
clearly inferable from the nature and effects of mora. In other words, the only effect of
the failure to consign the rentals in court was that the obligation to pay them subsisted
and the lessee remained liable for the amount of the unpaid contract rent,
corresponding to the period from July to November, 1946; it being undisputed that,
from December 1946 up to March 2, 1948, when the commercial buildings were burned,
the defendants appellants have paid the contract rentals at the rate of P350 per month.
But the failure to consign did not eradicate the default (mora) of the lessors nor the risk
of loss that lay upon them.
COMPENSATIO MORAE- THE DELAY OF THE OBLIGORS IN RECIPROCAL OBLIGATIONS
(LIKE IN SALE), IE., THE DELAY OF THE OBLIGOR CANCELS THE DELAY OF THE
OBLIGEE, AND THE VICE VERSA.

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR.
OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as
statutory receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents

Facts:
On April 28, 1965, Island Savings Bank, approved the loan application for P80,000.00 of
Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real
estate mortgage over his 100-hectare land. The approved loan application called for a
lump sum P80,000.00 loan, repayable in semi-annual installments for a period of 3
years, with 12% annual interest. On May 22, 1965, a mere P17,000.00 partial release of
the P80,000.00 loan was made by the Bank; and Sulpicio M. Tolentino and his wife Edita
Tolentino signed a promissory note for P17,000.00 at 12% annual interest, payable
within 3 years from the date of execution of the contract at semi-annual installments of
P3,459.00. An advance interest for the P80,000.00. On June 14, 1968, the Monetary
Board, after finding that Island Savings Bank failed to put up the required capital to
restore its solvency, issued Resolution No. 967 which prohibited Island Savings Bank
from doing business in the Philippines and instructed the Acting Superintendent of
Banks to take charge of the assets of Island Savings Bank. On August 1, 1968, Island
Savings Bank, filed an application for the extra-judicial foreclosure of the real estate
mortgage covering the 100-hectare land of Sulpicio M. Tolentino in view of the non-
payment of the P17,000.00 debt. Sulpicio M. Tolentino filed a petition with the Court of
First Instance of Agusan for injunction, specific performance or rescission and damages
with preliminary injunction, alleging that since Island Savings Bank failed to deliver the
P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by
ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per annum
from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate
mortgage. The Trial court, after hearing the merits of the case, ruled in favor of the
Petitioners. The Court of Appeals ruled that Island Savings Bank can neither foreclose
the real estate mortgage nor collect the P17,000.00 loan.

Issues:
WON Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory
note and if the liability to pay the P17,000.00 subsists, can his real estate mortgage be
foreclosed to satisfy said amount.

Ruling:
YES. When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00
loan agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal
obligations, the obligation or promise of each party is the consideration for that of the
other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1
[1969]); and when one party has performed or is ready and willing to perform his part
of the contract, the other party who has not performed or is not ready and willing to
perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings Bank to
furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate
mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan.
From such date, the obligation of Island Savings Bank to furnish the P80, 000.00 loan
accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965,
and lasted for a period of 3 yearsor when the Monetary Board of the Central Bank
issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from
doing further business. Such prohibition made it legally impossible for Island Savings
Bank to furnish the P63,000.00 balance of the P80,000.00 loan. Since both parties were
in default in the performance of their respective reciprocal obligations, that is, Island
Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio
M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3
years as stipulated, they are both liable for damages. Since Island Savings Bank failed to
furnish the P63,000.00 balance of the P80,000.00 loan, the real estate mortgage of
Sulpicio M. Tolentino became unenforceable to such extent. P63, 000.00 is 78.75% of
P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to
the extent of 78. 75 hectares. The mortgage covering the remainder of 21.25 hectares
subsists as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to
secure a P17,000.00 debt.

ii. Contravention of the tenor (Art. 1167)

G.R. No. 160867 September 20, 2006

BONIFACIO NAKPIL, petitioner,

vs.
MANILA TOWERS DEVELOPMENT CORPORATION, respondent.

DOCTRINE:
Art. 1168. When the obligation consists in not doing, and the obligor does what has been
forbidden him, it shall also be undone at his expense.
A lessee, Atty. Bonifacio Nakpil files a complaint against a development corporation for
damages to his office and personal belongings after the building he leased was
demolished, but the Supreme Court rules in favor of the corporation, stating that they
were not responsible for the demolition and the lessee failed to prove their involvement
in the loss of his belongings.

FACTS:
Atty. Bonifacio Nakpil, a lessee, filed a complaint against Manila Towers Development
Corp. (MTDC) for damages to his office and personal belongings. In 1964, a 14-storey
building in Manila was leased to about 200 Filipino Chinese tenants, including Nakpil.
The building was later sold to MTDC, who acquired it from the Government Service
Insurance System (GSIS). The tenants formed the House International Building Tenants
Association, Inc. (HIBTAI) and protested the sale, claiming priority to buy the property.
In 1981, the City Engineer requested MTDC to correct the defects in the building,
warning that they posed a danger to the tenants. HIBTAI filed a complaint against GSIS
for injunction and damages, but it was dismissed. HIBTAI then filed another complaint
for annulment of contract and damages against MTDC, CMC, and GSIS. In 1995, the City
Building Official conducted an ocular inspection of the building and found serious
defects. The tenants were ordered to vacate and MTDC was ordered to make repairs.
MTDC did not comply, and the City Building Official issued a closure order and ordered
the tenants to vacate within 15 days. On July 19, 1996, the City Building Official's
personnel entered the building and demolished it. Nakpil's office was destroyed, and his
personal belongings were scattered, thrown away, or stolen.

ISSUE:
Whether MTDC is liable for damages to Nakpil.

RULING:
No. The Supreme Court ruled in favor of MTDC and reversed the decision of the Court of
Appeals. The Court affirmed the decision of the trial court dismissing Nakpil's
complaint.
The duty to maintain the lessee (Nakpil) in the peaceful and adequate enjoyment of the
lease only protects the lessee from acts of third persons or acts of the lessor that
permanently interfere with the lessee's beneficial enjoyment of the premises. In this
case, the demolition was done by the City Building Official, not MTDC. Therefore, MTDC
did not breach its lease contract with Nakpil. There was no abandonment of possession
by Nakpil, as he still had control and possession of his office until it was demolished.
Nakpil failed to prove that MTDC was responsible for the loss of his personal
belongings. The evidence showed that the demolition was carried out by the City
Building Official's personnel, and there was no evidence that they took Nakpil's
belongings.

G.R. No. 190601 February 7, 2011

SPOUSES LUIGI M. GUANIO and ANNA HERNANDEZ-GUANIO, Petitioners,
vs.
MAKATI SHANGRI-LA HOTEL and RESORT, INC., also doing business under the name of
SHANGRI-LA HOTEL MANILA, Respondent.

Facts
Spouses Guanio booked their wedding reception at Shangri-La Hotel Makati. A day
before the reception the parties finalized their contract. Petitioners claim that during
the reception the guests complained of the delay in the service of their dinner and some
items were unavailable, the waiters were said to be rude when asked about the delay.
Because of what happened, petitioners sent a letter complaint to Makati Shangri-la
Hotel and received an apologetic reply from Krister Svensson, the hotels Executive
Assistant Manager in charge of Food and Beverage. Despite the apology, they filed a
complaint for breach of contract and damages before the Regional Trial Court (RTC) of
Makati City. RTC ruled in favor of the petitioner and ordered the respondent to pay for
damages. RTC relying on the letter of Svensson observed that from the tenor of the
letter that respondent admits that the services the plaintiff received were unacceptable
and definitely not up to their standards. The respondent denied that Svensson’s letter is
an admission of liability and that it was meant to maintain goodwill to its customer. On
Appeal, CA however reversed the RTC’s decision in holding that the proximate cause of
petitioners’ injury was the unexpected increase in their guest.

ISSUE:
Whether or not Makati Shangri-La is guilty of breach of contract/Whether or not
proximate cause is applicable to actionsinvolving breach of contract.
RULING:
According to the SC, proximate cause is not applicable in the case since petitioner’s
complaint arose from a contract. “The doctrine of proximate cause is applicable only in
actions for quasi-delicts, not in actions involving breach of contract.” What applies in the
present case is Article 1170 of the Civil CodeArt. 1170. Those who in the performance of
their obligations are guilty offraud, negligence or delay, and those who in any manner
contravene thetenor thereof, are liable for damages. The court citing RCPI v. Verchez, et
alIn culpa contractual x x x the mere proof of the existence of the contractand the failure
of its compliance justify, prima facie, a corresponding rightof relief. Xxx A breach upon
the contract confers upon the injured party avalid cause for recovering that which may
have been lost or suffered. XxxBreach of contract is defined as the failure without legal
reason to complywith the terms of a contract. It is also defined as the [f]ailure, without
legalexcuse, to perform any promise which forms the whole or part of thecontract.

Petitioners’ failure to discharge their obligation to inform therespondents of the

increase in their guest excused the latterliability for any damage or inconvenience
occasioned thereby asprovided in their contract.
As for petitioners claim that respondent departed fromits verbal agreement with
petitioners, the same fails, given thatthe written contract which the parties entered into
the day beforethe event, being the law between them.
Regarding the letter of letter of Svensson, as explained byrespondent Catering director
the hotel’s procedure on receivingand processing complaints is mainly to show empathy
and toensure the client that there will be investigation and it is not inany way that they
are admitting any fault .The exculpatory clause notwithstanding, the Court notes that
respondentcould have managed the situation better, it being held in high esteem inthe
hotel and service industry.To the Court, the delay in service might have been avoided or
minimized ifrespondent exercised prescience in scheduling events. No less than
qualityservice should be delivered especially in events which possibility ofrepetition is
close to nil. Petitioners are not expected to get married twicein their lifetimes

[G.R. No. L-27454. April 30, 1970.]

ROSENDO O. CHAVES, Plaintiff-Appellant, v. FRUCTUOSO GONZALES, Defendant-
Appellee.
Chaves, Elio, Chaves & Associates, for Plaintiff-Appellant.
Sulpicio E. Platon, for Defendant-Appellee.

 NON-PERFORMANCE (ARTS 1167 AND 1170) – TYPEWRITER

SUMMARY: Rosendo Chavez brought his typewriter to Fructuoso Gonzales for repair
but Gonzales was unable to complete the repairs. Chavez later retrieved the typewriter
from Gonzales and discovered that some parts were missing. Chavez had the typewriter
repaired by another shop, costing P89.85. Chavez sued Gonzales for damages. The court
ruled that Gonzales was liable for breaching his obligation to properly repair the
typewriter. Gonzales was ordered to pay P58.75 for the cost of repairs and P31.10 for
the missing parts, as he failed to return the typewriter in the same condition as when it
was received.

FACTS:
"In the early part of July, 1963, the plaintiff ROSENDO O. CHAVES delivered to the
defendant FRUCTUOSO GONZALES, who is a typewriter repairer, a portable typewriter
FOR ROUTINE CLEANING AND SERVICING. The defendant was not able to finish the job
after some time despite repeated reminders made by the plaintiff. The defendant
merely gave assurances, but failed to comply with the same. In October, 1963, the
defendant Gonzales asked from the plaintiff Chaves the sum of P6.00 for the purchase of
spare parts, which amount the plaintiff gave to the defendant. On October 26, 1963,
after getting exasperated with the delay of the repair of the typewriter, the plaintiff
went to the house of the defendant and asked for the return of the typewriter. The
defendant delivered the typewriter in a wrapped package. On reaching home, the
plaintiff examined the typewriter returned to him by the defendant and found out that
the same was in shambles, with the interior cover and some parts and screws missing.
On October 29, 1963, the plaintiff sent a letter to the defendant formally demanding the
return of the missing parts, the interior cover and the sum of P6.00 (Exhibit D). The
following day, the defendant returned to the plaintiff some of the missing parts, the
interior cover and the P6.00. "On August 29, 1964, the plaintiff had his typewriter
repaired by Freixas Business Machines, and the repair job cost him a total of P89.85,
including labor and materials. On the other hand, the position of the defendant-appellee,
Fructuoso Gonzales, is that he is not liable at all, not even for the sum of P31.10, because
his contract with plaintiff-appellant did not contain a period, so that plaintiff-appellant
should have first filed a petition for the court to fix the period, under Article 1197 of the
Civil Code, within which the defendant appellee was to comply with the contract before
said defendant-appellee could be held liable for breach of contract.

ISSUE;
WON the defendant Gonzales is liable for the cost of the repair made by Freixas
Business Machines with the plaintiff Gonzales typewriter.

RULING:
Yes. It is clear that the defendant-appellee contravened the tenor of his obligation
because he not only did not repair the typewriter but returned it "in shambles",
according to the appealed decision. For such contravention, as appellant contends, he is
liable under Article 1167 of the Civil Code jam quot, for the cost of executing the
obligation in a proper manner. "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 he undone." The cost of the execution of the obligation in
this case should be the cost of the labor or service expended in the repair of the
typewriter, which is in the amount of P58.75 because the obligation or contract was to
repair it. In addition, the defendant-appellee is likewise liable, under Article 1170 of the
Code, for the cost of the missing parts, in the amount of P31.10, for in his obligation to
repair the typewriter he was bound, but failed or neglected, to return it in the same
condition it was when he received it. Appellant’s claims for moral and temperate
damages and attorney’s fees were, however, correctly rejected by the trial court, for
these were not alleged in his complaint. The defendant-appellee is obliged to pay, as he
is hereby ordered to pay, the plaintiff-appellant the sum of P89.85, with interest at the
legal rate from the filing of the complaint. Costs in all instances against appellee
Fructuoso Gonzales.

G.R. No. 73867 February 29, 1988

TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner,
vs.
IGNACIO CASTRO, SR., SOFIA C. CROUCH, IGNACIO CASTRO JR., AURORA CASTRO,
SALVADOR CASTRO, MARIO CASTRO, CONRADO CASTRO, ESMERALDA C. FLORO,
AGERICO CASTRO, ROLANDO CASTRO, VIRGILIO CASTRO AND GLORIA CASTRO, and
HONORABLE INTERMEDIATE APPELLATE COURT, respondents.

 Telegram

SUMMARY: In the case at bar, petitioner and private respondent Sofia C. Crouch entered
into a contract whereby, for a fee, petitioner undertook to send said private
respondent’s message overseas by telegram. This, petitioner did not do, despite
performance by said private respondent of her obligation by paying the required
charges. Petitioner was therefore guilty of contravening its obligation to said private
respondent and is thus liable for damages.

FACTS:
On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr. and
mother of the other plaintiffs, passed away in Lingayen, Pangasinan. On the same day,
her daughter Sofia C. Crouch, who was then vacationing in the Philippines, addressed a
telegram to plaintiff Ignacio Castro, Sr. at 685 Wanda, Scottsburg, Indiana, U.S.A., 47170
announcing Consolacion's death. The telegram was accepted by the defendant
TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC. in its Dagupan office, for
transmission, after payment of the required fees or charges.

The telegram never reached its addressee. Consolacion was interred with only her
daughter Sofia in attendance. Neither the husband nor any of the other children of the
deceased, then all residing in the United States, returned for the burial.

When Sofia returned to the United States, she discovered that the wire she had caused
the defendant to send, had not been received. She and the other plaintiffs thereupon
brought action for damages arising from defendant's breach of contract. The only
defense of the defendant TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC.
was that it was unable to transmit the telegram because of "technical and atmospheric
factors beyond its control." No evidence appears on record that defendant ever made
any attempt to advise the plaintiff Sofia C. Crouch as to why it could not transmit the
telegram.

The Court of First Instance of Pangasinan, after trial, ordered TELEFAST

COMMUNICATIONS/PHILIPPINE WIRELESS, INC. to pay the plaintiffs Sofia C. Crouch
damages, with interest at 6% per annum.

Telefast Communication appeals from the judgment of the appellate court, contending
that the award of moral damages should be eliminated as defendant's negligent act was
not motivated by "fraud, malice or recklessness."

In other words, under petitioner's theory, it can only be held liable for P 31.92, the fee
or charges paid by Sofia C. Crouch for the telegram that was never sent to the addressee
thereof.

ISSUE:
Whether the petitioner company is liable for damages?

RULING:
Yes. Art. 1170 of the Civil Code provides that “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. 2176 also provides that
“whoever by act or omission causes damage to another, there being fault or negligence,
is obliged to pay for the damage done.” In the case at bar, petitioner and private
respondent Sofia C. Crouch entered into a contract whereby, for a fee, petitioner
undertook to send said private respondent’s message overseas by telegram. This,
petitioner did not do, despite performance by said private respondent of her obligation
by paying the required charges. Petitioner was therefore guilty of contravening its
obligation to said private respondent and is thus liable for damages. This liability is not
limited to actual or quantified damages. To sustain petitioner’s contrary position in this
regard would result in an inequitous situation where petitioner will only be held liable
for the actual cost of a telegram fixed thirty (30) years ago. We find Art. 2217 of the Civil
Code applicable to the case at bar. It states: "Moral damages include physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral
shock, social humiliation, and similar injury. Though incapable of pecuniary
computation, moral damages may be recovered if they are the proximate results of the
defendant's wrongful act or omission." There is no doubt that these emotional
sufferings were proximately caused by appellant's omission and substantive law
provides for the justification for the award of moral damages. The Court also sustain the
trial court's award of P16,000.00 as compensatory damages to Sofia C. Crouch
representing the expenses she incurred when she came to the Philippines from the
United States to testify before the trial court. Had petitioner not been remiss in
performing its obligation, there would have been no need for this suit or for Mrs.
Crouch's testimony. The award of exemplary damages by the trial court is likewise
justified and, therefore, sustained in the amount of P1,000.00 for each of the private
respondents, as a warning to all telegram companies to observe due diligence in
transmitting the messages of their customers.
 G.R. No. L-15645 January 31, 1964
PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees,
vs.
NATIONAL RICE AND CORN CORPORATION, defendant-appellant,
MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee.

FACTS:
On May 19, 1952, plaintiff-appellee Mrs. Paz Arrieta participated in a public bidding
called by National Rice and Corn Corp. for the supply of 20,000 metric tons of Burmese
rice. As her bid of $203, 000 per metric ton was the lowest, she was awarded the
contract for the same. On July 1, 1952, Arrieta and NARIC entered into Contract of Sale
of Rice under the term of which the former obligated herself to deliver to the latter 20,
000 metric tons of Burmese rice at $203, 000 per metric ton. In turn, NARIC committed
itself to pay for the imported rice “by means of an irrevocable, confirmed and assignable
letter of credit in US currency in favor of Arrieta and/or supplier in Burma,
immediately.” However, it was only on July 30, 1952 that NARIC took the first step to
open a letter of credit by forwarding to the PNB its application for Commercial Letter of
Credit. On the same day, Arrieta, thru counsel, advised NARIC of the extreme necessity
for the opening of the letter of credit since she had by then made a tender to her
supplier in Rangoon, Burma equivalent to 5% of the F.O.B. price of 20, 000 tons at
$180.70 and in compliance with the regulations in Rangoon, this 5% will be confiscated
if the required letter of credit is not received by them before August 4, 1952. On August
4, PNB informed NARIC that its application for a letter of credit (LC) has been approved
by the Board of Directors with the condition that 50% marginal cash deposit be paid
and that drafts are to be paid upon presentment. It turned out that NARIC was not in
financial position to meet the condition. As a result of the delay, the allocation of
Arrieta’s supplier in Rangoon was cancelled and the 5% deposit amounting to 524 kyats
or approximately P200, 000 was forfeited.

ISSUE:
WON NARIC is liable for damages.

RULING:
Yes. One who assumes a contractual obligation and fails to perform the same on account
of his inability to meet certain bank which inability he knew and was aware of when he
entered into contract, should be held liable in damages for breach of contract.
Under Article 1170 of the Civil Code, not only debtors guilty of fraud, negligence or
default but also debtor of every, in general, who fails in the performance of his
obligations is bound to indemnify for the losses and damages caused thereby.

iii. Fraud (Art. 1171)

ALEJANDRO V. TANKEH vs. DEVELOPMENT BANK OF THE PHILIPPINES, STERLING

SHIPPING LINES, INC., RUPERTO V. TANKEH, VICENTE ARENAS, and ASSET
PRIVATIZATION TRUST

Dolo Causante or causal fraud (Art.1338)- are those deceptions or misrepresentations

of a serious character employed by one party and without whichthe other party would
not have entered into the contract.
FACTS:
Respondent Ruperto V. Tankeh is the President of Sterling Shipping Lines who applied a
loan from Development Bank of the Philippines for the partial financing of M/V Golden
Lilac (now as M/V SterlingAce). Petitioner Dr. Alejandro V. Tankeh alleged that his
younger brother, Ruperto approached and informed him that the latter (his younger
brother Ruperto) was operating a new shipping line business and offered him
(Petitioner Dr. Alejandro) 1,000 shares to be the director of the business worth 1M
Pesos. In 1981, petitioner Dr. Alejandro signed the Assignment of Shares of Stock with
Voting Rights and the promissory note. The loan was then approved by DBP. Sometime
in 1987, DBP sold the M/V Sterling Ace in Singapore. Petitioner filed several Complaints
and that the promissory note he signed in 1981 be declared null and void on the ground
that he was fraudulently deceive into signing the contract.

ISSUE:
Whether the fraud contemplated serious enough to render a contract voidable.

HELD:
No. Only incidental fraud exists in this case. Therefore, it is not sufficient to warrant the
annulmentof the contracts, petitioner entered into, but Ruperto V. Tankeh was liable for
the commission of incidental fraud for refusing to allow petitioner Dr. Alejandro to
participate in the management of the business. Although there was no fraud that had
been undertaken to obtain petitioner’s consent, THERE WAS FRAUD IN THE
PERFORMANCE OF THE CONTRACT. The records showed that petitioner had been
unjustly excluded from participating in the management of the affairs of the
corporation. THIS EXCLUSION FROM THE MANAGEMENT IN THE AFFAIRS OF
STERLING SHIPPING LINES, INC. CONSTITUTED FRAUD INCIDENTAL TO THE
PERFORMANCE OF THE OBLIGATION. 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. There are two types of fraud
contemplated in the performance of contracts: dolo incidente or incidental fraud and
dolo causante or fraud serious enough to render a contract voidable.

G.R. No. L-4811 July 31, 1953

CHARLES F. WOODHOUSE, plaintiff-appellant,
vs.
FORTUNATO F. HALILI, defendant-appellant.

SUMMARY:
Facts:
Woodhouse represented to Halili that he is the grantee of an exclusive franchise to
bottle and distribute Mission Dryproducts in the Philippines, when in truth, he was only
granted a 30-day option. After negotiations between them, they entered into a
partnership agreement where it was agreed upon that Woodhouse is entitled to 30% of
the profits. When Halili found out after their US trip that Woodhouse is not such
grantee, Halili did not execute the agreement they had. Thus, Woodhouse filed a
complaint for accounting of profits andexecution of the contract.

ISSUE:
Whether or not the false representation or fraud, if it existed, annuls the agreement to
form the partnership.

Held:
No. The false representations of Woodhouse do not amount to the invalidity of the
contract they entered into. In order that fraud may vitiate consent, it must be the causal
(dolo causante), not merely the incidental (dolo incidente), inducement to the making
of the contract. The supposed ownership of an exclusive franchise was actually the
consideration or price Woodhouse gave in exchange for the share of 30% granted him
in the net profits of the partnership business. This only amounts to dolo incidente since
it only involves getting Halili’s consent to a big slice in the profits, which is only an
incidental matter in the agreement.

----------
FACTS:
On November 29, 1947, the plaintiff Charles Woodhouse entered on a written
agreement, with the defendant, Fortunato Halili. The agreement was arrived at after
various conferences and consultations by and between them, with the assistance of
their respective attorneys. The most important provisions of which are (1) that they
shall organize a partnership for the bottling and distribution of Mision soft drinks,
plaintiff to act as industrial partner or manager, and the defendant as a capitalist,
furnishing the capital necessary therefor; (2) that the defendant was to decide matters
of general policy regarding the business, while the plaintiff was to attend to the
operation and development of the bottling plant; (3) that the plaintiff was to secure the
Mission Soft Drinks franchise for and in behalf of the proposed partnership; and (4) that
the plaintiff was to receive 30 per cent of the net profits of the business. The above
agreement was arrived at after various conferences and consultations by and between
them, with the assistance of their respective attorneys. Prior to entering into this
agreement, plaintiff had informed the the parent company, Mission Dry Corporation of
Los Angeles, California, U.S.A., manufacturers of the bases and ingridients of the
beverages bearing its name, that he had interested a prominent financier (defendant
herein) to invest half a million dollars for the franchise and requested bottling and
distribution rights for a limited time until it can be transferred to the corporation that
was to be formed. He was granted a 30-day right option.

of the said beverages, and requested, in order that he may close the deal with him, that
the right to bottle and distribute be granted him for a limited time under the condition
that it will finally be transferred to the corporation. Pursuant for this request, plaintiff
was given "a thirty-days" option on exclusive bottling and distribution rights for the
Philippines". Before this meeting Woodhouse or plaintiff's lawyer had prepared the
draft of the agreement, but this was not satisfactory because a partnership, instead of a
corporation, was desired. Halili or Defendant's lawyer prepared after the meeting his
own draft. This last draft appears to be the main basis of the agreement.
The contract was finally signed by plaintiff on December 3, 1947 and on that day
plaintiff and defendant went to the United States, and on December 10, 1947, a
franchise agreement was entered into the Mission Dry Corporation and Fortunato F.
Halili and/or Charles F. Woodhouse, granted defendant the exclusive right, license, and
authority to produce, bottle, distribute, and sell Mision beverages in the Philippines.

When the bottling plant was already on operation, plaintiff Woodhouse demanded of
defendant Halili that the partnership papers be executed. At first defendant Halili
executed himself, saying there was no hurry. Then he promised to do so after the sales
of the product had been increased to P50,000. After Halili’s promise and refused to give
further allowances, Woodhouse instituted the action.

In his complaint plaintiff asks for the (1) execution of the contract of partnership, (2) an
accounting of the profits, and a (3) share of 30 per cent of the said profit, as well as (4)
damages in the amount of P200,000. In his answer defendant alleges by way of defense
(1) that defendant's consent to the agreement, was secured by the representation of
plaintiff that he was the owner, or was about to become owner of an exclusive bottling
franchise, which representation was false, and plaintiff did not secure the franchise, but
was given to defendant himself; (2) that defendant did not fail to carry out his
undertakings, but that it was plaintiff who failed; (3) that plaintiff agreed to contribute
the exclusive franchise to the partnership, but plaintiff failed to do so. He also presented
a (4) counter-claim for P200,000 as damages. Court of First Instance rendered
judgment ordering defendant Halili to render an accounting of the profits of the bottling
and distribution business, subject of the action, and to pay plaintiff Woodhouse 15
percent thereof. It held that the execution of the contract of partnership could not be
enforced upon the parties, but it also held that the defense of fraud was not proved.
Against this judgment both parties have appealed.

ISSUE:
Whether or not the false representation or fraud, if it existed, annuls the agreement to
form the partnership.

RULING:
No, the false representation made by plaintiff was merely incidental fraud (dolo
incidente) as opposed to causal fraud (dolo causante). Thus, the contract remains in
force. However, both parties are entitled to damages.

It must be noted that fraud is manifested in illimitable number of degrees or gradations,

from the innocent praises of a salesman about the excellence of his wares to those
malicious machinations and representations that the law punishes as a crime. In Article
1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the causal fraud,
which may be a ground for the annulment of a contract, and the incidental deceit, which
only renders the party who employs it liable for damages. This Court had held that in
order that fraud may vitiate consent, it must be the causal (dolo causante), not merely
the incidental (dolo causante), inducement to the making of the contract.
The principal obligation Woodhouse entered was to transfer the Mission Soft Drinks
franchise to the partnership. Although Woodhouse is guilty of misrepresentation, it was
not the cause of Halili’s consent. Rather, what it caused was the latter’s consent to the
30% share in profits to be enjoyed by Woodhouse. This is merely incidental to the
agreement. Halili cannot be compelled to execute the partnership against hiw will. Thus,
the obligation is converted to one for damages for lost revenue. This fact
notwithsatanding, Halili is also entitled to damages due to Woodhouse’s incidental
fraud. The Court held that 15% diminution of Woodhouse’s share in the profits is the
correct amount of damages taking compensation into account.

iv. Negligence (Art 1172-1173)

 Test of Negligence
➢ WON the defendant, in doing the alleged negligent act, observed the reasonable care
and caution, which an ordinary and prudent person would have used in the same
situation. IF NOT, then he is guilty of negligence.

G.R. No. 119850 June 20, 1996

MANDARIN VILLA, INC., petitioner,
vs.
COURT OF APPEALS, and CLODUALDO DE JESUS, respondents.

FACTS: (Negligence arising from non-following of POS Guidelines)

Atty. Clodualdo de Jesus hosted a dinner for his friends at petitioner’s restaurant, the
Mandarin Villa Seafiood Village. After dinner the waiter handed him the bill in the
amount of P2,658.50. Atty. De Jesus offered to pay through his BANKARD credit card.
The card was accepted however after validation the waiter returned and audibly
informed Atty. De Jesus that his credit card had expired. Atty. De Jesus replied saying
that the same is about to expire on September 1990 as embossed on its face. Atty. De
Jesus and his two guests went to cashier to verify again the card. The computer said
“CARD EXPIRED”. They then returned to their table. Prof. Lirag, another guest, uttered
the following remarks: “ Clody, may problema ba? Baka kailangang maghugas na kame
ng pinggan?”. He then left to get his BPI Express Credit card from his car. The same was
honored and accepted. After the incident, he instituted the civil suit for damages against
BANKARD and petitioner. The trial court ordered the defendants to pay Atty. De Jesus
jointly and severally for moral and exemplary damages, and attorney’s fees. The CA
modified the decision finding petitioner solely liable for the damages, reduced the
monetary award for moral and exemplary damages, and deleting the award for
attorney’s fees.

ISSUE:
WON petitioner negligent based on the facts and if so, is its negligent act is the
proximate cause of the damage suffered by Atty. De Jesus.

HELD:
YES. Petitioner cites its good faith in checking, not just once but twice, the validity of the
aforementioned card prior its dishonor. It argued that since the computer flashed an
information that the credit card expired, petitioner could not be expected to honor the
same much less be adjudged negligent for dishonoring it. The test for determining the
existence of negligence in a particular case may be stated as follows: Did the defendant
in doing the alleged negligent act use the reasonable care and caution which an ordinary
prudent person would have used in the same situation? If not, then he is guilty of
negligence. The Point of Sale Guidelines which outlined the steps that petitioner must
follow must follow under the circumstances provides: CARD EXPIRED 1. check expiry
date on card, 2. if unexpired, refer to CB, 2.1 if valid, honor up to maximum of SPL only,
2.2 if in CB as Lost, do procedures 2a to 2e. 2.3 if in CB as Suspended/Cancelled, do not
honor the card, 3. if expired, do not honor the card. Cleary, it has not yet expired in
October 1989, when the same was wrongfully dishonored. Hence, petitioner did not use
the reasonable care and caution which an ordinary prudent person would have used in
the same situation and as such petitioner is guilty of negligence. The humiliation and
embarrassment of the private respondent was brought about not by such remark of
Prof. Lirag but by the fact of dishonor by petitioner of credit card. The remark of Prof.
Lirag served only to aggravate the embarrassment then felt by Atty. De Jesus albeit
silently within himself. The appeal is DISMISSED.

G.R. No. 34840 September 23, 1931

NARCISO GUTIERREZ, plaintiff-appellee,
vs.
BONIFACIO GUTIERREZ, MARIA V. DE GUTIERREZ, MANUEL GUTIERREZ, ABELARDO
VELASCO, and SATURNINO CORTEZ, defendants-appellants.

FACTS:

On February 2, 1930, a passenger truck and an automobile of private ownership

collided while attempting to pass each other on the Talon bridge on the Manila South
Road. The truck was driven by the chauffeur Abelardo Velasco, and was owned by
Saturnino Cortez. The automobile was being operated by Bonifacio Gutierrez, a lad 18
years of age, and was owned by Bonifacio’s father and mother, Mr. and Mrs. Manuel
Gutierrez. At the time of the collision, the father was not in the car, but the mother,
together will several other members of the Gutierrez family was accommodated therein.
A passenger in the autobus, by the name of Narciso Gutierrez, was en route from San
Pablo, Laguna, to Manila. The collision between the bus and the automobile resulted in
Narciso Gutierrez suffering a fracture right leg which required medical attendance for a
considerable period of time. It is conceded that the collision was caused by negligence
pure and simple. The difference between the parties is that, while the plaintiff blames
both sets of defendants, the owner of the passenger truck blames the automobile, and
the owner of the automobile, in turn, blames the truck.

ISSUE:
Whether or not, Manuel Gutierrez or the father of Bonifacio may be held liable for
damages as head of house for acts of his minor child Bonifacio Gutierrez.

RULING:
Yes. The head of a house, the owner of an automobile, who maintains it for the general
use of his family is liable for its negligent operation by one of his children, whom he
designates or permits to run it, where the car is occupied and being used at the time of
the injury for the pleasure of other members of the owner’s family than the child driving
it. The guaranty given by the father at the time the son was granted a license to operate
motor vehicles made the father responsible for the acts of his son. Based on these facts,
pursuant to the provisions of article 1903 of the Civil Code, the father alone and not the
minor or the mother, would be liable for the damages caused by the minor. We are
dealing with the civil law liability of parties for obligations which arise from fault or
negligence. At the same time, we believe that, as has been done in other cases, we can
take cognizance of the common law rule on the same subject.

G.R. No. L-48930 February 23, 1944

ANTONIO VAZQUEZ, petitioner,
vs.
FRANCISCO DE BORJA, respondent.

x---------------------------------------------------------x

G.R. No. L-48931 February 23, 1944

FRANCISCO DE BORJA, petitioner,
vs.
ANTONIO VAZQUEZ, respondent.

FACTS:
Francisco de Borja purchased from Natividad-Vasquez Sabani Development Co.
(NVSD) , Inc. 4,000 cavans of palay at PhP 2.10 per cavan to be delivered on February
1932. On behalf of the company, Antonio Vasquez executed the contract as acting
president and manager and Fernando Busuegoas as corporate treasurer. However,
NVSD had only delivered 2,488 cavans of palay of the value of PhP 5,224.80 and refused
to liver the remaining balance of PhP 1,512 cavans of the value of PhP 3,175.20. It also
failed to return 1,510 empty sacks owned by De Borja amounting to PhP 377.50.
Moreover, the company became insolvent. De Borja incurred damages resulting from
the undelivered cavans and that prompted him to sue Vasquez and Busuegoas for the
damages.

Vasquez contends that he did not enter the contract in his own individual and personal
capacity but as the manager at the time of the transaction. As a counterclaim, Vasquez
alleged that he suffered damages in the sum of PhP 1,000 on account of the complaint
action.

CFI found Vasques guilty of negligence in the performance of the contract and held him
personally liable on that account. It ruled in favor of the plaintiff and ordered Vasquez to
pay De Borja of the damages. The Court also absolved Busuego from the complaint and
plaintiff from the counterclaim. CA affirmed the decision of the RTC but reduced the
sum. It found Vasquez liable for gross negligence under Articles 1102, 1103, and 1902 of
the Old Civil Code and subsidiary liable with NVSD. On the motion of recommendation,
CA set aside its judgment and ordered the case be remanded to the court of origin for
further proceedings. Hence, this petition for certiorari.
ISSUE:
WON Vasquez is personally liable for the damages

RULING:
No. SC also held that the CFI and CA both erred in holding Vasquez liable for negligence
in the performance of the contract. They have manifestly failed to distinguish a
contractual obligation from an extracontractual obligation, or an obligation arising from
contract from an obligation arising from culpa aquiliana. The fault and negligence
referred to in articles 1101-1104 of the Civil Code are those incidental to the fulfillment
or nonfullfillment of a contractual obligation; while the fault or negligence referred to in
article 1902 is the culpa aquiliana of the civil law, homologous but not identical to tort
of the common law, which gives rise to an obligation independently of any contract. The
fact that the corporation, acting thru Vazquez as its manager, was guilty of negligence in
the fulfillment of the contract, did not make Vazquez principally or even subsidiarily
liable for such negligence. Since it was the corporation's contract, its nonfulfillment,
whether due to negligence or fault or to any other cause, made the corporation and not
its agent liable.

On the other hand, if Vasquez were to be held liable for its negligence independently of
the contract by his fault or negligence cause damaged to the plaintiff, he would be liable
to the latter under article 1902 of the Civil Code. But then the plaintiff's cause of action
should be based on culpa aquiliana and not on the contract alleged in his complaint and
Vazquez' liability would be principal and not merely subsidiary, as the Court of Appeals
has erroneously held.

As for the counterclaim filed by Vasquez against De Borja, SC ruled that finding of the CA
does not warrant his contention that the suit against him is malicious and tortious. As a
matter of moral justice, the indignant attitude adopted by the defendant towards the
plaintiff for having brought this action against him is in estimation not wholly right.
Thus, he does not have a cause of action against the plaintiff.

G.R. No. L-14335 January 28, 1920

MANUEL DE GUIA, plaintiff-appellant,
vs.
THE MANILA ELECTRIC RAILROAD & LIGHT COMPANY, defendant-appellant.

STREET, J.:

This is an appeal prosecuted both by the plaintiff and the defendant from a judgment of
the Court of First Instance of the City of Manila, whereby the plaintiff was awarded the
sum of P6,100, with interest and costs, as damages incurred by him in consequence of
physical injuries sustained while riding on one of the defendant's car.

The accident which gave rise to the litigation occurred on September 4, 1915, near the
end of the street-car line in Caloocan, Rizal, a northern suburb of the city of Manila. It
appears that, at about 8 o'clock p.m., of the date mentioned, the plaintiff Manuel de Guia,
a physician residing in Caloocan, boarded a car at the end of the line with the intention
of coming to the city. At about 30 meters from the starting point the car entered a
switch, the plaintiff remaining on the back platform holding the handle of the right-hand
door. Upon coming out of the switch, the small wheels of the rear truck left the track,
ran for a short distance along the macadam filling, which was flush with the rails, and
struck a concrete post at the left of the tract. The post was shattered; and as the car
stopped the plaintiff was thrown against the door with some violence, receiving bruises
and possibly certain internal injuries, the extent of which is a subject of dispute.

The trial court found that the motorman of the derailed car was negligent in having
maintained too rapid a speed. This inference appears to be based chiefly upon the
results of the shock, involving the shattering of the post and the bending of the kingpost
of the car. It is insisted for the defendant company that the derailment was due to the
presence of a stone, somewhat larger than a goose egg, which had become accidentally
lodged between the rails at the juncture of the switch and which was unobserved by the
motorman. In this view the derailment of the car is supposed to be due to casus
fortuitos and not chargeable to the negligence of the motorman.

Even supposing that the derailment of the car was due to the accidental presence of
such a stone as suggested, we do not think that the existence of negligence is disproved.
The motorman says that upon approaching the switch he reduced the electrical energy
to the point that the car barely entered the switch under its own momentum, and this
operation was repeated as he passed out. Upon getting again on the straight tract he put
the control successively at points one, two, three and lastly at point four. At the moment
when the control was placed at point four he perceived that the rear wheels were
derailed and applied the brake; but at the same instant the car struck the post, some 40
meters distant from the exit of the switch. One of the defendant's witnesses stated in
court that the rate of a car propelled by electricity with the control at point "four"
should be about five or 6 miles per hour. There was some other evidence to the effect
that the car was behind schedule time and that it was being driven after leaving the
switch, at a higher rate than would ordinarily be indicated by the control at point four.
This inference is rendered more tenable by the circumstance that the car was practically
empty. On the whole, we are of the opinion that the finding of negligence in the
operation of the car must be sustained, as not being clearly contrary to the evidence; not
so much because of excessive speed as because of the distance which the car was
allowed to run with the front wheels of the rear truck derailed. It seems to us than an
experienced and attentive motorman should have discovered that something was
wrong and would have stopped before he had driven the car over the entire distance
from the point where the wheels left the track to the place where the post was struck.

The conclusion being accepted that there was negligence on the part of the motorman in
driving the car, it results that the company is liable for the damage resulting to the
plaintiff as a consequence of that negligence. The plaintiff had boarded the car as a
passenger for the city of Manila and the company undertook to convey him for hire. The
relation between the parties was, therefore, of a contractual nature, and the duty of the
carrier is to be determined with reference to the principles of contract law, that is, the
company was bound to convey and deliver the plaintiff safely and securely with
reference to the degree of care which, under the circumstances, is required by law and
custom applicable to the case (art. 1258, Civil Code). Upon failure to comply with that
obligation the company incurred the liability defined in articles 1103-1107 of the Civil
Code. (Cangco vs. Manila Railroad Company, 38 Phil. Rep., 768; Manila Railroad
Company vs. Compañia Transatlantica, and Atlantic, Gulf & Pacific Co., 38 Phil. Rep.,
875.)

From the nature of the liability thus incurred, it is clear that the defendant company can
not avail itself of the last paragraph of article 1903 of the Civil Code, since that provision
has reference to liability incurred by negligence IN THE ABSENCE OF CONTRACTUAL
RELATION, THAT IS, TO THE CULPA AQUILIANA OF THE CIVIL LAW. It was therefore
irrelevant for the defendant company to prove, as it did, that the company had exercised
due care in the selection and instruction of the motorman who was in charge of its car
and that he was in fact an experienced and reliable servant.

At this point, however, it should be observed that although in case like this the
defendant must answer for the consequences of the negligence of its employee, the
court has the power to moderate liability according to the circumstances of the case
(art. 1103, Civ. Code): Furthermore, we think it obvious that an employer who has in
fact displayed due diligence in choosing and instructing his servants is entitled to be
considered a debtor in good faith, within the meaning of article 1107 of the same Code.
Construing these two provisions together, applying them to the facts of this case, it
results that the defendant's liability is limited to such damages as might, at the time of
the accident, have been reasonably foreseen as a probable consequence of the physical
injuries inflicted upon the plaintiff and which were in fact a necessary result of those
injuries. There is nothing novel in this proposition, since both the civil and the common
law are agreed upon the point that the damages ordinarily recoverable for the breach of
a contractual obligation, against a person who has acted in good faith, are such as can
reasonably be foreseen at the time the obligation is contracted. In Daywalt vs.
Corporacion de PP. Agustinos Recoletos (39 Phil., 587), we said: "The extent of the
liability for the breach of a contract must be determined in the light of the situation in
existence at the time the contract is made; and the damages ordinarily recoverable are
in all events limited to such as might be reasonably foreseen in the light of the facts then
known to the contracting parties."

This brings us to consider the amount which may be awarded to the plaintiff as
damages. Upon this point the trial judge found that, as a result of the physical and
nervous derangement resulting from the accident, Dr. De Guia was unable properly to
attend to his professional labors for three months and suspended his practice for that
period. It was also proved by the testimony of the plaintiff that his customary income, as
a physician, was about P300 per month. The trial judge accordingly allowed P900, as
damages for loss of professional earnings. This allowance is attacked upon appeal by the
defendant as excessive both as to the period and rate of allowance. Upon examining the
evidence we fell disinclined to disturb this part of the judgment, though it must be
conceded that the estimate of the trial judge on this point was liberal enough to the
plaintiff.

Another item allowed by the trial judge consists of P3,900, which the plaintiff is
supposed to have lost by reason of his inability to accept a position as district health
officer in Occidental Negros. It appears in this connection that Mr. Alunan,
representative from Occidental Negros, had asked Dr. Montinola, who supposedly had
the authority to make the appointment, to nominate the plaintiff to such position. The
job was supposed to be good for two years, with a salary of P1,600 per annum, and
possibility of outside practice worth P350. Accepting these suggestions as true, it is
evident that the damages thus incurred are too speculative to be the basis of recovery in
a civil action. This element of damages must therefore be eliminated. It goes without
saying that damage of this character could not, at the time of the accident, have been
foreseen by the delinquent party as a probable consequence of the injury inflicted — a
circumstance which makes applicable article 1107 of the Civil Code, as already
expounded.

The last element of damages to be considered is the item of the plaintiff's doctor's bills,
a subject which we momentarily pass for discussion further on, since the controversy on
this point can be more readily understood in connection with the question raised by the
plaintiff's appeal.

The plaintiff alleges in the complaint that the damages incurred by him as a result of the
injuries in question ascend to the amount of P40,000. Of this amount the sum of
P10,000 is supposed to represent the cost of medical treatment and other expenses
incident to the plaintiff's cure, while the remainder (P30,000) represents the damage
resulting from the character of his injuries, which are supposedly such as to incapacitate
him for the exercise of the medical profession in the future. In support of these claims
the plaintiff introduced evidence, consisting of his own testimony and that of numerous
medical experts, tending to show that as a result of the injuries in question he had
developed infarct of the liver and traumatic neurosis, accompanied by nervousness,
vertigo, and other disturbing symptoms of a serious and permanent character, it being
claimed that these manifestations of disorder rendered him liable to a host of other
dangerous diseases, such as pleuresy, tuberculosis, pneumonia, and pulmonary
gangrene, and that restoration to health could only be accomplished, if at all, after long
years of complete repose. The trial judge did not take these pretensions very seriously,
and, as already stated, limited the damages to the three items of professional earnings,
expenses of medical treatment, and the loss of the appointment as medical treatment,
and the loss of the appointment as medical inspector in Occidental Negros. As the
appeal of the plaintiff opens the whole case upon the question of damages, it is desirable
to present a somewhat fuller statement than that already given with respect to extent
and character of the injuries in question.

The plaintiff testified that, at the time the car struck against the concrete post, he was
standing on the rear platform, grasping the handle of the right-hand door. The shock of
the impact threw him forward, and the left part of his chest struck against the door
causing him to fall. In falling, the plaintiff says, his head struck one of the seats and he
became unconscious. He was presently taken to his home which was only a short
distance away, where he was seen at about 10 o'clock p. m., by a physician in the
employment of the defendant company. This physician says that the plaintiff was then
walking about and apparently suffering somewhat from bruises on his chest. He said
nothing about his head being injured and refused to go to a hospital. Later, during the
same night Dr. Carmelo Basa was called in to see the plaintiff. This physician says that
he found Doctor De Guia lying in bed and complaining of a severe pain in the side.
During the visit of Doctor Basa the plaintiff several times spit up blood, a manifestation
no doubt due to the effects of the bruises received in his side. The next day Doctor De
Guia went into Manila to consult another physician, Doctor Miciano, and during the
course of a few weeks he called into consultation other doctors who were introduced as
witnesses in his behalf at the trial of this case. According to the testimony of these
witnesses, as well as that of the plaintiff himself, the symptoms of physical and nervous
derangement in the plaintiff speedily developed in portentous degree.

Other experts were introduced by the defendant whose testimony tended to show that
the plaintiff's injuries, considered in their physical effects, were trivial and that the
attendant nervous derangement, with its complicated train of ailments, was merely
simulated.

Upon this question the opposing medical experts ventilated a considerable mass of
professional learning with reference to the nature and effects of the baffling disease
known as traumatic neurosis, or traumatic hysteria — a topic which has been the
occasion of much controversy in actions of this character in the tribunals of Europe and
America. The subject is one of considerable interest from a medico-legal point of view,
but we deem it unnecessary in this opinion to enter upon a discussion of its voluminous
literature. It is enough to say that in our opinion the plaintiff's case for large damages in
respect to his supposed incapacitation for future professional practice is not made out.
Of course in this jurisdiction damages can not be assessed in favor of the plaintiff as
compensation for the physical or mental pain which he may have endured (Marcelo vs.
Velasco, 11 Phil. Rep. 287); and the evidence relating to the injuries, both external and
internal, received by him must be examined chiefly in its bearing upon his material
welfare, that is, in its results upon his earning capacity and the expenses incurred in
restoration to the usual condition of health.

The evidence before us shows that immediately after the accident in question Doctor De
Guia, sensing in the situation a possibility of profit, devoted himself with great assiduity
to the promotion of this litigation; and with the aid of his own professional knowledge,
supplemented by suggestions obtained from his professional friends and associates, he
enveloped himself more or less unconsciously in an atmosphere of delusion which
rendered him incapable of appreciating at their true value the symptoms of disorder
which he developed. The trial court was in our opinion fully justified in rejecting the
exaggerated estimate of damages thus created.

We now pass to the consideration of the amount allowed to the plaintiff by the trial
judge as the expense incurred for medical service. In this connection Doctor Montes
testified that he was first called to see the plaintiff upon September 14, 1915, when he
found him suffering from traumatic neurosis. Three months later he was called upon to
treat the same patient for an acute catarrhal condition, involving disturbance in the
pulmonary region. The treatment for this malady was successful after two months, but
at the end of six months the same trouble recurred and required further treatment. In
October of the year 1916, or more than a year after the accident in question occurred,
Doctor Montes was called in consultation with Doctor Guerrero to make an examination
of the plaintiff. Doctor Montes says that his charges altogether for services rendered to
the plaintiff amount to P350, of which the sum of P200 had been paid by the plaintiff
upon bills rendered from time to time. This physician speaks in the most general terms
with respect to the times and extent of the services rendered; and it is by no means
clear that those services which were rendered many months, or year, after the accident
had in fact any necessary or legitimate relation to the injuries received by the plaintiff.
In view of the vagueness and uncertainty of the testimony relating to Doctor Montes'
services, we are of the opinion that the sum of P200, or the amount actually paid to him
by the plaintiff, represents the extent of the plaintiff's obligation with respect to
treatment for said injuries.

With regard to the obligation supposedly incurred by the plaintiff to three other
physicians, we are of the opinion that they are not a proper subject of recovery in this
action; and this for more than one reason. In the first place, it does not appear that said
physicians have in fact made charges for those services with the intention of imposing
obligations on the plaintiff to pay for them. On the contrary it would seem that said
services were gratuitously rendered out of courtesy to the plaintiff as a member of the
medical profession. The suggestions made on the stand by these physicians to the effect
that their services were worth the amounts stated by them are not sufficient to proved
that the plaintiff had incurred the obligation to pay those amounts. In the second place,
we are convinced that in employing so many physicians the plaintiff must have had in
view of the successful promotion of the issue of this lawsuit rather than the bona fide
purpose of effecting the cure of his injuries. In order to constitute a proper element of
recovery in an action of this character, the medical service for which reimbursement is
claimed should not only be such as to have created a legal obligation upon the plaintiff
but such as was reasonably necessary in view of his actual condition. It can not be
permitted that a litigant should retain an unusual and unnecessary number of
professional experts with a view to the successful promotion of a lawsuit and expect to
recover against his adversary the entire expense thus incurred. His claim for medical
services must be limited to such expenditures as were reasonably suited to the case.

The second error assigned in the brief of the defendant company presents a question of
practice which, though not vital to the solution of this case, is of sufficient general
importance to merit notice. It appears that four of the physicians examined as witnesses
for the plaintiff had made written statements at various dates certifying the results of
their respective examinations into the condition of the plaintiff. When these witnesses
were examined in court the identified their respective signatures to these certificates
and the trial judge, over the defendant's objection, admitted the documents as primary
evidence in the case. This was undoubtedly erroneous. A document of this character is
not primary evidence in any sense, since it is fundamentally of a hearsay nature; and the
only legitimate use to which one of these certificates could be put, as evidence for the
plaintiff, was to allow the physician who issued it to refer thereto to refresh his memory
upon details which he might have forgotten. In Zwangizer vs. Newman (83 N. Y. Supp.,
1071) which was also an action to recover damages for personal injury, it appeared that
a physician, who had been sent by one of the parties to examine the plaintiff, had made
at the time a written memorandum of the results of the examination; and it was
proposed to introduce this document in evidence at the trial. It was excluded by the trial
judge, and it was held upon appeal that this was proper. Said the court: "There was no
failure or exhaustion of the memory, and no impeachment of the memorandum on
cross-examination; and the document was clearly incompetent as evidence in chief."

It results from the foregoing that the judgment appealed from must be modified by
reducing the amount of the recovery to eleven hundred pesos (1,100), with legal
interest from November 8, 1916. As thus modified the judgment is affirmed, without
any special pronouncement as to costs of this instance. So ordered.
 G.R. No. 141258 April 9, 2003
TOMASA SARMIENTO, petitioner,
vs.
SPS. LUIS & ROSE SUN-CABRIDO and MARIA LOURDES SUN, respondents.

CORONA, J.:

This appeal by certiorari stems from the Decision1 of respondent Court of Appeals
promulgated on November 26, 1999 in CA-G.R. SP No. 47431 declaring the private
respondents not liable for damages.

Petitioner, Tomasa Sarmiento, states that sometime in April 1994, a friend, Dra. Virginia
Lao, requested her to find somebody to reset a pair of diamond earrings into two gold
rings.2 Accordingly, petitioner sent a certain Tita Payag with the pair of earrings to
Dingding’s Jewelry Shop, owned and managed by respondent spouses Luis and Rose
Cabrido,3 which accepted the job order for P400.4

Petitioner provided 12 grams of gold to be used in crafting the pair of ring settings.5
After 3 days, Tita Payag delivered to the jewelry shop one of Dra. Lao’s diamond
earrings which was earlier appraised as worth .33 carat and almost perfect in cut and
clarity.6 Respondent Ma. Lourdes (Marilou) Sun went on to dismount the diamond from
its original setting. Unsuccessful, she asked their goldsmith, Zenon Santos, to do it.
Santos removed the diamond by twisting the setting with a pair of pliers, breaking the
gem in the process.7

Petitioner required the respondents to replace the diamond with the same size and
quality. When they refused, the petitioner was forced to buy a replacement in the
amount of P30,000.8

Respondent Rose Cabrido, manager of Dingding’s Jewelry Shop, denied having entered
into any transaction with Tita Payag whom she met only after the latter came to the
jewelry shop to seek compensation from Santos for the broken piece of jewelry.9
However, it was possible that Payag may have availed of their services as she could not
have known every customer who came to their shop. Rose disclosed that she usually
arrived at 11:00 a.m. When she was not around, her mother and sister tended the
shop.10

Marilou admitted knowing Payag who came to Dingding’s Jewelry Shop to avail of their
services regarding a certain piece of jewelry. After a short conversation, Payag went
inside the shop to see Santos. When the precious stone was broken by Santos, Payag
demanded P15,000 from him. As the latter had no money, she turned to Marilou for
reimbursement apparently thinking that Marilou was the owner of the shop.11

For his part, Santos recalled that Payag requested him to dismount what appeared to
him was a sapphire. While clipping the setting with the use of a small pair of pliers, the
stone accidentally broke. Santos denied being an employee of Dingding’s Jewelry
Shop.12

Attempts to settle the controversy before the barangay lupon proved futile.13
Consequently, petitioner filed a complaint for damages on June 28, 1994 with the
Municipal Trial Court in Cities (MTCC) of Tagbilaran City docketed as Civil Case No.
2339 which rendered a decision14 in favor of the petitioner, the dispositive portion of
which reads:

WHEREFORE, Decision is hereby rendered in favor of plaintiff Tomasa Sarmiento and

against defendants Spouses Luis and Rose Sun-Cabrido, ordering defendants to pay
jointly and severally the amount of Thirty Thousand Pesos (P30,000.00) as actual or
compensatory damages; Three Thousand Pesos (P3,000.00) as moral damages; Five
Thousand Pesos (P5,000.00) as attorney’s fees; Two Thousand Pesos (P2,000.00) as
litigation expenses, with legal interest of 6% per annum from the date of this decision
and 12% per annum from the date when this decision becomes final until the amounts
shall have been fully paid and to pay the costs.

This case as against defendant Maria Lourdes Sun as well as defendants’ counterclaim
are dismissed for lack of merit.

SO ORDERED.

On appeal, the Regional Trial Court (RTC) of Tagbilaran City, Branch 3, reversed the
decision of the MTCC, thus absolving the respondents of any responsibility arising from
breach of contract.15 Finding no reversible error, the Court of Appeals (CA) affirmed
the judgment of the RTC in its Decision promulgated on November 26, 1999.16

Unable to accept the decision, the petitioner filed the instant petition for review with
the following assigned errors:

THE COURT OF APPEALS ERRED IN MAINTAINING AND SO HOLDING THAT ZENON

SANTOS IS NOT AN EMPLOYEE OF DEFENDANT (herein respondent) ROSE SUN-
CABRIDO, AND IS THEREFORE ANSWERABLE FOR HIS OWN ACTS OR OMISSIONS

II

THE HONORABLE COURT OF APPEALS ERRED IN SUSTAINING THE REGIONAL TRIAL

COURT’S PRONOUNCEMENTS THAT THERE EXISTS NO AGREEMENT BETWEEN THE
PETITIONER AND RESPONDENTS THAT THE LATTER WOULD ANSWER FOR ANY
LIABILITY SHOULD THE DIAMOND BE DAMAGED IN THE PROCESS OF DISMOUNTING
THEM FROM THE EARRINGS.

Essentially, petitioner claims that the dismounting of the diamond from its original
setting was part of the obligation assumed by the private respondents under the
contract of service. Thus, they should be held liable for damages arising from its
breakage. On the other hand, the version of the private respondents, upheld by the RTC
and the CA, is that their agreement with the petitioner was for crafting two gold rings
mounted with diamonds only and did not include the dismounting of the said diamonds
from their original setting.17 Consequently, the crux of the instant controversy is the
scope of the obligation assumed by the private respondents under the verbal contract of
service with the petitioner.

The Court notes that, during the trial, private respondents vigorously denied any
transaction between Dingdings’ Jewelry Shop and the petitioner, through Tita Payag.
Rose Cabrido, for instance, denied having ever met Payag before the latter came to seek
reimbursement for the value of the broken diamond. Likewise, while Marilou
acknowledged acquaintance with Payag, she nevertheless denied accepting any job
order from her. Debunking their protestations, however, the MTCC of Tagbilaran City
rendered its decision on November 26, 1999 in favor of herein petitioner.

Apparently realizing the weakness and futility of their position, private respondents
conceded, on appeal, the existence of an agreement with the petitioner for crafting a
pair of gold rings mounted with diamonds. This apparent concession by the private
respondents, however, was really nothing but an ingenious maneuver, designed to
preclude, just the same, any recovery for damages by the petitioner. Thus, while
ostensibly admitting the existence of the said agreement, private respondents,
nonetheless denied assuming any obligation to dismount the diamonds from their
original settings.18

The inconsistent position of the private respondents impugns their credibility. They
cannot be permitted to adopt a certain stance, only to vacillate later to suit their
interest. We are therefore inclined to agree with the MTCC in giving credence to the
version of the petitioner. The MTCC had the unique opportunity to actually observe the
behavior and demeanor of the witnesses as they testified during the trial.19

At any rate, the contemporaneous and subsequent acts of the parties20 support the
version of the petitioner. Thus, when Tita Payag asked Marilou of Dingding’s Jewelry
Shop to reset a pair of diamond earrings, she brought with her the said pieces of jewelry
so that the diamonds which were still mounted could be measured and the new ring
settings crafted accordingly. On the said occasion, Marilou expressed no reservation
regarding the dismounting of the diamonds which, after all, was an integral part of
petitioner’s job order. She should have instructed Payag to have them dismounted first
if Marilou had actually intended to spare the jewelry shop of the task but she did not.
Instead, petitioner was charged P400 for the job order which was readily accepted.
Thus, a perfected contract to reset the pair of diamond earrings arose between the
petitioner, through Payag, and Dingding’s Jewelry Shop, through Marilou.

Marilou’s subsequent actuations were even more revealing as regards the scope of
obligation assumed by the jewelry shop. After the new settings were completed in 3
days, she called up the petitioner to bring the diamond earrings to be reset.21 Having
initially examined one of them, Marilou went on to dismount the diamond from its
original setting. Unsuccessful, she then delegated the task to their goldsmith, Zenon
Santos. Having acted the way she did, Marilou cannot now deny the shop’s obligation to
reset the pair of earrings.
Obligations arising from contracts have the force of law between the contracting
parties.22 Corollarily, 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.23 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.24

In the case at bar, it is beyond doubt that Santos acted negligently in dismounting the
diamond from its original setting. It appears to be the practice of the trade to use a
miniature wire saw in dismounting precious gems, such as diamonds, from their
original settings.25 However, Santos employed a pair of pliers in clipping the original
setting, thus resulting in breakage of the diamond. The jewelry shop failed to perform
its obligation with the ordinary diligence required by the circumstances. It should be
pointed out that Marilou examined the diamond before dismounting it from the original
setting and found the same to be in order. Its subsequent breakage in the hands of
Santos could only have been caused by his negligence in using the wrong equipment.
Res ipsa loquitur.

Private respondents seek to avoid liability by passing the buck to Santos who claimed to
be an independent worker. They also claim, rather lamely, that Marilou simply
happened to drop by at Dingding’s Jewelry Shop when Payag arrived to place her job
order.26

We do not think so.

The facts show that Santos had been working at Dingding’s Jewelry Shop as goldsmith
for about 6 months accepting job orders through referrals from private respondents.27
On the other hand, Payag stated that she had transacted with Dingding’s Jewelry Shop
on at least 10 previews occasions, always through Marilou.28 The preponderance of
evidence supports the view that Marilou and Zenon Santos were employed at Dingding’s
Jewelry Shop in order to perform activities which were usually necessary or desirable in
its business.29

We therefore hold that an obligation to pay actual damages arose in favor of the
petitioner against the respondents spouses who admittedly owned and managed
Dingding’s Jewelry Shop. It was proven that petitioner replaced the damaged jewelry in
the amount of P30,000.30

The facts of the case also justify the award of moral damages. As a general rule, moral
damages are not recoverable in actions for damages predicated on a breach of contract
for it is not one of the items enumerated under Article 2219 of the Civil Code.31 Moral
damages may be awarded in a breach of contract only when there is proof that
defendant acted in bad faith, or was guilty of gross negligence amounting to bad faith, or
in wanton disregard of his contractual obligation.32 Santos was a goldsmith for more
than 40 years.33 Given his long experience in the trade, he should have known that
using a pair of pliers instead of a miniature wire saw in dismounting a precious stone
like a diamond would have entailed an unnecessary risk of breakage. He went on with it
anyway. Hence, respondent spouses are liable for P10,000 as moral damages due to the
gross negligence of their employee.
However, private respondent’s refusal to pay the value of the damaged jewelry
emanated from an honest belief that they were not responsible therefor, hence,
negating any basis for the award of attorney’s fees.34

WHEREFORE, the instant petition is GRANTED and the assailed decision of the Court of
Appeals dated November 26, 1999 is hereby reversed and set aside. Private
respondents Luis Cabrido and Rose Sun-Cabrido are hereby ordered to pay, jointly and
severally, the amount of P30,000 as actual damages and P10,000 as moral damages in
favor of the petitioner.

No costs.

SO ORDERED.

G.R. No. 138334 August 25, 2003

ESTELA L. CRISOSTOMO, Petitioner,
vs.
The Court of Appeals and CARAVAN TRAVEL & TOURS INTERNATIONAL, INC.,
Respondents.

DECISION

YNARES-SANTIAGO, J.:

In May 1991, petitioner Estela L. Crisostomo contracted the services of respondent

Caravan Travel and Tours International, Inc. to arrange and facilitate her booking,
ticketing and accommodation in a tour dubbed "Jewels of Europe". The package tour
included the countries of England, Holland, Germany, Austria, Liechstenstein,
Switzerland and France at a total cost of P74,322.70. Petitioner was given a 5% discount
on the amount, which included airfare, and the booking fee was also waived because
petitioner’s niece, Meriam Menor, was respondent company’s ticketing manager.

Pursuant to said contract, Menor went to her aunt’s residence on June 12, 1991 – a
Wednesday – to deliver petitioner’s travel documents and plane tickets. Petitioner, in
turn, gave Menor the full payment for the package tour. Menor then told her to be at the
Ninoy Aquino International Airport (NAIA) on Saturday, two hours before her flight on
board British Airways.

Without checking her travel documents, petitioner went to NAIA on Saturday, June 15,
1991, to take the flight for the first leg of her journey from Manila to Hongkong. To
petitioner’s dismay, she discovered that the flight she was supposed to take had already
departed the previous day. She learned that her plane ticket was for the flight scheduled
on June 14, 1991. She thus called up Menor to complain.
Subsequently, Menor prevailed upon petitioner to take another tour – the "British
Pageant" – which included England, Scotland and Wales in its itinerary. For this tour
package, petitioner was asked anew to pay US$785.00 or P20,881.00 (at the then
prevailing exchange rate of P26.60). She gave respondent US$300 or P7,980.00 as
partial payment and commenced the trip in July 1991.

Upon petitioner’s return from Europe, she demanded from respondent the
reimbursement of P61,421.70, representing the difference between the sum she paid
for "Jewels of Europe" and the amount she owed respondent for the "British Pageant"
tour. Despite several demands, respondent company refused to reimburse the amount,
contending that the same was non-refundable.1 Petitioner was thus constrained to file a
complaint against respondent for breach of contract of carriage and damages, which
was docketed as Civil Case No. 92-133 and raffled to Branch 59 of the Regional Trial
Court of Makati City.

In her complaint,2 petitioner alleged that her failure to join "Jewels of Europe" was due
to respondent’s fault since it did not clearly indicate the departure date on the plane
ticket. Respondent was also negligent in informing her of the wrong flight schedule
through its employee Menor. She insisted that the "British Pageant" was merely a
substitute for the "Jewels of Europe" tour, such that the cost of the former should be
properly set-off against the sum paid for the latter.

For its part, respondent company, through its Operations Manager, Concepcion Chipeco,
denied responsibility for petitioner’s failure to join the first tour. Chipeco insisted that
petitioner was informed of the correct departure date, which was clearly and legibly
printed on the plane ticket. The travel documents were given to petitioner two days
ahead of the scheduled trip. Petitioner had only herself to blame for missing the flight,
as she did not bother to read or confirm her flight schedule as printed on the ticket.

Respondent explained that it can no longer reimburse the amount paid for "Jewels of
Europe", considering that the same had already been remitted to its principal in
Singapore, Lotus Travel Ltd., which had already billed the same even if petitioner did
not join the tour. Lotus’ European tour organizer, Insight International Tours Ltd.,
determines the cost of a package tour based on a minimum number of projected
participants. For this reason, it is accepted industry practice to disallow refund for
individuals who failed to take a booked tour.3

Lastly, respondent maintained that the "British Pageant" was not a substitute for the
package tour that petitioner missed. This tour was independently procured by
petitioner after realizing that she made a mistake in missing her flight for "Jewels of
Europe". Petitioner was allowed to make a partial payment of only US$300.00 for the
second tour because her niece was then an employee of the travel agency. Consequently,
respondent prayed that petitioner be ordered to pay the balance of P12,901.00 for the
"British Pageant" package tour.

After due proceedings, the trial court rendered a decision,4 the dispositive part of which
reads:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Ordering the defendant to return and/or refund to the plaintiff the amount of Fifty
Three Thousand Nine Hundred Eighty Nine Pesos and Forty Three Centavos
(P53,989.43) with legal interest thereon at the rate of twelve percent (12%) per annum
starting January 16, 1992, the date when the complaint was filed;

2. Ordering the defendant to pay the plaintiff the amount of Five Thousand (P5,000.00)
Pesos as and for reasonable attorney’s fees;

3. Dismissing the defendant’s counterclaim, for lack of merit; and

4. With costs against the defendant.

SO ORDERED.5

The trial court held that respondent was negligent in erroneously advising petitioner of
her departure date through its employee, Menor, who was not presented as witness to
rebut petitioner’s testimony. However, petitioner should have verified the exact date
and time of departure by looking at her ticket and should have simply not relied on
Menor’s verbal representation. The trial court thus declared that petitioner was guilty of
contributory negligence and accordingly, deducted 10% from the amount being claimed
as refund.

Respondent appealed to the Court of Appeals, which likewise found both parties to be at
fault. However, the appellate court held that petitioner is more negligent than
respondent because as a lawyer and well-traveled person, she should have known
better than to simply rely on what was told to her. This being so, she is not entitled to
any form of damages. Petitioner also forfeited her right to the "Jewels of Europe" tour
and must therefore pay respondent the balance of the price for the "British Pageant"
tour. The dispositive portion of the judgment appealed from reads as follows:

WHEREFORE, premises considered, the decision of the Regional Trial Court dated
October 26, 1995 is hereby REVERSED and SET ASIDE. A new judgment is hereby
ENTERED requiring the plaintiff-appellee to pay to the defendant-appellant the amount
of P12,901.00, representing the balance of the price of the British Pageant Package
Tour, the same to earn legal interest at the rate of SIX PERCENT (6%) per annum, to be
computed from the time the counterclaim was filed until the finality of this decision.
After this decision becomes final and executory, the rate of TWELVE PERCENT (12%)
interest per annum shall be additionally imposed on the total obligation until payment
thereof is satisfied. The award of attorney’s fees is DELETED. Costs against the plaintiff-
appellee.

SO ORDERED.6

Upon denial of her motion for reconsideration,7 petitioner filed the instant petition
under Rule 45 on the following grounds:

I
It is respectfully submitted that the Honorable Court of Appeals committed a reversible
error in reversing and setting aside the decision of the trial court by ruling that the
petitioner is not entitled to a refund of the cost of unavailed "Jewels of Europe" tour she
being equally, if not more, negligent than the private respondent, for in the contract of
carriage the common carrier is obliged to observe utmost care and extra-ordinary
diligence which is higher in degree than the ordinary diligence required of the
passenger. Thus, even if the petitioner and private respondent were both negligent, the
petitioner cannot be considered to be equally, or worse, more guilty than the private
respondent. At best, petitioner’s negligence is only contributory while the private
respondent [is guilty] of gross negligence making the principle of pari delicto
inapplicable in the case;

II

The Honorable Court of Appeals also erred in not ruling that the "Jewels of Europe" tour
was not indivisible and the amount paid therefor refundable;

III

The Honorable Court erred in not granting to the petitioner the consequential damages
due her as a result of breach of contract of carriage.8

Petitioner contends that respondent did not observe the standard of care required of a
common carrier when it informed her wrongly of the flight schedule. She could not be
deemed more negligent than respondent since the latter is required by law to exercise
extraordinary diligence in the fulfillment of its obligation. If she were negligent at all,
the same is merely contributory and not the proximate cause of the damage she
suffered. Her loss could only be attributed to respondent as it was the direct
consequence of its employee’s gross negligence.

Petitioner’s contention has no merit.

By definition, a contract of carriage or transportation is one whereby a certain person

or association of persons obligate themselves to transport persons, things, or news from
one place to another for a fixed price.9 Such person or association of persons are
regarded as carriers and are classified as private or special carriers and common or
public carriers.10 A common carrier is defined under Article 1732 of the Civil Code as
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.

It is obvious from the above definition that respondent is not an entity engaged in the
business of transporting either passengers or goods and is therefore, neither a private
nor a common carrier. Respondent did not undertake to transport petitioner from one
place to another since its covenant with its customers is simply to make travel
arrangements in their behalf. Respondent’s services as a travel agency include
procuring tickets and facilitating travel permits or visas as well as booking customers
for tours.
While petitioner concededly bought her plane ticket through the efforts of respondent
company, this does not mean that the latter ipso facto is a common carrier. At most,
respondent acted merely as an agent of the airline, with whom petitioner ultimately
contracted for her carriage to Europe. Respondent’s obligation to petitioner in this
regard was simply to see to it that petitioner was properly booked with the airline for
the appointed date and time. Her transport to the place of destination, meanwhile,
pertained directly to the airline.

The object of petitioner’s contractual relation with respondent is the latter’s service of
arranging and facilitating petitioner’s booking, ticketing and accommodation in the
package tour. In contrast, the object of a contract of carriage is the transportation of
passengers or goods. It is in this sense that the contract between the parties in this case
was an ordinary one for services and not one of carriage. Petitioner’s submission is
premised on a wrong assumption.

The nature of the contractual relation between petitioner and respondent is

determinative of the degree of care required in the performance of the latter’s
obligation under the contract. For reasons of public policy, a common carrier in a
contract of carriage is bound by law to carry passengers as far as human care and
foresight can provide using the utmost diligence of very cautious persons and with due
regard for all the circumstances.11 As earlier stated, however, respondent is not a
common carrier but a travel agency. It is thus not bound under the law to observe
extraordinary diligence in the performance of its obligation, as petitioner claims.

Since the contract between the parties is an ordinary one for services, the standard of
care required of respondent is that of a good father of a family under Article 1173 of the
Civil Code.12 This connotes reasonable care consistent with that which an ordinarily
prudent person would have observed when confronted with a similar situation. The test
to determine whether negligence attended the performance of an obligation is: did the
defendant in doing the alleged negligent act use that reasonable care and caution which
an ordinarily prudent person would have used in the same situation? If not, then he is
guilty of negligence.13

In the case at bar, the lower court found Menor negligent when she allegedly informed
petitioner of the wrong day of departure. Petitioner’s testimony was accepted as
indubitable evidence of Menor’s alleged negligent act since respondent did not call
Menor to the witness stand to refute the allegation. The lower court applied the
presumption under Rule 131, Section 3 (e)14 of the Rules of Court that evidence
willfully suppressed would be adverse if produced and thus considered petitioner’s
uncontradicted testimony to be sufficient proof of her claim.

On the other hand, respondent has consistently denied that Menor was negligent and
maintains that petitioner’s assertion is belied by the evidence on record. The date and
time of departure was legibly written on the plane ticket and the travel papers were
delivered two days in advance precisely so that petitioner could prepare for the trip. It
performed all its obligations to enable petitioner to join the tour and exercised due
diligence in its dealings with the latter.

We agree with respondent.

Respondent’s failure to present Menor as witness to rebut petitioner’s testimony could
not give rise to an inference unfavorable to the former. Menor was already working in
France at the time of the filing of the complaint,15 thereby making it physically
impossible for respondent to present her as a witness. Then too, even if it were possible
for respondent to secure Menor’s testimony, the presumption under Rule 131, Section
3(e) would still not apply. The opportunity and possibility for obtaining Menor’s
testimony belonged to both parties, considering that Menor was not just respondent’s
employee, but also petitioner’s niece. It was thus error for the lower court to invoke the
presumption that respondent willfully suppressed evidence under Rule 131, Section
3(e). Said presumption would logically be inoperative if the evidence is not intentionally
omitted but is simply unavailable, or when the same could have been obtained by both
parties.16

In sum, we do not agree with the finding of the lower court that Menor’s negligence
concurred with the negligence of petitioner and resultantly caused damage to the latter.
Menor’s negligence was not sufficiently proved, considering that the only evidence
presented on this score was petitioner’s uncorroborated narration of the events. It is
well-settled that the party alleging a fact has the burden of proving it and a mere
allegation cannot take the place of evidence.17 If the plaintiff, upon whom rests the
burden of proving his cause of action, fails to show in a satisfactory manner facts upon
which he bases his claim, the defendant is under no obligation to prove his exception or
defense.18

Contrary to petitioner’s claim, the evidence on record shows that respondent exercised
due diligence in performing its obligations under the contract and followed standard
procedure in rendering its services to petitioner. As correctly observed by the lower
court, the plane ticket19 issued to petitioner clearly reflected the departure date and
time, contrary to petitioner’s contention. The travel documents, consisting of the tour
itinerary, vouchers and instructions, were likewise delivered to petitioner two days
prior to the trip. Respondent also properly booked petitioner for the tour, prepared the
necessary documents and procured the plane tickets. It arranged petitioner’s hotel
accommodation as well as food, land transfers and sightseeing excursions, in
accordance with its avowed undertaking.

Therefore, it is clear that respondent performed its prestation under the contract as
well as everything else that was essential to book petitioner for the tour. Had petitioner
exercised due diligence in the conduct of her affairs, there would have been no reason
for her to miss the flight. Needless to say, after the travel papers were delivered to
petitioner, it became incumbent upon her to take ordinary care of her concerns. This
undoubtedly would require that she at least read the documents in order to assure
herself of the important details regarding the trip.

The negligence of the obligor in the performance of the obligation renders him liable for
damages for the resulting loss suffered by the obligee. Fault or negligence of the obligor
consists in his failure to exercise due care and prudence in the performance of the
obligation as the nature of the obligation so demands.20 There is no fixed standard of
diligence applicable to each and every contractual obligation and each case must be
determined upon its particular facts. The degree of diligence required depends on the
circumstances of the specific obligation and whether one has been negligent is a
question of fact that is to be determined after taking into account the particulars of each
case.21 1âwphi1

The lower court declared that respondent’s employee was negligent. This factual
finding, however, is not supported by the evidence on record. While factual findings
below are generally conclusive upon this court, the rule is subject to certain exceptions,
as when the trial court overlooked, misunderstood, or misapplied some facts or
circumstances of weight and substance which will affect the result of the case.22

In the case at bar, the evidence on record shows that respondent company performed
its duty diligently and did not commit any contractual breach. Hence, petitioner cannot
recover and must bear her own damage.

WHEREFORE, the instant petition is DENIED for lack of merit. The decision of the Court
of Appeals in CA-G.R. CV No. 51932 is AFFIRMED. Accordingly, petitioner is ordered to
pay respondent the amount of P12,901.00 representing the balance of the price of the
British Pageant Package Tour, with legal interest thereon at the rate of 6% per annum,
to be computed from the time the counterclaim was filed until the finality of this
Decision. After this Decision becomes final and executory, the rate of 12% per annum
shall be imposed until the obligation is fully settled, this interim period being deemed to
be by then an equivalent to a forbearance of credit.23

SO ORDERED.

G.R. Nos. 103442-45 May 21, 1993

NATIONAL POWER CORPORATION, ET AL., petitioners,
vs.
THE COURT OF APPEALS, GAUDENCIO C. RAYO, ET AL., respondents.

DAVIDE, JR., J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court
urging this Court to set aside the 19 August 1991 consolidated Decision of the Court of
Appeals in CA.-G.R. CV Nos. 27290-931 which reversed the Decision of Branch 5 of the
then Court of First Instance (now Regional Trial Court) of Bulacan, and held petitioners
National Power Corporation (NPC) and Benjamin Chavez jointly and severally liable to
the private respondents for actual and moral damages, litigation expenses and
attorney's fees.

This present controversy traces its beginnings to four (4) separate complaints2 for
damages filed against the NPC and Benjamin Chavez before the trial court. The plaintiffs
therein, now private respondents, sought to recover actual and other damages for the
loss of lives and the destruction to property caused by the inundation of the town of
Norzagaray, Bulacan on 26-27 October 1978. The flooding was purportedly caused by
the negligent release by the defendants of water through the spillways of the Angat Dam
(Hydroelectric Plant). In said complaints, the plaintiffs alleged, inter alia, that: 1)
defendant NPC operated and maintained a multi-purpose hydroelectric plant in the
Angat River at Hilltop, Norzagaray, Bulacan; 2) defendant Benjamin Chavez was the
plant supervisor at the time of the incident in question; 3) despite the defendants'
knowledge, as early as 24 October 1978, of the impending entry of typhoon "Kading,"
they failed to exercise due diligence in monitoring the water level at the dam; 4) when
the said water level went beyond the maximum allowable limit at the height of the
typhoon, the defendants suddenly, negligently and recklessly opened three (3) of the
dam's spillways, thereby releasing a large amount of water which inundated the banks
of the Angat River; and 5) as a consequence, members of the household of the plaintiffs,
together with their animals, drowned, and their properties were washed away in the
evening of 26 October and the early hours of 27 October 1978.3

In their Answers, the defendants, now petitioners, alleged that: 1) the NPC exercised
due care, diligence and prudence in the operation and maintenance of the hydroelectric
plant; 2) the NPC exercised the diligence of a good father in the selection of its
employees; 3) written notices were sent to the different municipalities of Bulacan
warning the residents therein about the impending release of a large volume of water
with the onset of typhoon "Kading" and advise them to take the necessary precautions;
4) the water released during the typhoon was needed to prevent the collapse of the dam
and avoid greater damage to people and property; 5) in spite of the precautions
undertaken and the diligence exercised, they could still not contain or control the flood
that resulted and; 6) the damages incurred by the private respondents were caused by a
fortuitous event or force majeure and are in the nature and character of damnum
absque injuria. By way of special affirmative defense, the defendants averred that the
NPC cannot be sued because it performs a purely governmental function.4

Upon motion of the defendants, a preliminary hearing on the special defense was
conducted. As a result thereof, the trial court dismissed the complaints as against the
NPC on the ground that the provision of its charter allowing it to sue and be sued does
not contemplate actions based on tort. The parties do not, however, dispute the fact that
this Court overruled the trial court and ordered the reinstatement of the complaints as
against the NPC.5

Being closely interrelated, the cases were consolidated and trial thereafter ensued.

The lower court rendered its decision on 30 April 1990 dismissing the complaints "for
lack of sufficient and credible evidence."6 Consequently, the private respondents
seasonably appealed therefrom to the respondent Court which then docketed the cases
as CA-G.R. CV Nos. 27290-93.

In its joint decision promulgated on 19 August 1991, the Court of Appeals reversed the
appealed decision and awarded damages in favor of the private respondents. The
dispositive portion of the decision reads:

CONFORMABLY TO THE FOREGOING, the joint decision appealed from is hereby

REVERSED and SET ASIDE, and a new one is hereby rendered:
1. In Civil Case No. SM-950, ordering defendants-appellees to pay, jointly and severally,
plaintiffs-appellants, with legal interest from the date when this decision shall become
final and executory, the following:

A. Actual damages, to wit:

1) Gaudencio C. Rayo, Two Hundred Thirty One Thousand Two Hundred Sixty Pesos
(P231,260.00);

2) Bienvenido P. Pascual, Two Hundred Four Thousand Five Hundred Pesos

(P204.500.00);

3) Tomas Manuel, One Hundred Fifty Five Thousand Pesos (P155,000.00);

4) Pedro C. Bartolome, One Hundred Forty Seven Thousand Pesos (P147,000.00);.

5) Bernardino Cruz, One Hundred Forty Three Thousand Five Hundred Fifty Two Pesos
and Fifty Centavos (P143,552.50);

6) Jose Palad, Fifty Seven Thousand Five Hundred Pesos (P57,500.00);

7) Mariano S. Cruz, Forty Thousand Pesos (P40,000.00);

8) Lucio Fajardo, Twenty nine Thousand Eighty Pesos (P29,080.00); and

B. Litigation expenses of Ten Thousand Pesos (P10,000.00);

2. In Civil case No. SM-951, ordering defendants-appellees to pay jointly and severally,
plaintiff-appellant, with legal interest from the date when this decision shall have
become final and executory, the following :

A. Actual damages of Five Hundred Twenty Thousand Pesos (P520,000.00);.

B. Moral damages of five hundred Thousand Pesos (P500,000.00); and.

C. Litigation expenses of Ten Thousand Pesos (P10,000.00);.

3. In Civil Case No. SM-953, ordering defendants-appellees to pay, jointly and severally,
with legal interest from the date when this decision shall have become final and
executory;

A. Plaintiff-appellant Angel C. Torres:

1) Actual damages of One Hundred Ninety Nine Thousand One Hundred Twenty Pesos
(P199,120.00);

2) Moral Damages of One Hundred Fifty Thousand Pesos (P150,000.00);

B. Plaintiff-appellant Norberto Torres:

1) Actual damages of Fifty Thousand Pesos (P50,000.00);

2) Moral damages of Fifty Thousand Pesos (P50,000.00);

C. Plaintiff-appellant Rodelio Joaquin:

1) Actual damages of One Hundred Thousand Pesos (P100,000.00);

2) Moral damages of One Hundred Thousand Pesos (P100,000.00); and

D. Plaintifsf-appellants litigation expenses of Ten Thousand Pesos (P10,000.00);

4. In Civil case No. SM-1247, ordering defendants-appellees to pay, jointly and severally,
with legal interest from the date when this decision shall have become final and
executory :

A. Plaintiffs-appellants Presentacion Lorenzo and Clodualdo Lorenzo:

1) Actual damages of Two Hundred Fifty Six Thousand Six Hundred Pesos
(P256,600.00);

2) Moral damages of Fifty Thousand Pesos (P50,000.00);

B. Plaintiff-appellant Consolacion Guzman :

1) Actual damages of One Hundred forty Thousand Pesos (P140,000.00);

2) Moral damages of Fifty Thousand Pesos (P50,000.00);

C. Plaintiff-appellant Virginia Guzman :

1) Actual damages of Two Hundred Five Hundred Twenty Pesos (205,520.00); and

D. Plaintiffs-appellants litigation expenses of Ten Thousand Pesos (10,000.00).

In addition, in all the four (4) instant cases, ordering defendants-appellees to pay,
jointly and severally, plaintiffs-appellants attorney fees in an amount equivalent to 15%
of the total amount awarded.

No pronouncement as to costs.7

The foregoing judgment is based on the public respondent's conclusion that the
petitioners were guilty of:

. . . a patent gross and evident lack of foresight, imprudence and negligence . . . in the
management and operation of Angat Dam. The unholiness of the hour, the extent of the
opening of the spillways, And the magnitude of the water released, are all but products
of defendants-appellees' headlessness, slovenliness, and carelessness. The resulting
flash flood and inundation of even areas (sic) one (1) kilometer away from the Angat
River bank would have been avoided had defendants-appellees prepared the Angat Dam
by maintaining in the first place, a water elevation which would allow room for the
expected torrential rains.8

This conclusion, in turn, is anchored on its findings of fact, to wit:

As early as October 21, 1978, defendants-appellees knew of the impending onslaught of

and imminent danger posed by typhoon "Kading". For as alleged by defendants-
appellees themselves, the coming of said super typhoon was bannered by Bulletin
Today, a newspaper of national circulation, on October 25, 1978, as "Super Howler to hit
R.P." The next day, October 26, 1978, said typhoon once again merited a headline in said
newspaper as "Kading's Big Blow expected this afternoon" (Appellee's Brief, p. 6). Apart
from the newspapers, defendants-appellees learned of typhoon "Kading' through radio
announcements (Civil Case No. SM-950, TSN, Benjamin Chavez, December 4, 1984, pp.
7-9).

Defendants-appellees doubly knew that the Angat Dam can safely hold a normal
maximum headwater elevation of 217 meters (Appellee's brief, p. 12; Civil Case No. SM-
951, Exhibit "I-6"; Civil Case No. SM-953, Exhibit "J-6"; Civil Case No. SM-1247, Exhibit
"G-6").

Yet, despite such knowledge, defendants-appellees maintained a reservoir water

elevation even beyond its maximum and safe level, thereby giving no sufficient
allowance for the reservoir to contain the rain water that will inevitably be brought by
the coming typhoon.

On October 24, 1978, before typhoon "Kading" entered the Philippine area of
responsibility, water elevation ranged from 217.61 to 217.53, with very little opening of
the spillways, ranging from 1/2 to 1 meter. On October 25, 1978, when typhoon
"Kading" entered the Philippine area of responsibility, and public storm signal number
one was hoisted over Bulacan at 10:45 a.m., later raised to number two at 4:45 p.m., and
then to number three at 10:45 p.m., water elevation ranged from 217.47 to 217.57, with
very little opening of the spillways, ranging from 1/2 to 1 meter. On October 26, 1978,
when public storm signal number three remained hoisted over Bulacan, the water
elevation still remained at its maximum level of 217.00 to 218.00 with very little
opening of the spillways ranging from 1/2 to 2 meters, until at or about midnight, the
spillways were suddenly opened at 5 meters, then increasing swiftly to 8, 10, 12, 12.5,
13, 13.5, 14, 14.5 in the early morning hours of October 27, 1978, releasing water at the
rate of 4,500 cubic meters per second, more or less. On October 27, 1978, water
elevation remained at a range of 218.30 to 217.05 (Civil Case No. SM-950, Exhibits "D"
and series, "L", "M", "N", and "O" and Exhibits "3" and "4"; Civil Case No. SM-951,
Exhibits "H" and "H-1"; Civil Case No. SM-953, Exhibits "I" and "I-1"; Civil Case No. SM
1247, Exhibits "F" and "F-1").

xxx xxx xxx

From the mass of evidence extant in the record, We are convinced, and so hold that the
flash flood on October 27, 1978, was caused not by rain waters (sic), but by stored
waters (sic) suddenly and simultaneously released from the Angat Dam by defendants-
appellees, particularly from midnight of October 26, 1978 up to the morning hours of
October 27,
1978.9

The appellate court rejected the petitioners' defense that they had sent "early warning
written notices" to the towns of Norzagaray, Angat, Bustos, Plaridel, Baliwag and
Calumpit dated 24 October 1978 which read:

TO ALL CONCERN (sic):

Please be informed that at present our reservoir (dam) is full and that we have been
releasing water intermittently for the past several days.

With the coming of typhoon "Rita" (Kading) we expect to release greater (sic) volume of
water, if it pass (sic) over our place.

In view of this kindly advise people residing along Angat River to keep alert and stay in
safe places.

BENJAMIN L. CHAVEZ
Power Plant Superintendent10

because:

Said notice was delivered to the "towns of Bulacan" on October 26, 1978 by defendants-
appellees driver, Leonardo Nepomuceno (Civil Case No. SM-950, TSN, Benjamin Chavez,
December 4, 1984, pp. 7-11 and TSN, Leonardo Nepomuceno, March 7, 1985, pp. 10-
12).

Said notice is ineffectual, insufficient and inadequate for purposes of the opening of the
spillway gates at midnight of October 26, 1978 and on October 27, 1978. It did not
prepare or warn the persons so served, for the volume of water to be released, which
turned out to be of such magnitude, that residents near or along the Angat River, even
those one (1) kilometer away, should have been advised to evacuate. Said notice,
addressed "TO ALL CONCERN (sic)," was delivered to a policeman (Civil Case No. SM-
950, pp. 10-12 and Exhibit "2-A") for the municipality of Norzagaray. Said notice was
not thus addressed and delivered to the proper and responsible officials who could have
disseminated the warning to the residents directly affected. As for the municipality of
Sta. Maria, where plaintiffs-appellants in Civil Case No. SM-1246 reside, said notice does
not appear to have been served.11

Relying on Juan F. Nakpil & Sons vs. Court of Appeals,12 public respondent rejected the
petitioners' plea that the incident in question was caused by force majeure and that they
are, therefore, not liable to the private respondents for any kind of damage — such
damage being in the nature of damnum absque injuria.
The motion for reconsideration filed by the petitioners, as well as the motion to modify
judgment filed by the public respondents,13 were denied by the public respondent in its
Resolution of 27 December 1991.14

Petitioners thus filed the instant petition on 21 February 1992.

After the Comment to the petition was filed by the private respondents and the Reply
thereto was filed by the petitioners, We gave due course to the petition on 17 June 1992
and directed the parties to submit their respective Memoranda,15 which they
subsequently complied with.

The petitioners raised the following errors allegedly committed by the respondent
Court :

I. THE COURT OF APPEALS ERRED IN APPLYING THE RULING OF NAKPIL & SONS V.
COURT OF APPEALS AND HOLDING THAT PETITIONERS WERE GUILTY OF
NEGLIGENCE.

II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE WRITTEN NOTICES OF
WARNING ISSUED BY PETITIONERS WERE INSUFFICIENT.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE DAMAGE SUFFERED BY
PRIVATE RESPONDENTS WAS NOT DAMNUM ABSQUE INJURIA.

IV. THE COURT OF APPEALS ERRED IN NOT AWARDING THE COUNTERCLAIM OF

PETITIONERS FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION.16

These same errors were raised by herein petitioners in G.R. No. 96410, entitled National
Power Corporation, et al., vs. Court of Appeals, et al.,17 which this Court decided on 3
July 1992. The said case involved the very same incident subject of the instant petition.
In no uncertain terms, We declared therein that the proximate cause of the loss and
damage sustained by the plaintiffs therein — who were similarly situated as the private
respondents herein — was the negligence of the petitioners, and that the 24 October
1978 "early warning notice" supposedly sent to the affected municipalities, the same
notice involved in the case at bar, was insufficient. We thus cannot now rule otherwise
not only because such a decision binds this Court with respect to the cause of the
inundation of the town of Norzagaray, Bulacan on 26-27 October 1978 which resulted in
the loss of lives and the destruction to property in both cases, but also because of the
fact that on the basis of its meticulous analysis and evaluation of the evidence adduced
by the parties in the cases subject of CA-G.R. CV Nos. 27290-93, public respondent found
as conclusively established that indeed, the petitioners were guilty of "patent gross and
evident lack of foresight, imprudence and negligence in the management and operation
of Angat Dam," and that "the extent of the opening of the spillways, and the magnitude
of the water released, are all but products of defendants-appellees' headlessness,
slovenliness, and carelessness."18 Its findings and conclusions are biding upon Us, there
being no showing of the existence of any of the exceptions to the general rule that
findings of fact of the Court of Appeals are conclusive upon this Court.19 Elsewise
stated, the challenged decision can stand on its own merits independently of Our
decision in G.R. No. 96410. In any event, We reiterate here in Our pronouncement in the
latter case that Juan F. Nakpil & Sons vs. Court of Appeals20 is still good law as far as the
concurrent liability of an obligor in the case of force majeure is concerned. In the Nakpil
case, We held:

To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of
an obligation due to an "act of God," the following 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 unforseeable or unavoidable; (c) the event must be such as to render it
impossible for the debtor to fulfill his obligation in a moral manner; and (d) the debtor
must be free from any participation in, or aggravation of the injury to the creditor.
(Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA 423;
Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring
Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).

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 all 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 were, 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 that 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). 21

Accordingly, petitioners cannot be heard to invoke the act of God or force majeure to
escape liability for the loss or damage sustained by private respondents since they, the
petitioners, were guilty of negligence. The event then was not occasioned exclusively by
an act of God or force majeure; a human factor — negligence or imprudence — had
intervened. The effect then of the force majeure in question may be deemed to have,
even if only partly, resulted from the participation of man. Thus, the whole occurrence
was thereby humanized, as it were, and removed from the laws applicable to acts of
God.

WHEREFORE, for want of merit, the instant petition is hereby DISMISSED and the
Consolidated Decision of the Court of Appeals in CA-G.R. CV Nos. 27290-93 is
AFFIRMED, with costs against the petitioners.

SO ORDERED.
3. Remedies in case of breach
a. Action for performance
G.R. No. 117190 January 2, 1997

JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING
AND GENERAL MERCHANDISING, petitioner,
vs.
COURT OF APPEALS and VICENTE HERCE JR., respondents.

FACTS:
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.

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. 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." 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."

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.

ISSUE:
whether petitioner is under obligation to reconstruct the windmill after it collapsed.

RULING:
Yes, petitioner is ordered to "reconstruct subject defective windmill system, in
accordance with the one-year guaranty" and to complete the same within three (3)
months from the finality of this decision but 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.

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.

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
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," 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." 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 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, 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." 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." 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.

i. Accion subrogatoria (Art. 1177)

ii. Accion pauliana
[G.R. No. 144169. March 28, 2001.]
KHE HONG CHENG, alias FELIX KHE, SANDRA JOY KHE and RAY STEVEN KHE,
Petitioners, v. COURT OF APPEALS, HON. TEOFILO GUADIZ, RTC 147, MAKATI CITY and
PHILAM INSURANCE CO., INC., Respondents.

The original complaint that is the subject matter of this case is an accion pauliana — an
action filed by Philam Insurance Company, Inc. (respondent Philam) to rescind or annul
the donations made by petitioner Khe Hong Cheng allegedly in fraud of creditors.

ISSUE:
Whether or not the action to rescind the donations has already prescribed.
While the first paragraph of Article 1389 of the Civil Code states: "The action to claim
rescission must be commenced within four years . . ." the question is, from which point
or event does this prescriptive period commence to run?

FACTS:
Petitioner Khe Hong Cheng, alias Felix Khe, is the owner of Butuan Shipping Lines. It
appears that on or about October 4, 1985, the Philippine Agricultural Trading
Corporation shipped on board the vessel M/V PRINCE ERIC, owned by petitioner Khe
Hong Cheng, 3,400 bags of copra at Masbate, Masbate, for delivery to Dipolog City,
Zamboanga del Norte. The said shipment of copra was covered by a marine insurance
policy issued by American Home Insurance Company (respondent Philam’s assured).
M/V PRINCE ERIC, however, sank somewhere between Negros Island and Northeastern
Mindanao, resulting in the total loss of the shipment. Because of the loss, the insurer,
American Home, paid the amount of P354,000.00 (the value of the copra) to the
consignee.

Having been subrogated into the rights of the consignee, American Home instituted Civil
Case No. 13357 in the Regional Trial Court (RTC) of Makati, Branch 147 to recover the
money paid to the consignee, based on breach of contract of carriage. While the case
was still pending, or on December 20, 1989, petitioner Khe Hong Cheng executed deeds
of donations of parcels of land in favor of his children, herein co-petitioners Sandra Joy
and Ray Steven.
The trial court rendered judgment against petitioner Khe Hong Cheng in Civil Case No.
13357 on December 29, 1993, four years after the donations were made and the TCTs
were registered in the donees’ names.
After the said decision became final and executory, a writ of execution was forthwith,
issued on September 14, 1995. Said writ of execution, however, was not served. An alias
writ of execution was, thereafter, applied for and granted in October 1996. Despite
earnest efforts, the sheriff found no property under the name of Butuan Shipping Lines
and/or petitioner Khe Hong Cheng to levy or garnish for the satisfaction of the trial
court’s decision. When the sheriff, accompanied by counsel of respondent Philam, went
to Butuan City on January 17, 1997, to enforce the alias writ of execution, they
discovered that petitioner Khe Hong Cheng no longer had any property and that he had
conveyed the subject properties to his children.

On February 25, 1997, respondent Philam filed a complaint with the Regional Trial
Court of Makati City, Branch 147, for the rescission of the deeds of donation executed by
petitioner Khe Hong Cheng in favor of his children and for the nullification of their titles
(Civil Case No. 97-415). Respondent Philam alleged, inter alia, that petitioner Khe Hong
Cheng executed the aforesaid deeds in fraud of his creditors, including respondent
Philam.

Petitioners subsequently filed their answer to the complaint a quo. They moved for its
dismissal on the ground that the action had already prescribed. They posited that the
registration of the deeds of donation on December 27, 1989 constituted constructive
notice and since the complaint a quo was filed only on February 25, 1997, or more than
four (4) years after said registration, the action was already barred by prescription.
Acting thereon, the trial court denied the motion to dismiss. It held that respondent
Philam’s complaint had not yet prescribed. According to the trial court, the prescriptive
period began to run only from December 29, 1993, the date of the decision of the trial
court in Civil Case No. 13357.

On appeal by petitioners, the CA affirmed the trial court’s decision in favor of

respondent Philam. The CA declared that the action to rescind the donations had not yet
prescribed. Citing Articles 1381 and 1383 of the Civil Code, the CA basically ruled that
the four year period to institute the action for rescission began to run only in January
1997, and not when the decision in the civil case became final and executory on
December 29, 1993. The CA reckoned the accrual of respondent Philam’s cause of action
on January 1997, the time when it first learned that the judgment award could not be
satisfied because the judgment creditor, petitioner Khe Hong Cheng, had no more
properties in his name. Prior thereto, respondent Philam had not yet exhausted all legal
means for the satisfaction of the decision in its favor, as prescribed under Article 1383
of the Civil Code. 5

The Court of Appeals thus denied the petition for certiorari filed before it, and held that
the trial court did not commit any error in denying petitioners’ motion to dismiss. Their
motion for reconsideration was likewise dismissed in the appellate court’s resolution
dated July 11, 2000.

Petitioners now assail the aforesaid decision and resolution of the CA alleging
that:chanrob1es virtual 1aw library

I. PUBLIC RESPONDENT GRAVELY ERRED AND ACTED IN GRAVE ABUSE OF

DISCRETION WHEN IT DENIED THE PETITION TO DISMISS THE CASE BASED ON THE
GROUND OF PRESCRIPTION.

II. PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT

PRESCRIPTION BEGINS TO RUN WHEN IN JANUARY 1997 THE SHERIFF WENT TO
BUTUAN CITY IN SEARCH OF PROPERTIES OF PETITIONER FELIX KHE CHENG TO
SATISFY THE JUDGMENT IN CIVIL CASE NO. 13357 AND FOUND OUT THAT AS EARLY
AS DEC. 20, 1989, PETITIONERS KHE CHENG EXECUTED THE DEEDS OF DONATIONS
IN FAVOR OF HIS CO-PETITIONERS THAT THE ACTION FOR RESCISSION ACCRUED
BECAUSE PRESCRIPTION BEGAN TO RUN WHEN THESE DONATIONS WERE
REGISTERED WITH THE REGISTER OF DEEDS IN DECEMBER 1989, AND WHEN THE
COMPLAINT WAS FILED ONLY IN FEBRUARY 1997, MORE THAN FOUR YEARS HAVE
ALREADY LAPSED AND THEREFORE, IT HAS ALREADY PRESCRIBED.

Essentially, the issue for resolution posed by petitioners is this: When did the four (4)
year prescriptive period as provided for in Article 1389 of the Civil Code for respondent
Philam to file its action for rescission of the subject deeds of donation commence to run?

The petition is without merit.

Article 1389 of the Civil Code simply provides that, "The action to claim rescission must
be commenced within four years." Since this provision of law is silent as to when the
prescriptive period would commence, the general rule, i.e, from the moment the cause
of action accrues, therefore, applies. Article 1150 of the Civil Code is particularly
instructive:

ARTICLE 1150. The time for prescription for all kinds of actions, when there is no
special provision which ordains otherwise, shall be counted from the day they may be
brought.

Indeed, this Court enunciated the principle that it is the legal possibility of bringing the
action which determines the starting point for the computation of the prescriptive
period for the action. 7 Article 1383 of the Civil Code provides as follows:

ARTICLE 1383. An 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.

It is thus apparent that an action to rescind or an accion pauliana must be of last resort,
availed of only after all other legal remedies have been exhausted and have been proven
futile. For an accion pauliana to accrue, the following requisites must
concur:chanrob1es virtual 1aw library

1) That the plaintiff asking for rescission, has a credit prior to the alienation, although
demandable later; 2) That the debtor has made a subsequent contract conveying a
patrimonial benefit to a third person; 3) That the creditor has no other legal remedy to
satisfy his claim, but would benefit by rescission of the conveyance to the third person;
4) That the act being impugned is fraudulent; 5) That the third person who received the
property conveyed, if by onerous title, has been an accomplice in the fraud. 8 (Emphasis
ours)

We quote with approval the following disquisition of the CA on the matter:chanrob1es

virtual 1aw library

An accion pauliana accrues only when the creditor discovers that he has no other legal
remedy for the satisfaction of his claim against the debtor other than an accion pauliana.
The accion pauliana is an action of a last resort. For as long as the creditor still has a
remedy at law for the enforcement of his claim against the debtor, the creditor will not
have any cause of action against the creditor for rescission of the contracts entered into
by and between the debtor and another person or persons. Indeed, an accion pauliana
presupposes a judgment and the issuance by the trial court of a writ of execution for the
satisfaction of the judgment and the failure of the Sheriff to enforce and satisfy the
judgment of the court. It presupposes that the creditor has exhausted the property of
the debtor. The date of the decision of the trial court against the debtor is immaterial.
What is important is that the credit of the plaintiff antedates that of the fraudulent
alienation by the debtor of his property. After all, the decision of the trial court against
the debtor will retroact to the time when the debtor became indebted to the creditor. 9

Petitioners, however, maintain that the cause of action of respondent Philam against
them for the rescission of the deeds of donation accrued as early as December 27, 1989,
when petitioner Khe Hong Cheng registered the subject conveyances with the Register
of Deeds. Respondent Philam allegedly had constructive knowledge of the execution of
said deeds under Section 52 of Presidential Decree No. 1529, quoted infra, as follows:

SECTION 52. Constructive knowledge upon registration. — Every conveyance,

mortgage, lease, lien, attachment, order, judgment, instrument or entry affecting
registered land shall, if registered, filed or entered in the Office of the Register of Deeds
for the province or city where the land to which it relates lies, be constructive notice to
all persons from the time of such registering, filing, or entering.

Petitioners argument that the Civil Code must yield to the Mortgage and Registration
Laws is misplaced, for in no way does this imply that the specific provisions of the
former may be all together ignored. To count the four year prescriptive period to
rescind an allegedly fraudulent contract from the date of registration of the conveyance
with the Register of Deeds, as alleged by the petitioners, would run counter to Article
1383 of the Civil Code as well as settled jurisprudence. It would likewise violate the
third requisite to file an action for rescission of an allegedly fraudulent conveyance of
property, i.e., the creditor has no other legal remedy to satisfy his claim.

An accion pauliana thus presupposes the following: 1) A judgment; 2) the issuance by

the trial court of a writ of execution for the satisfaction of the judgment, and 3) the
failure of the sheriff to enforce and satisfy the judgment of the court. It requires that the
creditor has exhausted the property of the debtor. The date of the decision of the trial
court is immaterial. What is important is that the credit of the plaintiff antedates that of
the fraudulent alienation by the debtor of his property. After all, the decision of the trial
court against the debtor will retroact to the time when the debtor became indebted to
the creditor.

Tolentino, a noted civilist, explained:

". . . [T]herefore, credits with suspensive term or condition are excluded, because the
accion pauliana presupposes a judgment and unsatisfied execution, which cannot exist
when the debt is not yet demandable at the time the rescissory action is brought.
Rescission is a subsidiary action, which presupposes that the creditor has exhausted the
property of the debtor which is impossible in credits which cannot be enforced because
of a suspensive term or condition.

While it is necessary that the credit of the plaintiff in the accion pauliana must be prior
to the fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if
the judgment be subsequent to the alienation, it is merely declaratory with retroactive
effect to the date when the credit was constituted."

These principles were reiterated by the Court when it explained the requisites of an
accion pauliana in greater detail, to wit:

"The following successive measures must be taken by a creditor before he may bring an
action for rescission of an allegedly fraudulent sale: (1) exhaust the properties of the
debtor through levying by attachment and execution upon all the property of the
debtor, except such as are exempt from execution; (2) exercise all the rights and actions
of the debtor, save those personal to him (accion subrogatoria); and (3) seek rescission
of the contracts executed by the debtor in fraud of their rights (accion pauliana).
Without availing of the first and second remedies, i.e., exhausting the properties of the
debtor or subrogating themselves in Francisco Bareg’s transmissible rights and actions.
petitioners simply undertook the third measure and filed an action for annulment of
sale. This cannot be done." 11 (Emphasis ours)

In the same case, the Court also quoted the rationale of the CA when it upheld the
dismissal of the accion pauliana on the basis of lack of cause of
action:jgc:chanrobles.com.ph

"In this case, plaintiff’s appellants had not even commenced an action against
defendants-appellees Bareng for the collection of the alleged indebtedness. Plaintiffs-
appellants had not even tried to exhaust the property of defendants-appellees Bareng.
Plaintiffs-appellants, in seeking the rescission of the contracts of sale entered into
between defendants-appellees, failed to show and prove that defendants-appellees
Bareng had no other property, either at the time of the sale or at the time this action
was filed, out of which they could have collected this (sic) debts." (Emphasis ours)

Even if respondent Philam was aware, as of December 27, 1989, that petitioner Khe
Hong Cheng had executed the deeds of donation in favor of his children, the complaint
against Butuan Shipping Lines and/or petitioner Khe Hong Cheng was still pending
before the trial court. Respondent Philam had no inkling, at the time, that the trial
court’s judgment would be in its favor and further, that such judgment would not be
satisfied due to the deeds of donation executed by petitioner Khe Hong Cheng during
the pendency of the case. Had respondent Philam filed his complaint on December 27,
1989, such complaint would have been dismissed for being premature. Not only were
all other legal remedies for the enforcement of respondent Philam’s claims not yet
exhausted at the time the deeds of donation were executed and registered. Respondent
Philam would also not have been able to prove then that petitioner Khe Hong Cheng had
no more property other than those covered by the subject deeds to satisfy a favorable
judgment by the trial court.chanrob1es virtua1 1aw 1ibrary

It bears stressing that petitioner Khe Hong Cheng even expressly declared and
represented that he had reserved to himself property sufficient to answer for his debts
contracted prior to this date:

"That the DONOR further states, for the same purpose as expressed in the next
preceding paragraph, that this donation is not made with the object of defrauding his
creditors having reserved to himself property sufficient to answer his debts contracted
prior to this date." 12

As mentioned earlier, respondent Philam only learned about the unlawful conveyances
made by petitioner Khe Hong Cheng in January 1997 when its counsel accompanied the
sheriff to Butuan City to attach the properties of petitioner Khe Hong Cheng. There they
found that he no longer had any properties in his name. It was only then that
respondent Philam’s action for rescission of the deeds of donation accrued because then
it could be said that respondent Philam had exhausted all legal means to satisfy the trial
court’s judgment in its favor. Since respondent Philam filed its complaint for accion
pauliana against petitioners on February 25, 1997, barely a month from its discovery
that petitioner Khe Hong Cheng had no other property to satisfy the judgment award
against him, its action for rescission of the subject deeds clearly had not yet prescribed.

A final point. Petitioners now belatedly raise on appeal the defense of improper venue
claiming that respondent Philam’s complaint is a real action and should have been filed
with the RTC of Butuan City since the property subject matter of the donations are
located therein. Suffice it to say that petitioners are already deemed to have waived
their right to question the venue of the instant case. Improper venue should be objected
to as follows 1) in a motion to dismiss filed within the time but before the filing of the
answer; 13 or 2) in the answer as an affirmative defense over which, in the discretion of
the court, a preliminary hearing may be held as if a motion to dismiss had been filed. 14
Having failed to either file a motion to dismiss on the ground of improper of venue or
include the same as an affirmative defense in their answer, petitioners are deemed to
have their right to object to improper venue.

WHEREFORE, premises considered, the petition is hereby DENIED for lack of merit.

SO ORDERED.

G.R. No. 134685 November 19, 1999

MARIA ANTONIA SIGUAN, petitioner,
vs.
ROSA LIM, LINDE LIM, INGRID LIM and NEIL LIM, respondents.

DAVIDE, JR., C.J.:

May the Deed of Donation executed by respondent Rosa Lim (hereafter LIM) in favor of
her children be rescinded for being in fraud of her alleged creditor, petitioner Maria
Antonia Siguan? This is the pivotal issue to be resolved in this petition for review on
certiorari under Rule 45 of the Revised Rules of Court.

The relevant facts, as borne out of the records, are as follows:

On 25 and 26 August 1990, LIM issued two Metrobank checks in the sums of P300,000
and P241,668, respectively, payable to "cash." Upon presentment by petitioner with the
drawee bank, the checks were dishonored for the reason "account closed." Demands to
make good the checks proved futile. As a consequence, a criminal case for violation of
Batas Pambansa Blg. 22, docketed as Criminal Cases Nos. 22127-28, were filed by
petitioner against LIM with Branch 23 of the Regional Trial Court (RTC) of Cebu City. In
its decision 1 dated 29 December 1992, the court a quo convicted LIM as charged. The
case is pending before this Court for review and docketed as G.R. No. 134685.

It also appears that on 31 July 1990 LIM was convicted of estafa by the RTC of Quezon
City in Criminal Case No. Q-89-2216 2 filed by a certain Victoria Suarez. This decision
was affirmed by the Court of Appeals. On appeal, however, this Court, in a decision 3
promulgated on 7 April 1997, acquitted LIM but held her civilly liable in the amount of
P169,000, as actual damages, plus legal interest.

Meanwhile, on 2 July 1991, a Deed of Donation 4 conveying the following parcels of land
and purportedly executed by LIM on 10 August 1989 in favor of her children, Linde,
Ingrid and Neil, was registered with the Office of the Register of Deeds of Cebu City:

(1) a parcel of land situated at Barrio Lahug, Cebu City, containing an area of 563 sq. m.
and covered by TCT No. 93433;

(2) a parcel of land situated at Barrio Lahug, Cebu City, containing an area of 600 sq. m.
and covered by TCT No. 93434;

(3) a parcel of land situated at Cebu City containing an area of 368 sq. m. and covered by
TCT No. 87019; and

(4) a parcel of land situated at Cebu City, Cebu containing an area of 511 sq. m. and
covered by TCT No. 87020.

New transfer certificates of title were thereafter issued in the names of the donees. 5

On 23 June 1993, petitioner filed an accion pauliana against LIM and her children before
Branch 18 of the RTC of Cebu City to rescind the questioned Deed of Donation and to
declare as null and void the new transfer certificates of title issued for the lots covered
by the questioned Deed. The complaint was docketed as Civil Case No. CEB-14181.
Petitioner claimed therein that sometime in July 1991, LIM, through a Deed of Donation,
fraudulently transferred all her real property to her children in bad faith and in fraud of
creditors, including her; that LIM conspired and confederated with her children in
antedating the questioned Deed of Donation, to petitioner's and other creditors'
prejudice; and that LIM, at the time of the fraudulent conveyance, left no sufficient
properties to pay her obligations.

On the other hand, LIM denied any liability to petitioner. She claimed that her
convictions in Criminal Cases Nos. 22127-28 were erroneous, which was the reason
why she appealed said decision to the Court of Appeals. As regards the questioned Deed
of Donation, she maintained that it was not antedated but was made in good faith at a
time when she had sufficient property. Finally, she alleged that the Deed of Donation
was registered only on 2 July 1991 because she was seriously ill.

In its decision of 31 December 1994, 6 the trial court ordered the rescission of the
questioned deed of donation; (2) declared null and void the transfer certificates of title
issued in the names of private respondents Linde, Ingrid and Neil Lim; (3) ordered the
Register of Deeds of Cebu City to cancel said titles and to reinstate the previous titles in
the name of Rosa Lim; and (4) directed the LIMs to pay the petitioner, jointly and
severally, the sum of P10,000 as moral damages; P10,000 as attorney's fees; and P5,000
as expenses of litigation.

On appeal, the Court of Appeals, in a decision 7 promulgated on 20 February 1998,

reversed the decision of the trial court and dismissed petitioner's accion pauliana. It
held that two of the requisites for filing an accion pauliana were absent, namely, (1)
there must be a credit existing prior to the celebration of the contract; and (2) there
must be a fraud, or at least the intent to commit fraud, to the prejudice of the creditor
seeking the rescission.

According to the Court of Appeals, the Deed of Donation, which was executed and
acknowledged before a notary public, appears on its face to have been executed on 10
August 1989. Under Section 23 of Rule 132 of the Rules of Court, the questioned Deed,
being a public document, is evidence of the fact which gave rise to its execution and of
the date thereof. No antedating of the Deed of Donation was made, there being no
convincing evidence on record to indicate that the notary public and the parties did
antedate it. Since LIM's indebtedness to petitioner was incurred in August 1990, or a
year after the execution of the Deed of Donation, the first requirement for accion
pauliana was not met.

Anent petitioner's contention that assuming that the Deed of Donation was not
antedated it was nevertheless in fraud of creditors because Victoria Suarez became
LIM's creditor on 8 October 1987, the Court of Appeals found the same untenable, for
the rule is basic that the fraud must prejudice the creditor seeking the rescission.

Her motion for reconsideration having been denied, petitioner came to this Court and
submits the following issue:

WHETHER OR NOT THE DEED OF DONATION, EXH. 1, WAS ENTERED INTO IN FRAUD
OF [THE] CREDITORS OF RESPONDENT ROSA [LIM].

Petitioner argues that the finding of the Court of Appeals that the Deed of Donation was
not in fraud of creditors is contrary to well-settled jurisprudence laid down by this
Court as early as 1912 in the case of Oria v. McMicking, 8 which enumerated the various
circumstances indicating the existence of fraud in a transaction. She reiterates her
arguments below, and adds that another fact found by the trial court and admitted by
the parties but untouched by the Court of Appeals is the existence of a prior final
judgment against LIM in Criminal Case No. Q-89-2216 declaring Victoria Suarez as LIM's
judgment creditor before the execution of the Deed of Donation.

Petitioner further argues that the Court of Appeals incorrectly applied or interpreted
Section 23, 9 Rule 132 of the Rules of Court, in holding that "being a public document,
the said deed of donation is evidence of the fact which gave rise to its execution and of
the date of the latter." Said provision should be read with Section 30 10 of the same Rule
which provides that notarial documents are prima facie evidence of their execution, not
"of the facts which gave rise to their execution and of the date of the latter."

Finally, petitioner avers that the Court of Appeals overlooked Article 759 of the New
Civil Code, which provides: "The donation is always presumed to be in fraud of creditors
when at the time of the execution thereof the donor did not reserve sufficient property
to pay his debts prior to the donation." In this case, LIM made no reservation of
sufficient property to pay her creditors prior to the execution of the Deed of Donation.
On the other hand, respondents argue that (a) having agreed on the law and requisites
of accion pauliana, petitioner cannot take shelter under a different law; (b) petitioner
cannot invoke the credit of Victoria Suarez, who is not a party to this case, to support
her accion pauliana; (c) the Court of Appeals correctly applied or interpreted Section 23
of Rule 132 of the Rules of Court; (d) petitioner failed to present convincing evidence
that the Deed of Donation was antedated and executed in fraud of petitioner; and (e) the
Court of Appeals correctly struck down the awards of damages, attorney's fees and
expenses of litigation because there is no factual basis therefor in the body of the trial
court's decision.

The primordial issue for resolution is whether the questioned Deed of Donation was
made in fraud of petitioner and, therefore, rescissible. A corollary issue is whether the
awards of damages, attorney's fees and expenses of litigation are proper.

We resolve these issues in the negative.

The rule is well settled that the jurisdiction of this Court in cases brought before it from
the Court of Appeals via Rule 45 of the Rules of Court is limited to reviewing errors of
law. Findings of fact of the latter court are conclusive, except in a number of instances.
11 In the case at bar, one of the recognized exceptions warranting a review by this Court
of the factual findings of the Court of Appeals exists, to wit, the factual findings and
conclusions of the lower court and Court of Appeals are conflicting, especially on the
issue of whether the Deed of Donation in question was in fraud of creditors.

Art. 1381 of the Civil Code enumerates the contracts which are rescissible, and among
them are "those contracts undertaken in fraud of creditors when the latter cannot in
any other manner collect the claims due them."

The action to rescind contracts in fraud of creditors is known as accion pauliana. For
this action to prosper, the following requisites must be present: (1) the plaintiff asking
for rescission has a credit prior to the alienation, 12 although demandable later; (2) the
debtor has made a subsequent contract conveying a patrimonial benefit to a third
person; (3) the creditor has no other legal remedy to satisfy his claim; 13 (4) the act
being impugned is fraudulent; 14 (5) the third person who received the property
conveyed, if it is by onerous title, has been an accomplice in the fraud. 15

The general rule is that rescission requires the existence of creditors at the time of the
alleged fraudulent alienation, and this must be proved as one of the bases of the judicial
pronouncement setting aside the contract. 16 Without any prior existing debt, there can
neither be injury nor fraud. While it is necessary that the credit of the plaintiff in the
accion pauliana must exist prior to the fraudulent alienation, the date of the judgment
enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is
merely declaratory, with retroactive effect to the date when the credit was constituted.
17

In the instant case, the alleged debt of LIM in favor of petitioner was incurred in August
1990, while the deed of donation was purportedly executed on 10 August 1989.
We are not convinced with the allegation of the petitioner that the questioned deed was
antedated to make it appear that it was made prior to petitioner's credit. Notably, that
deed is a public document, it having been acknowledged before a notary public. 18 As
such, it is evidence of the fact which gave rise to its execution and of its date, pursuant
to Section 23, Rule 132 of the Rules of Court.

Petitioner's contention that the public documents referred to in said Section 23 are only
those entries in public records made in the performance of a duty by a public officer
does not hold water. Section 23 reads:

Sec. 23. Public documents as evidence. — Documents consisting of entries in public

records made in the performance of a duty by a public officer are prima facie evidence
of the facts therein stated. All other public documents are evidence, even against a third
person, of the fact which gave rise to their execution and of the date of the latter.
(Emphasis supplied).

The phrase "all other public documents" in the second sentence of Section 23 means
those public documents other than the entries in public records made in the
performance of a duty by a public officer. And these include notarial documents, like the
subject deed of donation. Section 19, Rule 132 of the Rules of Court provides:

Sec. 19. Classes of docum/ents. — For the purpose of their presentation in evidence,
documents are either public or private.

Public documents are:

(a) . . .

(b) Documents acknowledged before a notary public except last wills and
testaments. . . .

It bears repeating that notarial documents, except last wills and testaments, are public
documents and are evidence of the facts that gave rise to their execution and of their
date.

In the present case, the fact that the questioned Deed was registered only on 2 July 1991
is not enough to overcome the presumption as to the truthfulness of the statement of
the date in the questioned deed, which is 10 August 1989. Petitioner's claim against LIM
was constituted only in August 1990, or a year after the questioned alienation. Thus, the
first two requisites for the rescission of contracts are absent.

Even assuming arguendo that petitioner became a creditor of LIM prior to the
celebration of the contract of donation, still her action for rescission would not fare well
because the third requisite was not met. Under Article 1381 of the Civil Code, contracts
entered into in fraud of creditors may be rescinded only when the creditors cannot in
any manner collect the claims due them. Also, Article 1383 of the same Code provides
that the action for rescission is but a subsidiary remedy which cannot be instituted
except when the party suffering damage has no other legal means to obtain reparation
for the same. The term "subsidiary remedy" has been defined as "the exhaustion of all
remedies by the prejudiced creditor to collect claims due him before rescission is
resorted to." 19 It is, therefore, "essential that the party asking for rescission prove that
he has exhausted all other legal means to obtain satisfaction of his claim. 20 Petitioner
neither alleged nor proved that she did so. On this score, her action for the rescission of
the questioned deed is not maintainable even if the fraud charged actually did exist." 21

The fourth requisite for an accion pauliana to prosper is not present either.

Art. 1387, first paragraph, of the Civil Code provides: "All contracts by virtue of which
the debtor alienates property by gratuitous title are presumed to have been entered
into in fraud of creditors when the donor did not reserve sufficient property to pay all
debts contracted before the donation. Likewise, Article 759 of the same Code, second
paragraph, states that the donation is always presumed to be in fraud of creditors when
at the time thereof the donor did not reserve sufficient property to pay his debts prior
to the donation.

For this presumption of fraud to apply, it must be established that the donor did not
leave adequate properties which creditors might have recourse for the collection of
their credits existing before the execution of the donation.

As earlier discussed, petitioner's alleged credit existed only a year after the deed of
donation was executed. She cannot, therefore, be said to have been prejudiced or
defrauded by such alienation. Besides, the evidence disclose that as of 10 August 1989,
when the deed of donation was executed, LIM had the following properties:

(1) A parcel of land containing an area of 220 square meters, together with the house
constructed thereon, situated in Sto. Niño Village, Mandaue City, Cebu, registered in the
name of Rosa Lim and covered by TCT No. 19706; 22

(2) A parcel of land located in Benros Subdivision, Lawa-an, Talisay, Cebu; 23

(3) A parcel of land containing an area of 2.152 hectares, with coconut trees thereon,
situated at Hindag-an, St. Bernard, Southern Leyte, and covered by Tax Declaration No.
13572. 24

(4) A parcel of land containing an area of 3.6 hectares, with coconut trees thereon,
situated at Hindag-an, St. Bernard, Southern Leyte, and covered by Tax Declaration No.
13571. 25

During her cross-examination, LIM declared that the house and lot mentioned in no. 1
was bought by her in the amount of about P800,000 to P900,000. 26 Thus:

ATTY. FLORIDO:

Q These properties at the Sto. Niño Village, how much did you acquire this property?

A Including the residential house P800,000.00 to P900,000.00.

Q How about the lot which includes the house. How much was the price in the Deed of
Sale of the house and lot at Sto. Niño Violage [sic]?

A I forgot.

Q How much did you pay for it?

A That is P800,000.00 to P900,000.00.

Petitioner did not adduce any evidence that the price of said property was lower. Anent
the property in no. 2, LIM testified that she sold it in 1990. 27 As to the properties in
nos. 3 and 4, the total market value stated in the tax declarations dated 23 November
1993 was P56,871.60. Aside from these tax declarations, petitioner did not present
evidence that would indicate the actual market value of said properties. It was not,
therefore, sufficiently established that the properties left behind by LIM were not
sufficient to cover her debts existing before the donation was made. Hence, the
presumption of fraud will not come into play.

Nevertheless, a creditor need not depend solely upon the presumption laid down in
Articles 759 and 1387 of the Civil Code. Under the third paragraph of Article 1387, the
design to defraud may be proved in any other manner recognized by the law of
evidence. Thus in the consideration of whether certain transfers are fraudulent, the
Court has laid down specific rules by which the character of the transaction may be
determined. The following have been denominated by the Court as badges of fraud:

(1) The fact that the consideration of the conveyance is fictitious or is inadequate;

(2) A transfer made by a debtor after suit has begun and while it is pending against him;

(3) A sale upon credit by an insolvent debtor;

(4) Evidence of large indebtedness or complete insolvency;

(5) The transfer of all or nearly all of his property by a debtor, especially when he is
insolvent or greatly embarrassed financially;

(6) The fact that the transfer is made between father and son, when there are present
other of the above circumstances; and

(7) The failure of the vendee to take exclusive possession of all the property. 28

The above enumeration, however, is not an exclusive list. The circumstances evidencing
fraud are as varied as the men who perpetrate the fraud in each case. This Court has
therefore declined to define it, reserving the liberty to deal with it under whatever form
it may present itself. 29

Petitioner failed to discharge the burden of proving any of the circumstances

enumerated above or any other circumstance from which fraud can be inferred.
Accordingly, since the four requirements for the rescission of a gratuitous contract are
not present in this case, petitioner's action must fail.

In her further attempt to support her action for rescission, petitioner brings to our
attention the 31 July 1990 Decision 30 of the RTC of Quezon City, Branch 92, in Criminal
Case No. Q-89-2216. LIM was therein held guilty of estafa and was ordered to pay
complainant Victoria Suarez the sum of P169,000 for the obligation LIM incurred on 8
October 1987. This decision was affirmed by the Court of Appeals. Upon appeal,
however, this Court acquitted LIM of estafa but held her civilly liable for P169,000 as
actual damages.

It should be noted that the complainant in that case, Victoria Suarez, albeit a creditor
prior to the questioned alienation, is not a party to this accion pauliana. Article 1384 of
the Civil Code provides that rescission shall only be to the extent necessary to cover the
damages caused. Under this Article, only the creditor who brought the action for
rescission can benefit from the rescission; those who are strangers to the action cannot
benefit from its effects. 31 And the revocation is only to the extent of the plaintiff
creditor's unsatisfied credit; as to the excess, the alienation is maintained. 32 Thus,
petitioner cannot invoke the credit of Suarez to justify rescission of the subject deed of
donation.

Now on the propriety of the trial court's awards of moral damages, attorney's fees and
expenses of litigation in favor of the petitioner. We have pored over the records and
found no factual or legal basis therefor. The trial court made these awards in the
dispositive portion of its decision without stating, however, any justification for the
same in the ratio decidendi. Hence, the Court of Appeals correctly deleted these awards
for want of basis in fact, law or equity.

WHEREFORE, the petition is hereby DISMISSED and the challenged decision of the
Court of Appeals in CA-G.R. CV. No. 50091 is AFFIRMED in toto.

No pronouncement as to costs.

SO ORDERED.

4. Extinguishment of Liability in case of Breach due to fortuitous event (Art. 1174)

a. Concept of fortuitous event
b. Requisites

G.R. No. L-47851 October 3, 1986

JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners,
vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS,
and the PHILIPPINE BAR ASSOCIATION, respondents.

PARAS, J.:
These are petitions for review on certiorari of the November 28, 1977 decision of the
Court of Appeals in CA-G.R. No. 51771-R modifying the decision of the Court of First
Instance of Manila, Branch V, in Civil Case No. 74958 dated September 21, 1971 as
modified by the Order of the lower court dated December 8, 1971. The Court of Appeals
in modifying the decision of the lower court included an award of an additional amount
of P200,000.00 to the Philippine Bar Association to be paid jointly and severally by the
defendant United Construction Co. and by the third-party defendants Juan F. Nakpil and
Sons and Juan F. Nakpil.

The dispositive portion of the modified decision of the lower court reads:

WHEREFORE, judgment is hereby rendered:

(a) Ordering defendant United Construction Co., Inc. and third-party defendants (except
Roman Ozaeta) to pay the plaintiff, jointly and severally, the sum of P989,335.68 with
interest at the legal rate from November 29, 1968, the date of the filing of the complaint
until full payment;

(b) Dismissing the complaint with respect to defendant Juan J. Carlos;

(c) Dismissing the third-party complaint;

(d) Dismissing the defendant's and third-party defendants' counterclaims for lack of
merit;

(e) Ordering defendant United Construction Co., Inc. and third-party defendants (except
Roman Ozaeta) to pay the costs in equal shares.

SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the judgment appealed from is modified to include an award of

P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with interest at
the legal rate from November 29, 1968 until full payment to be paid jointly and
severally by defendant United Construction Co., Inc. and third party defendants (except
Roman Ozaeta). In all other respects, the judgment dated September 21, 1971 as
modified in the December 8, 1971 Order of the lower court is hereby affirmed with
COSTS to be paid by the defendant and third party defendant (except Roman Ozaeta) in
equal shares.

SO ORDERED.

Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan
J. Carlos in L-47863 seek the reversal of the decision of the Court of Appeals, among
other things, for exoneration from liability while petitioner Philippine Bar Association
in L-47896 seeks the modification of aforesaid decision to obtain an award of
P1,830,000.00 for the loss of the PBA building plus four (4) times such amount as
damages resulting in increased cost of the building, P100,000.00 as exemplary damages;
and P100,000.00 as attorney's fees.

These petitions arising from the same case filed in the Court of First Instance of Manila
were consolidated by this Court in the resolution of May 10, 1978 requiring the
respective respondents to comment. (Rollo, L-47851, p. 172).

The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp.
269-348; pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are
as follows:

The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated

under the Corporation Law, decided to construct an office building on its 840 square
meters lot located at the comer of Aduana and Arzobispo Streets, Intramuros, Manila.
The construction was undertaken by the United Construction, Inc. on an
"administration" basis, on the suggestion of Juan J. Carlos, the president and general
manager of said corporation. The proposal was approved by plaintiff's board of
directors and signed by its president Roman Ozaeta, a third-party defendant in this case.
The plans and specifications for the building were prepared by the other third-party
defendants Juan F. Nakpil & Sons. The building was completed in June, 1966.

In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and
its environs and the building in question sustained major damage. The front columns of
the building buckled, causing the building to tilt forward dangerously. The tenants
vacated the building in view of its precarious condition. As a temporary remedial
measure, the building was shored up by United Construction, Inc. at the cost of
P13,661.28.

On November 29, 1968, the plaintiff commenced this action for the recovery of damages
arising from the partial collapse of the building against United Construction, Inc. and its
President and General Manager Juan J. Carlos as defendants. Plaintiff alleges that the
collapse of the building was accused by defects in the construction, the failure of the
contractors to follow plans and specifications and violations by the defendants of the
terms of the contract.

Defendants in turn filed a third-party complaint against the architects who prepared the
plans and specifications, alleging in essence that the collapse of the building was due to
the defects in the said plans and specifications. Roman Ozaeta, the then president of the
plaintiff Bar Association was included as a third-party defendant for damages for having
included Juan J. Carlos, President of the United Construction Co., Inc. as party defendant.

On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and
Juan F. Nakpil presented a written stipulation which reads:

1. That in relation to defendants' answer with counterclaims and third- party

complaints and the third-party defendants Nakpil & Sons' answer thereto, the plaintiff
need not amend its complaint by including the said Juan F. Nakpil & Sons and Juan F.
Nakpil personally as parties defendant.
2. That in the event (unexpected by the undersigned) that the Court should find after
the trial that the above-named defendants Juan J. Carlos and United Construction Co.,
Inc. are free from any blame and liability for the collapse of the PBA Building, and
should further find that the collapse of said building was due to defects and/or
inadequacy of the plans, designs, and specifications p by the third-party defendants, or
in the event that the Court may find Juan F. Nakpil and Sons and/or Juan F. Nakpil
contributorily negligent or in any way jointly and solidarily liable with the defendants,
judgment may be rendered in whole or in part. as the case may be, against Juan F. Nakpil
& Sons and/or Juan F. Nakpil in favor of the plaintiff to all intents and purposes as if
plaintiff's complaint has been duly amended by including the said Juan F. Nakpil & Sons
and Juan F. Nakpil as parties defendant and by alleging causes of action against them
including, among others, the defects or inadequacy of the plans, designs, and
specifications prepared by them and/or failure in the performance of their contract
with plaintiff.

3. Both parties hereby jointly petition this Honorable Court to approve this stipulation.
(Record on Appeal, pp. 274-275; Rollo, L-47851,p.169).

Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which
among others, the parties agreed to refer the technical issues involved in the case to a
Commissioner. Mr. Andres O. Hizon, who was ultimately appointed by the trial court,
assumed his office as Commissioner, charged with the duty to try the following issues:

1. Whether the damage sustained by the PBA building during the August 2, 1968
earthquake had been caused, directly or indirectly, by:

(a) The inadequacies or defects in the plans and specifications prepared by third-party
defendants;

(b) The deviations, if any, made by the defendants from said plans and specifications
and how said deviations contributed to the damage sustained;

(c) The alleged failure of defendants to observe the requisite quality of materials and
workmanship in the construction of the building;

(d) The alleged failure to exercise the requisite degree of supervision expected of the
architect, the contractor and/or the owner of the building;

(e) An act of God or a fortuitous event; and

(f) Any other cause not herein above specified.

2. If the cause of the damage suffered by the building arose from a combination of the
above-enumerated factors, the degree or proportion in which each individual factor
contributed to the damage sustained;

3. Whether the building is now a total loss and should be completely demolished or
whether it may still be repaired and restored to a tenantable condition. In the latter
case, the determination of the cost of such restoration or repair, and the value of any
remaining construction, such as the foundation, which may still be utilized or availed of
(Record on Appeal, pp. 275-276; Rollo, L-47851, p. 169).

Thus, the issues of this case were divided into technical issues and non-technical issues.
As aforestated the technical issues were referred to the Commissioner. The non-
technical issues were tried by the Court.

Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it
may topple down in case of a strong earthquake. The motions were opposed by the
defendants and the matter was referred to the Commissioner. Finally, on April 30, 1979
the building was authorized to be demolished at the expense of the plaintiff, but not
another earthquake of high intensity on April 7, 1970 followed by other strong
earthquakes on April 9, and 12, 1970, caused further damage to the property. The actual
demolition was undertaken by the buyer of the damaged building. (Record on Appeal,
pp. 278-280; Ibid.)

After the protracted hearings, the Commissioner eventually submitted his report on
September 25, 1970 with the findings that while the damage sustained by the PBA
building was caused directly by the August 2, 1968 earthquake whose magnitude was
estimated at 7.3 they were also caused by the defects in the plans and specifications
prepared by the third-party defendants' architects, deviations from said plans and
specifications by the defendant contractors and failure of the latter to observe the
requisite workmanship in the construction of the building and of the contractors,
architects and even the owners to exercise the requisite degree of supervision in the
construction of subject building.

All the parties registered their objections to aforesaid findings which in turn were
answered by the Commissioner.

The trial court agreed with the findings of the Commissioner except as to the holding
that the owner is charged with full nine supervision of the construction. The Court sees
no legal or contractual basis for such conclusion. (Record on Appeal, pp. 309-328; Ibid).

Thus, on September 21, 1971, the lower court rendered the assailed decision which was
modified by the Intermediate Appellate Court on November 28, 1977.

All the parties herein appealed from the decision of the Intermediate Appellate Court.
Hence, these petitions.

On May 11, 1978, the United Architects of the Philippines, the Association of Civil
Engineers, and the Philippine Institute of Architects filed with the Court a motion to
intervene as amicus curiae. They proposed to present a position paper on the liability of
architects when a building collapses and to submit likewise a critical analysis with
computations on the divergent views on the design and plans as submitted by the
experts procured by the parties. The motion having been granted, the amicus curiae
were granted a period of 60 days within which to submit their position.

After the parties had all filed their comments, We gave due course to the petitions in
Our Resolution of July 21, 1978.
The position papers of the amicus curiae (submitted on November 24, 1978) were duly
noted.

The amicus curiae gave the opinion that the plans and specifications of the Nakpils were
not defective. But the Commissioner, when asked by Us to comment, reiterated his
conclusion that the defects in the plans and specifications indeed existed.

Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord.
No. 4131) and the 1966 Asep Code, the Commissioner added that even if it can be
proved that the defects in the construction alone (and not in the plans and design)
caused the damage to the building, still the deficiency in the original design and jack of
specific provisions against torsion in the original plans and the overload on the ground
floor columns (found by an the experts including the original designer) certainly
contributed to the damage which occurred. (Ibid, p. 174).

In their respective briefs petitioners, among others, raised the following assignments of
errors: Philippine Bar Association claimed that the measure of damages should not be
limited to P1,100,000.00 as estimated cost of repairs or to the period of six (6) months
for loss of rentals while United Construction Co., Inc. and the Nakpils claimed that it was
an act of God that caused the failure of the building which should exempt them from
responsibility and not the defective construction, poor workmanship, deviations from
plans and specifications and other imperfections in the case of United Construction Co.,
Inc. or the deficiencies in the design, plans and specifications prepared by petitioners in
the case of the Nakpils. Both UCCI and the Nakpils object to the payment of the
additional amount of P200,000.00 imposed by the Court of Appeals. UCCI also claimed
that it should be reimbursed the expenses of shoring the building in the amount of
P13,661.28 while the Nakpils opposed the payment of damages jointly and solidarity
with UCCI.

The pivotal issue in this case is whether or not an act of God-an unusually strong
earthquake-which caused the failure of the building, exempts from liability, parties who
are otherwise liable because of their negligence.

The applicable law governing the rights and liabilities of the parties herein is Article
1723 of the New Civil Code, which provides:

Art. 1723. The engineer or architect who drew up the plans and specifications for a
building is liable for damages if within fifteen years from the completion of the structure
the same should collapse by reason of a defect in those plans and specifications, or due
to the defects in the ground. The contractor is likewise responsible for the damage if the
edifice fags within the same period on account of defects in the construction or the use
of materials of inferior quality furnished by him, or due to any violation of the terms of
the contract. If the engineer or architect supervises the construction, he shall be
solidarily liable with the contractor.

Acceptance of the building, after completion, does not imply waiver of any of the causes
of action by reason of any defect mentioned in the preceding paragraph.
The action must be brought within ten years following the collapse of the building.

On the other hand, the general rule is that no person shall be responsible for events
which could not be foreseen or which though foreseen, were inevitable (Article 1174,
New Civil Code).

An act of God has been defined as an accident, due directly and exclusively to natural
causes without human intervention, which by no amount of foresight, pains or care,
reasonably to have been expected, could have been prevented. (1 Corpus Juris 1174).

There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act
of God.

To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of
an obligation due to an "act of God," the following 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 unforseeable 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.
(Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA 423;
Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring
Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).

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 all 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 were, 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 that 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).

The negligence of the defendant and the third-party defendants petitioners was
established beyond dispute both in the lower court and in the Intermediate Appellate
Court. Defendant United Construction Co., Inc. was found to have made substantial
deviations from the plans and specifications. and to have failed to observe the requisite
workmanship in the construction as well as to exercise the requisite degree of
supervision; while the third-party defendants were found to have inadequacies or
defects in the plans and specifications prepared by them. As correctly assessed by both
courts, the defects in the construction and in the plans and specifications were the
proximate causes that rendered the PBA building unable to withstand the earthquake of
August 2, 1968. For this reason the defendant and third-party defendants cannot claim
exemption from liability. (Decision, Court of Appeals, pp. 30-31).

It is well settled that the findings of facts of the Court of Appeals are conclusive on the
parties and on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs.
Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is a
finding grounded entirely on speculation, surmise and conjectures; (2) the inference
made is manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is
based on misapprehension of facts; (5) the findings of fact are conflicting , (6) the Court
of Appeals went beyond the issues of the case and its findings are contrary to the
admissions of both appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co., February
8, 1967, 19 SCRA 289, 291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7)
the findings of facts of the Court of Appeals are contrary to those of the trial court; (8)
said findings of facts are conclusions without citation of specific evidence on which they
are based; (9) the facts set forth in the petition as well as in the petitioner's main and
reply briefs are not disputed by the respondents (Garcia vs. CA, June 30, 1970, 33 SCRA
622; Alsua-Bett vs. Court of Appeals, July 30, 1979, 92 SCRA 322, 366); (10) the finding
of fact of the Court of Appeals is premised on the supposed absence of evidence and is
contradicted by evidence on record (Salazar vs. Gutierrez, May 29, 1970, 33 SCRA 243,
247; Cited in G.R. No. 66497-98, Sacay v. Sandiganbayan, July 10, 1986).

It is evident that the case at bar does not fall under any of the exceptions above-
mentioned. On the contrary, the records show that the lower court spared no effort in
arriving at the correct appreciation of facts by the referral of technical issues to a
Commissioner chosen by the parties whose findings and conclusions remained
convincingly unrebutted by the intervenors/amicus curiae who were allowed to
intervene in the Supreme Court.

In any event, the relevant and logical observations of the trial court as affirmed by the
Court of Appeals that "while it is not possible to state with certainty that the building
would not have collapsed were those defects not present, the fact remains that several
buildings in the same area withstood the earthquake to which the building of the
plaintiff was similarly subjected," cannot be ignored.

The next issue to be resolved is the amount of damages to be awarded to the PBA for the
partial collapse (and eventual complete collapse) of its building.

The Court of Appeals affirmed the finding of the trial court based on the report of the
Commissioner that the total amount required to repair the PBA building and to restore
it to tenantable condition was P900,000.00 inasmuch as it was not initially a total loss.
However, while the trial court awarded the PBA said amount as damages, plus
unrealized rental income for one-half year, the Court of Appeals modified the amount by
awarding in favor of PBA an additional sum of P200,000.00 representing the damage
suffered by the PBA building as a result of another earthquake that occurred on April 7,
1970 (L-47896, Vol. I, p. 92).
The PBA in its brief insists that the proper award should be P1,830,000.00 representing
the total value of the building (L-47896, PBA's No. 1 Assignment of Error, p. 19), while
both the NAKPILS and UNITED question the additional award of P200,000.00 in favor of
the PBA (L- 47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner, p.
25). The PBA further urges that the unrealized rental income awarded to it should not
be limited to a period of one-half year but should be computed on a continuing basis at
the rate of P178,671.76 a year until the judgment for the principal amount shall have
been satisfied L- 47896, PBA's No. 11 Assignment of Errors, p. 19).

The collapse of the PBA building as a result of the August 2, 1968 earthquake was only
partial and it is undisputed that the building could then still be repaired and restored to
its tenantable condition. The PBA, however, in view of its lack of needed funding, was
unable, thru no fault of its own, to have the building repaired. UNITED, on the other
hand, spent P13,661.28 to shore up the building after the August 2, 1968 earthquake (L-
47896, CA Decision, p. 46). Because of the earthquake on April 7, 1970, the trial court
after the needed consultations, authorized the total demolition of the building (L-47896,
Vol. 1, pp. 53-54).

There should be no question that the NAKPILS and UNITED are liable for the damage
resulting from the partial and eventual collapse of the PBA building as a result of the
earthquakes.

We quote with approval the following from the erudite decision penned by Justice Hugo
E. Gutierrez (now an Associate Justice of the Supreme Court) while still an Associate
Justice of the Court of Appeals:

There is no question that an earthquake and other forces of nature such as cyclones,
drought, floods, lightning, and perils of the sea are acts of God. It does not necessarily
follow, however, that specific losses and suffering resulting from the occurrence of these
natural force are also acts of God. We are not convinced on the basis of the evidence on
record that from the thousands of structures in Manila, God singled out the blameless
PBA building in Intramuros and around six or seven other buildings in various parts of
the city for collapse or severe damage and that God alone was responsible for the
damages and losses thus suffered.

The record is replete with evidence of defects and deficiencies in the designs and plans,
defective construction, poor workmanship, deviation from plans and specifications and
other imperfections. These deficiencies are attributable to negligent men and not to a
perfect God.

The act-of-God arguments of the defendants- appellants and third party defendants-
appellants presented in their briefs are premised on legal generalizations or
speculations and on theological fatalism both of which ignore the plain facts. The
lengthy discussion of United on ordinary earthquakes and unusually strong earthquakes
and on ordinary fortuitous events and extraordinary fortuitous events leads to its
argument that the August 2, 1968 earthquake was of such an overwhelming and
destructive character that by its own force and independent of the particular negligence
alleged, the injury would have been produced. If we follow this line of speculative
reasoning, we will be forced to conclude that under such a situation scores of buildings
in the vicinity and in other parts of Manila would have toppled down. Following the
same line of reasoning, Nakpil and Sons alleges that the designs were adequate in
accordance with pre-August 2, 1968 knowledge and appear inadequate only in the light
of engineering information acquired after the earthquake. If this were so, hundreds of
ancient buildings which survived the earthquake better than the two-year old PBA
building must have been designed and constructed by architects and contractors whose
knowledge and foresight were unexplainably auspicious and prophetic. Fortunately, the
facts on record allow a more down to earth explanation of the collapse. The failure of
the PBA building, as a unique and distinct construction with no reference or comparison
to other buildings, to weather the severe earthquake forces was traced to design
deficiencies and defective construction, factors which are neither mysterious nor
esoteric. The theological allusion of appellant United that God acts in mysterious ways
His wonders to perform impresses us to be inappropriate. The evidence reveals defects
and deficiencies in design and construction. There is no mystery about these acts of
negligence. The collapse of the PBA building was no wonder performed by God. It was a
result of the imperfections in the work of the architects and the people in the
construction company. More relevant to our mind is the lesson from the parable of the
wise man in the Sermon on the Mount "which built his house upon a rock; and the rain
descended and the floods came and the winds blew and beat upon that house; and it fen
not; for it was founded upon a rock" and of the "foolish upon the sand. And the rain
descended and man which built his house the floods came, and the winds blew, and beat
upon that house; and it fell and great was the fall of it. (St. Matthew 7: 24-27)." The
requirement that a building should withstand rains, floods, winds, earthquakes, and
natural forces is precisely the reason why we have professional experts like architects,
and engineers. Designs and constructions vary under varying circumstances and
conditions but the requirement to design and build well does not change.

The findings of the lower Court on the cause of the collapse are more rational and
accurate. Instead of laying the blame solely on the motions and forces generated by the
earthquake, it also examined the ability of the PBA building, as designed and
constructed, to withstand and successfully weather those forces.

The evidence sufficiently supports a conclusion that the negligence and fault of both
United and Nakpil and Sons, not a mysterious act of an inscrutable God, were
responsible for the damages. The Report of the Commissioner, Plaintiff's Objections to
the Report, Third Party Defendants' Objections to the Report, Defendants' Objections to
the Report, Commissioner's Answer to the various Objections, Plaintiffs' Reply to the
Commissioner's Answer, Defendants' Reply to the Commissioner's Answer, Counter-
Reply to Defendants' Reply, and Third-Party Defendants' Reply to the Commissioner's
Report not to mention the exhibits and the testimonies show that the main arguments
raised on appeal were already raised during the trial and fully considered by the lower
Court. A reiteration of these same arguments on appeal fails to convince us that we
should reverse or disturb the lower Court's factual findings and its conclusions drawn
from the facts, among them:

The Commissioner also found merit in the allegations of the defendants as to the
physical evidence before and after the earthquake showing the inadequacy of design, to
wit:
Physical evidence before the earthquake providing (sic) inadequacy of design;

1. inadequate design was the cause of the failure of the building.

2. Sun-baffles on the two sides and in front of the building;

a. Increase the inertia forces that move the building laterally toward the Manila Fire
Department.

b. Create another stiffness imbalance.

3. The embedded 4" diameter cast iron down spout on all exterior columns reduces the
cross-sectional area of each of the columns and the strength thereof.

4. Two front corners, A7 and D7 columns were very much less reinforced.

Physical Evidence After the Earthquake, Proving Inadequacy of design;

1. Column A7 suffered the severest fracture and maximum sagging. Also D7.

2. There are more damages in the front part of the building than towards the rear, not
only in columns but also in slabs.

3. Building leaned and sagged more on the front part of the building.

4. Floors showed maximum sagging on the sides and toward the front corner parts of
the building.

5. There was a lateral displacement of the building of about 8", Maximum sagging occurs
at the column A7 where the floor is lower by 80 cm. than the highest slab level.

6. Slab at the corner column D7 sagged by 38 cm.

The Commissioner concluded that there were deficiencies or defects in the design, plans
and specifications of the PBA building which involved appreciable risks with respect to
the accidental forces which may result from earthquake shocks. He conceded, however,
that the fact that those deficiencies or defects may have arisen from an obsolete or not
too conservative code or even a code that does not require a design for earthquake
forces mitigates in a large measure the responsibility or liability of the architect and
engineer designer.

The Third-party defendants, who are the most concerned with this portion of the
Commissioner's report, voiced opposition to the same on the grounds that (a) the
finding is based on a basic erroneous conception as to the design concept of the
building, to wit, that the design is essentially that of a heavy rectangular box on stilts
with shear wan at one end; (b) the finding that there were defects and a deficiency in
the design of the building would at best be based on an approximation and, therefore,
rightly belonged to the realm of speculation, rather than of certainty and could very
possibly be outright error; (c) the Commissioner has failed to back up or support his
finding with extensive, complex and highly specialized computations and analyzes
which he himself emphasizes are necessary in the determination of such a highly
technical question; and (d) the Commissioner has analyzed the design of the PBA
building not in the light of existing and available earthquake engineering knowledge at
the time of the preparation of the design, but in the light of recent and current
standards.

The Commissioner answered the said objections alleging that third-party defendants'
objections were based on estimates or exhibits not presented during the hearing that
the resort to engineering references posterior to the date of the preparation of the plans
was induced by the third-party defendants themselves who submitted computations of
the third-party defendants are erroneous.

The issue presently considered is admittedly a technical one of the highest degree. It
involves questions not within the ordinary competence of the bench and the bar to
resolve by themselves. Counsel for the third-party defendants has aptly remarked that
"engineering, although dealing in mathematics, is not an exact science and that the
present knowledge as to the nature of earthquakes and the behaviour of forces
generated by them still leaves much to be desired; so much so "that the experts of the
different parties, who are all engineers, cannot agree on what equation to use, as to
what earthquake co-efficients are, on the codes to be used and even as to the type of
structure that the PBA building (is) was (p. 29, Memo, of third- party defendants before
the Commissioner).

The difficulty expected by the Court if tills technical matter were to be tried and
inquired into by the Court itself, coupled with the intrinsic nature of the questions
involved therein, constituted the reason for the reference of the said issues to a
Commissioner whose qualifications and experience have eminently qualified him for the
task, and whose competence had not been questioned by the parties until he submitted
his report. Within the pardonable limit of the Court's ability to comprehend the meaning
of the Commissioner's report on this issue, and the objections voiced to the same, the
Court sees no compelling reasons to disturb the findings of the Commissioner that there
were defects and deficiencies in the design, plans and specifications prepared by third-
party defendants, and that said defects and deficiencies involved appreciable risks with
respect to the accidental forces which may result from earthquake shocks.

(2) (a) The deviations, if any, made by the defendants from the plans and specifications,
and how said deviations contributed to the damage sustained by the building.

(b) The alleged failure of defendants to observe the requisite quality of materials and
workmanship in the construction of the building.

These two issues, being interrelated with each other, will be discussed together.

The findings of the Commissioner on these issues were as follows:

We now turn to the construction of the PBA Building and the alleged deficiencies or
defects in the construction and violations or deviations from the plans and
specifications. All these may be summarized as follows:

a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.

(1) Wrongful and defective placing of reinforcing bars.

(2) Absence of effective and desirable integration of the 3 bars in the cluster.

(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no larger
than 1 inch.

(4) Reinforcement assembly is not concentric with the column, eccentricity being 3" off
when on one face the main bars are only 1 1/2' from the surface.

(5) Prevalence of honeycombs,

(6) Contraband construction joints,

(7) Absence, or omission, or over spacing of spiral hoops,

(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5, ground floor,

(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground floor,

(10) Undergraduate concrete is evident,

(11) Big cavity in core of Column 2A-4, second floor,

(12) Columns buckled at different planes. Columns buckled worst where there are no
spirals or where spirals are cut. Columns suffered worst displacement where the
eccentricity of the columnar reinforcement assembly is more acute.

b. Summary of alleged defects as reported by Engr. Antonio Avecilla.

Columns are first (or ground) floor, unless otherwise stated.

(1) Column D4 — Spacing of spiral is changed from 2" to 5" on centers,

(2) Column D5 — No spiral up to a height of 22" from the ground floor,

(3) Column D6 — Spacing of spiral over 4 l/2,

(4) Column D7 — Lack of lateral ties,

(5) Column C7 — Absence of spiral to a height of 20" from the ground level, Spirals are
at 2" from the exterior column face and 6" from the inner column face,
(6) Column B6 — Lack of spiral on 2 feet below the floor beams,

(7) Column B5 — Lack of spirals at a distance of 26' below the beam,

(8) Column B7 — Spirals not tied to vertical reinforcing bars, Spirals are uneven 2" to
4",

(9) Column A3 — Lack of lateral ties,

(10) Column A4 — Spirals cut off and welded to two separate clustered vertical bars,

(11) Column A4 — (second floor Column is completely hollow to a height of 30"

(12) Column A5 — Spirals were cut from the floor level to the bottom of the spandrel
beam to a height of 6 feet,

(13) Column A6 — No spirals up to a height of 30' above the ground floor level,

(14) Column A7— Lack of lateralties or spirals,

c. Summary of alleged defects as reported by the experts of the Third-Party defendants.

Ground floor columns.

(1) Column A4 — Spirals are cut,

(2) Column A5 — Spirals are cut,

(3) Column A6 — At lower 18" spirals are absent,

(4) Column A7 — Ties are too far apart,

(5) Column B5 — At upper fourth of column spirals are either absent or improperly
spliced,

(6) Column B6 — At upper 2 feet spirals are absent,

(7) Column B7 — At upper fourth of column spirals missing or improperly spliced.

(8) Column C7— Spirals are absent at lowest 18"

(9) Column D5 — At lowest 2 feet spirals are absent,

(10) Column D6 — Spirals are too far apart and apparently improperly spliced,

(11) Column D7 — Lateral ties are too far apart, spaced 16" on centers.

There is merit in many of these allegations. The explanations given by the engineering
experts for the defendants are either contrary to general principles of engineering
design for reinforced concrete or not applicable to the requirements for ductility and
strength of reinforced concrete in earthquake-resistant design and construction.

We shall first classify and consider defects which may have appreciable bearing or
relation to' the earthquake-resistant property of the building.

As heretofore mentioned, details which insure ductility at or near the connections

between columns and girders are desirable in earthquake resistant design and
construction. The omission of spirals and ties or hoops at the bottom and/or tops of
columns contributed greatly to the loss of earthquake-resistant strength. The plans and
specifications required that these spirals and ties be carried from the floor level to the
bottom reinforcement of the deeper beam (p. 1, Specifications, p. 970, Reference 11).
There were several clear evidences where this was not done especially in some of the
ground floor columns which failed.

There were also unmistakable evidences that the spacings of the spirals and ties in the
columns were in many cases greater than those called for in the plans and specifications
resulting again in loss of earthquake-resistant strength. The assertion of the engineering
experts for the defendants that the improper spacings and the cutting of the spirals did
not result in loss of strength in the column cannot be maintained and is certainly
contrary to the general principles of column design and construction. And even granting
that there be no loss in strength at the yield point (an assumption which is very
doubtful) the cutting or improper spacings of spirals will certainly result in the loss of
the plastic range or ductility in the column and it is precisely this plastic range or
ductility which is desirable and needed for earthquake-resistant strength.

There is no excuse for the cavity or hollow portion in the column A4, second floor, and
although this column did not fail, this is certainly an evidence on the part of the
contractor of poor construction.

The effect of eccentricities in the columns which were measured at about 2 1/2 inches
maximum may be approximated in relation to column loads and column and beam
moments. The main effect of eccentricity is to change the beam or girder span. The
effect on the measured eccentricity of 2 inches, therefore, is to increase or diminish the
column load by a maximum of about 1% and to increase or diminish the column or
beam movements by about a maximum of 2%. While these can certainly be absorbed
within the factor of safety, they nevertheless diminish said factor of safety.

The cutting of the spirals in column A5, ground floor is the subject of great contention
between the parties and deserves special consideration.

The proper placing of the main reinforcements and spirals in column A5, ground floor,
is the responsibility of the general contractor which is the UCCI. The burden of proof,
therefore, that this cutting was done by others is upon the defendants. Other than a
strong allegation and assertion that it is the plumber or his men who may have done the
cutting (and this was flatly denied by the plumber) no conclusive proof was presented.
The engineering experts for the defendants asserted that they could have no motivation
for cutting the bar because they can simply replace the spirals by wrapping around a
new set of spirals. This is not quite correct. There is evidence to show that the pouring
of concrete for columns was sometimes done through the beam and girder
reinforcements which were already in place as in the case of column A4 second floor. If
the reinforcement for the girder and column is to subsequently wrap around the spirals,
this would not do for the elasticity of steel would prevent the making of tight column
spirals and loose or improper spirals would result. The proper way is to produce correct
spirals down from the top of the main column bars, a procedure which can not be done
if either the beam or girder reinforcement is already in place. The engineering experts
for the defendants strongly assert and apparently believe that the cutting of the spirals
did not materially diminish the strength of the column. This belief together with the
difficulty of slipping the spirals on the top of the column once the beam reinforcement is
in place may be a sufficient motivation for the cutting of the spirals themselves. The
defendants, therefore, should be held responsible for the consequences arising from the
loss of strength or ductility in column A5 which may have contributed to the damages
sustained by the building.

The lack of proper length of splicing of spirals was also proven in the visible spirals of
the columns where spalling of the concrete cover had taken place. This lack of proper
splicing contributed in a small measure to the loss of strength.

The effects of all the other proven and visible defects although nor can certainly be
accumulated so that they can contribute to an appreciable loss in earthquake-resistant
strength. The engineering experts for the defendants submitted an estimate on some of
these defects in the amount of a few percent. If accumulated, therefore, including the
effect of eccentricity in the column the loss in strength due to these minor defects may
run to as much as ten percent.

To recapitulate: the omission or lack of spirals and ties at the bottom and/or at the top
of some of the ground floor columns contributed greatly to the collapse of the PBA
building since it is at these points where the greater part of the failure occurred. The
liability for the cutting of the spirals in column A5, ground floor, in the considered
opinion of the Commissioner rests on the shoulders of the defendants and the loss of
strength in this column contributed to the damage which occurred.

It is reasonable to conclude, therefore, that the proven defects, deficiencies and

violations of the plans and specifications of the PBA building contributed to the
damages which resulted during the earthquake of August 2, 1968 and the vice of these
defects and deficiencies is that they not only increase but also aggravate the weakness
mentioned in the design of the structure. In other words, these defects and deficiencies
not only tend to add but also to multiply the effects of the shortcomings in the design of
the building. We may say, therefore, that the defects and deficiencies in the construction
contributed greatly to the damage which occurred.

Since the execution and supervision of the construction work in the hands of the
contractor is direct and positive, the presence of existence of all the major defects and
deficiencies noted and proven manifests an element of negligence which may amount to
imprudence in the construction work. (pp. 42-49, Commissioners Report).

As the parties most directly concerned with this portion of the Commissioner's report,
the defendants voiced their objections to the same on the grounds that the
Commissioner should have specified the defects found by him to be "meritorious"; that
the Commissioner failed to indicate the number of cases where the spirals and ties were
not carried from the floor level to the bottom reinforcement of the deeper beam, or
where the spacing of the spirals and ties in the columns were greater than that called for
in the specifications; that the hollow in column A4, second floor, the eccentricities in the
columns, the lack of proper length of splicing of spirals, and the cut in the spirals in
column A5, ground floor, did not aggravate or contribute to the damage suffered by the
building; that the defects in the construction were within the tolerable margin of safety;
and that the cutting of the spirals in column A5, ground floor, was done by the plumber
or his men, and not by the defendants.

Answering the said objections, the Commissioner stated that, since many of the defects
were minor only the totality of the defects was considered. As regards the objection as
to failure to state the number of cases where the spirals and ties were not carried from
the floor level to the bottom reinforcement, the Commissioner specified groundfloor
columns B-6 and C-5 the first one without spirals for 03 inches at the top, and in the
latter, there were no spirals for 10 inches at the bottom. The Commissioner likewise
specified the first storey columns where the spacings were greater than that called for
in the specifications to be columns B-5, B-6, C-7, C-6, C-5, D-5 and B-7. The objection to
the failure of the Commissioner to specify the number of columns where there was lack
of proper length of splicing of spirals, the Commissioner mentioned groundfloor
columns B-6 and B-5 where all the splices were less than 1-1/2 turns and were not
welded, resulting in some loss of strength which could be critical near the ends of the
columns. He answered the supposition of the defendants that the spirals and the ties
must have been looted, by calling attention to the fact that the missing spirals and ties
were only in two out of the 25 columns, which rendered said supposition to be
improbable.

The Commissioner conceded that the hollow in column A-4, second floor, did not
aggravate or contribute to the damage, but averred that it is "evidence of poor
construction." On the claim that the eccentricity could be absorbed within the factor of
safety, the Commissioner answered that, while the same may be true, it also contributed
to or aggravated the damage suffered by the building.

The objection regarding the cutting of the spirals in Column A-5, groundfloor, was
answered by the Commissioner by reiterating the observation in his report that
irrespective of who did the cutting of the spirals, the defendants should be held liable
for the same as the general contractor of the building. The Commissioner further stated
that the loss of strength of the cut spirals and inelastic deflections of the supposed
lattice work defeated the purpose of the spiral containment in the column and resulted
in the loss of strength, as evidenced by the actual failure of this column.

Again, the Court concurs in the findings of the Commissioner on these issues and fails to
find any sufficient cause to disregard or modify the same. As found by the
Commissioner, the "deviations made by the defendants from the plans and
specifications caused indirectly the damage sustained and that those deviations not only
added but also aggravated the damage caused by the defects in the plans and
specifications prepared by third-party defendants. (Rollo, Vol. I, pp. 128-142)
The afore-mentioned facts clearly indicate the wanton negligence of both the defendant
and the third-party defendants in effecting the plans, designs, specifications, and
construction of the PBA building and We hold such negligence as equivalent to bad faith
in the performance of their respective tasks.

Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379,
4380) which may be in point in this case reads:

One who negligently creates a dangerous condition cannot escape liability for the
natural and probable consequences thereof, although the act of a third person, or an act
of God for which he is not responsible, intervenes to precipitate the loss.

As already discussed, the destruction was not purely an act of God. Truth to tell
hundreds of ancient buildings in the vicinity were hardly affected by the earthquake.
Only one thing spells out the fatal difference; gross negligence and evident bad faith,
without which the damage would not have occurred.

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the
special and environmental circumstances of this case, We deem it reasonable to render
a decision imposing, as We do hereby impose, upon the defendant and the third-party
defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code,
Supra, p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION
(P5,000,000.00) Pesos to cover all damages (with the exception of attorney's fees)
occasioned by the loss of the building (including interest charges and lost rentals) and
an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's
fees, the total sum being payable upon the finality of this decision. Upon failure to pay
on such finality, twelve (12%) per cent interest per annum shall be imposed upon afore-
mentioned amounts from finality until paid. Solidary costs against the defendant and
third-party defendants (except Roman Ozaeta).

SO ORDERED.

G.R. No. L-21749 September 29, 1967

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
LUZON STEVEDORING CORPORATION, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

H. San Luis and L.V. Simbulan for defendant-appellant.

REYES, J.B.L., J.:

The present case comes by direct appeal from a decision of the Court of First Instance of
Manila (Case No. 44572) adjudging the defendant-appellant, Luzon Stevedoring
Corporation, liable in damages to the plaintiff-appellee Republic of the Philippines.
In the early afternoon of August 17, 1960, barge L-1892, owned by the Luzon
Stevedoring Corporation was being towed down the Pasig river by tugboats "Bangus"
and "Barbero"1 also belonging to the same corporation, when the barge rammed
against one of the wooden piles of the Nagtahan bailey bridge, smashing the posts and
causing the bridge to list. The river, at the time, was swollen and the current swift, on
account of the heavy downpour of Manila and the surrounding provinces on August 15
and 16, 1960.

Sued by the Republic of the Philippines for actual and consequential damage caused by
its employees, amounting to P200,000 (Civil Case No. 44562, CFI of Manila), defendant
Luzon Stevedoring Corporation disclaimed liability therefor, on the grounds that it had
exercised due diligence in the selection and supervision of its employees; that the
damages to the bridge were caused by force majeure; that plaintiff has no capacity to
sue; and that the Nagtahan bailey bridge is an obstruction to navigation.

After due trial, the court rendered judgment on June 11, 1963, holding the defendant
liable for the damage caused by its employees and ordering it to pay to plaintiff the
actual cost of the repair of the Nagtahan bailey bridge which amounted to P192,561.72,
with legal interest thereon from the date of the filing of the complaint.

Defendant appealed directly to this Court assigning the following errors allegedly
committed by the court a quo, to wit:

I — The lower court erred in not holding that the herein defendant-appellant had
exercised the diligence required of it in the selection and supervision of its personnel to
prevent damage or injury to others.1awphîl.nèt

II — The lower court erred in not holding that the ramming of the Nagtahan bailey
bridge by barge L-1892 was caused by force majeure.

III — The lower court erred in not holding that the Nagtahan bailey bridge is an
obstruction, if not a menace, to navigation in the Pasig river.

IV — The lower court erred in not blaming the damage sustained by the Nagtahan
bailey bridge to the improper placement of the dolphins.

V — The lower court erred in granting plaintiff's motion to adduce further evidence in
chief after it has rested its case.

VI — The lower court erred in finding the plaintiff entitled to the amount of
P192,561.72 for damages which is clearly exorbitant and without any factual basis.

However, it must be recalled that the established rule in this jurisdiction is that when a
party appeals directly to the Supreme Court, and submits his case there for decision, he
is deemed to have waived the right to dispute any finding of fact made by the trial Court.
The only questions that may be raised are those of law (Savellano vs. Diaz, L-17441, July
31, 1963; Aballe vs. Santiago, L-16307, April 30, 1963; G.S.I.S. vs. Cloribel, L-22236, June
22, 1965). A converso, a party who resorts to the Court of Appeals, and submits his case
for decision there, is barred from contending later that his claim was beyond the
jurisdiction of the aforesaid Court. The reason is that a contrary rule would encourage
the undesirable practice of appellants' submitting their cases for decision to either court
in expectation of favorable judgment, but with intent of attacking its jurisdiction should
the decision be unfavorable (Tyson Tan, et al. vs. Filipinas Compañia de Seguros) et al.,
L-10096, Res. on Motion to Reconsider, March 23, 1966). Consequently, we are limited
in this appeal to the issues of law raised in the appellant's brief.

Taking the aforesaid rules into account, it can be seen that the only reviewable issues in
this appeal are reduced to two:

1) Whether or not the collision of appellant's barge with the supports or piers of the
Nagtahan bridge was in law caused by fortuitous event or force majeure, and

2) Whether or not it was error for the Court to have permitted the plaintiff-appellee to
introduce additional evidence of damages after said party had rested its case.

As to the first question, considering that the Nagtahan bridge was an immovable and
stationary object and uncontrovertedly provided with adequate openings for the
passage of water craft, including barges like of appellant's, it is undeniable that the
unusual event that the barge, exclusively controlled by appellant, rammed the bridge
supports raises a presumption of negligence on the part of appellant or its employees
manning the barge or the tugs that towed it. For in the ordinary course of events, such a
thing does not happen if proper care is used. In Anglo American Jurisprudence, the
inference arises by what is known as the "res ipsa loquitur" rule (Scott vs. London
Docks Co., 2 H & C 596; San Juan Light & Transit Co. vs. Requena, 224 U.S. 89, 56 L. Ed.,
680; Whitwell vs. Wolf, 127 Minn. 529, 149 N.W. 299; Bryne vs. Great Atlantic & Pacific
Tea Co., 269 Mass. 130; 168 N.E. 540; Gribsby vs. Smith, 146 S.W. 2d 719).

The appellant strongly stresses the precautions taken by it on the day in question: that
it assigned two of its most powerful tugboats to tow down river its barge L-1892; that it
assigned to the task the more competent and experienced among its patrons, had the
towlines, engines and equipment double-checked and inspected; that it instructed its
patrons to take extra precautions; and concludes that it had done all it was called to do,
and that the accident, therefore, should be held due to force majeure or fortuitous event.

These very precautions, however, completely destroy the appellant's defense. For caso
fortuito or force majeure (which in law are identical in so far as they exempt an obligor
from liability)2 by definition, are extraordinary events not foreseeable or avoidable,
"events that could not be foreseen, or which, though foreseen, were inevitable" (Art.
1174, Civ. Code of the Philippines). It is, therefore, not enough that the event should not
have been foreseen or anticipated, as is commonly believed, but it must be one
impossible to foresee or to avoid. The mere difficulty to foresee the happening is not
impossibility to foresee the same: "un hecho no constituye caso fortuito por la sola
circunstancia de que su existencia haga mas dificil o mas onerosa la accion diligente del
presento ofensor" (Peirano Facio, Responsibilidad Extra-contractual, p. 465; Mazeaud
Trait de la Responsibilite Civil, Vol. 2, sec. 1569). The very measures adopted by
appellant prove that the possibility of danger was not only foreseeable, but actually
foreseen, and was not caso fortuito.
Otherwise stated, the appellant, Luzon Stevedoring Corporation, knowing and
appreciating the perils posed by the swollen stream and its swift current, voluntarily
entered into a situation involving obvious danger; it therefore assured the risk, and can
not shed responsibility merely because the precautions it adopted turned out to be
insufficient. Hence, the lower Court committed no error in holding it negligent in not
suspending operations and in holding it liable for the damages caused.

It avails the appellant naught to argue that the dolphins, like the bridge, were
improperly located. Even if true, these circumstances would merely emphasize the need
of even higher degree of care on appellant's part in the situation involved in the present
case. The appellant, whose barges and tugs travel up and down the river everyday,
could not safely ignore the danger posed by these allegedly improper constructions that
had been erected, and in place, for years.

On the second point: appellant charges the lower court with having abused its
discretion in the admission of plaintiff's additional evidence after the latter had rested
its case. There is an insinuation that the delay was deliberate to enable the manipulation
of evidence to prejudice defendant-appellant.

We find no merit in the contention. Whether or not further evidence will be allowed
after a party offering the evidence has rested his case, lies within the sound discretion of
the trial Judge, and this discretion will not be reviewed except in clear case of abuse.3

In the present case, no abuse of that discretion is shown. What was allowed to be
introduced, after plaintiff had rested its evidence in chief, were vouchers and papers to
support an item of P1,558.00 allegedly spent for the reinforcement of the panel of the
bailey bridge, and which item already appeared in Exhibit GG. Appellant, in fact, has no
reason to charge the trial court of being unfair, because it was also able to secure, upon
written motion, a similar order dated November 24, 1962, allowing reception of
additional evidence for the said defendant-appellant.4

WHEREFORE, finding no error in the decision of the lower Court appealed from, the
same is hereby affirmed. Costs against the defendant-appellant.

G.R. No. L-25906 May 28, 1970

PEDRO D. DIOQUINO, plaintiff-appellee,
vs.
FEDERICO LAUREANO, AIDA DE LAUREANO and JUANITO LAUREANO, defendants-
appellants.

FERNANDO, J.:

The present lawsuit had its origin in a relationship, if it could be called such, the use of a
car owned by plaintiff Pedro D. Dioquino by defendant Federico Laureano, clearly of a
character casual and temporary but unfortunately married by an occurrence resulting
in its windshield being damaged. A stone thrown by a boy who, with his other
companions, was thus engaged in what undoubtedly for them must have been
mistakenly thought to be a none too harmful prank did not miss its mark. Plaintiff
would hold defendant Federico Laureano accountable for the loss thus sustained,
including in the action filed the wife, Aida de Laureano, and the father, Juanito Laureano.
Plaintiff prevail in the lower court, the judgment however going only against the
principal defendant, his spouse and his father being absolved of any responsibility.
Nonetheless, all three of them appealed directly to us, raising two questions of law, the
first being the failure of the lower court to dismiss such a suit as no liability could have
been incurred as a result of a fortuitous event and the other being its failure to award
damages against plaintiff for the unwarranted inclusion of the wife and the father in this
litigation. We agree that the lower court ought to have dismissed the suit, but it does not
follow that thereby damages for the inclusion of the above two other parties in the
complaint should have been awarded appellants.

The facts as found by the lower court follow: "Attorney Pedro Dioquino, a practicing
lawyer of Masbate, is the owner of a car. On March 31, 1964, he went to the office of the
MVO, Masbate, to register the same. He met the defendant Federico Laureano, a patrol
officer of said MVO office, who was waiting for a jeepney to take him to the office of the
Provincial Commander, PC, Masbate. Attorney Dioquino requested the defendant
Federico Laureano to introduce him to one of the clerks in the MVO Office, who could
facilitate the registration of his car and the request was graciously attended to.
Defendant Laureano rode on the car of Atty. Dioquino on his way to the P.C. Barracks at
Masbate. While about to reach their destination, the car driven by plaintiff's driver and
with defendant Federico Laureano as the sole passenger was stoned by some
'mischievous boys,' and its windshield was broken. Defendant Federico Laureano
chased the boys and he was able to catch one of them. The boy was taken to Atty.
Dioquino [and] admitted having thrown the stone that broke the car's windshield. The
plaintiff and the defendant Federico Laureano with the boy returned to the P.C. barracks
and the father of the boy was called, but no satisfactory arrangements [were] made
about the damage to the
windshield."1

It was likewise noted in the decision now on appeal: "The defendant Federico Laureano
refused to file any charges against the boy and his parents because he thought that the
stone-throwing was merely accidental and that it was due to force majeure. So he did
not want to take any action and after delaying the settlement, after perhaps consulting a
lawyer, the defendant Federico Laureano refused to pay the windshield himself and
challenged that the case be brought to court for judicial adjudication. There is no
question that the plaintiff tried to convince the defendant Federico Laureano just to pay
the value of the windshield and he even came to the extent of asking the wife to
convince her husband to settle the matter amicably but the defendant Federico
Laureano refused to make any settlement, clinging [to] the belief that he could not be
held liable because a minor child threw a stone accidentally on the windshield and
therefore, the same was due to force majeure."2

1. The law being what it is, such a belief on the part of defendant Federico Laureano was
justified. The express language of Art. 1174 of the present Civil Code which is a
restatement of Art. 1105 of the Old Civil Code, except for the addition of the nature of an
obligation requiring the assumption of risk, compels such a conclusion. It reads thus:
"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." Even under the old Civil Code then, as stressed by us
in the first decision dating back to 1908, in an opinion by Justice Mapa, the rule was
well-settled that in the absence of a legal provision or an express covenant, "no one
should be held to account for fortuitous cases."3 Its basis, as Justice Moreland stressed,
is the Roman law principle major casus est, cui humana infirmitas resistere non potest.4
Authorities of repute are in agreement, more specifically concerning an obligation
arising from contract "that some extraordinary circumstance independent of the will of
the obligor, or of his employees, is an essential element of a caso fortuito."5 If it could be
shown that such indeed was the case, liability is ruled out. There is no requirement of
"diligence beyond what human care and foresight can provide."6

The error committed by the lower court in holding defendant Federico Laureano liable
appears to be thus obvious. Its own findings of fact repel the motion that he should be
made to respond in damages to the plaintiff for the broken windshield. What happened
was clearly unforeseen. It was a fortuitous event resulting in a loss which must be borne
by the owner of the car. An element of reasonableness in the law would be manifestly
lacking if, on the circumstances as thus disclosed, legal responsibility could be imputed
to an individual in the situation of defendant Laureano. Art. 1174 of the Civil Code
guards against the possibility of its being visited with such a reproach. Unfortunately,
the lower court was of a different mind and thus failed to heed its command.

It was misled, apparently, by the inclusion of the exemption from the operation of such a
provision of a party assuming the risk, considering the nature of the obligation
undertaken. A more careful analysis would have led the lower court to a different and
correct interpretation. The very wording of the law dispels any doubt that what is
therein contemplated is the resulting liability even if caused by a fortuitous event where
the party charged may be considered as having assumed the risk incident in the nature
of the obligation to be performed. It would be an affront, not only to the logic but to the
realities of the situation, if in the light of what transpired, as found by the lower court,
defendant Federico Laureano could be held as bound to assume a risk of this nature.
There was no such obligation on his part.

Reference to the leading case of Republic v. Luzon Stevedoring Corp.7 will illustrate
when the nature of the obligation is such that the risk could be considered as having
been assumed. As noted in the opinion of Justice J.B.L. Reyes, speaking for the Court:
"The appellant strongly stresses the precautions taken by it on the day in question: that
it assigned two of its most powerful tugboats to tow down river its barge L-1892; that it
assigned to the task the more competent and experienced among its patrons, had the
towlines, engines and equipment double-checked and inspected; that it instructed its
patrons to take extra-precautions; and concludes that it had done all it was called to do,
and that the accident, therefore, should be held due to force majeure or fortuitous
event." Its next paragraph explained clearly why the defense of caso fortuito or force
majeure does not lie. Thus: "These very precautions, however, completely destroy the
appellant's defense. For caso fortuito or force majeure (which in law are identical in so
far as they exempt an obligor from liability) by definition, are extraordinary events not
foreseeable or avoidable, 'events that could not be foreseen, or which, though foreseen,
were inevitable' (Art. 1174, Civil Code of the Philippines). It is, therefore, not enough
that the event should not have been foreseen or participated, as is commonly believed,
but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the
happening is not impossibility to foresee the same: un hecho no constituye caso fortuito
por la sola circunstancia de que su existencia haga mas dificil o mas onerosa la accion
diligente del presente ofensor' (Peirano Facio, Responsibilidad Extra-contractual, p.
465; Mazeaud, Traite de la Responsibilite Civile, Vol. 2, sec. 1569). The very measures
adopted by appellant prove that the possibility of danger was not only foreseeable, but
actually foreseen, and was not caso fortuito."

In that case then, the risk was quite evident and the nature of the obligation such that a
party could rightfully be deemed as having assumed it. It is not so in the case before us.
It is anything but that. If the lower court, therefore, were duly mindful of what this
particular legal provision contemplates, it could not have reached the conclusion that
defendant Federico Laureano could be held liable. To repeat, that was clear error on its
part.

2. Appellants do not stop there. It does not suffice for them that defendant Federico
Laureano would be freed from liability. They would go farther. They would take plaintiff
to task for his complaint having joined the wife, Aida de Laureano, and the father,
Juanita Laureano. They were far from satisfied with the lower court's absolving these
two from any financial responsibility. Appellants would have plaintiff pay damages for
their inclusion in this litigation. We are not disposed to view the matter thus.

It is to be admitted, of course, that plaintiff, who is a member of the bar, ought to have
exercised greater care in selecting the parties against whom he would proceed. It may
be said that his view of the law that would consider defendant Federico Laureano liable
on the facts as thus disclosed, while erroneous, is not bereft of plausibility. Even the
lower court, mistakenly of course, entertained similar view. For plaintiff, however, to
have included the wife and the father would seem to indicate that his understanding of
the law is not all that it ought to have been.

Plaintiff apparently was not entirely unaware that the inclusion in the suit filed by him
was characterized by unorthodoxy. He did attempt to lend some color of justification by
explicitly setting forth that the father was joined as party defendant in the case as he
was the administrator of the inheritance of an undivided property to which defendant
Federico Laureano could lay claim and that the wife was likewise proceeded against
because the conjugal partnership would be made to respond for whatever liability
would be adjudicated against the husband.

It cannot be said that such an attempt at justification is impressed with a high

persuasive quality. Far from it. Nonetheless, mistaken as plaintiff apparently was, it
cannot be concluded that he was prompted solely by the desire to inflict needless and
unjustified vexation on them. Considering the equities of the situation, plaintiff having
suffered a pecuniary loss which, while resulting from a fortuitous event, perhaps would
not have occurred at all had not defendant Federico Laureano borrowed his car, we, feel
that he is not to be penalized further by his mistaken view of the law in including them
in his complaint. Well-worth paraphrasing is the thought expressed in a United States
Supreme Court decision as to the existence of an abiding and fundamental principle that
the expenses and annoyance of litigation form part of the social burden of living in a
society which seeks to attain social control through law.8
WHEREFORE, the decision of the lower court of November 2, 1965 insofar as it orders
defendant Federico Laureano to pay plaintiff the amount of P30,000.00 as damages plus
the payment of costs, is hereby reversed. It is affirmed insofar as it dismissed the case
against the other two defendants, Juanita Laureano and Aida de Laureano, and declared
that no moral damages should be awarded the parties. Without pronouncement as to
costs.

G.R. No. L-29640 June 10, 1971

GUILLERMO AUSTRIA, petitioner,
vs.
THE COURT OF APPEALS (Second Division), PACIFICO ABAD and MARIA G. ABAD,
respondents.

REYES, J.B.L., J.:

Guillermo Austria petitions for the review of the decision rendered by the Court of
Appeal (in CA-G.R. No. 33572-R), on the sole issue of whether in a contract of agency
(consignment of goods for sale) it is necessary that there be prior conviction for
robbery before the loss of the article shall exempt the consignee from liability for such
loss.

In a receipt dated 30 January 1961, Maria G. Abad acknowledged having received from
Guillermo Austria one (1) pendant with diamonds valued at P4,500.00, to be sold on
commission basis or to be returned on demand. On 1 February 1961, however, while
walking home to her residence in Mandaluyong, Rizal, Abad was said to have been
accosted by two men, one of whom hit her on the face, while the other snatched her
purse containing jewelry and cash, and ran away. Among the pieces of jewelry allegedly
taken by the robbers was the consigned pendant. The incident became the subject of a
criminal case filed in the Court of First Instance of Rizal against certain persons
(Criminal Case No. 10649, People vs. Rene Garcia, et al.).

As Abad failed to return the jewelry or pay for its value notwithstanding demands,
Austria brought in the Court of First Instance of Manila an action against her and her
husband for recovery of the pendant or of its value, and damages. Answering the
allegations of the complaint, defendants spouses set up the defense that the alleged
robbery had extinguished their obligation.

After due hearing, the trial court rendered judgment for the plaintiff, and ordered
defendants spouses, jointly and severally, to pay to the former the sum of P4,500.00,
with legal interest thereon, plus the amount of P450.00 as reasonable attorneys' fees,
and the costs. It was held that defendants failed to prove the fact of robbery, or, if
indeed it was committed, that defendant Maria Abad was guilty of negligence when she
went home without any companion, although it was already getting dark and she was
carrying a large amount of cash and valuables on the day in question, and such
negligence did not free her from liability for damages for the loss of the jewelry.
Not satisfied with his decision, the defendants went to the Court of Appeals, and there
secured a reversal of the judgment. The appellate court overruling the finding of the
trial court on the lack of credibility of the two defense witnesses who testified on the
occurrence of the robbery, and holding that the facts of robbery and defendant Maria
Abad's possesion of the pendant on that unfortunate day have been duly published,
declared respondents not responsible for the loss of the jewelry on account of a
fortuitous event, and relieved them from liability for damages to the owner. Plaintiff
thereupon instituted the present proceeding.

It is now contended by herein petitioner that the Court of Appeals erred in finding that
there was robbery in the case, although nobody has been found guilty of the supposed
crime. It is petitioner's theory that for robbery to fall under the category of a fortuitous
event and relieve the obligor from his obligation under a contract, pursuant to Article
1174 of the new Civil Code, there ought to be prior finding on the guilt of the persons
responsible therefor. In short, that the occurrence of the robbery should be proved by a
final judgment of conviction in the criminal case. To adopt a different view, petitioner
argues, would be to encourage persons accountable for goods or properties received in
trust or consignment to connive with others, who would be willing to be accused in
court for the robbery, in order to be absolved from civil liability for the loss or
disappearance of the entrusted articles.

We find no merit in the contention of petitioner.

It is recognized in this jurisdiction that to constitute a caso fortuito that would exempt a
person from responsibility, it is necessary that (1) the event must be independent of the
human will (or rather, of the debtor's or obligor's); (2) the occurrence must render it
impossible for the debtor to fulfill the obligation in a normal manner; and that (3) the
obligor must be free of participation in or aggravation of the injury to the creditor.1 A
fortuitous event, therefore, can be produced by nature, e.g., earthquakes, storms, floods,
etc., or by the act of man, such as war, attack by bandits, robbery,2 etc., provided that
the event has all the characteristics enumerated above.

It is not here disputed that if respondent Maria Abad were indeed the victim of robbery,
and if it were really true that the pendant, which she was obliged either to sell on
commission or to return to petitioner, were taken during the robbery, then the
occurrence of that fortuitous event would have extinguished her liability. The point at
issue in this proceeding is how the fact of robbery is to be established in order that a
person may avail of the exempting provision of Article 1174 of the new Civil Code,
which reads as follows:

ART. 1174. Except in cases expressly specified by 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.

It may be noted the reform that the emphasis of the provision is on the events, not on
the agents or factors responsible for them. To avail of the exemption granted in the law,
it is not necessary that the persons responsible for the occurrence should be found or
punished; it would only be sufficient to established that the enforceable event, the
robbery in this case did take place without any concurrent fault on the debtor's part,
and this can be done by preponderant evidence. To require in the present action for
recovery the prior conviction of the culprits in the criminal case, in order to establish
the robbery as a fact, would be to demand proof beyond reasonable doubt to prove a
fact in a civil case.

It is undeniable that in order to completely exonerate the debtor for reason of a

fortutious event, such debtor must, in addition to the cams itself, be free of any
concurrent or contributory fault or negligence.3 This is apparent from Article 1170 of
the Civil Code of the Philippines, providing that:

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.

It is clear that under the circumstances prevailing at present in the City of Manila and its
suburbs, with their high incidence of crimes against persons and property that renders
travel after nightfall a matter to be sedulously avoided without suitable precaution and
protection, the conduct of respondent Maria G. Abad, in returning alone to her house in
the evening, carrying jewelry of considerable value would be negligent per se and would
not exempt her from responsibility in the case of a robbery. We are not persuaded,
however, that the same rule should obtain ten years previously, in 1961, when the
robbery in question did take place, for at that time criminality had not by far reached
the levels attained in the present day.

There is likewise no merit in petitioner's argument that to allow the fact of robbery to
be recognized in the civil case before conviction is secured in the criminal action, would
prejudice the latter case, or would result in inconsistency should the accused obtain an
acquittal or should the criminal case be dismissed. It must be realized that a court
finding that a robbery has happened would not necessarily mean that those accused in
the criminal action should be found guilty of the crime; nor would a ruling that those
actually accused did not commit the robbery be inconsistent with a finding that a
robbery did take place. The evidence to establish these facts would not necessarily be
the same.

WHEREFORE, finding no error in the decision of the Court of Appeals under review, the
petition in this case is hereby dismissed with costs against the petitioner.

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.

Raymundo A. Armovit for private respondent in L-47379.

The Solicitor General for petitioner.

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 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, 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).

The project involved two (2) major phases: the first phase comprising, the tunnel work
covering a distance 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.

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.

G.R. No. 113003 October 17, 1997

ALBERTA YOBIDO and CRESENCIO YOBIDO, petitioners,
vs.
COURT OF APPEALS, LENY TUMBOY, ARDEE TUMBOY and JASMIN TUMBOY,
respondents.
ROMERO, J.:

In this petition for review on certiorari of the decision of the Court of Appeals, the issue
is whether or not the explosion of a newly installed tire of a passenger vehicle is a
fortuitous event that exempts the carrier from liability for the death of a passenger.

On April 26, 1988, spouses Tito and Leny Tumboy and their minor children named
Ardee and Jasmin, bearded at Mangagoy, Surigao del Sur, a Yobido Liner bus bound for
Davao City. Along Picop Road in Km. 17, Sta. Maria, Agusan del Sur, the left front tire of
the bus exploded. The bus fell into a ravine around three (3) feet from the road and
struck a tree. The incident resulted in the death of 28-year-old Tito Tumboy and
physical injuries to other passengers.

On November 21, 1988, a complaint for breach of contract of carriage, damages and
attorney's fees was filed by Leny and her children against Alberta Yobido, the owner of
the bus, and Cresencio Yobido, its driver, before the Regional Trial Court of Davao City.
When the defendants therein filed their answer to the complaint, they raised the
affirmative defense of caso fortuito. They also filed a third-party complaint against
Philippine Phoenix Surety and Insurance, Inc. This third-party defendant filed an
answer with compulsory counterclaim. At the pre-trial conference, the parties agreed to
a stipulation of facts.1

Upon a finding that the third party defendant was not liable under the insurance
contract, the lower court dismissed the third party complaint. No amicable settlement
having been arrived at by the parties, trial on the merits ensued.

The plaintiffs asserted that violation of the contract of carriage between them and the
defendants was brought about by the driver's failure to exercise the diligence required
of the carrier in transporting passengers safely to their place of destination. According
to Leny Tumboy, the bus left Mangagoy at 3:00 o'clock in the afternoon. The winding
road it traversed was not cemented and was wet due to the rain; it was rough with
crushed rocks. The bus which was full of passengers had cargoes on top. Since it was
"running fast," she cautioned the driver to slow down but he merely stared at her
through the mirror. At around 3:30 p.m., in Trento, she heard something explode and
immediately, the bus fell into a ravine.

For their part, the defendants tried to establish that the accident was due to a fortuitous
event. Abundio Salce, who was the bus conductor when the incident happened, testified
that the 42-seater bus was not full as there were only 32 passengers, such that he
himself managed to get a seat. He added that the bus was running at a speed of "60 to
50" and that it was going slow because of the zigzag road. He affirmed that the left front
tire that exploded was a "brand new tire" that he mounted on the bus on April 21, 1988
or only five (5) days before the incident. The Yobido Liner secretary, Minerva Fernando,
bought the new Goodyear tire from Davao Toyo Parts on April 20, 1988 and she was
present when it was mounted on the bus by Salce. She stated that all driver applicants in
Yobido Liner underwent actual driving tests before they were employed. Defendant
Cresencio Yobido underwent such test and submitted his professional driver's license
and clearances from the barangay, the fiscal and the police.
On August 29, 1991, the lower court rendered a decision2 dismissing the action for lack
of merit. On the issue of whether or not the tire blowout was a caso fortuito, it found
that "the falling of the bus to the cliff was a result of no other outside factor than the tire
blow-out." It held that the ruling in the La Mallorca and Pampanga Bus Co. v. De Jesus3
that a tire blowout is "a mechanical defect of the conveyance or a fault in its equipment
which was easily discoverable if the bus had been subjected to a more thorough or rigid
check-up before it took to the road that morning" is inapplicable to this case. It reasoned
out that in said case, it was found that the blowout was caused by the established fact
that the inner tube of the left front tire "was pressed between the inner circle of the left
wheel and the rim which had slipped out of the wheel." In this case, however, "the cause
of the explosion remains a mystery until at present." As such, the court added, the tire
blowout was "a caso fortuito which is completely an extraordinary circumstance
independent of the will" of the defendants who should be relieved of "whatever liability
the plaintiffs may have suffered by reason of the explosion pursuant to Article 11744 of
the Civil Code."

Dissatisfied, the plaintiffs appealed to the Court of Appeals. They ascribed to the lower
court the following errors: (a) finding that the tire blowout was a caso fortuito; (b)
failing to hold that the defendants did not exercise utmost and/or extraordinary
diligence required of carriers under Article 1755 of the Civil Code, and (c) deciding the
case contrary to the ruling in Juntilla v. Fontanar,5 and Necesito v. Paras.6

On August 23, 1993, the Court of Appeals rendered the Decision7 reversing that of the
lower court. It held that:

To Our mind, the explosion of the tire is not in itself a fortuitous event. The cause of the
blow-out, if due to a factory defect, improper mounting, excessive tire pressure, is not
an unavoidable event. On the other hand, there may have been adverse conditions on
the road that were unforeseeable and/or inevitable, which could make the blow-out a
caso fortuito. The fact that the cause of the blow-out was not known does not relieve the
carrier of liability. Owing to the statutory presumption of negligence against the carrier
and its obligation to exercise the utmost diligence of very cautious persons to carry the
passenger safely as far as human care and foresight can provide, it is the burden of the
defendants to prove that the cause of the blow-out was a fortuitous event. It is not
incumbent upon the plaintiff to prove that the cause of the blow-out is not caso-fortuito.

Proving that the tire that exploded is a new Goodyear tire is not sufficient to discharge
defendants' burden. As enunciated in Necesito vs. Paras, the passenger has neither
choice nor control over the carrier in the selection and use of its equipment, and the
good repute of the manufacturer will not necessarily relieve the carrier from liability.

Moreover, there is evidence that the bus was moving fast, and the road was wet and
rough. The driver could have explained that the blow-out that precipitated the accident
that caused the death of Toto Tumboy could not have been prevented even if he had
exercised due care to avoid the same, but he was not presented as witness.

The Court of Appeals thus disposed of the appeal as follows:

WHEREFORE, the judgment of the court a quo is set aside and another one entered
ordering defendants to pay plaintiffs the sum of P50,000.00 for the death of Tito
Tumboy, P30,000.00 in moral damages, and P7,000.00 for funeral and burial expenses.

SO ORDERED.

The defendants filed a motion for reconsideration of said decision which was denied on
November 4, 1993 by the Court of Appeals. Hence, the instant petition asserting the
position that the tire blowout that caused the death of Tito Tumboy was a caso fortuito.
Petitioners claim further that the Court of Appeals, in ruling contrary to that of the
lower court, misapprehended facts and, therefore, its findings of fact cannot be
considered final which shall bind this Court. Hence, they pray that this Court review the
facts of the case.

The Court did re-examine the facts and evidence in this case because of the
inapplicability of the established principle that the factual findings of the Court of
Appeals are final and may not be reviewed on appeal by this Court. This general
principle is subject to exceptions such as the one present in this case, namely, that the
lower court and the Court of Appeals arrived at diverse factual findings.8 However,
upon such re-examination, we found no reason to overturn the findings and conclusions
of the Court of Appeals.

As a rule, when a passenger boards a common carrier, he takes the risks incidental to
the mode of travel he has taken. After all, a carrier is not an insurer of the safety of its
passengers and is not bound absolutely and at all events to carry them safely and
without injury.9 However, when a passenger is injured or dies while travelling, the law
presumes that the common carrier is negligent. Thus, the Civil Code provides:

Art. 1756. In case of death or injuries to passengers, common carriers are presumed to
have been at fault or to have acted negligently, unless they prove that they observed
extraordinary diligence as prescribed in articles 1733 and 1755.

Article 1755 provides that "(a) common carrier is bound to carry the passengers safely
as far as human care and foresight can provide, using the utmost diligence of very
cautious persons, with a due regard for all the circumstances." Accordingly, in culpa
contractual, once a passenger dies or is injured, the carrier is presumed to have been at
fault or to have acted negligently. This disputable presumption may only be overcome
by evidence that the carrier had observed extraordinary diligence as prescribed by
Articles 1733,10 1755 and 1756 of the Civil Code or that the death or injury of the
passenger was due to a fortuitous event.11 Consequently, the court need not make an
express finding of fault or negligence on the part of the carrier to hold it responsible for
damages sought by the passenger.12

In view of the foregoing, petitioners' contention that they should be exempt from
liability because the tire blowout was no more than a fortuitous event that could not
have been foreseen, must fail. A fortuitous event is possessed of the following
characteristics: (a) the cause of the unforeseen and unexpected occurrence, or the
failure of the debtor to comply with his obligations, 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 obliger must be free from any participation in the aggravation of the injury resulting
to the creditor.13 As Article 1174 provides, 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.14

Under the circumstances of this case, the explosion of the new tire may not be
considered a fortuitous event. There are human factors involved in the situation. The
fact that the tire was new did not imply that it was entirely free from manufacturing
defects or that it was properly mounted on the vehicle. Neither may the fact that the tire
bought and used in the vehicle is of a brand name noted for quality, resulting in the
conclusion that it could not explode within five days' use. Be that as it may, it is settled
that an accident caused either by defects in the automobile or through the negligence of
its driver is not a caso fortuito that would exempt the carrier from liability for
damages.15

Moreover, a common carrier may not be absolved from liability in case of force majeure
or fortuitous event alone. The common carrier must still prove that it was not negligent
in causing the death or injury resulting from an accident.16 This Court has had occasion
to state:

While it may be true that the tire that blew-up was still good because the grooves of the
tire were still visible, this fact alone does not make the explosion of the tire a fortuitous
event. No evidence was presented to show that the accident was due to adverse road
conditions or that precautions were taken by the jeepney driver to compensate for any
conditions liable to cause accidents. The sudden blowing-up, therefore, could have been
caused by too much air pressure injected into the tire coupled by the fact that the
jeepney was overloaded and speeding at the time of the accident.17

It is interesting to note that petitioners proved through the bus conductor, Salce, that
the bus was running at "60-50" kilometers per hour only or within the prescribed lawful
speed limit. However, they failed to rebut the testimony of Leny Tumboy that the bus
was running so fast that she cautioned the driver to slow down. These contradictory
facts must, therefore, be resolved in favor of liability in view of the presumption of
negligence of the carrier in the law. Coupled with this is the established condition of the
road — rough, winding and wet due to the rain. It was incumbent upon the defense to
establish that it took precautionary measures considering partially dangerous condition
of the road. As stated above, proof that the tire was new and of good quality is not
sufficient proof that it was not negligent. Petitioners should have shown that it
undertook extraordinary diligence in the care of its carrier, such as conducting daily
routinary check-ups of the vehicle's parts. As the late Justice J.B.L. Reyes said:

It may be impracticable, as appellee argues, to require of carriers to test the strength of

each and every part of its vehicles before each trip; but we are of the opinion that a due
regard for the carrier's obligations toward the traveling public demands adequate
periodical tests to determine the condition and strength of those vehicle portions the
failure of which may endanger the safety of the passengers.18
Having failed to discharge its duty to overthrow the presumption of negligence with
clear and convincing evidence, petitioners are hereby held liable for damages. Article
176419 in relation to Article 220620 of the Civil Code prescribes the amount of at least
three thousand pesos as damages for the death of a passenger. Under prevailing
jurisprudence, the award of damages under Article 2206 has been increased to fifty
thousand pesos (P50,000.00).
Moral damages are generally not recoverable in culpa contractual except when bad faith
had been proven. However, the same damages may be recovered when breach of
contract of carriage results in the death of a passenger,22 as in this case. Exemplary
damages, awarded by way of example or correction for the public good when moral
damages are awarded,23 may likewise be recovered in contractual obligations if the
defendant acted in wanton, fraudulent, reckless, oppressive, or malevolent manner.24
Because petitioners failed to exercise the extraordinary diligence required of a common
carrier, which resulted in the death of Tito Tumboy, it is deemed to have acted
recklessly.25 As such, private respondents shall be entitled to exemplary damages.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED subject to the
modification that petitioners shall, in addition to the monetary awards therein, be liable
for the award of exemplary damages in the amount of P20,000.00. Costs against
petitioners.
SO ORDERED.

G.R. No. 132864 October 24, 2005

PHILIPPINE FREE PRESS, INC., Petitioner,
vs.
COURT OF APPEALS (12th Division) and LIWAYWAY PUBLISHING, INC., Respondents.

DECISION

GARCIA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner
Philippine Free Press, Inc. seeks the reversal of the Decision1 dated February 25, 1998
of the Court of Appeals (CA) in CA-GR CV No. 52660, affirming, with modification, an
earlier decision of the Regional Trial Court at Makati, Branch 146, in an action for
annulment of deeds of sale thereat instituted by petitioner against the Presidential
Commission for Good

Government (PCGG) and the herein private respondent, Liwayway Publishing, Inc.

As found by the appellate court in the decision under review, the facts are:

xxx [Petitioner] . . . is a domestic corporation engaged in the publication of Philippine

Free Press Magazine, one of the . . . widely circulated political magazines in the
Philippines. Due to its wide circulation, the publication of the Free Press magazine
enabled [petitioner] to attain considerable prestige prior to the declaration of Martial
Law as well as to achieve a high profit margin. . . .
Sometime in . . . 1963, [petitioner] purchased a parcel of land situated at No. 2249,
Pasong Tamo Street, Makati which had an area of 5,000 square meters as evidenced
by . . . (TCT) No. 109767 issued by the Register of Deeds of Makati (Exh. Z). Upon taking
possession of the subject land, [petitioner] constructed an office building thereon to
house its various machineries, equipment, office furniture and fixture. [Petitioner]
thereafter made the subject building its main office . . . .

During the 1965 presidential elections, [petitioner] supported the late President
Diosdado Macapagal against then Senate President Ferdinand Marcos. Upon the election
of the late President Ferdinand Marcos in 1965 and prior to the imposition of Martial
law on September 21, 1972, [petitioner] printed numerous articles highly critical of the
Marcos administration, exposing the corruption and abuses of the regime. The
[petitioner] likewise ran a series of articles exposing the plan of the Marcoses to impose
a dictatorship in the guise of Martial Law . . . .

In the evening of September 20, 1972, soldiers surrounded the Free Press Building,
forced out its employees at gunpoint and padlocked the said establishment. The soldier
in charge of the military contingent then informed Teodoro Locsin, Jr., the son of
Teodoro Locsin, Sr., the President of [petitioner], that Martial Law had been declared
and that they were instructed by the late President Marcos to take over the building and
to close the printing press. xxx.

On September 21, 1972 . . ., Teodoro Locsin, Sr. was arrested [and] . . . . was brought to
Camp Crame and was subsequently transferred to the maximum security bloc at Fort
Bonifacio.

Sometime in December, 1972, Locsin, Sr. was informed . . . that no charges were to be
filed against him and that he was to be provisionally released subject to the following
conditions, to wit: (1) he remained (sic) under ‘city arrest’; xxx (5) he was not to
publish the Philippine Free Press nor was he to do, say or write anything critical of the
Marcos administration . . . .

Consequently, the publication of the Philippine Free Press ceased. The subject building
remained padlocked and under heavy military guard (TSB, 27 May 1993, pp. 51-52;
stipulated). The cessation of the publication of the ... magazine led to the financial ruin
of [petitioner] . . . . [Petitioner’s] situation was further aggravated when its employees
demanded the payment of separation pay as a result of the cessation of its operations.
[Petitioner’s] minority stockholders, furthermore, made demands that Locsin, Sr. buy
out their shares. xxx.

On separate occasions in 1973, Locsin, Sr. was approached by the late Atty. Crispin
Baizas with offers from then President Marcos for the acquisition of the [petitioner].
However, Locsin, Sr. refused the offer stating that [petitioner] was not for sale (TSN, 2
May 1988, pp. 8-9, 40; 27 May 1993, pp. 66-67).

A few months later, the late Secretary Guillermo De Vega approached Locsin, Sr.
reiterating Marcos’s offer to purchase the name and the assets of the [petitioner].xxx
Sometime during the middle of 1973, Locsin, Sr. was contacted by Brig. Gen. Hans
Menzi, the former aide-de-camp of then President Marcos concerning the sale of the
[petitioner]. Locsin, Sr. requested that the meeting be held inside the [petitioner]
Building and this was arranged by Menzi (TSN, 27 May 1993, pp. 69-70). During the
said meeting, Menzi once more reiterated Marcos’s offer to purchase both the name and
the assets of [petitioner] adding that "Marcos cannot be denied" (TSN, 27 May 1993, p.
71). Locsin, Sr. refused but Menzi insisted that he had no choice but to sell. Locsin, Sr.
then made a counteroffer that he will sell the land, the building and all the machineries
and equipment therein but he will be allowed to keep the name of the [petitioner].
Menzi promised to clear the matter with then President Marcos (TSN, 27 May 1993, p.
72). Menzi thereafter contacted Locsin, Sr. and informed him that President Marcos was
amenable to his counteroffer and is offering the purchase price of Five Million Seven
Hundred Fifty Thousand (P5, 750,000.00) Pesos for the land, the building, the
machineries, the office furnishing and the fixtures of the [petitioner] on a "take-it-or-
leave-it" basis (TSN, 2 May 1988, pp.42-43; 27 May 1993, p. 88).

On August 22, 1973, Menzi tendered to Locsin, Sr. a check for One Million (P1,
000,000.00) Pesos downpayment for the sale, . . . Locsin, Sr. accepted the check, subject
to the condition that he will refund the same in case the sale will not push through.
(Exh. 7).

On August 23, 1973, the Board of Directors of [petitioner] held a meeting and
reluctantly passed a resolution authorizing Locsin, Sr. to sell the assets of the
[petitioner] to Menzi minus the name "Philippine Free Press (Exhs. A-1 and 1; TSN, 27
May 1993, pp. 73-76).

On October 23, 1973, the parties [petitioner, as vendor and private respondent,
represented by B/Gen. Menzi, as vendee] met . . . and executed two (2) notarized Deeds
of Sale covering the land, building and the machineries of the [petitioner]. Menzi paid
the balance of the purchase price in the amount of . . . (P4,750,000.00) Pesos (Exhs. A
and (; B and 10;TSN, 27 May 1993, pp. 81-82; 3 June 1993, p. 89).

Locsin, Sr. thereafter used the proceeds of the sale to pay the separation pay of
[petitioner’s] employees, buy out the shares of the minority stockholders as well as to
settle all its obligations.

On February 26, 1987, [petitioner] filed a complaint for Annulment of Sale against
[respondent] Liwayway and the PCGG before the Regional Trail Court of Makati, Branch
146 on the grounds of vitiated consent and gross inadequacy of purchase price. On
motion of defendant PCGG, the complaint against it was dismissed on October 22, 1987.
(Words in bracket and underscoring added)

In a decision dated October 31, 1995,2 the trial court dismissed petitioner’s complaint
and granted private respondent’s counterclaim, to wit:

WHEREFORE, in view of all the foregoing premises, the herein complaint for annulment
of sales is hereby dismissed for lack of merit.
On [respondent] counterclaim, the court finds for [respondent] and against [petitioner]
for the recovery of attorney’s fees already paid for at P1,945,395.98, plus a further
P316,405.00 remaining due and payable.

SO ORDERED. (Words in bracket added)

In time, petitioner appealed to the Court of Appeals (CA) whereat its appellate recourse
was docketed as CA-G.R. C.V. No. 52660.

As stated at the outset hereof, the appellate court, in a decision dated February 25,
1998, affirmed with modification the appealed decision of the trial court, the
modification consisting of the deletion of the award of attorney’s fees to private
respondent, thus:

WHEREFORE, with the sole modification that the award of attorney’s fees in favor of
[respondent] be deleted, the Decision appealed from is hereby AFFIRMED in all
respects.

SO ORDERED.

Hence, petitioner’s present recourse, urging the setting aside of the decision under
review which, to petitioner, decided questions of substance in a way not in accord with
law and applicable jurisprudence considering that the appellate court gravely erred:

I. xxx IN ITS MISAPPLICATION OF THE DECISIONS OF THE HONORABLE COURT THAT

RESULTED IN ITS ERRONEOUS CONCLUSION THAT PETITIONER'S CAUSE OF ACTION
HAD ALREADY PRESCRIBED.

II. xxx IN CONCLUDING THAT THE UNDISPUTED FACTS AND CIRCUMSTANCES

PRECEDING THE EXECUTION OF THE CONTRACTS OF SALE FOR THE PETITIONER'S
PROPERTIES DID NOT ESTABLISH THE FORCE, INTIMIDATION, DURESS AND UNDUE
INFLUENCE WHICH VITIATED PETITIONER'S CONSENT.

A. xxx IN CONSIDERING AS HEARSAY THE TESTIMONIAL EVIDENCE WHICH CLEARLY

ESTABLISHED THE THREATS MADE UPON PETITIONER AND THAT RESPONDENT
LIWAYWAY WILL BE USED AS THE CORPORATE VEHICLE FOR THE FORCED
ACQUISITION OF PETITIONER'S PROPERTIES.

B. xxx IN CONCLUDING THAT THE ACTS OF THEN PRESIDENT MARCOS DURING

MARTIAL LAW DID NOT CONSTITUTE THE FORCE, INTIMIDATION, DURESS AND
UNDUE INFLUENCE WHICH VITIATED PETITIONER'S CONSENT.

C. xxx IN RESOLVING THE INSTANT CASE ON THE BASIS OF MERE SURMISES AND
SPECULATIONS INSTEAD OF THE UNDISPUTED EVIDENCE ON RECORD.

III. xxx IN CONCLUDING THAT THE GROSSLY INADEQUATE PURCHASE PRICE FOR
PETITIONER'S PROPERTIES DOES NOT INDICATE THE VITIATION OF PETITIONER'S
CONSENT TO THE CONTRACTS OF SALE.
IV. xxx IN CONCLUDING THAT PETITIONER'S USE OF THE PROCEEDS OF THE SALE
FOR ITS SURVIVAL CONSTITUTE AN IMPLIED RATIFICATION [OF] THE CONTRACTS OF
SALE.

V. xxx IN EXCLUDING PETITIONER'S EXHIBITS "X-6" TO "X-7" AND "Y-3" (PROFFER)

WHICH ARE ADMISSIBLE EVIDENCE WHICH COMPETENTLY PROVE THAT THEN
PRESIDENT MARCOS OWNED PRIVATE RESPONDENT LIWAYWAY, WHICH WAS USED
AS THE CORPORATE VEHICLE FOR THE ACQUISITION OF PETITIONER'S PROPERTIES.

The petition lacks merit.

Petitioner starts off with its quest for the allowance of the instant recourse on the
submission that the martial law regime tolled the prescriptive period under Article
1391 of the Civil Code, which pertinently reads:

Article 391. The action for annulment shall be brought within four years.

This period shall begin:

In cases of intimidation, violence or undue influence, from the time the defect of the
consent ceases.

xxx xxx xxx

It may be recalled that the separate deeds of sale3 sought to be annulled under
petitioner’s basic complaint were both executed on October 23, 1973. Per the appellate
court, citing Development Bank of the Philippines [DBP] vs. Pundogar4, the 4-year
prescriptive period for the annulment of the aforesaid deeds ended "in late 1977",
doubtless suggesting that petitioner’s right to seek such annulment accrued four (4)
years earlier, a starting time-point corresponding, more or less, to the date of the
conveying deed, i.e., October 23, 1973. Petitioner contends, however, that the 4-year
prescriptive period could not have commenced to run on October 23, 1973, martial law
being then in full swing. Plodding on, petitioner avers that the continuing threats on the
life of Mr. Teodoro Locsin, Sr. and his family and other menacing effects of martial law –
which should be considered as force majeure - ceased only after the February 25, 1986
People Power uprising.

Petitioner instituted its complaint for annulment of contracts on February 26, 1987. The
question that now comes to the fore is: Did the 4-year prescriptive period start to run in
late October 1973, as postulated in the decision subject of review, or on February 25,
1986, as petitioner argues, on the theory that martial law has the effects of a force
majeure5, which, in turn, works to suspend the running of the prescriptive period for
the main case filed with the trial court.

Petitioner presently faults the Court of Appeals for its misapplication of the doctrinal
rule laid down in DBP vs. Pundogar6 where this Court, citing and quoting excerpts from
the ruling in Tan vs. Court of Appeals 7, as reiterated in National Development Company
vs. Court of Appeals, 8 wrote –
We can not accept the petitioners’ contention that the period during which
authoritarian rule was in force had interrupted prescription and that the same began to
run only on February 25, 1986, when the Aquino government took power. It is true that
under Article 1154 [of the Civil Code] xxx fortuitous events have the effect of tolling the
period of prescription. However, we can not say, as a universal rule, that the period
from September 21, 1972 through February 25, 1986 involves a force majeure. Plainly,
we can not box in the "dictatorial" period within the term without distinction, and
without, by necessity, suspending all liabilities, however demandable, incurred during
that period, including perhaps those ordered by this Court to be paid. While this Court is
cognizant of acts of the last regime, especially political acts, that might have indeed
precluded the enforcement of liability against that regime and/or its minions, the Court
is not inclined to make quite a sweeping pronouncement, . . . . It is our opinion that
claims should be taken on a case-to-case basis. This selective rule is compelled, among
others, by the fact that not all those imprisoned or detained by the past dictatorship
were true political oppositionists, or, for that matter, innocent of any crime or
wrongdoing. Indeed, not a few of them were manipulators and scoundrels. [Italization
in the original; Underscoring and words in bracket added]

According to petitioner, the appellate court misappreciated and thus misapplied the
correct thrust of the Tan case, as reiterated in DBP which, per petitioner’s own
formulation, is the following:9

The prevailing rule, therefore, is that on a case-to-case basis, the Martial Law regime
may be treated as force majeure that suspends the running of the applicable
prescriptive period provided that it is established that the party invoking the imposition
of Martial Law as a force majeure are true oppositionists during the Martial Law regime
and that said party was so circumstanced that is was impossible for said party to
commence, continue or to even resist an action during the dictatorial regime. (Emphasis
and underscoring in the original)

We are not persuaded.

It strains credulity to believe that petitioner found it impossible to commence and

succeed in an annulment suit during the entire stretch of the dictatorial regime. The
Court can grant that Mr. Locsin, Sr. and petitioner were, in the context of DBP and Tan,
"true oppositionists" during the period of material law. Petitioner, however, has failed
to convincingly prove that Mr. Locsin, Sr., as its then President, and/or its governing
board, were so circumstanced that it was well-nigh impossible for him/them to
successfully institute an action during the martial law years. Petitioner cannot plausibly
feign ignorance of the fact that shortly after his arrest in the evening of September 20,
1972, Mr. Locsin, Sr., together with several other journalists10, dared to file suits
against powerful figures of the dictatorial regime and veritably challenged the legality of
the declaration of martial law. Docketed in this Court as GR No. L-35538, the case, after
its consolidation with eight (8) other petitions against the martial law regime, is now
memorialized in books of jurisprudence and cited in legal publications and case studies
as Aquino vs. Enrile.11

Incidentally, Mr. Locsin Sr., as gathered from the ponencia of then Chief Justice Querube
Makalintal in Aquino, was released from detention notwithstanding his refusal to
withdraw from his petition in said case. Judging from the actuations of Mr. Locsin, Sr.
during the onset of martial law regime and immediately thereafter, any suggestion that
intimidation or duress forcibly stayed his hands during the dark days of martial law to
seek judicial assistance must be rejected.12

Given the foregoing perspective, the Court is not prepared to disturb the ensuing ruling
of the appellate court on the effects of martial law on petitioner’s right of action:

In their testimonies before the trial court, both Locsin, Sr. and Locsin, Jr. claimed that
they had not filed suit to recover the properties until 1987 as they could not expect
justice to be done because according to them, Marcos controlled every part of the
government, including the courts, (TSN, 2 May 1988, pp. 23-24; 27 May 1993, p. 121).
While that situation may have obtained during the early years of the martial law
administration, We could not agree with the proposition that it remained consistently
unchanged until 1986, a span of fourteen (14) years. The unfolding of subsequent
events would show that while dissent was momentarily stifled, it was not totally
silenced. On the contrary, it steadily simmered and smoldered beneath the political
surface and culminated in that groundswell of popular protest which swept the
dictatorship from power.13

The judiciary too, as an institution, was no ivory tower so detached from the ever
changing political climate. While it was not totally impervious to the influence of the
dictatorship’s political power, it was not hamstrung as to render it inutile to perform its
functions normally. To say that the Judiciary was not able to render justice to the
persons who sought redress before it . . . during the Martial Law years is a sweeping and
unwarranted generalization as well as an unfounded indictment. The Judiciary, . . . did
not lack in gallant jurists and magistrates who refused to be cowed into silence by the
Marcos administration. Be that as it may, the Locsin’s mistrust of the courts and of
judicial processes is no excuse for their non-observance of the prescriptive period set
down by law.

Corollary to the presented issue of prescription of action for annulment of contract

voidable on account of defect of consent14 is the question of whether or not duress,
intimidation or undue influence vitiated the petitioner’s consent to the subject contracts
of sale. Petitioner delves at length on the vitiation issue and, relative thereto, ascribes
the following errors to the appellate court: first, in considering as hearsay the
testimonial evidence that may prove the element of "threat" against petitioner or Mr.
Locsin, Sr., and the dictatorial regime's use of private respondent as a corporate vehicle
for forcibly acquiring petitioner’s properties; second, in concluding that the acts of then
President Marcos during the martial law years did not have a consent-vitiating effect on
petitioner; and third, in resolving the case on the basis of mere surmises and
speculations.

The evidence referred to as hearsay pertains mainly to the testimonies of Messrs.

Locsin, Sr. and Teodoro Locsin, Jr. (the Locsins, collectively), which, in gist, established
the following facts: 1) the widely circulated Free Press magazine, which, prior to the
declaration of Martial Law, took the strongest critical stand against the Marcos
administration, was closed down on the eve of such declaration, which closure
eventually drove petitioner to financial ruin; 2) upon Marcos’ orders, Mr. Locsin, Sr. was
arrested and detained for over 2 months without charges and, together with his family,
was threatened with execution; 3) Mr. Locsin, Sr. was provisionally released on the
condition that he refrains from reopening Free Press and writing anything critical of the
Marcos administration; and 4) Mr. Locsin, Sr. and his family remained fearful of
reprisals from Marcos until the 1986 EDSA Revolution.

Per the Locsins, it was amidst the foregoing circumstances that petitioner’s property in
question was sold to private respondent, represented by Gen. Menzi, who, before the
sale, allegedly applied the squeeze on Mr. Locsin, Sr. thru the medium of the "Marcos
cannot be denied" and "[you] have no choice but to sell" line.

The appellate court, in rejecting petitioner’s above posture of vitiation of consent,

observed:

It was under the above-enumerated circumstances that the late Hans Menzi, allegedly
acting on behalf of the late President Marcos, made his offer to purchase the Free Press.
It must be noted, however, that the testimonies of Locsin, Sr. and Locsin, Jr. regarding
Menzi’s alleged implied threat that "Marcos cannot be denied" and that [respondent]
was to be the corporate vehicle for Marcos’s takeover of the Free Press is hearsay as
Menzi already passed away and is no longer in a position to defend himself; the same
can be said of the offers to purchase made by Atty. Crispin Baizas and Secretary
Guillermo de Vega who are also both dead. It is clear from the provisions of Section 36,
Rule 130 of the 1989 Revised Rules on Evidence that any evidence, . . . is hearsay if its
probative value is not based on the personal knowledge of the witness but on the
knowledge of some other person not on the witness stand. Consequently, hearsay
evidence, whether objected to or not, has no probative value unless the proponent can
show that the evidence falls within the exceptions to the hearsay evidence rule
(Citations omitted)

The appellate court’s disposition on the vitiation-of-consent angle and the ratio therefor
commends itself for concurrence.

Jurisprudence instructs that evidence of statement made or a testimony is hearsay if

offered against a party who has no opportunity to cross-examine the witness. Hearsay
evidence is excluded precisely because the party against whom it is presented is
deprived of or is bereft of opportunity to cross-examine the persons to whom the
statements or writings are attributed.15 And there can be no quibbling that because
death has supervened, the late Gen Menzi, like the other purported Marcos subalterns,
Messrs. Baizas and De Vega, cannot cross-examine the Locsins for the threatening
statements allegedly made by them for the late President.

Like the Court of Appeals, we are not unmindful of the exception to the hearsay rule
provided in Section 38, Rule 130 of the Rules of Court, which reads:

SEC. 38. Declaration against interest. – The declaration made by a person deceased or
unable to testify, against the interest of the declarant, if the fact asserted in the
declaration was at the time it was made so far contrary to the declarant's own interest,
that a reasonable man in his position would not have made the declaration unless he
believed it to be true, may be received in evidence against himself or his successors-in-
interest and against third persons.

However, in assessing the probative value of Gen. Menzi’s supposed declaration against
interest, i.e., that he was acting for the late President Marcos when he purportedly
coerced Mr. Locsin, Sr. to sell the Free Press property, we are loathed to give it the
evidentiary weight petitioner endeavors to impress upon us. For, the Locsins can hardly
be considered as disinterested witnesses. They are likely to gain the most from the
annulment of the subject contracts. Moreover, allegations of duress or coercion should,
like fraud, be viewed with utmost caution. They should not be laid lightly at the door of
men whose lips had been sealed by death.16 Francisco explains why:

[I]t has been said that "of all evidence, the narration of a witness of his conversation
with a dead person is esteemed in justice the weakest.’" One reason for its unreliability
is that the alleged declarant can not recall to the witness the circumstances under which
his statement were made. The temptation and opportunity for fraud in such cases also
operate against the testimony. Testimony to statements of a deceased person, at least
where proof of them will prejudice his estate, is regarded as an unsafe foundation for
judicial action except in so far as such evidence is borne out by what is natural and
probable under the circumstances taken in connection with actual known facts. And a
court should be very slow to act upon the statement of one of the parties to a supposed
agreement after the death of the other party; such corroborative evidence should be
adduced as to satisfy the court of the truth of the story which is to benefit materially the
person telling it. 17

Excepting, petitioner insists that the testimonies of its witnesses – the Locsins - are not
hearsay because:

In this regard, hearsay evidence has been defined as "the evidence not of what the
witness knows himself but of what he has heard from others." xxx Thus, the mere fact
that the other parties to the conversations testified to by the witness are already
deceased does [not] render such testimony inadmissible for being hearsay. 18

xxx xxx xxx

The testimonies of Teodoro Locsin, Sr. and Teodoro Locsin, Jr. that the late Atty. Baizas,
Gen. Menzi and Secretary de Vega stated that they were representing Marcos, that
"Marcos cannot be denied", and the fact that Gen. Menzi stated that private respondent
Liwayway was to be the corporate vehicle for the then President Marcos' take-over of
petitioner Free Press are not hearsay. Teodoro Locsin, Sr. and Teodoro Locsin, Jr. were
in fact testifying to matters of their own personal knowledge because they were either
parties to the said conversation or were present at the time the said statements were
made. 19

Again, we disagree.

Even if petitioner succeeds in halving its testimonial evidence, one-half purporting to

quote the words of a live witness and the other half purporting to quote what the live
witness heard from one already dead, the other pertaining to the dead shall
nevertheless remain hearsay in character.

The all too familiar rule is that "a witness can testify only to those facts which he knows
of his own knowledge". 20 There can be no quibbling that petitioner’s witnesses cannot
testify respecting what President Marcos said to Gen. Menzi about the acquisition of
petitioner’s newspaper, if any there be, precisely because none of said witnesses ever
had an opportunity to hear what the two talked about.

Neither may petitioner circumvent the hearsay rule by invoking the exception under the
declaration-against-interest rule. In context, the only declaration supposedly made by
Gen. Menzi which can conceivably be labeled as adverse to his interest could be that he
was acting in behalf of Marcos in offering to acquire the physical assets of petitioner. Far
from making a statement contrary to his own interest, a declaration conveying the
notion that the declarant possessed the authority to speak and to act for the President of
the Republic can hardly be considered as a declaration against interest.

Petitioner next assails the Court of Appeals on its conclusion that Martial Law is not per
se a consent-vitiating phenomenon. Wrote the appellate court: 21

In other words, the act of the ruling power, in this case the martial law administration,
was not an act of mere trespass but a trespass in law - not a perturbacion de mero
hecho but a pertubacion de derecho - justified as it is by an act of government in
legitimate self-defense (IFC Leasing & Acceptance Corporation v. Sarmiento
Distributors Corporation, …, citing Caltex (Phils.) v. Reyes, 84 Phil. 654 [1949].
Consequently, the act of the Philippine Government in declaring martial law can not be
considered as an act of intimidation of a third person who did not take part in the
contract (Article 1336, Civil Code). It is, therefore, incumbent on [petitioner] to present
clear and convincing evidence showing that the late President Marcos, acting through
the late Hans Menzi, abused his martial law powers by forcing plaintiff-appellant to sell
its assets. In view of the largely hearsay nature of appellant’s evidence on this point,
appellant’s cause must fall.

According to petitioner, the reasoning of the appellate court is "flawed" because:22

It is implicit from the foregoing reasoning of the Court of Appeals that it treated the
forced closure of the petitioner's printing press, the arrest and incarceration without
charges of Teodoro Locsin, Sr., the threats that he will be shot and the threats that other
members of his family will be arrested as legal acts done by a dictator under the Martial
Law regime. The same flawed reasoning led the Court of Appeals to the erroneous
conclusion that such acts do not constitute force, intimidation, duress and undue
influence that vitiated petitioner's consent to the Contracts of Sale.

The contention is a rehash of petitioner’s bid to impute on private respondent acts of

force and intimidation that were made to bear on petitioner or Mr. Locsin, Sr. during the
early years of martial law. It failed to take stock of a very plausible situation depicted in
the appellate court’s decision which supports its case disposition on the issue
respecting vitiation. Wrote that court:
Even assuming that the late president Marcos is indeed the owner of [respondent], it
does not necessarily follow that he, acting through the late Hans Menzi, abused his
power by resorting to intimidation and undue influence to coerce the Locsins into
selling the assets of Free Press to them (sic).

It is an equally plausible scenario that Menzi convinced the Locsins to sell the assets of
the Free Press without resorting to threats or moral coercion by simply pointing out to
them the hard fact that the Free Press was in dire financial straits after the declaration
of Martial Law and was being sued by its former employees, minority stockholders and
creditors. Given such a state of affairs, the Locsins had no choice but to sell their
assets.23

Petitioner laments that the scenario depicted in the immediately preceding quotation as
a case of a court resorting to "mere surmises and speculations", 24 oblivious that
petitioner itself can only offer, as counterpoint, also mere surmises and speculations,
such as its claim about Eugenio Lopez Sr. and Imelda R. Marcos offering "enticing
amounts" to buy Free Press.25

It bears stressing at this point that even after the imposition of martial law, petitioner,
represented by Mr. Locsin, Sr., appeared to have dared the ire of the powers-that-be. He
did not succumb to, but in fact spurned offers to buy, lock-stock-and-barrel, the Free
Press magazine, dispatching Marcos’ emissaries with what amounts to a curt "Free
Press is not for sale". This reality argues against petitioner’s thesis about vitiation of its
contracting mind, and, to be sure, belying the notion that Martial Law worked as a
Sword of Damocles that reduced petitioner or Mr. Locsin, Sr. into being a mere
automaton. The following excerpt from the Court of Appeals’ decision is self-
explanatory: 26

Noteworthy is the fact that although the threat of arrest hung over his head like the
Sword of Damocles, Locsin Sr. was still able to reject the offers of Atty. Baizas and
Secretary De Vega, both of whom were supposedly acting on behalf of the late President
Marcos, without being subjected to reprisals. In fact, the Locsins testified that the initial
offer of Menzi was rejected even though it was supposedly accompanied by the threat
that "Marcos cannot be denied". Locsin, Sr. was, moreover, even able to secure a
compromise that only the assets of the Free Press will be sold. It is, therefore, quite
possible that plaintiff-appellant’s financial condition, albeit caused by the declaration of
Martial Law, was a major factor in influencing Locsin, Sr. to accept Menzi’s offer. It is not
farfetched to consider that Locsin, Sr. would have eventually proceeded with the sale
even in the absence of the alleged intimidation and undue influence because of the
absence of other buyers.

Petitioner’s third assigned error centers on the gross inadequacy of the purchase price,
referring to the amount of P5,775,000.00 private respondent paid for the property in
question. To petitioner, the amount thus paid does not even approximate the actual
market value of the assets and properties,27 and is very much less than the P18 Million
offered by Eugenio Lopez.28 Accordingly, petitioner urges the striking down, as
erroneous, the ruling of the Court of Appeals on purchase price inadequacy, stating in
this regard as follows: 29
Furthermore, the Court of Appeals in determining the adequacy of the price for the
properties and assets of petitioner Free Press relied heavily on the claim that the
audited financial statements for the years 1971 and 1972 stated that the book value of
the land is set at Two Hundred Thirty-Seven Thousand Five Hundred Pesos
(P237,500.00). However, the Court of Appeals' reliance on the book value of said assets
is clearly misplaced. It should be noted that the book value of fixed assets bears very
little correlation with the actual market value of an asset. (Emphasis and underscoring
in the original).

With the view we take of the matter, the book or actual market value of the property at
the time of sale is presently of little moment. For, petitioner is effectively precluded, by
force of the principle of estoppel ,30 from cavalierly disregarding with impunity its own
books of account in which the property in question is assigned a value less than what
was paid therefor. And, in line with the rule on the quantum of evidence required in civil
cases, neither can we cavalierly brush aside private respondent’s evidence, cited with
approval by the appellate court, that tends to prove that-31

xxx the net book value of the Properties was actually only ₱994,723.66 as appearing in
Free Press's Balance Sheet as of November 30, 1972 (marked as Exh. 13 and Exh. V),
which was duly audited by SyCip, Gorres, and Velayo, thus clearly showing that Free
Press actually realized a hefty profit of ₱4,755,276.34 from the sale to Liwayway.

Lest it be overlooked, gross inadequacy of the purchase price does not, as a matter of
civil law, per se affect a contract of sale. Article 1470 of the Civil Code says so. It reads:

Article 1470. Gross inadequacy of price does not affect a contract of sale, except as it
may indicate a defect in the consent, or that the parties really intended a donation or
some other act or contract.

Following the aforequoted codal provision, it behooves petitioner to first prove "a
defect in the consent", failing which its case for annulment contract of sale on ground
gross inadequacy of price must fall. The categorical conclusion of the Court of Appeals,
confirmatory of that of the trial court, is that the price paid for the Free Press’ office
building, and other physical assets is not unreasonable to justify the nullification of the
sale. This factual determination, predicated as it were on offered evidence, notably
petitioner’s Balance Sheet as of November 30, 1972 (Exh. 13), must be accorded great
weight if not finality.32

In the light of the foregoing disquisition, the question of whether or not petitioner’s
undisputed utilization of the proceeds of the sale constitutes, within the purview of
Article 1393 of the Civil Code,33 implied ratification of the contracts of sale need not
detain us long. Suffice it to state in this regard that the ruling of the Court of Appeals on
the matter is well-taken. Wrote the appellate court: 34

In the case at bench, Free Press’s own witnesses admitted that the proceeds of the 1973
sale were used to settle the claims of its employees, redeem the shares of its
stockholders and finance the company’s entry into money-market shareholdings and
fishpond business activities (TSN, 2 May 1988, pp. 16, 42-45). It need not be
overemphasized that by using the proceeds in this manner, Free Press only too clearly
confirmed the voluntaries of its consent and ratified the sale. Needless to state, such
ratification cleanses the assailed contract from any alleged defects from the moment it
was constituted (Art. 1396, Civil Code).

Petitioner’s posture that its use of the proceeds of the sale does not translate to tacit
ratification of what it viewed as voidable contracts of sale, such use being a "matter of
[its financial] survival",35 is untenable. As couched, Article 1393 of the Civil Code is
concerned only with the act which passes for ratification of contract, not the reason
which actuated the ratifying person to act the way he did. "Ubi lex non distinguit nec nos
distinguere debemus. When the law does not distinguish, neither should we". 36

Finally, petitioner would fault the Court of Appeals for excluding Exhibits "X-6" to "X-7"
and "Y-3" (proffer). These excluded documents which were apparently found in the
presidential palace or turned over by the US Government to the PCGG, consist of, among
others, what appears to be private respondent’s Certificate of Stock for 24,502 shares in
the name of Gen. Menzi, but endorsed in blank. The proffer was evidently intended to
show that then President Marcos owned private respondent, Liwayway Publishing Inc.
Said exhibits are of little relevance to the resolution of the main issue tendered in this
case. Whether or not the contracts of sale in question are voidable is the issue, not the
ownership of Liwayway Publishing, Inc.
WHEREFORE, the petition is DENIED, and the challenged decision of the Court of
Appeals AFFIRMED.
Costs against petitioner. SO ORDERED.

G.R. No. 147324 May 25, 2004

PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, petitioner,

vs.
GLOBE TELECOM, INC. (formerly Globe Mckay Cable and Radio Corporation),
respondents.

x-----------------------------x

GLOBE TELECOM, INC., petitioner,

vs.
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

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

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:

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

On 31 December 1991, the Philippine Government sent a Note Verbale to 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:

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:

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

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 attorney’s fees. However,
Globe refused to heed Philcomsat’s 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, attorney’s 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 majeure under 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:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

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;

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

3. Ordering the DISMISSAL of defendant’s counterclaim for lack of merit; and

4. With costs against the defendant.

SO ORDERED.9

Both parties appealed the trial court’s 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 majeure which 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 attorney’s fees. It explained that it
terminated Philcomsat’s 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 Decision dismissing

Philcomsat’s appeal for lack of merit and affirming the trial court’s 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 Government’s 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
Philcomsat’s 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

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 COURT’S

AWARD OF ATTORNEY’S 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

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

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 court’s pronouncement
that Globe is liable to pay rentals for December 1992 even though it terminated
Philcomsat’s 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

Philcomsat also maintains that contrary to the appellate court’s findings, it is entitled to
attorney’s fees and exemplary damages.16

In its Comment to Philcomsat’s 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 attorney’s 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

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 Philcomsat’s services were actually terminated on 08 November
1992.20

In its Comment, Philcomsat claims that Globe’s 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

On 15 August 2001, the Court issued a Resolution giving due course to Philcomsat’s
Petition in G.R. No.

147324 and required the parties to submit their respective memoranda.

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

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 attorney’s 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 Philcomsat’s 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

Philcomsat and Globe agreed in Section 8 of the Agreement that the following events
shall be deemed events constituting force majeure:

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

2. Strikes or other labor difficulties;

3. Insurrection;

4. Riots;

5. National emergencies;

6. War;

7. Acts of public enemies;

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

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

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

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

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

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:

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 former’s
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:

We also point out the sheer inequity of PHILCOMSAT’s 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 GLOBE’s 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

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 court’s 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 court’s 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 attorney’s fees and exemplary damages.

The award of attorney’s 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 attorney’s fees where a party acted in gross and evident bad faith in
refusing to satisfy the other party’s 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
attorney’s fees would not be warranted.
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 Philcomsat’s 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. 147839 June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,
vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a petition for review on certiorari of the Decision1 dated October 11,
2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision
dated August 31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC) in Civil
Case No. 92-322 and upheld the causes of action for damages of Insurance Company of
North America (respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA
Resolution dated April 11, 2001 which denied petitioner's motion for reconsideration.

The factual background of the case is as follows:

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi
Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks
owned by Levi Strauss & Co.. IMC and LSPI separately obtained from respondent fire
insurance policies with book debt endorsements. The insurance policies provide for
coverage on "book debts in connection with ready-made clothing materials which have
been sold or delivered to various customers and dealers of the Insured anywhere in the
Philippines."2 The policies defined book debts as the "unpaid account still appearing in
the Book of Account of the Insured 45 days after the time of the loss covered under this
Policy."3 The policies also provide for the following conditions:

1. Warranted that the Company shall not be liable for any unpaid account in respect of
the merchandise sold and delivered by the Insured which are outstanding at the date of
loss for a period in excess of six (6) months from the date of the covering invoice or
actual delivery of the merchandise whichever shall first occur.

2. Warranted that the Insured shall submit to the Company within twelve (12) days
after the close of every calendar month all amount shown in their books of accounts as
unpaid and thus become receivable item from their customers and dealers. x x x4

xxxx

Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25,
1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was
consumed by fire. Included in the items lost or destroyed in the fire were stocks of
ready-made clothing materials sold and delivered by IMC and LSPI.

On February 4, 1992, respondent filed a complaint for damages against petitioner. It

alleges that IMC and LSPI filed with respondent their claims under their respective fire
insurance policies with book debt endorsements; that as of February 25, 1991, the
unpaid accounts of petitioner on the sale and delivery of ready-made clothing materials
with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that respondent paid
the claims of IMC and LSPI and, by virtue thereof, respondent was subrogated to their
rights against petitioner; that respondent made several demands for payment upon
petitioner but these went unheeded.5

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could
not be held liable because the property covered by the insurance policies were
destroyed due to fortuities event or force majeure; that respondent's right of
subrogation has no basis inasmuch as there was no breach of contract committed by it
since the loss was due to fire which it could not prevent or foresee; that IMC and LSPI
never communicated to it that they insured their properties; that it never consented to
paying the claim of the insured.6
At the pre-trial conference the parties failed to arrive at an amicable settlement.7 Thus,
trial on the merits ensued.

On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint.8
It held that the fire was purely accidental; that the cause of the fire was not attributable
to the negligence of the petitioner; that it has not been established that petitioner is the
debtor of IMC and LSPI; that since the sales invoices state that "it is further agreed that
merely for purpose of securing the payment of purchase price, the above-described
merchandise remains the property of the vendor until the purchase price is fully paid",
IMC and LSPI retained ownership of the delivered goods and must bear the loss.

Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its
decision setting aside the decision of the RTC. The dispositive portion of the decision
reads:

WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET
ASIDE and a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to
pay:

1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant

to the insured Inter Capitol Marketing Corporation, plus legal interest from the time of
demand until fully paid;

2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to

the insured Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully
paid.

With costs against the defendant-appellee.

SO ORDERED.10

The CA held that the sales invoices are proofs of sale, being detailed statements of the
nature, quantity and cost of the thing sold; that loss of the goods in the fire must be
borne by petitioner since the proviso contained in the sales invoices is an exception
under Article 1504 (1) of the Civil Code, to the general rule that if the thing is lost by a
fortuitous event, the risk is borne by the owner of the thing at the time the loss under
the principle of res perit domino; that petitioner's obligation to IMC and LSPI is not the
delivery of the lost goods but the payment of its unpaid account and as such the
obligation to pay is not extinguished, even if the fire is considered a fortuitous event;
that by subrogation, the insurer has the right to go against petitioner; that, being a fire
insurance with book debt endorsements, what was insured was the vendor's interest as
a creditor.11

Petitioner filed a motion for reconsideration12 but it was denied by the CA in its
Resolution dated April 11, 2001.13

Hence, the present petition for review on certiorari anchored on the following
Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT
CASE WAS ONE OVER CREDIT.

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT
GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY
THEREOF.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC

SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14

Anent the first error, petitioner contends that the insurance in the present case cannot
be deemed to be over credit since an insurance "on credit" belies not only the nature of
fire insurance but the express terms of the policies; that it was not credit that was
insured since respondent paid on the occasion of the loss of the insured goods to fire
and not because of the non-payment by petitioner of any obligation; that, even if the
insurance is deemed as one over credit, there was no loss as the accounts were not yet
due since no prior demands were made by IMC and LSPI against petitioner for payment
of the debt and such demands came from respondent only after it had already paid IMC
and LSPI under the fire insurance policies.15

As to the second error, petitioner avers that despite delivery of the goods, petitioner-
buyer IMC and LSPI assumed the risk of loss when they secured fire insurance policies
over the goods.

Concerning the third ground, petitioner submits that there is no subrogation in favor of
respondent as no valid insurance could be maintained thereon by IMC and LSPI since all
risk had transferred to petitioner upon delivery of the goods; that petitioner was not
privy to the insurance contract or the payment between respondent and its insured nor
was its consent or approval ever secured; that this lack of privity forecloses any real
interest on the part of respondent in the obligation to pay, limiting its interest to
keeping the insured goods safe from fire.

For its part, respondent counters that while ownership over the ready- made clothing
materials was transferred upon delivery to petitioner, IMC and LSPI have insurable
interest over said goods as creditors who stand to suffer direct pecuniary loss from its
destruction by fire; that petitioner is liable for loss of the ready-made clothing materials
since it failed to overcome the presumption of liability under Article 126516 of the Civil
Code; that the fire was caused through petitioner's negligence in failing to provide
stringent measures of caution, care and maintenance on its property because electric
wires do not usually short circuit unless there are defects in their installation or when
there is lack of proper maintenance and supervision of the property; that petitioner is
guilty of gross and evident bad faith in refusing to pay respondent's valid claim and
should be liable to respondent for contracted lawyer's fees, litigation expenses and cost
of suit.17

As a general rule, in petitions for review, the jurisdiction of this Court in cases brought
before it from the CA is limited to reviewing questions of law which involves no
examination of the probative value of the evidence presented by the litigants or any of
them.18 The Supreme Court is not a trier of facts; it is not its function to analyze or
weigh evidence all over again.19 Accordingly, findings of fact of the appellate court are
generally conclusive on the Supreme Court.20

Nevertheless, jurisprudence has recognized several exceptions in which factual issues

may be resolved by this Court, such as: (1) when the findings are grounded entirely on
speculation, surmises or conjectures; (2) when the inference made is manifestly
mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when
the judgment is based on a misapprehension of facts; (5) when the findings of facts are
conflicting; (6) when in making its findings the CA went beyond the issues of the case,
or its findings are contrary to the admissions of both the appellant and the appellee; (7)
when the findings are contrary to the trial court; (8) when the findings are conclusions
without citation of specific evidence on which they are based; (9) when the facts set
forth in the petition as well as in the petitioner's main and reply briefs are not disputed
by the respondent; (10) when the findings of fact are premised on the supposed
absence of evidence and contradicted by the evidence on record; and (11) when the CA
manifestly overlooked certain relevant facts not disputed by the parties, which, if
properly considered, would justify a different conclusion.21 Exceptions (4), (5), (7),
and (11) apply to the present petition.

At issue is the proper interpretation of the questioned insurance policy. Petitioner

claims that the CA erred in construing a fire insurance policy on book debts as one
covering the unpaid accounts of IMC and LSPI since such insurance applies to loss of the
ready-made clothing materials sold and delivered to petitioner.

The Court disagrees with petitioner's stand.

It is well-settled that when the words of a contract are plain and readily understood,
there is no room for construction.22 In this case, the questioned insurance policies
provide coverage for "book debts in connection with ready-made clothing materials
which have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."23 ; and defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of the loss
covered under this Policy."24 Nowhere is it provided in the questioned insurance
policies that the subject of the insurance is the goods sold and delivered to the
customers and dealers of the insured.

Indeed, when the terms of the agreement are clear and explicit that they do not justify
an attempt to read into it any alleged intention of the parties, the terms are to be
understood literally just as they appear on the face of the contract.25 Thus, what were
insured against were the accounts of IMC and LSPI with petitioner which remained
unpaid 45 days after the loss through fire, and not the loss or destruction of the goods
delivered.

Petitioner argues that IMC bears the risk of loss because it expressly reserved
ownership of the goods by stipulating in the sales invoices that "[i]t is further agreed
that merely for purpose of securing the payment of the purchase price the above
described merchandise remains the property of the vendor until the purchase price
thereof is fully paid."26
The Court is not persuaded.

The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:

ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
transferred to the buyer the goods are at the buyer's risk whether actual delivery has
been made or not, except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer,
in pursuance of the contract and the ownership in the goods has been retained by the
seller merely to secure performance by the buyer of his obligations under the contract,
the goods are at the buyer's risk from the time of such delivery; (Emphasis supplied)

xxxx

Thus, when the seller retains ownership only to insure that the buyer will pay its debt,
the risk of loss is borne by the buyer.27 Accordingly, petitioner bears the risk of loss of
the goods delivered.

IMC and LSPI did not lose complete interest over the goods. They have an insurable
interest until full payment of the value of the delivered goods. Unlike the civil law
concept of res perit domino, where ownership is the basis for consideration of who
bears the risk of loss, in property insurance, one's interest is not determined by concept
of title, but whether insured has substantial economic interest in the property.28

Section 13 of our Insurance Code defines insurable interest as "every interest in

property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the insured."
Parenthetically, under Section 14 of the same Code, an insurable interest in property
may consist in: (a) an existing interest; (b) an inchoate interest founded on existing
interest; or (c) an expectancy, coupled with an existing interest in that out of which the
expectancy arises.

Therefore, an insurable interest in property does not necessarily imply a property

interest in, or a lien upon, or possession of, the subject matter of the insurance, and
neither the title nor a beneficial interest is requisite to the existence of such an interest,
it is sufficient that the insured is so situated with reference to the property that he
would be liable to loss should it be injured or destroyed by the peril against which it is
insured.29 Anyone has an insurable interest in property who derives a benefit from its
existence or would suffer loss from its destruction.30 Indeed, a vendor or seller retains
an insurable interest in the property sold so long as he has any interest therein, in other
words, so long as he would suffer by its destruction, as where he has a vendor's lien.31
In this case, the insurable interest of IMC and LSPI pertain to the unpaid accounts
appearing in their Books of Account 45 days after the time of the loss covered by the
policies.

The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous event under
Article 117432 of the Civil Code is misplaced. As held earlier, petitioner bears the loss
under Article 1504 (1) of the Civil Code.

Moreover, it must be stressed that the insurance in this case is not for loss of goods by
fire but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days after
the fire. Accordingly, petitioner's obligation is for the payment of money. As correctly
stated by the CA, where the obligation consists in the payment of money, the failure of
the debtor to make the payment even by reason of a fortuitous event shall not relieve
him of his liability.33 The rationale for this is that the rule that an obligor should be held
exempt from liability when the loss occurs thru a fortuitous event only holds true when
the obligation consists in the delivery of a determinate thing and there is no stipulation
holding him liable even in case of fortuitous event. It does not apply when the obligation
is pecuniary in nature.34

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the
loss or destruction of anything of the same kind does not extinguish the obligation." If
the obligation is generic in the sense that the object thereof is designated merely by its
class or genus without any particular designation or physical segregation from all
others of the same class, the loss or destruction of anything of the same kind even
without the debtor's fault and before he has incurred in delay will not have the effect of
extinguishing the obligation.35 This rule is based on the principle that the genus of a
thing can never perish. Genus nunquan perit.36 An obligation to pay money is generic;
therefore, it is not excused by fortuitous loss of any specific property of the debtor.37

Thus, whether fire is a fortuitous event or petitioner was negligent are matters
immaterial to this case. What is relevant here is whether it has been established that
petitioner has outstanding accounts with IMC and LSPI.

With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to
"C-22"38 show that petitioner has an outstanding account with IMC in the amount of
P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment to IMC. Exhibit
"F"40 is the subrogation receipt executed by IMC in favor of respondent upon receipt of
the insurance proceeds. All these documents have been properly identified, presented
and marked as exhibits in court. The subrogation receipt, by itself, is sufficient to
establish not only the relationship of respondent as insurer and IMC as the insured, but
also the amount paid to settle the insurance claim. The right of subrogation accrues
simply upon payment by the insurance company of the insurance claim.41
Respondent's action against petitioner is squarely sanctioned by Article 2207 of the
Civil Code which provides:

Art. 2207. If the plaintiff's property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the contract. x x x

Petitioner failed to refute respondent's evidence.

As to LSPI, respondent failed to present sufficient evidence to prove its cause of action.
No evidentiary weight can be given to Exhibit "F Levi Strauss",42 a letter dated April 23,
1991 from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an
admission of petitioner's unpaid account with LSPI. It only confirms the loss of Levi's
products in the amount of P535,613.00 in the fire that razed petitioner's building on
February 25, 1991.

Moreover, there is no proof of full settlement of the insurance claim of LSPI; no

subrogation receipt was offered in evidence. Thus, there is no evidence that respondent
has been subrogated to any right which LSPI may have against petitioner. Failure to
substantiate the claim of subrogation is fatal to petitioner's case for recovery of the
amount of P535,613.00.

WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11,
2000 and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No.
61848 are AFFIRMED with the MODIFICATION that the order to pay the amount of
P535,613.00 to respondent is DELETED for lack of factual basis.
No pronouncement as to costs.
SO ORDERED.

5. Usurious Transactions (Art. 1175)

a. Loan and Mutuum
b. PD 858; PD 1685
c. Central Bank Circular No. 416
d. Monetary Board Circular No. 905 lifting interest rate ceiling

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC.,
respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.

VITUG, J.:

The issues, albeit not completely novel, are: (a) whether or not a claim for damage
sustained on a shipment of goods can be a solidary, or joint and several, liability of the
common carrier, the arrastre operator and the customs broker; (b) whether the
payment of legal interest on an award for loss or damage is to be computed from the
time the complaint is filed or from the date the decision appealed from is rendered; and
(c) whether the applicable rate of interest, referred to above, is twelve percent (12%)
or six percent (6%).

The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and
undisputed facts that have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and broker-
forwarder for damages sustained by a shipment while in defendants' custody, filed by
the insurer-subrogee who paid the consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama,
Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping
Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy
No. 81/01177 for P36,382,466.38.

Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto
the custody of defendant Metro Port Service, Inc. The latter excepted to one drum, said
to be in bad order, which damage was unknown to plaintiff.

On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from
defendant Metro Port Service, Inc., one drum opened and without seal (per "Request for
Bad Order Survey." Exh. D).

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of
the shipment to the consignee's warehouse. The latter excepted to one drum which
contained spillages, while the rest of the contents was adulterated/fake (per "Bad Order
Waybill" No. 10649, Exh. E).

Plaintiff contended that due to the losses/damage sustained by said drum, the
consignee suffered losses totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against defendants who failed and refused to pay
the same (Exhs. H, I, J, K, L).

As a consequence of the losses sustained, plaintiff was compelled to pay the consignee
P19,032.95 under the aforestated marine insurance policy, so that it became subrogated
to all the rights of action of said consignee against defendants (per "Form of
Subrogation", "Release" and Philbanking check, Exhs. M, N, and O). (pp. 85-86, Rollo.)

There were, to be sure, other factual issues that confronted both courts. Here, the
appellate court said:
Defendants filed their respective answers, traversing the material allegations of the
complaint contending that: As for defendant Eastern Shipping it alleged that the
shipment was discharged in good order from the vessel unto the custody of Metro Port
Service so that any damage/losses incurred after the shipment was incurred after the
shipment was turned over to the latter, is no longer its liability (p. 17, Record);
Metroport averred that although subject shipment was discharged unto its custody,
portion of the same was already in bad order (p. 11, Record); Allied Brokerage alleged
that plaintiff has no cause of action against it, not having negligent or at fault for the
shipment was already in damage and bad order condition when received by it, but
nonetheless, it still exercised extra ordinary care and diligence in the handling/delivery
of the cargo to consignee in the same condition shipment was received by it.

From the evidence the court found the following:

The issues are:

1. Whether or not the shipment sustained losses/damages;

2. Whether or not these losses/damages were sustained while in the custody of

defendants (in whose respective custody, if determinable);

3. Whether or not defendant(s) should be held liable for the losses/damages (see
plaintiff's pre-Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's
Records, p. 38).

As to the first issue, there can be no doubt that the shipment sustained losses/damages.
The two drums were shipped in good order and condition, as clearly shown by the Bill
of Lading and Commercial Invoice which do not indicate any damages drum that was
shipped (Exhs. B and C). But when on December 12, 1981 the shipment was delivered
to defendant Metro Port Service, Inc., it excepted to one drum in bad order.

Correspondingly, as to the second issue, it follows that the losses/damages were

sustained while in the respective and/or successive custody and possession of
defendants carrier (Eastern), arrastre operator (Metro Port) and broker (Allied
Brokerage). This becomes evident when the Marine Cargo Survey Report (Exh. G), with
its "Additional Survey Notes", are considered. In the latter notes, it is stated that when
the shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila on
December 12, 1981, it was observed that "one (1) fiber drum (was) in damaged
condition, covered by the vessel's Agent's Bad Order Tally Sheet No. 86427." The report
further states that when defendant Allied Brokerage withdrew the shipment from
defendant arrastre operator's custody on January 7, 1982, one drum was found opened
without seal, cello bag partly torn but contents intact. Net unrecovered spillages was 15
kgs. The report went on to state that when the drums reached the consignee, one drum
was found with adulterated/faked contents. It is obvious, therefore, that these
losses/damages occurred before the shipment reached the consignee while under the
successive custodies of defendants. Under Art. 1737 of the New Civil Code, the common
carrier's duty to observe extraordinary diligence in the vigilance of goods remains in full
force and effect even if the goods are temporarily unloaded and stored in transit in the
warehouse of the carrier at the place of destination, until the consignee has been
advised and has had reasonable opportunity to remove or dispose of the goods (Art.
1738, NCC). Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad
Order Cargoes" (Exhs. 3-Eastern) states that on December 12, 1981 one drum was
found "open" and thus held:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

A. Ordering defendants to pay plaintiff, jointly and severally:

1. The amount of P19,032.95, with the present legal interest of 12% per annum from
October 1, 1982, the date of filing of this complaints, until fully paid (the liability of
defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of
the loss, whichever is lesser, while the liability of defendant Metro Port Service, Inc.
shall be to the extent of the actual invoice value of each package, crate box or container
in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the Management
Contract);

2. P3,000.00 as attorney's fees, and

3. Costs.

B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied

Brokerage Corporation.

SO ORDERED. (p. 207, Record).

Dissatisfied, defendant's recourse to US.

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record. We find that the conclusion drawn
therefrom is correct. As there is sufficient evidence that the shipment sustained damage
while in the successive possession of appellants, and therefore they are liable to the
appellee, as subrogee for the amount it paid to the consignee. (pp. 87-89, Rollo.)

The Court of Appeals thus affirmed in toto the judgment of the court a quo.

In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and
grave abuse of discretion on the part of the appellate court when —

I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE

ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE
RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;

II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT
SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE
RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE
DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER
ANNUM, PRIVATE RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.

The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by petitioner carrier
are not all that novel. Indeed, we do have a fairly good number of previous decisions
this Court can merely tack to.

The common carrier's duty to observe the requisite diligence in the shipment of goods
lasts from the time the articles are surrendered to or unconditionally placed in the
possession of, and received by, the carrier for transportation until delivered to, or until
the lapse of a reasonable time for their acceptance by, the person entitled to receive
them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai
vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or
arrive in damaged condition, a presumption arises against the carrier of its failure to
observe that diligence, and there need not be an express finding of negligence to hold it
liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139
SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course,
exceptional cases when such presumption of fault is not observed but these cases,
enumerated in Article 17341 of the Civil Code, are exclusive, not one of which can be
applied to this case.

The question of charging both the carrier and the arrastre operator with the obligation
of properly delivering the goods to the consignee has, too, been passed upon by the
Court. In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have
explained, in holding the carrier and the arrastre operator liable in solidum, thus:

The legal relationship between the consignee and the arrastre operator is akin to that of
a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The
relationship between the consignee and the common carrier is similar to that of the
consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line, et al., 107
Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care of the goods
that are in its custody and to deliver them in good condition to the consignee, such
responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER
are therefore charged with the obligation to deliver the goods in good condition to the
consignee.

We do not, of course, imply by the above pronouncement that the arrastre operator and
the customs broker are themselves always and necessarily liable solidarily with the
carrier, or vice-versa, nor that attendant facts in a given case may not vary the rule. The
instant petition has been brought solely by Eastern Shipping Lines, which, being the
carrier and not having been able to rebut the presumption of fault, is, in any event, to be
held liable in this particular case. A factual finding of both the court a quo and the
appellate court, we take note, is that "there is sufficient evidence that the shipment
sustained damage while in the successive possession of appellants" (the herein
petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines,
Inc., the sole petitioner in this case, is inevitable regardless of whether there are others
solidarily liable with it.

It is over the issue of legal interest adjudged by the appellate court that deserves more
than just a passing remark.

Let us first see a chronological recitation of the major rulings of this Court:

The early case of Malayan Insurance Co., Inc., vs. Manila Port Service, decided on 15 May
1969, involved a suit for recovery of money arising out of short deliveries and pilferage
of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court)
averred in its complaint that the total amount of its claim for the value of the
undelivered goods amounted to P3,947.20. This demand, however, was neither
established in its totality nor definitely ascertained. In the stipulation of facts later
entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon.
The trial court rendered judgment ordering the appellants (defendants) Manila Port
Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of
P1,447.51 with legal interest thereon from the date the complaint was filed on 28
December 1962 until full payment thereof. The appellants then assailed, inter alia, the
award of legal interest. In sustaining the appellants, this Court ruled:

Interest upon an obligation which calls for the payment of money, absent a stipulation,
is the legal rate. Such interest normally is allowable from the date of demand, judicial or
extrajudicial. The trial court opted for judicial demand as the starting point.

But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be
recovered upon unliquidated claims or damages, except when the demand can be
established with reasonable certainty." And as was held by this Court in Rivera vs.
Perez,4 L-6998, February 29, 1956, if the suit were for damages, "unliquidated and not
known until definitely ascertained, assessed and determined by the courts after proof
(Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis
supplied)

The case of Reformina vs. Tomol,5 rendered on 11 October 1985, was for "Recovery of
Damages for Injury to Person and Loss of Property." After trial, the lower court decreed:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
defendants and against the defendants and third party plaintiffs as follows:

Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay
jointly and severally the following persons:

xxx xxx xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00
which is the value of the boat F B Pacita III together with its accessories, fishing gear
and equipment minus P80,000.00 which is the value of the insurance recovered and the
amount of P10,000.00 a month as the estimated monthly loss suffered by them as a
result of the fire of May 6, 1969 up to the time they are actually paid or already the total
sum of P370,000.00 as of June 4, 1972 with legal interest from the filing of the
complaint until paid and to pay attorney's fees of P5,000.00 with costs against
defendants and third party plaintiffs. (Emphasis supplied.)

On appeal to the Court of Appeals, the latter modified the amount of damages awarded
but sustained the trial court in adjudging legal interest from the filing of the complaint
until fully paid. When the appellate court's decision became final, the case was
remanded to the lower court for execution, and this was when the trial court issued its
assailed resolution which applied the 6% interest per annum prescribed in Article 2209
of the Civil Code. In their petition for review on certiorari, the petitioners contended
that Central Bank Circular No. 416, providing thus —By virtue of the authority granted
to it under Section 1 of Act 2655, as amended, Monetary Board in its Resolution No.
1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or
forbearance of any money, goods, or credits and the rate allowed in judgments, in the
absence of express contract as to such rate of interest, shall be twelve (12%) percent
per annum. This Circular shall take effect immediately. (Emphasis found in the text) —
should have, instead, been applied. This Court ruled:
The judgments spoken of and referred to are judgments in litigations involving loans or
forbearance of any money, goods or credits. Any other kind of monetary judgment
which has nothing to do with, nor involving loans or forbearance of any money, goods
or credits does not fall within the coverage of the said law for it is not within the ambit
of the authority granted to the Central Bank.

xxx xxx xxx

Coming to the case at bar, the decision herein sought to be executed is one rendered in
an Action for Damages for injury to persons and loss of property and does not involve
any loan, much less forbearances of any money, goods or credits. As correctly argued by
the private respondents, the law applicable to the said case is Article 2209 of the New
Civil Code which reads —

Art. 2209. — If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of interest agreed upon, and in the absence of stipulation, the legal
interest which is six percent per annum.

The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, promulgated
on 28 July 1986. The case was for damages occasioned by an injury to person and loss of
property. The trial court awarded private respondent Pedro Manabat actual and
compensatory damages in the amount of P72,500.00 with legal interest thereon from
the filing of the complaint until fully paid. Relying on the Reformina v. Tomol case, this
Court modified the interest award from 12% to 6% interest per annum but sustained
the time computation thereof, i.e., from the filing of the complaint until fully paid.

In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for the recovery of
damages arising from the collapse of a building, ordered, inter alia, the "defendant
United Construction Co., Inc. (one of the petitioners) . . . to pay the plaintiff, . . . , the sum
of P989,335.68 with interest at the legal rate from November 29, 1968, the date of the
filing of the complaint until full payment . . . ." Save from the modification of the amount
granted by the lower court, the Court of Appeals sustained the trial court's decision.
When taken to this Court for review, the case, on 03 October 1986, was decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the
special and environmental circumstances of this case, we deem it reasonable to render a
decision imposing, as We do hereby impose, upon the defendant and the third-party
defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code,
Supra. p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION
(P5,000,000.00) Pesos to cover all damages (with the exception to attorney's fees)
occasioned by the loss of the building (including interest charges and lost rentals) and
an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's
fees, the total sum being payable upon the finality of this decision. Upon failure to pay
on such finality, twelve (12%) per cent interest per annum shall be imposed upon
aforementioned amounts from finality until paid. Solidary costs against the defendant
and third-party defendants (Except Roman Ozaeta). (Emphasis supplied)
A motion for reconsideration was filed by United Construction, contending that "the
interest of twelve (12%) per cent per annum imposed on the total amount of the
monetary award was in contravention of law." The Court ruled out the applicability of
the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April
1988, it explained:

There should be no dispute that the imposition of 12% interest pursuant to Central
Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance
of any money, goods or credit; and (3) rate allowed in judgments (judgments spoken of
refer to judgments involving loans or forbearance of any money, goods or credits.
(Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v.
Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is neither a
loan or a forbearance, but then no interest is actually imposed provided the sums
referred to in the judgment are paid upon the finality of the judgment. It is delay in the
payment of such final judgment, that will cause the imposition of the interest.

It will be noted that in the cases already adverted to, the rate of interest is imposed on
the total sum, from the filing of the complaint until paid; in other words, as part of the
judgment for damages. Clearly, they are not applicable to the instant case. (Emphasis
supplied.)

The subsequent case of American Express International, Inc., vs. Intermediate Appellate
Court was a petition for review on certiorari from the decision, dated 27 February 1985,
of the then Intermediate Appellate Court reducing the amount of moral and exemplary
damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and
its resolution, dated 29 April 1985, restoring the amount of damages awarded by the
trial court, i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary
damages with interest thereon at 12% per annum from notice of judgment, plus costs of
suit. In a decision of 09 November 1988, this Court, while recognizing the right of the
private respondent to recover damages, held the award, however, for moral damages by
the trial court, later sustained by the IAC, to be inconceivably large. The Court thus set
aside the decision of the appellate court and rendered a new one, "ordering the
petitioner to pay private respondent the sum of One Hundred Thousand (P100,000.00)
Pesos as moral damages, with six (6%) percent interest thereon computed from the
finality of this decision until paid. (Emphasis supplied)

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz which
arose from a breach of employment contract. For having been illegally dismissed, the
petitioner was awarded by the trial court moral and exemplary damages without,
however, providing any legal interest thereon. When the decision was appealed to the
Court of Appeals, the latter held:

WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental
dated October 31, 1972 is affirmed in all respects, with the modification that
defendants-appellants, except defendant-appellant Merton Munn, are ordered to pay,
jointly and severally, the amounts stated in the dispositive portion of the decision,
including the sum of P1,400.00 in concept of compensatory damages, with interest at
the legal rate from the date of the filing of the complaint until fully paid (Emphasis
supplied.)
The petition for review to this Court was denied. The records were thereupon
transmitted to the trial court, and an entry of judgment was made. The writ of execution
issued by the trial court directed that only compensatory damages should earn interest
at 6% per annum from the date of the filing of the complaint. Ascribing grave abuse of
discretion on the part of the trial judge, a petition for certiorari assailed the said order.
This Court said:

. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the
legal rate" from the time of the filing of the complaint. . . Said circular [Central Bank
Circular No. 416] does not apply to actions based on a breach of employment contract
like the case at bar. (Emphasis supplied)

The Court reiterated that the 6% interest per annum on the damages should be
computed from the time the complaint was filed until the amount is fully paid.

Quite recently, the Court had another occasion to rule on the matter. National Power
Corporation vs. Angas, decided on 08 May 1992, involved the expropriation of certain
parcels of land. After conducting a hearing on the complaints for eminent domain, the
trial court ordered the petitioner to pay the private respondents certain sums of money
as just compensation for their lands so expropriated "with legal interest thereon . . .
until fully paid." Again, in applying the 6% legal interest per annum under the Civil
Code, the Court declared:

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or

credits but EXPROPRIATION of certain parcels of land for a public purpose, the payment
of which is without stipulation regarding interest, and the INTEREST ADJUDGED BY
THE TRIAL COURT IS IN THE NATURE OF INDEMNITY FOR DAMAGES. The legal
interest required to be paid on the amount of just compensation for the properties
expropriated is manifestly in the form of indemnity for damages for the delay in the
payment thereof. Therefore, since the kind of interest involved in the joint judgment of
the lower court sought to be enforced in this case is INTEREST BY WAY OF DAMAGES,
and NOT BY WAY OF EARNINGS FROM LOANS, etc. Art. 2209 of the Civil Code shall
apply.

Concededly, there have been seeming variances in the above holdings. The cases can
perhaps be classified into two groups according to the similarity of the issues involved
and the corresponding rulings rendered by the court. The "first group" would consist of
the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz (1986),
Florendo v. Ruiz (1989) and National Power Corporation v. Angas (1992). In the
"second group" would be Malayan Insurance Company v. Manila Port Service (1969),
Nakpil and Sons v. Court of Appeals (1988), and American Express International v.
Intermediate Appellate Court (1988).

In the "first group", the basic issue focuses on the application of either the 6% (under
the Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily
discernible in these cases that there has been a consistent holding that the Central Bank
Circular imposing the 12% interest per annum applies only to loans or forbearance of
money, goods or credits, as well as to judgments involving such loan or forbearance of
money, goods or credits, and that the 6% interest under the Civil Code governs when
the transaction involves the payment of indemnities in the concept of damage arising
from the breach or a delay in the performance of obligations in general. Observe, too,
that in these cases, a common time frame in the computation of the 6% interest per
annum has been applied, i.e., from the time the complaint is filed until the adjudged
amount is fully paid.

The "second group", did not alter the pronounced rule on the application of the 6% or
12% interest per annum, depending on whether or not the amount involved is a loan or
forbearance, on the one hand, or one of indemnity for damage, on the other hand.
Unlike, however, the "first group" which remained consistent in holding that the
running of the legal interest should be from the time of the filing of the complaint until
fully paid, the "second group" varied on the commencement of the running of the legal
interest.

Malayan held that the amount awarded should bear legal interest from the date of the
decision of the court a quo, explaining that "if the suit were for damages, 'unliquidated
and not known until definitely ascertained, assessed and determined by the courts after
proof,' then, interest 'should be from the date of the decision.'" American Express
International v. IAC, introduced a different time frame for reckoning the 6% interest by
ordering it to be "computed from the finality of (the) decision until paid." The Nakpil
and Sons case ruled that 12% interest per annum should be imposed from the finality of
the decision until the judgment amount is paid.

The ostensible discord is not difficult to explain. The factual circumstances may have
called for different applications, guided by the rule that the courts are vested with
discretion, depending on the equities of each case, on the award of interest.
Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest
the following rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts
or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as
follows:

1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest
shall be 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.

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 12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance of credit.

WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with
the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the
amount due computed from the decision, dated 03 February 1988, of the court a quo. A
TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on
such amount upon finality of this decision until the payment thereof. SO ORDERED.

G.R. No. 128721 March 9, 1999

CRISMINA GARMENTS, INC., petitioner,
vs.
COURT OF APPEALS and NORMA SIAPNO, respondent.

(CONCLUSION: No, it is not proper to impose interest at the rate of twelve percent
(12%) per annum for an obligation that does not involve a loan or forbearance of
money in the absence of stipulation of the parties. By virtue of the authority granted to
it under Section 1 of Act No. 2655, as amended, otherwise known as the "Usury Law",
the Monetary Board, in its Resolution No. 1622 dated July 29, 1974, has prescribed that
the rate of interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the ABSENCE OF EXPRESS CONTRACT as to such rate of
interest, shall be twelve per cent (12%) per annum." In this case, there is an absence of
such agreement that’s why the rate shall be six percent (6%) per annum, computed
from the time of the filing of the Complaint in the trial court until the finality of the
judgment. If the adjudged principal and the interest (or any part thereof) remain unpaid
thereafter, the interest rate shall be twelve percent (12%) per annum computed from
the time the judgment becomes final and executory until it is fully satisfied.
PANGANIBAN, J.:

Interest shall be computed in accordance with the stipulation of the parties. In the
absence of such agreement, the rate shall be twelve percent (12%) per annum when the
obligation arises out of a loan or a forbearance of money, goods or credits. In other
cases, it shall be six percent (6%).

The Case
On May 5, 1997, Crismina Garments, Inc. filed a Petition for Review on Certiorari
assailing the December 28, 1995 Decision and March 17, 1997 Resolution of the Court of
Appeals in CA-GR CV No. 28973. On September 24, 1997, this Court issued a minute
Resolution denying the petition "for its failure to show any reversible error on the part
of the Court of Appeals."

Petitioner then filed a Motion for Reconsideration, arguing that the interest rate should
be computed at 6 percent per annum as provided under Article 2209 of the Civil Code,
not 12 percent per annum as prescribed under Circular No. 416 of the Central Bank of
the Philippines. Acting on the Motion, the Court reinstated the Petition, but only with
respect to the issue of which interest rate should be applied.
The Facts

As the facts of the case are no longer disputed, we are reproducing hereunder the
findings of the appellate court:

During the period from February 1979 to April 1979, the [herein petitioner], which was
engaged in the export of girls' denim pants, contracted the services of the [respondent],
the sole proprietress of the D'Wilmar Garments, for the sewing of 20,762 pieces of
assorted girls['] denims supplied by the [petitioner] under Purchase Orders Nos. 1404,
dated February 15, 1979, 0430 dated February 1, 1979, 1453 dated April 30, 1979. The
[petitioner] was obliged to pay the [respondent], for her services, in the total amount of
P76,410.00. The [respondent] sew[ed] the materials and delivered the same to the
[petitioner] which acknowledged the same per Delivery Receipt Nos. 0030 dated
February 9, 1979; 0032, dated February 15, 1979; 0033 dated February 21, 1979; 0034,
dated February 24, 1979; 0036, dated February 20, 1979; 0038, dated March 11,
1979[;] 0039, dated March 24, 1979; 0040 dated March 27, 1979; 0041, dated March 29,
1979; 0044, dated Marc[h] 25, 1979; 0101 dated May 18, 1979[;] 0037, dated March 10,
1979 and 0042 dated March 10, 1979, in good order condition. At first, the [respondent]
was told that the sewing of some of the pants w[as] defective. She offered to take
delivery of the defective pants. However, she was later told by [petitioner]'s
representative that the goods were already good. She was told to just return for her
check of P76,410.00. However, the [petitioner] failed to pay her the aforesaid amount.
This prompted her to hire the services of counsel who, on November 12, 1979, wrote a
letter to the [petitioner] demanding payment of the aforesaid amount within ten (10)
days from receipt thereof. On February 7, 1990, the [petitioner]'s [v]ice-[p]resident-
[c]omptroller, wrote a letter to [respondent]'s counsel, averring, inter alia, that the pairs
of jeans sewn by her, numbering 6,164 pairs, were defective and that she was liable to
the [petitioner] for the amount of P49,925.51 which was the value of the damaged pairs
of denim pants and demanded refund of the aforesaid amount.

On January 8, 1981, the [respondent] filed her complaint against the [petitioner] with
the [trial court] for the collection of the principal amount of P76,410.00. . . .

xxx xxx xxx

After due proceedings, the [trial court] rendered judgment, on February 28, 1989, in
favor of the [respondent] against the [petitioner], the dispositive portion of which reads
as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant ordering the latter to pay the former:

(1) The sum of P76,140.00 with interest thereon at 12% per annum, to be counted from
the filing of this complaint on January 8, 1981, until fully paid;

(2) The sum of P5,000 as attorney[']s fees; and

(3) The costs of this suit;

(4) Defendant's counterclaim is hereby dismissed.8

The Court of Appeals (CA) affirmed the trial court's ruling, except for the award of
attorney's fees which was deleted. Subsequently, the CA denied the Motion for
Reconsideration.

Hence, this recourse to this Court

Sole Issue

In light of the Court's Resolution dated April 27, 1998, petitioner submits for our
consideration this sole issue:

Whether or not it is proper to impose interest at the rate of twelve percent (12%) per
annum for an obligation that does not involve a loan or forbearance of money in the
absence of stipulation of the parties.

This Court's Ruling

We sustain petitioner's contention that the interest rate should be computed at six
percent (6%) per annum.

Sole Issue: Interest Rate

The controversy revolves around petitioner's payment of the price beyond the period
prescribed in a contract for a piece of work. Article 1589 on the Civil Code provides that
"[t]he vendee [herein petitioner] shall owe interest for the period between the delivery
of the thing and the payment of the price . . . should he be in default from the time of
judicial or extrajudicial demand for the payment of the price." The only issue now is the
applicable rate of interest for the late payment.

Because the case before us is "an action for the enforcement of an obligation for
payment of money arising from a contract for a piece of work,"petitioner submits that
the interest rate should be six percent (6%), pursuant to Article 2209 of the Civil Code ,
which states:
If the obligation consists in the payment of money and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment
of the interest agreed upon, and in the absence of stipulation, the legal interest, which is
six per cent per annum." (Emphasis supplied.)

On the other hand, private respondent maintains that the interest rate should be twelve
percent (12 %) per annum, in accordance with Central Bank (CB) Circular No. 416,
which reads:

By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended,
otherwise known as the "Usury Law", the Monetary Board, in its Resolution No. 1622
dated July 29, 1974, has prescribed that the rate of interest for the loan or forbearance
of any money, goods or credits and the rate allowed in judgments, in the ABSENCE OF
EXPRESS CONTRACT as to such rate of interest, shall be twelve per cent (12%) per
annum." (Emphasis supplied.)

She argues that the circular applies, since "the money sought to be recovered by her is
in the form of forbearance."

We agree with the petitioner. In Reformina v. Tomol Jr., this Court stressed that the
interest rate under CB Circular No. 416 applies to (1) loans; (2) forbearance of money,
goods or credits; or (3) a judgment involving a loan or forbearance of money, goods or
credits. Cases beyond the scope of the said circular are governed by Article 2209 of the
Civil Code, which considers interest a form of indemnity for the delay in the
performance of an obligation.

In Eastern Shipping Lines, Inc. v. Court of Appeals, the Court gave the following
guidelines for the application of the proper interest rates:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts
or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as
follows:

1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest
shall be 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.

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 . . . 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 12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to forbearance of credit.

In Keng Hua Paper Products Co., Inc. v. CA, 20 we also ruled that the monetary award
shall earn interest at twelve percent (12%) per annum from the date of finality of the
judgment until its satisfaction, regardless of whether or not the case involves a loan of
forbearance of money. The interim period is deemed to be equivalent to a forbearance
of a credit. 21

Because the amount due in this case arose from a contract for a piece of work, not from
a loan or forbearance of money, the legal interest of six percent (6%) per annum should
be applied. Furthermore, since the amount of the demand could be ESTABLISHED WITH
CERTAINTY when the Complaint was filed, the six percent (6%) interest should be
COMPUTED FROM THE FILING OF THE SAID COMPLAINT. But AFTER THE JUDGMENT
BECOMES FINAL AND EXECUTORY until the obligation is satisfied, the interest should
be reckoned at twelve percent (12%) per year.

Private respondent maintains that the twelve percent (12%) interest should be
imposed, because the obligation arose from a forbearance of money. This is erroneous.
In Eastern Shipping, the Court observed that a "forbearance" in the context of the usury
law is a "contractual obligation of lender or creditor to refrain, during a given period of
time, from requiring the borrower or debtor to repay a loan or debt then due and
payable." Using this standard, the obligation in this case was obviously not a
forbearance of money, goods or credit.

WHEREFORE, the appealed Decision is MODIFIED. The rate of interest shall be six
percent (6%) per annum, computed from the time of the filing of the Complaint in the
trial court until the finality of the judgment. If the adjudged principal and the interest
(or any part thereof) remain unpaid thereafter, the interest rate shall be twelve percent
(12%) per annum computed from the time the judgment becomes final and executory
until it is fully satisfied. No pronouncement as to costs.
SO ORDERED.

G.R. No. 113926 October 23, 1996

SECURITY BANK AND TRUST COMPANY, petitioner,
vs.
REGIONAL TRIAL COURT OF MAKATI, BRANCH 61, MAGTANGGOL EUSEBIO and LEILA
VENTURA, respondents.

(CONCLUSION: Yes. the 23% rate of interest per annum agreed upon by petitioner bank
and respondents is allowable and not against the Usury Law. The Court AFFIRMED with
the MODIFICATION that the rate of interest that should be imposed be 23% per annum.
For the reason that both parties signed the promissory notes which are binding
between them. The rate of interest was agreed upon by the parties freely. Significantly,
respondent did not question that rate or the stipulation therein. All the promissory
notes were signed in 1983 and, therefore, were already covered by CB Circular No. 905.
Contrary to the claim of respondent court, THIS CIRCULAR DID NOT REPEAL NOR IN
ANYWAY AMEND THE USURY LAW but simply suspended the latter's effectivity.

HERMOSISIMA, JR. J.:p

Questions of law which are of first impression are sought to be resolved in this case:
Should the rate of interest on a loan or forbearance of money, goods or credits, as
stipulated in a contract, far in excess of the ceiling prescribed under or pursuant to the
Usury Law, prevail over Section 2 of Central Bank Circular No. 905 which prescribes
that the rate of interest thereof shall continue to be 12% per annum? Do the Courts have
the discretion to arbitrarily override stipulated interest rates of promissory notes and
stipulated interest rates of promissory notes and thereby impose a 12% interest on the
loans, in the absence of evidence justifying the imposition of a higher rate?

This is a petition for review on certiorari for the purpose of assailing the decision of
Honorable Judge Fernando V. Gorospe of the Regional Trial Court of Makati, Branch 61,
dated March 30, 1993, which found private respondent Eusebio liable to petitioner for a
sum of money. Interest was lowered by the court a quo from 23% per annum as agreed
upon the parties to 12% per annum.

The undisputed facts are as follows:

On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory Note
No. TL/74/178/83 in favor of petitioner Security Bank and Trust Co. (SBTC) in the total
amount of One Hundred Thousand Pesos (P100,000.00) payable in (6) six monthly
installments with a stipulated interest of 23% per annum up to the fifth installment.

On July 28, 1983, respondent Eusebio again executed Promissory Note No.
TL/74/1296/83 in favor of petitioner SBTC. Respondent bound himself to pay the sum
of One Hundred Thousand Pesos (P100,000.00) in six (6) monthly installments plus
23% interest per annum.

Finally, another Promissory Note No. TL74/1491/83 was executed on August 31, 1983
in the amount of Sixty Five Thousand Pesos (P65,000.00). Respondent agreed to pay
this note in six (6) monthly installments plus interest at the rate of 23% per annum.

On all the abovementioned promissory notes, private respondent Leila Ventura had
signed as co-maker.
Upon maturity which fell on the different dates below, the principal balance remaining
on the notes stood at:

1) PN No. TL/74/748/83 — P16,665.00 as of September 1983.

2) PN No. TL/74/1296/83 — P83,333.00 as of August 1983.
3) PN No. TL/74/1991/83 — P65,000.00 as of August 1983.

Upon the failure and refusal of respondent Eusebio to pay the aforestated balance
payable, a collection case was filed in court by petitioner SBTC. 5 On March 30, 1993,
the court a quo rendered a judgment in favor of petitioner SBTC, the dispositive portion
which reads:

WHEREFORE, premises above-considered, and plaintiff's claim having been duly

proven, judgment is hereby rendered in favor of plaintiff and as against defendant
Eusebio who is hereby ordered to:

1. Pay the sum of P16,655.00, plus interest of 12% per annum starting 27 September
1983, until fully paid;

2. Pay the sum of P83,333.00, plus interest of 12% per annum starting 28 August 1983,
until fully paid;

3. Pay the sum of P65,000.00, plus interest of 12% per annum starting 31 August 1983,
until fully paid;

4. Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as and
by way of attorney's fees; and to

5. Pay the costs of this suit.

SO ORDERED.

On August 6, 1993, a motion for partial reconsideration was filed by petitioner SBTC
contending that:

(1) the interest rate agreed upon by the parties during the signing of the promissory
notes was 23% per annum;

(2) the interests awarded should be compounded quarterly from due date as provided
in the three (3) promissory notes;

(3) defendants Leila Ventura should likewise be held liable to pay the balance on the
promissory notes since she has signed as co-maker and as such, is liable jointly and
severally with defendant Eusebio without a need for demand upon her.

Consequently, an Order was issued by the court a quo denying the motion to grant the
rates of interest beyond 12% per annum; and holding defendant Leila Ventura jointly
and severally liable with co-defendants Eusebio.
Hence, this petition.

The sole issue to be settled in this petition is whether or not the 23% rate of interest per
annum agreed upon by petitioner bank and respondents is allowable and not against
the Usury Law.

We find merit in this petition.

From the examination of the records, it appears that indeed the agreed rate of interest
as stipulated on the three (3) promissory notes is 23% per annum. The applicable
provision of law is the Central Bank Circular No. 905 which took effect on December 22,
1982, particularly Sections 1 and 2 which state: 9

Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on
a loan or forbearance of any money, goods or credits, regardless of maturity and
whether secured or unsecured, that may be charged or collected by any person,
whether natural or judicial, shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law, as amended.

Sec. 2. The rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of express contract as to such rate of
interest, shall continue to be twelve per cent (12%) per annum.

CB Circular 905 was issued by the Central Bank's Monetary Board pursuant to P.D. 1684
empowering them to prescribe the maximum rates of interest for loans and certain
forbearances, to wit:

Sec. 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as follows:

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate of
interest for the loan or renewal thereof or the forbearance of any money, goods or
credits, and to change such rate or rates whenever warranted by prevailing economic
and social conditions: Provided, That changes in such rate or rates may be effected
gradually on scheduled dates announced in advance.

In the exercise of the authority herein granted, the Monetary Board may prescribe
higher maximum rates for loans of low priority, such as consumer loans or renewals
thereof as well as such loans made by pawnshops, finance companies and other similar
credit institutions although the rates prescribed for these institutions need not
necessarily be uniform. The Monetary Board is also authorized to prescribed different
maximum rate or rates for different types of borrowings, including deposits and deposit
substitutes, or loans of financial intermediaries.

The court has ruled in the case of Philippine National Bank v. Court of Appeals that:

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to
stipulate freely regarding any subsequent adjustment in the interest rate that shall
accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to
adjust, upward or downward, the interest previously stipulated.

All the promissory notes were signed in 1983 and, therefore, were already covered by
CB Circular No. 905. Contrary to the claim of respondent court, THIS CIRCULAR DID
NOT REPEAL NOR IN ANYWAY AMEND THE USURY LAW but simply suspended the
latter's effectivity.

Basic is the rule of statutory construction that when the law is clear and unambiguous,
the court is left with no alternative but to apply the same according to its clear language.
As we have held in the case of Quijano v. Development Bank of the Philippines:

. . . We cannot see any room for interpretation or construction in the clear and
unambiguous language of the above-quoted provision of law. This Court had steadfastly
adhered to the doctrine that its first and fundamental duty is the application of the law
according to its express terms, interpretation being called for only when such literal
application is impossible. No process of interpretation or construction need be resorted
to where a provision of law peremptorily calls for application. Where a requirement or
condition is made in explicit and unambiguous terms, no discretion is left to the
judiciary. It must see to it that is mandate is obeyed.

The rate of interest was agreed upon by the parties freely. Significantly, respondent did
not question that rate. It is not for respondent court a quo to change the stipulations in
the contract where it is not illegal. Furthermore, Article 1306 of the New Civil Code
provides that contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy. We find no valid reason for the respondent
court a quo to impose a 12% rate of interest on the principal balance owing to
petitioner by respondent in the presence of a valid stipulation. In a loan or forbearance
of money, the interest due should be that stipulated in writing, and in the absence
thereof, the rate shall be 12% per annum. Hence, only in the absence of a stipulation can
the court impose the 12% rate of interest.

The promissory notes were signed by both parties voluntarily. Therefore, stipulations
therein are binding between them. Respondent Eusebio, likewise, did not question any
of the stipulations therein. In fact, in the Comment filed by respondent Eusebio to this
court, he chose not to question the decision and instead expressed his desire to
negotiate with the petitioner bank for "terms within which to settle his obligation."
IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is hereby
AFFIRMED with the MODIFICATION that the rate of interest that should be imposed be
23% per annum.
SO ORDERED.

G.R. No. 113412 April 17, 1996

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.
(CONCLUSION: No, respondent bank was not authorized to raise its interest rates from
21% to as high as 68% under the credit agreement.Petitioners never agreed in writing
to pay the increased interest rates demanded by respondent bank in contravention to
the tenor of their credit agreement. That an increase in interest rates from 18% to as
much as 68% is excessive and unconscionable is indisputable. In the face of the
unequivocal interest rate provisions in the credit agreement and in the law requiring
the parties to agree to changes in the interest rate in writing, we hold that the unilateral
and progressive increases imposed by respondent PNB were null and void. Their effect
was to increase the total obligation on an eighteen million peso loan to an amount way
over three times that which was originally granted to the borrowers. That these
increases, occasioned by crafty manipulations in the interest rates is unconscionable
and neutralizes the salutary policies of extending loans to spur business cannot be
disputed. Presidential Decree No. 385 was issued principally to guarantee that
government financial institutions would not be denied substantial cash inflows
necessary to finance the government's development projects all over the country by
large borrowers who resort to litigation to prevent or delay the government's collection
of their debts or loans. In facilitating collection of debts through its automatic
foreclosure provisions, the government is however, not exempted from observing basic
principles of law, and ordinary fairness and decency under the due process clause of the
Constitution. In the first place, because of the dispute regarding the interest rate
increases, an issue which was never settled on merit in the courts below, the exact
amount of petitioner's obligations could not be determined. Thus, THE FORECLOSURE
PROVISIONS OF P.D. 385 COULD BE VALIDLY INVOKED BY RESPONDENT ONLY AFTER
SETTLEMENT OF THE QUESTION INVOLVING THE INTEREST RATE ON THE LOAN, and
ONLY AFTER THE SPOUSES REFUSED TO MEET THEIR OBLIGATIONS FOLLOWING
SUCH DETERMINATION.

KAPUNAN, J.:p

On various dates in 1981, the Philippine National Bank granted to herein petitioners,
the spouses Ponciano L. Almeda and Eufemia P. Almeda several loan/credit
accommodations totalling P18.0 Million pesos payable in a period of six years at an
interest rate of 21% per annum. To secure the loan, the spouses Almeda executed a Real
Estate Mortgage Contract covering a 3,500 square meter parcel of land, together with
the building erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati, Metro
Manila. A credit agreement embodying the terms and conditions of the loan was
executed between the parties. Pertinent portions of the said agreement are quoted
below:

SPECIAL CONDITIONS

xxx xxx xxx

The loan shall be subject to interest at the rate of twenty one per cent (21%) per
annum, payable semi-annually in arrears, the first interest payment to become due and
payable six (6) months from date of initial release of the loan. The loan shall likewise be
subject to the appropriate service charge and a penalty charge of three per cent (30%)
per annum to be imposed on any amount remaining unpaid or not rendered when due.
xxx xxx xxx

III. OTHER CONDITIONS

(c) Interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may adopt in the future; provided, that
the interest rate on this/these accommodations shall be correspondingly decreased in
the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate agreed upon shall
take effect on the effectivity date of the increase or decrease of the maximum interest
rate.

Between 1981 and 1984, petitioners made several partial payments on the loan totaling.
P7,735,004.66, a substantial portion of which was applied to accrued interest. On March
31, 1984, respondent bank, over petitioners' protestations, raised the interest rate to
28%, allegedly pursuant to Section III-c (1) of its credit agreement. Said interest rate
thereupon increased from an initial 21% to a high of 68% between March of 1984 to
September, 1986.

Petitioner protested the increase in interest rates, to no avail. Before the loan was to
mature in March, 1988, the spouses filed on February 6, 1988 a petition for declaratory
relief with prayer for a writ of preliminary injunction and temporary restraining order
with the Regional Trial Court of Makati, docketed as Civil Case No. 18872. In said
petition, which was raffled to Branch 134 presided by Judge Ignacio Capulong, the
spouses sought clarification as to whether or not the PNB could unilaterally raise
interest rates on the loan, pursuant to the credit agreement's escalation clause, and in
relation to Central Bank Circular No. 905. As a preliminary measure, the lower court, on
March 3, 1988, issued a writ of preliminary injunction enjoining the Philippine National
Bank from enforcing an interest rate above the 21% stipulated in the credit agreement.
By this time the spouses were already in default of their loan obligations.

Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the
PNB countered by ordering the extrajudicial foreclosure of petitioner's mortgaged
properties and scheduled an auction sale for March 14, 1989. Upon motion by
petitioners, however, the lower court, on April 5, 1989, granted a supplemental writ of
preliminary injunction, staying the public auction of the mortgaged property.

On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court
dissolved the supplemental writ of preliminary injunction. Petitioners filed a motion for
reconsideration. In the interim, respondent bank once more set a new date for the
foreclosure sale of Marvin Plaza which was March 12, 1990. Prior to the scheduled date,
however, petitioners tendered to respondent bank the amount of P40,142,518.00,
consisting of the principal (P18,000,000.00) and accrued interest calculated at the
originally stipulated rate of 21%. The PNB refused to accept the payment.5
As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990,
formally consigned the amount of P40,142,518.00 with the Regional Trial Court in Civil
Case No. 90-663. They prayed therein for a writ of preliminary injunction with a
temporary restraining order. The case was raffled to Branch 147, presided by Judge
Teofilo Guadiz. On March 15, 1990, respondent bank sought the dismissal of the case.

On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the
writ of preliminary injunction enjoining the foreclosure sale of "Marvin Plaza"
scheduled on March 12, 1990. On April 17, 1990 respondent bank filed a motion for
reconsideration of the said order.

On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by
Judge Eriberto Rosario who issued an order consolidating said case with Civil Case
18871 presided by Judge Ignacio Capulong.

For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30,
1990, respondent bank filed a petition for Certiorari, Prohibition and Mandamus with
respondent Court of Appeals, assailing the following orders of the Regional Trial Court:

1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary
injunction restraining the foreclosure sale of Mavin Plaza set on March 12, 1990;

2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent bank's
motion to lift the writ of injunction issued by Judge Guadiz as well as its motion to
dismiss Civil Case No. 90-663;

3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's subsequent
motion to lift the writ of preliminary injunction; and

4. Order of Judge Capulong dated October 20, 1992 denying respondent bank's motion
for reconsideration.

On August 27, 1993, respondent court rendered its decision setting aside the assailed
orders and upholding respondent bank's right to foreclose the mortgaged property
pursuant to Act 3135, as amended and P.D. 385. Petitioners' Motion for Reconsideration
and Supplemental Motion for Reconsideration, dated September 15, 1993 and October
28, 1993, respectively, were denied by respondent court in its resolution dated January
10, 1994.

Hence the instant petition.

This appeal by certiorari from the respondent court's decision dated August 27, 1993
raises two principal issues namely: 1) Whether or not respondent bank was authorized
to raise its interest rates from 21% to as high as 68% under the credit agreement; and
2) Whether or not respondent bank is granted the authority to foreclose the Marvin
Plaza under the mandatory foreclosure provisions of P.D. 385.

In its comment dated April 19, 1994, respondent bank vigorously denied that the
increases in the interest rates were illegal, unilateral, excessive and arbitrary, it argues
that the escalated rates of interest it imposed was based on the agreement of the
parties. Respondent bank further contends that it had a right to foreclose the mortgaged
property pursuant to P.D. 385, after petitioners were unable to pay their loan
obligations to the bank based on the increased rates upon maturity in 1984.

The instant petition is impressed with merit.

The binding effect of any agreement between parties to a contract is premised on two
settled principles: (1) that any obligation arising from contract has the force of law
between the parties; and (2) that there must be mutuality between the parties based on
their essential equality. Any contract which appears to be heavily weighed in favor of
one of the parties so as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left solely to the will of one
of the parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that respondent
bank unilaterally altered the terms of its contract with petitioners by increasing the
interest rates on the loan without the prior assent of the latter. In fact, the manner of
agreement is itself explicitly stipulated by the Civil Code when it provides, in Article
1956 that "No interest shall be due unless it has been expressly stipulated in writing."
What has been "stipulated in writing" from a perusal of interest rate provision of the
credit agreement signed between the parties is that petitioners were bound merely to
pay 21% interest, subject to a possible escalation or de-escalation, when 1) the
circumstances warrant such escalation or de-escalation; 2) within the limits allowed by
law; and 3) upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the parties to the
contract in this case was the 21% rate stipulated in the interest provision. Any doubt
about this is in fact readily resolved by a careful reading of the credit agreement
because the same plainly uses the phrase "interest rate agreed upon," in reference to the
original 21% interest rate. The interest provision states:

(c) interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may adopt in the future; provided, that
the interest rate on this/these accommodations shall be correspondingly decreased in
the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate agreed upon shall
take effect on the effectivity date of the increase or decrease of the maximum interest
rate.

In Philippine National Bank v. Court of Appeals, this Court disauthorized respondent

bank from unilaterally raising the interest rate in the borrower's loan from 18% to 32%,
41% and 48% partly because the aforestated increases violated the principle of
mutuality of contracts expressed in Article 1308 of the Civil Code. The Court held:

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest
rates —
. . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law.

but it did not authorize the PNB, or any bank for that matter, to unilaterally and
successively increase the agreed interest rates from 18% to 48% within a span of four
(4) months, in violation of P.D. 116 which limits such changes to once every twelve
months.

Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate
on the private respondent's loan, violated the mutuality of contracts ordained in Article
1308 of the Civil Code:

Art. 308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.

In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda,
Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between
the PNB and the private respondent gave the PNB a license (although in fact there was
none) to increase the interest rate at will during the term of the loan, that license would
have been null and void for being violative of the principle of mutuality essential in
contracts. It would have invested the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal footing, the weaker party's (the
debtor) participation being reduced to the alternative "to take it or lease it" (Qua vs.
Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the
weaker party whom the courts of justice must protect against abuse and imposition.

PNB's successive increases of the interest rate on the private respondent's loan, over
the latter's protest, were arbitrary as they violated an express provision of the Credit
Agreement (Exh. 1) Section 9.01 that its terms "may be amended only by an instrument
in writing signed by the party to be bound as burdened by such amendment." The
increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides
that "no interest shall be due unless it has been expressly stipulated in writing."

The debtor herein never agreed in writing to pay the interest increases fixed by the PNB
beyond 24% per annum, hence, he is not bound to pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a period of four (4)
months is excessive, as found by the Court of Appeals, is indisputable.

Clearly, the galloping increases in interest rate imposed by respondent bank on

petitioners' loan, over the latter's vehement protests, were arbitrary.

Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not
authorize the bank, or any lending institution for that matter, to progressively increase
interest rates on borrowings to an extent which would have made it virtually impossible
for debtors to comply with their own obligations. True, escalation clauses in credit
agreements are perfectly valid and do not contravene public policy. Such clauses,
however, (as are stipulations in other contracts) are nonetheless still subject to laws
and provisions governing agreements between parties, which agreements — while they
may be the law between the contracting parties — implicitly incorporate provisions of
existing law. Consequently, while the Usury Law ceiling on interest rates was lifted by
C.B. Circular 905, nothing in the said circular could possibly be read as granting
respondent bank carte blanche authority to raise interest rates to levels which would
either enslave its borrowers or lead to a haemorrhaging of their assets. Borrowing
represents a transfusion of capital from lending institutions to industries and
businesses in order to stimulate growth. This would not, obviously, be the effect of
PNB's unilateral and lopsided policy regarding the interest rates of petitioners'
borrowings in the instant case.

Apart from violating the principle of mutuality of contracts, there is authority for
disallowing the interest rates imposed by respondent bank, for the credit agreement
specifically requires that the increase be "within the limits allowed by law". In the case
of PNB v. Court of Appeals, cited above, this Court clearly emphasized that C.B. Circular
No. 905 could not be properly invoked to justify the escalation clauses of such contracts,
not being a grant of specific authority.

Furthermore, the escalation clause of the credit agreement requires that the same be
made "within the limits allowed by law," obviously referring specifically to legislative
enactments not administrative circulars. Note that the phrase "limits imposed by law,"
refers only to the escalation clause. However, the same agreement allows reduction on
the basis of law or the Monetary Board. Had the parties intended the word "law" to refer
to both legislative enactments and administrative circulars and issuances, the
agreement would not have gone as far as making a distinction between "law or the
Monetary Board Circulars" in referring to mutually agreed upon reductions in interest
rates. This distinction was the subject of the Court's disquisition in the case of Banco
Filipino Savings and Mortgage Bank v. Navarro where the Court held that:

What should be resolved is whether BANCO FILIPINO can increase the interest rate on
the LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered
opinion that it may not.

The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event a law increasing
the lawful rates of interest that may be charged on this particular kind of loan.
(Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate may be
increased "in the event a law should be enacted increasing the lawful rate of interest
that may be charged on this particular kind of loan." The Escalation Clause was
dependent on an increase of rate made by "law" alone.

CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular
duly issued is not strictly a statute or a law, it has, however, the force and effect of law."
(Emphasis supplied). "An administrative regulation adopted pursuant to law has the
force and effect of law." "That administrative rules and regulations have the force of law
can no longer be questioned."

The distinction between a law and an administrative regulation is recognized in the

Monetary Board guidelines quoted in the latter to the BORROWER of Ms. Paderes of
September 24, 1976 (supra). According to the guidelines, for a loan's interest to be
subject to the increases provided in CIRCULAR No. 494, there must be an Escalation
Clause allowing the increase "in the event that any law or Central Bank regulation is
promulgated increasing the maximum rate for loans." The guidelines thus presuppose
that a Central Bank regulation is not within the term "any law."

The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980,
adding section 7-a to the Usury Law, providing that parties to an agreement pertaining
to a loan could stipulate that the rate of interest agreed upon may be increased in the
event that the applicable maximum rate of interest is increased "by law or by the
Monetary Board." To quote:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or

credits may stipulate that the rate of interest agreed upon may be increased in the event
that the applicable maximum rate of interest is increased by law or by the Monetary
Board:

Provided, That such stipulation shall be valid only if there is also a stipulation in the
agreement that the rate of interest agreed upon shall be reduced in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board;

Provided, further, That the adjustment in the rate of interest agreed upon shall take
effect on or after the effectivity of the increase or decrease in the maximum rate of
interest.' (Paragraphing and emphasis supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid should
specifically provide: (1) that there can be an increase in interest if increased by law or
by the Monetary Board; and (2) in order for such stipulation to be valid, it must include
a provision for reduction of the stipulated interest "in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary Board."

Petitioners never agreed in writing to pay the increased interest rates demanded by
respondent bank in contravention to the tenor of their credit agreement. That an
increase in interest rates from 18% to as much as 68% is excessive and unconscionable
is indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to
virtually half of the entire principal (P7,735,004.66) which was applied to interest
alone. By the time the spouses tendered the amount of P40,142,518.00 in settlement of
their obligations; respondent bank was demanding P58,377,487.00 over and above
those amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are
not solely potestative but based on reasonable and valid grounds. Here, as clearly
demonstrated above, not only the increases of the interest rates on the basis of the
escalation clause patently unreasonable and unconscionable, but also there are no valid
and reasonable standards upon which the increases are anchored.

We go now to respondent bank's claim that the principal issue in the case at bench
involves its right to foreclose petitioners' properties under P.D. 385. We find
respondent's pretense untenable.

Presidential Decree No. 385 was issued principally to guarantee that government
financial institutions would not be denied substantial cash inflows necessary to finance
the government's development projects all over the country by large borrowers who
resort to litigation to prevent or delay the government's collection of their debts or
loans. In facilitating collection of debts through its automatic foreclosure provisions, the
government is however, not exempted from observing basic principles of law, and
ordinary fairness and decency under the due process clause of the Constitution.
In the first place, because of the dispute regarding the interest rate increases, an issue
which was never settled on merit in the courts below, the exact amount of petitioner's
obligations could not be determined. Thus, THE FORECLOSURE PROVISIONS OF P.D.
385 COULD BE VALIDLY INVOKED BY RESPONDENT ONLY AFTER SETTLEMENT OF
THE QUESTION INVOLVING THE INTEREST RATE ON THE LOAN, and ONLY AFTER THE
SPOUSES REFUSED TO MEET THEIR OBLIGATIONS FOLLOWING SUCH
DETERMINATION. In Filipinas Marble Corporation v. Intermediate Appellate Court,
involving P.D. 385's provisions on mandatory foreclosure, we held that:

We cannot, at this point, conclude that respondent DBP together with the Bancom
people actually misappropriated and misspent the $5 million loan in whole or in part
although the trial court found that there is "persuasive" evidence that such acts were
committed by the respondent. This matter should rightfully be litigated below in the
main action. Pending the outcome of such litigation, P.D. 385 cannot automatically be
applied for if it is really proven that respondent DBP is responsible for the
misappropriation of the loan, even if only in part, then the foreclosure of the petitioner's
properties under the provisions of P.D. 385 to satisfy the whole amount of the loan
would be a gross mistake. It would unduly prejudice the petitioner, its employees and
their families.

Only after trial on the merits of the main case can the true amount of the loan which was
applied wisely or not, for the benefit of the petitioner be determined. Consequently, the
extent of the loan where there was no failure of consideration and which may be
properly satisfied by foreclosure proceedings under P.D. 385 will have to await the
presentation of evidence in a trial on the merits.

In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in
Filipinas Marble Corporation, held:

The enforcement of P.D. 385 will sweep under the rug' this iceberg of a scandal in the
sugar industry during the Marcos Martial Law years. This we can not allow to happen.
For the benefit of future generations, all the dirty linen in the
PHILSUCUCOM/NASUTRA/RPB closets have to be exposed in public so that the same
may NEVER be repeated.
It is of paramount national interest, that we allow the trial court to proceed with
dispatch to allow the parties below to present their evidence.

Furthermore, petitioners made a valid consignation of what they, in good faith and in
compliance with the letter of the Credit Agreement, honestly believed to be the real
amount of their remaining obligations with the respondent bank. The latter could not
therefore claim that there was no honest-to-goodness attempt on the part of the spouse
to settle their obligations. Respondent's rush to inequitably invoke the foreclosure
provisions of P.D. 385 through its legal machinations in the courts below, in spite of the
unsettled differences in interpretation of the credit agreement was obviously made in
bad faith, to gain the upper hand over petitioners.

In the face of the unequivocal interest rate provisions in the credit agreement and in the
law requiring the parties to agree to changes in the interest rate in writing, we hold that
the unilateral and progressive increases imposed by respondent PNB were null and
void. Their effect was to increase the total obligation on an eighteen million peso loan to
an amount way over three times that which was originally granted to the borrowers.
That these increases, occasioned by crafty manipulations in the interest rates is
unconscionable and neutralizes the salutary policies of extending loans to spur business
cannot be disputed.

WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated

August 27, 1993, as well as the resolution dated February 10, 1994 is hereby REVERSED
AND SET ASIDE. The case is remanded to the Regional Trial Court of Makati for further
proceedings. SO ORDERED.
8. Transmissibility of rights (Art. 1178)
a. Rule and Exceptions

G.R. No. 118248 April 5, 2000

DKC HOLDINGS CORPORATION,petitioner,
vs.
COURT OF APPEALS, VICTOR U. BARTOLOME and REGISTER OF DEEDS FOR METRO
MANILA, DISTRICT III, respondents.

(CONCLUSION: No, the Contract of Lease with Option to Buy entered into by the late
Encarnacion Bartolome with petitioner was not terminated upon her death or whether
it binds her sole heir, Victor, even after her demise. The subject matter of the contract is
likewise a lease, which is a property right. The death of a party does not excuse
nonperformance of a contract which involves a property right, and the rights and
obligations thereunder pass to the personal representatives of the deceased. Similarly,
nonperformance is not excused by the death of the party when the other party has a
property interest in the subject matter of the contract. Under both Article 1311 of the
Civil Code and jurisprudence, therefore, Victor is bound by the subject Contract of Lease
with Option to Buy. It appears, therefore, that the exercise by petitioner of its option to
lease the subject property was made in accordance with the contractual provisions.
Concomitantly, private respondent Victor Bartolome has the obligation to surrender
possession of and lease the premises to petitioner for a period of six (6) years, pursuant
to the Contract of Lease with Option to Buy.
YNARES-SANTIAGO, J.:

This is a petition for review on certiorari seeking the reversal of the December 5, 1994
Decision of the Court of Appeals in CA-G.R. CV No. 40849 entitled "DKC Holdings
Corporation vs. Victor U. Bartolome, et al.",1 affirming in toto the January 4, 1993
Decision of the Regional Trial Court of Valenzuela, Branch 172,2 which dismissed Civil
Case No. 3337-V-90 and ordered petitioner to pay P30,000.00 as attorney's fees.

The subject of the controversy is a 14,021 square meter parcel of land located in
Malinta, Valenzuela, Metro Manila which was originally owned by private respondent
Victor U. Bartolome's deceased mother, Encarnacion Bartolome, under Transfer
Certificate of Title No. B-37615 of the Register of Deeds of Metro Manila, District III. This
lot was in front of one of the textile plants of petitioner and, as such, was seen by the
latter as a potential warehouse site.

On March 16, 1988, petitioner entered into a Contract of Lease with Option to Buy with
Encarnacion Bartolome, whereby petitioner was given the option to lease or lease with
purchase the subject land, which option must be exercised within a period of two years
counted from the signing of the Contract. In turn, petitioner undertook to pay P3,000.00
a month as consideration for the reservation of its option. Within the two-year period,
petitioner shall serve formal written notice upon the lessor Encarnacion Bartolome of
its desire to exercise its option. The contract also provided that in case petitioner chose
to lease the property, it may take actual possession of the premises. In such an event,
the lease shall be for a period of six years, renewable for another six years, and the
monthly rental fee shall be P15,000.00 for the first six years and P18,000.00 for the next
six years, in case of renewal.

Petitioner regularly paid the monthly P3,000.00 provided for by the Contract to
Encarnacion until her death in January 1990. Thereafter, petitioner coursed its payment
to private respondent Victor Bartolome, being the sole heir of Encarnacion. Victor,
however, refused to accept these payments.

Meanwhile, on January 10, 1990, Victor executed an Affidavit of Self-Adjudication over

all the properties of Encarnacion, including the subject lot. Accordingly, respondent
Register of Deeds cancelled Transfer Certificate of Title No. B-37615 and issued
Transfer Certificate of Title No. V-14249 in the name of Victor Bartolome.

On March 14, 1990, petitioner served upon Victor, via registered mail, notice that it was
exercising its option to lease the property, tendering the amount of P15,000.00 as rent
for the month of March. Again, Victor refused to accept the tendered rental fee and to
surrender possession of the property to petitioner.

Petitioner thus opened Savings Account No. 1-04-02558-I-1 with the China Banking
Corporation, Cubao Branch, in the name of Victor Bartolome and deposited therein the
P15,000.00 rental fee for March as well as P6,000.00 reservation fees for the months of
February and March.

Petitioner also tried to register and annotate the Contract on the title of Victor to the
property. Although respondent Register of Deeds accepted the required fees, he
nevertheless refused to register or annotate the same or even enter it in the day book or
primary register.

Thus, on April 23, 1990, petitioner filed a complaint for specific performance and
damages against Victor and the Register of Deeds, docketed as Civil Case No. 3337-V-90
which was raffled off to Branch 171 of the Regional Trial Court of Valenzuela. Petitioner
prayed for the surrender and delivery of possession of the subject land in accordance
with the Contract terms; the surrender of title for registration and annotation thereon
of the Contract; and the payment of P500,000.00 as actual damages, P500,000.00 as
moral damages, P500,000.00 as exemplary damages and P300,000.00 as attorney's fees.

Meanwhile, on May 8, 1990, a Motion for Intervention with Motion to Dismiss was filed
by one Andres Lanozo, who claimed that he was and has been a tenant-tiller of the
subject property, which was agricultural riceland, for forty-five years. He questioned the
jurisdiction of the lower court over the property and invoked the Comprehensive
Agrarian Reform Law to protect his rights that would be affected by the dispute
between the original parties to the case.

On May 18, 1990, the lower court issued an Order referring the case to the Department
of Agrarian Reform for preliminary determination and certification as to whether it was
proper for trial by said court.
On July 4, 1990, the lower court issued another Order6 referring the case to Branch 172
of the RTC of Valenzuela which was designated to hear cases involving agrarian land,
after the Department of Agrarian Reform issued a letter-certification stating that
referral to it for preliminary determination is no longer required.

On July 16, 1990, the lower court issued an Order denying the Motion to Intervene,7
holding that Lanozo's rights may well be ventilated in another proceeding in due time.

After trial on the merits, the RTC of Valenzuela, Branch 172 rendered its Decision on
January 4, 1993, dismissing the Complaint and ordering petitioner to pay Victor
P30,000.00 as attorney's fees. On appeal to the CA, the Decision was affirmed in toto.

Hence, the instant Petition assigning the following errors:

(A) FIRST ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PROVISION ON

THE NOTICE TO EXERCISE OPTION WAS NOT TRANSMISSIBLE.

(B) SECOND ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE NOTICE OF

OPTION MUST BE SERVED BY DKC UPON ENCARNACION BARTOLOME PERSONALLY.

(C) THIRD ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE CONTRACT WAS
ONE-SIDED AND ONEROUS IN FAVOR OF DKC.
(D) FOURTH ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE EXISTENCE OF A

REGISTERED TENANCY WAS FATAL TO THE VALIDITY OF THE CONTRACT.

(E) FIFTH ASSIGNMENT OF ERROR

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PLAINTIFF-

APPELLANT WAS LIABLE TO DEFENDANT-APPELLEE FOR ATTORNEY'S FEES.8

The issue to be resolved in this case is whether or not the Contract of Lease with Option
to Buy entered into by the late Encarnacion Bartolome with petitioner was terminated
upon her death or whether it binds her sole heir, Victor, even after her demise.

Both the lower court and the Court of Appeals held that the said contract was
terminated upon the death of Encarnacion Bartolome and did not bind Victor because
he was not a party thereto.

Art. 1311 of the Civil Code provides, as follows —

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. The heir is not liable beyond the
value of the property he received from the decedent.

xxx xxx xxx

The general rule, therefore, is that heirs are bound by contracts entered into by their
predecessors-in-interest except when the rights and obligations arising therefrom are
not transmissible by (1) their nature, (2) stipulation or (3) provision of law.

In the case at bar, there is neither contractual stipulation nor legal provision making the
rights and obligations under the contract intransmissible. More importantly, the nature
of the rights and obligations therein are, by their nature, transmissible.

The nature of intransmissible rights as explained by Arturo Tolentino, an eminent

civilist, is as follows:

Among contracts which are intransmissible are those which are purely personal, either
by provision of law, such as in cases of partnerships and agency, or by the very nature of
the obligations arising therefrom, such as those requiring special personal qualifications
of the obligor. It may also be stated that contracts for the payment of money debts are
not transmitted to the heirs of a party, but constitute a charge against his estate. Thus,
where the client in a contract for professional services of a lawyer died, leaving minor
heirs, and the lawyer, instead of presenting his claim for professional services under the
contract to the probate court, substituted the minors as parties for his client, it was held
that the contract could not be enforced against the minors; the lawyer was limited to a
recovery on the basis of quantum meruit.
In American jurisprudence, "(W)here acts stipulated in a contract require the exercise
of special knowledge, genius, skill, taste, ability, experience, judgment, discretion,
integrity, or other personal qualification of one or both parties, the agreement is of a
personal nature, and terminates on the death of the party who is required to render
such service." 10

It has also been held that a good measure for determining whether a contract
terminates upon the death of one of the parties is whether it is of such a character that it
may be performed by the promissor's personal representative. Contracts to perform
personal acts which cannot be as well performed by others are discharged by the death
of the promissor. Conversely, where the service or act is of such a character that it may
as well be performed by another, or where the contract, by its terms, shows that
performance by others was contemplated, DEATH DOES NOT TERMINATE THE
CONTRACT OR EXCUSE NONPERFORMANCE.

In the case at bar, there is no personal act required from the late Encarnacion
Bartolome. Rather, the obligation of Encarnacion in the contract to deliver possession of
the subject property to petitioner upon the exercise by the latter of its option to lease
the same may very well be performed by her heir Victor.

As early as 1903, it was held that "(H)e who contracts does so for himself and his heirs."
In 1952, it was ruled that if the predecessor was duty-bound to reconvey land to
another, and at his death the reconveyance had not been made, the heirs can be
compelled to execute the proper deed for reconveyance. This was grounded upon the
principle that heirs cannot escape the legal consequence of a transaction entered into by
their predecessor-in-interest because they have inherited the property subject to the
liability affecting their common ancestor.

It is futile for Victor to insist that he is not a party to the contract because of the clear
provision of Article 1311 of the Civil Code. Indeed, being an heir of Encarnacion, there is
privity of interest between him and his deceased mother. He only succeeds to what
rights his mother had and what is valid and binding against her is also valid and binding
as against him. This is clear from Parañaque Kings Enterprises vs. Court of Appeals,
where this Court rejected a similar defense —

With respect to the contention of respondent Raymundo that he is not privy to the lease
contract, not being the lessor nor the lessee referred to therein, he could thus not have
violated its provisions, but he is nevertheless a proper party. Clearly, he stepped into
the shoes of the owner-lessor of the land as, by virtue of his purchase, he assumed all
the obligations of the lessor under the lease contract. Moreover, he received benefits in
the form of rental payments. Furthermore, the complaint, as well as the petition, prayed
for the annulment of the sale of the properties to him. Both pleadings also alleged
collusion between him and respondent Santos which defeated the exercise by petitioner
of its right of first refusal.

In order then to accord complete relief to petitioner, respondent Raymundo was a

necessary, if not indispensable, party to the case. A favorable judgment for the
petitioner will necessarily affect the rights of respondent Raymundo as the buyer of the
property over which petitioner would like to assert its right of first option to buy.

In the case at bar, the subject matter of the contract is likewise a lease, which is a
property right. The death of a party does not excuse nonperformance of a contract
which involves a property right, and the rights and obligations thereunder pass to the
personal representatives of the deceased. Similarly, nonperformance is not excused by
the death of the party when the other party has a property interest in the subject matter
of the contract.

Under both Article 1311 of the Civil Code and jurisprudence, therefore, Victor is bound
by the subject Contract of Lease with Option to Buy.

That being resolved, we now rule on the issue of whether petitioner had complied with
its obligations under the contract and with the requisites to exercise its option. The
payment by petitioner of the reservation fees during the two-year period within which
it had the option to lease or purchase the property is not disputed. In fact, the payment
of such reservation fees, except those for February and March, 1990 were admitted by
Victor. 17 This is clear from the transcripts, to wit —

ATTY. MOJADO:

One request, Your Honor. The last payment which was allegedly made in January 1990
just indicate in that stipulation that it was issued November of 1989 and postdated
January 1990 and then we will admit all.

COURT:

All reservation fee?

ATTY. MOJADO:

Yes, Your Honor.

COURT:

All as part of the lease?

ATTY. MOJADO:

Reservation fee, Your Honor. There was no payment with respect to payment of rentals.
18

Petitioner also paid the P15,000.00 monthly rental fee on the subject property by
depositing the same in China Bank Savings Account No. 1-04-02558-I-1, in the name of
Victor as the sole heir of Encarnacion Bartolome, for the months of March to July 30,
1990, or a total of five (5) months, despite the refusal of Victor to turn over the subject
property.
Likewise, petitioner complied with its duty to inform the other party of its intention to
exercise its option to lease through its letter dated Match 12, 1990, 21 well within the
two-year period for it to exercise its option. Considering that at that time Encarnacion
Bartolome had already passed away, it was legitimate for petitioner to have addressed
its letter to her heir.

It appears, therefore, that the exercise by petitioner of its option to lease the subject
property was made in accordance with the contractual provisions. Concomitantly,
private respondent Victor Bartolome has the obligation to surrender possession of and
lease the premises to petitioner for a period of six (6) years, pursuant to the Contract of
Lease with Option to Buy.

Coming now to the issue of tenancy, we find that this is not for this Court to pass upon in
the present petition. We note that the Motion to Intervene and to Dismiss of the alleged
tenant, Andres Lanozo, was denied by the lower court and that such denial was never
made the subject of an appeal. As the lower court stated in its Order, the alleged right of
the tenant may well be ventilated in another proceeding in due time.

WHEREFORE, in view of the foregoing, the instant Petition for Review is GRANTED. The
Decision of the Court of Appeals in CA-G.R. CV No. 40849 and that of the Regional Trial
Court of Valenzuela in Civil Case No. 3337-V-90 are both SET ASIDE and a new one
rendered ordering private respondent Victor Bartolome to:

(a) surrender and deliver possession of that parcel of land covered by Transfer
Certificate of Title No. V-14249 by way of lease to petitioner and to perform all
obligations of his predecessor-in-interest, Encarnacion Bartolome, under the subject
Contract of Lease with Option to Buy;

(b) surrender and deliver his copy of Transfer Certificate of Title No. V-14249 to
respondent Register of Deeds for registration and annotation thereon of the subject
Contract of Lease with Option to Buy;

(c) pay costs of suit.

Respondent Register of Deeds is, accordingly, ordered to register and annotate the
subject Contract of Lease with Option to Buy at the back of Transfer Certificate of Title
No. V-14249 upon submission by petitioner of a copy thereof to his office. SO ORDERED.

IV. Different Kinds of Obligations (Arts. 1179-1230)

1. Pure and Conditional Obligations (Arts. 1179-1192)
a. Pure obligations
b. Conditional obligations]
i. Condition
 G.R. No. L-11827 July 31, 1961

FERNANDO A. GAITE, plaintiff-appellee,

vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING CO., INC.,
SEGUNDINA VIVAS, FRNACISCO DANTE, PACIFICO ESCANDOR and FERNANDO TY,
defendants-appellants.

Alejo Mabanag for plaintiff-appellee.

Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-appellants.

REYES, J.B.L., J.:

This appeal comes to us directly from the Court of First Instance because the claims
involved aggregate more than P200,000.00.

Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself
or in a representative capacity, of 11 iron lode mineral claims, known as the Dawahan
Group, situated in the municipality of Jose Panganiban, province of Camarines Norte.

By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier constituted

and appointed plaintiff-appellee Fernando A. Gaite as his true and lawful attorney-in-
fact to enter into a contract with any individual or juridical person for the exploration
and development of the mining claims aforementioned on a royalty basis of not less
than P0.50 per ton of ore that might be extracted therefrom. On March 19, 1954, Gaite in
turn executed a general assignment (Record on Appeal, pp. 17-19) conveying the
development and exploitation of said mining claims into the Larap Iron Mines, a single
proprietorship owned solely by and belonging to him, on the same royalty basis
provided for in Exhibit "3". Thereafter, Gaite embarked upon the development and
exploitation of the mining claims in question, opening and paving roads within and
outside their boundaries, making other improvements and installing facilities therein
for use in the development of the mines, and in time extracted therefrom what he claim
and estimated to be approximately 24,000 metric tons of iron ore.

For some reason or another, Isabelo Fonacier decided to revoke the authority granted
by him to Gaite to exploit and develop the mining claims in question, and Gaite assented
thereto subject to certain conditions. As a result, a document entitled "Revocation of
Power of Attorney and Contract" was executed on December 8, 1954 (Exhibit
"A"),wherein Gaite transferred to Fonacier, for the consideration of P20,000.00, plus
10% of the royalties that Fonacier would receive from the mining claims, all his rights
and interests on all the roads, improvements, and facilities in or outside said claims, the
right to use the business name "Larap Iron Mines" and its goodwill, and all the records
and documents relative to the mines. In the same document, Gaite transferred to
Fonacier all his rights and interests over the "24,000 tons of iron ore, more or less" that
the former had already extracted from the mineral claims, in consideration of the sum of
P75,000.00, P10,000.00 of which was paid upon the signing of the agreement, and
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from and out
of the first letter of credit covering the first shipment of iron ores and of the first
amount derived from the local sale of iron ore made by the Larap Mines & Smelting Co.
Inc., its assigns, administrators, or successors in interests.

To secure the payment of the said balance of P65,000.00, Fonacier promised to execute
in favor of Gaite a surety bond, and pursuant to the promise, Fonacier delivered to Gaite
a surety bond dated December 8, 1954 with himself (Fonacier) as principal and the
Larap Mines and Smelting Co. and its stockholders George Krakower, Segundina Vivas,
Pacifico Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit "A-1"). Gaite
testified, however, that when this bond was presented to him by Fonacier together with
the "Revocation of Power of Attorney and Contract", Exhibit "A", on December 8, 1954,
he refused to sign said Exhibit "A" unless another bond under written by a bonding
company was put up by defendants to secure the payment of the P65,000.00 balance of
their price of the iron ore in the stockpiles in the mining claims. Hence, a second bond,
also dated December 8, 1954 (Exhibit "B"),was executed by the same parties to the first
bond Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as additional surety,
but it provided that the liability of the surety company would attach only when there
had been an actual sale of iron ore by the Larap Mines & Smelting Co. for an amount of
not less then P65,000.00, and that, furthermore, the liability of said surety company
would automatically expire on December 8, 1955. Both bonds were attached to the
"Revocation of Power of Attorney and Contract", Exhibit "A", and made integral parts
thereof.

On the same day that Fonacier revoked the power of attorney he gave to Gaite and the
two executed and signed the "Revocation of Power of Attorney and Contract", Exhibit
"A", Fonacier entered into a "Contract of Mining Operation", ceding, transferring, and
conveying unto the Larap Mines and Smelting Co., Inc. the right to develop, exploit, and
explore the mining claims in question, together with the improvements therein and the
use of the name "Larap Iron Mines" and its good will, in consideration of certain
royalties. Fonacier likewise transferred, in the same document, the complet
e title to the approximately 24,000 tons of iron ore which he acquired from Gaite, to the
Larap & Smelting Co., in consideration for the signing by the company and its
stockholders of the surety bonds delivered by Fonacier to Gaite (Record on Appeal, pp.
82-94).

Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far
Eastern Surety and Insurance Company, no sale of the approximately 24,000 tons of
iron ore had been made by the Larap Mines & Smelting Co., Inc., nor had the P65,000.00
balance of the price of said ore been paid to Gaite by Fonacier and his sureties payment
of said amount, on the theory that they had lost right to make use of the period given
them when their bond, Exhibit "B" automatically expired (Exhibits "C" to "C-24"). And
when Fonacier and his sureties failed to pay as demanded by Gaite, the latter filed the
present complaint against them in the Court of First Instance of Manila (Civil Case No.
29310) for the payment of the P65,000.00 balance of the price of the ore, consequential
damages, and attorney's fees.
All the defendants except Francisco Dante set up the uniform defense that the obligation
sued upon by Gaite was subject to a condition that the amount of P65,000.00 would be
payable out of the first letter of credit covering the first shipment of iron ore and/or the
first amount derived from the local sale of the iron ore by the Larap Mines & Smelting
Co., Inc.; that up to the time of the filing of the complaint, no sale of the iron ore had
been made, hence the condition had not yet been fulfilled; and that consequently, the
obligation was not yet due and demandable. Defendant Fonacier also contended that
only 7,573 tons of the estimated 24,000 tons of iron ore sold to him by Gaite was
actually delivered, and counterclaimed for more than P200,000.00 damages.

At the trial of the case, the parties agreed to limit the presentation of evidence to two
issues:

(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000.00
become due and demandable when the defendants failed to renew the surety bond
underwritten by the Far Eastern Surety and Insurance Co., Inc. (Exhibit "B"), which
expired on December 8, 1955; and

(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant
Fonacier were actually in existence in the mining claims when these parties executed
the "Revocation of Power of Attorney and Contract", Exhibit "A."

On the first question, the lower court held that the obligation of the defendants to pay
plaintiff the P65,000.00 balance of the price of the approximately 24,000 tons of iron
ore was one with a term: i.e., that it would be paid upon the sale of sufficient iron ore by
defendants, such sale to be effected within one year or before December 8, 1955; that
the giving of security was a condition precedent to Gait's giving of credit to defendants;
and that as the latter failed to put up a good and sufficient security in lieu of the Far
Eastern Surety bond (Exhibit "B") which expired on December 8, 1955, the obligation
became due and demandable under Article 1198 of the New Civil Code.

As to the second question, the lower court found that plaintiff Gaite did have
approximately 24,000 tons of iron ore at the mining claims in question at the time of the
execution of the contract Exhibit "A."

Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to

pay him, jointly and severally, P65,000.00 with interest at 6% per annum from
December 9, 1955 until payment, plus costs. From this judgment, defendants jointly
appealed to this Court.

During the pendency of this appeal, several incidental motions were presented for
resolution: a motion to declare the appellants Larap Mines & Smelting Co., Inc. and
George Krakower in contempt, filed by appellant Fonacier, and two motions to dismiss
the appeal as having become academic and a motion for new trial and/or to take judicial
notice of certain documents, filed by appellee Gaite. The motion for contempt is
unmeritorious because the main allegation therein that the appellants Larap Mines &
Smelting Co., Inc. and Krakower had sold the iron ore here in question, which allegedly
is "property in litigation", has not been substantiated; and even if true, does not make
these appellants guilty of contempt, because what is under litigation in this appeal is
appellee Gaite's right to the payment of the balance of the price of the ore, and not the
iron ore itself. As for the several motions presented by appellee Gaite, it is unnecessary
to resolve these motions in view of the results that we have reached in this case, which
we shall hereafter discuss.

The main issues presented by appellants in this appeal are:

(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay
appellee Gaite the P65,000.00 (balance of the price of the iron ore in question)is one
with a period or term and not one with a suspensive condition, and that the term
expired on December 8, 1955; and

(2) that the lower court erred in not holding that there were only 10,954.5 tons in the
stockpiles of iron ore sold by appellee Gaite to appellant Fonacier.

The first issue involves an interpretation of the following provision in the contract
Exhibit "A":

7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier all
his rights and interests over the 24,000 tons of iron ore, more or less, above-referred to
together with all his rights and interests to operate the mine in consideration of the sum
of SEVENTY-FIVE THOUSAND PESOS (P75,000.00) which the latter binds to pay as
follows:

a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of this agreement.

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be paid from and out
of the first letter of credit covering the first shipment of iron ore made by the Larap
Mines & Smelting Co., Inc., its assigns, administrators, or successors in interest.

We find the court below to be legally correct in holding that the shipment or local sale of
the iron ore is not a condition precedent (or suspensive) to the payment of the balance
of P65,000.00, but was only a suspensive period or term. What characterizes a
conditional obligation is the fact that its efficacy or obligatory force (as distinguished
from its demandability) is subordinated to the happening of a future and uncertain
event; so that if the suspensive condition does not take place, the parties would stand as
if the conditional obligation had never existed. That the parties to the contract Exhibit
"A" did not intend any such state of things to prevail is supported by several
circumstances:

1) The words of the contract express no contingency in the buyer's obligation to pay:
"The balance of Sixty-Five Thousand Pesos (P65,000.00) will be paid out of the first
letter of credit covering the first shipment of iron ores . . ." etc. There is no uncertainty
that the payment will have to be made sooner or later; what is undetermined is merely
the exact date at which it will be made. By the very terms of the contract, therefore, the
existence of the obligation to pay is recognized; only its maturity or demandability is
deferred.
2) A contract of sale is normally commutative and onerous: not only does each one of
the parties assume a correlative obligation (the seller to deliver and transfer ownership
of the thing sold and the buyer to pay the price),but each party anticipates performance
by the other from the very start. While in a sale the obligation of one party can be
lawfully subordinated to an uncertain event, so that the other understands that he
assumes the risk of receiving nothing for what he gives (as in the case of a sale of hopes
or expectations, emptio spei), it is not in the usual course of business to do so; hence,
the contingent character of the obligation must clearly appear. Nothing is found in the
record to evidence that Gaite desired or assumed to run the risk of losing his right over
the ore without getting paid for it, or that Fonacier understood that Gaite assumed any
such risk. This is proved by the fact that Gaite insisted on a bond a to guarantee
payment of the P65,000.00, an not only upon a bond by Fonacier, the Larap Mines &
Smelting Co., and the company's stockholders, but also on one by a surety company; and
the fact that appellants did put up such bonds indicates that they admitted the definite
existence of their obligation to pay the balance of P65,000.00.

3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or

shipment of the ore as a condition precedent, would be tantamount to leaving the
payment at the discretion of the debtor, for the sale or shipment could not be made
unless the appellants took steps to sell the ore. Appellants would thus be able to
postpone payment indefinitely. The desireability of avoiding such a construction of the
contract Exhibit "A" needs no stressing.

4) Assuming that there could be doubt whether by the wording of the contract the
parties indented a suspensive condition or a suspensive period (dies ad quem) for the
payment of the P65,000.00, the rules of interpretation would incline the scales in favor
of "the greater reciprocity of interests", since sale is essentially onerous. The Civil Code
of the Philippines, Article 1378, paragraph 1, in fine, provides:

If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity
of interests.

and there can be no question that greater reciprocity obtains if the buyer' obligation is
deemed to be actually existing, with only its maturity (due date) postponed or deferred,
that if such obligation were viewed as non-existent or not binding until the ore was sold.

The only rational view that can be taken is that the sale of the ore to Fonacier was a sale
on credit, and not an aleatory contract where the transferor, Gaite, would assume the
risk of not being paid at all; and that the previous sale or shipment of the ore was not a
suspensive condition for the payment of the balance of the agreed price, but was
intended merely to fix the future date of the payment.

This issue settled, the next point of inquiry is whether appellants, Fonacier and his
sureties, still have the right to insist that Gaite should wait for the sale or shipment of
the ore before receiving payment; or, in other words, whether or not they are entitled to
take full advantage of the period granted them for making the payment.

We agree with the court below that the appellant have forfeited the right court below
that the appellants have forfeited the right to compel Gaite to wait for the sale of the ore
before receiving payment of the balance of P65,000.00, because of their failure to renew
the bond of the Far Eastern Surety Company or else replace it with an equivalent
guarantee. The expiration of the bonding company's undertaking on December 8, 1955
substantially reduced the security of the vendor's rights as creditor for the unpaid
P65,000.00, a security that Gaite considered essential and upon which he had insisted
when he executed the deed of sale of the ore to Fonacier (Exhibit "A"). The case
squarely comes under paragraphs 2 and 3 of Article 1198 of the Civil Code of the
Philippines:

"ART. 1198. The debtor shall lose every right to make use of the period:

(1) . . .

(2) When he does not furnish to the creditor the guaranties or securities which he has
promised.

(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory.

Appellants' failure to renew or extend the surety company's bond upon its expiration
plainly impaired the securities given to the creditor (appellee Gaite), unless
immediately renewed or replaced.

There is no merit in appellants' argument that Gaite's acceptance of the surety

company's bond with full knowledge that on its face it would automatically expire
within one year was a waiver of its renewal after the expiration date. No such waiver
could have been intended, for Gaite stood to lose and had nothing to gain barely; and if
there was any, it could be rationally explained only if the appellants had agreed to sell
the ore and pay Gaite before the surety company's bond expired on December 8, 1955.
But in the latter case the defendants-appellants' obligation to pay became absolute after
one year from the transfer of the ore to Fonacier by virtue of the deed Exhibit "A.".

All the alternatives, therefore, lead to the same result: that Gaite acted within his rights
in demanding payment and instituting this action one year from and after the contract
(Exhibit "A") was executed, either because the appellant debtors had impaired the
securities originally given and thereby forfeited any further time within which to pay; or
because the term of payment was originally of no more than one year, and the balance
of P65,000.00 became due and payable thereafter.

Coming now to the second issue in this appeal, which is whether there were really
24,000 tons of iron ore in the stockpiles sold by appellee Gaite to appellant Fonacier,
and whether, if there had been a short-delivery as claimed by appellants, they are
entitled to the payment of damages, we must, at the outset, stress two things: first, that
this is a case of a sale of a specific mass of fungible goods for a single price or a lump
sum, the quantity of "24,000 tons of iron ore, more or less," stated in the contract
Exhibit "A," being a mere estimate by the parties of the total tonnage weight of the mass;
and second, that the evidence shows that neither of the parties had actually measured of
weighed the mass, so that they both tried to arrive at the total quantity by making an
estimate of the volume thereof in cubic meters and then multiplying it by the estimated
weight per ton of each cubic meter.

The sale between the parties is a sale of a specific mass or iron ore because no provision
was made in their contract for the measuring or weighing of the ore sold in order to
complete or perfect the sale, nor was the price of P75,000,00 agreed upon by the parties
based upon any such measurement.(see Art. 1480, second par., New Civil Code). The
subject matter of the sale is, therefore, a determinate object, the mass, and not the actual
number of units or tons contained therein, so that all that was required of the seller
Gaite was to deliver in good faith to his buyer all of the ore found in the mass,
notwithstanding that the quantity delivered is less than the amount estimated by them
(Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171 So. 872,
applying art. 2459 of the Louisiana Civil Code). There is no charge in this case that Gaite
did not deliver to appellants all the ore found in the stockpiles in the mining claims in
questions; Gaite had, therefore, complied with his promise to deliver, and appellants in
turn are bound to pay the lump price.

But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not
a definite mass, but approximately 24,000 tons of ore, so that any substantial difference
in this quantity delivered would entitle the buyers to recover damages for the short-
delivery, was there really a short-delivery in this case?

We think not. As already stated, neither of the parties had actually measured or weighed
the whole mass of ore cubic meter by cubic meter, or ton by ton. Both parties predicate
their respective claims only upon an estimated number of cubic meters of ore multiplied
by the average tonnage factor per cubic meter.

Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles
of ore that he sold to Fonacier, while appellants contend that by actual measurement,
their witness Cirpriano Manlañgit found the total volume of ore in the stockpiles to be
only 6.609 cubic meters. As to the average weight in tons per cubic meter, the parties
are again in disagreement, with appellants claiming the correct tonnage factor to be
2.18 tons to a cubic meter, while appellee Gaite claims that the correct tonnage factor is
about 3.7.

In the face of the conflict of evidence, we take as the most reliable estimate of the
tonnage factor of iron ore in this case to be that made by Leopoldo F. Abad, chief of the
Mines and Metallurgical Division of the Bureau of Mines, a government pensionado to
the States and a mining engineering graduate of the Universities of Nevada and
California, with almost 22 years of experience in the Bureau of Mines. This witness
placed the tonnage factor of every cubic meter of iron ore at between 3 metric tons as
minimum to 5 metric tons as maximum. This estimate, in turn, closely corresponds to
the average tonnage factor of 3.3 adopted in his corrected report (Exhibits "FF" and FF-
1") by engineer Nemesio Gamatero, who was sent by the Bureau of Mines to the mining
claims involved at the request of appellant Krakower, precisely to make an official
estimate of the amount of iron ore in Gaite's stockpiles after the dispute arose.

Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles
made by appellant's witness Cipriano Manlañgit is correct, if we multiply it by the
average tonnage factor of 3.3 tons to a cubic meter, the product is 21,809.7 tons, which
is not very far from the estimate of 24,000 tons made by appellee Gaite, considering that
actual weighing of each unit of the mass was practically impossible, so that a reasonable
percentage of error should be allowed anyone making an estimate of the exact quantity
in tons found in the mass. It must not be forgotten that the contract Exhibit "A"
expressly stated the amount to be 24,000 tons, more or less. (ch. Pine River Logging &
Improvement Co. vs U.S., 279, 46 L. Ed. 1164).

There was, consequently, no short-delivery in this case as would entitle appellants to

the payment of damages, nor could Gaite have been guilty of any fraud in making any
misrepresentation to appellants as to the total quantity of ore in the stockpiles of the
mining claims in question, as charged by appellants, since Gaite's estimate appears to be
substantially correct.

WHEREFORE, finding no error in the decision appealed from, we hereby affirm the
same, with costs against appellants.

G.R. No. 131784 September 16, 1999

FELIX I. GONZALES, petitioner,
vs.
THE HEIRS OF THOMAS and PAULA CRUZ, herein represented by ELENA C. TALENS,
respondents.

PANGANIBAN, J.:

If a stipulation in a contract admits of several meanings, it shall be understood as

bearing that import most adequate to render it effectual. An obligation cannot be
enforced unless the plaintiff has fulfilled the condition upon which it is premised. Hence,
an obligation to purchase cannot be implemented unless and until the sellers have
shown their title to the specific portion of the property being sold.

The Case

Before us is a Petition for Review on Certiorari assailing the August 13, 1997 Decision 1
of the Court of Appeals 2 in CA-GR CV No. 303754, which disposed as follows:

WHEREFORE, the decision of the trial court dated November 16, 1990 is hereby
REVERSED. The appellee FELIX GONZALES is hereby ordered to surrender possession
of the property covered by the Contract of Lease/Purchase to the appellants, Heirs of
Thomas and Paula Cruz, and to pay to the appellants the following amounts:

1. P15,000.00 per annum as rentals counted from December 1, 1984 until the appellants
shall have recovered possession of the property subject of the Contract of
Lease/Purchase;
2. P5,000.00 as attorney's fees; and
3. Costs of suit. 3
On the other hand, the trial court 4 Decision, 5 which was by the CA, ruled as follows:

WHEREFORE, premises considered, this Court hereby renders judgment in favor of the
defendant, Felix Gonzales, and against the plaintiffs, as follows:

(1) Ordering the dismissal of the case;

(2) Sentencing the plaintiffs, jointly and severally, the sum of P20,000.00 as moral
damages and the other sum of P10,000.00 as and for attorney's fees; and

(3) To pay the costs. 6

The Facts

We hereby reproduce, unedited, the Court of Appeals' summary of the facts of this case
as follows:

On December 1, 1983, Paula Año Cruz together with the plaintiffs heirs of Thomas and
Paula Cruz, namely Ricardo A. Cruz, Carmelita M. Cruz, Salome A Cruz, Irenea C. Victoria,
Leticia C. Salvador and Elena C. Talens, entered into a Contract of Lease/Purchase with
the defendant, Felix L. Gonzales, the sole proprietor and manager of Felgon Farms, of a
half-portion of a "parcel of land containing an area 12 hectares, more or less, and an
accretion of 2 hectares, more or less, situated in Rodriguez Town, Province of Rizal" and
covered by Transfer Certificate of Title No. 12111 (Exhibit A, p. 157, Records). The
contract of Lease/Purchase contains the following provisions:

1. The terms of this Contract is for a period of one year upon the signing thereof. After
the period of this Contract, the LESSEE shall purchase the property on the agreeable
price of One Million Pesos (P1,000,000.00) payable within Two (2) years period with an
interest of 12% per annum subject to the devalued amount of the Philippine Peso,
according to the following schedule of payment:

Upon the execution of the Deed of Sale 50% — and thereafter 25% every six (6) months
thereafter, payable within the first ten (10) days of the beginning of each period of six
(6) months.

2. The LESSEE shall pay by way of annual rental an amount equivalent to Two Thousand
Five Hundred (P2,500.00) Pesos per hectare, upon the signing of this contract on Dec. 1,
1983.

xxx xxx xxx

9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and
distinct T.C.T. over the herein leased portion to the LESSEE within a reasonable period
of time which shall not in any case exceed four (4) years, after which a new Contract
shall be executed by the herein parties which shall be the same in all respects with this
Contract of Lease/Purchase insofar as the terms and conditions are concerned.

xxx xxx xxx

(Exhibits A, A-1; pp. 157-158. Records)

The defendant Gonzales paid the P2,500.00 per hectare of P15,000.00 annual rental on
the half-portion of the property covered by Transfer Certificate of Title No. 12111 in
accordance with the second provision of the Contract of Lease/Purchase (p. 12, TSN,
September 14, 1989) and thereafter took possession of the property, installing thereon
the defendant Jesus Sambrano as his caretaker (pp. 16-17, 27 TSN, December 12, 1989).
The defendant Gonzales did not, however, exercise his option to purchase the property
immediately after the expiration of the one-year lease on November 30, 1984 (pp. 19-
20, TSN, September 14, 1989). He remained in possession of the property without
paying the purchase price provided for in the Contract of Lease/Purchase (Ibid.) and
without paying any further rentals thereon (p. 36, TSN, November 7, 1989).

A letter was sent by one of the plaintiffs-heirs Ricardo Cruz to the defendant Gonzales
informing him of the lessors' decision to rescind the Contract of Lease/Purchase due to
a breach thereof committed by the defendant (Exhibit C; p. 162, Records) The letter also
served as a demand on the defendant to vacate the premises within 10 days from
receipt of said letter (Ibid.).

The defendant Gonzales refused to vacate the property and continued possession
thereof (p. 2, Record). The matter was therefore brought before the barangay captain of
San Isidro, but owing to the defendant's refusal to appear before the barangay, a
certification allowing the case to be brought to Court was issued on March 18, 1987
(Exhibit E; p. 165, Records).

The lessor, Paula Año Cruz died the following day, March 19, 1987 (p. 9, TSN, September
14, 1989).

A final demand letter to vacate the premises was sent by the remaining lessors who are
also the heirs of the deceased lessor Paula Año Cruz, through their counsel on August
24, 1987 which the defendant Gonzales received but did not heed (Exhibits D and D-1;
pp. 163-164, Records).

The property subject of the Contract of Lease/Purchase is currently the subject of an

Extra-Judicial Partition (Exhibits G and G-1; pp. 168-169, Records). Title to the property
remains in the name of the plaintiffs' predecessors-in-interest, Bernardina Calixto and
Severo Cruz (Exhibit B; p. 160, Records).

Alleging breach of the provisions of the Contract of Lease/Purchase, the plaintiffs filed a
complaint for recovery of possession of the property — subject of the contract with
damages, both moral and compensatory and attorney's fees and litigation expenses (p.
3, Records).

Alleging breach of paragraph nine of the Contract of Lease/Purchase, and payment of

only P50,000.00 of the P500,000.00 agreed down payment on the purchase price of
P1,000,000.00, the defendant Gonzales filed his answer on November 23, 1987 praying
for a dismissal of the complaint filed against him and an award of moral, exemplary and
actual damages, as well as litigation expenses (pp. 19-22, Records).
The defendant Sambrano was, upon motion, declared in default for failure to file an
answer despite valid service of summons (p. 30, Records).

The parties limited the issues to be resolved to:

(1) Whether or not paragraph 9 of the contract is a condition precedent before the
defendant is to pay the down payment;

(2) Whether or not plaintiffs can rescind the Contract of Lease/Purchase; and

(3) Whether or not plaintiffs can terminate the Contract of Lease. (p. 4, Decision; p. 262,
Records).

After the termination of the pre-trial conference, the trial court proceeded to hear the
case on the merits and arrived at its appealed decision based on the following findings
and conclusions:

Paragraph 9 of the contract clearly indicates that the lessors-plaintiffs shall obtain a
Transfer Certificate of Title in the name of the lessee within 4 years before a new
contract is to be entered into under the same terms and conditions as the original
Contract of Lease/Purchase. Thus, before a deed of Sale can be entered into between the
plaintiffs and the defendant, the plaintiffs have to obtain the Transfer Certificate of Title
in favor of the defendant. Article 1181 of the New Civil Code states that: "In conditional
obligations, the acquisition of rights, as well as the extinguishment or loss of those
already acquired, shall depend upon the happening of the event which constitutes the
condition." When the obligation assumed by a party to a contract is expressly subjected
to a condition, the obligation cannot be enforced against him unless the condition is
complied with (Wise & Co. vs. Kelly, 37 Phil. 695; PNB vs. Philippine Trust Co., 68. Phil.
48).

The failure of the plaintiffs to secure the Transfer Certificate of Title, as provided for in
the contract, does not entitle them to rescind the contract[.] Article 1191 of the New
Civil Code states that: "The power to rescind obligations is implied in reciprocal ones, in
case one of the obligers should not comply with what is incumbent upon him. The
injured party may choose between the fulfillment of the obligation, with the payment of
damages in either case. He may seek rescission, even after he has chosen fulfillment, if
the latter should become impossible. . . ." The power to rescind is given to the injured
party. Where the plaintiff is the party who did not perform, he is not entitled to insist
upon the performance of the contract by the defendant or recover damages by reason of
his own breach (Mateos vs. Lopez, 6 Phil. 206; Borque vs. Yu Chipco, 14 Phil. 95). An
action for specific performance of a contract is an equitable proceeding, and he who
seeks to enforce it must himself be fair and reasonable, and do equity (Seva vs. Berwin,
48 Phil. 581). In this case, plaintiffs failed to comply with the conditions precedent after
2-1/2 years from the execution of the contract so as to entitle them to rescind the
contract. Although the contract stated that the same be done within 4 years from
execution, still, the defendant has to be assured that the land subject of the case will be
transferred in his name without any encumbrances, as the Extra-Judicial Partition dated
July 17, 1989 was being processed, and continues to be in process to this date. The
failure to secure the Transfer Certificate of Title in favor of the defendant entitles not
the plaintiffs but, rather, the defendant to either rescind or to ask for specific
performances.

Are the plaintiffs entitled to terminate the Contract of Lease? Article 1670 of the New
Civil Code states that:

If at the end of the contract the lessee should continue enjoying the thing leased for
fifteen days with the acquies[c]ence of the lessor and unless a notice to the contrary by
either party has previously been given, it is understood that there is an implied new
lease, not for the period of the original contract, but for the time established in Articles
1682 and 1687. The other terms of the original contract shall be revived.

Article 1682 of the New Civil Code states that:

The lease of a piece of rural land, when its duration has not been fixed, is understood to
have been made for all the time necessary for the gathering of the fruits which the
whole estate leased may yield in one year, or which it may yield once, although two or
more years may have to elapse for the purpose.

The plaintiffs filed the complaint on October 12, 1987 after making an extra-judicial
demand on July 2, 1986. The contract was entered into on December 1, 1983. The
demand was thus made more than a year and a half from the expiry date of the original
lease considering that there was no payment made for the second year of the lease. If
one has to consider the fact that the defendant was given the option to purchase the
property after two years, then, the lease would presumably run for at least two years. If
that is so, then, the demand was made seven months after the expiration of the two-year
lease. Still, this demand by the plaintiffs will come under the implied new lease of
Articles 1682 and 1670 so that the plaintiffs are not entitled to terminate the Contract of
Lease.

In sum, the plaintiffs cannot terminate the Contract of Lease due to their failure to notify
the defendant in due time of their intention to that effect. Nor can they rescind the
Contract of Purchase in view of the fact that there is a condition precedent which the
plaintiffs have not fulfilled. It is the defendant now who has the option to either rescind
or demand the performance of the contract. Moreover, according to Article 1654 of the
New Civil Code, the lessor is obliged to deliver the thing which is the object of the
contract in such condition as to render it fit for the use intended. Considering that the
lessors-plaintiffs have not delivered the property in whole over the protest of the
defendant, the latter suffered damages therefor. (p. 4-6, Decision; pp. 262-264, Records)

Their complaint thus dismissed, the plaintiffs, now appellants, assign the trial court of
having committed the following errors:

I. THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT PLAINTIFFS-APPELLANTS

COULD NOT VALIDLY RESCIND AND TERMINATE THE LEASE/PURCHASE CONTRACT
(EXHIBIT "A") AND THEREAFTER TO TAKE POSSESSION OF THE LAND IN QUESTION
AND EJECT THEREFROM DEFENDANTS-APPELLEES.
II. THE TRIAL COURT EQUALLY ERRED IN NOT GRANTING THE RELIEFS PLEADED
AND PRAYED FOR BY PLAINTIFFS-APPELLANTS IN THEIR COMPLAINT. (p. 42, Rollo)

The case was submitted for decision without the appellee's brief as per the Court's
resolution dated July 8, 1992 (p. 71, Rollo).

Ruling of the Court of Appeals

The Court of Appeals reversed the trial court in this wise:

The trial court, in its decision interpreted the ninth provision of the Contract of
Lease/Purchase to mean that before the appellee exercises his option to purchase the
property by paying the 50% plus interest on the P1,000,000.00 purchase price, the
appellants must first transfer the title to the property in the appellee's name. The Court
finds this interpretation of the provision strained if not altogether absurd. The transfer
of title to the property in the appellee's name cannot be interpreted as a condition
precedent to the payment of the agreed purchase price because such interpretation not
only runs counter [to] the explicit provisions of the contract but also is contrary to the
normal course of things anent the sale of real properties. The terms of the contract [are]
explicit and require no interpretation. Upon the expiration of the lease, the lessee shall
purchase the property. Besides, the normal course of things anent the sale of real
properties dictates that there must first be payment of the agreed purchase price before
transfer of title to the vendee's name can be made.

This was precisely what the appellants and Paula Año Cruz had in mind when they had
the ninth provision incorporated in the Contract of Lease/Purchase. They had asked for
a period of 4 years from the time they receive the downpayment of 50% within which to
have [the] title to the property transferred in the name of the appellee The reason for
this four (4) year period is [that] title to the property still remains in the name of the
original owners, the predecessors-in-interest of the herein appellants and [transferring]
the title to their names and eventually to the lessee-purchaser, appellee herein, would
take quite some time.

The appellee wanted to have the title to the property transferred in his name first
before he exercises his option to purchase allegedly in accordance with the ninth
provision of the contract. But the ninth provision does not give him this right. A reading
of the contract in its entirety shows that the 4 year period asked for by the appellants
within which to have title to the property transferred in the appellee's name will only
start to run when the appellee exercises his option to purchase. Since the appellee never
exercised his option to purchase, then appellee is not entitled to have the title to the
property transferred in his name.

Attributing reversible errors to the appellate court, petitioner elevated the case to this
Court. 7

The Issues

In his Memorandum, 8 petitioner submits the "following main issues":

I. Whether or not the Court of Appeals has gravely erred and committed grave abuse of
discretion in the interpretation of [the] law between the parties.

II. Whether or not the Court of Appeals committed serious mistakes in the finding of
facts which resulted [in] departing from the usual course of judicial proceedings.

For these issues to be resolved, petitioner asks this Court to answer the following
questions:

1. Is there a conflict between the statement in paragraph 1 of the Lease/Purchase

Contract and that [in] paragraph No. 9 thereof?

2. Is paragraph 9 of the Lease/Purchase Contract a condition precedent before

petitioner could exercise his option to buy the property?

3. Can plaintiff rescind or terminate the Contract of Lease after the one-year period?

In fine, the resolution of this case depends upon the proper interpretation of paragraph
nine of the Contract.

The Court's Ruling

The Petition is meritorious.

Main Issue:

Interpretation of Paragraph Nine

In its first paragraph, the disputed agreement provides that petitioner shall lease the
property for one year, after which he "shall purchase" it. Paragraph nine, on the other
hand, requires herein respondents to obtain a separate and distinct Transfer Certificate
of Title (TCT) over the property, viz.:

9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and
distinct T.C.T. over the lease portion to the LESSEE within a reasonable period of time
which shall not in any case exceed four (4) years, after which a new Contract shall be
executed by the herein parties which shall be the same in all respects with this Contract
of Lease/Purchase insofar as the terms and conditions are concerned.

Alleging that petitioner has not purchased the property after the lapse of one year,
respondents seek to rescind the Contract and to recover the property. Petitioner, on the
other hand, argues that he could not be compelled to purchase the property, because
respondents have not complied with paragraph nine, which obligates them to obtain a
separate and distinct title in their names. He contends that paragraph nine was a
condition precedent to the purchase of the property.

To be sure, this paragraph — and the entire agreement, for that matter — is not a model
of how a contract should be worded. It is an invitation to a litigation, as in fact the
parties had to go all to way up to this Court to plead for a resolution of their conflict
which is rooted in their failure to express themselves clearly. Small wonder, even the
two lower courts gave contradictory understanding of this provision, thereby
necessitating the intervention of the highest court of the land.

Both the trial court: and the Court of Appeals (CA) interpreted this provision to mean
that the respondents had obliged themselves to obtain a TCT in the name of petitioner-
lessee. The trial court held that this obligation was a condition precedent to petitioner's
purchase of the property. Since respondents had not performed their obligation, they
could not compel petitioner to buy the parcel of land. The CA took the opposite view,
holding that the property should be purchased first before respondents may be obliged
to obtain a TCT in the name of petitioner-lessee-buyer.

As earlier noted, petitioner disagrees with the interpretation of the two courts and
maintains that respondents were obligated to procure a TCT in their names before he
could be obliged to purchase the property in question.

Basic is the rule in the interpretation of contracts that if some stipulation therein should
admit of several meanings, it shall be understood as bearing that import most adequate
to render it effectual. 9 Considering the antecedents of the ownership of the disputed
lot, it appears that petitioner's interpretation renders clause nine most effectual.

The record shows that at the time the contract was executed, the land in question was
still registered in the name of Bernardina Calixto and Severo Cruz, respondents'
predecessors-in-interest. There is no showing whether respondents were the only heirs
of Severo Cruz or whether the other half of the land in the name of Bernardina Calixto
was adjudicated to them by any means. In fact, they admit that extrajudicial proceedings
were still ongoing. Hence, when the Contract of Lease/Purchase was executed, there
was no assurance that the respondents were indeed the owners of the specific portion
of the lot that petitioner wanted to buy, and if so, in what concept and to what extent.

Thus, the clear intent of the ninth paragraph was for respondents to obtain a separate
and distinct TCT in their names. This was necessary to enable them to show their
ownership of the stipulated portion of the land and their concomitant right to dispose of
it. Absent any title in their names, they could not have sold the disputed parcel of land.

It is well-settled principle in law that no one can five what one does not have — nemo
dat quod non habet. Accordingly, one can sell only what one owns or is authorized to
sell, and the buyer can acquire no more than what the seller can transfer legally. 10

Because the property remained registered in the names of their predecessors-in-

interest, private respondents could validly sell only their undivided interest in the
estate of Severo Cruz, the extent of which was however not shown in the records. There
being no partition of the estate thus, far, there was no guarantee as to how much and
which portion would be adjudicated to respondents.

In a contract of sale, the title to the property passes to the vendee upon the delivery of
the thing sold. 11 In this case, the respondent could not deliver ownership or title to a
specific portion of the yet undivided property. True, they could have intended to sell
their hereditary interest, but in the context of the Contract of Lease/Purchase, the
parties under paragraph nine wanted the specific portion of the land to be segregated,
identified and specifically titled. Hence, by the said Contract, the respondents as sellers
were given a maximum of four years within which to acquire a separate TCT in their
names, preparatory to the execution of the deed of sale and the payment of the agreed
price in the manner described in paragraph nine.

This interpretation is bolstered by the P50,000 petitioner advanced to respondents in

order to help them expedite the transfer of the TCT to their names. Ineluctably, the
intention of the parties was to have the title transferred first to respondents' names as a
condition for the completion of the purchase.

In holding that clause nine was not a condition precedent to the purchase of the
property, the CA relied on a literal interpretation to the effect that the TCT should be
obtained in the name of the petitioner-vendee. It reasoned that the title could be
transferred to the name of the buyer only after the completion of the purchase. Thus,
petitioner should first purchase the property before respondents could be obliged to
transfer the TCT to his name.

We disagree. The literal interpretation not only ignores the factual backdrop of the case;
it also utilizes a faulty parsing of paragraph nine, which should purportedly read as
follows: "The lessors . . . shall undertake to obtain a separate and distinct TCT . . . to the
LESSEE within a reasonable period of time which shall not in any case exceed four (4)
years . . .. " Read in its entirety, however, paragraph nine does not say that the TCT
should be obtain in the name of the lessee. In fact, paragraph nine requires respondents
to obtain a "TCT over the herein leased portion to the LESSEE," thereby showing that
the crucial phrase "to the LESSEE" adverts to "the leased portion" and not to the name
which should appear in the new TCT.

Furthermore, the CA interpretation ignores the other part of paragraph nine, stating
that after a separate TCT had been obtained, "a new contract shall be executed by the
herein parties which shall be the same in all respects with this Contract of
Lease/Purchase insofar as the terms and conditions are concerned."

If, as the CA held, petitioner should purchase the property first before the title can be
transferred to his name, why should there be a waiting period of four years before the
parties can execute the new contract evidencing the sale? Why should the petitioner still
be required to pay rentals after it purchases and pays for the property? The Contract
could not have envisioned this absurd scenario.

Clearly, the appellate court's literal interpretation of the first portion of paragraph nine
renders the latter portion thereof ineffectual. In other words, that portion can only
mean that the respondents should first obtain a TCT in their names, after which
petitioner is given time to purchase and pay for the property.

Respondents insist that "the obligation of petitioner to buy the disputed land
immediately after the termination of the one year lease period is
explicit." 12 However, it is more reasonable to state that the first paragraph was
effectively modified by the ninth. To repeat, petitioner can be compelled to perform his
obligation under the first paragraph, only after respondents have complied with the
ninth. Unless and until respondents have done so, the first paragraph cannot be
enforced against the petitioner.

In sum, we hold that the ninth provision was intended to ensure that respondents
would have a valid title over the specific portion they were selling to petitioner. Only
after the title is assured may the obligation to buy the land and to pay the sums stated in
the Contract be enforced within the period stipulated. Verily, the petitioner's obligation
to purchase has not yet ripened and cannot be enforced until and unless respondents
can prove their title to the property subject of the Contract.

Secondary Issues

Ninth Clause Was a Condition Precedent

Because the ninth clause required respondents to obtain a separate and distinct TCT in
their names and not in the name of petitioner, it logically follows that such undertaking
was a condition precedent to the latter's obligation to purchase and pay for the land. Put
differently, petitioner's obligation to purchase the land is a conditional one and is
governed by Article 1181 of the Civil
Code. 13

Condition has been defined as "every future and uncertain event upon which an
obligation or provision is made to depend. It is a future and uncertain event upon which
the acquisition or resolution of rights is made to depend by those who execute the
juridical act." 14 Without it, the sale of the property under the Contract cannot be
perfected, and petitioner cannot be obliged to purchase the property. "When the
consent of a party to a contract is given subject to the fulfillment of a suspensive
condition, the contract is not perfected unless that condition is first complied with." 15

The Court has held that "[w]hen the obligation assumed by a party to a contract is
expressly subjected to a condition, the obligation cannot be enforced against him unless
the condition is complied with." 16 Furthermore, "[t]he obligatory force of a conditional
obligation is subordinated to the happening of a future and uncertain event, so that if
that event does not take place, the parties would stand as if the conditional obligation
had never existed." 17

In this case, the obligation of the petitioner to buy the land cannot be enforced unless
respondents comply with the suspensive condition that they acquire first a separate and
distinct TCT in their names. The suspensive condition not having been fulfilled, then the
obligation of the petitioner to purchase the land has not arisen.

Respondents Cannot Rescind the Contract

In the same vein, respondents cannot rescind the contract, they have not caused the
transfer of the TCT to their names, which is a condition precedent to petitioner's
obligation. This Court has held that "there can be no rescission (or more properly,
resolution) of an obligation as yet non-existent, because the suspensive condition has
not happened." 18
Since the reversal of the CA Decision is inevitable, the trial court's judgment should be
reinstated. However, we find no sufficient factual or legal justifications for the award of
moral damages and attorney's fees.

WHEREFORE, the petition is GRANTED and the appealed Decision is REVERSED and
SET ASIDE. The Decision of the trial court is REINSTATED, but the award of moral
damages and attorney's fees is DELETED for lack of basis. No costs. SO ORDERED.

G.R. No. 118347 October 24, 1996

VICENTE LIM and MICHAEL, LIM, petitioners,

vs.
COURT OF APPEALS and LIBERTY H. LUNA, respondents.

MENDOZA, J.:p

Private respondent Liberty Luna is the owner of a piece of land located at the corner of
G. Araneta Avenue and Quezon Avenue in Quezon City. The land, consisting of 1,013.6
square meters, is covered by TCT No. 193230 of Registry of Deeds of Quezon City. On
September 2, 1988 private respondent sold the land to petitioners Vicente and Michael
Lim for P3,547,600.00. As prepared by petitioners' broker, Atty. Rustico Zapata of the
Zapata Realty Company, the receipt embodying the agreement 1 read as follows:

RECEIPT

RECEIVED from ZAPATA REALTY CO. INC., through Mr. Edmundo Kaimo of 101
Building, Metrobank Cashier's Check No. 020583, Dasmariñas branch, in the sum of
TWO HUNDRED THOUSAND (P200,000.00) PESOS, as earnest money for the purchase
of a parcel of land at the corner of G. Araneta Avenue and Quezon Avenue, Quezon City,
with an area of 1,013.6 sq. m. covered by TCT 193230, Registry of Deeds for Quezon
City, at the price of P3,547,600.00, subject to the following conditions:

1. This sum of P200,000.00 shall form part of the purchase price;

2. The balance of P3,347,600.00 shall be paid in full after the squatters/occupants have
totally vacated the premises;

3. The seller assumes full responsibility to eject the squatters/occupants within said
period of sixty (60) days, from the date of receipt of the earnest money; and in case the
seller shall fail in her commitment to ejct the squatters/occupants within said period,
the seller shall refund to the buyer this sum of P200,000.00[plus another sum of ONE
HUNDRED THOUSAND (P100,000.00) PESOS as liquidated damages]; however, if the
buyer shall fail to pay the balance after the seller has ejected the squatters/occupants,
this sum of P200,000.00 shall be forfeited by the seller;

4. Capital gains tax, documentary stamps tax and broker's commission shall be for
seller's account while transfer and registration fees shall be for buyer's account.
5. That Zapata Realty Co. Inc. and Edmundo F. Kaimo are the exclusive brokers of the
buyers Vicente & Michael Lim.

6. Buyer assumes responsibility of the premises immediately upon eviction of the

squatters.

Quezon City, September 2, 1988.

(SGD.) LIBERTY H. LUNA

(Seller)

WITNESSED BY:

(SGD.) EDMUNDO KAIMO

However, when private respondent signed the receipt, she crossed out the bracketed
portion in paragraph 3 providing for the payment by private respondent of the amount
of P100,000.00 as liquidated damages in the event she failed to eject the squatter sixty
(60) days after the signing of the agreement. Thereafter, a check for P200,000.00 was
given to private respondent as earnest money, leaving a balance of P3,347,600 to be
paid in full after the squatters are ejected.

Private respondent Luna failed to eject the squatters from the land despite her alleged
efforts to do so. It appears that private respondent asked the help of a building official
and a city engineer to effect ejectment. 2 Nonetheless, petitioners did not demand the
return of their earnest money.

On January 17, 1989, the parties met at the office of Edmundo Kaimo to negotiate a
price increase to facilitate the ejectment of the squatters. The parties agreed to an
increase of P500.00 per square meter, by rounding off the total purchase price to
P4,000,000.00, with the remaining 13.6 square meters of the 1,013.6 square meters
given as a discount. Less the P200,000.00 given as earnest money, the balance to be paid
by petitioners was P3,800,000.00.

After a few days, private respondent tried to return the earnest money alleging her
failure to eject the squatters. She claimed that as a result of her failure to remove the
squatters from the land, the contract of sale ceased to exist and she no longer hand the
obligation to sell and deliver her property to petitioners. As petitioners had refused to
accept the refund of the earnest money, private respondent wrote them of February 22,
1989 that the amount would be deposited in court by consignation. On March 10, 1989,
private respondent filed a complaint for consignation against petitioners.

Private respondent alleged that it was her obligation to return the earnest money under
paragraph 3 of the receipt since the condition of ejecting the squatters had not been
fulfilled but petitioners unjustly refused to accept the refund. She claimed that although
she tried her best to eject the squatters, she failed in her efforts.
Petitioners, on other hand, argued in their answer that the legal requisites for a valid
consignation were not present and, therefore, the consignation was improper. They
claimed that private respondent never really intended to eject the squatters as,
evidenced by the absence of a case for ejectment. Petitioners charged that private
respondent had used her own failure as an excuse to get out of her contract.

Private respondent testified that she had wanted to return the earnest money after
realizing that she could not successfully eject the squatters but that she was not able to
do so because petitioners' broker, Zapata Realty Company, refused to give her
petitioners' address. 3 In her cross examination, she claimed that the primary reason for
the January 17, 1989 meeting was for her to return the money and to withdraw from
the sale and that the idea of increasing the price came from petitioners to convince her
to continue with the sale. 4 She later admitted, however, that the price increase and
decision to proceed with the sale were mutually agreed upon by her and petitioner
Vicente Lim. 5 Her admission was confirmed by her broker, Edmundo Kaimo, who
testified 6 that the purpose of the meeting was to discuss ways of carrying out the sale,
considering that private respondent was having difficulty ejecting the squatters and that
what he and private respondent proposed to petitioners was to increase the purchase
price to facilitate the ejectment.

Testifying in their turn, petitioner Vicente Lim denied that the January 17, 1989 meeting
was held at their instance. 7 He said that he was reluctant to agree to the price increase
but was prevailed upon to do so by his broker, Zapata Realty Company, and by
Edmundo Kaimo. This testimony was corroborated by Atty. Rustico Zapata and
Francisco Zapata of the Zapata Realty Company.

On December 28, 1992 the trial court 8 rendered a decision holding that there was a
perfected contract of sale between the parties and that pursuant to Art. 1545 of the Civil
Code, although the failure of private respondent to eject the squatters was a breach of
warranty, the performance of warranty could be waived by the buyer, as petitioners did
in this case. It found private respondent to have acted in bad faith by not exerting
earnest efforts to eject the squatters, in order to get out of the contract. The dispositive
portion of its decision reads:

WHEREFORE, under cool reflection and prescinding from the foregoing, judgment is
rendered in favor of the defendants and against plaintiff:

1. The complaint is dismissed.

2. Perforce, plaintiff is ordered to comply with the Receipt Agreement dated September
02, 1988 regarding the sale to the defendants of the property covered by Transfer
Certificate of Title No. T-193230 of the Registry of Deeds of Quezon City, upon payment
by the defendants of the balance of P3,800,000.00.

3. Plaintiff is ordered to pay the defendants the sum of P500,000.00 as moral damages.

4. Plaintiff to pay defendants the sum of P50,000.00 by way of attorney's fees.

5. Plaintiff to pay the cost.

SO ORDERED.

The private respondent appealed to the Court of Appeals, which

reversed 9 the trial court and allowed the complaint for consigantion. It held that as a
result of the non-fulfillment of the condition of ejecting the squatters, petitioners lost
the right to demand from the private respondent the sale of the land to them. The
appellate court described the sale in this case as a "contract with a condition obligation"
whereby the private respondent's obligation to sell and deliver and the petitioners'
obligation to pay the balance of the purchase price depended on the fulfillment of the
condition that the squatters be removed within 60 days.

The Court of Appeals held:

Under such condition, upon the ejectment of the squatters plaintiff would acquire the
right to demand that defendants proceed with the sale and pay the balance of the
purchase price; and, on the hand, should the event not happen, defendants would lose
the right they had acquired by giving the earnest money to plaintiff to demand that the
latter sell said land to them.

It also ruled that consignation was proper as the obligation to refund earnest money
was a clear debt and that contrary to the finding of the trial court, the facts show that
private respondent exerted earnest efforts to eject the squatters and was, therefore, not
in bad faith.

The petitioners filed this petition for review on the following grounds:

I. THE RULING OF THE COURT OF APPEALS THAT "THE NON-FULFILLMENT OF THE

CONDITION OF EJECTING THE SQUATTERS RESULTED IN DEFENDANTS' LOSING THE
RIGHT (ACQUIRED BY VIRTUE OF THE EARNEST MONEY) TO DEMAND THAT
PLAINTIFF SELL THE LAND TO THEM" IS PATENTLY AGAINST THE SPECIFIC LAW ON
SALES, AND IS A DISTORTED AND CLEARLY ERRONEOUS APPLICATION OF THE
GENERAL PROVISIONS OF THE LAW ON OBLIGATIONS AND CONTRACTS.

II. THE RULING OF THE COURT OF APPEALS IS A DISTORTION OF THE CONTRACT

BETWEEN THE PARTIES, WAY OF JUSTICE ITSELF BECAUSE IT REWARDS RATHER
THAN SANCTIONS THE NON-PERFORMANCE OF A CONTRACTED OBLIGATION.

III. THE QUESTION OF WHETHER OR NOT RESPONDENT LUNA EXERTED EARNEST

EFFORTS TO EJECT THE SQUATTERS DOES NOT PERTAIN TO THE ISSUE OF THE
PROPRIETY OF CONSIGNATION BUT REFERS TO THE MATTER OF WHETHER OR NOT
RESPONDENT LUNA WAS IN BAD FAITH AND IS THEREFORE LIABLE FOR DAMAGES
INFLICTED UPON THE PETITIONERS; AND THE RULING THAT SUCH EARNEST
EFFORTS WAS PRESENT IS CONTRARY TO UNCONTRADICTED EVIDENCE.

The petition is well, taken. The first question is whether as a result of private
respondent's failure to eject the squatters from the land, petitioners, as the Court of
Appeals ruled, lost the right to demand that the land be sold to them. we hold that they
did not and that the appellate court erred in holding otherwise. The agreement, as
quoted above, shows a perfected contract of sale. Under Art. 1475 of the Civil Code,
there is a perfected contract of sale if there is a meeting of the minds on the subject and
the price. A sale is a consensual contract requiring only the consent of the parties on
these two points. In this case, the parties agreed on the subject the 1,013.6 square meter
lot and on the purchase price of P4,000,000.00. No particular form is required for the
validity of their contract and, therefore, upon its perfection, the parties can reciprocally
demand performance of their respective obligations. 10

Indeed, the earnest money given is proof of the perfection of the contract. As Art. 1482
of the Civil Code states, "Whenever earnest money is given in a contract of sale, it shall
be considered as part of the price and as proof of the perfection of the contract." This
perfected contract imposed reciprocal obligations on the parties. Petitioners' obligation
was to pay the balance of the price, while private respondent's obligation was to deliver
the property to petitioners upon payment of the price. I is true that private respondent
undertook to eject the squatters before delivery of the property within a certain period
and that for her failure to carry out her obligation she could be obliged to do so depends
on petitioners who can waive the condition and opt to proceed with the sale instead.

Private respondent Luna contends that as condition of ejecting the squatters was not
met, she no longer has an obligation to proceed with the sale of her lot. This contention
is erroneous. Private respondent fails to distinguish between a condition imposed on
the perfection of the contract and a condition imposed on the performance of an
obligation. Failure to comply with first condition results in the failure of a contract,
while failure to comply with the second condition only gives the other party the option
either to refuse to proceed with the sale or to waive the condition. Thus, Art. 1545 of the
Civil Code states:

Art. 1545. Where the obligation of either party to a contract of sale is subject to any
condition which is not performed, such party may refuse to proceed with the contract or
her may waiver performance of the condition. If the other party has promised that the
condition should happen or be performed, such first mentioned party may also treat the
nonperformance of the condition as a breach of warranty.

Where the ownership in the things has not passed, the buyer may treat the fulfillment
by the seller of his obligation to deliver the same as described and as warranted
expressly or by implication in the contract of sale as a condition of the obligation of the
buyer to perform his promise to accept and pay for the thing. (Emphasis added)

In this case, there is already a perfected contract. The condition was imposed only on
the performance of the obligation. Hence, petitioners have the right to choose whether
to demand the return of P200,000.00 which they have paid as earnest money or to
proceed with the sale. They have chosen to proceed with the sale and private
respondent cannot refuse to do so.

Indeed, private respondent is not the injured party. She cannot rescind the contract
without violating the principle of mutuality of contracts, which prohibits allowing the
validity and performance of contracts to be left to the will of one of the parties. 11 Thus
in a case 12 on all fours with this case, this Court held:
Under the agreement, private respondent is obligated to evict the squatters on the
property. The ejectment of the squatters is a condition the operative act of which sets
into motion the period of compliance by petitioner of his own obligation, i.e., to pay the
balance of the purchase price. Private respondent's failure "to remove the squatters
from the property" within the stipulated period gives petitioner the right to either
refuse to proceed with the agreement or waive that condition in consonance with
Article 1545 of the Civil Code. This option clearly belongs to petitioner and not to
private respondent. 13

....

In any case, private respondent's action for rescission is not warranted. She is not the
injured party. The right of resolution of a party to an obligation under Article 1191 of
the Civil Code is predicated on a breach of faith by the other party that violates the
reciprocity between them. It is private respondent who has failed in her obligation
under the
contract. 14

The second question is whether private respondent is liable for damages to petitioners.
The trial court correctly found private respondent guilty of breach of contract and
awarding moral damages and attorney's fees to petitioners. The court held:

The failure of the plaintiff (Luna) to eject the squatters which is her "full responsibility"
and "commitment" under the contract of sale, aggravated by her persistence in evading
the obligation to deliver the property on the basis of her very own failure, the
persistence culminating in the instant case for consignation, show not just a breach of
contract but a breach in bad faith. . . .

The Court finds that the defendant may be awarded moral damages in the amount they
prayed for, which is P500,000.00 considering that it was the same amount which the
parties have determined as the cost of the removal of the squatters. The clear absence of
merit of plaintiff's position, which at [the] bottom is an attempt to profit from one's own
breach, compels this court to award attorney's fees, defendants having been
unnecessarily dragged into a litigation.

Indeed, the evidence shows that private respondent made little more than token effort
to seek the ejectment of squatters from the land, revealing her real intention to be
finding a way of getting out of her contract. Her failure to eject the squatters despite
sufficient time and funds given to her by petitioners, her offer to return the earnest
money only a month after their meeting on January 17, 1989 in which she agreed to
proceed with the sale in consideration of which the purchase price was increased by
almost P500,000.00 and her consignation of the earnest money despite petitioners'
insistence that the sale should go on even if she had failed to eject the squatters — all
these betray private respondent's failure to comply with her obligation. Private
respondent's lack of intention to really comply with her obligation under the contract is
underscored by her failure to seek the assistance of courts in ejecting the squatters. It
might be granted that, at first, she thought going to the city engineer's office was the
expedient way of ejecting the squatters. However, having seen the futility of such
recourse and having been given money, private respondent had no excuse for filing the
action bellow. Her failure to make use of her resources and her insistence on rescinding
the sale shows quite clearly that she was indeed just looking for a way to get out of her
contractual obligation by pointing to her own abject failure to rid the land of squatters.

The Court of Appeals erred in holding that private respondent had made earnest efforts
in discharging her obligation, relying for this purpose on the testimony of Domingo
Tapay, Building Official of Quezon City. Edgardo C. Julian, Civil Engineer in charge of
demolition ion the Office of the Building Official of Quezon City, testified that though a
request for demolition had been made by private respondent Luna, no demolition
actually took place and that the attempt to do so was made only sometime in mid-1989.
15 This confirms the letter dated April 24, 1989 of the City Engineer's Office of Quezon
City to petitioner that as of that date there was no record in that office of any request for
the ejectment of squatters from the land. 16

The trial court awarded P500,000.00 to petitioners as moral damages for suffering,
delay and inconvenience they experienced as a result of private respondent's failure in
bad faith to proceed under the contract. This amount corresponds to the price increase
agreed to be paid to private respondent to facilitate the ejectment of the squatters.

The award of moral damages is in accordance with Art. 2220 of the Civil Code which
provides that moral damages may be awarded in case of a breach of contract where the
defendant acted fraudulently or in bad faith. However, the amount awarded is in our
opinion excessive. To be sure the amount to be awarded depends upon the discretion of
the court based on the circumstances of each case but, having regard for the purpose for
awarding such damages, we think that fixing the amount equivalent to the increase
given to private respondent would be contrary to the rule that moral damages are not
intended to enrich the complainant at the expense of the defendant 17 or to penalize the
defendant. 18 Under the circumstance an award of P100,000.00 would be fair and
reasonable.

This Court also agrees with the award of attorney's fees by the trial court. As found by
the trial court, there was clear absence of merit in private respondent's position thus
unnecessarily forcing petitioners to litigate. Under Art. 2208(4)(5) of the Civil Code,
attorney's fees may be recovered when the civil action or processing against the
plaintiff is clearly unfounded and where defendant acted in gross and evident bad faith
in refusing to satisfy the plaintiff's claim.

WHEREFORE, the decision of the Court of Appeals is REVERSED and that of the Regional
Trial Court is REINSTATED, with the MODIFICATION that private respondent is ordered
to pay the sum of P100,000.00 as moral damages and P50,000.00 as attorney's fees to
petitioners.

SO ORDERED.