G.R. No. 78173 October 26, 1992 ANDRES SUMAOANG, petitioner, vs. HON.

JUDGE, REGIONAL TRIAL COURT, BRANCH XXXI, GUIMBA, NUEVA ECIJA and ATTY. JORGE A. PASCUA, respondents. FELICIANO, J.: In the Petition presently before us, Andres Sumaoang seeks to annul the Decision 1 dated 31 August 1982, rendered by the then Court of First Instance ("CFI") of Nueva Ecija in Civil Case No. 697-G, which awarded to private respondent Atty. Jorge A. Pascua the sum of P110,000.00 as attorney's fees. On 15 July 1933, the late Sebastian Sumaoang filed with the Bureau of Lands a homestead application over Lot No. 3098 of the Cadastral Survey of Santiago, Isabela, covering an area of 21.3445 hectares. He then took possession of and cultivated the lot. Due to illness and the dangerous conditions then prevailing in Santiago, Isabela immediately after the second World War, he transferred his residence to his native town of Sta. Ignacia, Tarlac where he died on 22 August 1952. Meanwhile, Florencio and Regino, both surnamed Domingo applied for a homestead patent over Lot No. 3098 during Sebastian Sumaoang's absence. On 11 may 1950, Florencio Domingo was granted a homestead patent (HP No. V5218) over the land on the strength of which the Register of Deeds of Isabela issued Original Certificate of Title No. T1202 to him. To protect their interests over the homestead, petitioner and his brothers, Vitaliano and Pedro Sumaoang, engaged the services of private respondent Atty. Jorge A. Pascua, promising him, in a letter dated 17 December 1964 2 a contingent fee of "not less than one-half (1/2)" of the entire homestead, if recovered. As counsel for the Sumaoangs, Atty. Pascua filed a formal protest with the Bureau of Lands contesting the legality of the issuance of Homestead Patent No. V-5218 to Florencio Domingo. On 7 February 1962, the Bureau of Lands rendered a decision 3 declaring Homestead Patent No. V-5218 inoperative and ordered that steps be taken towards the filing of a reversion case with the view to cancelling that homestead patent and its corresponding certificate of title, and disposing of the land to petitioner and his brothers as heirs of Sebastian Sumaoang should the facts so warrant. Pursuant to the above decision of the Bureau of Lands, the Solicitor General filed, on behalf of the Republic of the Philippines, a reversion case against Florencio and Regino Domingo for the cancellation of Homestead Patent No. V5218 and Original Certificate of Title No. T-1201 before the CFI of Isabela. In that case, Atty. Pascua filed, on behalf of petitioner and his brothers, a complaint-in-intervention claiming preferential rights to the land in favor of his clients. 4 After trial, the lower court rendered a decision 5 dated 17 February 1971 declaring the homestead patent, as well as the certificate of title, null and void and ordered the reversion of the land to the State subject to the rights of petitioner and his brothers. In its dispositive portion, the decision stated that: WHEREFORE, judgment is rendered: (a) Declaring homestead patent No. V-5218 and the corresponding Original Certificate of Title No. T-1201 both in favor of the defendant Florencio Domingo and covering Lot No. 3098, Cad. 211, null and void and ordering the reversion of the said lot to the State subject to the rights of the intervenors as the facts may warrant; (b) Ordering defendant Florencio Domingo to surrender to the defendant Register of Deeds his owner's duplicate of said torrens title or Original Certificate of Title No. T-1201 for cancellation and any other transfer certificates of title that might have been issued by the Register of Deeds emanating from Original Certificate of Title No. T-1201; (c) Ordering the Register of Deeds of Isabela, upon his receipt of the owner's duplicate certificate of title to cancel homestead patent No. V-5218 and the original and duplicate of said Original Certificate of Title No. T-1201 in the name of Florencio Domingo and any other transfer certificates of title issued emanating from Original Certificate of Title No. T1201; (d) Ordering the defendant Florencio Domingo to pay to the intervenors the sum of 160 2/3 cavanes of palay or the value of P1,928.00 computed from P12.00 per cavan, per agricultural year since 1953 until this judgment becomes final. This decision was affirmed by both the Court of Appeals 6 and the Supreme Court. 7 The decision became final and executory on 11 February 1973. In 1977, petitioner and his brothers took possession of Lot No. 3098 and subdivided it among themselves. Not having received compensation for his professional services as counsel, Atty. Pascua filed sometime in 1979 a complaint for collection of attorney's fees against his former clients, petitioner and his brothers, before the CFI of Guimba, Nueva Ecija. The trial court stated in its judgment dated 31 August 1982 that Atty. Pascua was entitled only to "the equivalent of one-half of the property in its peso valuation" and somehow ordered petitioner and his brothers to pay attorney's fees in the amount of P110,000.00. The dispositive portion of this decision reads as follows: WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of the plaintiff, Atty. Jorge A. Pascua, ordering the defendants Vitaliano, Andres, and Pedro all surnamed Sumaoang, to jointly and severally pay the sum of

One Hundred Ten Pesos (P110,000.00) as attorney's fee; the sum of One Thousand Five Hundred Pesos (P1,500.00) as attorney's fee in the prosecution of the instant case, to pay the cost of the suit. The decision of 31 August 1982 of the CFI of Guimba became final and executory. On motion of Atty. Pascua, the trial court on 22 April 1983 ordered the issuance of a writ of execution. The corresponding writ of execution was issued by the Branch Clerk of Court on 25 January 1985. 8 The Deputy Provincial Sheriff then levied upon and sold at public auction the entire lot of 21.3445 hectares here involved to Atty. Pascua as the sole and hence the highest bidder, for and in consideration of P110,000.00 as partial payment of the judgment obligation. 9 Petitioner brought the present Petition 10 asking for the nullification of the 31 August 1982 decision of the Guimba CFI, as well as the writ of execution, the notice of levy and auction sale and the certificate of sale issued in favor of Atty. Pascua. Petitioner's cause of action is anchored principally on the contention that the award of P110,000.00 as attorney's fees of Atty. Pascua was unconscionable. Petitioner argues that the Solicitor General, and not Atty. Pascua, had actively handled the reversion case and that Atty. Pascua's participation therein was limited to the filing of a complaint-in-intervention on behalf of his clients. In the complaint-in-intervention, Atty. Pascua asked for the same relief as that sought by the Solicitor General, although the former added the additional prayer that his clients be accorded preferential rights over the land reverted to the public domain. Petitioner further contended that the contract for legal services between petitioner and his brothers on the hand and Atty. Pascua on the other, provided only for attorney's fees of P5,000.00, as Atty. Pascua himself allegedly admitted in the complaint-in-intervention filed in the reversion case. Upon the other hand, Atty. Pascua's principal contentions are that award of attorney's fees by the Guimba CFI in its 31 August 1982 decision was not unconscionable and that decision had already become final and executory. The ordinary rule is that a judgment may be annulled only on certain defined grounds, lack of jurisdiction, fraud, or illegality. 11 In the case at bar, petitioner has not adduced any jurisdictional defects vitiating the judgment assailed; neither has petitioner shown that the judgment, as such, is in violation of a particular statute. Petitioner's allegation that there was improper venue would not suffice to nullify the decision already rendered and final. From the view we take of this case, however, the circumstances that the Decision of the Guimba CFI of 31 August 1982 became final and executory and that the jurisdiction of the trial court to render that Decision has not been successfully assailed, are not decisive. It is essential to note that the relationship between an attorney and his client is a fiduciary one. Canon 17 of the Code of Professional Responsibility stresses that "a lawyer owes fidelity to the cause of his client and he shall be mindful of the trust and confidence reposed in him." Canon 16 requires a lawyer to "hold in trust all monies and properties of his client that may come into his possession. 12 A lawyer it not merely the defender of his client's cause and a trustee of his client in respect of the client's cause of action and assets; he is also, and first and foremost, an officer of the court and participates in the fundamental function of administering justice in society. It follows that a lawyer's compensation for professional services rendered are subject to the supervision of the court, not just to guarantee that the fees he charges and receives remain reasonable and commensurate with the services rendered, but also to maintain the dignity and integrity of the legal profession to which he belongs. Upon taking his attorney's oath as an officer of the court, a lawyer submits himself to the authority of the courts to regulate his right to charge professional fees. 13 In the instant case, the Court considers that the fees which private respondent Atty. Pascua received from petitioner and his brothers became unreasonable and unconscionable in character, not because the original agreement between Atty. Pascua and his clients was itself unreasonable and unconscionable but rather as a result of the subsequent dispositions of the trial court. The Decision of the trial court shows that respondent Judge upheld the reasonableness and the lawfulness of the contingent fee contract between Atty. Pascua and the Sumaoang brothers. Instead, however, of simply awarding Atty. Pascua a one-half (1/2) portion of the property involved, respondent Judge would up awarding Atty. Pascua a peso amount. In other words, respondent Judge unilaterally and officiously converted the form or medium of compensation from the (1/2) portion of the land recovered by petitioner and his brothers through the efforts of Atty. Pascua, into a peso amount representing, in the mind of the Judge, the value of that one-half (1/2) portion. In his decision, respondent Judge said, among other things: It is however noted by this Court that plaintiff should only be awarded the equivalent of one-half of the property as his lawful attorney's fee in its peso valuation. The land of the defendants commands a high price per hectare in Isabela because NIA had constructed an irrigation canal near it which supplies abundant water supply making it possible

for defendants to harvest twice a year. Per hectare, the land owned by the defendants now commands P10,000.00 minimum as price. 14 (Emphasis supplied) Most charitably viewed, respondent Judge was apparently laboring under the impression that the land involved had greatly appreciated in value during the years of litigation. Without requiring or obtaining any third party appraisal of the actual or fair market value of the 21.3445 hectares involved, respondent Judge fixed the sum of P110,000.00 as the "equivalent of 1/2 of the property in its peso valuation." Thus, the respondent Judge in fact disregarded the contingent fee contract between attorney and client, after holding that contract lawful. Worse, the Judge turned out to be grossly uninformed about property valuations, especially the valuation of property sold at public sale in Guimba, Nueva Ecija, and his judgment allowed Atty. Pascua to acquire the entire parcel of land which had been the subject matter of the litigation and for the recovery of which, Atty. Pascua had been retained by the Sumaoang brothers. In brief, Atty. Pascua was able to acquire all the 21.3445 hectares of land although the respondent court had intended to award him only one-half (1/2) "the [assumed] value of such land." In Licudan vs. Court of Appeals, 15 this Court said: . . . There should never be an instance where a lawyer gets as attorney's fees the entire property involved in the litigation. It is unconscionable for the victor in litigation to lose everything he won to the fees of his own lawyer. xxx xxx xxx In resolving the issue of reasonableness of the attorney's fees, we uphold the time-honoured legal maxim that a lawyer shall at all times uphold the integrity and dignity of the legal profession so that his basic ideal becomes one of rendering service and securing justice, not money-making. For the worst scenario that can never happen to a client is to lose the litigated property to his lawyer in whom all trust and confidence were bestowed at the very inception of the legal controversy. . . . (Emphasis supplied) We believe and so hold that respondent Atty. Pascua, under the circumstances of this case, must be regarded as holding the title of the property acquired by him at public sale under an implied trust in favor of petitioner and his brothers, to the extent of one-half (1/2) of that property. Among the species of implied trusts recognized by our Civil Code is that set forth in Article 1456: If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. The "mistakes" or "fraud" that results in an implied trust being impressed upon the property involved, may be the mistake or fraud of a third person, and need not be a mistake or fraud committed directly by the trustee himself under the implied trust. 16 Accordingly, in the instant case, an implied trust was established upon the land acquired by Atty. Pascua even though the operative mistake was a mistake of respondent trial judge. Respondent Judge may be seen to have intended to convey only one-half (1/2) of the land involved as attorney's fees to Atty. Pascua. Atty. Pascua, however, took advantage of the Judge's mistake in order to acquire all the 21.3445 hectares for himself. Atty. Pascua obviously knew that under his contract with his clients, he was entitled to ask only for one-half (1/2) of the land. When he purchased the entire land at public auction for P110,000.00 (leaving his clients still owing him P1,500.00), the amount and character of his attorney's fees became unreasonable and unconscionable and constituted unjust enrichment at the expense of his clients. The conclusion we reach in this case rests not only on Article 1456 of the Civil Code but also on the principles of the general law of trusts which, through Article 1442 of the Civil Code, have been adopted or incorporated into our civil law, to the extent that such principles are not inconsistent with the Civil Code and other statutes and the Rules of Court. In Roa, Jr. v. Court of Appeals, 17 where petitioner had retained property the beneficial ownership of which belonged to the private respondents, the Supreme Court affirmed the decision of the Court of Appeals directing petitioner to convey title to that property to private respondents. The Supreme Court rested its decision on the principles of the general law of trusts which, the Court held, included the following general principles embedded in American law and jurisprudence: A constructive trust, otherwise known as a trust ex maleficio, a trust ex delicto, a trust de son tort, an involuntary trust, or an implied trust, is a trust by operation of law which arises contrary to intention and in invitum, against one who, by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice, concealment, or questionable means, or who in any way against equity and good conscience, either has obtained or holds the legal right to property which he ought not, in equity and good conscience, hold and enjoy. It is raised by equity to satisfy the demands of justice. However, a constructive trust does not arise on every moral wrong in acquiring or holding property or on every abuse of confidence in business or other

affairs; ordinarily such a trust arises and will be declared only on wrongful acquisitions or retentions of property of which equity, in accordance with its fundamental principles and the traditional exercise of its jurisdiction or in accordance with statutory provision, takes cognizance. It has been broadly ruled that a breach of confidence, although in business or social relations, rendering an acquisition or retention of property by one person unconscionable against another, raises a constructive trust. And specifically applicable to the case at bar is the doctrine that "A constructive thrust is substantially an appropriate remedy against unjust enrichment. It is raised by equity in respect of property, which has been acquired by fraud, or where, although acquired originally without fraud, it is against equity that it should be retained by the person holding it." The above principle is not in conflict with the New Civil Code, Code of Commerce, Rules of Court and special laws. And since We are a court of law and of equity, the case at bar must be resolved on the general principles of law on constructive trust which basically rest on equitable considerations in order to satisfy the demands of justice, morality, conscience and fair dealing and thus protect the innocent against fraud. As the respondent court said, "It behooves upon the courts to shield fiduciary relations against every manner of chicanery or detestable design cloaked by legal technicalities." 18 (Citations omitted; Emphasis partly supplied and partly in the original) A constructive trust, in general usage in the United States, 19 is not based on an expressed intent that it shall exist, or even on an implied or presumed intent. A constructive trust is created by a court of equity as a means of affording relief. 20 Constructive trusts constitute a remedial device "through which preference of self is made subordinate to loyalty to others." 21 In particular, fraud on the part of the person holding or detaining the property at stake is not essential in order that an implied trust may spring into being. In other words of Judge Cardozo, in Beatty v. Guggenheim Exploration Co.: 22 [w]hen property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee. The consequences of an implied trust are, principally, that the implied trustee shall deliver the possession and reconvey title to the property to the beneficiary of the trust, and to pay to the latter the fruits and other net profit received from such property during the period of wrongful or unconscionable holding, and otherwise to adjust the equities between the trustee holding the legal title and the beneficiaries of the trust. 23 Applying the provisions of Article 1456 of the Civil Code and the foregoing principles of the general law of trusts, we treat the present so-called "Petition for Annulment of the Decision of the CFI, etc." as a "Petition for Reconveyance" and, accordingly, require private respondent Atty. Pascua to reconvey or cause the reconveyance of one-half (1/2) of the 21.3445 hectares of land here involved, plus one-half (1/2) of all profits (net of expenses and taxes) which Atty. Pascua may have derived from or in respect of such land during the time he has held the same, to petitioner and his brothers, Vitaliano and Pedro Sumaoang. WHEREFORE, for all the foregoing, and treating the present Petition as a Petition for Reconveyance of Land, the Court hereby GRANTS the same. Private respondent Atty. Jorge A. Pascua is hereby ORDERED to reconvey or cause the reconveyance of one-half (1/2) of the land here involved, plus one-half (1/2) of the net profits derived from or in respect of such land during the time it has been held by private respondent Pascua, to petitioner and petitioner's brothers, Vitaliano and Pedro Sumaoang. No pronouncement as to costs. SO ORDERED.

G.R. No. 74449 August 20, 1993

IMELDA A. NAKPIL, petitioner vs.

INTERMEDIATE APPELLATE COURT, CARLOS J. VALDES and CAVAL REALTY CORPORATION, respondents.

Eliseo B. Alampay for petitioner.

Romero, Lagman, torres, Arrieta & Evangelista Law Offices and Bengozn, Zarraga, Narciso, Cudala, Pecson, Azcua & Bengzon Law Offices for respondents.

BELLOSILLO, J.:

PULONG MAULAP, a summer residence in Baguio City along historic Moran Street, is the subject of this bitter and protracted legal battle for ownership between two families earlier associated for years in close, kinship-like relations.

Pinggoy and Charlie were the best of friends, their closeness dating back to their high school days in La Salle, and later, at the Philippine Law School. Treating each other more than just brothers, Charlie easily became Pinggoy's confidant, and later, his lawyer, accountant, auditor, and on some occasions, a business and financial consultant. Their relationship extended to their families. Pinggoy became the godfather of Charlie's second son, while Charlie became the godfather of Pinggoy's youngest.

But the close relationship had to end. On 8 July 1973, tragedy struck. While the two families were vacationing at the beach house of the Valdeses in Bagac, Bataan, Pinggoy drowned. As expected, Charlie went to the succor of Pinggoy's distressed wife Nena. He acted as the legal counsel and accountant of Nena, who became the administratrix of her husband's estate.

However, since then things have changed. In fact, towards the end of 1978, the question arose as to who between the Nakpils and the Valdeses should own Pulong Maulap.

On 21 March 1979, petitioner instituted an action for reconveyance with damages for breach of trust before the Regional Trial Court of Baguio City against respondents Carlos "Charlie" Valdes and Caval Realty Corporation. She alleged

in her complaint that her husband Jose "Pinggoy" Nakpil prior to his death had requested Valdes to purchase Pulong Maulap and thereafter register the sale and hold the title thereto in trust for him (Pinggoy Nakpil), which respondent Valdes did. But after her husband's death, Valdes concealed and suppressed all information regarding the trust agreement; instead, he transferred Pulong Maulap in the name of respondent Caval Realty Corporation, which is 99.7% owned by him, in exchange for 1,500 shares of stock.

Respondent Valdes, on the other hand, denied the existence of any trust agreement over Pulong Maulap. He averred that he bought the summer residence for himself with his own funds and without any participation of the late Nakpil; neither was it bought in trust for the latter. Valdes claims that he only informed Pinggoy Nakpil of the acquisition of Pulong Maulap, and Pinggoy merely showed interest in buying the property if he could have the money. Meanwhile, considering their avowed friendship, he (Valdes) offered the usufruct of the property to the Nakpils who in turn agreed to shoulder its maintenance expenses, real estate taxes, fire insurance premiums and servicing of interest on the mortgage obligation constituted on the property.

From the records it appears that the Valdeses bought Pulong Maulap for P150,000.00 with respondent Valdes giving a downpayment of P50,000.00 and assuming the vendors' mortgage obligation of P100,000.00 with the Philippine National Bank (PNB), which he reduced to P75,000.00 by paying P25,000.00. On 12 July 1965, a deed of sale was executed and Transfer Certificate of Title No. 10247 was thereafter issued in the name of Valdes. As agreed, in the early part of May 1965, even before the execution of the deed of sale in favor of the Valdeses, the Nakpils moved in and stayed a Pulong Maulap even until after Pinggoy's death.

Meanwhile, in order to facilitate the servicing of the mortgage obligation over Pulong Maulap, the loan was transferred to the First United Bank (FUB) where Pinggoy Nakpil was then a vice-president. Valdes borrowed P75,000.00 from FUB with which he paid PNB, and at the same time constituted in favor of FUB a mortgage over Pulong Maulap. He also borrowed P65,000.00 from FUB to finance the repair and renovation of Pulong Maulap.

Petitioner submits that respondent Valdes had recognized her late husband's ownership of Pulong Maulap on the basis among others of the following documents: (a) "Exh. "H," a letter dated 28 March 1969 sent by Carlos J. Valdes & Co., an accounting firm owned by respondent Valdes, to the City Treasurer of Baguio remitting to the latter, "[o]n behalf of (our) their clients, Mr. Jose Nakpil . . . the following FUB checks for the payment of their 1969 real estate taxes" on Pulong Maulap; (b) Exh. "J," letter of Valdes to petitioner dated 24 August 1973 with the latter's handwritten conforme, date and signature

Dear Nena,

At the First United Bank, there are two loans in my name:

PN # ERB-893/73 for P65,000.00 PN # 644/72 for P75,000.00

In addition, there fell due on note #ERB 893/73, P3,976.00 representing interest as of July 22, 1973. On the loan of P75,000.00, there is an interest payable of, P750.00 a month.

Both of these loans, while in my name, were obtained by Pinggoy for his person. . . .

As we agreed, I will take over the total loan of P140,000.00 and pay all of the interests due on the notes. It is likewise understood between us that you will continue occupying the premises at Moran St., free of any encumbrance or payment, for 5 years starting August 1, 1973.

It is likewise understood that real property taxes will be paid by us but maintenance expenses shall be shouldered by you.

As I said, this letter is purely for the record.

Sincerely,

(SGD.) CHARLIE JV,

and, (c) Exh. "L," another letter of Valdes to petitioner dated 17 September 1974

Dear Comadre,

Our records show that the P75,000.00 initially advanced for the Moran property still remains unpaid.

Under these circumstances, you could add to the present purchase price, P75,000.00 plus interest therein at 12% for 5 years or:

Present Purchase Price: P255,056.64; Add: Unpaid accountP75,000.00; Interest for 5 years at 12% P45,000.00 = P120,000.00; Total P375,056.64.

Sincerely,

(SGD.) CHARLIE JV.

The records likewise show that on 13 February 1978, Valdes assigned Pulong Maulap to Caval Realty Corporation, for which Transfer Certificate of Title No. T-28484 was issued on 23 March 1978. Later, after petitioner allegedly received a P2,000,000.00 offer for Pulong Maulap from Pasay City Mayor Pablo Cuneta, she wrote Valdes demanding a reconveyance to enable her to effect the sale and reimburse the latter from the proceeds thereof for the advances he made. On 30 December 1978, Valdes allegedly told petitioner that he could not execute the deed of conveyance because Pulong Maulap was his and he had no intention of selling it.

On 7 July 1983, the Regional Trial Court 1 rendered a decision holding that a trust relationship existed 2

From the two letters of Valdes, Exhibits "J" and "L", it would appear that while the downpayment of P50,000.00 and the further sum of P25,000.00 paid to PNB were paid but of his personal funds, the same was considered by him as a loan to Nakpil; and while the remaining P75,000.00, representing the balance of the mortgage indebtedness of the Garcias to the PNB, was liquidated with the proceeds of a loan from FUB, the said loan, although in the name of Valdes, was actually Nakpil's. In other words, the property was acquired with funds partly loaned by Valdes to Nakpil and partly borrowed by Nakpil from FUB albeit in Valdes' name.

To the mind of the Court, Exhibit's "J" and "L" are confirmatory of a pre-existing express trust relationship between Valdes and the late Nakpil over the property in dispute, conformity with the theory of the plaintiff, whereunder Valdes is the trustee and Nakpil, the trustor and, at the same time, beneficiary. . . .

Assuming that Exhibits "J" and "L" could no stand as proof of an express trust, still the Court believes that they could, as they indeed are, proof of an implied trust under Article 1450 of the Civil Code. . . .

Nevertheless, the trial court dismissed the petition for reconveyance on the ground that petitioner, by conforming to Exh. "J" and acquiescing with Exh. "L," the very documents she presented to prove the existence of a trust relationship, has waived her right over Pulong Maulap 3

. . . the Court is inclined to believe that the real agreement between the plaintiff and the defendant Valdes under Exhibits "J" or "5" and "L" is that Valdes was to take over the two FUB loans of the plaintiff's late husband in consideration of the plaintiff giving up her claim to the disputed property, but with a right to continued occupancy for a period of five years, free from any encumbrance or payment, except maintenance expenses, and under an option yet in favor of the latter to purchase back the property within the stipulated five years upon the payment of the said FUB loans, including interests, plus the further sum of P75,000.00 initially advanced by Valdes on the property, also with interests, or the total amount of P375,056.64.

Under the agreement, the Court is of the view that the plaintiff has waived whatever right she may have over the property, and she would be in estoppel to revive or assert he same unless she could prove that she has complied with the terms and the conditions she agreed on. To hold otherwise would be tantamount to placing Valdes in a very disadvantegious position. . . .

Furthermore, petitioner's letter dated 31 July 1978, the last day of the five-year period stipulated in Exh. "J," sent to respondent Valdes and his wife, which states

Dear Aida and Charlie,

I hope that when this letter reaches you it finds you and your family in the best of health and happiness. My children and I are enjoying these too, thank god. We have also managed to adapt contentedly through all the various pressures and strains we have been subjected to since Pinggoy's death. It is amazing how we humans can endure so much of these when met with acceptance and humility. Honestly, I cannot claim credit to the latter virtue. Many times in the past, during my darkest moments, believe me, humility was farthest from my thoughts.

With regard to our Moran property, a thought occured to me that if I may be able to raise the amount necessary to pay back your advances for "Pulong Maulap" (this is the name I gave the property, remember?), would you be willing to reconvey the property to us as soon as I reimburse your advances?

Of course, as I said this is just an idea because at present, although we are in the final stages of winding-up the estate, the results are still hazy and uncertain. I understand from Linda Asuncion that so much will depend on the generosity of my in-laws; hence, so be it!

Thank you again for the help you have given me and my children. For you and your family, I offer to god all the "Purgatory" He gives me here on earth.

Sincerely,

(SGD.) Nena A. Nakpil,

was construed by the trial court as "more an expression of her (petitioner's) resignation to her having lost the property than a demand for reconveyance. 4

Not satisfied with the decision of the trial court, both parties appealed to respondent Intermediate Appellate Court which on 17 December 1985 5 reversed the trial court and ruled that "[f]rom the foregoing facts, it is quite evident there was no trust at all. . . . 6 On 21 April 1986, the motion of herein petitioner to reconsider the decision of respondent appellate court was denied for "absolute lack of merit."

Petitioner, in this petition for review, argues that respondent Intermediate Appelate Court did not only err in holding that the documents she presented were insufficient to prove the existence of a trust relationship but it also failed to rule that the trial court's interpretation of petitioner's conformity to Exh. "J" as a waiver was, in essence, a pactum commissorium, and therefore null and void.

Respondent Valdes, on the other hand, maintains that no direct proof has been presented to sustain that he was merely instructed by petitioner's late husband to purchase the disputed property, and thereafter register and hold title thereto in trust for the latter; neither could there have been an implied trust pursuant to Art. 1450 of the Civil Code 7since this provision refers only to instances where the purchase price of the property sold is paid by the lender for the benefit of the borrower or buyer of the property. Here, Valdes bought the disputed property using his own funds. The late Nakpil came into the picture only after the sale to Valdes was consummated, and only as an offeror to buy the property, not from the former owners, but from Valdes. Furthermore, Valdes contends the Exhs. "J" and "L" cannot amount to pactum commissorium since the elements thereof, i.e., existence of a creditor-debtor relationship; the obligation is secured by pledge or mortgage of certain properties over which the debtor has title; and, ownership of the property passes to the creditor by mere default of debtor, are not present.

Thus, the issues before us are: whether Art. 1450 of the Civil Code applies; and, if it so applies, whether petitioner can still compel reconveyance of Pulong Maulap from respondent Valdes.

Implied trusts, which may either be resulting or constructive, are those which, without being express, are deducible from the nature of the transaction as matters of intent, or which are superinduced on the transaction by operation of law as matter of equity, independently of the particular intention of the parties. 8 Article 1450, which petitioner invokes in the case at bar, is an illustration of an implied trust which is constructive. 9

Article 1450 presupposes a situation where a person, using his own funds, purchases a certain piece of land in behalf of another who, in the meantime, may not have sufficient funds to purchase the land. The property is then transferred in

the name of the trustee, the person who paid for the land, until he is reimbursed by the beneficiary, the person for whom the land is purchased. It is only after the beneficiary reimburses the trustee of the purchase price that the former can compel conveyance of the purchased property from the latter.

From the evidence adduced, it may be concluded that respondent Valdes, using his own funds, purchased Pulong Maulap in behalf of the late Nakpil. This is based on the letters to petitioner of Valdes where he categorically admitted that "[b]oth of these loans, while in my (respondent Valdes) name, were obtained by Pinggoy (the late Nakpil) for his person, 10 and that the "P75,000.00 initially advanced for the Moran property still remains unpaid. 11

It is evident from these letters that while the balance of P75,000.00 on the mortgage of the vendors with PNB was liquidated from the proceeds of a loan respondent obtained from FUB, such loan was actually secured by the late Nakpil by merely using Valdes' name. Such is also the case with respect to another FUB loan amounting to P65,000.00, the proceeds of which were used to finance the repair and renovation of Pulong Maulap. And, while the downpayment of P50,000.00 and the partial payment of P25,000.00 to PNB came from the personal funds of Valdes, he considered them as advances to the late Nakpil. Otherwise, Valdes would never have deemed the amount as "unpaid" in his letter to petitioner of 17 September 1974.

The letter of Valdes to the City Treasurer of Baguio made while remitting payment of real estate taxes is also enlightening. It provided therein that the payment being tendered was "[o]n behalf" of the Nakpil's, 12 which is an express recognition of the implied trust.

Consequently, respondent Valdes is estopped from claiming that he bought Pulong Maulap for himself, and not merely in trust for the late Nakpil, as this contention is belied by the facts. Hence, we rule that constructive trust under Art. 1450 of the New Civil Code existed between the parties.

However, petitioner cannot as yet redeem and compel conveyance of the property. For, Valdes must still be reimbursed for the advances he made on the disputed property, such reimbursement being a conditio sine qua non for compelling conveyance under Art. 1450.

The period within which to compel conveyance of Pulong Maulap is not imprescriptible. The rule is well-settled that an action for reconveyance based on an implied or constructive trust prescibes in ten (10) years. 13 But, in the case before us, petitioner could still compel conveyance of the disputed property from respondent provided the former reimburses the latter for all his expenses. After all, Valdes never repudiated the constructive trust during the lifetime of the late Jose Nakpil. On the contrary, he expressly recognized it. The prescriptive period therefore did not begin to run until after he repudiated the trust. 14 And such repudiation came when Valdes excluded Pulong Maulap from the list of properties of the late Jose Nakpil submitted to the intestate court 15 in 1973. Even then, the present action for conveyance was filed in 1979 or well within the ten-years period.

At first blush, it may seem that after the death of Jose Nakpil on 8 July 1973, petitioner ceded ownership of Pulong Maulap to Valdes by way of dacion en pago 16as shown by her acquiescence to Exh. "J". A careful examination of said Exh. "J" does not show however that petitioner, as administratrix of the estate of the late Jose Nakpil, released or surrendered the latter's interest over Pulong Maulap to respondent. Thus, there can be no dacion en pago to speak of since ownership of the thing delivered was never transferred of the creditor. The trust relations between the parties was therefore never extinguished. Besides, petitioner could not have waived the interest of her children with the late Jose M. Nakpil who are her co-heirs to the Nakpil estate.

The fact that there was no transfer of ownership intended by the parties under their arrangement during the five-year period to pay can further be bolstered by Exh. "I-2", 18an annex to the claim filed against the estate proceedings of the late Jose Nakpil by his brother, Angel Nakpil, which was prepared by Carlos J. Valdes & Co., the accounting firm of herein respondent. Exhibit "I-2", which is a list of the application of the proceeds of various FUB loans contracted as of 31 December 1973 by the late Jose Nakpil, whether in his name or that of others, contains the two (2) loans contracted in the name of respondent. If ownership of Pulong Maulap was already transferred or ceded to Valdes, these loans should not have been included in the list.

Indeed, as we view it, what the parties merely agreed to under the arrangement outlined in Exh. "J" was that respondent Valdes would undertake to "take over the total loan of P140,000.00 and pay all of the interests due on the notes" while the heirs of the late Jose Nakpil would continue to live in the disputed property for five (5) years without any remuneration save for regular maintenance expenses. 19This does not mean, however, that if at the end of the fiveyear period petitioner failed to reimburse Valdes for his advances, which respondent computed to be P375,056.64 as of 31 July 1978 per his letter to petitioner of 17 September 1974, Valdes could already automatically assume ownership of Pulong Maulap. Instead, the remedy of respondents Carlos J. Valdes and Caval Realty Corporation was to proceed against the estate of the late Jose M. Nakpil and/or the property itself.

The arrangement entered into between the parties, whereby Pulong Maulap was to be "considered sold to him (respondent) . . . 20 in case petitioner fails to reimburse Valdes, must then be construed as tantamount to a pactum commissorium 21 which is expressly prohibited by Art. 2088 of the Civil Code. 22For, there was to be automatic appropriation of the property by Valdes in the event of failure of petitioner to pay the value of the advances. Thus, contrary to respondent's manifestations, all the elements of a pactum commissorium were present: there was a creditor-debtor relationship between the parties; the property was used as security for the loan; and, there was automatic appropriation by respondent of Pulong Maulap in case of default of petitioner.

In fine, we conclude that there was a constructive trust between the parties under Art. 1450 of the New Civil Code. Consequently, petitioner may redeem and compel conveyance of the disputed property but only after reimbursing respondent the sum of P375,056.64, with legal interest from 31 July 1978, the amount advanced by Valdes for the purchase of the Pulong Maulap.

WHEREFORE, the petition is GRANTED. The assailed decision of the then Intermediate Appellate Court which affirmed that of the Regional Trial Court is SET ASIDE.

Private respondents Carlos J. Valdes and Caval Realty Corporation are ordered jointly and severally to RECONVEY Pulong Maulap to petitioner Imelda A. Nakpil and the heirs of the late Jose M. Nakpil upon reimbursement by the latter of the advances of private respondent Carlos J. Valdes amounting to P375.056.64, with legal interest from 31 July 1978 until fully paid.

Private respondents are further ordered to pay the costs of suit.

SO ORDERED. G.R. No. 126297

January 31, 2007

PROFESSIONAL SERVICES, INC., Petitioner, vs. NATIVIDAD and ENRIQUE AGANA, Respondents.

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

G.R. No. 126467

January 31, 2007

NATIVIDAD (Substituted by her children MARCELINO AGANA III, ENRIQUE AGANA, JR., EMMA AGANA ANDAYA, JESUS AGANA, and RAYMUND AGANA) and ENRIQUE AGANA, Petitioners, vs. JUAN FUENTES, Respondent.

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

G.R. No. 127590

January 31, 2007

MIGUEL AMPIL, Petitioner,

vs. NATIVIDAD AGANA and ENRIQUE AGANA, Respondents.

DECISION

SANDOVAL-GUTIERREZ, J.:

Hospitals, having undertaken one of mankinds most important and delicate endeavors, must assume the grave responsibility of pursuing it with appropriate care. The care and service dispensed through this high trust, however technical, complex and esoteric its character may be, must meet standards of responsibility commensurate with the undertaking to preserve and protect the health, and indeed, the very lives of those placed in the hospitals keeping.1

Assailed in these three consolidated petitions for review on certiorari is the Court of Appeals Decision2 dated September 6, 1996 in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198 affirming with modification the Decision3 dated March 17, 1993 of the Regional Trial Court (RTC), Branch 96, Quezon City in Civil Case No. Q-43322 and nullifying its Order dated September 21, 1993.

The facts, as culled from the records, are:

On April 4, 1984, Natividad Agana was rushed to the Medical City General Hospital (Medical City Hospital) because of difficulty of bowel movement and bloody anal discharge. After a series of medical examinations, Dr. Miguel Ampil, petitioner in G.R. No. 127590, diagnosed her to be suffering from "cancer of the sigmoid."

On April 11, 1984, Dr. Ampil, assisted by the medical staff4 of the Medical City Hospital, performed an anterior resection surgery on Natividad. He found that the malignancy in her sigmoid area had spread on her left ovary, necessitating the removal of certain portions of it. Thus, Dr. Ampil obtained the consent of Natividads husband, Enrique Agana, to permit Dr. Juan Fuentes, respondent in G.R. No. 126467, to perform hysterectomy on her.

After Dr. Fuentes had completed the hysterectomy, Dr. Ampil took over, completed the operation and closed the incision.

However, the operation appeared to be flawed. In the corresponding Record of Operation dated April 11, 1984, the attending nurses entered these remarks:

"sponge count lacking 2

"announced to surgeon searched (sic) done but to no avail continue for closure."

On April 24, 1984, Natividad was released from the hospital. Her hospital and medical bills, including the doctors fees, amounted to P60,000.00.

After a couple of days, Natividad complained of excruciating pain in her anal region. She consulted both Dr. Ampil and Dr. Fuentes about it. They told her that the pain was the natural consequence of the surgery. Dr. Ampil then recommended that she consult an oncologist to examine the cancerous nodes which were not removed during the operation.

On May 9, 1984, Natividad, accompanied by her husband, went to the United States to seek further treatment. After four months of consultations and laboratory examinations, Natividad was told she was free of cancer. Hence, she was advised to return to the Philippines.

On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains. Two weeks thereafter, her daughter found a piece of gauze protruding from her vagina. Upon being informed about it, Dr. Ampil proceeded to her house where he managed to extract by hand a piece of gauze measuring 1.5 inches in width. He then assured her that the pains would soon vanish.

Dr. Ampils assurance did not come true. Instead, the pains intensified, prompting Natividad to seek treatment at the Polymedic General Hospital. While confined there, Dr. Ramon Gutierrez detected the presence of another foreign object in her vagina -- a foul-smelling gauze measuring 1.5 inches in width which badly infected her vaginal vault. A rectovaginal fistula had formed in her reproductive organs which forced stool to excrete through the vagina. Another surgical operation was needed to remedy the damage. Thus, in October 1984, Natividad underwent another surgery.

On November 12, 1984, Natividad and her husband filed with the RTC, Branch 96, Quezon City a complaint for damages against the Professional Services, Inc. (PSI), owner of the Medical City Hospital, Dr. Ampil, and Dr. Fuentes, docketed as Civil Case No. Q-43322. They alleged that the latter are liable for negligence for leaving two pieces of gauze inside Natividads body and malpractice for concealing their acts of negligence.

Meanwhile, Enrique Agana also filed with the Professional Regulation Commission (PRC) an administrative complaint for gross negligence and malpractice against Dr. Ampil and Dr. Fuentes, docketed as Administrative Case No. 1690. The PRC

Board of Medicine heard the case only with respect to Dr. Fuentes because it failed to acquire jurisdiction over Dr. Ampil who was then in the United States.

On February 16, 1986, pending the outcome of the above cases, Natividad died and was duly substituted by her abovenamed children (the Aganas).

On March 17, 1993, the RTC rendered its Decision in favor of the Aganas, finding PSI, Dr. Ampil and Dr. Fuentes liable for negligence and malpractice, the decretal part of which reads:

WHEREFORE, judgment is hereby rendered for the plaintiffs ordering the defendants PROFESSIONAL SERVICES, INC., DR. MIGUEL AMPIL and DR. JUAN FUENTES to pay to the plaintiffs, jointly and severally, except in respect of the award for exemplary damages and the interest thereon which are the liabilities of defendants Dr. Ampil and Dr. Fuentes only, as follows:

1. As actual damages, the following amounts:

a. The equivalent in Philippine Currency of the total of US$19,900.00 at the rate of P21.60-US$1.00, as reimbursement of actual expenses incurred in the United States of America;

b. The sum of P4,800.00 as travel taxes of plaintiffs and their physician daughter;

c. The total sum of P45,802.50, representing the cost of hospitalization at Polymedic Hospital, medical fees, and cost of the saline solution;

2. As moral damages, the sum of P2,000,000.00;

3. As exemplary damages, the sum of P300,000.00;

4. As attorneys fees, the sum of P250,000.00;

5. Legal interest on items 1 (a), (b), and (c); 2; and 3 hereinabove, from date of filing of the complaint until full payment; and

6. Costs of suit.

SO ORDERED.

Aggrieved, PSI, Dr. Fuentes and Dr. Ampil interposed an appeal to the Court of Appeals, docketed as CA-G.R. CV No. 42062.

Incidentally, on April 3, 1993, the Aganas filed with the RTC a motion for a partial execution of its Decision, which was granted in an Order dated May 11, 1993. Thereafter, the sheriff levied upon certain properties of Dr. Ampil and sold them for P451,275.00 and delivered the amount to the Aganas.

Following their receipt of the money, the Aganas entered into an agreement with PSI and Dr. Fuentes to indefinitely suspend any further execution of the RTC Decision. However, not long thereafter, the Aganas again filed a motion for an alias writ of execution against the properties of PSI and Dr. Fuentes. On September 21, 1993, the RTC granted the motion and issued the corresponding writ, prompting Dr. Fuentes to file with the Court of Appeals a petition for certiorari and prohibition, with prayer for preliminary injunction, docketed as CA-G.R. SP No. 32198. During its pendency, the Court of Appeals issued a Resolution5 dated October 29, 1993 granting Dr. Fuentes prayer for injunctive relief.

On January 24, 1994, CA-G.R. SP No. 32198 was consolidated with CA-G.R. CV No. 42062.

Meanwhile, on January 23, 1995, the PRC Board of Medicine rendered its Decision6 in Administrative Case No. 1690 dismissing the case against Dr. Fuentes. The Board held that the prosecution failed to show that Dr. Fuentes was the one who left the two pieces of gauze inside Natividads body; and that he concealed such fact from Natividad.

On September 6, 1996, the Court of Appeals rendered its Decision jointly disposing of CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198, thus:

WHEREFORE, except for the modification that the case against defendant-appellant Dr. Juan Fuentes is hereby DISMISSED, and with the pronouncement that defendant-appellant Dr. Miguel Ampil is liable to reimburse defendantappellant Professional Services, Inc., whatever amount the latter will pay or had paid to the plaintiffs-appellees, the decision appealed from is hereby AFFIRMED and the instant appeal DISMISSED.

Concomitant with the above, the petition for certiorari and prohibition filed by herein defendant-appellant Dr. Juan Fuentes in CA-G.R. SP No. 32198 is hereby GRANTED and the challenged order of the respondent judge dated September 21, 1993, as well as the alias writ of execution issued pursuant thereto are hereby NULLIFIED and SET ASIDE. The bond posted by the petitioner in connection with the writ of preliminary injunction issued by this Court on November 29, 1993 is hereby cancelled.

Costs against defendants-appellants Dr. Miguel Ampil and Professional Services, Inc.

SO ORDERED.

Only Dr. Ampil filed a motion for reconsideration, but it was denied in a Resolution7 dated December 19, 1996.

Hence, the instant consolidated petitions.

In G.R. No. 126297, PSI alleged in its petition that the Court of Appeals erred in holding that: (1) it is estopped from raising the defense that Dr. Ampil is not its employee; (2) it is solidarily liable with Dr. Ampil; and (3) it is not entitled to its counterclaim against the Aganas. PSI contends that Dr. Ampil is not its employee, but a mere consultant or independent contractor. As such, he alone should answer for his negligence.

In G.R. No. 126467, the Aganas maintain that the Court of Appeals erred in finding that Dr. Fuentes is not guilty of negligence or medical malpractice, invoking the doctrine of res ipsa loquitur. They contend that the pieces of gauze are prima facie proofs that the operating surgeons have been negligent.

Finally, in G.R. No. 127590, Dr. Ampil asserts that the Court of Appeals erred in finding him liable for negligence and malpractice sans evidence that he left the two pieces of gauze in Natividads vagina. He pointed to other probable causes, such as: (1) it was Dr. Fuentes who used gauzes in performing the hysterectomy; (2) the attending nurses failure to properly count the gauzes used during surgery; and (3) the medical intervention of the American doctors who examined Natividad in the United States of America.

For our resolution are these three vital issues: first, whether the Court of Appeals erred in holding Dr. Ampil liable for negligence and malpractice; second, whether the Court of Appeals erred in absolving Dr. Fuentes of any liability; and third, whether PSI may be held solidarily liable for the negligence of Dr. Ampil.

I - G.R. No. 127590

Whether the Court of Appeals Erred in Holding Dr. Ampil

Liable for Negligence and Malpractice.

Dr. Ampil, in an attempt to absolve himself, gears the Courts attention to other possible causes of Natividads detriment. He argues that the Court should not discount either of the following possibilities: first, Dr. Fuentes left the gauzes in Natividads body after performing hysterectomy; second, the attending nurses erred in counting the gauzes; and third, the American doctors were the ones who placed the gauzes in Natividads body.

Dr. Ampils arguments are purely conjectural and without basis. Records show that he did not present any evidence to prove that the American doctors were the ones who put or left the gauzes in Natividads body. Neither did he submit evidence to rebut the correctness of the record of operation, particularly the number of gauzes used. As to the alleged negligence of Dr. Fuentes, we are mindful that Dr. Ampil examined his (Dr. Fuentes) work and found it in order.

The glaring truth is that all the major circumstances, taken together, as specified by the Court of Appeals, directly point to Dr. Ampil as the negligent party, thus:

First, it is not disputed that the surgeons used gauzes as sponges to control the bleeding of the patient during the surgical operation.

Second, immediately after the operation, the nurses who assisted in the surgery noted in their report that the sponge count (was) lacking 2; that such anomaly was announced to surgeon and that a search was done but to no avail prompting Dr. Ampil to continue for closure x x x.

Third, after the operation, two (2) gauzes were extracted from the same spot of the body of Mrs. Agana where the surgery was performed.

An operation requiring the placing of sponges in the incision is not complete until the sponges are properly removed, and it is settled that the leaving of sponges or other foreign substances in the wound after the incision has been closed is at least prima facie negligence by the operating surgeon.8 To put it simply, such act is considered so inconsistent with due care as to raise an inference of negligence. There are even legions of authorities to the effect that such act is negligence per se.9

Of course, the Court is not blind to the reality that there are times when danger to a patients life precludes a surgeon from further searching missing sponges or foreign objects left in the body. But this does not leave him free from any obligation. Even if it has been shown that a surgeon was required by the urgent necessities of the case to leave a sponge in his patients abdomen, because of the dangers attendant upon delay, still, it is his legal duty to so inform his patient within a reasonable time thereafter by advising her of what he had been compelled to do. This is in order that she might seek relief from the effects of the foreign object left in her body as her condition might permit. The ruling in Smith v. Zeagler10 is explicit, thus:

The removal of all sponges used is part of a surgical operation, and when a physician or surgeon fails to remove a sponge he has placed in his patients body that should be removed as part of the operation, he thereby leaves his operation uncompleted and creates a new condition which imposes upon him the legal duty of calling the new condition to his patients attention, and endeavoring with the means he has at hand to minimize and avoid untoward results likely to ensue therefrom.

Here, Dr. Ampil did not inform Natividad about the missing two pieces of gauze. Worse, he even misled her that the pain she was experiencing was the ordinary consequence of her operation. Had he been more candid, Natividad could have taken the immediate and appropriate medical remedy to remove the gauzes from her body. To our mind, what was initially an act of negligence by Dr. Ampil has ripened into a deliberate wrongful act of deceiving his patient.

This is a clear case of medical malpractice or more appropriately, medical negligence. To successfully pursue this kind of case, a patient must only prove that a health care provider either failed to do something which a reasonably prudent health care provider would have done, or that he did something that a reasonably prudent provider would not have done; and that failure or action caused injury to the patient.11 Simply put, the elements are duty, breach, injury and proximate causation. Dr, Ampil, as the lead surgeon, had the duty to remove all foreign objects, such as gauzes, from Natividads body before closure of the incision. When he failed to do so, it was his duty to inform Natividad about it. Dr. Ampil breached both duties. Such breach caused injury to Natividad, necessitating her further examination by American doctors and another surgery. That Dr. Ampils negligence is the proximate cause12 of Natividads injury could be traced from his act of closing the incision despite the information given by the attending nurses that two pieces of gauze were still missing. That they were later on extracted from Natividads vagina established the causal link between Dr. Ampils negligence and the injury. And what further aggravated such injury was his deliberate concealment of the missing gauzes from the knowledge of Natividad and her family.

II - G.R. No. 126467

Whether the Court of Appeals Erred in Absolving

Dr. Fuentes of any Liability

The Aganas assailed the dismissal by the trial court of the case against Dr. Fuentes on the ground that it is contrary to the doctrine of res ipsa loquitur. According to them, the fact that the two pieces of gauze were left inside Natividads body is a prima facie evidence of Dr. Fuentes negligence.

We are not convinced.

Literally, res ipsa loquitur means "the thing speaks for itself." It is the rule that the fact of the occurrence of an injury, taken with the surrounding circumstances, may permit an inference or raise a presumption of negligence, or make out a plaintiffs prima facie case, and present a question of fact for defendant to meet with an explanation.13 Stated differently, where the thing which caused the injury, without the fault of the injured, is under the exclusive control of the defendant and the injury is such that it should not have occurred if he, having such control used proper care, it affords reasonable evidence, in the absence of explanation that the injury arose from the defendants want of care, and the burden of proof is shifted to him to establish that he has observed due care and diligence.14

From the foregoing statements of the rule, the requisites for the applicability of the doctrine of res ipsa loquitur are: (1) the occurrence of an injury; (2) the thing which caused the injury was under the control and management of the defendant; (3) the occurrence was such that in the ordinary course of things, would not have happened if those who had control or management used proper care; and (4) the absence of explanation by the defendant. Of the foregoing requisites, the most instrumental is the "control and management of the thing which caused the injury."15

We find the element of "control and management of the thing which caused the injury" to be wanting. Hence, the doctrine of res ipsa loquitur will not lie.

It was duly established that Dr. Ampil was the lead surgeon during the operation of Natividad. He requested the assistance of Dr. Fuentes only to perform hysterectomy when he (Dr. Ampil) found that the malignancy in her sigmoid area had spread to her left ovary. Dr. Fuentes performed the surgery and thereafter reported and showed his work to Dr. Ampil. The latter examined it and finding everything to be in order, allowed Dr. Fuentes to leave the operating room. Dr. Ampil then resumed operating on Natividad. He was about to finish the procedure when the attending nurses informed him that two pieces of gauze were missing. A "diligent search" was conducted, but the misplaced gauzes were not found. Dr. Ampil then directed that the incision be closed. During this entire period, Dr. Fuentes was no longer in the operating room and had, in fact, left the hospital.

Under the "Captain of the Ship" rule, the operating surgeon is the person in complete charge of the surgery room and all personnel connected with the operation. Their duty is to obey his orders.16 As stated before, Dr. Ampil was the lead surgeon. In other words, he was the "Captain of the Ship." That he discharged such role is evident from his following conduct: (1) calling Dr. Fuentes to perform a hysterectomy; (2) examining the work of Dr. Fuentes and finding it in order; (3) granting Dr. Fuentes permission to leave; and (4) ordering the closure of the incision. To our mind, it was this act of ordering the closure of the incision notwithstanding that two pieces of gauze remained unaccounted for, that caused

injury to Natividads body. Clearly, the control and management of the thing which caused the injury was in the hands of Dr. Ampil, not Dr. Fuentes.

In this jurisdiction, res ipsa loquitur is not a rule of substantive law, hence, does not per se create or constitute an independent or separate ground of liability, being a mere evidentiary rule.17 In other words, mere invocation and application of the doctrine does not dispense with the requirement of proof of negligence. Here, the negligence was proven to have been committed by Dr. Ampil and not by Dr. Fuentes.

III - G.R. No. 126297

Whether PSI Is Liable for the Negligence of Dr. Ampil

The third issue necessitates a glimpse at the historical development of hospitals and the resulting theories concerning their liability for the negligence of physicians.

Until the mid-nineteenth century, hospitals were generally charitable institutions, providing medical services to the lowest classes of society, without regard for a patients ability to pay.18 Those who could afford medical treatment were usually treated at home by their doctors.19 However, the days of house calls and philanthropic health care are over. The modern health care industry continues to distance itself from its charitable past and has experienced a significant conversion from a not-for-profit health care to for-profit hospital businesses. Consequently, significant changes in health law have accompanied the business-related changes in the hospital industry. One important legal change is an increase in hospital liability for medical malpractice. Many courts now allow claims for hospital vicarious liability under the theories of respondeat superior, apparent authority, ostensible authority, or agency by estoppel. 20

In this jurisdiction, the statute governing liability for negligent acts is Article 2176 of the Civil Code, which reads:

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

A derivative of this provision is Article 2180, the rule governing vicarious liability under the doctrine of respondeat superior, thus:

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

x x x

x x x

The owners and managers of an establishment or enterprise are likewise responsible for damages caused by their employees in the service of the branches in which the latter are employed or on the occasion of their functions.

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

x x x

x x x

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

A prominent civilist commented that professionals engaged by an employer, such as physicians, dentists, and pharmacists, are not "employees" under this article because the manner in which they perform their work is not within the control of the latter (employer). In other words, professionals are considered personally liable for the fault or negligence they commit in the discharge of their duties, and their employer cannot be held liable for such fault or negligence. In the context of the present case, "a hospital cannot be held liable for the fault or negligence of a physician or surgeon in the treatment or operation of patients."21

The foregoing view is grounded on the traditional notion that the professional status and the very nature of the physicians calling preclude him from being classed as an agent or employee of a hospital, whenever he acts in a professional capacity.22 It has been said that medical practice strictly involves highly developed and specialized knowledge,23 such that physicians are generally free to exercise their own skill and judgment in rendering medical services sans interference.24 Hence, when a doctor practices medicine in a hospital setting, the hospital and its employees are deemed to subserve him in his ministrations to the patient and his actions are of his own responsibility.25

The case of Schloendorff v. Society of New York Hospital26 was then considered an authority for this view. The "Schloendorff doctrine" regards a physician, even if employed by a hospital, as an independent contractor because of the skill he exercises and the lack of control exerted over his work. Under this doctrine, hospitals are exempt from the application of the respondeat superior principle for fault or negligence committed by physicians in the discharge of their profession.

However, the efficacy of the foregoing doctrine has weakened with the significant developments in medical care. Courts came to realize that modern hospitals are increasingly taking active role in supplying and regulating medical care to patients. No longer were a hospitals functions limited to furnishing room, food, facilities for treatment and operation, and attendants for its patients. Thus, in Bing v. Thunig,27 the New York Court of Appeals deviated from the Schloendorff doctrine, noting that modern hospitals actually do far more than provide facilities for treatment. Rather, they regularly employ, on a salaried basis, a large staff of physicians, interns, nurses, administrative and manual workers. They charge patients for medical care and treatment, even collecting for such services through legal action, if necessary. The court then concluded that there is no reason to exempt hospitals from the universal rule of respondeat superior.

In our shores, the nature of the relationship between the hospital and the physicians is rendered inconsequential in view of our categorical pronouncement in Ramos v. Court of Appeals28 that for purposes of apportioning responsibility in medical negligence cases, an employer-employee relationship in effect exists between hospitals and their attending and visiting physicians. This Court held:

"We now discuss the responsibility of the hospital in this particular incident. The unique practice (among private hospitals) of filling up specialist staff with attending and visiting "consultants," who are allegedly not hospital employees, presents problems in apportioning responsibility for negligence in medical malpractice cases. However, the difficulty is more apparent than real.

In the first place, hospitals exercise significant control in the hiring and firing of consultants and in the conduct of their work within the hospital premises. Doctors who apply for consultant slots, visiting or attending, are required to submit proof of completion of residency, their educational qualifications, generally, evidence of accreditation by the appropriate board (diplomate), evidence of fellowship in most cases, and references. These requirements are carefully scrutinized by members of the hospital administration or by a review committee set up by the hospital who either accept or reject the application. x x x.

After a physician is accepted, either as a visiting or attending consultant, he is normally required to attend clinicopathological conferences, conduct bedside rounds for clerks, interns and residents, moderate grand rounds and patient audits and perform other tasks and responsibilities, for the privilege of being able to maintain a clinic in the hospital, and/or for the privilege of admitting patients into the hospital. In addition to these, the physicians performance as a specialist is generally evaluated by a peer review committee on the basis of mortality and morbidity statistics, and feedback from patients, nurses, interns and residents. A consultant remiss in his duties, or a consultant who regularly falls short of the minimum standards acceptable to the hospital or its peer review committee, is normally politely terminated.

In other words, private hospitals, hire, fire and exercise real control over their attending and visiting consultant staff. While consultants are not, technically employees, x x x, the control exercised, the hiring, and the right to terminate consultants all fulfill the important hallmarks of an employer-employee relationship, with the exception of the payment of wages. In assessing whether such a relationship in fact exists, the control test is determining. Accordingly, on the basis

of the foregoing, we rule that for the purpose of allocating responsibility in medical negligence cases, an employeremployee relationship in effect exists between hospitals and their attending and visiting physicians. "

But the Ramos pronouncement is not our only basis in sustaining PSIs liability. Its liability is also anchored upon the agency principle of apparent authority or agency by estoppel and the doctrine of corporate negligence which have gained acceptance in the determination of a hospitals liability for negligent acts of health professionals. The present case serves as a perfect platform to test the applicability of these doctrines, thus, enriching our jurisprudence.

Apparent authority, or what is sometimes referred to as the "holding

out" theory, or doctrine of ostensible agency or agency by estoppel,29 has its origin from the law of agency. It imposes liability, not as the result of the reality of a contractual relationship, but rather because of the actions of a principal or an employer in somehow misleading the public into believing that the relationship or the authority exists.30 The concept is essentially one of estoppel and has been explained in this manner:

"The principal is bound by the acts of his agent with the apparent authority which he knowingly permits the agent to assume, or which he holds the agent out to the public as possessing. The question in every case is whether the principal has by his voluntary act placed the agent in such a situation that a person of ordinary prudence, conversant with business usages and the nature of the particular business, is justified in presuming that such agent has authority to perform the particular act in question.31

The applicability of apparent authority in the field of hospital liability was upheld long time ago in Irving v. Doctor Hospital of Lake Worth, Inc.32 There, it was explicitly stated that "there does not appear to be any rational basis for excluding the concept of apparent authority from the field of hospital liability." Thus, in cases where it can be shown that a hospital, by its actions, has held out a particular physician as its agent and/or employee and that a patient has accepted treatment from that physician in the reasonable belief that it is being rendered in behalf of the hospital, then the hospital will be liable for the physicians negligence.

Our jurisdiction recognizes the concept of an agency by implication or estoppel. Article 1869 of the Civil Code reads:

ART. 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of action, or his failure to repudiate the agency, knowing that another person is acting on his behalf without authority.

In this case, PSI publicly displays in the lobby of the Medical City Hospital the names and specializations of the physicians associated or accredited by it, including those of Dr. Ampil and Dr. Fuentes. We concur with the Court of Appeals

conclusion that it "is now estopped from passing all the blame to the physicians whose names it proudly paraded in the public directory leading the public to believe that it vouched for their skill and competence." Indeed, PSIs act is tantamount to holding out to the public that Medical City Hospital, through its accredited physicians, offers quality health care services. By accrediting Dr. Ampil and Dr. Fuentes and publicly advertising their qualifications, the hospital created the impression that they were its agents, authorized to perform medical or surgical services for its patients. As expected, these patients, Natividad being one of them, accepted the services on the reasonable belief that such were being rendered by the hospital or its employees, agents, or servants. The trial court correctly pointed out:

x x x regardless of the education and status in life of the patient, he ought not be burdened with the defense of absence of employer-employee relationship between the hospital and the independent physician whose name and competence are certainly certified to the general public by the hospitals act of listing him and his specialty in its lobby directory, as in the case herein. The high costs of todays medical and health care should at least exact on the hospital greater, if not broader, legal responsibility for the conduct of treatment and surgery within its facility by its accredited physician or surgeon, regardless of whether he is independent or employed."33

The wisdom of the foregoing ratiocination is easy to discern. Corporate entities, like PSI, are capable of acting only through other individuals, such as physicians. If these accredited physicians do their job well, the hospital succeeds in its mission of offering quality medical services and thus profits financially. Logically, where negligence mars the quality of its services, the hospital should not be allowed to escape liability for the acts of its ostensible agents.

We now proceed to the doctrine of corporate negligence or corporate responsibility.

One allegation in the complaint in Civil Case No. Q-43332 for negligence and malpractice is that PSI as owner, operator and manager of Medical City Hospital, "did not perform the necessary supervision nor exercise diligent efforts in the supervision of Drs. Ampil and Fuentes and its nursing staff, resident doctors, and medical interns who assisted Drs. Ampil and Fuentes in the performance of their duties as surgeons."34 Premised on the doctrine of corporate negligence, the trial court held that PSI is directly liable for such breach of duty.

We agree with the trial court.

Recent years have seen the doctrine of corporate negligence as the judicial answer to the problem of allocating hospitals liability for the negligent acts of health practitioners, absent facts to support the application of respondeat superior or apparent authority. Its formulation proceeds from the judiciarys acknowledgment that in these modern times, the duty of providing quality medical service is no longer the sole prerogative and responsibility of the physician. The modern hospitals have changed structure. Hospitals now tend to organize a highly professional medical staff whose competence and performance need to be monitored by the hospitals commensurate with their inherent responsibility to provide quality medical care.35

The doctrine has its genesis in Darling v. Charleston Community Hospital.36 There, the Supreme Court of Illinois held that "the jury could have found a hospital negligent, inter alia, in failing to have a sufficient number of trained nurses attending the patient; failing to require a consultation with or examination by members of the hospital staff; and failing to review the treatment rendered to the patient." On the basis of Darling, other jurisdictions held that a hospitals corporate negligence extends to permitting a physician known to be incompetent to practice at the hospital.37 With the passage of time, more duties were expected from hospitals, among them: (1) the use of reasonable care in the maintenance of safe and adequate facilities and equipment; (2) the selection and retention of competent physicians; (3) the overseeing or supervision of all persons who practice medicine within its walls; and (4) the formulation, adoption and enforcement of adequate rules and policies that ensure quality care for its patients.38 Thus, in Tucson Medical Center, Inc. v. Misevich,39 it was held that a hospital, following the doctrine of corporate responsibility, has the duty to see that it meets the standards of responsibilities for the care of patients. Such duty includes the proper supervision of the members of its medical staff. And in Bost v. Riley,40 the court concluded that a patient who enters a hospital does so with the reasonable expectation that it will attempt to cure him. The hospital accordingly has the duty to make a reasonable effort to monitor and oversee the treatment prescribed and administered by the physicians practicing in its premises.

In the present case, it was duly established that PSI operates the Medical City Hospital for the purpose and under the concept of providing comprehensive medical services to the public. Accordingly, it has the duty to exercise reasonable care to protect from harm all patients admitted into its facility for medical treatment. Unfortunately, PSI failed to perform such duty. The findings of the trial court are convincing, thus:

x x x PSIs liability is traceable to its failure to conduct an investigation of the matter reported in the nota bene of the count nurse. Such failure established PSIs part in the dark conspiracy of silence and concealment about the gauzes. Ethical considerations, if not also legal, dictated the holding of an immediate inquiry into the events, if not for the benefit of the patient to whom the duty is primarily owed, then in the interest of arriving at the truth. The Court cannot accept that the medical and the healing professions, through their members like defendant surgeons, and their institutions like PSIs hospital facility, can callously turn their backs on and disregard even a mere probability of mistake or negligence by refusing or failing to investigate a report of such seriousness as the one in Natividads case.

It is worthy to note that Dr. Ampil and Dr. Fuentes operated on Natividad with the assistance of the Medical City Hospitals staff, composed of resident doctors, nurses, and interns. As such, it is reasonable to conclude that PSI, as the operator of the hospital, has actual or constructive knowledge of the procedures carried out, particularly the report of the attending nurses that the two pieces of gauze were missing. In Fridena v. Evans,41 it was held that a corporation is bound by the knowledge acquired by or notice given to its agents or officers within the scope of their authority and in reference to a matter to which their authority extends. This means that the knowledge of any of the staff of Medical City Hospital constitutes knowledge of PSI. Now, the failure of PSI, despite the attending nurses report, to investigate and inform Natividad regarding the missing gauzes amounts to callous negligence. Not only did PSI breach its duties to oversee or supervise all persons who practice medicine within its walls, it also failed to take an active step in fixing the negligence committed. This renders PSI, not only vicariously liable for the negligence of Dr. Ampil under Article 2180 of the Civil Code, but also directly liable for its own negligence under Article 2176. In Fridena, the Supreme Court of Arizona held:

x x x In recent years, however, the duty of care owed to the patient by the hospital has expanded. The emerging trend is to hold the hospital responsible where the hospital has failed to monitor and review medical services being provided within its walls. See Kahn Hospital Malpractice Prevention, 27 De Paul . Rev. 23 (1977).

Among the cases indicative of the emerging trend is Purcell v. Zimbelman, 18 Ariz. App. 75,500 P. 2d 335 (1972). In Purcell, the hospital argued that it could not be held liable for the malpractice of a medical practitioner because he was an independent contractor within the hospital. The Court of Appeals pointed out that the hospital had created a professional staff whose competence and performance was to be monitored and reviewed by the governing body of the hospital, and the court held that a hospital would be negligent where it had knowledge or reason to believe that a doctor using the facilities was employing a method of treatment or care which fell below the recognized standard of care.

Subsequent to the Purcell decision, the Arizona Court of Appeals held that a hospital has certain inherent responsibilities regarding the quality of medical care furnished to patients within its walls and it must meet the standards of responsibility commensurate with this undertaking. Beeck v. Tucson General Hospital, 18 Ariz. App. 165, 500 P. 2d 1153 (1972). This court has confirmed the rulings of the Court of Appeals that a hospital has the duty of supervising the competence of the doctors on its staff. x x x.

x x

In the amended complaint, the plaintiffs did plead that the operation was performed at the hospital with its knowledge, aid, and assistance, and that the negligence of the defendants was the proximate cause of the patients injuries. We find that such general allegations of negligence, along with the evidence produced at the trial of this case, are sufficient to support the hospitals liability based on the theory of negligent supervision."

Anent the corollary issue of whether PSI is solidarily liable with Dr. Ampil for damages, let it be emphasized that PSI, apart from a general denial of its responsibility, failed to adduce evidence showing that it exercised the diligence of a good father of a family in the accreditation and supervision of the latter. In neglecting to offer such proof, PSI failed to discharge its burden under the last paragraph of Article 2180 cited earlier, and, therefore, must be adjudged solidarily liable with Dr. Ampil. Moreover, as we have discussed, PSI is also directly liable to the Aganas.

One final word. Once a physician undertakes the treatment and care of a patient, the law imposes on him certain obligations. In order to escape liability, he must possess that reasonable degree of learning, skill and experience required by his profession. At the same time, he must apply reasonable care and diligence in the exercise of his skill and the application of his knowledge, and exert his best judgment.

WHEREFORE, we DENY all the petitions and AFFIRM the challenged Decision of the Court of Appeals in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198.

Costs against petitioners PSI and Dr. Miguel Ampil.

SO ORDERED. Republic of the Philippines Supreme Court Manila

SECOND DIVISION

G.R. No. 188288

January 16, 2012

SPOUSES FERNANDO and LOURDES VILORIA, Petitioners,

--versus-

CONTINENTAL AIRLINES, INC., Respondent.

DECISION

REYES, J.:

This is a petition for review under Rule 45 of the Rules of Court from the January 30, 2009 Decision1 of the Special Thirteenth Division of the Court of Appeals (CA) in CA-G.R. CV No. 88586 entitled Spouses Fernando and Lourdes Viloria v. Continental Airlines, Inc., the dispositive portion of which states:

WHEREFORE, the Decision of the Regional Trial Court, Branch 74, dated 03 April 2006, awarding US$800.00 or its peso equivalent at the time of payment, plus legal rate of interest from 21 July 1997 until fully paid, [P]100,000.00 as moral damages, *P+50,000.00 as exemplary damages, *P+40,000.00 as attorneys fees and costs of suit to plaintiffs-appellees is hereby REVERSED and SET ASIDE.

Defendant-appellants counterclaim is DENIED.

Costs against plaintiffs-appellees.

SO ORDERED.2

On April 3, 2006, the Regional Trial Court of Antipolo City, Branch 74 (RTC) rendered a Decision, giving due course to the complaint for sum of money and damages filed by petitioners Fernando Viloria (Fernando) and Lourdes Viloria (Lourdes), collectively called Spouses Viloria, against respondent Continental Airlines, Inc. (CAI). As culled from the records, below are the facts giving rise to such complaint.

On or about July 21, 1997 and while in the United States, Fernando purchased for himself and his wife, Lourdes, two (2) round trip airline tickets from San Diego, California to Newark, New Jersey on board Continental Airlines. Fernando purchased the tickets at US$400.00 each from a travel agency called Holiday Travel and was attended to by a certain Margaret Mager (Mager). According to Spouses Viloria, Fernando agreed to buy the said tickets after Mager informed them that there were no available seats at Amtrak, an intercity passenger train service provider in the United States. Per the tickets, Spouses Viloria were scheduled to leave for Newark on August 13, 1997 and return to San Diego on August 21, 1997.

Subsequently, Fernando requested Mager to reschedule their flight to Newark to an earlier date or August 6, 1997. Mager informed him that flights to Newark via Continental Airlines were already fully booked and offered the alternative of a round trip flight via Frontier Air. Since flying with Frontier Air called for a higher fare of US$526.00 per passenger and would mean traveling by night, Fernando opted to request for a refund. Mager, however, denied his request as the subject tickets are non-refundable and the only option that Continental Airlines can offer is the re-issuance of new tickets within one (1) year from the date the subject tickets were issued. Fernando decided to reserve two (2) seats with Frontier Air.

As he was having second thoughts on traveling via Frontier Air, Fernando went to the Greyhound Station where he saw an Amtrak station nearby. Fernando made inquiries and was told that there are seats available and he can travel on Amtrak anytime and any day he pleased. Fernando then purchased two (2) tickets for Washington, D.C.

From Amtrak, Fernando went to Holiday Travel and confronted Mager with the Amtrak tickets, telling her that she had misled them into buying the Continental Airlines tickets by misrepresenting that Amtrak was already fully booked. Fernando reiterated his demand for a refund but Mager was firm in her position that the subject tickets are nonrefundable.

Upon returning to the Philippines, Fernando sent a letter to CAI on February 11, 1998, demanding a refund and alleging that Mager had deluded them into purchasing the subject tickets.3

In a letter dated February 24, 1998, Continental Micronesia informed Fernando that his complaint had been referred to the Customer Refund Services of Continental Airlines at Houston, Texas.4

In a letter dated March 24, 1998, Continental Micronesia denied Fernandos request for a refund and advised him that he may take the subject tickets to any Continental ticketing location for the re-issuance of new tickets within two (2) years from the date they were issued. Continental Micronesia informed Fernando that the subject tickets may be used as a form of payment for the purchase of another Continental ticket, albeit with a re-issuance fee.5

On June 17, 1999, Fernando went to Continentals ticketing office at Ayala Avenue, Makati City to have the subject tickets replaced by a single round trip ticket to Los Angeles, California under his name. Therein, Fernando was informed that Lourdes ticket was non-transferable, thus, cannot be used for the purchase of a ticket in his favor. He was also informed that a round trip ticket to Los Angeles was US$1,867.40 so he would have to pay what will not be covered by the value of his San Diego to Newark round trip ticket.

In a letter dated June 21, 1999, Fernando demanded for the refund of the subject tickets as he no longer wished to have them replaced. In addition to the dubious circumstances under which the subject tickets were issued, Fernando claimed that CAIs act of charging him with US$1,867.40 for a round trip ticket to Los Angeles, which other airlines priced at US$856.00, and refusal to allow him to use Lourdes ticket, breached its undertaking under its March 24, 1998 letter.6

On September 8, 2000, Spouses Viloria filed a complaint against CAI, praying that CAI be ordered to refund the money they used in the purchase of the subject tickets with legal interest from July 21, 1997 and to pay P1,000,000.00 as moral damages, P500,000.00 as exemplary damages and P250,000.00 as attorneys fees.7

CAI interposed the following defenses: (a) Spouses Viloria have no right to ask for a refund as the subject tickets are nonrefundable; (b) Fernando cannot insist on using the ticket in Lourdes name for the purchase of a round trip ticket to Los Angeles since the same is non-transferable; (c) as Mager is not a CAI employee, CAI is not liable for any of her acts; (d) CAI, its employees and agents did not act in bad faith as to entitle Spouses Viloria to moral and exemplary damages and attorneys fees. CAI also invoked the following clause printed on the subject tickets:

3. To the extent not in conflict with the foregoing carriage and other services performed by each carrier are subject to: (i) provisions contained in this ticket, (ii) applicable tariffs, (iii) carriers conditions of carriage and related regulations which are made part hereof (and are available on application at the offices of carrier), except in transportation between a place in the United States or Canada and any place outside thereof to which tariffs in force in those countries apply.8

According to CAI, one of the conditions attached to their contract of carriage is the non-transferability and nonrefundability of the subject tickets.

The RTCs Ruling

Following a full-blown trial, the RTC rendered its April 3, 2006 Decision, holding that Spouses Viloria are entitled to a refund in view of Magers misrepresentation in obtaining their consent in the purchase of the subject tickets.9 The relevant portion of the April 3, 2006 Decision states:

Continental Airlines agent Ms. Mager was in bad faith when she was less candid and diligent in presenting to plaintiffs spouses their booking options. Plaintiff Fernando clearly wanted to travel via AMTRAK, but defendants agent misled him into purchasing Continental Airlines tickets instead on the fraudulent misrepresentation that Amtrak was fully booked. In fact, defendant Airline did not specifically denied (sic) this allegation.

Plainly, plaintiffs spouses, particularly plaintiff Fernando, were tricked into buying Continental Airline tickets on Ms. Magers misleading misrepresentations. Continental Airlines agent Ms. Mager further relied on and exploited plaintiff Fernandos need and told him that they must book a flight immediately or risk not being able to travel at all on the couples preferred date. Unfortunately, plaintiffs spouses fell prey to the airlines and its agents unethical tactics for baiting trusting customers.10

Citing Articles 1868 and 1869 of the Civil Code, the RTC ruled that Mager is CAIs agent, hence, bound by her bad faith and misrepresentation. As far as the RTC is concerned, there is no issue as to whether Mager was CAIs agent in view of CAIs implied recognition of her status as such in its March 24, 1998 letter.

The act of a travel agent or agency being involved here, the following are the pertinent New Civil Code provisions on agency:

Art. 1868. By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter.

Art. 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of action, or his failure to repudiate the agency, knowing that another person is acting on his behalf without authority.

Agency may be oral, unless the law requires a specific form.

As its very name implies, a travel agency binds itself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. This court takes judicial notice of the common services rendered by travel agencies that represent themselves as such, specifically the reservation and booking of local and foreign tours as well as the issuance of airline tickets for a commission or fee.

The services rendered by Ms. Mager of Holiday Travel agency to the plaintiff spouses on July 21, 1997 were no different from those offered in any other travel agency. Defendant airline impliedly if not expressly acknowledged its principalagent relationship with Ms. Mager by its offer in the letter dated March 24, 1998 an obvious attempt to assuage plaintiffs spouses hurt feelings.11

Furthermore, the RTC ruled that CAI acted in bad faith in reneging on its undertaking to replace the subject tickets within two (2) years from their date of issue when it charged Fernando with the amount of US$1,867.40 for a round trip ticket to Los Angeles and when it refused to allow Fernando to use Lourdes ticket. Specifically:

Tickets may be reissued for up to two years from the original date of issue. When defendant airline still charged plaintiffs spouses US$1,867.40 or more than double the then going rate of US$856.00 for the unused tickets when the same were presented within two (2) years from date of issue, defendant airline exhibited callous treatment of passengers.12

The Appellate Courts Ruling

On appeal, the CA reversed the RTCs April 3, 2006 Decision, holding that CAI cannot be held liable for Magers act in the absence of any proof that a principal-agent relationship existed between CAI and Holiday Travel. According to the CA, Spouses Viloria, who have the burden of proof to establish the fact of agency, failed to present evidence demonstrating

that Holiday Travel is CAIs agent. Furthermore, contrary to Spouses Vilorias claim, the contractual relationship between Holiday Travel and CAI is not an agency but that of a sale.

Plaintiffs-appellees assert that Mager was a sub-agent of Holiday Travel who was in turn a ticketing agent of Holiday Travel who was in turn a ticketing agent of Continental Airlines. Proceeding from this premise, they contend that Continental Airlines should be held liable for the acts of Mager. The trial court held the same view.

We do not agree. By the contract of agency, a person binds him/herself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. The elements of agency are: (1) consent, express or implied, of the parties to establish the relationship; (2) the object is the execution of a juridical act in relation to a third person; (3) the agent acts as a representative and not for him/herself; and (4) the agent acts within the scope of his/her authority. As the basis of agency is representation, there must be, on the part of the principal, an actual intention to appoint, an intention naturally inferable from the principals words or actions. In the same manner, there must be an intention on the part of the agent to accept the appointment and act upon it. Absent such mutual intent, there is generally no agency. It is likewise a settled rule that persons dealing with an assumed agent are bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it. Agency is never presumed, neither is it created by the mere use of the word in a trade or business name. We have perused the evidence and documents so far presented. We find nothing except bare allegations of plaintiffs-appellees that Mager/Holiday Travel was acting in behalf of Continental Airlines. From all sides of legal prism, the transaction in issue was simply a contract of sale, wherein Holiday Travel buys airline tickets from Continental Airlines and then, through its employees, Mager included, sells it at a premium to clients.13

The CA also ruled that refund is not available to Spouses Viloria as the word non-refundable was clearly printed on the face of the subject tickets, which constitute their contract with CAI. Therefore, the grant of their prayer for a refund would violate the proscription against impairment of contracts.

Finally, the CA held that CAI did not act in bad faith when they charged Spouses Viloria with the higher amount of US$1,867.40 for a round trip ticket to Los Angeles. According to the CA, there is no compulsion for CAI to charge the lower amount of US$856.00, which Spouses Viloria claim to be the fee charged by other airlines. The matter of fixing the prices for its services is CAIs prerogative, which Spouses Viloria cannot intervene. In particular:

It is within the respective rights of persons owning and/or operating business entities to peg the premium of the services and items which they provide at a price which they deem fit, no matter how expensive or exhorbitant said price may seem vis--vis those of the competing companies. The Spouses Viloria may not intervene with the business judgment of Continental Airlines.14

The Petitioners Case

In this Petition, this Court is being asked to review the findings and conclusions of the CA, as the latters reversal of the RTCs April 3, 2006 Decision allegedly lacks factual and legal bases. Spouses Viloria claim that CAI acted in bad faith when it required them to pay a higher amount for a round trip ticket to Los Angeles considering CAIs undertaking to re-issue new tickets to them within the period stated in their March 24, 1998 letter. CAI likewise acted in bad faith when it disallowed Fernando to use Lourdes ticket to purchase a round trip to Los Angeles given that there is nothing in Lourdes ticket indicating that it is non-transferable. As a common carrier, it is CAIs duty to inform its passengers of the terms and conditions of their contract and passengers cannot be bound by such terms and conditions which they are not made aware of. Also, the subject contract of carriage is a contract of adhesion; therefore, any ambiguities should be construed against CAI. Notably, the petitioners are no longer questioning the validity of the subject contracts and limited its claim for a refund on CAIs alleged breach of its undertaking in its March 24, 1998 letter.

The Respondents Case

In its Comment, CAI claimed that Spouses Vilorias allegation of bad faith is negated by its willingness to issue new tickets to them and to credit the value of the subject tickets against the value of the new ticket Fernando requested. CAI argued that Spouses Vilorias sole basis to claim that the price at which CAI was willing to issue the new tickets is unconscionable is a piece of hearsay evidence an advertisement appearing on a newspaper stating that airfares from Manila to Los Angeles or San Francisco cost US$818.00.15 Also, the advertisement pertains to airfares in September 2000 and not to airfares prevailing in June 1999, the time when Fernando asked CAI to apply the value of the subject tickets for the purchase of a new one.16 CAI likewise argued that it did not undertake to protect Spouses Viloria from any changes or fluctuations in the prices of airline tickets and its only obligation was to apply the value of the subject tickets to the purchase of the newly issued tickets.

With respect to Spouses Vilorias claim that they are not aware of CAIs restrictions on the subject tickets and that the terms and conditions that are printed on them are ambiguous, CAI denies any ambiguity and alleged that its representative informed Fernando that the subject tickets are non-transferable when he applied for the issuance of a new ticket. On the other hand, the word non-refundable clearly appears on the face of the subject tickets.

CAI also denies that it is bound by the acts of Holiday Travel and Mager and that no principal-agency relationship exists between them. As an independent contractor, Holiday Travel was without capacity to bind CAI.

Issues

To determine the propriety of disturbing the CAs January 30, 2009 Decision and whether Spouses Viloria have the right to the reliefs they prayed for, this Court deems it necessary to resolve the following issues:

a. Does a principal-agent relationship exist between CAI and Holiday Travel?

b. Assuming that an agency relationship exists between CAI and Holiday Travel, is CAI bound by the acts of Holiday Travels agents and employees such as Mager?

c. Assuming that CAI is bound by the acts of Holiday Travels agents and employees, can the representation of Mager as to unavailability of seats at Amtrak be considered fraudulent as to vitiate the consent of Spouse Viloria in the purchase of the subject tickets?

d. Is CAI justified in insisting that the subject tickets are non-transferable and non-refundable?

e. Is CAI justified in pegging a different price for the round trip ticket to Los Angeles requested by Fernando?

f. Alternatively, did CAI act in bad faith or renege its obligation to Spouses Viloria to apply the value of the subject tickets in the purchase of new ones when it refused to allow Fernando to use Lourdes ticket and in charging a higher price for a round trip ticket to Los Angeles?

This Courts Ruling

I. A principal-agent relationship exists between CAI and Holiday Travel.

With respect to the first issue, which is a question of fact that would require this Court to review and re-examine the evidence presented by the parties below, this Court takes exception to the general rule that the CAs findings of fact are conclusive upon Us and our jurisdiction is limited to the review of questions of law. It is well-settled to the point of being axiomatic that this Court is authorized to resolve questions of fact if confronted with contrasting factual findings of the trial court and appellate court and if the findings of the CA are contradicted by the evidence on record.17

According to the CA, agency is never presumed and that he who alleges that it exists has the burden of proof. Spouses Viloria, on whose shoulders such burden rests, presented evidence that fell short of indubitably demonstrating the existence of such agency.

We disagree. The CA failed to consider undisputed facts, discrediting CAIs denial that Holiday Travel is one of its agents. Furthermore, in erroneously characterizing the contractual relationship between CAI and Holiday Travel as a contract of sale, the CA failed to apply the fundamental civil law principles governing agency and differentiating it from sale.

In Rallos v. Felix Go Chan & Sons Realty Corporation,18 this Court explained the nature of an agency and spelled out the essential elements thereof:

Out of the above given principles, sprung the creation and acceptance of the relationship of agency whereby one party, called the principal (mandante), authorizes another, called the agent (mandatario), to act for and in his behalf in transactions with third persons. The essential elements of agency are: (1) there is consent, express or implied of the parties to establish the relationship; (2) the object is the execution of a juridical act in relation to a third person; (3) the agent acts as a representative and not for himself, and (4) the agent acts within the scope of his authority.

Agency is basically personal, representative, and derivative in nature. The authority of the agent to act emanates from the powers granted to him by his principal; his act is the act of the principal if done within the scope of the authority. Qui facit per alium facit se. He who acts through another acts himself.19

Contrary to the findings of the CA, all the elements of an agency exist in this case. The first and second elements are present as CAI does not deny that it concluded an agreement with Holiday Travel, whereby Holiday Travel would enter into contracts of carriage with third persons on CAIs behalf. The third element is also present as it is undisputed that Holiday Travel merely acted in a representative capacity and it is CAI and not Holiday Travel who is bound by the contracts of carriage entered into by Holiday Travel on its behalf. The fourth element is also present considering that CAI has not made any allegation that Holiday Travel exceeded the authority that was granted to it. In fact, CAI consistently maintains the validity of the contracts of carriage that Holiday Travel executed with Spouses Viloria and that Mager was not guilty of any fraudulent misrepresentation. That CAI admits the authority of Holiday Travel to enter into contracts of carriage on its behalf is easily discernible from its February 24, 1998 and March 24, 1998 letters, where it impliedly recognized the validity of the contracts entered into by Holiday Travel with Spouses Viloria. When Fernando informed CAI that it was Holiday Travel who issued to them the subject tickets, CAI did not deny that Holiday Travel is its authorized agent.

Prior to Spouses Vilorias filing of a complaint against it, CAI never refuted that it gave Holiday Travel the power and authority to conclude contracts of carriage on its behalf. As clearly extant from the records, CAI recognized the validity of the contracts of carriage that Holiday Travel entered into with Spouses Viloria and considered itself bound with Spouses Viloria by the terms and conditions thereof; and this constitutes an unequivocal testament to Holiday Travels authority to act as its agent. This Court cannot therefore allow CAI to take an altogether different position and deny that Holiday Travel is its agent without condoning or giving imprimatur to whatever damage or prejudice that may result from such denial or retraction to Spouses Viloria, who relied on good faith on CAIs acts in recognition of Holiday Travels authority. Estoppel is primarily based on the doctrine of good faith and the avoidance of harm that will befall an innocent party due to its injurious reliance, the failure to apply it in this case would result in gross travesty of justice.20 Estoppel bars CAI from making such denial.

As categorically provided under Article 1869 of the Civil Code, *a+gency may be express, or implied from the acts of the principal, from his silence or lack of action, or his failure to repudiate the agency, knowing that another person is acting on his behalf without authority.

Considering that the fundamental hallmarks of an agency are present, this Court finds it rather peculiar that the CA had branded the contractual relationship between CAI and Holiday Travel as one of sale. The distinctions between a sale and an agency are not difficult to discern and this Court, as early as 1970, had already formulated the guidelines that would aid in differentiating the two (2) contracts. In Commissioner of Internal Revenue v. Constantino,21 this Court extrapolated that the primordial differentiating consideration between the two (2) contracts is the transfer of ownership or title over the property subject of the contract. In an agency, the principal retains ownership and control over the property and the agent merely acts on the principals behalf and under his instructions in furtherance of the objectives for which the agency was established. On the other hand, the contract is clearly a sale if the parties intended that the delivery of the property will effect a relinquishment of title, control and ownership in such a way that the recipient may do with the property as he pleases.

Since the company retained ownership of the goods, even as it delivered possession unto the dealer for resale to customers, the price and terms of which were subject to the companys control, the relationship between the company and the dealer is one of agency, tested under the following criterion:

The difficulty in distinguishing between contracts of sale and the creation of an agency to sell has led to the establishment of rules by the application of which this difficulty may be solved. The decisions say the transfer of title or agreement to transfer it for a price paid or promised is the essence of sale. If such transfer puts the transferee in the attitude or position of an owner and makes him liable to the transferor as a debtor for the agreed price, and not merely as an agent who must account for the proceeds of a resale, the transaction is a sale; while the essence of an agency to sell is the delivery to an agent, not as his property, but as the property of the principal, who remains the owner and has the right to control sales, fix the price, and terms, demand and receive the proceeds less the agents commission upon sales made. 1 Mechem on Sales, Sec. 43; 1 Mechem on Agency, Sec. 48; Williston on Sales, 1; Tiedeman on Sales, 1. (Salisbury v. Brooks, 94 SE 117, 118-119)22

As to how the CA have arrived at the conclusion that the contract between CAI and Holiday Travel is a sale is certainly confounding, considering that CAI is the one bound by the contracts of carriage embodied by the tickets being sold by Holiday Travel on its behalf. It is undisputed that CAI and not Holiday Travel who is the party to the contracts of carriage executed by Holiday Travel with third persons who desire to travel via Continental Airlines, and this conclusively indicates the existence of a principal-agent relationship. That the principal is bound by all the obligations contracted by the agent within the scope of the authority granted to him is clearly provided under Article 1910 of the Civil Code and this constitutes the very notion of agency.

II. In actions based on quasi-delict, a principal can only be held liable for the tort committed by its agents employees if it has been established by preponderance of evidence that the principal was also at fault or negligent or that the principal exercise control and supervision over them.

Considering that Holiday Travel is CAIs agent, does it necessarily follow that CAI is liable for the fault or negligence of Holiday Travels employees? Citing China Air Lines, Ltd. v. Court of Appeals, et al.,23 CAI argues that it cannot be held liable for the actions of the employee of its ticketing agent in the absence of an employer-employee relationship.

An examination of this Courts pronouncements in China Air Lines will reveal that an airline company is not completely exonerated from any liability for the tort committed by its agents employees. A prior determination of the nature of the passengers cause of action is necessary. If the passengers cause of action against the airline company is premised on culpa aquiliana or quasi-delict for a tort committed by the employee of the airline companys agent, there must be an independent showing that the airline company was at fault or negligent or has contributed to the negligence or tortuous conduct committed by the employee of its agent. The mere fact that the employee of the airline companys agent has committed a tort is not sufficient to hold the airline company liable. There is no vinculum juris between the airline company and its agents employees and the contractual relationship between the airline company and its agent does not operate to create a juridical tie between the airline company and its agents employees. Article 2180 of the Civil Code does not make the principal vicariously liable for the tort committed by its agents employees and the principalagency relationship per se does not make the principal a party to such tort; hence, the need to prove the principals own fault or negligence.

On the other hand, if the passengers cause of action for damages against the airline company is based on contractual breach or culpa contractual, it is not necessary that there be evidence of the airline companys fault or negligence. As this Court previously stated in China Air Lines and reiterated in Air France vs. Gillego,24 in an action based on a breach of contract of carriage, the aggrieved party does not have to prove that the common carrier was at fault or was negligent. All that he has to prove is the existence of the contract and the fact of its non-performance by the carrier.

Spouses Vilorias cause of action on the basis of Magers alleged fraudulent misrepresentation is clearly one of tort or quasi-delict, there being no pre-existing contractual relationship between them. Therefore, it was incumbent upon Spouses Viloria to prove that CAI was equally at fault.

However, the records are devoid of any evidence by which CAIs alleged liability can be substantiated. Apart from their claim that CAI must be held liable for Magers supposed fraud because Holiday Travel is CAIs agent, Spouses Viloria did not present evidence that CAI was a party or had contributed to Magers complained act either by instructing or authorizing Holiday Travel and Mager to issue the said misrepresentation.

It may seem unjust at first glance that CAI would consider Spouses Viloria bound by the terms and conditions of the subject contracts, which Mager entered into with them on CAIs behalf, in order to deny Spouses Vilorias request for a

refund or Fernandos use of Lourdes ticket for the re-issuance of a new one, and simultaneously claim that they are not bound by Magers supposed misrepresentation for purposes of avoiding Spouses Vilorias claim for damages and maintaining the validity of the subject contracts. It may likewise be argued that CAI cannot deny liability as it benefited from Magers acts, which were performed in compliance with Holiday Travels obligations as CAIs agent.

However, a persons vicarious liability is anchored on his possession of control, whether absolute or limited, on the tortfeasor. Without such control, there is nothing which could justify extending the liability to a person other than the one who committed the tort. As this Court explained in Cangco v. Manila Railroad Co.:25

With respect to extra-contractual obligation arising from negligence, whether of act or omission, it is competent for the legislature to elect and our Legislature has so elected to limit such liability to cases in which the person upon whom such an obligation is imposed is morally culpable or, on the contrary, for reasons of public policy, to extend that liability, without regard to the lack of moral culpability, so as to include responsibility for the negligence of those persons whose acts or omissions are imputable, by a legal fiction, to others who are in a position to exercise an absolute or limited control over them. The legislature which adopted our Civil Code has elected to limit extra-contractual liability with certain well-defined exceptions to cases in which moral culpability can be directly imputed to the persons to be charged. This moral responsibility may consist in having failed to exercise due care in ones own acts, or in having failed to exercise due care in the selection and control of ones agent or servants, or in the control of persons who, by reasons of their status, occupy a position of dependency with respect to the person made liable for their conduct.26 (emphasis supplied)

It is incumbent upon Spouses Viloria to prove that CAI exercised control or supervision over Mager by preponderant evidence. The existence of control or supervision cannot be presumed and CAI is under no obligation to prove its denial or nugatory assertion. Citing Belen v. Belen,27 this Court ruled in Jayme v. Apostol,28 that:

In Belen v. Belen, this Court ruled that it was enough for defendant to deny an alleged employment relationship. The defendant is under no obligation to prove the negative averment. This Court said:

It is an old and well-settled rule of the courts that the burden of proving the action is upon the plaintiff, and that if he fails satisfactorily to show the facts upon which he bases his claim, the defendant is under no obligation to prove his exceptions. This [rule] is in harmony with the provisions of Section 297 of the Code of Civil Procedure holding that each party must prove his own affirmative allegations, etc.29 (citations omitted)

Therefore, without a modicum of evidence that CAI exercised control over Holiday Travels employees or that CAI was equally at fault, no liability can be imposed on CAI for Magers supposed misrepresentation.

III. Even on the assumption that CAI may be held liable for the acts of Mager, still, Spouses Viloria are not entitled to a refund. Magers statement cannot be considered a causal fraud that would justify the annulment of the subject contracts that would oblige CAI to indemnify Spouses Viloria and return the money they paid for the subject tickets.

Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent of the contracting parties was obtained through fraud, the contract is considered voidable and may be annulled within four (4) years from the time of the discovery of the fraud. Once a contract is annulled, the parties are obliged under Article 1398 of the same Code to restore to each other the things subject matter of the contract, including their fruits and interest.

On the basis of the foregoing and given the allegation of Spouses Viloria that Fernandos consent to the subject contracts was supposedly secured by Mager through fraudulent means, it is plainly apparent that their demand for a refund is tantamount to seeking for an annulment of the subject contracts on the ground of vitiated consent.

Whether the subject contracts are annullable, this Court is required to determine whether Magers alleged misrepresentation constitutes causal fraud. Similar to the dispute on the existence of an agency, whether fraud attended the execution of a contract is factual in nature and this Court, as discussed above, may scrutinize the records if the findings of the CA are contrary to those of the RTC.

Under Article 1338 of the Civil Code, there is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. 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.30 In Samson v. Court of Appeals,31 causal fraud was defined as a deception employed by one party prior to or simultaneous to the contract in order to secure the consent of the other.32

Also, fraud must be serious and its existence must be established by clear and convincing evidence. As ruled by this Court in Sierra v. Hon. Court of Appeals, et al.,33 mere preponderance of evidence is not adequate:

Fraud must also be discounted, for according to the Civil Code:

Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which without them, he would not have agreed to.

Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties.

To quote Tolentino again, the misrepresentation constituting the fraud must be established by full, clear, and convincing evidence, and not merely by a preponderance thereof. The deceit must be serious. The fraud is serious when it is sufficient to impress, or to lead an ordinarily prudent person into error; that which cannot deceive a prudent person cannot be a ground for nullity. The circumstances of each case should be considered, taking into account the personal conditions of the victim.34

After meticulously poring over the records, this Court finds that the fraud alleged by Spouses Viloria has not been satisfactorily established as causal in nature to warrant the annulment of the subject contracts. In fact, Spouses Viloria failed to prove by clear and convincing evidence that Magers statement was fraudulent. Specifically, Spouses Viloria failed to prove that (a) there were indeed available seats at Amtrak for a trip to New Jersey on August 13, 1997 at the time they spoke with Mager on July 21, 1997; (b) Mager knew about this; and (c) that she purposely informed them otherwise.

This Court finds the only proof of Magers alleged fraud, which is Fernandos testimony that an Amtrak had assured him of the perennial availability of seats at Amtrak, to be wanting. As CAI correctly pointed out and as Fernando admitted, it was possible that during the intervening period of three (3) weeks from the time Fernando purchased the subject tickets to the time he talked to said Amtrak employee, other passengers may have cancelled their bookings and reservations with Amtrak, making it possible for Amtrak to accommodate them. Indeed, the existence of fraud cannot be proved by mere speculations and conjectures. Fraud is never lightly inferred; it is good faith that is. Under the Rules of Court, it is presumed that a person is innocent of crime or wrong and that private transactions have been fair and regular.35 Spouses Viloria failed to overcome this presumption.

IV. Assuming the contrary, Spouses Viloria are nevertheless deemed to have ratified the subject contracts.

Even assuming that Magers representation is causal fraud, the subject contracts have been impliedly ratified when Spouses Viloria decided to exercise their right to use the subject tickets for the purchase of new ones. Under Article 1392 of the Civil Code, ratification extinguishes the action to annul a voidable contract.

Ratification of a voidable contract is defined under Article 1393 of the Civil Code as follows:

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right.

Implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom.36

Simultaneous with their demand for a refund on the ground of Fernandos vitiated consent, Spouses Viloria likewise asked for a refund based on CAIs supposed bad faith in reneging on its undertaking to replace the subject tickets with a round trip ticket from Manila to Los Angeles.

In doing so, Spouses Viloria are actually asking for a rescission of the subject contracts based on contractual breach. Resolution, the action referred to in Article 1191, is based on the defendants breach of faith, a violation of the reciprocity between the parties37 and in Solar Harvest, Inc. v. Davao Corrugated Carton Corporation,38 this Court ruled that a claim for a reimbursement in view of the other partys failure to comply with his obligations under the contract is one for rescission or resolution.

However, annulment under Article 1390 of the Civil Code and rescission under Article 1191 are two (2) inconsistent remedies. In resolution, all the elements to make the contract valid are present; in annulment, one of the essential elements to a formation of a contract, which is consent, is absent. In resolution, the defect is in the consummation stage of the contract when the parties are in the process of performing their respective obligations; in annulment, the defect is already present at the time of the negotiation and perfection stages of the contract. Accordingly, by pursuing the remedy of rescission under Article 1191, the Vilorias had impliedly admitted the validity of the subject contracts, forfeiting their right to demand their annulment. A party cannot rely on the contract and claim rights or obligations under it and at the same time impugn its existence or validity. Indeed, litigants are enjoined from taking inconsistent positions.39

V. Contracts cannot be rescinded for a slight or casual breach.

CAI cannot insist on the non-transferability of the subject tickets.

Considering that the subject contracts are not annullable on the ground of vitiated consent, the next question is: Do Spouses Viloria have the right to rescind the contract on the ground of CAIs supposed breach of its undertaking to issue new tickets upon surrender of the subject tickets?

Article 1191, as presently worded, states:

The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfilment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

According to Spouses Viloria, CAI acted in bad faith and breached the subject contracts when it refused to apply the value of Lourdes ticket for Fernandos purchase of a round trip ticket to Los Angeles and in requiring him to pay an amount higher than the price fixed by other airline companies.

In its March 24, 1998 letter, CAI stated that non-refundable tickets may be used as a form of payment toward the purchase of another Continental ticket for $75.00, per ticket, reissue fee ($50.00, per ticket, for tickets purchased prior to October 30, 1997).

Clearly, there is nothing in the above-quoted section of CAIs letter from which the restriction on the non-transferability of the subject tickets can be inferred. In fact, the words used by CAI in its letter supports the position of Spouses Viloria, that each of them can use the ticket under their name for the purchase of new tickets whether for themselves or for some other person.

Moreover, as CAI admitted, it was only when Fernando had expressed his interest to use the subject tickets for the purchase of a round trip ticket between Manila and Los Angeles that he was informed that he cannot use the ticket in Lourdes name as payment.

Contrary to CAIs claim, that the subject tickets are non-transferable cannot be implied from a plain reading of the provision printed on the subject tickets stating that *t+o the extent not in conflict with the foregoing carriage and other services performed by each carrier are subject to: (a) provisions contained in this ticket, x x x (iii) carriers conditions of carriage and related regulations which are made part hereof (and are available on application at the offices of carrier) x x x. As a common carrier whose business is imbued with public interest, the exercise of extraordinary diligence requires CAI to inform Spouses Viloria, or all of its passengers for that matter, of all the terms and conditions governing their contract of carriage. CAI is proscribed from taking advantage of any ambiguity in the contract of carriage to impute knowledge on its passengers of and demand compliance with a certain condition or undertaking that is not clearly stipulated. Since the prohibition on transferability is not written on the face of the subject tickets and CAI failed to inform Spouses Viloria thereof, CAI cannot refuse to apply the value of Lourdes ticket as payment for Fernandos purchase of a new ticket.

CAIs refusal to accept Lourdes ticket for the purchase of a new ticket for Fernando is only a casual breach.

Nonetheless, the right to rescind a contract for non-performance of its stipulations is not absolute. 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 violations as would defeat the very object of the parties in making the agreement.40 Whether a breach is substantial is largely determined by the attendant circumstances.41

While CAIs refusal to allow Fernando to use the value of Lourdes ticket as payment for the purchase of a new ticket is unjustified as the non-transferability of the subject tickets was not clearly stipulated, it cannot, however be considered substantial. The endorsability of the subject tickets is not an essential part of the underlying contracts and CAIs failure to comply is not essential to its fulfillment of its undertaking to issue new tickets upon Spouses Vilorias surrender of the subject tickets. This Court takes note of CAIs willingness to perform its principal obligation and this is to apply the price of the ticket in Fernandos name to the price of the round trip ticket between Manila and Los Angeles. CAI was likewise willing to accept the ticket in Lourdes name as full or partial payment as the case may be for the purchase of any ticket, albeit under her name and for her exclusive use. In other words, CAIs willingness to comply with its undertaking under its March 24, 1998 cannot be doubted, albeit tainted with its erroneous insistence that Lourdes ticket is nontransferable.

Moreover, Spouses Vilorias demand for rescission cannot prosper as CAI cannot be solely faulted for the fact that their agreement failed to consummate and no new ticket was issued to Fernando. Spouses Viloria have no right to insist that a single round trip ticket between Manila and Los Angeles should be priced at around $856.00 and refuse to pay the difference between the price of the subject tickets and the amount fixed by CAI. The petitioners failed to allege, much less prove, that CAI had obliged itself to issue to them tickets for any flight anywhere in the world upon their surrender of the subject tickets. In its March 24, 1998 letter, it was clearly stated that *n+on-refundable tickets may be used as a form of payment toward the purchase of another Continental ticket42 and there is nothing in it suggesting that CAI had obliged itself to protect Spouses Viloria from any fluctuation in the prices of tickets or that the surrender of the subject tickets will be considered as full payment for any ticket that the petitioners intend to buy regardless of actual price and destination. The CA was correct in holding that it is CAIs right and exclusive prerogative to fix the prices for its services and it may not be compelled to observe and maintain the prices of other airline companies.43

The conflict as to the endorsability of the subject tickets is an altogether different matter, which does not preclude CAI from fixing the price of a round trip ticket between Manila and Los Angeles in an amount it deems proper and which does not provide Spouses Viloria an excuse not to pay such price, albeit subject to a reduction coming from the value of the subject tickets. It cannot be denied that Spouses Viloria had the concomitant obligation to pay whatever is not covered by the value of the subject tickets whether or not the subject tickets are transferable or not.

There is also no showing that Spouses Viloria were discriminated against in bad faith by being charged with a higher rate. The only evidence the petitioners presented to prove that the price of a round trip ticket between Manila and Los Angeles at that time was only $856.00 is a newspaper advertisement for another airline company, which is inadmissible for being hearsay evidence, twice removed. Newspaper clippings are hearsay if they were offered for the purpose of proving the truth of the matter alleged. As ruled in Feria v. Court of Appeals,:44

[N]ewspaper articles amount to hearsay evidence, twice removed and are therefore not only inadmissible but without any probative value at all whether objected to or not, unless offered for a purpose other than proving the truth of the matter asserted. In this case, the news article is admissible only as evidence that such publication does exist with the tenor of the news therein stated.45 (citations omitted)

The records of this case demonstrate that both parties were equally in default; hence, none of them can seek judicial redress for the cancellation or resolution of the subject contracts and they are therefore bound to their respective obligations thereunder. As the 1st sentence of Article 1192 provides:

Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. (emphasis supplied)

Therefore, CAIs liability for damages for its refusal to accept Lourdes ticket for the purchase of Fernandos round trip ticket is offset by Spouses Vilorias liability for their refusal to pay the amount, which is not covered by the subject tickets. Moreover, the contract between them remains, hence, CAI is duty bound to issue new tickets for a destination chosen by Spouses Viloria upon their surrender of the subject tickets and Spouses Viloria are obliged to pay whatever amount is not covered by the value of the subject tickets.

This Court made a similar ruling in Central Bank of the Philippines v. Court of Appeals.46 Thus:

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.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his overdue P17,000.00 debt. x x x.47

Another consideration that militates against the propriety of holding CAI liable for moral damages is the absence of a showing that the latter acted fraudulently and in bad faith. Article 2220 of the Civil Code requires evidence of bad faith and fraud and moral damages are generally not recoverable inculpa contractual except when bad faith had been proven.48 The award of exemplary damages is likewise not warranted. Apart from the requirement that the defendant acted in a wanton, oppressive and malevolent manner, the claimant must prove his entitlement to moral damages.49

WHEREFORE, premises considered, the instant Petition is DENIED.

SO ORDERED.