FRANKLIN G. GACAL and CORAZON M.

GACAL, the latter assisted

by
her
husband,
FRANKLIN
G.
GACAL,
petitioners,
vs.
PHILIPPINE AIR LINES, INC., and THE HONORABLE PEDRO SAMSON
C. ANIMAS, in his capacity as PRESIDING JUDGE of the COURT OF
FIRST INSTANCE OF SOUTH COTABATO, BRANCH I, respondents.
PARAS, J.:
This is a, petition for review on certiorari of the decision of the Court of
First Instance of South Cotabato, Branch 1, * promulgated on August 26,
1980 dismissing three (3) consolidated cases for damages: Civil Case No.
1701, Civil Case No. 1773 and Civil Case No. 1797 (Rollo, p. 35).
The facts, as found by respondent court, are as follows:
Plaintiffs Franklin G. Gacal and his wife, Corazon M. Gacal,
Bonifacio S. Anislag and his wife, Mansueta L. Anislag, and
the late Elma de Guzman, were then passengers boarding
defendant's BAC 1-11 at Davao Airport for a flight to
Manila, not knowing that on the same flight, Macalinog,
Taurac Pendatum known as Commander Zapata, Nasser
Omar, Liling Pusuan Radia, Dimantong Dimarosing and
Mike Randa, all of Marawi City and members of the Moro
National Liberation Front (MNLF), were their co-passengers,
three (3) armed with grenades, two (2) with .45 caliber
pistols, and one with a .22 caliber pistol. Ten (10) minutes
after take off at about 2:30 in the afternoon, the hijackers
brandishing their respective firearms announced the
hijacking of the aircraft and directed its pilot to fly to Libya.
With the pilot explaining to them especially to its leader,
Commander Zapata, of the inherent fuel limitations of the
plane and that they are not rated for international flights,
the hijackers directed the pilot to fly to Sabah. With the
same explanation, they relented and directed the aircraft
to land at Zamboanga Airport, Zamboanga City for
refueling. The aircraft landed at 3:00 o'clock in the
afternoon of May 21, 1976 at Zamboanga Airport. When
the plane began to taxi at the runway, it was met by two
armored cars of the military with machine guns pointed at
the plane, and it stopped there. The rebels thru its
commander demanded that a DC-aircraft take them to
Libya with the President of the defendant company as
hostage and that they be given $375,000 and six (6)
armalites, otherwise they will blow up the plane if their

demands will not be met by the government and Philippine

Air Lines. Meanwhile, the passengers were not served any
food nor water and it was only on May 23, a Sunday, at
about 1:00 o'clock in the afternoon that they were served
1/4 slice of a sandwich and 1/10 cup of PAL water. After
that, relatives of the hijackers were allowed to board the
plane but immediately after they alighted therefrom, an
armored car bumped the stairs. That commenced the
battle between the military and the hijackers which led
ultimately to the liberation of the surviving crew and the
passengers, with the final score of ten (10) passengers and
three (3) hijackers dead on the spot and three (3) hijackers
captured.
City Fiscal Franklin G. Gacal was unhurt. Mrs. Corazon M.
Gacal suffered injuries in the course of her jumping out of
the plane when it was peppered with bullets by the army
and after two (2) hand grenades exploded inside the plane.
She was hospitalized at General Santos Doctors Hospital,
General Santos City, for two (2) days, spending P245.60 for
hospital and medical expenses, Assistant City Fiscal
Bonifacio S. Anislag also escaped unhurt but Mrs. Anislag
suffered a fracture at the radial bone of her left elbow for
which she was hospitalized and operated on at the San
Pedro Hospital, Davao City, and therefore, at Davao
Regional Hospital, Davao City, spending P4,500.00. Elma
de Guzman died because of that battle. Hence, the action
of damages instituted by the plaintiffs demanding the
following damages, to wit:
Civil Case No. 1701
City Fiscal Franklin G. Gacal and Mrs.
Corazon M. Gacal actual damages:
P245.60 for hospital and medical expenses
of Mrs Gacal; P8,995.00 for their personal
belongings which were lost and not
recovered; P50,000.00 each for moral
damages; and P5,000.00 for attorney's
fees, apart from the prayer for an award of
exemplary damages (Record, pp. 4-6, Civil
Case No. 1701).
Civil Case No. 1773

Page | 1

xxx xxx xxx

force majeure and other causes beyond the control of the respondent
Airline.
Civil Case No. 1797

xxx xxx xxx

The trial court, on August 26, 1980, dismissed the complaints finding that
all the damages sustained in the premises were attributed to force
majeure.
On September 12, 1980 the spouses Franklin G. Gacal and Corazon M.
Gacal, plaintiffs in Civil Case No. 1701, filed a notice of appeal with the
lower court on pure questions of law (Rollo, p. 55) and the petition for
review on certiorari was filed with this Court on October 20, 1980 (Rollo, p.
30).
The Court gave due course to the petition (Rollo, p. 147) and both parties
filed their respective briefs but petitioner failed to file reply brief which was
noted by the Court in the resolution dated May 3, 1982 (Rollo, p. 183).
Petitioners alleged that the main cause of the unfortunate incident is the
gross, wanton and inexcusable negligence of respondent Airline personnel
in their failure to frisk the passengers adequately in order to discover
hidden weapons in the bodies of the six (6) hijackers. They claimed that
despite the prevalence of skyjacking, PAL did not use a metal detector
which is the most effective means of discovering potential skyjackers
among the passengers (Rollo, pp. 6-7).
Respondent Airline averred that in the performance of its obligation to
safely transport passengers as far as human care and foresight can
provide, it has exercised the utmost diligence of a very cautious person
with due regard to all circumstances, but the security checks and measures
and surveillance precautions in all flights, including the inspection of
baggages and cargo and frisking of passengers at the Davao Airport were
performed and rendered solely by military personnel who under
appropriate authority had assumed exclusive jurisdiction over the same in
all airports in the Philippines.
Similarly, the negotiations with the hijackers were a purely government
matter and a military operation, handled by and subject to the absolute
and exclusive jurisdiction of the military authorities. Hence, it concluded
that the accident that befell RP-C1161 was caused by fortuitous event,

The determinative issue in this case is whether or not hijacking or air

piracy during martial law and under the circumstances obtaining herein, is
a caso fortuito or force majeure which would exempt an aircraft from
payment of damages to its passengers whose lives were put in jeopardy
and whose personal belongings were lost during the incident.
Under the Civil Code, common carriers are required to exercise
extraordinary diligence in their vigilance over the goods and for the safety
of passengers transported by them, according to all the circumstances of
each case (Article 1733). They are presumed at fault or to have acted
negligently whenever a passenger dies or is injured (Philippine Airlines, Inc.
v. National Labor Relations Commission, 124 SCRA 583 [1983]) or for the
loss, destruction or deterioration of goods in cases other than those
enumerated in Article 1734 of the Civil Code (Eastern Shipping Lines, Inc.
v. Intermediate Appellate Court, 150 SCRA 463 [1987]).
The source of a common carrier's legal liability is the contract of carriage,
and by entering into said contract, it binds itself to carry the passengers
safely as far as human care and foresight can provide. There is breach of
this obligation if it fails to exert extraordinary diligence according to all the
circumstances of the case in exercise of the utmost diligence of a very
cautious person (Isaac v. Ammen Transportation Co., 101 Phil. 1046 [1957];
Juntilla v. Fontanar, 136 SCRA 624 [1985]).
It is the duty of a common carrier to overcome the presumption of
negligence (Philippine National Railways v. Court of Appeals, 139 SCRA 87
[1985]) and it must be shown that the carrier had observed the required
extraordinary diligence of a very cautious person as far as human care and
foresight can provide or that the accident was caused by a fortuitous event
(Estrada v. Consolacion, 71 SCRA 523 [1976]). Thus, as ruled by this Court,
no person shall be responsible for those "events which could not be
foreseen or which though foreseen were inevitable. (Article 1174, Civil
Code). The term is synonymous with caso fortuito (Lasam v. Smith, 45 Phil.
657 [1924]) which is of the same sense as "force majeure" (Words and
Phrases Permanent Edition, Vol. 17, p. 362).
In order to constitute a caso fortuito or force majeure that would exempt a
person from liability under Article 1174 of the Civil Code, it is necessary
that the following elements must concur: (a) the cause of the breach of the
obligation must be independent of the human will (the will of the debtor or
the obligor); (b) the event must be either unforeseeable or unavoidable; (c)

Page | 2

the event must be such as to render it impossible for the debtor to fulfill
his obligation in a normal manner; and (d) the debtor must be free from
any participation in, or aggravation of the injury to the creditor (Lasam v.
Smith, 45 Phil. 657 [1924]; Austria v. Court of Appeals, 39 SCRA 527
[1971]; Estrada v. Consolacion, supra; Vasquez v. Court of Appeals, 138
SCRA 553 [1985]; Juan F. Nakpil & Sons v. Court of Appeals, 144 SCRA 596
[1986]). Caso fortuito or force majeure, by definition, are extraordinary
events not foreseeable or avoidable, events that could not be foreseen, or
which, though foreseen, are inevitable. It is, therefore, not enough that the
event should not have been foreseen or anticipated, as is commonly
believed, but it must be one impossible to foresee or to avoid. The mere
difficulty to foresee the happening is not impossibility to foresee the same
(Republic v. Luzon Stevedoring Corporation, 21 SCRA 279 [1967]).
Applying the above guidelines to the case at bar, the failure to transport
petitioners safely from Davao to Manila was due to the skyjacking incident
staged by six (6) passengers of the same plane, all members of the Moro
National Liberation Front (MNLF), without any connection with private
respondent, hence, independent of the will of either the PAL or of its
passengers.
Under normal circumstances, PAL might have foreseen the skyjacking
incident which could have been avoided had there been a more thorough
frisking of passengers and inspection of baggages as authorized by R.A.
No. 6235. But the incident in question occurred during Martial Law where
there was a military take-over of airport security including the frisking of
passengers and the inspection of their luggage preparatory to boarding
domestic and international flights. In fact military take-over was
specifically announced on October 20, 1973 by General Jose L. Rancudo,
Commanding General of the Philippine Air Force in a letter to Brig. Gen.
Jesus Singson, then Director of the Civil Aeronautics Administration (Rollo,
pp. 71-72) later confirmed shortly before the hijacking incident of May 21,
1976 by Letter of Instruction No. 399 issued on April 28, 1976 (Rollo, p.
72).
Otherwise stated, these events rendered it impossible for PAL to perform
its obligations in a nominal manner and obviously it cannot be faulted with
negligence in the performance of duty taken over by the Armed Forces of
the Philippines to the exclusion of the former.
Finally, there is no dispute that the fourth element has also been satisfied.
Consequently the existence of force majeure has been established
exempting respondent PAL from the payment of damages to its passengers
who suffered death or injuries in their persons and for loss of their

baggages. PREMISES CONSIDERED, the petition is hereby DISMISSED for

lack of merit and the decision of the Court of First Instance of South
Cotabato, Branch I is hereby AFFIRMED.SO ORDERED.
G.R. No. L-82619 September 15, 1993
PHILIPPINE
AIRLINES,
INC.,
petitioner,
vs.
COURT OF APPEALS and PEDRO ZAPATOS, respondents.
Leighton R. Liazon for petitioner.
Balmes L. Ocampo for private respondent.

BELLOSILLO, J.:
This petition for review in certiorari seeks to annul and set aside the
decision of the then Intermediate Appellant Court, 1 now Court of Appeals,
dated 28 February 1985, in AC-G.R. CV No. 69327 ("Pedro Zapatos v.
Philippine Airlines, Inc.") affirming the decision of the then Court of first
Instance, now Regional Trial Court, declaring Philippine Airlines, Inc., liable
in damages for breach of contract.
On 25 November 1976, private respondent filed a complaint for damages
for breach of contract of carriage 2 against Philippine Airlines, Inc. (PAL),
before the then Court of First Instance, now Regional Trial Court, of Misamis
Occidental, at Ozamiz City. According to him, on 2 August 1976, he was
among the twenty-one (21) passengers of PAL Flight 477 that took off from
Cebu bound for Ozamiz City. The routing of this flight was Cebu-OzamizCotabato. While on flight and just about fifteen (15) minutes before landing
at Ozamiz City, the pilot received a radio message that the airport was
closed due to heavy rains and inclement weather and that he should
proceed to Cotabato City instead.
Upon arrival at Cotabato City, the PAL Station Agent informed the
passengers of their options to return to Cebu on flight 560 of the same day
and thence to Ozamiz City on 4 August 1975, or take the next flight to
Cebu the following day, or remain at Cotabato and take the next available
flight to Ozamiz City on 5 August 1975. 3 The Station Agent likewise
informed them that Flight 560 bound for Manila would make a stop-over at
Cebu to bring some of the diverted passengers; that there were only six (6)
seats available as there were already confirmed passengers for Manila;
and, that the basis for priority would be the check-in sequence at Cebu.

Page | 3

Private respondent chose to return to Cebu but was not accommodated

because he checked-in as passenger No. 9 on Flight 477. He insisted on
being given priority over the confirmed passengers in the accommodation,
but the Station Agent refused private respondent's demand explaining that
the latter's predicament was not due to PAL's own doing but to be a force
majeure. 4
Private respondent tried to stop the departure of Flight 560 as his personal
belongings, including a package containing a camera which a certain Miwa
from Japan asked him to deliver to Mrs. Fe Obid of Gingoog City, were still
on board. His plea fell on deaf ears. PAL then issued to private respondent
a free ticket to Iligan city, which the latter received under protest. 5 Private
respondent was left at the airport and could not even hitch a ride in the
Ford Fiera loaded with PAL personnel. 6 PAL neither provided private
respondent with transportation from the airport to the city proper nor food
and accommodation for his stay in Cotabato City.
The following day, private respondent purchased a PAL ticket to Iligan City.
He informed PAL personnel that he would not use the free ticket because
he was filing a case against PAL. 7 In Iligan City, private respondent hired a
car from the airport to Kolambugan, Lanao del Norte, reaching Ozamiz City
by crossing the bay in a launch. 8 His personal effects including the camera,
which were valued at P2,000.00 were no longer recovered.
On 13 January 1977, PAL filed its answer denying that it unjustifiably
refused to accommodate private respondent. 9 It alleged that there was
simply no more seat for private respondent on Flight 560 since there were
only six (6) seats available and the priority of accommodation on Flight 560
was based on the check-in sequence in Cebu; that the first six (6) priority
passengers on Flight 477 chose to take Flight 560; that its Station Agent
explained in a courteous and polite manner to all passengers the reason
for PAL's inability to transport all of them back to Cebu; that the stranded
passengers agreed to avail of the options and had their respective tickets
exchanged
for
their
onward
trips;
that
it
was
only the private respondent who insisted on being given priority in the
accommodation; that pieces of checked-in baggage and had carried items
of the Ozamiz City passengers were removed from the aircraft; that the
reason for their pilot's inability to land at Ozamis City airport was because
the runway was wet due to rains thus posing a threat to the safety of both
passengers and aircraft; and, that such reason of force majeure was a valid
justification for the pilot to bypass Ozamiz City and proceed directly to
Cotabato City.

(1) As actual damages, the sum of Two Hundred

Pesos (P200.00) representing plaintiff's expenses
for transportation, food and accommodation during
his stranded stay at Cotabato City; the sum of
Forty-Eight Pesos (P48.00) representing his flight
fare from Cotabato City to Iligan city; the sum of
Five Hundred Pesos (P500.00) representing
plaintiff's transportation expenses from Iligan City
to Ozamiz City; and the sum of Five Thousand
Pesos (P5,000.00) as loss of business opportunities
during his stranded stay in Cotabato City;
(2) As moral damages, the sum of Fifty Thousand
Pesos (P50,000.00) for plaintiff's hurt feelings,
serious anxiety, mental anguish and unkind and
discourteous treatment perpetrated by defendant's
employees during his stay as stranded passenger
in Cotabato City;
(3) As exemplary damages, the sum of Ten
Thousand Pesos (P10,000.00) to set a precedent to
the defendant airline that it shall provide means to
give comfort and convenience to stranded
passengers;
(4) The sum of Three Thousand Pesos (P3,000.00)
as attorney's fees;
(5) To pay the costs of this suit.
PAL appealed to the Court of Appeals which on 28 February 1985, finding
no reversible error, affirmed the judgment of the court a quo. 11
PAL then sought recourse to this Court by way of a petition for review on
certiorari 12 upon the following issues: (1) Can the Court of Appeals render
a decision finding petitioner (then defendant-appellant in the court below)
negligent and, consequently, liable for damages on a question of
substance which was neither raised on a question nor proved at the trial?
(2) Can the Court of Appeals award actual and moral damages contrary to
the evidence and established jurisprudence? 13

the dispositive

An assiduous examination of the records yields no valid reason for reversal

of the judgment on appeal; only a modification of its disposition.

WHEREFORE, judgment is hereby rendered in favor

of the plaintiff and against the defendant Philippine
AirLines, Inc. ordering the latter to pay:

In its petition, PAL vigorously maintains that private respondent's principal

cause of action was its alleged denial of private respondent's demand for
priority over the confirmed passengers on Flight 560. Likewise, PAL points
out that the complaint did not impute to PAL neglect in failing to attend to

On 4 June 1981, the trial court rendered its decision

portion of which states:

10

Page | 4

the needs of the diverted passengers; and, that the question of negligence
was not and never put in issue by the pleadings or proved at the trial.
Contrary to the above arguments, private respondent's amended
complaint touched on PAL's indifference and inattention to his
predicament. The pertinent portion of the amended complaint 14 reads:
10. That by virtue of the refusal of the defendant
through its agent in Cotabato to accommodate (sic)
and allow the plaintiff to take and board the plane
back to Cebu, and by accomodating (sic) and
allowing passengers from Cotabato for Cebu in his
stead and place, thus forcing the plaintiff against
his will, to be left and stranded in Cotabato,
exposed to the peril and danger of muslim rebels
plundering at the time, the plaintiff, as a
consequence, (have) suffered mental anguish,
mental torture, social humiliation, bismirched
reputation and wounded feeling, all amounting to a
conservative
amount
of
thirty
thousand
(P30,000.00) Pesos.
To substantiate this aspect of apathy, private respondent testified

15

A I did not even notice that I was I

think the last passenger or the last
person out of the PAL employees
and army personnel that were left
there. I did not notice that when I
was already outside of the building
after our conversation.
Q What did you do next?
A I banished (sic) because it seems
that there was a war not far from
the airport. The sound of guns and
the soldiers were plenty.
Q After that what did you do?
A I tried to look for a transportation
that could bring me down to the
City of Cotabato.
Q Were you able to go there?

A I was at about 7:00 o'clock in the

evening more or less and it was a
private jeep that I boarded. I was
even questioned why I and who am
(sic) I then. Then I explained my
side that I am (sic) stranded
passenger. Then they brought me
downtown at Cotabato.
Q During your conversation with
the Manager were you not offered
any vehicle or transportation to
Cotabato airport downtown?
A In fact I told him (Manager) now I
am by-passed passenger here
which is not my destination what
can you offer me. Then they
answered, "it is not my fault. Let us
forget that."
Q In other words when the Manager
told you that offer was there a
vehicle ready?
A Not yet. Not long after that the
Ford
Fiera
loaded
with
PAL
personnel was passing by going to
the City of Cotabato and I stopped
it to take me a ride because there
was
no
more
available
transportation but I was not
accommodated.
Significantly, PAL did not seem to mind the introduction of evidence which
focused on its alleged negligence in caring for its stranded passengers.
Well-settled is the rule in evidence that the protest or objection against the
admission of evidence should be presented at the time the evidence is
offered, and that the proper time to make protest or objection to the
admissibility of evidence is when the question is presented to the witness
or at the time the answer thereto is given. 16 There being no objection,
such evidence becomes property of the case and all the parties are
amenable to any favorable or unfavorable effects resulting from the
evidence. 17
PAL instead attempted to rebut the aforequoted testimony. In the process,
it failed to substantiate its counter allegation for want of concrete proof 18

Page | 5

Atty. Rubin
counsel:

O.

Rivera

PAL's

respondent himself is to be blamed for unreasonably refusing to use the

free ticket which PAL issued.

Q You said PAL refused to help you

when you were in Cotabato, is that
right?

The contract of air carriage is a peculiar one. Being imbued with public
interest, the law requires common carriers to carry the passengers safely
as far as human care and foresight can provide, using the utmost diligence
of very cautious persons, with due regard for all the circumstances. 20 In
Air France v. Carrascoso, 21 we held that

Private respondent:
A Yes.
Q Did you ask them to help you
regarding
any
offer
of
transportation or of any other
matter asked of them?
A Yes, he (PAL PERSONNEL) said
what is? It is not our fault.
Q Are you not aware that one
fellow passenger even claimed that
he was given Hotel accommodation
because they have no money?
xxx xxx xxx
A No, sir, that was never offered to
me. I said, I tried to stop them but
they were already riding that PAL
pick-up jeep, and I was not
accommodated.
Having joined in the issue over the alleged lack of care it exhibited towards
its passengers, PAL cannot now turn around and feign surprise at the
outcome of the case. When issues not raised by the pleadings are tried by
express or implied consent of the parties, they shall be treated in all
respects as if they had been raised in the pleadings. 19
With regard to the award of damages affirmed by the appellate court, PAL
argues that the same is unfounded. It asserts that it should not be charged
with the task of looking after the passengers' comfort and convenience
because the diversion of the flight was due to a fortuitous event, and that
if made liable, an added burden is given to PAL which is over and beyond
its duties under the contract of carriage. It submits that granting arguendo
that negligence exists, PAL cannot be liable in damages in the absence of
fraud or bad faith; that private respondent failed to apprise PAL of the
nature of his trip and possible business losses; and, that private

A contract to transport passengers is quite

different in kind and degree from any other
contractual relation. And this, because of the
relation which an air carrier sustains with the
public. Its business is mainly with the travelling
public. It invites people to avail of the comforts and
advantages it offers. The contract of air carriage,
therefore, generates a relation attended with a
public duty . . . . ( emphasis supplied).
The position taken by PAL in this case clearly illustrates its failure to grasp
the exacting standard required by law. Undisputably, PAL's diversion of its
flight due to inclement weather was a fortuitous event. Nonetheless, such
occurrence did not terminate PAL's contract with its passengers. Being in
the business of air carriage and the sole one to operate in the country, PAL
is deemed equipped to deal with situations as in the case at bar. What we
said in one case once again must be stressed, i.e., the relation of carrier
and passenger continues until the latter has been landed at the port of
destination and has left the carrier's premises. 22 Hence, PAL necessarily
would still have to exercise extraordinary diligence in safeguarding the
comfort, convenience and safety of its stranded passengers until they have
reached their final destination. On this score, PAL grossly failed considering
the then ongoing battle between government forces and Muslim rebels in
Cotabato City and the fact that the private respondent was a stranger to
the place. As the appellate court correctly ruled
While the failure of plaintiff in the first instance to
reach his destination at Ozamis City in accordance
with the contract of carriage was due to the closure
of the airport on account of rain and inclement
weather which was radioed to defendant 15
minutes before landing, it has not been disputed by
defendant airline that Ozamis City has no allweather airport and has to cancel its flight to
Ozamis City or by-pass it in the event of inclement
weather. Knowing this fact, it becomes the duty of
defendant to provide all means of comfort and
convenience to its passengers when they would
have to be left in a strange place in case of such
by-passing. The steps taken by defendant airline
company towards this end has not been put in

Page | 6

evidence, especially for those 7 others who were

not accommodated in the return trip to Cebu, only
6 of the 21 having been so accommodated. It
appears that plaintiff had to leave on the next flight
2 days later. If the cause of non-fulfillment of the
contract is due to a fortuitous event, it has to be
the sole and only cause (Art. 1755 CC., Art. 1733
C.C.) Since part of the failure to comply with the
obligation of common carrier to deliver its
passengers safely to their destination lay in the
defendant's failure to provide comfort and
convenience to its stranded passengers using
extra-ordinary diligence, the cause of nonfulfillment is not solely and exclusively due to
fortuitous event, but due to something which
defendant airline could have prevented, defendant
becomes liable to plaintiff. 23

Aforesaid Report being an entry in the course of business is prima facie

evidence of the facts therein stated. Private respondent, apart from his
testimony, did not offer any controverting evidence. If indeed PAL omitted
to give information about the options available to its diverted passengers,
it would have been deluged with complaints. But, only private respondent
complained
Atty. Rivera (for PAL)
Q I understand from you Mr.
Zapatos that at the time you were
waiting at Cotabato Airport for the
decision of PAL, you were not
informed of the decision until after
the airplane left is that correct?
A Yes.

While we find PAL remiss in its duty of extending utmost care to private
respondent while being stranded in Cotabato City, there is no sufficient
basis to conclude that PAL failed to inform him about his nonaccommodation on Flight 560, or that it was inattentive to his queries
relative thereto.

COURT:
Q What do you mean by "yes"? You
meant you were not informed?

On 3 August 1975, the Station Agent reported to his Branch Manager in

Cotabato City that

A Yes, I was not informed of their

decision, that they will only
accommodate few passengers.

3. Of the fifteen stranded passengers two pax

elected to take F478 on August 05, three pax opted
to take F442 August 03. The remaining ten (10)
including subject requested that they be instead
accommodated (sic) on F446 CBO-IGN the
following day where they intended to take the
surface transportation to OZC. Mr. Pedro Zapatos
had by then been very vocal and boiceterous (sic)
at the counter and we tactfully managed to steer
him inside the Station Agent's office. Mr. Pedro
Zapatos then adamantly insisted that all the
diverted passengers should have been given
priority over the originating passengers of F560
whether confirmed or otherwise. We explained our
policies and after awhile he seemed pacified and
thereafter took his ticket (in-lieued (sic) to CBOIGN, COCON basis), at the counter in the presence
of five other passengers who were waiting for their
tickets too. The rest of the diverted pax had left
earlier after being assured their tickets will be
ready the following day. 24

Q Aside from you there were many

other stranded passengers?
A I believed, yes.
Q And you want us to believe that
PAL did not explain (to) any of
these
passengers
about
the
decision regarding those who will
board the aircraft back to Cebu?
A No, Sir.
Q Despite these facts Mr. Zapatos
did any of the other passengers
complained (sic) regarding that
incident?
xxx xxx xxx

Page | 7

A There were plenty of argument

and I was one of those talking
about my case.
Q
Did
you
hear
anybody
complained (sic) that he has not
been informed of the decision
before the plane left for Cebu?
A No.

25

Admittedly, private respondent's insistence on being given priority in

accommodation was unreasonable considering the fortuitous event and
that there was a sequence to be observed in the booking, i.e., in the order
the passengers checked-in at their port of origin. His intransigence in fact
was the main cause for his having to stay at the airport longer than was
necessary.

the same to Ten Thousand Pesos (P10,000.00). Conformably herewith, the

award of exemplary damages is also reduced to five Thousand Pesos
(5,000.00). Moral damages are not intended to enrich the private
respondent. They are awarded only to enable the injured party to obtain
means, diversion or amusements that will serve to alleviate the moral
suffering he has undergone by reason of the defendant's culpable action. 29
With regard to the award of actual damages in the amount of P5,000.00
representing private respondent's alleged business losses occasioned by
his stay at Cotabato City, we find the same unwarranted. Private
respondent's testimony that he had a scheduled business "transaction of
shark liver oil supposedly to have been consummated on August 3, 1975 in
the morning" and that "since (private respondent) was out for nearly two
weeks I missed to buy about 10 barrels of shark liver oil," 30 are purely
speculative. Actual or compensatory damages cannot be presumed but
must be duly proved with reasonable degree of certainty. A court cannot
rely on speculation, conjecture or guesswork as to the fact and amount of
damages, but must depend upon competent proof that they have suffered
and on evidence of the actual amount thereof. 31

Atty. Rivera:
Q And, you were saying that
despite the fact that according to
your testimony there were at least
16 passengers who were stranded
there in Cotabato airport according
to your testimony, and later you
said that there were no other
people left there at that time, is
that correct?
A Yes, I did not see anyone there
around. I think I was the only
civilian who was left there.

WHEREFORE the decision appealed from is AFFIRMED with modification

however that the award of moral damages of Fifty Thousand Pesos
(P50,000.00) is reduced to Ten Thousand Pesos (P10,000.00) while the
exemplary damages of Ten Thousand Pesos (P10,000.00) is also reduced to
Five Thousand Pesos (P5,000.00). The award of actual damages in the
amount Five Thousand Pesos (P5,000.00) representing business losses
occasioned by private respondent's being stranded in Cotabato City is
deleted.
SO ORDERED.

[G.R. No. 126389. July 10, 1998]

Q Why is it that it took you long

time to leave that place?
A Because I was arguing with the
PAL personnel. 26
Anent the plaint that PAL employees were disrespectful and inattentive
toward private respondent, the records are bereft of evidence to support
the same. Thus, the ruling of respondent Court of Appeals in this regard is
without basis. 27 On the contrary, private respondent was attended to not
only by the personnel of PAL but also by its Manager." 28
In the light of these findings, we find the award of moral damages of Fifty
Thousand Pesos (P50,000.00) unreasonably excessive; hence, we reduce

SOUTHEASTERN COLLEGE, INC., petitioner, vs. COURT OF APPEALS,

JUANITA DE JESUS VDA. DE DIMAANO, EMERITA DIMAANO,
REMEDIOS
DIMAANO,
CONSOLACION
DIMAANO
and
MILAGROS DIMAANO, respondents.
DECISION
PURISIMA, J.:
Petition for review under Rule 45 of the Rules of Court seeking to set
aside the Decisioni promulgated on July 31, 1996, and Resolution ii dated
September 12, 1996 of the Court of Appeals iii in CA-G.R. No. 41422, entitled

Page | 8

Juanita de Jesus vda. de Dimaano, et al. vs. Southeastern College, Inc.,

which reduced the moral damages awarded below from P1,000,000.00 to
P200,000.00.iv The Resolution under attack denied petitioners motion for
reconsideration.

condition; and furthermore, typhoon Saling was an act of God and

therefore beyond human control such that petitioner cannot be
answerable for the damages wrought thereby, absent any negligence on
its part.

Private respondents are owners of a house at 326 College Road, Pasay

City, while petitioner owns a four-storey school building along the same
College Road. On October 11, 1989, at about 6:30 in the morning, a
powerful typhoon Saling hit Metro Manila. Buffeted by very strong
winds, the roof of petitioners building was partly ripped off and blown
away, landing on and destroying portions of the roofing of private
respondents house. After the typhoon had passed, an ocular inspection of
the destroyed buildings was conducted by a team of engineers headed by
the city building official, Engr. Jesus L. Reyna. Pertinent aspects of the
latters Reportv dated October 18, 1989 stated, as follows:

The trial court, giving credence to the ocular inspection report to the
effect that subject school building had a defective roofing structure,
found that, while typhoon Saling was accompanied by strong winds, the
damage to private respondents house could have been avoided if the
construction of the roof of [petitioners] building was not faulty. The
dispositive portion of the lower courts decisionvii reads thus:
WHEREFORE, in view of the foregoing, the Court renders
judgment (sic) in favor of the plaintiff (sic) and against the
defendants, (sic) ordering the latter to pay jointly and severally
the former as follows:

5. One of the factors that may have led to this calamitous

event is the formation of the buildings in the area and the
general direction of the wind. Situated in the peripheral lot is an
almost U-shaped formation of 4-storey building. Thus, with the
strong winds having a westerly direction, the general formation
of the buildings becomes a big funnel-like structure, the one
situated along College Road, receiving the heaviest impact of the
strong winds. Hence, there are portions of the roofing, those
located on both ends of the building, which remained intact after
the storm.
6. Another factor and perhaps the most likely reason for the
dislodging of the roofings structural trusses is the improper
anchorage of the said trusses to the roof beams. The 1/2
diameter steel bars embedded on the concrete roof beams which
serve as truss anchorage are not bolted nor nailed to the trusses.
Still, there are other steel bars which were not even bent to the
trusses, thus, those trusses are not anchored at all to the roof
beams.
It then recommended that to avoid any further loss and damage to lives,
limbs and property of persons living in the vicinity, the fourth floor of
subject school building be declared as a structural hazard.
In their Complaintvi before the Regional Trial Court of Pasay City,
Branch 117, for damages based on culpa aquiliana, private respondents
alleged that the damage to their house rendered the same uninhabitable,
forcing them to stay temporarily in others houses. And so they sought to
recover from petitioner P117,116.00, as actual damages, P1,000,000.00,
as moral damages, P300,000.00, as exemplary damages and P100,000.00,
for and as attorneys fees; plus costs.
In its Answer, petitioner averred that subject school building had
withstood several devastating typhoons and other calamities in the past,
without its roofing or any portion thereof giving way; that it has not been
remiss in its responsibility to see to it that said school building, which
houses school children, faculty members, and employees, is in tip-top

a) P117,116.00, as actual damages, plus litigation

expenses;
b) P1,000,000.00 as moral damages;
c) P100,000.00 as attorneys fees;
d) Costs of the instant suit.
The claim for exemplary damages is denied for the reason
that the defendants (sic) did not act in a wanton fraudulent,
reckless, oppressive or malevolent manner.
In its appeal to the Court of Appeals, petitioner assigned as errors, viii
that:
I
THE TRIAL COURT ERRED IN HOLDING THAT TYPHOON
SALING, AS AN ACT OF GOD, IS NOT THE SOLE AND ABSOLUTE
REASON FOR THE RIPPING-OFF OF THE SMALL PORTION OF THE
ROOF OF SOUTHEASTERNS FOUR (4) STOREY SCHOOL BUILDING.
II
THE TRIAL COURT ERRED IN HOLDING THAT THE
CONSTRUCTION OF THE ROOF OF DEFENDANTS SCHOOL
BUILDING WAS FAULTY NOTWITHSTANDING THE ADMISSION
THAT THERE WERE TYPHOONS BEFORE BUT NOT AS GRAVE AS
TYPHOON SALING WHICH IS THE DIRECT AND PROXIMATE
CAUSE OF THE INCIDENT.
III
THE TRIAL COURT ERRED IN AWARDING ACTUAL AND MORAL
DAMAGES AS WELL AS ATTORNEYS FEES AND LITIGATION
EXPENSES AND COSTS OF SUIT TO DIMAANOS WHEN THEY HAVE
NOT INCURRED ACTUAL DAMAGES AT ALL AS DIMAANOS HAVE

Page | 9

ALREADY SOLD THEIR PROPERTY, AN INTERVENING EVENT THAT

RENDERS THIS CASE MOOT AND ACADEMIC.
IV
THE TRIAL COURT ERRED IN ORDERING THE ISSUANCE OF THE
WRIT OF EXECUTION INSPITE OF THE PERFECTION OF
SOUTHEASTERNS APPEAL WHEN THERE IS NO COMPELLING
REASON FOR THE ISSUANCE THERETO.
As mentioned earlier, respondent Court of Appeals affirmed with
modification the trial courts disposition by reducing the award of moral
damages from P1,000,000.00 to P200,000.00. Hence, petitioners resort to
this Court, raising for resolution the issues of:
1. Whether or not the award of actual damage [sic] to
respondent Dimaanos on the basis of speculation or conjecture,
without proof or receipts of actual damage, [sic] legally feasible
or justified.
2.
Whether or not the award of moral damages to
respondent Dimaanos, without the latter having suffered, actual
damage has legal basis.
3. Whether or not respondent Dimaanos who are no longer
the owner of the property, subject matter of the case, during its
pendency, has the right to pursue their complaint against
petitioner when the case was already rendered moot and
academic by the sale of the property to third party.
4. Whether or not the award of attorneys fees when the
case was already moot and academic [sic] legally justified.
5. Whether or not petitioner is liable for damage caused to
others by typhoon Saling being an act of God.
6. Whether or not the issuance of a writ of execution
pending appeal, ex-parte or without hearing, has support in law.

could not have been foreseen.ix Escriche elaborates it as an unexpected

event or act of God which could neither be foreseen nor resisted. x Civilist
Arturo M. Tolentino adds that [f]ortuitous events may be produced by two
general causes: (1) by nature, such as earthquakes, storms, floods,
epidemics, fires, etc. and (2) by the act of man, such as an armed
invasion, attack by bandits, governmental prohibitions, robbery, etc. xi
In order that a fortuitous event may exempt a person from liability, it
is necessary that he be free from any previous negligence or misconduct
by reason of which the loss may have been occasioned. xii An act of God
cannot be invoked for the protection of a person who has been guilty of
gross negligence in not trying to forestall its possible adverse
consequences. When a persons negligence concurs with an act of God in
producing damage or injury to another, such person is not exempt from
liability by showing that the immediate or proximate cause of the damage
or injury was a fortuitous event. When the effect is found to be partly the
result of the participation of man whether it be from active intervention,
or neglect, or failure to act the whole occurrence is hereby humanized,
and removed from the rules applicable to acts of God. xiii
In the case under consideration, the lower court accorded full
credence to the finding of the investigating team that subject school
buildings roofing had no sufficient anchorage to hold it in position
especially when battered by strong winds. Based on such finding, the trial
court imputed negligence to petitioner and adjudged it liable for damages
to private respondents.
After a thorough study and evaluation of the evidence on record, this
Court believes otherwise, notwithstanding the general rule that factual
findings by the trial court, especially when affirmed by the appellate court,
are binding and conclusive upon this Court. xiv After a careful scrutiny of the
records and the pleadings submitted by the parties, we find exception to
this rule and hold that the lower courts misappreciated the evidence
proffered.

Art 1174. Except in cases expressly specified by the law, or

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

There is no question that a typhoon or storm is a fortuitous event, a

natural occurrence which may be foreseen but is unavoidable despite any
amount of foresight, diligence or care.xv In order to be exempt from liability
arising from any adverse consequence engendered thereby, there should
have been no human participation amounting to a negligent act. xvi In other
words, the person seeking exoneration from liability must not be guilty of
negligence.
Negligence, as commonly understood, is conduct which
naturally or reasonably creates undue risk or harm to others. It may be the
failure to observe that degree of care, precaution, and vigilance which the
circumstances justly demand,xvii or the omission to do something which a
prudent and reasonable man, guided by considerations which ordinarily
regulate the conduct of human affairs, would do. xviii From these premises,
we proceed to determine whether petitioner was negligent, such that if it
were not, the damage caused to private respondents house could have
been avoided?

The antecedent of fortuitous event or caso fortuito is found in the

Partidas which defines it as an event which takes place by accident and

At the outset, it bears emphasizing that a person claiming damages

for the negligence of another has the burden of proving the existence of

The pivot of inquiry here, determinative of the other issues, is whether

the damage on the roof of the building of private respondents resulting
from the impact of the falling portions of the school buildings roof ripped
off by the strong winds of typhoon Saling, was, within legal
contemplation, due to fortuitous event? If so, petitioner cannot be held
liable for the damages suffered by the private respondents. This conclusion
finds support in Article 1174 of the Civil Code, which provides:

Page | 10

fault or negligence causative of his injury or loss. The facts constitutive of

negligence must be affirmatively established by competent evidence, xix
not merely by presumptions and conclusions without basis in fact. Private
respondents, in establishing the culpability of petitioner, merely relied on
the aforementioned report submitted by a team which made an ocular
inspection of petitioners school building after the typhoon. As the term
imparts, an ocular inspection is one by means of actual sight or viewing. xx
What is visual to the eye though, is not always reflective of the real cause
behind. For instance, one who hears a gunshot and then sees a wounded
person, cannot always definitely conclude that a third person shot the
victim. It could have been self-inflicted or caused accidentally by a stray
bullet. The relationship of cause and effect must be clearly shown.
In the present case, other than the said ocular inspection, no
investigation was conducted to determine the real cause of the partial
unroofing of petitioners school building. Private respondents did not even
show that the plans, specifications and design of said school building were
deficient and defective. Neither did they prove any substantial deviation
from the approved plans and specifications. Nor did they conclusively
establish that the construction of such building was basically flawed. xxi
On the other hand, petitioner elicited from one of the witnesses of
private respondents, city building official Jesus Reyna, that the original
plans and design of petitioners school building were approved prior to its
construction. Engr. Reyna admitted that it was a legal requirement before
the construction of any building to obtain a permit from the city building
official (city engineer, prior to the passage of the Building Act of 1977). In
like manner, after construction of the building, a certification must be
secured from the same official attesting to the readiness for occupancy of
the edifice. Having obtained both building permit and certificate of
occupancy, these are, at the very least, prima facie evidence of the regular
and proper construction of subject school building. xxii
Furthermore, when part of its roof needed repairs of the damage
inflicted by typhoon Saling, the same city official gave the go-signal for
such repairs without any deviation from the original design and
subsequently, authorized the use of the entire fourth floor of the same
building. These only prove that subject building suffers from no structural
defect, contrary to the report that its U-shaped form was structurally
defective. Having given his unqualified imprimatur, the city building
official is presumed to have properly performed his duties xxiii in connection
therewith.
In addition, petitioner presented its vice president for finance and
administration who testified that an annual maintenance inspection and
repair of subject school building were regularly undertaken. Petitioner was
even willing to present its maintenance supervisor to attest to the extent of
such regular inspection but private respondents agreed to dispense with
his testimony and simply stipulated that it would be corroborative of the
vice presidents narration.

regarding any defect on the same structure has ever been lodged before
his office prior to the institution of the case at bench. It is a matter of
judicial notice that typhoons are common occurrences in this country. If
subject school buildings roofing was not firmly anchored to its trusses,
obviously, it could not have withstood long years and several typhoons
even stronger than Saling.
In light of the foregoing, we find no clear and convincing evidence to
sustain the judgment of the appellate court. We thus hold that petitioner
has not been shown negligent or at fault regarding the construction and
maintenance of its school building in question and that typhoon Saling
was the proximate cause of the damage suffered by private respondents
house.
With this disposition on the pivotal issue, private respondents claim
for actual and moral damages as well as attorneys fees must fail. xxiv
Petitioner cannot be made to answer for a purely fortuitous event. xxv More
so because no bad faith or willful act to cause damage was alleged and
proven to warrant moral damages.
Private respondents failed to adduce adequate and competent proof
of the pecuniary loss they actually incurred. xxvi It is not enough that the
damage be capable of proof but must be actually proved with a reasonable
degree of certainty, pointing out specific facts that afford a basis for
measuring whatever compensatory damages are borne. xxvii Private
respondents merely submitted an estimated amount needed for the repair
of the roof of their subject building. What is more, whether the necessary
repairs were caused ONLY by petitioners alleged negligence in the
maintenance of its school building, or included the ordinary wear and tear
of the house itself, is an essential question that remains indeterminable.
The Court deems unnecessary to resolve the other issues posed by
petitioner.
As regards the sixth issue, however, the writ of execution issued on
April 1, 1993 by the trial court is hereby nullified and set aside. Private
respondents are ordered to reimburse any amount or return to petitioner
any property which they may have received by virtue of the enforcement
of said writ.
WHEREFORE, the petition is GRANTED and the challenged Decision is
REVERSED. The complaint of private respondents in Civil Case No. 7314
before the trial court a quo is ordered DISMISSED and the writ of execution
issued on April 1, 1993 in said case is SET ASIDE. Accordingly, private
respondents are ORDERED to return to petitioner any amount or property
received by them by virtue of said writ. Costs against the private
respondents.
SO ORDERED.
G.R. No. 147324

May 25, 2004

Moreover, the city building official, who has been in the city
government service since 1974, admitted in open court that no complaint

Page | 11

PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, petitioner,

vs.
GLOBE TELECOM, INC. (formerly Globe Mckay Cable and Radio
Corporation), respondents.
GLOBE
TELECOM,
INC.,
petitioner,
vs.
PHILIPPINE COMMUNICATION SATELLITE CORPORATION, respondent.

Subsequently, Philcomsat installed and established the earth station at

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

TINGA, J.:
Before the Court are two Petitions for Review assailing the Decision of the
Court of Appeals, dated 27 February 2001, in CA-G.R. CV No. 63619. 1
The facts of the case are undisputed.
For several years prior to 1991, Globe Mckay Cable and Radio Corporation,
now Globe Telecom, Inc. (Globe), had been engaged in the coordination of
the provision of various communication facilities for the military bases of
the United States of America (US) in Clark Air Base, Angeles, Pampanga
and Subic Naval Base in Cubi Point, Zambales. The said communication
facilities were installed and configured for the exclusive use of the US
Defense Communications Agency (USDCA), and for security reasons, were
operated only by its personnel or those of American companies contracted
by it to operate said facilities. The USDCA contracted with said American
companies, and the latter, in turn, contracted with Globe for the use of the
communication facilities. Globe, on the other hand, contracted with local
service providers such as the Philippine Communications Satellite
Corporation (Philcomsat) for the provision of the communication facilities.
On 07 May 1991, Philcomsat and Globe entered into an Agreement
whereby Philcomsat obligated itself to establish, operate and provide an
IBS Standard B earth station (earth station) within Cubi Point for the
exclusive use of the USDCA.2 The term of the contract was for 60 months,
or five (5) years.3 In turn, Globe promised to pay Philcomsat monthly
rentals for each leased circuit involved.4
At the time of the execution of the Agreement, both parties knew that the
Military Bases Agreement between the Republic of the Philippines and the
US (RP-US Military Bases Agreement), which was the basis for the
occupancy of the Clark Air Base and Subic Naval Base in Cubi Point, was to
expire in 1991. Under Section 25, Article XVIII of the 1987 Constitution,
foreign military bases, troops or facilities, which include those located at
the US Naval Facility in Cubi Point, shall not be allowed in the Philippines
unless a new treaty is duly concurred in by the Senate and ratified by a
majority of the votes cast by the people in a national referendum when the
Congress so requires, and such new treaty is recognized as such by the US
Government.

FINDING that the Treaty constitutes a defective framework

for the continuing relationship between the two countries
in the spirit of friendship, cooperation and sovereign
equality: Now, therefore, be it Resolved by the Senate, as it
is hereby resolved, To express its decision not to concur in
the ratification of the Treaty of Friendship, Cooperation and
Security and its Supplementary Agreements, at the same
time reaffirming its desire to continue friendly relations
with the government and people of the United States of
America.6
On 31 December 1991, the Philippine Government sent a Note Verbale to
the US Government through the US Embassy, notifying it of the Philippines
termination of the RP-US Military Bases Agreement. The Note Verbale
stated that since the RP-US Military Bases Agreement, as amended, shall
terminate on 31 December 1992, the withdrawal of all US military forces
from Subic Naval Base should be completed by said date.
In a letter dated 06 August 1992, Globe notified Philcomsat of its intention
to discontinue the use of the earth station effective 08 November 1992 in
view of the withdrawal of US military personnel from Subic Naval Base
after the termination of the RP-US Military Bases Agreement. Globe invoked
as basis for the letter of termination Section 8 (Default) of the Agreement,
which provides:
Neither party shall be held liable or deemed to be in
default for any failure to perform its obligation under this
Agreement if such failure results directly or indirectly from
force majeure or fortuitous event. Either party is thus
precluded from performing its obligation until such force
majeure or fortuitous event shall terminate. For the
purpose of this paragraph, force majeure shall mean
circumstances beyond the control of the party involved
including, but not limited to, any law, order, regulation,
direction or request of the Government of the Philippines,
strikes or other labor difficulties, insurrection riots, national
emergencies, war, acts of public enemies, fire, floods,
typhoons or other catastrophies or acts of God.

Page | 12

Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that
"we expect [Globe] to know its commitment to pay the stipulated rentals
for the remaining terms of the Agreement even after [Globe] shall have
discontinue[d] the use of the earth station after November 08, 1992." 7
Philcomsat referred to Section 7 of the Agreement, stating as follows:
7. DISCONTINUANCE OF SERVICE
Should [Globe] decide to discontinue with the use of the
earth station after it has been put into operation, a written
notice shall be served to PHILCOMSAT at least sixty (60)
days prior to the expected date of termination.
Notwithstanding the non-use of the earth station, [Globe]
shall continue to pay PHILCOMSAT for the rental of the
actual number of T1 circuits in use, but in no case shall be
less than the first two (2) T1 circuits, for the remaining life
of the agreement. However, should PHILCOMSAT make use
or sell the earth station subject to this agreement, the
obligation of [Globe] to pay the rental for the remaining life
of the agreement shall be at such monthly rate as may be
agreed upon by the parties.8
After the US military forces left Subic Naval Base, Philcomsat sent Globe a
letter dated 24 November 1993 demanding payment of its outstanding
obligations under the Agreement amounting to US$4,910,136.00 plus
interest and attorneys fees. However, Globe refused to heed Philcomsats
demand.
On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati
a Complaint against Globe, praying that the latter be ordered to pay
liquidated damages under the Agreement, with legal interest, exemplary
damages, attorneys fees and costs of suit. The case was raffled to Branch
59 of said court.
Globe filed an Answer to the Complaint, insisting that it was constrained to
end the Agreement due to the termination of the RP-US Military Bases
Agreement and the non-ratification by the Senate of the Treaty of
Friendship and Cooperation, which events constituted force majeure under
the Agreement. Globe explained that the occurrence of said events
exempted it from paying rentals for the remaining period of the
Agreement.
On 05 January 1999, the trial court rendered its Decision, the dispositive
portion of which reads:
WHEREFORE, premises considered, judgment is hereby
rendered as follows:

1. Ordering the defendant to pay the plaintiff the

amount of Ninety Two Thousand Two Hundred
Thirty Eight US Dollars (US$92,238.00) or its
equivalent in Philippine Currency (computed at the
exchange rate prevailing at the time of compliance
or payment) representing rentals for the month of
December 1992 with interest thereon at the legal
rate of twelve percent (12%) per annum starting
December 1992 until the amount is fully paid;
2. Ordering the defendant to pay the plaintiff the
amount of Three Hundred Thousand (P300,000.00)
Pesos as and for attorneys fees;
3. Ordering the DISMISSAL of
counterclaim for lack of merit; and

defendants

4. With costs against the defendant.

SO ORDERED.9
Both parties appealed the trial courts Decision to the Court of Appeals.
Philcomsat claimed that the trial court erred in ruling that: (1) the nonratification by the Senate of the Treaty of Friendship, Cooperation and
Security and its Supplementary Agreements constitutes force majeure
which exempts Globe from complying with its obligations under the
Agreement; (2) Globe is not liable to pay the rentals for the remainder of
the term of the Agreement; and (3) Globe is not liable to Philcomsat for
exemplary damages.
Globe, on the other hand, contended that the RTC erred in holding it liable
for payment of rent of the earth station for December 1992 and of
attorneys fees. It explained that it terminated Philcomsats services on 08
November 1992; hence, it had no reason to pay for rentals beyond that
date.
On 27 February 2001, the Court of Appeals promulgated its Decision
dismissing Philcomsats appeal for lack of merit and affirming the trial
courts finding that certain events constituting force majeure under Section
8 the Agreement occurred and justified the non-payment by Globe of
rentals for the remainder of the term of the Agreement.
The appellate court ruled that the non-ratification by the Senate of the
Treaty of Friendship, Cooperation and Security, and its Supplementary
Agreements, and the termination by the Philippine Government of the RPUS Military Bases Agreement effective 31 December 1991 as stated in the
Philippine Governments Note Verbale to the US Government, are acts,

Page | 13

directions, or requests of the Government of the Philippines which

constitute force majeure. In addition, there were circumstances beyond the
control of the parties, such as the issuance of a formal order by Cdr. Walter
Corliss of the US Navy, the issuance of the letter notification from ATT and
the complete withdrawal of all US military forces and personnel from Cubi
Point, which prevented further use of the earth station under the
Agreement.

party involved including, but not limited to, any law, order, regulation,
direction or request of the Government of the Philippines, strikes or other
labor difficulties, insurrection riots, national emergencies, war, acts of
public enemies, fire, floods, typhoons or other catastrophies or acts of
God," should be deemed subject to Article 1174 which defines fortuitous
events as events which could not be foreseen, or which, though foreseen,
were inevitable.13

However, the Court of Appeals ruled that although Globe sought to

terminate Philcomsats services by 08 November 1992, it is still liable to
pay rentals for the December 1992, amounting to US$92,238.00 plus
interest, considering that the US military forces and personnel completely
withdrew from Cubi Point only on 31 December 1992. 10

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

Both parties filed their respective Petitions for Review assailing the
Decision of the Court of Appeals.
In G.R. No. 147324,11
assignments of error:

petitioner

Philcomsat

raises

the

following

A. THE HONORABLE COURT OF APPEALS ERRED IN

ADOPTING A DEFINITION OF FORCE MAJEURE DIFFERENT
FROM WHAT ITS LEGAL DEFINITION FOUND IN ARTICLE
1174 OF THE CIVIL CODE, PROVIDES, SO AS TO EXEMPT
GLOBE TELECOM FROM COMPLYING WITH ITS OBLIGATIONS
UNDER THE SUBJECT AGREEMENT.
B. THE HONORABLE COURT OF APPEALS ERRED IN RULING
THAT GLOBE TELECOM IS NOT LIABLE TO PHILCOMSAT FOR
RENTALS FOR THE REMAINING TERM OF THE AGREEMENT,
DESPITE THE CLEAR TENOR OF SECTION 7 OF THE
AGREEMENT.
C. THE HONORABLE OCURT OF APPEALS ERRED IN
DELETING THE TRIAL COURTS AWARD OF ATTORNEYS
FEES IN FAVOR OF PHILCOMSAT.
D. THE HONORABLE COURT OF APPEALS ERRED IN RULING
THAT GLOBE TELECOM IS NOT LIABLE TO PHILCOMSAT FOR
EXEMPLARY DAMAGES.12
Philcomsat argues that the termination of the RP-US Military Bases
Agreement cannot be considered a fortuitous event because the
happening thereof was foreseeable. Although the Agreement was freely
entered into by both parties, Section 8 should be deemed ineffective
because it is contrary to Article 1174 of the Civil Code. Philcomsat posits
the view that the validity of the parties definition of force majeure in
Section 8 of the Agreement as "circumstances beyond the control of the

Philcomsat also maintains that contrary to the appellate courts findings, it

is entitled to attorneys fees and exemplary damages.16
In its Comment to Philcomsats Petition, Globe asserts that Section 8 of the
Agreement is not contrary to Article 1174 of the Civil Code because said
provision does not prohibit parties to a contract from providing for other
instances when they would be exempt from fulfilling their contractual
obligations. Globe also claims that the termination of the RP-US Military
Bases Agreement constitutes force majeure and exempts it from complying
with its obligations under the Agreement. 17 On the issue of the propriety of
awarding attorneys fees and exemplary damages to Philcomsat, Globe
maintains that Philcomsat is not entitled thereto because in refusing to pay
rentals for the remainder of the term of the Agreement, Globe only acted in
accordance with its rights.18
In G.R. No. 147334,19 Globe, the petitioner therein, contends that the
Court of Appeals erred in finding it liable for the amount of US$92,238.00,
representing rentals for December 1992, since Philcomsats services were
actually terminated on 08 November 1992.20
In its Comment, Philcomsat claims that Globes petition should be
dismissed as it raises a factual issue which is not cognizable by the Court
in a petition for review on certiorari.21
On 15 August 2001, the Court issued a Resolution giving due course to
Philcomsats Petition in G.R. No.
147324 and required the parties to submit their respective memoranda. 22

Page | 14

Similarly, on 20 August 2001, the Court issued a Resolution giving due

course to the Petition filed by Globe in G.R. No. 147334 and required
both parties to submit their memoranda.23

A fortuitous event under Article 1174 may either be an "act of God," or

natural occurrences such as floods or typhoons, 24 or an "act of man," such
as riots, strikes or wars.25

Philcomsat and Globe thereafter filed their respective Consolidated

Memoranda in the two cases, reiterating their arguments in their
respective petitions.

Philcomsat and Globe agreed in Section 8 of the Agreement that the

following events shall be deemed events constituting force majeure:

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

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

Philippine Government;
2. Strikes or other labor difficulties;
3. Insurrection;
4. Riots;
5. National emergencies;

No reversible error was committed by the Court of Appeals in issuing the

assailed Decision; hence the petitions are denied.
There is no merit is Philcomsats argument that Section 8 of the Agreement
cannot be given effect because the enumeration of events constituting
force majeure therein unduly expands the concept of a fortuitous event
under Article 1174 of the Civil Code and is therefore invalid.
In support of its position, Philcomsat contends that under Article 1174 of
the Civil Code, an event must be unforeseen in order to exempt a party to
a contract from complying with its obligations therein. It insists that since
the expiration of the RP-US Military Bases Agreement, the non-ratification
of the Treaty of Friendship, Cooperation and Security and the withdrawal of
US military forces and personnel from Cubi Point were not unforeseeable,
but were possibilities known to it and Globe at the time they entered into
the Agreement, such events cannot exempt Globe from performing its
obligation of paying rentals for the entire five-year term thereof.
However, Article 1174, which exempts an obligor from liability on account
of fortuitous events or force majeure, refers not only to events that are
unforeseeable, but also to those which are foreseeable, but
inevitable:
Art. 1174. Except in cases specified by the law, or when it
is otherwise declared by stipulation, or when the nature of
the obligation requires the assumption of risk, no person
shall be responsible for those events which, could not be
foreseen, or which, though foreseen were inevitable.

6. War;
7. Acts of public enemies;
8. Fire, floods, typhoons or other catastrophies or acts of
God;
9. Other circumstances beyond the control of the parties.
Clearly, the foregoing are either unforeseeable, or foreseeable but beyond
the control of the parties. There is nothing in the enumeration that runs
contrary to, or expands, the concept of a fortuitous event under Article
1174.
Furthermore, under Article 130626 of the Civil Code, parties to a contract
may establish such stipulations, clauses, terms and conditions as they may
deem fit, as long as the same do not run counter to the law, morals, good
customs, public order or public policy.27
Article 1159 of the Civil Code also provides that "[o]bligations arising from
contracts have the force of law between the contracting parties and should
be complied with in good faith."28 Courts cannot stipulate for the parties
nor amend their agreement where the same does not contravene law,
morals, good customs, public order or public policy, for to do so would be
to alter the real intent of the parties, and would run contrary to the
function of the courts to give force and effect thereto. 29

Page | 15

Not being contrary to law, morals, good customs, public order, or public
policy, Section 8 of the Agreement which Philcomsat and Globe freely
agreed upon has the force of law between them.30
In order that Globe may be exempt from non-compliance with its obligation
to pay rentals under Section 8, the concurrence of the following elements
must be established: (1) the event must be independent of the human will;
(2) the occurrence must render it impossible for the debtor to fulfill the
obligation in a normal manner; and (3) the obligor must be free of
participation in, or aggravation of, the injury to the creditor. 31
The Court agrees with the Court of Appeals and the trial court that the
abovementioned requisites are present in the instant case. Philcomsat and
Globe had no control over the non-renewal of the term of the RP-US
Military Bases Agreement when the same expired in 1991, because the
prerogative to ratify the treaty extending the life thereof belonged to the
Senate. Neither did the parties have control over the subsequent
withdrawal of the US military forces and personnel from Cubi Point in
December 1992:
Obviously the non-ratification by the Senate of the RP-US
Military Bases Agreement (and its Supplemental
Agreements) under its Resolution No. 141. (Exhibit "2") on
September 16, 1991 is beyond the control of the parties.
This resolution was followed by the sending on December
31, 1991 o[f] a "Note Verbale" (Exhibit "3") by the
Philippine Government to the US Government notifying the
latter of the formers termination of the RP-US Military
Bases Agreement (as amended) on 31 December 1992 and
that accordingly, the withdrawal of all U.S. military forces
from Subic Naval Base should be completed by said date.
Subsequently, defendant [Globe] received a formal order
from Cdr. Walter F. Corliss II Commander USN dated July 31,
1992 and a notification from ATT dated July 29, 1992 to
terminate the provision of T1s services (via an IBS
Standard B Earth Station) effective November 08, 1992.
Plaintiff [Philcomsat] was furnished with copies of the said
order and letter by the defendant on August 06, 1992.
Resolution No. 141 of the Philippine Senate and the Note
Verbale of the Philippine Government to the US
Government are acts, direction or request of the
Government of the Philippines and circumstances beyond
the control of the defendant. The formal order from Cdr.
Walter Corliss of the USN, the letter notification from ATT
and the complete withdrawal of all the military forces and
personnel from Cubi Point in the year-end 1992 are also
acts and circumstances beyond the control of the
defendant.

Considering the foregoing, the Court finds and so holds

that the afore-narrated circumstances constitute "force
majeure or fortuitous event(s) as defined under paragraph
8 of the Agreement.

From the foregoing, the Court finds that the defendant is

exempted from paying the rentals for the facility for the
remaining term of the contract.
As a consequence of the termination of the RP-US Military
Bases Agreement (as amended) the continued stay of all
US Military forces and personnel from Subic Naval Base
would no longer be allowed, hence, plaintiff would no
longer be in any position to render the service it was
obligated under the Agreement. To put it blantly (sic), since
the US military forces and personnel left or withdrew from
Cubi Point in the year end December 1992, there was no
longer any necessity for the plaintiff to continue
maintaining the IBS facility. 32 (Emphasis in the original.)
The aforementioned events made impossible the continuation of the
Agreement until the end of its five-year term without fault on the part of
either party. The Court of Appeals was thus correct in ruling that the
happening of such fortuitous events rendered Globe exempt from payment
of rentals for the remainder of the term of the Agreement.
Moreover, it would be unjust to require Globe to continue paying rentals
even though Philcomsat cannot be compelled to perform its corresponding
obligation under the Agreement. As noted by the appellate court:
We also point out the sheer inequity of PHILCOMSATs
position. PHILCOMSAT would like to charge GLOBE rentals
for the balance of the lease term without there being any
corresponding telecommunications service subject of the
lease. It will be grossly unfair and iniquitous to hold GLOBE
liable for lease charges for a service that was not and could
not have been rendered due to an act of the government
which was clearly beyond GLOBEs control. The binding
effect of a contract on both parties is based on the
principle that the obligations arising from contracts have
the force of law between the contracting parties, and there
must be mutuality between them based essentially on their
equality under which it is repugnant to have one party
bound by the contract while leaving the other party free
therefrom (Allied Banking Corporation v. Court of
Appeals, 284 SCRA 357).33

Page | 16

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

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

Although Globe alleged that it terminated the Agreement with Philcomsat

effective 08 November 1992 pursuant to the formal order issued by Cdr.
Corliss of the US Navy, the date when they actually ceased using the earth
station subject of the Agreement was not established during the trial. 34
However, the trial court found that the US military forces and personnel
completely withdrew from Cubi Point only on 31 December 1992. 35 Thus,
until that date, the USDCA had control over the earth station and had the
option of using the same. Furthermore, Philcomsat could not have removed
or rendered ineffective said communication facility until after 31 December
1992 because Cubi Point was accessible only to US naval personnel up to
that time. Hence, the Court of Appeals did not err when it affirmed the trial
courts ruling that Globe is liable for payment of rentals until December
1992.

AUSTRIA-MARTINEZ, J.:

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

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue

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

The award of attorneys fees is the exception rather than the rule, and
must be supported by factual, legal and equitable justifications. 36 In
previously decided cases, the Court awarded attorneys fees where a party
acted in gross and evident bad faith in refusing to satisfy the other partys
claims and compelled the former to litigate to protect his rights; 37 when the
action filed is clearly unfounded, 38 or where moral or exemplary damages
are awarded.39 However, in cases where both parties have legitimate
claims against each other and no party actually prevailed, such as in the
present case where the claims of both parties were sustained in part, an
award of attorneys fees would not be warranted.40
Exemplary damages may be awarded in cases involving contracts or quasicontracts, if the erring party acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. 41 In the present case, it was not shown
that Globe acted wantonly or oppressively in not heeding Philcomsats
demands for payment of rentals. It was established during the trial of the
case before the trial court that Globe had valid grounds for refusing to
comply with its contractual obligations after 1992.
WHEREFORE, the Petitions are DENIED for lack of merit. The assailed
Decision of the Court of Appeals in CA-G.R. CV No. 63619 is AFFIRMED.

The factual background of the case is as follows:

1. Warranted that the Company shall not be liable for any

unpaid account in respect of the merchandise sold and
delivered by the Insured which are outstanding at the date
of loss for a period in excess of six (6) months from the
date of the covering invoice or actual delivery of the
merchandise whichever shall first occur.
2. Warranted that the Insured shall submit to the Company
within twelve (12) days after the close of every calendar
month all amount shown in their books of accounts as
unpaid and thus become receivable item from their
customers and dealers. x x x4
xxxx

SO ORDERED.
G.R. No. 147839

Before the Court is a petition for review on certiorari of the Decision 1 dated
October 11, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848
which set aside the Decision dated August 31, 1998 of the Regional Trial
Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the
causes of action for damages of Insurance Company of North America
(respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA
Resolution dated April 11, 2001 which denied petitioner's motion for
reconsideration.

June 8, 2006

Petitioner is a customer and dealer of the products of IMC and LSPI. On

February 25, 1991, the Gaisano Superstore Complex in Cagayan de Oro
City, owned by petitioner, was consumed by fire. Included in the items lost

Page | 17

or destroyed in the fire were stocks of ready-made clothing materials sold

and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint for damages against
petitioner. It alleges that IMC and LSPI filed with respondent their claims
under their respective fire insurance policies with book debt endorsements;
that as of February 25, 1991, the unpaid accounts of petitioner on the sale
and delivery of ready-made clothing materials with IMC was P2,119,205.00
while with LSPI it was P535,613.00; that respondent paid the claims of IMC
and LSPI and, by virtue thereof, respondent was subrogated to their rights
against petitioner; that respondent made several demands for payment
upon petitioner but these went unheeded.5

2. the amount of P535,613.00 representing the amount

paid by the plaintiff-appellant to the insured Levi Strauss
Phil., Inc., plus legal interest from the time of demand until
fully paid.
With costs against the defendant-appellee.
SO ORDERED.10

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

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

At the pre-trial conference the parties failed to arrive at an amicable

settlement.7 Thus, trial on the merits ensued.

Petitioner filed a motion for reconsideration 12 but it was denied by the CA in

its Resolution dated April 11, 2001.13

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

Hence, the present petition for review on certiorari anchored on the

following Assignment of Errors:

Dissatisfied, petitioner appealed to the CA. 9 On October 11, 2000, the CA

rendered its decision setting aside the decision of the RTC. The dispositive
portion of the decision reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED
and SET ASIDE and a new one is entered ordering defendant-appellee
Gaisano Cagayan, Inc. to pay:
1. the amount of P2,119,205.60 representing the amount
paid by the plaintiff-appellant to the insured Inter Capitol
Marketing Corporation, plus legal interest from the time of
demand until fully paid;

THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE

INSTANT CASE WAS ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE
SUBJECT GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER
UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC
SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF
RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present
case cannot be deemed to be over credit since an insurance "on credit"
belies not only the nature of fire insurance but the express terms of the
policies; that it was not credit that was insured since respondent paid on
the occasion of the loss of the insured goods to fire and not because of the
non-payment by petitioner of any obligation; that, even if the insurance is
deemed as one over credit, there was no loss as the accounts were not yet
due since no prior demands were made by IMC and LSPI against petitioner

Page | 18

for payment of the debt and such demands came from respondent only
after it had already paid IMC and LSPI under the fire insurance policies. 15
As to the second error, petitioner avers that despite delivery of the goods,
petitioner-buyer IMC and LSPI assumed the risk of loss when they secured
fire insurance policies over the goods.
Concerning the third ground, petitioner submits that there is no
subrogation in favor of respondent as no valid insurance could be
maintained thereon by IMC and LSPI since all risk had transferred to
petitioner upon delivery of the goods; that petitioner was not privy to the
insurance contract or the payment between respondent and its insured nor
was its consent or approval ever secured; that this lack of privity forecloses
any real interest on the part of respondent in the obligation to pay, limiting
its interest to keeping the insured goods safe from fire.
For its part, respondent counters that while ownership over the readymade clothing materials was transferred upon delivery to petitioner, IMC
and LSPI have insurable interest over said goods as creditors who stand to
suffer direct pecuniary loss from its destruction by fire; that petitioner is
liable for loss of the ready-made clothing materials since it failed to
overcome the presumption of liability under Article 1265 16 of the Civil
Code; that the fire was caused through petitioner's negligence in failing to
provide stringent measures of caution, care and maintenance on its
property because electric wires do not usually short circuit unless there are
defects in their installation or when there is lack of proper maintenance
and supervision of the property; that petitioner is guilty of gross and
evident bad faith in refusing to pay respondent's valid claim and should be
liable to respondent for contracted lawyer's fees, litigation expenses and
cost of suit.17
As a general rule, in petitions for review, the jurisdiction of this Court in
cases brought before it from the CA is limited to reviewing questions of law
which involves no examination of the probative value of the evidence
presented by the litigants or any of them. 18 The Supreme Court is not a
trier of facts; it is not its function to analyze or weigh evidence all over
again.19 Accordingly, findings of fact of the appellate court are generally
conclusive on the Supreme Court.20
Nevertheless, jurisprudence has recognized several exceptions in which
factual issues may be resolved by this Court, such as: (1) when the findings
are grounded entirely on speculation, surmises or conjectures; (2) when
the inference made is manifestly mistaken, absurd or impossible; (3) when
there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of facts are conflicting; (6)
when in making its findings the CA went beyond the issues of the case, or
its findings are contrary to the admissions of both the appellant and the
appellee; (7) when the findings are contrary to the trial court; (8) when the
findings are conclusions without citation of specific evidence on which they

are based; (9) when the facts set forth in the petition as well as in the
petitioner's main and reply briefs are not disputed by the respondent; (10)
when the findings of fact are premised on the supposed absence of
evidence and contradicted by the evidence on record; and (11) when the
CA manifestly overlooked certain relevant facts not disputed by the
parties, which, if properly considered, would justify a different conclusion. 21
Exceptions (4), (5), (7), and (11) apply to the present petition.
At issue is the proper interpretation of the questioned insurance policy.
Petitioner claims that the CA erred in construing a fire insurance policy on
book debts as one covering the unpaid accounts of IMC and LSPI since such
insurance applies to loss of the ready-made clothing materials sold and
delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract are plain and readily
understood, there is no room for construction. 22 In this case, the
questioned insurance policies provide coverage for "book debts in
connection with ready-made clothing materials which have been sold or
delivered to various customers and dealers of the Insured anywhere in the
Philippines."23 ; and defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of
the loss covered under this Policy."24 Nowhere is it provided in the
questioned insurance policies that the subject of the insurance is the goods
sold and delivered to the customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they
do not justify an attempt to read into it any alleged intention of the parties,
the terms are to be understood literally just as they appear on the face of
the contract.25 Thus, what were insured against were the accounts of IMC
and LSPI with petitioner which remained unpaid 45 days after the loss
through fire, and not the loss or destruction of the goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly
reserved ownership of the goods by stipulating in the sales invoices that
"[i]t is further agreed that merely for purpose of securing the payment of
the purchase price the above described merchandise remains the property
of the vendor until the purchase price thereof is fully paid." 26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil
Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk
until the ownership therein is transferred to the buyer, but when the

Page | 19

ownership therein is transferred to the buyer the goods are at the buyer's
risk whether actual delivery has been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee
for the buyer, in pursuance of the contract and the ownership in the goods
has been retained by the seller merely to secure performance by the buyer
of his obligations under the contract, the goods are at the buyer's risk from
the time of such delivery; (Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will
pay its debt, the risk of loss is borne by the buyer. 27 Accordingly, petitioner
bears the risk of loss of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an
insurable interest until full payment of the value of the delivered goods.
Unlike the civil law concept of res perit domino, where ownership is the
basis for consideration of who bears the risk of loss, in property insurance,
one's interest is not determined by concept of title, but whether insured
has substantial economic interest in the property.28
Section 13 of our Insurance Code defines insurable interest as "every
interest in property, whether real or personal, or any relation thereto, or
liability in respect thereof, of such nature that a contemplated peril might
directly damnify the insured." Parenthetically, under Section 14 of the
same Code, an insurable interest in property may consist in: (a) an existing
interest; (b) an inchoate interest founded on existing interest; or (c) an
expectancy, coupled with an existing interest in that out of which the
expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a
property interest in, or a lien upon, or possession of, the subject matter of
the insurance, and neither the title nor a beneficial interest is requisite to
the existence of such an interest, it is sufficient that the insured is so
situated with reference to the property that he would be liable to loss
should it be injured or destroyed by the peril against which it is insured. 29
Anyone has an insurable interest in property who derives a benefit from its
existence or would suffer loss from its destruction. 30 Indeed, a vendor or
seller retains an insurable interest in the property sold so long as he has
any interest therein, in other words, so long as he would suffer by its
destruction, as where he has a vendor's lien. 31 In this case, the insurable
interest of IMC and LSPI pertain to the unpaid accounts appearing in their
Books of Account 45 days after the time of the loss covered by the policies.

Petitioner's argument that it is not liable because the fire is a fortuitous

event under Article 1174 32 of the Civil Code is misplaced. As held earlier,
petitioner bears the loss under Article 1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss
of goods by fire but for petitioner's accounts with IMC and LSPI that
remained unpaid 45 days after the fire. Accordingly, petitioner's obligation
is for the payment of money. As correctly stated by the CA, where the
obligation consists in the payment of money, the failure of the debtor to
make the payment even by reason of a fortuitous event shall not relieve
him of his liability.33 The rationale for this is that the rule that an obligor
should be held exempt from liability when the loss occurs thru a fortuitous
event only holds true when the obligation consists in the delivery of a
determinate thing and there is no stipulation holding him liable even in
case of fortuitous event. It does not apply when the obligation is pecuniary
in nature.34
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic
thing, the loss or destruction of anything of the same kind does not
extinguish the obligation." If the obligation is generic in the sense that the
object thereof is designated merely by its class or genus without any
particular designation or physical segregation from all others of the same
class, the loss or destruction of anything of the same kind even without the
debtor's fault and before he has incurred in delay will not have the effect of
extinguishing the obligation.35 This rule is based on the principle that the
genus of a thing can never perish. Genus nunquan perit. 36 An obligation to
pay money is generic; therefore, it is not excused by fortuitous loss of any
specific property of the debtor. 37
Thus, whether fire is a fortuitous event or petitioner was negligent are
matters immaterial to this case. What is relevant here is whether it has
been established that petitioner has outstanding accounts with IMC and
LSPI.
With respect to IMC, the respondent has adequately established its claim.
Exhibits "C" to "C-22"38 show that petitioner has an outstanding account
with IMC in the amount of P2,119,205.00. Exhibit "E"39 is the check voucher
evidencing payment to IMC. Exhibit "F"40 is the subrogation receipt
executed by IMC in favor of respondent upon receipt of the insurance
proceeds. All these documents have been properly identified, presented
and marked as exhibits in court. The subrogation receipt, by itself, is
sufficient to establish not only the relationship of respondent as insurer and
IMC as the insured, but also the amount paid to settle the insurance claim.
The right of subrogation accrues simply upon payment by the insurance
company of the insurance claim. 41 Respondent's action against petitioner is
squarely sanctioned by Article 2207 of the Civil Code which provides:

The next question is: Is petitioner liable for the unpaid accounts?
Art. 2207. If the plaintiff's property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of

Page | 20

the wrong or breach of contract complained of, the insurance company

shall be subrogated to the rights of the insured against the wrongdoer or
the person who has violated the contract. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its
cause of action. No evidentiary weight can be given to Exhibit "F Levi
Strauss",42 a letter dated April 23, 1991 from petitioner's General Manager,
Stephen S. Gaisano, Jr., since it is not an admission of petitioner's unpaid
account with LSPI. It only confirms the loss of Levi's products in the amount
of P535,613.00 in the fire that razed petitioner's building on February 25,
1991.
Moreover, there is no proof of full settlement of the insurance claim of LSPI;
no subrogation receipt was offered in evidence. Thus, there is no evidence
that respondent has been subrogated to any right which LSPI may have
against petitioner. Failure to substantiate the claim of subrogation is fatal
to petitioner's case for recovery of the amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated
October 11, 2000 and Resolution dated April 11, 2001 of the Court of
Appeals in CA-G.R. CV No. 61848 are AFFIRMED with the MODIFICATION
that the order to pay the amount of P535,613.00 to respondent is
DELETED for lack of factual basis.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 159617

R. C. Sicam located at No. 17 Aguirre Ave., BF Homes Paraaque, Metro

Manila, to secure a loan in the total amount of P59,500.00.
On October 19, 1987, two armed men entered the pawnshop and took
away whatever cash and jewelry were found inside the pawnshop vault.
The incident was entered in the police blotter of the Southern Police
District, Paraaque Police Station as follows:
Investigation shows that at above TDPO, while victims were
inside the office, two (2) male unidentified persons entered
into the said office with guns drawn. Suspects(sic) (1) went
straight inside and poked his gun toward Romeo Sicam and
thereby tied him with an electric wire while suspects (sic)
(2) poked his gun toward Divina Mata and Isabelita
Rodriguez and ordered them to lay (sic) face flat on the
floor. Suspects asked forcibly the case and assorted
pawned jewelries items mentioned above.
Suspects after taking the money and jewelries fled on
board a Marson Toyota unidentified plate number.3
Petitioner Sicam sent respondent Lulu a letter dated October 19, 1987
informing her of the loss of her jewelry due to the robbery incident in the
pawnshop. On November 2, 1987, respondent Lulu then wrote a letter 4 to
petitioner Sicam expressing disbelief stating that when the robbery
happened, all jewelry pawned were deposited with Far East Bank near the
pawnshop since it had been the practice that before they could withdraw,
advance notice must be given to the pawnshop so it could withdraw the
jewelry from the bank. Respondent Lulu then requested petitioner Sicam to
prepare the pawned jewelry for withdrawal on November 6, 1987 but
petitioner Sicam failed to return the jewelry.

August 8, 2007

ROBERTO C. SICAM and AGENCIA de R.C. SICAM, INC., petitioners,

vs.
LULU V. JORGE and CESAR JORGE, respondents.

On September 28, 1988, respondent Lulu joined by her husband, Cesar

Jorge, filed a complaint against petitioner Sicam with the Regional Trial
Court of Makati seeking indemnification for the loss of pawned jewelry and
payment of actual, moral and exemplary damages as well as attorney's
fees. The case was docketed as Civil Case No. 88-2035.

DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Roberto C. Sicam, Jr.
(petitioner Sicam) and Agencia de R.C. Sicam, Inc. (petitioner corporation)
seeking to annul the Decision1 of the Court of Appeals dated March 31,
2003, and its Resolution2 dated August 8, 2003, in CA G.R. CV No. 56633.

Petitioner Sicam filed his Answer contending that he is not the real partyin-interest as the pawnshop was incorporated on April 20, 1987 and known
as Agencia de R.C. Sicam, Inc; that petitioner corporation had exercised
due care and diligence in the safekeeping of the articles pledged with it
and could not be made liable for an event that is fortuitous.
Respondents subsequently filed an Amended Complaint to include
petitioner corporation.

It appears that on different dates from September to October 1987, Lulu V.

Jorge (respondent Lulu) pawned several pieces of jewelry with Agencia de

Page | 21

Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is

concerned considering that he is not the real party-in-interest.
Respondents opposed the same. The RTC denied the motion in an Order
dated November 8, 1989.5
After trial on the merits, the RTC rendered its Decision 6 dated January 12,
1993, dismissing respondents complaint as well as petitioners
counterclaim. The RTC held that petitioner Sicam could not be made
personally liable for a claim arising out of a corporate transaction; that in
the Amended Complaint of respondents, they asserted that "plaintiff
pawned assorted jewelries in defendants' pawnshop"; and that as a
consequence of the separate juridical personality of a corporation, the
corporate debt or credit is not the debt or credit of a stockholder.
The RTC further ruled that petitioner corporation could not be held liable
for the loss of the pawned jewelry since it had not been rebutted by
respondents that the loss of the pledged pieces of jewelry in the
possession of the corporation was occasioned by armed robbery; that
robbery is a fortuitous event which exempts the victim from liability for the
loss, citing the case of Austria v. Court of Appeals;7 and that the parties
transaction was that of a pledgor and pledgee and under Art. 1174 of the
Civil Code, the pawnshop as a pledgee is not responsible for those events
which could not be foreseen.
Respondents appealed the RTC Decision to the CA. In a Decision dated
March 31, 2003, the CA reversed the RTC, the dispositive portion of which
reads as follows:
WHEREFORE, premises considered, the instant Appeal is
GRANTED, and the Decision dated January 12, 1993,of the
Regional Trial Court of Makati, Branch 62, is hereby
REVERSED and SET ASIDE, ordering the appellees to pay
appellants the actual value of the lost jewelry amounting to
P272,000.00, and attorney' fees of P27,200.00.8
In finding petitioner Sicam liable together with petitioner corporation, the
CA applied the doctrine of piercing the veil of corporate entity reasoning
that respondents were misled into thinking that they were dealing with the
pawnshop owned by petitioner Sicam as all the pawnshop tickets issued to
them bear the words "Agencia de R.C. Sicam"; and that there was no
indication on the pawnshop tickets that it was the petitioner corporation
that owned the pawnshop which explained why respondents had to amend
their complaint impleading petitioner corporation.
The CA further held that the corresponding diligence required of a
pawnshop is that it should take steps to secure and protect the pledged
items and should take steps to insure itself against the loss of articles
which are entrusted to its custody as it derives earnings from the
pawnshop trade which petitioners failed to do; that Austria is not

applicable to this case since the robbery incident happened in 1961 when
the criminality had not as yet reached the levels attained in the present
day; that they are at least guilty of contributory negligence and should be
held liable for the loss of jewelries; and that robberies and hold-ups are
foreseeable risks in that those engaged in the pawnshop business are
expected to foresee.
The CA concluded that both petitioners should be jointly and severally held
liable to respondents for the loss of the pawned jewelry.
Petitioners motion for reconsideration was denied in a Resolution dated
August 8, 2003.
Hence, the instant petition for review with the following assignment of
errors:
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT
OPENED ITSELF TO REVERSAL, WHEN IT ADOPTED
UNCRITICALLY (IN FACT IT REPRODUCED AS ITS OWN
WITHOUT IN THE MEANTIME ACKNOWLEDGING IT) WHAT
THE RESPONDENTS ARGUED IN THEIR BRIEF, WHICH
ARGUMENT WAS PALPABLY UNSUSTAINABLE.
THE COURT OF APPEALS ERRED, AND WHEN IT DID, IT
OPENED ITSELF TO REVERSAL BY THIS HONORABLE COURT,
WHEN IT AGAIN ADOPTED UNCRITICALLY (BUT WITHOUT
ACKNOWLEDGING IT) THE SUBMISSIONS OF THE
RESPONDENTS IN THEIR BRIEF WITHOUT ADDING
ANYTHING MORE THERETO DESPITE THE FACT THAT THE
SAID ARGUMENT OF THE RESPONDENTS COULD NOT HAVE
BEEN SUSTAINED IN VIEW OF UNREBUTTED EVIDENCE ON
RECORD.9
Anent the first assigned error, petitioners point out that the CAs finding
that petitioner Sicam is personally liable for the loss of the pawned
jewelries is "a virtual and uncritical reproduction of the arguments set out
on pp. 5-6 of the Appellants brief."10
Petitioners argue that the reproduced arguments of respondents in their
Appellants Brief suffer from infirmities, as follows:
(1) Respondents conclusively asserted in paragraph 2 of
their Amended Complaint that Agencia de R.C. Sicam, Inc.
is the present owner of Agencia de R.C. Sicam Pawnshop,
and therefore, the CA cannot rule against said conclusive
assertion of respondents;

Page | 22

(2) The issue resolved against petitioner Sicam was not

among those raised and litigated in the trial court; and
(3) By reason of the above infirmities, it was error for the
CA to have pierced the corporate veil since a corporation
has a personality distinct and separate from its individual
stockholders or members.
Anent the second error, petitioners point out that the CA finding on their
negligence is likewise an unedited reproduction of respondents brief which
had the following defects:
(1) There were unrebutted evidence on record that
petitioners had observed the diligence required of them,
i.e, they wanted to open a vault with a nearby bank for
purposes of safekeeping the pawned articles but was
discouraged by the Central Bank (CB) since CB rules
provide that they can only store the pawned articles in a
vault inside the pawnshop premises and no other place;
(2) Petitioners were adjudged negligent as they did not
take insurance against the loss of the pledged jelweries,
but it is judicial notice that due to high incidence of crimes,
insurance companies refused to cover pawnshops and
banks because of high probability of losses due to
robberies;
(3) In Hernandez v. Chairman, Commission on Audit (179
SCRA 39, 45-46), the victim of robbery was exonerated
from liability for the sum of money belonging to others and
lost by him to robbers.
Respondents filed their Comment and petitioners filed their Reply thereto.
The parties subsequently submitted their respective Memoranda.
We find no merit in the petition.
To begin with, although it is true that indeed the CA findings were exact
reproductions of the arguments raised in respondents (appellants) brief
filed with the CA, we find the same to be not fatally infirmed. Upon
examination of the Decision, we find that it expressed clearly and distinctly
the facts and the law on which it is based as required by Section 8, Article
VIII of the Constitution. The discretion to decide a case one way or another
is broad enough to justify the adoption of the arguments put forth by one
of the parties, as long as these are legally tenable and supported by law
and the facts on records.11

Our jurisdiction under Rule 45 of the Rules of Court is limited to the review
of errors of law committed by the appellate court. Generally, the findings of
fact of the appellate court are deemed conclusive and we are not dutybound to analyze and calibrate all over again the evidence adduced by the
parties in the court a quo.12 This rule, however, is not without exceptions,
such as where the factual findings of the Court of Appeals and the trial
court are conflicting or contradictory13 as is obtaining in the instant case.
However, after a careful examination of the records, we find no justification
to absolve petitioner Sicam from liability.
The CA correctly pierced the veil of the corporate fiction and adjudged
petitioner Sicam liable together with petitioner corporation. The rule is that
the veil of corporate fiction may be pierced when made as a shield to
perpetrate fraud and/or confuse legitimate issues. 14 The theory of
corporate entity was not meant to promote unfair objectives or otherwise
to shield them.15
Notably, the evidence on record shows that at the time respondent Lulu
pawned her jewelry, the pawnshop was owned by petitioner Sicam himself.
As correctly observed by the CA, in all the pawnshop receipts issued to
respondent Lulu in September 1987, all bear the words "Agencia de R. C.
Sicam," notwithstanding that the pawnshop was allegedly incorporated in
April 1987. The receipts issued after such alleged incorporation were still in
the name of "Agencia de R. C. Sicam," thus inevitably misleading, or at the
very least, creating the wrong impression to respondents and the public as
well, that the pawnshop was owned solely by petitioner Sicam and not by a
corporation.
Even petitioners counsel, Atty. Marcial T. Balgos, in his letter 16 dated
October 15, 1987 addressed to the Central Bank, expressly referred to
petitioner Sicam as the proprietor of the pawnshop notwithstanding the
alleged incorporation in April 1987.
We also find no merit in petitioners' argument that since respondents had
alleged in their Amended Complaint that petitioner corporation is the
present owner of the pawnshop, the CA is bound to decide the case on that
basis.
Section 4 Rule 129 of the Rules of Court provides that an admission, verbal
or written, made by a party in the course of the proceedings in the same
case, does not require proof. The admission may be contradicted only by
showing that it was made through palpable mistake or that no such
admission was made.
Thus, the general rule that a judicial admission is conclusive upon the
party making it and does not require proof, admits of two exceptions, to
wit: (1) when it is shown that such admission was made through palpable
mistake, and (2) when it is shown that no such admission was in fact made.

Page | 23

The latter exception allows one to contradict an admission by

denying that he made such an admission.17
The Committee on the Revision of the Rules of Court explained the second
exception in this wise:

the dismissal of the complaint against him simply on the

mere allegation that his pawnshop business is now
incorporated. It is a matter of defense, the merit of which
can only be reached after consideration of the evidence to
be presented in due course.19

x x x if a party invokes an "admission" by an adverse party,

but cites the admission "out of context," then the one
making the "admission" may show that he made no "such"
admission, or that his admission was taken out of
context.

Unmistakably, the alleged admission made in respondents' Amended

Complaint was taken "out of context" by petitioner Sicam to suit his own
purpose. Ineluctably, the fact that petitioner Sicam continued to issue
pawnshop receipts under his name and not under the corporation's name
militates for the piercing of the corporate veil.

x x x that the party can also show that he made no

"such admission", i.e., not in the sense in which the
admission is made to appear.

We likewise find no merit in petitioners' contention that the CA erred in

piercing the veil of corporate fiction of petitioner corporation, as it was not
an issue raised and litigated before the RTC.

That is the reason for the modifier "such" because if the

rule simply states that the admission may be contradicted
by showing that "no admission was made," the rule would
not really be providing for a contradiction of the admission
but just a denial.18 (Emphasis supplied).

Petitioner Sicam had alleged in his Answer filed with the trial court that he
was not the real party-in-interest because since April 20, 1987, the
pawnshop business initiated by him was incorporated and known as
Agencia de R.C. Sicam. In the pre-trial brief filed by petitioner Sicam, he
submitted that as far as he was concerned, the basic issue was whether he
is the real party in interest against whom the complaint should be
directed.20 In fact, he subsequently moved for the dismissal of the
complaint as to him but was not favorably acted upon by the trial court.
Moreover, the issue was squarely passed upon, although erroneously, by
the trial court in its Decision in this manner:

While it is true that respondents alleged in their Amended Complaint that

petitioner corporation is the present owner of the pawnshop, they did so
only because petitioner Sicam alleged in his Answer to the original
complaint filed against him that he was not the real party-in-interest as the
pawnshop was incorporated in April 1987. Moreover, a reading of the
Amended Complaint in its entirety shows that respondents referred to both
petitioner Sicam and petitioner corporation where they (respondents)
pawned their assorted pieces of jewelry and ascribed to both the failure to
observe due diligence commensurate with the business which resulted in
the loss of their pawned jewelry.
Markedly, respondents, in their Opposition to petitioners Motion to Dismiss
Amended Complaint, insofar as petitioner Sicam is concerned, averred as
follows:
Roberto C. Sicam was named the defendant in the original
complaint because the pawnshop tickets involved in this
case did not show that the R.C. Sicam Pawnshop was a
corporation. In paragraph 1 of his Answer, he admitted the
allegations in paragraph 1 and 2 of the Complaint. He
merely added "that defendant is not now the real party in
interest in this case."
It was defendant Sicam's omission to correct the pawnshop
tickets used in the subject transactions in this case which
was the cause of the instant action. He cannot now ask for

x x x The defendant Roberto Sicam, Jr likewise denies

liability as far as he is concerned for the reason that he
cannot be made personally liable for a claim arising from a
corporate transaction.
This Court sustains the contention of the defendant
Roberto C. Sicam, Jr. The amended complaint itself asserts
that "plaintiff pawned assorted jewelries in defendant's
pawnshop." It has been held that " as a consequence of the
separate juridical personality of a corporation, the
corporate debt or credit is not the debt or credit of the
stockholder, nor is the stockholder's debt or credit that of a
corporation.21
Clearly, in view of the alleged incorporation of the pawnshop, the issue of
whether petitioner Sicam is personally liable is inextricably connected with
the determination of the question whether the doctrine of piercing the
corporate veil should or should not apply to the case.
The next question is whether petitioners are liable for the loss of the
pawned articles in their possession.

Page | 24

Petitioners insist that they are not liable since robbery is a fortuitous event
and they are not negligent at all.
We are not persuaded.
Article 1174 of the Civil Code provides:
Art. 1174. Except in cases expressly specified by the law,
or when it is otherwise declared by stipulation, or when the
nature of the obligation requires the assumption of risk, no
person shall be responsible for those events which could
not be foreseen or which, though foreseen, were inevitable.
Fortuitous events by definition are extraordinary events not foreseeable or
avoidable. It is therefore, not enough that the event should not have been
foreseen or anticipated, as is commonly believed but it must be one
impossible to foresee or to avoid. The mere difficulty to foresee the
happening is not impossibility to foresee the same. 22
To constitute a fortuitous event, the following elements must concur: (a)
the cause of the unforeseen and unexpected occurrence or of the failure of
the debtor to comply with obligations must be independent of human will;
(b) it must be impossible to foresee the event that constitutes the caso
fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the
occurrence must be such as to render it impossible for the debtor to fulfill
obligations in a normal manner; and, (d) the obligor must be free from any
participation in the aggravation of the injury or loss. 23
The burden of proving that the loss was due to a fortuitous event rests on
him who invokes it.24 And, in order for a fortuitous event to exempt one
from liability, it is necessary that one has committed no negligence or
misconduct that may have occasioned the loss. 25
It has been held that an act of God cannot be invoked to protect a person
who has failed to take steps to forestall the possible adverse consequences
of such a loss. One's negligence may have concurred with an act of God in
producing damage and injury to another; nonetheless, showing that the
immediate or proximate cause of the damage or injury was a fortuitous
event would not exempt one from liability. When the effect is found to be
partly the result of a person's participation -- whether by active
intervention, neglect or failure to act -- the whole occurrence is humanized
and removed from the rules applicable to acts of God. 26
Petitioner Sicam had testified that there was a security guard in their
pawnshop at the time of the robbery. He likewise testified that when he
started the pawnshop business in 1983, he thought of opening a vault with
the nearby bank for the purpose of safekeeping the valuables but was
discouraged by the Central Bank since pawned articles should only be

stored in a vault inside the pawnshop. The very measures which petitioners
had allegedly adopted show that to them the possibility of robbery was not
only foreseeable, but actually foreseen and anticipated. Petitioner Sicams
testimony, in effect, contradicts petitioners defense of fortuitous event.
Moreover, petitioners failed to show that they were free from any
negligence by which the loss of the pawned jewelry may have been
occasioned.
Robbery per se, just like carnapping, is not a fortuitous event. It does not
foreclose the possibility of negligence on the part of herein petitioners. In
Co v. Court of Appeals,27 the Court held:
It is not a defense for a repair shop of motor vehicles to
escape liability simply because the damage or loss of a
thing lawfully placed in its possession was due to
carnapping. Carnapping per se cannot be considered as a
fortuitous event. The fact that a thing was unlawfully
and forcefully taken from another's rightful
possession, as in cases of carnapping, does not
automatically give rise to a fortuitous event. To be
considered as such, carnapping entails more than
the mere forceful taking of another's property. It
must be proved and established that the event was
an act of God or was done solely by third parties and
that neither the claimant nor the person alleged to
be negligent has any participation. In accordance
with the Rules of Evidence, the burden of proving
that the loss was due to a fortuitous event rests on
him who invokes it which in this case is the
private respondent. However, other than the police
report of the alleged carnapping incident, no other
evidence was presented by private respondent to the
effect that the incident was not due to its fault. A police
report of an alleged crime, to which only private
respondent is privy, does not suffice to establish the
carnapping. Neither does it prove that there was no fault
on the part of private respondent notwithstanding the
parties' agreement at the pre-trial that the car was
carnapped. Carnapping does not foreclose the possibility of
fault or negligence on the part of private respondent. 28
Just like in Co, petitioners merely presented the police report of the
Paraaque Police Station on the robbery committed based on the report of
petitioners' employees which is not sufficient to establish robbery. Such
report also does not prove that petitioners were not at fault.

Page | 25

On the contrary, by the very evidence of petitioners, the CA did not err in
finding that petitioners are guilty of concurrent or contributory negligence
as provided in Article 1170 of the Civil Code, to wit:
Art. 1170. Those who in the performance of their
obligations are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof, are
liable for damages.29
Article 2123 of the Civil Code provides that with regard to pawnshops and
other establishments which are engaged in making loans secured by
pledges, the special laws and regulations concerning them shall be
observed, and subsidiarily, the provisions on pledge, mortgage and
antichresis.
The provision on pledge, particularly Article 2099 of the Civil Code,
provides that the creditor shall take care of the thing pledged with the
diligence of a good father of a family. This means that petitioners must
take care of the pawns the way a prudent person would as to his own
property.
In this connection, Article 1173 of the Civil Code further provides:
Art. 1173. The fault or negligence of the obligor consists in
the omission of that diligence which is required by the
nature of the obligation and corresponds with the
circumstances of the persons, of time and of the place.
When negligence shows bad faith, the provisions of Articles
1171 and 2201, paragraph 2 shall apply.
If the law or contract does not state the diligence which is
to be observed in the performance, that which is expected
of a good father of a family shall be required.
We expounded in Cruz v. Gangan30 that negligence is the omission to do
something which a reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would do; or the doing of
something which a prudent and reasonable man would not do. 31 It is want
of care required by the circumstances.
A review of the records clearly shows that petitioners failed to exercise
reasonable care and caution that an ordinarily prudent person would have
used in the same situation. Petitioners were guilty of negligence in the
operation of their pawnshop business. Petitioner Sicam testified, thus:
Court:
Q. Do you have security guards in your pawnshop?

A. Yes, your honor.

Q. Then how come that the robbers were able to enter the
premises when according to you there was a security
guard?
A. Sir, if these robbers can rob a bank, how much more a
pawnshop.
Q. I am asking you how were the robbers able to enter
despite the fact that there was a security guard?
A. At the time of the incident which happened about 1:00
and 2:00 o'clock in the afternoon and it happened on a
Saturday and everything was quiet in the area BF Homes
Paraaque they pretended to pawn an article in the
pawnshop, so one of my employees allowed him to come in
and it was only when it was announced that it was a hold
up.
Q. Did you come to know how the vault was opened?
A. When the pawnshop is official (sic) open your honor the
pawnshop is partly open. The combination is off.
Q. No one open (sic) the vault for the robbers?
A. No one your honor it was open at the time of the
robbery.
Q. It is clear now that at the time of the robbery the vault
was open the reason why the robbers were able to get all
the items pawned to you inside the vault.
A. Yes sir.32
revealing that there were no security measures adopted by petitioners in
the operation of the pawnshop. Evidently, no sufficient precaution and
vigilance were adopted by petitioners to protect the pawnshop from
unlawful intrusion. There was no clear showing that there was any security
guard at all. Or if there was one, that he had sufficient training in securing
a pawnshop. Further, there is no showing that the alleged security guard
exercised all that was necessary to prevent any untoward incident or to
ensure that no suspicious individuals were allowed to enter the premises.
In fact, it is even doubtful that there was a security guard, since it is quite
impossible that he would not have noticed that the robbers were armed
with caliber .45 pistols each, which were allegedly poked at the

Page | 26

employees.33 Significantly, the alleged security guard was not presented at

all to corroborate petitioner Sicam's claim; not one of petitioners'
employees who were present during the robbery incident testified in court.
Furthermore, petitioner Sicam's admission that the vault was open at the
time of robbery is clearly a proof of petitioners' failure to observe the care,
precaution and vigilance that the circumstances justly demanded.
Petitioner Sicam testified that once the pawnshop was open, the
combination was already off. Considering petitioner Sicam's testimony that
the robbery took place on a Saturday afternoon and the area in BF Homes
Paraaque at that time was quiet, there was more reason for petitioners to
have exercised reasonable foresight and diligence in protecting the
pawned jewelries. Instead of taking the precaution to protect them, they
let open the vault, providing no difficulty for the robbers to cart away the
pawned articles.
We, however, do not agree with the CA when it found petitioners negligent
for not taking steps to insure themselves against loss of the pawned
jewelries.
Under Section 17 of Central Bank Circular No. 374, Rules and Regulations
for Pawnshops, which took effect on July 13, 1973, and which was issued
pursuant to Presidential Decree No. 114, Pawnshop Regulation Act, it is
provided that pawns pledged must be insured, to wit:
Sec. 17. Insurance of Office Building and Pawns- The place
of business of a pawnshop and the pawns pledged to it
must be insured against fire and against burglary as
well as for the latter(sic), by an insurance company
accredited by the Insurance Commissioner.
However, this Section was subsequently amended by CB Circular No. 764
which took effect on October 1, 1980, to wit:
Sec. 17 Insurance of Office Building and Pawns The office
building/premises and pawns of a pawnshop must be
insured against fire. (emphasis supplied).
where the requirement that insurance against burglary was deleted.
Obviously, the Central Bank considered it not feasible to require insurance
of pawned articles against burglary.
The robbery in the pawnshop happened in 1987, and considering the
above-quoted amendment, there is no statutory duty imposed on
petitioners to insure the pawned jewelry in which case it was error for the
CA to consider it as a factor in concluding that petitioners were negligent.

Nevertheless, the preponderance of evidence shows that petitioners failed

to exercise the diligence required of them under the Civil Code.
The diligence with which the law requires the individual at all times to
govern his conduct varies with the nature of the situation in which he is
placed and the importance of the act which he is to perform. 34 Thus, the
cases of Austria v. Court of Appeals,35 Hernandez v. Chairman, Commission
on Audit36 and Cruz v. Gangan37 cited by petitioners in their pleadings,
where the victims of robbery were exonerated from liability, find no
application to the present case.
In Austria, Maria Abad received from Guillermo Austria a pendant with
diamonds to be sold on commission basis, but which Abad failed to
subsequently return because of a robbery committed upon her in 1961.
The incident became the subject of a criminal case filed against several
persons. Austria filed an action against Abad and her husband (Abads) for
recovery of the pendant or its value, but the Abads set up the defense that
the robbery extinguished their obligation. The RTC ruled in favor of Austria,
as the Abads failed to prove robbery; or, if committed, that Maria Abad was
guilty of negligence. The CA, however, reversed the RTC decision holding
that the fact of robbery was duly established and declared the Abads not
responsible for the loss of the jewelry on account of a fortuitous event. We
held that for the Abads to be relieved from the civil liability of returning the
pendant under Art. 1174 of the Civil Code, it would only be sufficient that
the unforeseen event, the robbery, took place without any concurrent fault
on the debtors part, and this can be done by preponderance of evidence;
that to be free from liability for reason of fortuitous event, the debtor must,
in addition to the casus itself, be free of any concurrent or contributory
fault or negligence.38
We found in Austria that under the circumstances prevailing at the time the
Decision was promulgated in 1971, the City of Manila and its suburbs had a
high incidence of crimes against persons and property that rendered travel
after nightfall a matter to be sedulously avoided without suitable
precaution and protection; that the conduct of Maria Abad in returning
alone to her house in the evening carrying jewelry of considerable value
would have been negligence per se and would not exempt her from
responsibility in the case of robbery. However we did not hold Abad liable
for negligence since, the robbery happened ten years previously; i.e.,
1961, when criminality had not reached the level of incidence obtaining in
1971.
In contrast, the robbery in this case took place in 1987 when robbery was
already prevalent and petitioners in fact had already foreseen it as they
wanted to deposit the pawn with a nearby bank for safekeeping. Moreover,
unlike in Austria, where no negligence was committed, we found
petitioners negligent in securing their pawnshop as earlier discussed.

Page | 27

In Hernandez, Teodoro Hernandez was the OIC and special disbursing

officer of the Ternate Beach Project of the Philippine Tourism in Cavite. In
the morning of July 1, 1983, a Friday, he went to Manila to encash two
checks covering the wages of the employees and the operating expenses
of the project. However for some reason, the processing of the check was
delayed and was completed at about 3 p.m. Nevertheless, he decided to
encash the check because the project employees would be waiting for their
pay the following day; otherwise, the workers would have to wait until July
5, the earliest time, when the main office would open. At that time, he had
two choices: (1) return to Ternate, Cavite that same afternoon and arrive
early evening; or (2) take the money with him to his house in Marilao,
Bulacan, spend the night there, and leave for Ternate the following day. He
chose the second option, thinking it was the safer one. Thus, a little past 3
p.m., he took a passenger jeep bound for Bulacan. While the jeep was on
Epifanio de los Santos Avenue, the jeep was held up and the money kept
by Hernandez was taken, and the robbers jumped out of the jeep and ran.
Hernandez chased the robbers and caught up with one robber who was
subsequently charged with robbery and pleaded guilty. The other robber
who held the stolen money escaped. The Commission on Audit found
Hernandez negligent because he had not brought the cash proceeds of the
checks to his office in Ternate, Cavite for safekeeping, which is the normal
procedure in the handling of funds. We held that Hernandez was not
negligent in deciding to encash the check and bringing it home to Marilao,
Bulacan instead of Ternate, Cavite due to the lateness of the hour for the
following reasons: (1) he was moved by unselfish motive for his coemployees to collect their wages and salaries the following day, a
Saturday, a non-working, because to encash the check on July 5, the next
working day after July 1, would have caused discomfort to laborers who
were dependent on their wages for sustenance; and (2) that choosing
Marilao as a safer destination, being nearer, and in view of the
comparative hazards in the trips to the two places, said decision seemed
logical at that time. We further held that the fact that two robbers attacked
him in broad daylight in the jeep while it was on a busy highway and in the
presence of other passengers could not be said to be a result of his
imprudence and negligence.

cellular phone. She then reported the incident to the police authorities;
however, the thief was not located, and the cellphone was not recovered.
She also reported the loss to the Regional Director of TESDA, and she
requested that she be freed from accountability for the cellphone. The
Resident Auditor denied her request on the ground that she lacked the
diligence required in the custody of government property and was ordered
to pay the purchase value in the total amount of P4,238.00. The COA found
no sufficient justification to grant the request for relief from accountability.
We reversed the ruling and found that riding the LRT cannot per se be
denounced as a negligent act more so because Cruzs mode of transit was
influenced by time and money considerations; that she boarded the LRT to
be able to arrive in Caloocan in time for her 3 pm meeting; that any
prudent and rational person under similar circumstance can reasonably be
expected to do the same; that possession of a cellphone should not hinder
one from boarding the LRT coach as Cruz did considering that whether she
rode a jeep or bus, the risk of theft would have also been present; that
because of her relatively low position and pay, she was not expected to
have her own vehicle or to ride a taxicab; she did not have a government
assigned vehicle; that placing the cellphone in a bag away from covetous
eyes and holding on to that bag as she did is ordinarily sufficient care of a
cellphone while traveling on board the LRT; that the records did not show
any specific act of negligence on her part and negligence can never be
presumed.
Unlike in the Cruz case, the robbery in this case happened in petitioners'
pawnshop and they were negligent in not exercising the precautions justly
demanded of a pawnshop.
WHEREFORE, except for the insurance aspect, the Decision of the Court of
Appeals dated March 31, 2003 and its Resolution dated August 8, 2003, are
AFFIRMED.
Costs against petitioners.
SO ORDERED.

Unlike in Hernandez where the robbery happened in a public utility, the

robbery in this case took place in the pawnshop which is under the control
of petitioners. Petitioners had the means to screen the persons who were
allowed entrance to the premises and to protect itself from unlawful
intrusion. Petitioners had failed to exercise precautionary measures in
ensuring that the robbers were prevented from entering the pawnshop and
for keeping the vault open for the day, which paved the way for the
robbers to easily cart away the pawned articles.
In Cruz, Dr. Filonila O. Cruz, Camanava District Director of Technological
Education and Skills Development Authority (TESDA), boarded the Light
Rail Transit (LRT) from Sen. Puyat Avenue to Monumento when her
handbag was slashed and the contents were stolen by an unidentified
person. Among those stolen were her wallet and the government-issued

G.R. No. 177921

December 4, 2013

METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S. DYCHIAO

AND TIUOH YAN, SPOUSES GUILLERMO AND MERCEDES DYCHIAO,
AND SPOUSES VICENTE AND FILOMENA DYCHIAO, Petitioners,
vs.
ALLIED BANK CORPORATION, Respondent.
RESOLUTION
PERLAS-BERNABE, J.:

Page | 28

Assailed in this petition for review on certiorari 1 are the Decision2 dated
February 12, 2007 and the Resolution 3 dated May 10, 2007 of the Court of
Appeals (CA) in CA-G.R. CV No. 86896 which reversed and set aside the
Decision4 dated January 17, 2006 of the Regional Trial Court of Makati,
Branch 57 (RTC) in Civil Case No. 00-1563, thereby ordering petitioners
Metro Concast Steel Corporation (Metro Concast), Spouses Jose S. Dychiao
and Tiu Oh Yan, Spouses Guillermo and Mercedes Dychiao, and Spouses
Vicente and Filomena Duchiao (individual petitioners) to solidarily pay
respondent Allied Bank Corporation (Allied Bank) the aggregate amount of
P51,064,094.28, with applicable interests and penalty charges.
The Facts
On various dates and for different amounts, Metro Concast, a corporation
duly organized and existing under and by virtue of Philippine laws and
engaged in the business of manufacturing steel, 5 through its officers,
herein individual petitioners, obtained several loans from Allied Bank.
These loan transactions were covered by a promissory note and separate
letters of credit/trust receipts, the details of which are as follows:
<<Reference: http://www.scribd.com/doc/196404620/177921>>
Date Document Amount
December 13, 1996 Promissory Note No. 96-21301 6
P2,000,000.00 November 7, 1995 Trust Receipt No. 96-202365 7
P608,603.04 May 13, 1996 Trust Receipt No. 96-9605228
P3,753,777.40 May 24, 1996 Trust Receipt No. 96-960524 9
P4,602,648.08 March 21, 1997 Trust Receipt No. 97-20472410
P7,289,757.79 June 7, 1996 Trust Receipt No. 96-203280 11
P17,340,360.73 July 26, 1995 Trust Receipt No. 95-20194312
P670,709.24 August 31, 1995 Trust Receipt No. 95-20205313
P313,797.41 November 16, 1995 Trust Receipt No. 96-20243914

P750,089.25 December 13, 1995 Trust Receipt No. 96-379089 17

P92,919.00 December 13, 1995 Trust Receipt No. 96/20258118
P224,713.58
The interest rate under Promissory Note No. 96-21301 was pegged at
15.25% per annum (p.a.), with penalty charge of 3% per month in case of
default; while the twelve (12) trust receipts uniformly provided for an
interest rate of 14% p.a. and 1% penalty charge. By way of security, the
individual
petitioners
executed
several
Continuing
Guaranty/Comprehensive Surety Agreements19 in favor of Allied Bank.
Petitioners failed to settle their obligations under the aforementioned
promissory note and trust receipts, hence, Allied Bank, through counsel,
sent them demand letters,20 all dated December 10, 1998, seeking
payment of the total amount of P51,064,093.62, but to no avail. Thus,
Allied Bank was prompted to file a complaint for collection of sum of
money21 (subject complaint) against petitioners before the RTC, docketed
as Civil Case No. 00-1563. In their second 22 Amended Answer,23 petitioners
admitted their indebtedness to Allied Bank but denied liability for the
interests and penalties charged, claiming to have paid the total sum of
P65,073,055.73 by way of interest charges for the period covering 1992 to
1997.24
They also alleged that the economic reverses suffered by the Philippine
economy in 1998 as well as the devaluation of the peso against the US
dollar contributed greatly to the downfall of the steel industry, directly
affecting the business of Metro Concast and eventually leading to its
cessation. Hence, in order to settle their debts with Allied Bank, petitioners
offered the sale of Metro Concasts remaining assets, consisting of
machineries and equipment, to Allied Bank, which the latter, however,
refused. Instead, Allied Bank advised them to sell the equipment and apply
the proceeds of the sale to their outstanding obligations. Accordingly,
petitioners offered the equipment for sale, but since there were no takers,
the equipment was reduced into ferro scrap or scrap metal over the years.
In 2002, Peakstar Oil Corporation (Peakstar), represented by one Crisanta
Camiling (Camiling), expressed interest in buying the scrap metal. During
the negotiations with Peakstar, petitioners claimed that Atty. Peter Saw
(Atty. Saw), a member of Allied Banks legal department, acted as the
latters agent. Eventually, with the alleged conformity of Allied Bank,
through Atty. Saw, a Memorandum of Agreement 25 dated November 8,
2002 (MoA) was drawn between Metro Concast, represented by petitioner
Jose Dychiao, and Peakstar, through Camiling, under which Peakstar
obligated itself to purchase the scrap metal for a total consideration of
P34,000,000.00, payable as follows:

P13,015,109.87 July 3, 1996 Trust Receipt No. 96-203552 15

P401,608.89 June 20, 1995 Trust Receipt No. 95-20171016

(a) P4,000,000.00 by way of earnest money P2,000,000.00 to be paid in

cash and the other P2,000,000.00 to be paid in two (2) post-dated checks
of P1,000,000.00 each;26 and

Page | 29

(b) the balance of P30,000,000.00 to be paid in ten (10) monthly

installments of P3,000,000.00, secured by bank guarantees from Bankwise,
Inc. (Bankwise) in the form of separate post-dated checks. 27

reneged its guarantee under the [MoA], herein [petitioners] should be

deemed to be discharged from their obligations lawfully incurred in favor of
[Allied Bank]."33

Unfortunately, Peakstar reneged on all its obligations under the MoA. In

this regard, petitioners asseverated that:

The CA examined the MoA executed between Metro Concast, as seller of

the ferro scrap, and Peakstar, as the buyer thereof, and found that the
same did not indicate that Allied Bank intervened or was a party thereto. It
also pointed out the fact that the post-dated checks pursuant to the MoA
were issued in favor of Jose Dychiao. Likewise, the CA found no sufficient
evidence on record showing that Atty. Saw was duly and legally authorized
to act for and on behalf of Allied Bank, opining that the RTC was "indulging
in hypothesis and speculation"34 when it made a contrary pronouncement.
While Atty. Saw received the earnest money from Peakstar, the receipt was
signed by him on behalf of Jose Dychiao.35

(a) their failure to pay their outstanding loan obligations to Allied Bank
must be considered as force majeure ; and
(b) since Allied Bank was the party that accepted the terms and conditions
of payment proposed by Peakstar, petitioners must therefore be deemed to
have settled their obligations to Allied Bank. To bolster their defense,
petitioner Jose Dychiao (Jose Dychiao) testified 28 during trial that it was
Atty. Saw himself who drafted the MoA and subsequently received 29 the
P2,000,000.00 cash and the two (2) Bankwise post-dated checks worth
P1,000,000.00 each from Camiling. However, Atty. Saw turned over only
the two (2) checks and P1,500,000.00 in cash to the wife of Jose Dychiao. 30
Claiming that the subject complaint was falsely and maliciously filed,
petitioners prayed for the award of moral damages in the amount of
P20,000,000.00 in favor of Metro Concast and at least P25,000,000.00 for
each individual petitioner, P25,000,000.00 as exemplary damages,
P1,000,000.00 as attorneys fees, P500,000.00 for other litigation
expenses, including costs of suit.
The RTC Ruling

It also added that "[i]n the final analysis, the aforesaid checks and receipts
were signed by [Atty.] Saw either as representative of [petitioners] or as
partner of the latters legal counsel, and not in anyway as representative of
[Allied Bank]."36
Consequently, the CA granted the appeal and directed petitioners to
solidarily pay Allied Bank their corresponding obligations under the
aforementioned promissory note and trust receipts, plus interests, penalty
charges and attorneys fees. Petitioners sought reconsideration 37 which
was, however, denied in a Resolution 38 dated May 10, 2007. Hence, this
petition.
The Issue Before the Court

After trial on the merits, the RTC, in a Decision dated January 17, 2006,
dismissed the subject complaint, holding that the "causes of action sued
upon had been paid or otherwise extinguished." It ruled that since Allied
Bank was duly represented by its agent, Atty. Saw, in all the negotiations
and transactions with Peakstar considering that Atty. Saw
31

At the core of the present controversy is the sole issue of whether or not
the loan obligations incurred by the petitioners under the subject
promissory note and various trust receipts have already been extinguished.
The Courts Ruling

(a) drafted the MoA,

(b) accepted the bank guarantee issued by Bankwise, and
(c) was apprised of developments regarding the sale and disposition of the
scrap metal then it stands to reason that the MoA between Metro Concast
and Peakstar was binding upon said bank.
The CA Ruling
Allied Bank appealed to the CA which, in a Decision 32 dated February 12,
2007, reversed and set aside the ruling of the RTC, ratiocinating that there
was "no legal basis in fact and in law to declare that when Bankwise

Article 1231 of the Civil Code states that obligations are extinguished
either by payment or performance, the loss of the thing due, the
condonation or remission of the debt, the confusion or merger of the rights
of creditor and debtor, compensation or novation.
In the present case, petitioners essentially argue that their loan obligations
to Allied Bank had already been extinguished due to Peakstars failure to
perform its own obligations to Metro Concast pursuant to the MoA.
Petitioners classify Peakstars default as a form of force majeure in the
sense that they have, beyond their control, lost the funds they expected to
have received from the Peakstar (due to the MoA) which they would, in
turn, use to pay their own loan obligations to Allied Bank. They further
state that Allied Bank was equally bound by Metro Concasts MoA with

Page | 30

Peakstar since its agent, Atty. Saw, actively represented it during the
negotiations and execution of the said agreement. Petitioners arguments
are untenable. At the outset, the Court must dispel the notion that the MoA
would have any relevance to the performance of petitioners obligations to
Allied Bank. The MoA is a sale of assets contract, while petitioners
obligations to Allied Bank arose from various loan transactions. Absent any
showing that the terms and conditions of the latter transactions have been,
in any way, modified or novated by the terms and conditions in the MoA,
said contracts should be treated separately and distinctly from each other,
such that the existence, performance or breach of one would not depend
on the existence, performance or breach of the other. In the foregoing
respect, the issue on whether or not Allied Bank expressed its conformity
to the assets sale transaction between Metro Concast and Peakstar (as
evidenced by the MoA) is actually irrelevant to the issues related to
petitioners loan obligations to the bank. Besides, as the CA pointed out,
the fact of Allied Banks representation has not been proven in this case
and hence, cannot be deemed as a sustainable defense to exculpate
petitioners from their loan obligations to Allied Bank. Now, anent
petitioners reliance on force majeure, suffice it to state that Peakstars
breach of its obligations to Metro Concast arising from the MoA cannot be
classified as a fortuitous event under jurisprudential formulation. As
discussed in Sicam v. Jorge:39

stand. Considering, however, that Allied Banks extra-judicial demand on

petitioners appears to have been made only on December 10, 1998, the
computation of the applicable interests and penalty charges should be
reckoned only from such date.

Fortuitous events by definition are extraordinary events not foreseeable or

avoidable. It is therefore, not enough that the event should not have been
foreseen or anticipated, as is commonly believed but it must be one
impossible to foresee or to avoid. The mere difficulty to foresee the
happening is not impossibility to foresee the same. To constitute a
fortuitous event, the following elements must concur: (a) the cause of the
unforeseen and unexpected occurrence or of the failure of the debtor to
comply with obligations must be independent of human will; (b) it must
be impossible to foresee the event that constitutes the caso fortuito or, if it
can be foreseen, it must be impossible to avoid; (c) the occurrence must
be such as to render it impossible for the debtor to fulfill
obligations in a normal manner; and (d) the obligor must be free from
any participation in the aggravation of the injury or loss. 40 (Emphases
supplied)

DECISION

While it may be argued that Peakstars breach of the MoA was unforseen
by petitioners, the same us clearly not "impossible"to foresee or even an
event which is independent of human will." Neither has it been shown that
said occurrence rendered it impossible for petitioners to pay their loan
obligations to Allied Bank and thus, negates the formers force majeure
theory altogether. In any case, as earlier stated, the performance or breach
of the MoA bears no relation to the performance or breach of the subject
loan transactions, they being separate and distinct sources of obligations.
The fact of the matter is that petitioners loan obligations to Allied Bank
remain subsisting for the basic reason that the former has not been able to
prove that the same had already been paid 41 or, in any way, extinguished.
In this regard, petitioners liability, as adjudged by the CA, must perforce

WHEREFORE, the petition is DENIED. The Decision dated February 12, 2007
and Resolution dated May 10, 2007 of the Court of Appeals in CA-G.R. CV
No. 86896 are hereby AFFIRMED with MODIFICATION reckoning the
applicable interests and penalty charges from the date of the extrajudicial
demand or on December 10, 1998. The rest of the appellate courts
dispositions stand.
SO ORDERED.
G.R. No. 118180. September 20, 1996]
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF
APPEALS, Sps. NORMY D. CARPIO and CARMEN ORQUISA; Sps. ROLANDO D.
CARPIO and RAFAELA VILLANUEVA; Sps. ELISEO D. CARPIO and
ANUNCIACION del ROSARIO; LUZ C. REYES, MARIO C. REYES, JULIET REYESRUBIN, respondents.

PADILLA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court
which seeks to set aside the decision xxviii of the Court of Appeals (CA) dated
28 February 1994 in C.A.-G.R. CV No. 37158, as well as the resolution
dated 11 August 1994 denying petitioner's motion for reconsideration.
The facts are undisputed:
Private respondents were the original owners of a parcel of agricultural
land covered by TCT No. T-1432, situated in Barrio Capucao, Ozamis City,
with an area of 113,695 square meters, more or less.
On 30 May 1977, private respondents mortgaged said land to petitioner.
When private respondents defaulted on their obligation, petitioner
foreclosed the mortgage on the land and emerged as sole bidder in the
ensuing auction sale. Consequently, Transfer Certificate of Title No. T10913 was eventually issued in petitioner's name.
On 6 April 1984, petitioner and private respondents entered into a Deed of
Conditional Sale wherein petitioner agreed to reconvey the foreclosed
property to private respondents.

Page | 31

The pertinent stipulations of the Deed provided that:

"WHEREAS, the VENDOR acquired a parcel of land in an auction sale by the
City Sheriff of Ozamiz City, pursuant to Act 3135, as amended, and subject
to the redemption period pursuant to CA 141, described as follows:
xxx

xxx

The trial court held that petitioner interpreted the fourth paragraph of Sec.
6, Rep. Act 6657 literally in conjunction with Sec. 1 of E.O. 407.

xxx

WHEREAS, the VENDEES offered to repurchase and the VENDOR agreed to

sell the above-described property, subject to the terms and stipulations as
hereinafter stipulated, for the sum of SEVENTY THREE THOUSAND SEVEN
HUNDRED ONLY (P73,700.00), with a down payment of P8,900.00 and the
balance of P64,800 shall be payable in six (6) years on equal quarterly
amortization plan at 18% interest per annum.
The first quarterly
amortization of P4,470.36 shall be payable three months from the date of
the execution of the documents and all subsequent amortization shall be
due and payable every quarter thereafter.
xxx

xxx

"WHEREFORE, judgment is rendered ordering defendant to execute and

deliver unto plaintiffs a deed of final sale of the land subject of their deed
of conditional sale - Lot 5259-A, to pay plaintiffs P10,000.00 as nominal
damages, P5,000.00 as attorney's fees, P3,000.00 as litis expenses and
costs."xxx

The fourth paragraph of Sec. 6, Rep. Act 6657 states that:

"Upon the effectivity of this Act, any sale disposition, lease, management
contract or transfer of possession of private lands executed by the original
landowner in violation of this act shall be null and void; Provided, however,
that those executed prior to this act shall be valid only when registered
with the Register of Deeds after the effectivity of this Act. Thereafter, all
Register of Deeds shall inform the DAR within 320 days of any transaction
involving agricultural lands in excess of five hectares."

xxx
while Sec. 1 of E.O. 407 states that:

That, upon completion of the payment herein stipulated and agreed, the
Vendor agrees to deliver to the Vendee/s(,) his heirs, administrators and
assigns(,) a good and sufficient deed of conveyance covering the property,
subject matter of this deed of conditional sale, in accordance with the
provisions of law." (Exh. "A", p. 5, Records)xxix
On 6 April 1990, upon completing the payment of the full repurchase price,
private respondents demanded from petitioner the execution of a Deed of
Conveyance in their favor.
Petitioner then informed private respondents that the prestation to execute
and deliver a deed of conveyance in their favor had become legally
impossible in view of Sec. 6 of Rep. Act 6657 (the Comprehensive Agrarian
Reform Law or CARL) approved 10 June 1988, and Sec. 1 of E.O. 407 issued
10 June 1990.
Aggrieved, private respondents filed a complaint for specific performance
with damages against petitioner before the Regional Trial Court of Ozamis
City, Branch XV. During the pre-trial, the trial court narrowed down the
issue to whether or not Sec. 6 of the CARL (Rep. Act 6657) had rendered
legally impossible compliance by petitioner with its obligation to execute a
deed of conveyance of the subject land in favor of private respondents.
The trial court ordered both parties to file their separate memorandum and
deemed the case submitted for decision thereafter.
On 30 January 1992, the trial court rendered judgment, the dispositive part
of which reads:

"Sec. 1. All government instrumentalities but not limited to x x x financial

institutions such as the DBP x x x shall immediately execute deeds of
transfer in favor of the Republic of the Philippines as represented by the
Department of Agrarian Reform and surrender to the department all
landholdings suitable for agriculture."
The court a quo noted that Sec. 6 of Rep. Act 6657, taken in its entirety, is
a provision dealing primarily with retention limits in agricultural land
allowed the landowner and his family and that the fourth paragraph, which
nullifies any sale x x x by the original landowner in violation of the Act,
does not cover the sale by petitioner (not the original land owner) to
private respondents.
On the other hand, according to the trial court, E.O. 407 took effect on 10
June 1990. But private respondents completed payment of the price for
the property, object of the conditional sale, as early as 6 April 1990.
Hence, with the fulfillment of the condition for the sale, the land covered
thereby, was detached from the mass of foreclosed properties held by DBP,
and, therefore, fell beyond the ambit or reach of E.O. 407.
Dissatisfied, petitioner appealed to the Court of Appeals (CA), still insisting
that its obligation to execute a Deed of Sale in favor of private respondents
had become a legal impossibility and that the non-impairment clause of
the Constitution must yield to the demands of police power.
On 28 February 1994, the CA rendered judgment dismissing petitioner's
appeal on the basis of the following disquisitions:

Page | 32

"It is a rule that if the obligation depends upon a suspensive condition, the
demandability as well as the acquisition or effectivity of the rights arising
from the obligation is suspended pending the happening or fulfillment of
the fact or event which constitutes the condition. Once the event which
constitutes the condition is fulfilled resulting in the effectivity of the
obligation, its effects retroact to the moment when the essential elements
which gave birth to the obligation have taken place (8 Manresa, 5th Ed. Bk.
1, pa. 33). Applying this precept to the case, the full payment by the
appellee on April 6, 1990 retroacts to the time the contract of conditional
sale was executed on April 6, 1984. From that time, all elements of the
contract of sale were present. Consequently, the contract of sale was
perfected. As such, the said sale does not come under the coverage of
R.A. 6657.
It is likewise interesting to note that despite the mandate of Sec. 1, R.A.
6657, appellant continued to accept the payments made by the appellee
until it was fully paid on April 6, 1990. All that the appellant has to do now
is to execute the final deed of sale in favor of the appellee. To follow the
line of argument of the appellant would only result in an unconscionable
injury to the appellee. Obligations arising from contracts have the force of
law between the contracting parties and should be complied with in good
faith (Flavio Macasaet & Associates, Inc. vs. Commission on Audit, 173
SCRA 352).
Going now to E.O. 407, We hold that the same can neither affect
appellant's obligation under the deed of conditional sale. Under the said
law, appellant is required to transfer to the Republic of the Philippines 'all
lands foreclosed' effective June 10, 1990. Under the facts obtaining, the
subject property has ceased to belong to the mass of foreclosed property
falling within the reach of said law. As earlier explained, the property has
already been sold to herein appellees even before the said E.O. has been
enacted. On this same reason, We therefore need not delve on the
applicability of DBP Circular No. 11."xxxi
In the present petition for review on certiorari, petitioner still insists on its
position that Rep. Act 6657, E.O. 407 and DBP Circular No. 11 rendered its
obligation to execute a Deed of Sale to private respondents "a legal
impossibility."xxxii Petitioner also questions the award of attorney's fees,
nominal damages, and costs in favor of private respondents, as not in
accord with law and the evidence.xxxiii
We rule in favor of private respondents.
In conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition. xxxiv
The deed of conditional sale between petitioner and private respondents
was executed on 6 April 1984. Private respondents had religiously paid the

agreed installments on the property until they completed payment on 6

April 1990. Petitioner, in fact, allowed private respondents to fulfill the
condition of effecting full payment, and invoked Section 6 of Rep. Act 6657
only after private respondents, having fully paid the repurchase price,
demanded the execution of a Deed of Sale in their favor.
It will be noted that Rep. Act 6657 was enacted on 10 June 1988. Following
petitioner's argument in this case, its prestation to execute the deed of
sale was rendered legally impossible by Section 6 of said law. In other
words, the deed of conditional sale was extinguished by a supervening
event, giving rise to an impossibility of performance.
We reject petitioner's contention as we rule - as the trial court and CA have
correctly ruled - that neither Sec. 6 of Rep. Act 6657 nor Sec. 1 of E.O. 407
was intended to impair the obligation of contract petitioner had much
earlier concluded with private respondents.
More specifically, petitioner cannot invoke the last paragraph of Sec. 6 of
Rep. Act 6657 to set aside its obligations already existing prior to its
enactment. In the first place, said last paragraph clearly deals with "any
sale, lease, management contract or transfer or possession of private lands
executed by the original land owner." The original owner in this case is not
the petitioner but the private respondents. Petitioner acquired the land
through foreclosure proceedings but agreed thereafter to reconvey it to
private respondents, albeit conditionally.
As earlier stated, Sec. 6 of Rep. Act 6657 in its entirety deals with retention
limits allowed by law to small landowners. Since the property here
involved is more or less ten (10) hectares, it is then within the jurisdiction
of the Department of Agrarian Reform (DAR) to determine whether or not
the property can be subjected to agrarian reform. But this necessitates an
entirely different proceeding.
The CARL (Rep. Act 6657) was not intended to take away property without
due process of law. Nor is it intended to impair the obligation of contracts.
In the same manner must E.O. 407 be regarded. It was enacted two (2)
months after private respondents had legally fulfilled the condition in the
contract of conditional sale by the payment of all installments on their due
dates. These laws cannot have retroactive effect unless there is an
express provision in them to that effect.xxxv
As to petitioner's contention, however, that the CA erred in affirming the
trial court's decision awarding nominal damages, and attorney's fees to
private respondents, we rule in favor of petitioner.
It appears that the core issue in this case, being a pure question of law, did
not reach the trial stage as the case was submitted for decision after pretrial.

Page | 33

The award of attorney's fees under Article 2208 of the Civil Code is more of
an exception to the general rule that it is not sound policy to place a
penalty on the right to litigate. While judicial discretion in the award of
attorney's fees is not entirely left out, the same, as a rule, must have a
factual, legal or equitable justification. The matter cannot and should not
be left to speculation and conjecture.xxxvi

BELLOSILLO, J.:

As aptly stated in the Mirasol case:

Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a
member of the Board of Trustees of the Central Philippine College (now
Central Philippine University [CPU]), executed a deed of donation in favor
of the latter of a parcel of land identified as Lot No. 3174-B-1 of the
subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which
Transfer Certificate of Title No. T-3910-A was issued in the name of the
donee CPU with the following annotations copied from the deed of donation

"x x x The matter of attorney's fees cannot be touched once and only in
the dispositive portion of the decision. The text itself must expressly state
the reason why attorney's fees are being awarded. The court, after
reading through the text of the appealed decision, finds the same bereft of
any findings of fact and law to justify the award of attorney's fees. The
matter of such fees was touched but once and appears only in the
dispositive portion of the decision. Simply put, the text of the decision did
not state the reason why attorney's fees are being awarded, and for this
reason, the Court finds it necessary to disallow the same for being
conjectural."xxxvii
While DBP committed egregious error in interpreting Sec. 6 of RA 6657, the
same is not equivalent to gross and evident bad faith when it refused to
execute the deed of sale in favor of private respondents.
For the same reasons stated above, the award of nominal damages in the
amount of P10,000.00 should also be deleted.
The amount of P3,000.00 as litigation expenses and costs against
petitioner must remain.
WHEREFORE, premises considered, the petition is hereby DENIED, and
the decision of the CA is hereby AFFIRMED, for lack of any reversible error,
with the MODIFICATION that attorney's fees and nominal damages awarded
to private respondents are hereby DELETED.
SO ORDERED.
G.R. No. 112127 July 17, 1995
CENTRAL
PHILIPPINE
UNIVERSITY,
petitioner,
vs.
COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N. LOPEZ,
CECILIA P. VDA. DE LOPEZ, REDAN LOPEZ AND REMARENE LOPEZ,
respondents.

CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari

of the decision of the Court of Appeals which reversed that of the Regional
Trial Court of Iloilo City directing petitioner to reconvey to private
respondents the property donated to it by their predecessor-in-interest.

1. The land described shall be utilized by the CPU

exclusively for the establishment and use of a
medical college with all its buildings as part of the
curriculum;
2. The said college shall not sell, transfer or convey
to any third party nor in any way encumber said
land;
3. The said land shall be called "RAMON LOPEZ
CAMPUS", and the said college shall be under
obligation to erect a cornerstone bearing that
name. Any net income from the land or any of its
parks shall be put in a fund to be known as the
"RAMON LOPEZ CAMPUS FUND" to be used for
improvements of said campus and erection of a
building thereon. 1
On 31 May 1989, private respondents, who are the heirs of Don Ramon
Lopez, Sr., filed an action for annulment of donation, reconveyance and
damages against CPU alleging that since 1939 up to the time the action
was filed the latter had not complied with the conditions of the donation.
Private respondents also argued that petitioner had in fact negotiated with
the National Housing Authority (NHA) to exchange the donated property
with another land owned by the latter.
In its answer petitioner alleged that the right of private respondents to file
the action had prescribed; that it did not violate any of the conditions in
the deed of donation because it never used the donated property for any
other purpose than that for which it was intended; and, that it did not sell,
transfer or convey it to any third party.

Page | 34

On 31 May 1991, the trial court held that petitioner failed to comply with
the conditions of the donation and declared it null and void. The court a
quo further directed petitioner to execute a deed of the reconveyance of
the property in favor of the heirs of the donor, namely, private respondents
herein.
Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled
that the annotations at the back of petitioner's certificate of title were
resolutory conditions breach of which should terminate the rights of the
donee thus making the donation revocable.
The appellate court also found that while the first condition mandated
petitioner to utilize the donated property for the establishment of a
medical school, the donor did not fix a period within which the condition
must be fulfilled, hence, until a period was fixed for the fulfillment of the
condition, petitioner could not be considered as having failed to comply
with its part of the bargain. Thus, the appellate court rendered its decision
reversing the appealed decision and remanding the case to the court of
origin for the determination of the time within which petitioner should
comply with the first condition annotated in the certificate of title.
Petitioner now alleges that the Court of Appeals erred: (a) in holding that
the quoted annotations in the certificate of title of petitioner are onerous
obligations and resolutory conditions of the donation which must be
fulfilled non-compliance of which would render the donation revocable; (b)
in holding that the issue of prescription does not deserve "disquisition;"
and, (c) in remanding the case to the trial court for the fixing of the period
within which petitioner would establish a medical college. 2
We find it difficult to sustain the petition. A clear perusal of the conditions
set forth in the deed of donation executed by Don Ramon Lopez, Sr., gives
us no alternative but to conclude that his donation was onerous, one
executed for a valuable consideration which is considered the equivalent of
the donation itself, e.g., when a donation imposes a burden equivalent to
the value of the donation. A gift of land to the City of Manila requiring the
latter to erect schools, construct a children's playground and open streets
on the land was considered an onerous donation. 3 Similarly, where Don
Ramon Lopez donated the subject parcel of land to petitioner but imposed
an obligation upon the latter to establish a medical college thereon, the
donation must be for an onerous consideration.
Under Art. 1181 of the Civil Code, on conditional obligations, the
acquisition of rights, as well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event which constitutes
the condition. Thus, when a person donates land to another on the
condition that the latter would build upon the land a school, the condition
imposed was not a condition precedent or a suspensive condition but a
resolutory one. 4 It is not correct to say that the schoolhouse had to be
constructed before the donation became effective, that is, before the

donee could become the owner of the land, otherwise, it would be invading
the property rights of the donor. The donation had to be valid before the
fulfillment of the condition. 5 If there was no fulfillment or compliance with
the condition, such as what obtains in the instant case, the donation may
now be revoked and all rights which the donee may have acquired under it
shall be deemed lost and extinguished.
The claim of petitioner that prescription bars the instant action of private
respondents is unavailing.
The condition imposed by the donor, i.e., the building of a
medical school upon the land donated, depended upon the
exclusive will of the donee as to when this condition shall
be fulfilled. When petitioner accepted the donation, it
bound itself to comply with the condition thereof. Since the
time within which the condition should be fulfilled
depended upon the exclusive will of the petitioner, it has
been held that its absolute acceptance and the
acknowledgment of its obligation provided in the deed of
donation were sufficient to prevent the statute of
limitations from barring the action of private respondents
upon the original contract which was the deed of donation.
6

Moreover, the time from which the cause of action accrued for the
revocation of the donation and recovery of the property donated cannot be
specifically determined in the instant case. A cause of action arises when
that which should have been done is not done, or that which should not
have been done is done. 7 In cases where there is no special provision for
such computation, recourse must be had to the rule that the period must
be counted from the day on which the corresponding action could have
been instituted. It is the legal possibility of bringing the action which
determines the starting point for the computation of the period. In this
case, the starting point begins with the expiration of a reasonable period
and opportunity for petitioner to fulfill what has been charged upon it by
the donor.
The period of time for the establishment of a medical college and the
necessary buildings and improvements on the property cannot be
quantified in a specific number of years because of the presence of several
factors and circumstances involved in the erection of an educational
institution, such as government laws and regulations pertaining to
education, building requirements and property restrictions which are
beyond the control of the donee.
Thus, when the obligation does not fix a period but from its nature and
circumstances it can be inferred that a period was intended, the general
rule provided in Art. 1197 of the Civil Code applies, which provides that the
courts may fix the duration thereof because the fulfillment of the obligation

Page | 35

itself cannot be demanded until after the court has fixed the period for
compliance therewith and such period has arrived. 8

Facundo T. Bautista for petitioners.

Jesus T. Garcia for private respondent.

This general rule however cannot be applied considering the different set
of circumstances existing in the instant case. More than a reasonable
period of fifty (50) years has already been allowed petitioner to avail of the
opportunity to comply with the condition even if it be burdensome, to
make the donation in its favor forever valid. But, unfortunately, it failed to
do so. Hence, there is no more need to fix the duration of a term of the
obligation when such procedure would be a mere technicality and formality
and would serve no purpose than to delay or lead to an unnecessary and
expensive multiplication of suits. 9 Moreover, under Art. 1191 of the Civil
Code, when one of the obligors cannot comply with what is incumbent
upon him, the obligee may seek rescission and the court shall decree the
same unless there is just cause authorizing the fixing of a period. In the
absence of any just cause for the court to determine the period of the
compliance, there is no more obstacle for the court to decree the rescission
claimed.
Finally, since the questioned deed of donation herein is basically a
gratuitous one, doubts referring to incidental circumstances of a gratuitous
contract should be resolved in favor of the least transmission of rights and
interests. 10 Records are clear and facts are undisputed that since the
execution of the deed of donation up to the time of filing of the instant
action, petitioner has failed to comply with its obligation as donee.
Petitioner has slept on its obligation for an unreasonable length of time.
Hence, it is only just and equitable now to declare the subject donation
already ineffective and, for all purposes, revoked so that petitioner as
donee should now return the donated property to the heirs of the donor,
private respondents herein, by means of reconveyance.
WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31
May 1991 is REINSTATED and AFFIRMED, and the decision of the Court of
Appeals of 18 June 1993 is accordingly MODIFIED. Consequently, petitioner
is directed to reconvey to private respondents Lot No. 3174-B-1 of the
subdivision plan Psd-1144 covered by Transfer Certificate of Title No. T3910-A within thirty (30) days from the finality of this judgment.

MELO, J.:
The deed of conveyance executed on May 28, 1975 by Juan Galicia, Sr.,
prior to his demise in 1979, and Celerina Labuguin, in favor of Albrigido
Leyva involving the undivided one-half portion of a piece of land situated
at Poblacion, Guimba, Nueva Ecija for the sum of P50,000.00 under the
following terms:
1. The sum of PESOS: THREE THOUSAND
(P3,000.00) is HEREBY acknowledged to have been
paid upon the execution of this agreement;
2. The sum of PESOS: TEN THOUSAND (P10,000.00)
shall be paid within ten (10) days from and after
the execution of this agreement;
3. The sum of PESOS: TEN THOUSAND (P10,000.00)
represents the VENDORS' indebtedness with the
Philippine Veterans Bank which is hereby assumed
by the VENDEE; and
4. The balance of PESOS: TWENTY SEVEN
THOUSAND (P27,000.00.) shall be paid within one
(1) year from and after the execution of this
instrument. (p. 53, Rollo)
is the subject matter of the present litigation between the heirs of Juan
Galicia, Sr. who assert breach of the conditions as against private
respondent's claim anchored on full payment and compliance with the
stipulations thereof.

Costs against petitioner.

SO ORDERED.
G.R. No. 96053 March 3, 1993
JOSEFINA TAYAG, RICARDO GALICIA, TERESITA GALICIA, EVELYN
GALICIA, JUAN GALICIA, JR. and RODRIGO GALICIA, petitioners,
vs.
COURT OF APPEALS and ALBRIGIDO LEYVA, respondents.

The court of origin which tried the suit for specific performance filed by
private respondent on account of the herein petitioners' reluctance to
abide by the covenant, ruled in favor of the vendee (p. 64, Rollo) while
respondent court practically agreed with the trial court except as to the
amount to be paid to petitioners and the refund to private respondent are
concerned (p. 46, Rollo).
There is no dispute that the sum of P3,000.00 listed as first installment was
received by Juan Galicia, Sr. According to petitioners, of the P10,000.00 to
be paid within ten days from execution of the instrument, only P9,707.00

Page | 36

was tendered to, and received by, them on numerous occasions from May
29, 1975, up to November 3, 1979. Concerning private respondent's
assumption of the vendors' obligation to the Philippine Veterans Bank, the
vendee paid only the sum of P6,926.41 while the difference the
indebtedness came from Celerina Labuguin (p. 73, Rollo). Moreover,
petitioners asserted that not a single centavo of the P27,000.00
representing the remaining balance was paid to them. Because of the
apprehension that the heirs of Juan Galicia, Sr. are disavowing the contract
inked by their predecessor, private respondent filed the complaint for
specific performance.

2. Ordering the defendants, heirs of Juan Galicia,

jointly and severally to pay attorney's fees of
P6,000.00 and the further sum of P3,000.00 for
actual and compensatory damages;

In addressing the issue of whether the conditions of the instrument were

performed by herein private respondent as vendee, the Honorable
Godofredo Rilloraza, Presiding Judge of Branch 31 of the Regional Trial
Court, Third Judicial Region stationed at Guimba, Nueva Ecija, decided to
uphold private respondent's theory on the basis of constructive fulfillment
under Article 1186 and estoppel through acceptance of piecemeal
payments in line with Article 1235 of the Civil Code.

4. Ordering the withdrawal of the amount of

P18,520.00 now consigned with the Court, and the
amount of P17,204.75 be delivered to the heirs of
Juan Galicia as payment of the balance of the sale
of the lot in question, the defendants herein after
deducting the amount of attorney's fees and
damages awarded to the plaintiff hereof and the
delivery to the plaintiff of the further sum of
P1,315.25 excess or over payment and, defendants
to pay the cost of the suit. (p. 69, Rollo)

Anent the P10,000.00 specified as second installment, the lower court

counted against the vendors the candid statement of Josefina Tayag who
sat on the witness stand and made the admission that the check issued as
payment thereof was nonetheless paid on a staggered basis when the
check was dishonored (TSN, September 1, 1983, pp. 3-4; p. 3, Decision; p.
66, Rollo). Regarding the third condition, the trial court noted that plaintiff
below paid more than P6,000.00 to the Philippine Veterans Bank but
Celerina Labuguin, the sister and co-vendor of Juan Galicia, Sr. paid
P3,778.77 which circumstance was construed to be a ploy under Article
1186 of the Civil Code that "prematurely prevented plaintiff from paying
the installment fully" and "for the purpose of withdrawing the title to the
lot". The acceptance by petitioners of the various payments even beyond
the periods agreed upon, was perceived by the lower court as tantamount
to faithful performance of the obligation pursuant to Article 1235 of the
Civil Code. Furthermore, the trial court noted that private respondent
consigned P18,520.00, an amount sufficient to offset the remaining
balance, leaving the sum of P1,315.00 to be credited to private
respondent.
On September 12, 1984, judgment was rendered:
1. Ordering the defendants heirs of Juan Galicia,
to execute the Deed of Sale of their undivided ONE
HALF (1/2) portion of Lot No. 1130, Guimba
Cadastre, covered by TCT No. NT-120563, in favor
of plaintiff Albrigido Leyva, with an equal frontage
facing the national road upon finality of judgment;
that, in their default, the Clerk of Court II, is hereby
ordered to execute the deed of conveyance in line
with the provisions of Section 10, Rule 39 of the
Rules of Court;

3. Ordering Celerina Labuguin and the other

defendants herein to surrender to the Court the
owner's duplicate of TCT No. NT-120563, province
of Nueva Ecija, for the use of plaintiff in registering
the portion, subject matter of the instant suit;

and following the appeal interposed with respondent court, Justice Dayrit
with whom Justices Purisima and Aldecoa, Jr. concurred, modified the fourth
paragraph of the decretal portion to read:
4. Ordering the withdrawal of the amount of
P18,500.00 now consigned with the Court, and that
the amount of P16,870.52 be delivered to the heirs
of Juan Galicia, Sr. as payment to the unpaid
balance of the sale, including the reimbursement of
the amount paid to Philippine Veterans Bank,
minus the amount of attorney's fees and damages
awarded in favor of plaintiff. The excess of
P1,649.48 will be returned to plaintiff. The costs
against defendants. (p. 51, Rollo)
As to how the foregoing directive was arrived at, the appellate court
declared:
With respect to the fourth condition stipulated in
the contract, the period indicated therein is
deemed modified by the parties when the heirs of
Juan Galicia, Sr. accepted payments without
objection up to November 3, 1979. On the basis of
receipts presented by appellee commencing from
August 8, 1975 up to November 3, 1979, a total
amount of P13,908.25 has been paid, thereby
leaving a balance of P13,091.75. Said unpaid

Page | 37

balance plus the amount reimbursable to appellant

in the amount of P3,778.77 will leave an unpaid
total of P16,870.52. Since appellee consigned in
court the sum of P18,500.00, he is entitled to get
the excess of P1,629.48. Thus, when the heirs of
Juan
Galicia,
Sr.
(obligees)
accepted
the
performance, knowing its incompleteness or
irregularity and without expressing any protest or
objection, the obligation is deemed fully complied
with (Article 1235, Civil Code). (p. 50, Rollo)
Petitioners are of the impression that the decision appealed from, which
agreed with the conclusions of the trial court, is vulnerable to attack via
the recourse before Us on the principal supposition that the full
consideration of the agreement to sell was not paid by private respondent
and, therefore, the contract must be rescinded.
The suggestion of petitioners that the covenant must be cancelled in the
light of private respondent's so-called breach seems to overlook
petitioners' demeanor who, instead of immediately filing the case precisely
to rescind the instrument because of non-compliance, allowed private
respondent to effect numerous payments posterior to the grace periods
provided in the contract. This apathy of petitioners who even permitted
private respondent to take the initiative in filing the suit for specific
performance against them, is akin to waiver or abandonment of the right
to rescind normally conferred by Article 1191 of the Civil Code. As aptly
observed by Justice Gutierrez, Jr. in Angeles vs. Calasanz (135 SCRA 323
[1985]; 4 Paras, Civil Code of the Philippines Annotated, Twelfth Ed. [1989],
p. 203:
. . . We agree with the plaintiffs-appellees that
when the defendants-appellants, instead of
availing of their alleged right to rescind, have
accepted and received delayed payments of
installments, though the plaintiffs-appellees have
been in arrears beyond the grace period mentioned
in paragraph 6 of the contract, the defendantsappellants have waived, and are now estopped
from exercising their alleged right of rescission . . .
In Development Bank of the Philippines vs. Sarandi (5 CAR (25) 811; 817818; cited in 4 Padilla, Civil Code Annotated, Seventh Ed. [1987], pp. 212213) a similar opinion was expressed to the effect that:
In a perfected contract of sale of land under an
agreed schedule of payments, while the parties
may mutually oblige each other to compel the
specific performance of the monthly amortization
plan, and upon failure of the buyer to make the

payment, the seller has the right to ask for a

rescission of the contract under Art. 1191 of the
Civil Code, this shall be deemed waived by
acceptance of posterior payments.
Both the trial and appellate courts were, therefore, correct in sustaining the
claim of private respondent anchored on estoppel or waiver by acceptance
of delayed payments under Article 1235 of the Civil Code in that:
When the obligee accepts the performance,
knowing its incompleteness or irregularity, and
without expressing any protest or objection, the
obligation is deemed fully complied with.
considering that the heirs of Juan Galicia, Sr. accommodated private
respondent by accepting the latter's delayed payments not only beyond
the grace periods but also during the pendency of the case for specific
performance (p. 27, Memorandum for petitioners; p. 166, Rollo). Indeed,
the right to rescind is not absolute and will not be granted where there has
been substantial compliance by partial payments (4 Caguioa, Comments
and Cases on Civil Law, First Ed. [1968] p. 132). By and large, petitioners'
actuation is susceptible of but one construction that they are now
estopped from reneging from their commitment on account of acceptance
of benefits arising from overdue accounts of private respondent.
Now, as to the issue of whether payments had in fact been made, there is
no doubt that the second installment was actually paid to the heirs of Juan
Galicia, Sr. due to Josefina Tayag's admission in judicio that the sum of
P10,000.00 was fully liquidated. It is thus erroneous for petitioners to
suppose that "the evidence in the records do not support this conclusion"
(p. 18, Memorandum for Petitioners; p. 157, Rollo). A contrario, when the
court of origin, as well as the appellate court, emphasized the frank
representation along this line of Josefina Tayag before the trial court (TSN,
September l, 1983, pp. 3-4; p. 5, Decision in CA-G.R. CV No. 13339, p. 50,
Rollo; p. 3, Decision in Civil Case No. 681-G, p. 66, Rollo), petitioners chose
to remain completely mute even at this stage despite the opportunity
accorded to them, for clarification. Consequently, the prejudicial aftermath
of Josefina Tayag's spontaneous reaction may no longer be obliterated on
the basis of estoppel (Article 1431, Civil Code; Section 4, Rule 129; Section
2(a), Rule 131, Revised Rules on Evidence).
Insofar as the third item of the contract is concerned, it may be recalled
that respondent court applied Article 1186 of the Civil Code on constructive
fulfillment which petitioners claim should not have been appreciated
because they are the obligees while the proviso in point speaks of the
obligor. But, petitioners must concede that in a reciprocal obligation like a
contract of purchase, (Ang vs. Court of Appeals, 170 SCRA 286 [1989]; 4
Paras, supra, at p. 201), both parties are mutually obligors and also
obligees (4 Padilla, supra, at p. 197), and any of the contracting parties

Page | 38

may, upon non-fulfillment by the other privy of his part of the prestation,
rescind the contract or seek fulfillment (Article 1191, Civil Code). In short, it
is puerile for petitioners to say that they are the only obligees under the
contract since they are also bound as obligors to respect the stipulation in
permitting private respondent to assume the loan with the Philippine
Veterans Bank which petitioners impeded when they paid the balance of
said loan. As vendors, they are supposed to execute the final deed of sale
upon full payment of the balance as determined hereafter.
Lastly, petitioners argue that there was no valid tender of payment nor
consignation of the sum of P18,520.00 which they acknowledge to have
been deposited in court on January 22, 1981 five years after the amount of
P27,000.00 had to be paid (p. 23, Memorandum for Petitioners; p. 162,
Rollo). Again this suggestion ignores the fact that consignation alone
produced the effect of payment in the case at bar because it was
established below that two or more heirs of Juan Galicia, Sr. claimed the
same right to collect (Article 1256, (4), Civil Code; pp. 4-5, Decision in Civil
Case No. 681-G; pp. 67-68, Rollo). Moreover, petitioners did not bother to
refute the evidence on hand that, aside from the P18,520.00 (not
P18,500.00 as computed by respondent court) which was consigned,
private respondent also paid the sum of P13,908.25 (Exhibits "F" to "CC";
p. 50, Rollo). These two figures representing private respondent's payment
of the fourth condition amount to P32,428.25, less the P3,778.77 paid by
petitioners to the bank, will lead us to the sum of P28,649.48 or a refund of
P1,649.48 to private respondent as overpayment of the P27,000.00
balance.
WHEREFORE, the petition is hereby DISMISSED and the decision appealed
from is hereby AFFIRMED with the slight modification of Paragraph 4 of the
dispositive thereof which is thus amended to read:
4. ordering the withdrawal of the sum of
P18,520.00 consigned with the Regional Trial Court,
and that the amount of P16,870.52 be delivered by
private respondent with legal rate of interest until
fully paid to the heirs of Juan Galicia, Sr. as balance
of the sale including reimbursement of the sum
paid to the Philippine Veterans Bank, minus the
attorney's fees and damages awarded in favor of
private respondent. The excess of P1,649.48 shall
be returned to private respondent also with legal
interest until fully paid by petitioners. With costs
against petitioners.

SPS.
FELIPE
AND
LETICIA
CANNU,
petitioners,
vs.
SPS. GIL AND FERNANDINA GALANG AND NATIONAL HOME
MORTGAGE FINANCE CORPORATION, respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition for Review on Certiorari which seeks to set aside the
decision1 of the Court of Appeals dated 30 September 1998 which affirmed
with modification the decision of Branch 135 of the Regional Trial Court
(RTC) of Makati City, dismissing the complaint for Specific Performance and
Damages filed by petitioners, and its Resolution 2 dated 22 July 1999
denying petitioners motion for reconsideration.
A complaint3 for Specific Performance and Damages was filed by
petitioners-spouses Felipe and Leticia Cannu against respondents-spouses
Gil and Fernandina Galang and the National Home Mortgage Finance
Corporation (NHMFC) before Branch 135 of the RTC of Makati, on 24 June
1993. The case was docketed as Civil Case No. 93-2069.
The facts that gave rise to the aforesaid complaint are as follows:
Respondents-spouses Gil and Fernandina Galang obtained a loan from
Fortune Savings & Loan Association for P173,800.00 to purchase a house
and lot located at Pulang Lupa, Las Pias, with an area of 150 square
meters covered by Transfer Certificate of Title (TCT) No. T-8505 in the
names of respondents-spouses. To secure payment, a real estate mortgage
was constituted on the said house and lot in favor of Fortune Savings &
Loan Association. In early 1990, NHMFC purchased the mortgage loan of
respondents-spouses from Fortune Savings & Loan Association for
P173,800.00.
Respondent Fernandina Galang authorized4 her attorney-in-fact, Adelina R.
Timbang, to sell the subject house and lot.
Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and to
assume the balance of the mortgage obligations with the NHMFC and with
CERF Realty5 (the Developer of the property).
Of the P120,000.00, the following payments were made by petitioners:

SO ORDERED.
G.R. No. 139523

May 26, 2005

Date

Amount Paid

Page | 39

Petitioners made the following payments to the NHMFC:

July 19, 1990

March 13, 1991

April 6, 1991

November 28, 1991

Total

P40,000.00

Date

Amount

Receipt No.

July 9, 1990

P 14,312.47

D-50398611

March 12, 1991

8,000.00

D-72947812

February 4, 1992

10,000.00

D-99912713

March 31, 1993

6,000.00

E-56374914

April 19, 1993

10,000.00

E-58243215

April 27, 1993

7,000.00

E-61832616

15,000.007

15,000.008

5,000.009

P75,000.00

Thus, leaving a balance of P45,000.00.

A Deed of Sale with Assumption of Mortgage Obligation10 dated 20 August
1990 was made and entered into by and between spouses Fernandina and
Gil Galang (vendors) and spouses Leticia and Felipe Cannu (vendees) over
the house and lot in question which contains, inter alia, the following:
NOW, THEREFORE, for and in consideration of the sum of
TWO HUNDRED FIFTY THOUSAND PESOS (P250,000.00),
Philippine Currency, receipt of which is hereby
acknowledged by the Vendors and the assumption of the
mortgage obligation, the Vendors hereby sell, cede and
transfer unto the Vendees, their heirs, assigns and
successor in interest the above-described property
together with the existing improvement thereon.
It is a special condition of this contract that the Vendees
shall assume and continue with the payment of the
amortization with the National Home Mortgage Finance
Corporation Inc. in the outstanding balance of
P_______________, as of __________ and shall comply with and
abide by the terms and conditions of the mortgage
document dated Feb. 27, 1989 and identified as Doc. No.
82, Page 18, Book VII, S. of 1989 of Notary Public for
Quezon City Marites Sto. Tomas Alonzo, as if the Vendees
are the original signatories.
Petitioners immediately took possession and occupied the house and lot.

P 55,312.47

Petitioners paid the "equity" or second mortgage to CERF Realty. 17

Despite requests from Adelina R. Timbang and Fernandina Galang to pay
the balance of P45,000.00 or in the alternative to vacate the property in
question, petitioners refused to do so.
In a letter18 dated 29 March 1993, petitioner Leticia Cannu informed Mr.
Fermin T. Arzaga, Vice President, Fund Management Group of the NHMFC,
that the ownership rights over the land covered by TCT No. T-8505 in the
names of respondents-spouses had been ceded and transferred to her and
her husband per Deed of Sale with Assumption of Mortgage, and that they
were obligated to assume the mortgage and pay the remaining unpaid
loan balance. Petitioners formal assumption of mortgage was not
approved by the NHMFC.19

Page | 40

Because the Cannus failed to fully comply with their obligations,

respondent Fernandina Galang, on 21 May 1993, paid P233,957.64 as full
payment of her remaining mortgage loan with NHMFC.20
Petitioners opposed the release of TCT No. T-8505 in favor of respondentsspouses insisting that the subject property had already been sold to them.
Consequently, the NHMFC held in abeyance the release of said TCT.
Thereupon, a Complaint for Specific Performance and Damages was filed
asking, among other things, that petitioners (plaintiffs therein) be declared
the owners of the property involved subject to reimbursements of the
amount made by respondents-spouses (defendants therein) in
preterminating the mortgage loan with NHMFC.
Respondent NHMFC filed its Answer.21 It claimed that petitioners have no
cause of action against it because they have not submitted the formal
requirements to be considered assignees and successors-in-interest of the
property under litigation.
In their Answer, respondents-spouses alleged that because of petitionersspouses failure to fully pay the consideration and to update the monthly
amortizations with the NHMFC, they paid in full the existing obligations
with NHMFC as an initial step in the rescission and annulment of the Deed
of Sale with Assumption of Mortgage. In their counterclaim, they maintain
that the acts of petitioners in not fully complying with their obligations give
rise to rescission of the Deed of Sale with Assumption of Mortgage with the
corresponding damages.
22

After trial, the lower court rendered its decision ratiocinating:

On the basis of the evidence on record, testimonial and
documentary, this Court is of the view that plaintiffs have
no cause of action either against the spouses Galang or the
NHMFC. Plaintiffs have admitted on record they failed to
pay the amount of P45,000.00 the balance due to the
Galangs in consideration of the Deed of Sale With
Assumption of Mortgage Obligation (Exhs. "C" and "3").
Consequently, this is a breach of contract and evidently a
failure to comply with obligation arising from contracts. . .
In this case, NHMFC has not been duly informed due to lack
of formal requirements to acknowledge plaintiffs as legal
assignees, or legitimate tranferees and, therefore,
successors-in-interest to the property, plaintiffs should
have no legal personality to claim any right to the same
property.23
The decretal portion of the decision reads:

Premises considered, the foregoing complaint has not been

proven even by preponderance of evidence, and, as such,
plaintiffs have no cause of action against the defendants
herein. The above-entitled case is ordered dismissed for
lack of merit.
Judgment is hereby rendered by way of counterclaim, in
favor of defendants and against plaintiffs, to wit:
1. Ordering the Deed of Sale With Assumption of Mortgage
Obligation (Exhs. "C" and "3") rescinded and hereby
declared the same as nullified without prejudice for
defendants-spouses Galang to return the partial payments
made by plaintiffs; and the plaintiffs are ordered, on the
other hand, to return the physical and legal possession of
the subject property to spouses Galang by way of mutual
restitution;
2. To pay defendants spouses Galang and NHMFC, each the
amount of P10,000.00 as litigation expenses, jointly and
severally;
3. To pay attorneys fees to defendants in the amount of
P20,000.00, jointly and severally; and
4. The costs of suit.
5. No moral and exemplary damages awarded.24
A Motion for Reconsideration25 was filed, but same was denied. Petitioners
appealed the decision of the RTC to the Court of Appeals. On 30 September
1998, the Court of Appeals disposed of the appeal as follows:
Obligations arising from contract have the force of law
between the contracting parties and should be complied in
good faith. The terms of a written contract are binding on
the parties thereto.
Plaintiffs-appellants therefore are under obligation to pay
defendants-appellees spouses Galang the sum of
P250,000.00, and to assume the mortgage.
Records show that upon the execution of the Contract of
Sale or on July 19, 1990 plaintiffs-appellants paid
defendants-appellees spouses Galang the amount of only
P40,000.00.

Page | 41

The next payment was made by plaintiffs-appellants on

March 13, 1991 or eight (8) months after the execution of
the contract. Plaintiffs-appellants paid the amount of
P5,000.00.
The next payment was made on April 6, 1991 for
P15,000.00 and on November 28, 1991, for another
P15,000.00.
From 1991 until the present, no other payments were
made by plaintiffs-appellants to defendants-appellees
spouses Galang.
Out of the P250,000.00 purchase price which was
supposed to be paid on the day of the execution of
contract in July, 1990 plaintiffs-appellants have paid, in the
span of eight (8) years, from 1990 to present, the amount
of only P75,000.00. Plaintiffs-appellants should have paid
the P250,000.00 at the time of the execution of contract in
1990. Eight (8) years have already lapsed and plaintiffsappellants have not yet complied with their obligation.
We consider this breach to be substantial.
The tender made by plaintiffs-appellants after the filing of
this case, of the Managerial Check in the amount of
P278,957.00 dated January 24, 1994 cannot be considered
as an effective mode of payment.
Performance or payment may be effected not by tender of
payment alone but by both tender and consignation. It is
consignation which is essential in order to extinguish
plaintiffs-appellants obligation to pay the balance of the
purchase price.
In addition, plaintiffs-appellants failed to comply with their
obligation to pay the monthly amortizations due on the
mortgage.
In the span of three (3) years from 1990 to 1993, plaintiffsappellants made only six payments. The payments made
by plaintiffs-appellants are not even sufficient to answer for
the arrearages, interests and penalty charges.
On account of these circumstances, the rescission of the
Contract of Sale is warranted and justified.

WHEREFORE, foregoing considered, the appealed decision

is hereby AFFIRMED with modification. Defendantsappellees spouses Galang are hereby ordered to return the
partial payments made by plaintiff-appellants in the
amount of P135,000.00.
No pronouncement as to cost.26
The motion for reconsideration27 filed by petitioners was denied by the
Court of Appeals in a Resolution28 dated 22 July 1999.
Hence, this Petition for Certiorari.
Petitioners raise the following assignment of errors:
1. THE HONORABLE COURT OF APPEALS ERRED WHEN IT
HELD THAT PETITIONERS BREACH OF THE OBLIGATION
WAS SUBSTANTIAL.
2. THE HONORABLE COURT OF APPEALS ERRED WHEN IN
EFFECT IT HELD THAT THERE WAS NO SUBSTANTIAL
COMPLIANCE WITH THE OBLIGATION TO PAY THE MONTHLY
AMORTIZATION WITH NHMFC.
3. THE HONORABLE COURT OF APPEALS ERRED WHEN IT
FAILED
TO
CONSIDER
THE
OTHER
FACTS
AND
CIRCUMSTANCES THAT MILITATE AGAINST RESCISSION.
4. THE HONORABLE COURT OF APPEALS ERRED WHEN IT
FAILED TO CONSIDER THAT THE ACTION FOR RESCISSION
IS SUBSIDIARY.29
Before discussing the errors allegedly committed by the Court of Appeals,
it must be stated a priori that the latter made a misappreciation of
evidence regarding the consideration of the property in litigation when it
relied solely on the Deed of Sale with Assumption of Mortgage executed by
the respondents-spouses Galang and petitioners-spouses Cannu.
As above-quoted, the consideration for the house and lot stated in the
Deed of Sale with Assumption of Mortgage is P250,000.00, plus the
assumption of the balance of the mortgage loan with NHMFC. However,
after going over the record of the case, more particularly the Answer of
respondents-spouses, the evidence shows the consideration therefor is
P120,000.00, plus the payment of the outstanding loan mortgage with
NHMFC, and of the "equity" or second mortgage with CERF Realty
(Developer of the property).30

...

Page | 42

Nowhere in the complaint and answer of the petitioners-spouses Cannu

and respondents-spouses Galang shows that the consideration is
"P250,000.00." In fact, what is clear is that of the P120,000.00 to be paid
to the latter, only P75,000.00 was paid to Adelina Timbang, the spouses
Galangs attorney-in-fact. This debunks the provision in the Deed of Sale
with Assumption of Mortgage that the amount of P250,000.00 has been
received by petitioners.
Inasmuch as the Deed of Sale with Assumption of Mortgage failed to
express the true intent and agreement of the parties regarding its
consideration, the same should not be fully relied upon. The foregoing facts
lead us to hold that the case on hand falls within one of the recognized
exceptions to the parole evidence rule. Under the Rules of Court, a party
may present evidence to modify, explain or add to the terms of the written
agreement if he puts in issue in his pleading, among others, its failure to
express the true intent and agreement of the parties thereto. 31
In the case at bar, when respondents-spouses enumerated in their Answer
the terms and conditions for the sale of the property under litigation, which
is different from that stated in the Deed of Sale with Assumption with
Mortgage, they already put in issue the matter of consideration. Since
there is a difference as to what the true consideration is, this Court has
admitted evidence aliunde to explain such inconsistency. Thus, the Court
has looked into the pleadings and testimonies of the parties to thresh out
the discrepancy and to clarify the intent of the parties.
As regards the computation32 of petitioners as to the breakdown of the
P250,000.00 consideration, we find the same to be self-serving and
unsupported by evidence.
On the first assigned error, petitioners argue that the Court erred when it
ruled that their breach of the obligation was substantial.
Settled is the rule that rescission or, more accurately, resolution, 33 of a
party to an obligation under Article 1191 34 is predicated on a breach of
faith by the other party that violates the reciprocity between them. 35 Article
1191 reads:
Art. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and
the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even
after he has chosen fulfillment, if the latter should become
impossible.

The court shall decree the rescission claimed, unless there

be just cause authorizing the fixing of a period.
Rescission will not be permitted for a slight or casual breach of the
contract. Rescission may be had only for such breaches that are
substantial and fundamental as to defeat the object of the parties in
making the agreement.36 The question of whether a breach of contract is
substantial depends upon the attending circumstances 37 and not merely on
the percentage of the amount not paid.
In the case at bar, we find petitioners failure to pay the remaining balance
of P45,000.00 to be substantial. Even assuming arguendo that only said
amount was left out of the supposed consideration of P250,000.00, or
eighteen (18%) percent thereof, this percentage is still substantial. Taken
together with the fact that the last payment made was on 28 November
1991, eighteen months before the respondent Fernandina Galang paid the
outstanding balance of the mortgage loan with NHMFC, the intention of
petitioners to renege on their obligation is utterly clear.
Citing Massive Construction, Inc. v. Intermediate Appellate Court,38
petitioners ask that they be granted additional time to complete their
obligation. Under the facts of the case, to give petitioners additional time
to comply with their obligation will be putting premium on their blatant
non-compliance of their obligation. They had all the time to do what was
required of them (i.e., pay the P45,000.00 balance and to properly assume
the mortgage loan with the NHMFC), but still they failed to comply. Despite
demands for them to pay the balance, no payments were made. 39
The fact that petitioners tendered a Managers Check to respondentsspouses Galang in the amount of P278,957.00 seven months after the
filing of this case is of no moment. Tender of payment does not by itself
produce legal payment, unless it is completed by consignation. 40 Their
failure to fulfill their obligation gave the respondents-spouses Galang the
right to rescission.
Anent the second assigned error, we find that petitioners were not religious
in paying the amortization with the NHMFC. As admitted by them, in the
span of three years from 1990 to 1993, their payments covered only thirty
months.41 This, indeed, constitutes another breach or violation of the Deed
of Sale with Assumption of Mortgage. On top of this, there was no formal
assumption of the mortgage obligation with NHMFC because of the lack of
approval by the NHMFC42 on account of petitioners non-submission of
requirements in order to be considered as assignees/successors-in-interest
over the property covered by the mortgage obligation.43
On the third assigned error, petitioners claim there was no clear evidence
to show that respondents-spouses Galang demanded from them a strict
and/or faithful compliance of the Deed of Sale with Assumption of
Mortgage.

Page | 43

We do not agree.
There is sufficient evidence showing that demands were made from
petitioners to comply with their obligation. Adelina R. Timbang, attorney-infact of respondents-spouses, per instruction of respondent Fernandina
Galang, made constant follow-ups after the last payment made on 28
November 1991, but petitioners did not pay. 44 Respondent Fernandina
Galang stated in her Answer45 that upon her arrival from America in
October 1992, she demanded from petitioners the complete compliance of
their obligation by paying the full amount of the consideration
(P120,000.00) or in the alternative to vacate the property in question, but
still, petitioners refused to fulfill their obligations under the Deed of Sale
with Assumption of Mortgage. Sometime in March 1993, due to the fact
that full payment has not been paid and that the monthly amortizations
with the NHMFC have not been fully updated, she made her intentions
clear with petitioner Leticia Cannu that she will rescind or annul the Deed
of Sale with Assumption of Mortgage.
We likewise rule that there was no waiver on the part of petitioners to
demand the rescission of the Deed of Sale with Assumption of Mortgage.
The fact that respondents-spouses accepted, through their attorney-in-fact,
payments in installments does not constitute waiver on their part to
exercise their right to rescind the Deed of Sale with Assumption of
Mortgage. Adelina Timbang merely accepted the installment payments as
an accommodation to petitioners since they kept on promising they would
pay. However, after the lapse of considerable time (18 months from last
payment) and the purchase price was not yet fully paid, respondentsspouses exercised their right of rescission when they paid the outstanding
balance of the mortgage loan with NHMFC. It was only after petitioners
stopped paying that respondents-spouses moved to exercise their right of
rescission.
Petitioners cite the case of Angeles v. Calasanz46 to support their claim that
respondents-spouses waived their right to rescind. We cannot apply this
case since it is not on all fours with the case before us. First, in Angeles,
the breach was only slight and casual which is not true in the case before
us. Second, in Angeles, the buyer had already paid more than the principal
obligation, while in the instant case, the buyers (petitioners) did not pay
P45,000.00 of the P120,000.00 they were obligated to pay.
We find petitioners statement that there is no evidence of prejudice or
damage to justify rescission in favor of respondents-spouses to be
unfounded. The damage suffered by respondents-spouses is the effect of
petitioners failure to fully comply with their obligation, that is, their failure
to pay the remaining P45,000.00 and to update the amortizations on the
mortgage loan with the NHMFC. Petitioners have in their possession the
property under litigation. Having parted with their house and lot,
respondents-spouses should be fully compensated for it, not only
monetarily, but also as to the terms and conditions agreed upon by the
parties. This did not happen in the case before us.

Citing Seva v. Berwin & Co., Inc.,47 petitioners argue that no rescission
should be decreed because there is no evidence on record that respondent
Fernandina Galang is ready, willing and able to comply with her own
obligation to restore to them the total payments they made. They added
that no allegation to that effect is contained in respondents-spouses
Answer.
We find this argument to be misleading.
First, the facts obtaining in Seva case do not fall squarely with the case on
hand. In the former, the failure of one party to perform his obligation was
the fault of the other party, while in the case on hand, failure on the part of
petitioners to perform their obligation was due to their own fault.
Second, what is stated in the book of Justice Edgardo L. Paras is "[i]t
(referring to the right to rescind or resolve) can be demanded only if the
plaintiff is ready, willing and able to comply with his own obligation, and
the other is not." In other words, if one party has complied or fulfilled his
obligation, and the other has not, then the former can exercise his right to
rescind. In this case, respondents-spouses complied with their obligation
when they gave the possession of the property in question to petitioners.
Thus, they have the right to ask for the rescission of the Deed of Sale with
Assumption of Mortgage.
On the fourth assigned error, petitioners, relying on Article 1383 of the Civil
Code, maintain that the Court of Appeals erred when it failed to consider
that the action for rescission is subsidiary.
Their reliance on Article 1383 is misplaced.
The subsidiary character of the action for rescission applies to contracts
enumerated in Articles 138148 of the Civil Code. The contract involved in
the case before us is not one of those mentioned therein. The provision
that applies in the case at bar is Article 1191.
In the concurring opinion of Justice Jose B.L. Reyes in Universal Food Corp.
v. Court of Appeals,49 rescission under Article 1191 was distinguished from
rescission under Article 1381. Justice J.B.L. Reyes said:
. . . The rescission on account of breach of stipulations is
not predicated on injury to economic interests of the party
plaintiff but on the breach of faith by the defendant, that
violates the reciprocity between the parties. It is not a
subsidiary action, and Article 1191 may be scanned
without disclosing anywhere that the action for rescission
thereunder is subordinated to anything other than the
culpable breach of his obligations by the defendant. This
rescission is a principal action retaliatory in character, it

Page | 44

being unjust that a party be held bound to fulfill his

promises when the other violates his. As expressed in the
old Latin aphorism: "Non servanti fidem, non est fides
servanda." Hence, the reparation of damages for the
breach is purely secondary.
On the contrary, in the rescission by reason of lesion or
economic prejudice, the cause of action is subordinated to
the existence of that prejudice, because it is the raison d
tre as well as the measure of the right to rescind. Hence,
where the defendant makes good the damages caused, the
action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation of
these two articles is limited to the cases of rescission for
lesion enumerated in Article 1381 of the Civil Code of the
Philippines, and does not apply to cases under Article
1191.
From the foregoing, it is clear that rescission ("resolution" in the Old Civil
Code) under Article 1191 is a principal action, while rescission under Article
1383 is a subsidiary action. The former is based on breach by the other
party that violates the reciprocity between the parties, while the latter is
not.
In the case at bar, the reciprocity between the parties was violated when
petitioners failed to fully pay the balance of P45,000.00 to respondentsspouses and their failure to update their amortizations with the NHMFC.
Petitioners maintain that inasmuch as respondents-spouses Galang were
not granted the right to unilaterally rescind the sale under the Deed of Sale
with Assumption of Mortgage, they should have first asked the court for
the rescission thereof before they fully paid the outstanding balance of the
mortgage loan with the NHMFC. They claim that such payment is a
unilateral act of rescission which violates existing jurisprudence.
In Tan v. Court of Appeals,50 this court said:
. . . [T]he power to rescind obligations is implied in
reciprocal ones in case one of the obligors should not
comply with what is incumbent upon him is clear from a
reading of the Civil Code provisions. However, it is equally
settled that, in the absence of a stipulation to the contrary,
this power must be invoked judicially; it cannot be
exercised solely on a partys own judgment that the other
has committed a breach of the obligation. Where there is
nothing in the contract empowering the petitioner to
rescind it without resort to the courts, the petitioners
action in unilaterally terminating the contract in this case is
unjustified.

It is evident that the contract under consideration does not contain a

provision authorizing its extrajudicial rescission in case one of the parties
fails to comply with what is incumbent upon him. This being the case,
respondents-spouses should have asked for judicial intervention to obtain a
judicial declaration of rescission. Be that as it may, and considering that
respondents-spouses
Answer
(with
affirmative
defenses)
with
Counterclaim seeks for the rescission of the Deed of Sale with Assumption
of Mortgage, it behooves the court to settle the matter once and for all
than to have the case re-litigated again on an issue already heard on the
merits and which this court has already taken cognizance of. Having found
that petitioners seriously breached the contract, we, therefore, declare the
same is rescinded in favor of respondents-spouses.
As a consequence of the rescission or, more accurately, resolution of the
Deed of Sale with Assumption of Mortgage, it is the duty of the court to
require the parties to surrender whatever they may have received from the
other. The parties should be restored to their original situation. 51
The record shows petitioners paid respondents-spouses the amount of
P75,000.00 out of the P120,000.00 agreed upon. They also made
payments to NHMFC amounting to P55,312.47. As to the petitioners
alleged payment to CERF Realty of P46,616.70, except for petitioner Leticia
Cannus bare allegation, we find the same not to be supported by
competent evidence. As a general rule, one who pleads payment has the
burden of proving it.52 However, since it has been admitted in respondentsspouses Answer that petitioners shall assume the second mortgage with
CERF Realty in the amount of P35,000.00, and that Adelina Timbang,
respondents-spouses very own witness, testified 53 that same has been
paid, it is but proper to return this amount to petitioners. The three
amounts total P165,312.47 -- the sum to be returned to petitioners.
WHEREFORE, premises considered, the decision of the Court of Appeals is
hereby AFFIRMED with MODIFICATION. Spouses Gil and Fernandina Galang
are hereby ordered to return the partial payments made by petitioners in
the amount of P165,312.47. With costs.
SO ORDERED.
G.R. No. 147695

September 13, 2007

MANUEL
C.
PAGTALUNAN,
petitioner,
vs.
RUFINA DELA CRUZ VDA. DE MANZANO, respondent.
DECISION
AZCUNA, J.:

Page | 45

This is a petition for review on certiorari under Rule 45 of the Rules of Court
of the Court of Appeals (CA) Decision promulgated on October 30, 2000
and its Resolution dated March 23, 2001 denying petitioners motion for
reconsideration. The Decision of the CA affirmed the Decision of the
Regional Trial Court (RTC) of Malolos, Bulacan, dated June 25, 1999
dismissing the case of unlawful detainer for lack of merit.
The facts are as follows:
On July 19, 1974, Patricio Pagtalunan (Patricio), petitioners stepfather and
predecessor-in-interest, entered into a Contract to Sell with respondent,
wife of Patricios former mechanic, Teodoro Manzano, whereby the former
agreed to sell, and the latter to buy, a house and lot which formed half of a
parcel of land, covered by Transfer Certificate of Title (TCT) No. T-10029
(now TCT No. RT59929 [T-254773]), with an area of 236 square meters. The
consideration of P17,800 was agreed to be paid in the following manner:
P1,500 as downpayment upon execution of the Contract to Sell, and the
balance to be paid in equal monthly installments of P150 on or before the
last day of each month until fully paid.
It was also stipulated in the contract that respondent could immediately
occupy the house and lot; that in case of default in the payment of any of
the installments for 90 days after its due date, the contract would be
automatically rescinded without need of judicial declaration, and that all
payments made and all improvements done on the premises by
respondent would be considered as rentals for the use and occupation of
the property or payment for damages suffered, and respondent was
obliged to peacefully vacate the premises and deliver the possession
thereof to the vendor.
Petitioner claimed that respondent paid only P12,950. She allegedly
stopped paying after December 1979 without any justification or
explanation. Moreover, in a "Kasunduan"1 dated November 18, 1979,
respondent borrowed P3,000 from Patricio payable in one year either in
one lump sum payment or by installments, failing which the balance of the
loan would be added to the principal subject of the monthly amortizations
on the land.
Lastly, petitioner asserted that when respondent ceased paying her
installments, her status of buyer was automatically transformed to that of
a lessee. Therefore, she continued to possess the property by mere
tolerance of Patricio and, subsequently, of petitioner.
On the other hand, respondent alleged that she paid her monthly
installments religiously, until sometime in 1980 when Patricio changed his
mind and offered to refund all her payments provided she would surrender
the house. She refused. Patricio then started harassing her and began
demolishing the house portion by portion. Respondent admitted that she
failed to pay some installments after December 1979, but that she

resumed paying in 1980 until her balance dwindled to P5,650. She claimed
that despite several months of delay in payment, Patricio never sued for
ejectment and even accepted her late payments.
Respondent also averred that on September 14, 1981, she and Patricio
signed an agreement (Exh. 2) whereby he consented to the suspension of
respondents monthly payments until December 1981. However, even
before the lapse of said period, Patricio resumed demolishing respondents
house, prompting her to lodge a complaint with the Barangay Captain who
advised her that she could continue suspending payment even beyond
December 31, 1981 until Patricio returned all the materials he took from
her house. This Patricio failed to do until his death.
Respondent did not deny that she still owed Patricio P5,650, but claimed
that she did not resume paying her monthly installment because of the
unlawful acts committed by Patricio, as well as the filing of the ejectment
case against her. She denied having any knowledge of the Kasunduan of
November 18, 1979.
Patricio and his wife died on September 17, 1992 and on October 17, 1994,
respectively. Petitioner became their sole successor-in-interest pursuant to
a waiver by the other heirs. On March 5, 1997, respondent received a letter
from petitioners counsel dated February 24, 1997 demanding that she
vacate the premises within five days on the ground that her possession
had become unlawful. Respondent ignored the demand. The Punong
Barangay failed to settle the dispute amicably.
On April 8, 1997, petitioner filed a Complaint for unlawful detainer against
respondent with the Municipal Trial Court (MTC) of Guiguinto, Bulacan
praying that, after hearing, judgment be rendered ordering respondent to
immediately vacate the subject property and surrender it to petitioner;
forfeiting the amount of P12,950 in favor of petitioner as rentals; ordering
respondent to pay petitioner the amount of P3,000 under the Kasunduan
and the amount of P500 per month from January 1980 until she vacates
the property, and to pay petitioner attorneys fees and the costs.
On December 22, 1998, the MTC rendered a decision in favor of petitioner.
It stated that although the Contract to Sell provides for a rescission of the
agreement upon failure of the vendee to pay any installment, what the
contract actually allows is properly termed a resolution under Art. 1191 of
the Civil Code.
The MTC held that respondents failure to pay not a few installments
caused the resolution or termination of the Contract to Sell. The last
payment made by respondent was on January 9, 1980 (Exh. 71).
Thereafter, respondents right of possession ipso facto ceased to be a legal
right, and became possession by mere tolerance of Patricio and his
successors-in-interest. Said tolerance ceased upon demand on respondent
to vacate the property.

Page | 46

The dispositive portion of the MTC Decision reads:

Wherefore, all the foregoing considered, judgment is
hereby rendered, ordering the defendant:
a. to vacate the property covered by Transfer
Certificate of Title No. T-10029 of the Register of
Deeds of Bulacan (now TCT No. RT-59929 of the
Register of Deeds of Bulacan), and to surrender
possession thereof to the plaintiff;
b. to pay the plaintiff the amount of P113,500
representing rentals from January 1980 to the
present;
c. to pay the plaintiff such amount of rentals, at
P500/month, that may become due after the date
of judgment, until she finally vacates the subject
property;
d. to pay to the plaintiff the amount of P25,000 as
attorneys fees.

In a Decision promulgated on October 30, 2000, the CA denied the petition

and affirmed the Decision of the RTC. The dispositive portion of the
Decision reads:
WHEREFORE, the petition for review on certiorari is Denied.
The assailed Decision of the Regional Trial Court of Malolos,
Bulacan dated 25 June 1999 and its Order dated 10 August
1999 are hereby AFFIRMED.
SO ORDERED.

The CA found that the parties, as well as the MTC and RTC failed to advert
to and to apply Republic Act (R.A.) No. 6552, more commonly referred to as
the Maceda Law, which is a special law enacted in 1972 to protect buyers
of real estate on installment payments against onerous and oppressive
conditions.
The CA held that the Contract to Sell was not validly cancelled or rescinded
under Sec. 3 (b) of R.A. No. 6552, and recognized respondents right to
continue occupying unmolested the property subject of the contract to sell.
The CA denied petitioners motion for reconsideration in a Resolution dated
March 23, 2001.

SO ORDERED.2
Hence, this petition for review on certiorari.
On appeal, the RTC of Malolos, Bulacan, in a Decision dated June 25, 1999,
reversed the decision of the MTC and dismissed the case for lack of merit.
According to the RTC, the agreement could not be automatically rescinded
since there was delivery to the buyer. A judicial determination of rescission
must be secured by petitioner as a condition precedent to convert the
possession de facto of respondent from lawful to unlawful.
The dispositive portion of the RTC Decision states:
WHEREFORE, judgment is hereby rendered reversing the
decision of the Municipal Trial Court of Guiguinto, Bulacan
and the ejectment case instead be dismissed for lack of
merit.3
The motion for reconsideration and motion for execution filed by petitioner
were denied by the RTC for lack of merit in an Order dated August 10,
1999.
Thereafter, petitioner filed a petition for review with the CA.

Petitioner contends that:

A. Respondent Dela Cruz must bear the consequences of
her deliberate withholding of, and refusal to pay, the
monthly payment. The Court of Appeals erred in allowing
Dela Cruz who acted in bad faith from benefiting under the
Maceda Law.
B. The Court of Appeals erred in resolving the issue on the
applicability of the Maceda Law, which issue was not raised
in the proceedings a quo.
C. Assuming arguendo that the RTC was correct in ruling
that the MTC has no jurisdiction over a rescission case, the
Court of Appeals erred in not remanding the case to the
RTC for trial.5
Petitioner submits that the Maceda Law supports and recognizes the right
of vendors of real estate to cancel the sale outside of court, without need
for a judicial declaration of rescission, citing Luzon Brokerage Co., Inc., v.
Maritime Building Co., Inc.6

Page | 47

Petitioner contends that respondent also had more than the grace periods
provided under the Maceda Law within which to pay. Under Sec. 3 7 of the
said law, a buyer who has paid at least two years of installments has a
grace period of one month for every year of installment paid. Based on the
amount of P12,950 which respondent had already paid, she is entitled to a
grace period of six months within which to pay her unpaid installments
after December, 1979. Respondent was given more than six months from
January 1980 within which to settle her unpaid installments, but she failed
to do so. Petitioners demand to vacate was sent to respondent in February
1997.
There is nothing in the Maceda Law, petitioner asserts, which gives the
buyer a right to pay arrearages after the grace periods have lapsed, in the
event of an invalid demand for rescission. The Maceda Law only provides
that actual cancellation shall take place after 30 days from receipt of the
notice of cancellation or demand for rescission and upon full payment of
the cash surrender value to the buyer.
Petitioner contends that his demand letter dated February 24, 1997 should
be considered the notice of cancellation since the demand letter informed
respondent that she had "long ceased to have any right to possess the
premises in question due to [her] failure to pay without justifiable cause."
In support of his contention, he cited Layug v. Intermediate Appellate
Court8 which held that "the additional formality of a demand on [the
sellers] part for rescission by notarial act would appear, in the premises, to
be merely circuitous and consequently superfluous." He stated that in
Layug, the seller already made a written demand upon the buyer.
In addition, petitioner asserts that whatever cash surrender value
respondent is entitled to have been applied and must be applied to rentals
for her use of the house and lot after December, 1979 or after she stopped
payment of her installments.
Petitioner argues that assuming Patricio accepted respondents delayed
installments in 1981, such act cannot prevent the cancellation of the
Contract to Sell. Installments after 1981 were still unpaid and the
applicable grace periods under the Maceda Law on the unpaid installments
have long lapsed. Respondent cannot be allowed to hide behind the
Maceda Law. She acted with bad faith and must bear the consequences of
her deliberate withholding of and refusal to make the monthly payments.
Petitioner also contends that the applicability of the Maceda Law was never
raised in the proceedings below; hence, it should not have been applied by
the CA in resolving the case.
The Court is not persuaded.
The CA correctly ruled that R.A No. 6552, which governs sales of real estate
on installment, is applicable in the resolution of this case.

This case originated as an action for unlawful detainer. Respondent is

alleged to be illegally withholding possession of the subject property after
the termination of the Contract to Sell between Patricio and respondent. It
is, therefore, incumbent upon petitioner to prove that the Contract to Sell
had been cancelled in accordance with R.A. No. 6552.
The pertinent provision of R.A. No. 6552 reads:
Sec. 3. In all transactions or contracts involving the sale or
financing of real estate on installment payments, including
residential condominium apartments but excluding
industrial lots, commercial buildings and sales to tenants
under Republic Act Numbered Thirty-eight hundred fortyfour as amended by Republic Act Numbered Sixty-three
hundred eighty-nine, where the buyer has paid at least two
years of installments, the buyer is entitled to the following
rights in case he defaults in the payment of succeeding
installments:
(a) To pay, without additional interest, the unpaid
installments due within the total grace period earned by
him, which is hereby fixed at the rate of one month grace
period for every one year of installment payments made:
Provided, That this right shall be exercised by the buyer
only once in every five years of the life of the contract and
its extensions, if any.
(b) If the contract is cancelled, the seller shall refund
to the buyer the cash surrender value of the
payments on the property equivalent to fifty percent of
the total payments made and, after five years of
installments, an additional five percent every year but not
to exceed ninety percent of the total payments made:
Provided, That the actual cancellation of the
contract shall take place after thirty days from
receipt by the buyer of the notice of cancellation or
the demand for rescission of the contract by a
notarial act and upon full payment of the cash
surrender value to the buyer.9
R.A. No. 6552, otherwise known as the "Realty Installment Buyer Protection
Act," recognizes in conditional sales of all kinds of real estate (industrial,
commercial, residential) the right of the seller to cancel the contract upon
non-payment of an installment by the buyer, which is simply an event that
prevents the obligation of the vendor to convey title from acquiring binding
force.10 The Court agrees with petitioner that the cancellation of the
Contract to Sell may be done outside the court particularly when the buyer
agrees to such cancellation.

Page | 48

However, the cancellation of the contract by the seller must be in

accordance with Sec. 3 (b) of R.A. No. 6552, which requires a notarial act of
rescission and the refund to the buyer of the full payment of the cash
surrender value of the payments on the property. Actual cancellation of the
contract takes place after 30 days from receipt by the buyer of the notice
of cancellation or the demand for rescission of the contract by a notarial
act and upon full payment of the cash surrender value to the buyer.

that the cash surrender value payable to the buyer had been applied to
rentals of the property after respondent failed to pay the installments due.

Based on the records of the case, the Contract to Sell was not validly
cancelled or rescinded under Sec. 3 (b) of R.A. No. 6552.

The Court notes that this case has been pending for more than ten years.
Both parties prayed for other reliefs that are just and equitable under the
premises. Hence, the rights of the parties over the subject property shall
be resolved to finally dispose of that issue in this case.

First, Patricio, the vendor in the Contract to Sell, died on September 17,
1992 without canceling the Contract to Sell.
Second, petitioner also failed to cancel the Contract to Sell in accordance
with law.
Petitioner contends that he has complied with the requirements of
cancellation under Sec. 3 (b) of R.A. No. 6552. He asserts that his demand
letter dated February 24, 1997 should be considered as the notice of
cancellation or demand for rescission by notarial act and that the cash
surrender value of the payments on the property has been applied to
rentals for the use of the house and lot after respondent stopped payment
after January 1980.
The Court, however, finds that the letter 11 dated February 24, 1997, which
was written by petitioners counsel, merely made formal demand upon
respondent to vacate the premises in question within five days from
receipt thereof since she had "long ceased to have any right to possess the
premises x x x due to [her] failure to pay without justifiable cause the
installment payments x x x."
Clearly, the demand letter is not the same as the notice of cancellation or
demand for rescission by a notarial act required by R.A No. 6552.
Petitioner cannot rely on Layug v. Intermediate Appellate Court 12 to support
his contention that the demand letter was sufficient compliance. Layug
held that "the additional formality of a demand on [the sellers] part for
rescission by notarial act would appear, in the premises, to be merely
circuitous and consequently superfluous" since the seller therein filed an
action for annulment of contract, which is a kindred concept of
rescission by notarial act.13 Evidently, the case of unlawful detainer filed by
petitioner does not exempt him from complying with the said requirement.
In addition, Sec. 3 (b) of R.A. No. 6552 requires refund of the cash
surrender value of the payments on the property to the buyer before
cancellation of the contract. The provision does not provide a different
requirement for contracts to sell which allow possession of the property by
the buyer upon execution of the contract like the instant case. Hence,
petitioner cannot insist on compliance with the requirement by assuming

There being no valid cancellation of the Contract to Sell, the CA correctly

recognized respondents right to continue occupying the property subject
of the Contract to Sell and affirmed the dismissal of the unlawful detainer
case by the RTC.

Considering that the Contract to Sell was not cancelled by the vendor,
Patricio, during his lifetime or by petitioner in accordance with R.A. No.
6552 when petitioner filed this case of unlawful detainer after 22 years of
continuous possession of the property by respondent who has paid the
substantial amount of P12,300 out of the purchase price of P17,800, the
Court agrees with the CA that it is only right and just to allow respondent
to pay her arrears and settle the balance of the purchase price.
For respondents delay in the payment of the installments, the Court, in its
discretion, and applying Article 2209 14 of the Civil Code, may award
interest at the rate of 6% per annum 15 on the unpaid balance considering
that there is no stipulation in the Contract to Sell for such interest. For
purposes of computing the legal interest, the reckoning period should be
the filing of the complaint for unlawful detainer on April 8, 1997.
Based on respondents evidence16 of payments made, the MTC found that
respondent paid a total of P12,300 out of the purchase price of P17,800.
Hence, respondent still has a balance of P5,500, plus legal interest at the
rate of 6% per annum on the unpaid balance starting April 8, 1997.
The third issue is disregarded since petitioner assails an inexistent ruling of
the RTC on the lack of jurisdiction of the MTC over a rescission case when
the instant case he filed is for unlawful detainer.
WHEREFORE, the Decision of the Court of Appeals dated October 30,
2000 sustaining the dismissal of the unlawful detainer case by the RTC is
AFFIRMED with the following MODIFICATIONS:
1. Respondent Rufina Dela Cruz Vda. de Manzano shall pay
petitioner Manuel C. Pagtalunan the balance of the
purchase price in the amount of Five Thousand Five
Hundred Pesos (P5,500) plus interest at 6% per annum
from April 8, 1997 up to the finality of this judgment, and
thereafter, at the rate of 12% per annum;

Page | 49

2. Upon payment, petitioner Manuel C. Pagtalunan shall

execute a Deed of Absolute Sale of the subject property
and deliver the certificate of title in favor of respondent
Rufina Dela Cruz Vda. de Manzano; and
3. In case of failure to pay within 60 days from finality of
this Decision, respondent Rufina Dela Cruz Vda. de
Manzano shall immediately vacate the premises without
need of further demand, and the downpayment and
installment payments of P12,300 paid by her shall
constitute rental for the subject property.
No costs.
SO ORDERED.
G.R. No. 179965

February 20, 2013

NICOLAS
P.
DIEGO,
Petitioner,
RODOLFO P. DIEGO and EDUARDO P. DIEGO, Respondents.

vs.

In 1993, petitioner Nicolas P. Diego (Nicolas) and his brother Rodolfo,

respondent herein, entered into an oral contract to sell covering Nicolass
share, fixed at P500,000.00, as co-owner of the familys Diego Building
situated in Dagupan City. Rodolfo made a downpayment of P250,000.00. It
was agreed that the deed of sale shall be executed upon payment of the
remaining balance of P250,000.00. However, Rodolfo failed to pay the
remaining balance.
Meanwhile, the building was leased out to third parties, but Nicolass share
in the rents were not remitted to him by herein respondent Eduardo,
another brother of Nicolas and designated administrator of the Diego
Building. Instead, Eduardo gave Nicolass monthly share in the rents to
Rodolfo. Despite demands and protestations by Nicolas, Rodolfo and
Eduardo failed to render an accounting and remit his share in the rents and
fruits of the building, and Eduardo continued to hand them over to Rodolfo.
Thus, on May 17, 1999, Nicolas filed a Complaint 6 against Rodolfo and
Eduardo before the RTC of Dagupan City and docketed as Civil Case No. 9902971-D. Nicolas prayed that Eduardo be ordered to render an accounting
of all the transactions over the Diego Building; that Eduardo and Rodolfo be
ordered to deliver to Nicolas his share in the rents; and that Eduardo and
Rodolfo be held solidarily liable for attorneys fees and litigation expenses.

DEL CASTILLO, J.:

It is settled jurisprudence, to the point of being elementary, that an
agreement which stipulates that the seller shall execute a deed of sale only
upon or after tl1ll payment of the purchase price is a contract to sell, not
a contract of sale. In Reyes v. Tuparan, 1 this Court declared in categorical
terms that "[w]here the vendor promises to execute a deed of
absolute sale upon the completion by the vendee of the payment
of the price, the contract is only a contract to sell. The aforecited
stipulation shows that the vendors reserved title to the subject
property until full payment of the purchase price."
In this case, it is not disputed as in tact both parties agreed that the deed
of sale shall only be executed upon payment of the remaining balance of
the purchase price. Thus, pursuant to the above stated jurisprudence, we
similarly declare that the transaction entered into by the parties is a
contract to sell.
Before us is a Petition for Review on Certiorari2 questioning the June 29,
2007 Decision3 and the October 3, 2007 Resolution 4 of the Court of Appeals
(CA) in CA-G.R. CV No. 86512, which affirmed the April 19, 2005 Decision 5
of the Regional Trial Court (RTC), Branch 40, of Dagupan City in Civil Case
No. 99-02971-D.
Factual Antecedents

Rodolfo and Eduardo filed their Answer with Counterclaim 7 for damages
and attorneys fees. They argued that Nicolas had no more claim in the
rents in the Diego Building since he had already sold his share to Rodolfo.
Rodolfo admitted having remitted only P250,000.00 to Nicolas. He asserted
that he would pay the balance of the purchase price to Nicolas only after
the latter shall have executed a deed of absolute sale.
Ruling of the Regional Trial Court
After trial on the merits, or on April 19, 2005, the trial court rendered its
Decision8 dismissing Civil Case No. 99-02971-D for lack of merit and
ordering Nicolas to execute a deed of absolute sale in favor of Rodolfo
upon payment by the latter of the P250,000.00 balance of the agreed
purchase price. It made the following interesting pronouncement:
It is undisputed that plaintiff (Nicolas) is one of the co-owners of the Diego
Building, x x x. As a co-owner, he is entitled to [his] share in the rentals of
the said building. However, plaintiff [had] already sold his share to
defendant Rodolfo Diego in the amount of P500,000.00 and in fact, [had]
already received a partial payment in the purchase price in the amount of
P250,000.00. Defendant Eduardo Diego testified that as per
agreement, verbal, of the plaintiff and defendant Rodolfo Diego,
the remaining balance of P250,000.00 will be paid upon the
execution of the Deed of Absolute Sale. It was in the year 1997 when
plaintiff was being required by defendant Eduardo Diego to sign the Deed
of Absolute Sale. Clearly, defendant Rodolfo Diego was not yet in default as

Page | 50

the plaintiff claims which cause [sic] him to refuse to sign [sic] document.
The contract of sale was already perfected as early as the year 1993 when
plaintiff received the partial payment, hence, he cannot unilaterally revoke
or rescind the same. From then on, plaintiff has, therefore, ceased to be a
co-owner of the building and is no longer entitled to the fruits of the Diego
Building.
Equity and fairness dictate that defendant [sic] has to execute the
necessary document regarding the sale of his share to defendant Rodolfo
Diego. Correspondingly, defendant Rodolfo Diego has to perform his
obligation as per their verbal agreement by paying the remaining balance
of P250,000.00.9
To summarize, the trial court ruled that as early as 1993, Nicolas was no
longer entitled to the fruits of his aliquot share in the Diego Building
because he had "ceased to be a co-owner" thereof. The trial court held that
when Nicolas received the P250,000.00 downpayment, a "contract of sale"
was perfected. Consequently, Nicolas is obligated to convey such share to
Rodolfo, without right of rescission. Finally, the trial court held that the
P250,000.00 balance from Rodolfo will only be due and demandable when
Nicolas executes an absolute deed of sale.
Ruling of the Court of Appeals
Nicolas appealed to the CA which sustained the trial courts Decision in
toto. The CA held that since there was a perfected contract of sale between
Nicolas and Rodolfo, the latter may compel the former to execute the
proper sale document. Besides, Nicolass insistence that he has since
rescinded their agreement in 1997 proved the existence of a perfected
sale. It added that Nicolas could not validly rescind the contract because:
"1) Rodolfo ha[d] already made a partial payment; 2) Nicolas ha[d] already
partially performed his part regarding the contract; and 3) Rodolfo opposes
the rescission."10
The CA then proceeded to rule that since no period was stipulated within
which Rodolfo shall deliver the balance of the purchase price, it was
incumbent upon Nicolas to have filed a civil case to fix the same. But
because he failed to do so, Rodolfo cannot be considered to be in delay or
default.
Finally, the CA made another interesting pronouncement, that by virtue of
the agreement Nicolas entered into with Rodolfo, he had already
transferred his ownership over the subject property and as a consequence,
Rodolfo is legally entitled to collect the fruits thereof in the form of rentals.
Nicolas remaining right is to demand payment of the balance of the
purchase price, provided that he first executes a deed of absolute sale in
favor of Rodolfo.

Nicolas moved for reconsideration but the same was denied by the CA in
its Resolution dated October 3, 2007.
Hence, this Petition.
Issues
The Petition raises the following errors that must be rectified:
I
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THERE
WAS NO PERFECTED CONTRACT OF SALE BETWEEN PETITIONER NICOLAS
DIEGO AND RESPONDENT RODOLFO DIEGO OVER NICOLASS SHARE OF
THE BUILDING BECAUSE THE SUSPENSIVE CONDITION HAS NOT YET BEEN
FULFILLED.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE
CONTRACT OF SALE BETWEEN PETITIONER AND RESPONDENT RODOLFO
DIEGO REMAINS LEGALLY BINDING AND IS NOT RESCINDED GIVING
MISPLACED RELIANCE ON PETITIONER NICOLAS STATEMENT THAT THE
SALE HAS NOT YET BEEN REVOKED.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT
PETITIONER NICOLAS DIEGO ACTED LEGALLY AND CORRECTLY WHEN HE
UNILATERALLY RESCINDED AND REVOKED HIS AGREEMENT OF SALE WITH
RESPONDENT RODOLFO DIEGO CONSIDERING RODOLFOS MATERIAL,
SUBSTANTIAL BREACH OF THE CONTRACT.
IV
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER
HAS NO MORE RIGHTS OVER HIS SHARE IN THE BUILDING, DESPITE THE
FACT THAT THERE WAS AS YET NO PERFECTED CONTRACT OF SALE
BETWEEN PETITIONER NICOLAS DIEGO AND RODOLFO DIEGO AND THERE
WAS YET NO TRANSFER OF OWNERSHIP OF PETITIONERS SHARE TO
RODOLFO DUE TO THE NON-FULFILLMENT BY RODOLFO OF THE
SUSPENSIVE CONDITION UNDER THE CONTRACT.
V
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT
RESPONDENT RODOLFO HAS UNJUSTLY ENRICHED HIMSELF AT THE

Page | 51

EXPENSE OF PETITIONER BECAUSE DESPITE NOT HAVING PAID THE

BALANCE OF THE PURCHASE PRICE OF THE SALE, THAT RODOLFO HAS NOT
YET ACQUIRED OWNERSHIP OVER THE SHARE OF PETITIONER NICOLAS, HE
HAS ALREADY BEEN APPROPRIATING FOR HIMSELF AND FOR HIS PERSONAL
BENEFIT THE SHARE OF THE INCOME OF THE BUILDING AND THE PORTION
OF THE BUILDING ITSELF WHICH WAS DUE TO AND OWNED BY PETITIONER
NICOLAS.
VI
THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING ACTUAL
DAMAGES, ATTORNEYS FEES AND LITIGATION EXPENSES TO THE
PETITIONER DESPITE THE FACT THAT PETITIONERS RIGHTS HAD BEEN
WANTONLY VIOLATED BY THE RESPONDENTS. 11
Petitioners Arguments
In his Petition, the Supplement 12 thereon, and Reply,13 Nicolas argues that,
contrary to what the CA found, there was no perfected contract of sale
even though Rodolfo had partially paid the price; that in the absence of the
third element in a sale contract the price there could be no perfected
sale; that failing to pay the required price in full, Nicolas had the right to
rescind the agreement as an unpaid seller.
Nicolas likewise takes exception to the CA finding that Rodolfo was not in
default or delay in the payment of the agreed balance for his (Nicolass)
failure to file a case to fix the period within which payment of the balance
should be made. He believes that Rodolfos failure to pay within a
reasonable time was a substantial and material breach of the agreement
which gave him the right to unilaterally and extrajudicially rescind the
agreement and be discharged of his obligations as seller; and that his
repeated written demands upon Rodolfo to pay the balance granted him
such rights.
Nicolas further claims that based on his agreement with Rodolfo, there was
to be no transfer of title over his share in the building until Rodolfo has
effected full payment of the purchase price, thus, giving no right to the
latter to collect his share in the rentals.
Finally, Nicolas bewails the CAs failure to award damages, attorneys fees
and litigation expenses for what he believes is a case of unjust enrichment
at his expense.
Respondents Arguments
Apart from echoing the RTC and CA pronouncements, respondents accuse
the petitioner of "cheating" them, claiming that after the latter received
the P250,000.00 downpayment, he "vanished like thin air and hibernated

in the USA, he being an American citizen," 14 only to come back claiming

that the said amount was a mere loan.
They add that the Petition is a mere rehash and reiteration of the
petitioners arguments below, which are deemed to have been sufficiently
passed upon and debunked by the appellate court.
Our Ruling
The Court finds merit in the Petition.
The contract entered into by Nicolas and Rodolfo was a contract to
sell.
a) The stipulation to execute a deed of sale upon full payment of
the purchase price is a unique and distinguishing characteristic of
a contract to sell. It also shows that the vendor reserved title to
the property until full payment.
There is no dispute that in 1993, Rodolfo agreed to buy Nicolass share in
the Diego Building for the price of P500,000.00. There is also no dispute
that of the total purchase price, Rodolfo paid, and Nicolas received,
P250,000.00. Significantly, it is also not disputed that the parties agreed
that the remaining amount of P250,000.00 would be paid after Nicolas
shall have executed a deed of sale.
This stipulation, i.e., to execute a deed of absolute sale upon full payment
of the purchase price, is a unique and distinguishing characteristic of a
contract to sell. In Reyes v. Tuparan,15 this Court ruled that a stipulation
in the contract, "[w]here the vendor promises to execute a deed of
absolute sale upon the completion by the vendee of the payment
of the price," indicates that the parties entered into a contract to sell.
According to this Court, this particular provision is tantamount to a
reservation of ownership on the part of the vendor. Explicitly stated, the
Court ruled that the agreement to execute a deed of sale upon full
payment of the purchase price "shows that the vendors reserved title
to the subject property until full payment of the purchase price."16
In Tan v. Benolirao,17 this Court, speaking through Justice Brion, ruled that
the parties entered into a contract to sell as revealed by the following
stipulation:
d) That in case, BUYER has complied with the terms and conditions of this
contract, then the SELLERS shall execute and deliver to the BUYER the
appropriate Deed of Absolute Sale;18
The Court further held that "[j]urisprudence has established that
where the seller promises to execute a deed of absolute sale upon

Page | 52

the completion by the buyer of the payment of the price, the

contract is only a contract to sell."19

Received the amount of [P250,000.00] for 1 share of Diego Building as

partial payment for Nicolas Diego.

b) The acknowledgement receipt signed by Nicolas as well as the

contemporaneous acts of the parties show that they agreed on a
contract to sell, not of sale. The absence of a formal deed of
conveyance is indicative of a contract to sell.

(signed)
Nicolas Diego25

In San Lorenzo Development Corporation v. Court of Appeals,20 the facts

show that spouses Miguel and Pacita Lu (Lu) sold a certain parcel of land to
Pablo Babasanta (Pablo). After several payments, Pablo wrote Lu
demanding "the execution of a final deed of sale in his favor so that he
could effect full payment of the purchase price."21 To prove his allegation
that there was a perfected contract of sale between him and Lu, Pablo
presented a receipt signed by Lu acknowledging receipt of P50,000.00 as
partial payment.22
However, when the case reached this Court, it was ruled that the
transaction entered into by Pablo and Lu was only a contract to sell, not
a contract of sale. The Court held thus:
The receipt signed by Pacita Lu merely states that she accepted the sum of
fifty thousand pesos (P50,000.00) from Babasanta as partial payment of
3.6 hectares of farm lot situated in Sta. Rosa, Laguna. While there is no
stipulation that the seller reserves the ownership of the property until full
payment of the price which is a distinguishing feature of a contract to sell,
the subsequent acts of the parties convince us that the Spouses Lu
never intended to transfer ownership to Babasanta except upon
full payment of the purchase price.
Babasantas letter dated 22 May 1989 was quite telling. He stated therein
that despite his repeated requests for the execution of the final deed of
sale in his favor so that he could effect full payment of the price, Pacita Lu
allegedly refused to do so. In effect, Babasanta himself recognized
that ownership of the property would not be transferred to him
until such time as he shall have effected full payment of the price.
Moreover, had the sellers intended to transfer title, they could
have easily executed the document of sale in its required form
simultaneously with their acceptance of the partial payment, but
they did not. Doubtlessly, the receipt signed by Pacita Lu should
legally be considered as a perfected contract to sell.23
In the instant case, records show that Nicolas signed a mere receipt 24
acknowledging partial payment of P250,000.00 from Rodolfo. It states:
July 8, 1993

As we ruled in San Lorenzo Development Corporation v. Court of Appeals,26

the parties could have executed a document of sale upon receipt of the
partial payment but they did not. This is thus an indication that Nicolas did
not intend to immediately transfer title over his share but only upon full
payment of the purchase price. Having thus reserved title over the
property, the contract entered into by Nicolas is a contract to sell. In
addition, Eduardo admitted that he and Rodolfo repeatedly asked Nicolas
to sign the deed of sale 27 but the latter refused because he was not yet
paid the full amount. As we have ruled in San Lorenzo Development
Corporation v. Court of Appeals,28 the fact that Eduardo and Rodolfo asked
Nicolas to execute a deed of sale is a clear recognition on their part that
the ownership over the property still remains with Nicolas. In fine, the
totality of the parties acts convinces us that Nicolas never intended to
transfer the ownership over his share in the Diego Building until the full
payment of the purchase price. Without doubt, the transaction agreed
upon by the parties was a contract to sell, not of sale.
In Chua v. Court of Appeals,29 the parties reached an impasse when the
seller wanted to be first paid the consideration before a new transfer
certificate of title (TCT) is issued in the name of the buyer. Contrarily, the
buyer wanted to secure a new TCT in his name before paying the full
amount. Their agreement was embodied in a receipt containing the
following terms: "(1) the balance of P10,215,000.00 is payable on or before
15 July 1989; (2) the capital gains tax is for the account of x x x; and (3) if
[the buyer] fails to pay the balance x x x the [seller] has the right to forfeit
the earnest money x x x." 30 The case eventually reached this Court. In
resolving the impasse, the Court, speaking through Justice Carpio, held
that "[a] perusal of the Receipt shows that the true agreement between
the parties was a contract to sell." 31 The Court noted that "the agreement x
x x was embodied in a receipt rather than in a deed of sale, ownership not
having passed between them."32 The Court thus concluded that "[t]he
absence of a formal deed of conveyance is a strong indication that
the parties did not intend immediate transfer of ownership, but
only a transfer after full payment of the purchase price." 33 Thus, the
"true agreement between the parties was a contract to sell."34
In the instant case, the parties were similarly embroiled in an impasse. The
parties agreement was likewise embodied only in a receipt. Also, Nicolas
did not want to sign the deed of sale unless he is fully paid. On the other
hand, Rodolfo did not want to pay unless a deed of sale is duly executed in
his favor. We thus say, pursuant to our ruling in Chua v. Court of Appeals35
that the agreement between Nicolas and Rodolfo is a contract to sell.

Page | 53

This Court cannot subscribe to the appellate courts view that Nicolas
should first execute a deed of absolute sale in favor of Rodolfo, before the
latter can be compelled to pay the balance of the price. This is patently
ridiculous, and goes against every rule in the book. This pronouncement
virtually places the prospective seller in a contract to sell at the mercy of
the prospective buyer, and sustaining this point of view would place all
contracts to sell in jeopardy of being rendered ineffective by the act of the
prospective buyers, who naturally would demand that the deeds of
absolute sale be first executed before they pay the balance of the price.
Surely, no prospective seller would accommodate.
In fine, "the need to execute a deed of absolute sale upon
completion of payment of the price generally indicates that it is a
contract to sell, as it implies the reservation of title in the vendor
until the vendee has completed the payment of the price." 36 In
addition, "[a] stipulation reserving ownership in the vendor until full
payment of the price is x x x typical in a contract to sell." 37 Thus, contrary
to the pronouncements of the trial and appellate courts, the parties to this
case only entered into a contract to sell; as such title cannot legally pass to
Rodolfo until he makes full payment of the agreed purchase price.
c) Nicolas did not surrender or deliver title or possession to
Rodolfo.

share in the rentals which Eduardo remitted to Rodolfo. Failing which, he

filed the instant Complaint. To us, this bolsters our findings that Nicolas did
not intend to immediately transfer title over the property.
It must be stressed that it is anathema in a contract to sell that the
prospective seller should deliver title to the property to the prospective
buyer pending the latters payment of the price in full. It certainly is absurd
to assume that in the absence of stipulation, a buyer under a contract to
sell is granted ownership of the property even when he has not paid the
seller in full. If this were the case, then prospective sellers in a contract to
sell would in all likelihood not be paid the balance of the price.
This ponente has had occasion to rule that "[a] contract to sell is one
where the prospective seller reserves the transfer of title to the
prospective buyer until the happening of an event, such as full payment of
the purchase price. What the seller obliges himself to do is to sell the
subject property only when the entire amount of the purchase price has
already been delivered to him. In other words, the full payment of the
purchase price partakes of a suspensive condition, the nonfulfillment of
which prevents the obligation to sell from arising and thus, ownership is
retained by the prospective seller without further remedies by the
prospective buyer. It does not, by itself, transfer ownership to the buyer." 43
The contract to sell is terminated or cancelled.

Moreover, there could not even be a surrender or delivery of title or

possession to the prospective buyer Rodolfo. This was made clear by the
nature of the agreement, by Nicolass repeated demands for the return of
all rents unlawfully and unjustly remitted to Rodolfo by Eduardo, and by
Rodolfo and Eduardos repeated demands for Nicolas to execute a deed of
sale which, as we said before, is a recognition on their part that ownership
over the subject property still remains with Nicolas.
Significantly, when Eduardo testified, he claimed to be knowledgeable
about the terms and conditions of the transaction between Nicolas and
Rodolfo. However, aside from stating that out of the total consideration of
P500,000.00, the amount of P250,000.00 had already been paid while the
remaining P250,000.00 would be paid after the execution of the Deed of
Sale, he never testified that there was a stipulation as regards delivery of
title or possession.38
It is also quite understandable why Nicolas belatedly demanded the
payment of the rentals. Records show that the structural integrity of the
Diego Building was severely compromised when an earthquake struck
Dagupan City in 1990.39 In order to rehabilitate the building, the co-owners
obtained a loan from a bank. 40 Starting May 1994, the property was leased
to third parties and the rentals received were used to pay off the loan. 41 It
was only in 1996, or after payment of the loan that the co-owners started
receiving their share in the rentals. 42 During this time, Nicolas was in the
USA but immediately upon his return, he demanded for the payment of his

Having established that the transaction was a contract to sell, what

happens now to the parties agreement?
The remedy of rescission is not available in contracts to sell. 44 As explained
in Spouses Santos v. Court of Appeals:45
In view of our finding in the present case that the agreement between the
parties is a contract to sell, it follows that the appellate court erred when it
decreed that a judicial rescission of said agreement was necessary. This is
because there was no rescission to speak of in the first place. As we earlier
pointed out, in a contract to sell, title remains with the vendor and does
not pass on to the vendee until the purchase price is paid in full. Thus, in a
contract to sell, the payment of the purchase price is a positive suspensive
condition. Failure to pay the price agreed upon is not a mere breach, casual
or serious, but a situation that prevents the obligation of the vendor to
convey title from acquiring an obligatory force. This is entirely different
from the situation in a contract of sale, where non-payment of the price is
a negative resolutory condition. The effects in law are not identical. In a
contract of sale, the vendor has lost ownership of the thing sold and
cannot recover it, unless the contract of sale is rescinded and set aside. In
a contract to sell, however, the vendor remains the owner for as long as
the vendee has not complied fully with the condition of paying the
purchase price. If the vendor should eject the vendee for failure to meet
the condition precedent, he is enforcing the contract and not rescinding it.

Page | 54

When the petitioners in the instant case repossessed the disputed house
and lot for failure of private respondents to pay the purchase price in full,
they were merely enforcing the contract and not rescinding it. As
petitioners correctly point out, the Court of Appeals erred when it ruled
that petitioners should have judicially rescinded the contract pursuant to
Articles 1592 and 1191 of the Civil Code. Article 1592 speaks of nonpayment of the purchase price as a resolutory condition. It does not apply
to a contract to sell. As to Article 1191, it is subordinated to the provisions
of Article 1592 when applied to sales of immovable property. Neither
provision is applicable in the present case.46
Similarly, we held in Chua v. Court of Appeals47 that "Article 1592 of the
Civil Code permits the buyer to pay, even after the expiration of the period,
as long as no demand for rescission of the contract has been made upon
him either judicially or by notarial act. However, Article 1592 does not
apply to a contract to sell where the seller reserves the ownership until full
payment of the price,"48 as in this case.1wphi1
Applying the above jurisprudence, we hold that when Rodolfo failed to fully
pay the purchase price, the contract to sell was deemed terminated or
cancelled.49 As we have held in Chua v. Court of Appeals,50 "[s]ince the
agreement x x x is a mere contract to sell, the full payment of the
purchase price partakes of a suspensive condition. The non-fulfillment of
the condition prevents the obligation to sell from arising and
ownership is retained by the seller without further remedies by
the buyer." Similarly, we held in Reyes v. Tuparan51 that "petitioners
obligation to sell the subject properties becomes demandable only upon
the happening of the positive suspensive condition, which is the
respondents full payment of the purchase price. Without respondents
full payment, there can be no breach of contract to speak of
because petitioner has no obligation yet to turn over the title.
Respondents failure to pay in full the purchase price in full is not the
breach of contract contemplated under Article 1191 of the New Civil Code
but rather just an event that prevents the petitioner from being bound to
convey title to respondent." Otherwise stated, Rodolfo has no right to
compel Nicolas to transfer ownership to him because he failed to pay in full
the purchase price. Correlatively, Nicolas has no obligation to transfer his
ownership over his share in the Diego Building to Rodolfo. 52
Thus, it was erroneous for the CA to rule that Nicolas should have filed a
case to fix the period for Rodolfos payment of the balance of the purchase
price. It was not Nicolass obligation to compel Rodolfo to pay the balance;
it was Rodolfos duty to remit it.
It would appear that after Nicolas refused to sign the deed as there was yet
no full payment, Rodolfo and Eduardo hired the services of the Daroya
Accounting Office "for the purpose of estimating the amount to which
[Nicolas] still owes [Rodolfo] as a consequence of the unconsummated
verbal agreement regarding the formers share in the co-ownership of
[Diego Building] in favor of the latter." 53 According to the accountants

report, after Nicolas revoked his agreement with Rodolfo due to nonpayment, the downpayment of P250,000.00 was considered a loan of
Nicolas from Rodolfo.54 The accountant opined that the P250,000.00 should
earn interest at 18%.55 Nicolas however objected as regards the imposition
of interest as it was not previously agreed upon. Notably, the contents of
the accountants report were not disputed or rebutted by the respondents.
In fact, it was stated therein that "[a]ll the bases and assumptions made
particularly in the fixing of the applicable rate of interest have been
discussed with [Eduardo]."56
We find it irrelevant and immaterial that Nicolas described the termination
or cancellation of his agreement with Rodolfo as one of rescission. Being a
layman, he is understandably not adept in legal terms and their
implications. Besides, this Court should not be held captive or bound by
the conclusion reached by the parties. The proper characterization of an
action should be based on what the law says it to be, not by what a party
believed it to be. "A contract is what the law defines it to be x x x and not
what the contracting parties call it."57
On the other hand, the respondents additional submission that Nicolas
cheated them by "vanishing and hibernating" in the USA after receiving
Rodolfos P250,000.00 downpayment, only to come back later and claim
that the amount he received was a mere loan cannot be believed. How
the respondents could have been cheated or disadvantaged by Nicolass
leaving is beyond comprehension. If there was anybody who benefited
from Nicolass perceived "hibernation", it was the respondents, for they
certainly had free rein over Nicolass interest in the Diego Building. Rodolfo
put off payment of the balance of the price, yet, with the aid of Eduardo,
collected and appropriated for himself the rents which belonged to Nicolas.
Eduardo is solidarily liable with Rodolfo as regards the share of
Nicolas in the rents.
For his complicity, bad faith and abuse of authority as the Diego Building
administrator, Eduardo must be held solidarily liable with Rodolfo for all
that Nicolas should be entitled to from 1993 up to the present, or in
respect of actual damages suffered in relation to his interest in the Diego
Building. Eduardo was the primary cause of Nicolass loss, being directly
responsible for making and causing the wrongful payments to Rodolfo, who
received them under obligation to return them to Nicolas, the true
recipient.1wphi1 As such, Eduardo should be principally responsible to
Nicolas as well. Suffice it to state that every person must, in the exercise of
his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith; and every person
who, contrary to law, wilfully or negligently causes damage to another,
shall indemnify the latter for the same.58
Attorneys fees and other costs.

Page | 55

"Although attorneys fees are not allowed in the absence of stipulation, the
court can award the same when the defendants act or omission has
compelled the plaintiff to incur expenses to protect his interest or where
the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiffs plainly valid, just and demandable claim." 59 In the instant case, it
is beyond cavil that petitioner was constrained to file the instant case to
protect his interest because of respondents unreasonable and unjustified
refusal to render an accounting and to remit to the petitioner his rightful
share in rents and fruits in the Diego Building. Thus, we deem it proper to
award to petitioner attorneys fees in the amount of P50,000.00,60 as well
as litigation expenses in the amount of P20,000.00 and the sum of
P1,000.00 for each court appearance by his lawyer or lawyers, as prayed
for.

4. Respondents Rodolfo P. Diego and Eduardo P. Diego are

ORDERED, immediately and without further delay upon
receipt of this Decision, to solidarily pay the petitioner
attorneys fees in the amount of P50,000.00; litigation
expenses in the amount of P20,000.00 and the sum of
P1,000.00 per counsel for each court appearance by his
lawyer or lawyers;
5. The payment of P250,000.00 made by respondent
Rodolfo P. Diego, with legal interest from the filing of the
Complaint, shall be APPLIED, by way of compensation, to
his liabilities to the petitioner and to answer for all
damages and other awards and interests which are owing
to the latter under this Decision; and

WHEREFORE, premises considered, the Petition is GRANTED. The June

29, 2007 Decision and October 3, 2007 Resolution of the Court of Appeals
in CA-G.R. CV No. 86512, and the April 19, 2005 Decision of the Dagupan
City Regional Trial Court, Branch 40 in Civil Case No. 99-02971-D, are
hereby ANNULLED and SET ASIDE.

SO ORDERED.

The Court further decrees the following:

G.R. No. 201167

1. The oral contract to sell between petitioner Nicolas P.

Diego and respondent Rodolfo P. Diego is DECLARED
terminated/cancelled;
2. Respondents Rodolfo P. Diego and Eduardo P. Diego are
ORDERED to surrender possession and control, as the
case may be, of Nicolas P. Diegos share in the Diego
Building. Respondents are further commanded to return or
surrender to the petitioner the documents of title, receipts,
papers, contracts, and all other documents in any form or
manner pertaining to the latters share in the building,
which are deemed to be in their unauthorized and illegal
possession;
3. Respondents Rodolfo P. Diego and Eduardo P. Diego are
ORDERED to immediately render an accounting of all the
transactions, from the period beginning 1993 up to the
present, pertaining to Nicolas P. Diegos share in the Diego
Building, and thereafter commanded to jointly and
severally remit to the petitioner all rents, monies,
payments and benefits of whatever kind or nature
pertaining thereto, which are hereby deemed received by
them during the said period, and made to them or are due,
demandable and forthcoming during the said period and
from the date of this Decision, with legal interest from the
filing of the Complaint;

6. Respondents counterclaim is DISMISSED.

February 27, 2013

GOTESCO PROPERTIES, INC., JOSE C. GO, EVELYN GO, LOURDES G.

ORTIGA,
GEORGE
GO,
and
VICENTE
GO,
Petitioners,
vs.
SPOUSES EUGENIO and ANGELINA FAJARDO, Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules
of Court is the July 22, 2011 Decision 1 and February 29, 2012 Resolution 2 of
the Court of Appeals (CA) in CA-G.R. SP No. 112981, which affirmed with
modification the August 27, 2009 Decision 3 of the Office of the President
(OP).
The Facts
On January 24, 1995, respondent-spouses Eugenio and Angelina Fajardo
(Sps. Fajardo) entered into a Contract to Sell 4 (contract) with petitionercorporation Gotesco Properties, Inc. (GPI) for the purchase of a 100-square
meter lot identified as Lot No. 13, Block No.6, Phase No. IV of Evergreen
Executive Village, a subdivision project owned and developed by GPI
located at Deparo Road, Novaliches, Caloocan City. The subject lot is a
portion of a bigger lot covered by Transfer Certificate of Title (TCT) No.
2442205 (mother title).

Page | 56

Under the contract, Sps. Fajardo undertook to pay the purchase price of
P126,000.00 within a 10-year period, including interest at the rate of nine
percent (9%) per annum. GPI, on the other hand, agreed to execute a final
deed of sale (deed) in favor of Sps. Fajardo upon full payment of the
stipulated consideration. However, despite its full payment of the purchase
price on January 17, 20006 and subsequent demands,7 GPI failed to execute
the deed and to deliver the title and physical possession of the subject lot.
Thus, on May 3, 2006, Sps. Fajardo filed before the Housing and Land Use
Regulatory Board-Expanded National Capital Region Field Office
(HLURBENCRFO) a complaint8 for specific performance or rescission of
contract with damages against GPI and the members of its Board of
Directors namely, Jose C. Go, Evelyn Go, Lourdes G. Ortiga, George Go, and
Vicente Go (individual petitioners), docketed as HLURB Case No. REM050306-13319.

On February 9, 2007, the HLURB-ENCRFO issued a Decision 15 in favor of

Sps. Fajardo, holding that GPIs obligation to execute the corresponding
deed and to deliver the transfer certificate of title and possession of the
subject lot arose and thus became due and demandable at the time Sps.
Fajardo had fully paid the purchase price for the subject lot. Consequently,
GPIs failure to meet the said obligation constituted a substantial breach of
the contract which perforce warranted its rescission. In this regard, Sps.
Fajardo were given the option to recover the money they paid to GPI in the
amount of P168,728.83, plus legal interest reckoned from date of extrajudicial demand in September 2002 until fully paid. Petitioners were
likewise held jointly and solidarily liable for the payment of moral and
exemplary damages, attorney's fees and the costs of suit.

Sps. Fajardo averred that GPI violated Section 20 9 of Presidential Decree

No. 95710 (PD 957) due to its failure to construct and provide water
facilities, improvements, infrastructures and other forms of development
including water supply and lighting facilities for the subdivision project.
They also alleged that GPI failed to provide boundary marks for each lot
and that the mother title including the subject lot had no technical
description and was even levied upon by the Bangko Sentral ng Pilipinas
(BSP) without their knowledge. They thus prayed that GPI be ordered to
execute the deed, to deliver the corresponding certificate of title and the
physical possession of the subject lot within a reasonable period, and to
develop Evergreen Executive Village; or in the alternative, to cancel and/or
rescind the contract and refund the total payments made plus legal
interest starting January 2000.

On appeal, the HLURB Board of Commissioners affirmed the above ruling in

its August 3, 2007 Decision, 16 finding that the failure to execute the deed
and to deliver the title to Sps. Fajardo amounted to a violation of Section
25 of PD 957 which therefore, warranted the refund of payments in favor of
Sps. Fajardo.

For their part, petitioners maintained that at the time of the execution of
the contract, Sps. Fajardo were actually aware that GPI's certificate of title
had no technical description inscribed on it. Nonetheless, the title to the
subject lot was free from any liens or encumbrances. 11 Petitioners claimed
that the failure to deliver the title to Sps. Fajardo was beyond their control 12
because while GPI's petition for inscription of technical description (LRC
Case No. 4211) was favorably granted 13 by the Regional Trial Court of
Caloocan City, Branch 131 (RTC-Caloocan), the same was reversed 14 by the
CA; this caused the delay in the subdivision of the property into individual
lots with individual titles. Given the foregoing incidents, petitioners thus
argued that Article 1191 of the Civil Code (Code) the provision on which
Sps. Fajardo anchor their right of rescission remained inapplicable since
they were actually willing to comply with their obligation but were only
prevented from doing so due to circumstances beyond their control.
Separately, petitioners pointed out that BSP's adverse claim/levy which
was annotated long after the execution of the contract had already been
settled.

The Ruling of the CA

The Ruling of the HLURB Board of Commissioners

The Ruling of the OP

On further appeal, the OP affirmed the HLURB rulings in its August 27,
2009 Decision.17 In so doing, it emphasized the mandatory tenor of Section
25 of PD 957 which requires the delivery of title to the buyer upon full
payment and found that GPI unjustifiably failed to comply with the same.

On petition for review, the CA affirmed the above rulings with modification,
fixing the amount to be refunded to Sps. Fajardo at the prevailing market
value of the property18 pursuant to the ruling in Solid Homes v. Tan (Solid
Homes).19
The Petition
Petitioners insist that Sps. Fajardo have no right to rescind the contract
considering that GPI's inability to comply therewith was due to reasons
beyond its control and thus, should not be held liable to refund the
payments they had received. Further, since the individual petitioners never
participated in the acts complained of nor found to have acted in bad faith,
they should not be held liable to pay damages and attorney's fees.
The Court's Ruling

The Ruling of the HLURB-ENCRFO

The petition is partly meritorious.

Page | 57

A. Sps. Fajardos right to rescind

It is settled that in a contract to sell, the seller's obligation to deliver the
corresponding certificates of title is simultaneous and reciprocal to the
buyer's full payment of the purchase price.20 In this relation, Section 25 of
PD 957, which regulates the subject transaction, imposes on the
subdivision owner or developer the obligation to cause the transfer of the
corresponding certificate of title to the buyer upon full payment, to wit:
Sec. 25. Issuance of Title. The owner or developer shall deliver the
title of the lot or unit to the buyer upon full payment of the lot or
unit. No fee, except those required for the registration of the deed of sale
in the Registry of Deeds, shall be collected for the issuance of such title. In
the event a mortgage over the lot or unit is outstanding at the time of the
issuance of the title to the buyer, the owner or developer shall redeem the
mortgage or the corresponding portion thereof within six months from such
issuance in order that the title over any fully paid lot or unit may be
secured and delivered to the buyer in accordance herewith. (Emphasis
supplied.)
In the present case, Sps. Fajardo claim that GPI breached the contract due
to its failure to execute the deed of sale and to deliver the title and
possession over the subject lot, notwithstanding the full payment of the
purchase price made by Sps. Fajardo on January 17, 2000 21 as well as the
latters demand for GPI to comply with the aforementioned obligations per
the letter22 dated September 16, 2002. For its part, petitioners proffer that
GPI could not have committed any breach of contract considering that its
purported non-compliance was largely impelled by circumstances beyond
its control i.e., the legal proceedings concerning the subdivision of the
property into individual lots. Hence, absent any substantial breach, Sps.
Fajardo had no right to rescind the contract.
The Court does not find merit in petitioners contention.
A perusal of the records shows that GPI acquired the subject property on
March 10, 1992 through a Deed of Partition and Exchange 23 executed
between it and Andres Pacheco (Andres), the former registered owner of
the property. GPI was issued TCT No. 244220 on March 16, 1992 but the
same did not bear any technical description. 24 However, no plausible
explanation was advanced by the petitioners as to why the petition for
inscription (docketed as LRC Case No. 4211) dated January 6, 2000, 25 was
filed only after almost eight (8) years from the acquisition of the subject
property.
Neither did petitioners sufficiently explain why GPI took no positive action
to cause the immediate filing of a new petition for inscription within a
reasonable time from notice of the July 15, 2003 CA Decision which
dismissed GPIs earlier petition based on technical defects, this
notwithstanding Sps. Fajardo's full payment of the purchase price and prior

demand for delivery of title. GPI filed the petition before the RTC-Caloocan,
Branch 122 (docketed as LRC Case No. C-5026) only on November 23,
2006,26 following receipt of the letter 27 dated February 10, 2006 and the
filing of the complaint on May 3, 2006, alternatively seeking refund of
payments. While the court a quo decided the latter petition for inscription
in its favor,28 there is no showing that the same had attained finality or that
the approved technical description had in fact been annotated on TCT No.
244220, or even that the subdivision plan had already been approved.
Moreover, despite petitioners allegation29 that the claim of BSP had been
settled, there appears to be no cancellation of the annotations 30 in GPIs
favor. Clearly, the long delay in the performance of GPI's obligation from
date of demand on September 16, 2002 was unreasonable and unjustified.
It cannot therefore be denied that GPI substantially breached its contract
to sell with Sps. Fajardo which thereby accords the latter the right to
rescind the same pursuant to Article 1191 of the Code, viz:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with articles 1385 and 1388
and the Mortgage Law.
B. Effects of rescission
At this juncture, it is noteworthy to point out that rescission does not
merely terminate the contract and release the parties from further
obligations to each other, but abrogates the contract from its inception and
restores the parties to their original positions as if no contract has been
made.31 Consequently, mutual restitution, which entails the return of the
benefits that each party may have received as a result of the contract, is
thus required.32 To be sure, it has been settled that the effects of rescission
as provided for in Article 1385 of the Code are equally applicable to cases
under Article 1191, to wit:
xxxx

Page | 58

Mutual restitution is required in cases involving rescission under

Article 1191.1wphi1 This means bringing the parties back to their
original status prior to the inception of the contract. Article 1385 of the
Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the things
which were the object of the contract, together with their fruits,
and the price with its interest; consequently, it can be carried out
only when he who demands rescission can return whatever he may
be obligated to restore.
Neither shall rescission take place when the things which are the object of
the contract are legally in the possession of third persons who did not act
in bad faith.
In this case, indemnity for damages may be demanded from the person
causing the loss.
This Court has consistently ruled that this provision applies to
rescission under Article 1191:
Since Article 1385 of the Civil Code expressly and clearly states that
"rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its
interest," the Court finds no justification to sustain petitioners position that
said Article 1385 does not apply to rescission under Article 1191. x x x 33
(Emphasis supplied; citations omitted.)
In this light, it cannot be denied that only GPI benefited from the contract,
having received full payment of the contract price plus interests as early as
January 17, 2000, while Sps. Fajardo remained prejudiced by the persisting
non-delivery of the subject lot despite full payment. As a necessary
consequence, considering the propriety of the rescission as earlier
discussed, Sps. Fajardo must be able to recover the price of the property
pegged at its prevailing market value consistent with the Courts
pronouncement in Solid Homes,34 viz:
Indeed, there would be unjust enrichment if respondents Solid Homes, Inc.
& Purita Soliven are made to pay only the purchase price plus interest. It is
definite that the value of the subject property already escalated after
almost two decades from the time the petitioner paid for it. Equity and
justice dictate that the injured party should be paid the market
value of the lot, otherwise, respondents Solid Homes, Inc. & Purita
Soliven would enrich themselves at the expense of herein lot
owners when they sell the same lot at the present market value.
Surely, such a situation should not be countenanced for to do so would be
contrary to reason and therefore, unconscionable. Over time, courts have
recognized with almost pedantic adherence that what is inconvenient or
contrary to reason is not allowed in law. (Emphasis supplied.)

On this score, it is apt to mention that it is the intent of PD 957 to protect

the buyer against unscrupulous developers, operators and/or sellers who
reneged on their obligations.35 Thus, in order to achieve this purpose,
equity and justice dictate that the injured party should be afforded full
recompense and as such, be allowed to recover the prevailing market
value of the undelivered lot which had been fully paid for.1wphi1
C. Moral and exemplary damages, attorneys fees and costs of suit
Furthermore, the Court finds that there is proper legal basis to accord
moral and exemplary damages and attorney's fees, including costs of suit.
Verily, GPIs unjustified failure to comply with its obligations as abovediscussed caused Sps. Fajardo serious anxiety, mental anguish and
sleepless nights, thereby justifying the award of moral damages. In the
same vein, the payment of exemplary damages remains in order so as to
prevent similarly minded subdivision developers to commit the same
transgression. And finally, considering that Sps. Fajardo were constrained
to engage the services of counsel to file this suit, the award of attorneys
fees must be likewise sustained.
D. Liability of individual Petitioners
However, the Court finds no basis to hold individual petitioners solidarily
liable with petitioner GPI for the payment of damages in favor of Sps.
Fajardo since it was not shown that they acted maliciously or dealt with the
latter in bad faith. Settled 1s the rule that in the absence of malice and bad
faith, as in this case, officers of the corporation cannot be made personally
liable for liabilities of the corporation which, by legal fiction, has a
personality separate and distinct from its officers, stockholders, and
members.36
WHEREFORE, the assailed July 22, 2011 Decision and February 29, 2012
Resolution of the Court of Appeals in CA-G.R. SP No. 112981 are hereby
AFFIRMED WITH MODIFICATION, absolving individual petitioners Jose C.
Go, Evelyn Go, Lourdes G. Ortiga, George Go, and Vicente Go from
personal liability towards respondent-spouses Eugenio and Angelina
Fajardo.
SO ORDERED.
G.R. No. 188986

March 20, 2013

GALILEO A. MAGLASANG, doing business under the name GL

Enterprises,
Petitioner,
vs.
NORTHWESTERN INC., UNIVERSITY, Respondent.
DECISION

Page | 59

SERENO, CJ.:

F. ECDIS SYSTEM

Before this Court is a Rule 45 Petition, seeking a review of the 27 July 2009
Court of Appeals (CA) Decision in CA-G.R. CV No. 88989, 1 which modified
the Regional Trial Court (RTC) Decision of 8 January 2007 in Civil Case No.
Q-04-53660.2 The CA held that petitioner substantially breached its
contracts with respondent for the installation of an integrated bridge
system (IBS).

G. STEERING WHEEL SYSTEM

The antecedent .facts are as follows:3

On 10 June 2004, respondent Northwestern University (Northwestern), an
educational institution offering maritime-related courses, engaged the
services of a Quezon City-based firm, petitioner GL Enterprises, to install a
new IBS in Laoag City. The installation of an IBS, used as the students
training laboratory, was required by the Commission on Higher Education
(CHED) before a school could offer maritime transportation programs. 4
Since its IBS was already obsolete, respondent required petitioner to supply
and install specific components in order to form the most modern IBS that
would be acceptable to CHED and would be compliant with the standards
of the International Maritime Organization (IMO). For this purpose, the
parties executed two contracts.
The first contract partly reads:5
That in consideration of the payment herein mentioned to be made by the
First Party (defendant), the Second Party agrees to furnish, supply, install
and integrate the most modern INTEGRATED BRIDGE SYSTEM located at
Northwestern University MOCK BOAT in accordance with the general
conditions, plans and specifications of this contract.
SUPPLY & INSTALLATION OF THE FOLLOWING:
INTEGRATED BRIDGE SYSTEM
A. 2-RADAR SYSTEM
B. OVERHEAD CONSOLE MONITORING SYSTEM
C. ENGINE TELEGRAPH SYSTEM
D. ENGINE CONTROL SYSTEM
E. WEATHER CONTROL SYSTEM

H. BRIDGE CONSOLE

TOTAL COST:

Php 3,800,000

LESS:
OLD
EQUIPMENT TRADE-IN VALUE

MARITIME
1,000,000.00

DISCOUNT

100,000.00

PROJECT COST (MATERIALS & INSTALLATION)

PhP 2,700,000

(Emphasis in the original)

The second contract essentially contains the same terms and conditions as
follows:6
That in consideration of the payment herein mentioned to be made by the
First Party (defendant), the Second Party agrees to furnish, supply, install &
integrate the most modern INTEGRATED BRIDGE SYSTEM located at
Northwestern University MOCK BOAT in accordance with the general
conditions, plans and specifications of this contract.
SUPPLY & INSTALLATION OF THE FOLLOWING:
1. ARPA RADAR SIMULATION ROOM
xxxx
2. GMDSS SIMULATION ROOM
xxxx
TOTAL
COST:
(Emphasis in the original)

PhP

270,000.00

Common to both contracts are the following provisions: (1) the IBS and its
components must be compliant with the IMO and CHED standard and with
manuals for simulators/major equipment; (2) the contracts may be
terminated if one party commits a substantial breach of its undertaking;
and (3) any dispute under the agreement shall first be settled mutually

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between the parties, and if settlement is not obtained, resort shall be

sought in the courts of law.

Consequently, it ordered mutual restitution, which would thereby restore

the parties to their original positions as follows: 11

Subsequently, Northwestern paid P1 million as down payment to GL

Enterprises. The former then assumed possession of Northwesterns old
IBS as trade-in payment for its service. Thus, the balance of the contract
price remained at P1.97 million.7

Accordingly, plaintiff is hereby ordered to restore to the defendant all the

equipment obtained by reason of the First Contract and refund the
downpayment of P1,000,000.00 to the defendant; and for the defendant to
return to the plaintiff the equipment and materials it withheld by reason of
the non-continuance of the installation and integration project. In the event
that restoration of the old equipment taken from defendant's premises is
no longer possible, plaintiff is hereby ordered to pay the appraised value of
defendant's old equipment at P1,000,000.00. Likewise, in the event that
restoration of the equipment and materials delivered by the plaintiff to the
defendant is no longer possible, defendant is hereby ordered to pay its
appraised value at P1,027,480.00.

Two months after the execution of the contracts, GL Enterprises technicians

delivered various materials to the project site. However, when they started
installing the components, respondent halted the operations. GL
Enterprises then asked for an explanation.8
Northwestern justified the work stoppage upon its finding that the
delivered equipment were substandard. 9 It explained further that GL
Enterprises violated the terms and conditions of the contracts, since the
delivered components (1) were old; (2) did not have instruction manuals
and warranty certificates; (3) contained indications of being reconditioned
machines; and (4) did not meet the IMO and CHED standards. Thus,
Northwestern demanded compliance with the agreement and suggested
that GL Enterprises meet with the formers representatives to iron out the
situation.
Instead of heeding this suggestion, GL Enterprises filed on 8 September
2004 a Complaint10 for breach of contract and prayed for the following
sums: P1.97 million, representing the amount that it would have earned,
had Northwestern not stopped it from performing its tasks under the two
contracts; at least P100,000 as moral damages; at least P100,000 by way
of exemplary damages; at least P100,000 as attorneys fees and litigation
expenses; and cost of suit. Petitioner alleged that Northwestern breached
the contracts by ordering the work stoppage and thus preventing the
installation of the materials for the IBS.
Northwestern denied the allegation. In its defense, it asserted that since
the equipment delivered were not in accordance with the specifications
provided by the contracts, all succeeding works would be futile and would
entail unnecessary expenses. Hence, it prayed for the rescission of the
contracts and made a compulsory counterclaim for actual, moral, and
exemplary damages, and attorneys fees.
The RTC held both parties at fault. It found that Northwestern unduly halted
the operations, even if the contracts called for a completed project to be
evaluated by the CHED. In turn, the breach committed by GL Enterprises
consisted of the delivery of substandard equipment that were not
compliant with IMO and CHED standards as required by the agreement.
Invoking the equitable principle that "each party must bear its own loss,"
the trial court treated the contracts as impossible of performance without
the fault of either party or as having been dissolved by mutual consent.

Moreover, plaintiff is likewise ordered to restore and return all the

equipment obtained by reason of the Second Contract, or if restoration or
return is not possible, plaintiff is ordered to pay the value thereof to the
defendant.
SO ORDERED.
Aggrieved, both parties appealed to the CA. With each of them pointing a
finger at the other party as the violator of the contracts, the appellate
court ultimately determined that GL Enterprises was the one guilty of
substantial breach and liable for attorneys fees.
The CA appreciated that since the parties essentially sought to have an IBS
compliant with the CHED and IMO standards, it was GL Enterprises
delivery of defective equipment that materially and substantially breached
the contracts. Although the contracts contemplated a completed project to
be evaluated by CHED, Northwestern could not just sit idly by when it was
apparent that the components delivered were substandard.
The CA held that Northwestern only exercised ordinary prudence to
prevent the inevitable rejection of the IBS delivered by GL Enterprises.
Likewise, the appellate court disregarded petitioners excuse that the
equipment delivered might not have been the components intended to be
installed, for it would be contrary to human experience to deliver
equipment from Quezon City to Laoag City with no intention to use it.
This time, applying Article 1191 of the Civil Code, the CA declared the
rescission of the contracts. It then proceeded to affirm the RTCs order of
mutual restitution. Additionally, the appellate court granted P50,000 to
Northwestern by way of attorneys fees.
Before this Court, petitioner rehashes all the arguments he had raised in
the courts a quo.12 He maintains his prayer for actual damages equivalent

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to the amount that he would have earned, had respondent not stopped him
from performing his tasks under the two contracts; moral and exemplary
damages; attorneys fees; litigation expenses; and cost of suit.
Hence, the pertinent issue to be resolved in the instant appeal is whether
the CA gravely erred in (1) finding substantial breach on the part of GL
Enterprises; (2) refusing petitioners claims for damages, and (3) awarding
attorneys fees to Northwestern.

be complete with manuals. Aside from these clear provisions in the

contracts, the courts a quo similarly found that the intent of the parties
was to replace the old IBS in order to obtain CHED accreditation for
Northwesterns maritime-related courses.

Substantial Breaches of the Contracts

According to CHED Memorandum Order (CMO) No. 10, Series of 1999, as

amended by CMO No. 13, Series of 2005, any simulator used for simulatorbased training shall be capable of simulating the operating capabilities of
the shipboard equipment concerned. The simulation must be achieved at a
level of physical realism appropriate for training objectives; include the
capabilities, limitations and possible errors of such equipment; and provide
an interface through which a trainee can interact with the equipment, and
the simulated environment.

Although the RTC and the CA concurred in ordering restitution, the courts a
quo, however, differed on the basis thereof. The RTC applied the equitable
principle of mutual fault, while the CA applied Article 1191 on rescission.

Given these conditions, it was thus incumbent upon GL Enterprises to

supply the components that would create an IBS that would effectively
facilitate the learning of the students.

The power to rescind the obligations of the injured party is implied in

reciprocal obligations, such as in this case. On this score, the CA correctly
applied Article 1191, which provides thus:

However, GL Enterprises miserably failed in meeting its responsibility. As

contained in the findings of the CA and the RTC, petitioner supplied
substandard equipment when it delivered components that (1) were old;
(2) did not have instruction manuals and warranty certificates; (3) bore
indications of being reconditioned machines; and, all told, (4) might not
have met the IMO and CHED standards. Highlighting the defects of the
delivered materials, the CA quoted respondents testimonial evidence as
follows:16

RULING OF THE COURT

The power to rescind obligations is implied in reciprocal ones, in case one

of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
The two contracts require no less than substantial breach before they can
be rescinded. Since the contracts do not provide for a definition of
substantial breach that would terminate the rights and obligations of the
parties, we apply the definition found in our jurisprudence.
This Court defined in Cannu v. Galang 13 that substantial, unlike slight or
casual breaches of contract, are fundamental breaches that defeat the
object of the parties in entering into an agreement, since the law is not
concerned with trifles.14
The question of whether a breach of contract is substantial depends upon
the attending circumstances.15
In the case at bar, the parties explicitly agreed that the materials to be
delivered must be compliant with the CHED and IMO standards and must

Q: In particular which of these equipment of CHED requirements were not

complied with?
A: The Radar Ma'am, because they delivered only 10-inch PPI, that is the
monitor of the Radar. That is 16-inch and the gyrocompass with two (2)
repeaters and the history card. The gyrocompass - there is no marker,
there is no model, there is no serial number, no gimbal, no gyroscope and
a bulb to work it properly to point the true North because it is very
important to the Cadets to learn where is the true North being indicated by
the Master Gyrocompass.
xxxx
Q: Mr. Witness, one of the defects you noted down in this history card is
that the master gyrocompass had no gimbals, gyroscope and balls and was
replaced with an ordinary electric motor. So what is the Implication of this?
A: Because those gimbals, balls and the gyroscope it let the gyrocompass
to work so it will point the true North but they being replaced with the
ordinary motor used for toys so it will not indicate the true North.

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Q: So what happens if it will not indicate the true North?

A: It is very big problem for my cadets because they must, to learn into
school where is the true North and what is that equipment to be used on
board.

Given that petitioner, without justification, supplied substandard

components for the new IBS, it is thus clear that its violation was not
merely incidental, but directly related to the essence of the agreement
pertaining to the installation of an IBS compliant with the CHED and IMO
standards.

Q: One of the defects is that the steering wheel was that of an ordinary
automobile. And what is the implication of this?

Consequently, the CA correctly found substantial breach on the part of

petitioner.

A: Because. on board Maam, we are using the real steering wheel and the
cadets will be implicated if they will notice that the ship have the same
steering wheel as the car so it is not advisable for them.

In contrast, Northwesterns breach, if any, was characterized by the

appellate court as slight or casual. 21 By way of negative definition, a breach
is considered casual if it does not fundamentally defeat the object of the
parties in entering into an agreement. Furthermore, for there to be a
breach to begin with, there must be a "failure, without legal excuse, to
perform any promise which forms the whole or part of the contract."22

Q:. And another one is that the gyrocompass repeater was only refurbished
and it has no serial number. What is wrong with that?
A: It should be original Maam because this gyro repeater, it must to repeat
also the true North being indicated by the Master Gyro Compass so it will
not work properly, I dont know it will work properly. (Underscoring
supplied)
Evidently, the materials delivered were less likely to pass the CHED
standards, because the navigation system to be installed might not
accurately point to the true north; and the steering wheel delivered was
one that came from an automobile, instead of one used in ships. Logically,
by no stretch of the imagination could these form part of the most modern
IBS compliant with the IMO and CHED standards.
Even in the instant appeal, GL Enterprises does not refute that the
equipment it delivered was substandard. However, it reiterates its rejected
excuse that Northwestern should have made an assessment only after the
completion of the IBS.17 Thus, petitioner stresses that it was Northwestern
that breached the agreement when the latter halted the installation of the
materials for the IBS, even if the parties had contemplated a completed
project to be evaluated by CHED. However, as aptly considered by the CA,
respondent could not just "sit still and wait for such day that its
accreditation may not be granted by CHED due to the apparent
substandard equipment installed in the bridge system." 18 The appellate
court correctly emphasized that, by that time, both parties would have
incurred more costs for nothing.
Additionally, GL Enterprises reasons that, based on the contracts, the
materials that were hauled all the way from Quezon City to Laoag City
under the custody of the four designated installers might not have been
the components to be used.19 Without belaboring the point, we affirm the
conclusion of the CA and the RTC that the excuse is untenable for being
contrary to human experience.20

Here, as discussed, the stoppage of the installation was justified. The

action of Northwestern constituted a legal excuse to prevent the highly
possible rejection of the IBS. Hence, just as the CA concluded, we find that
Northwestern exercised ordinary prudence to avert a possible wastage of
time, effort, resources and also of the P2.9 million representing the value of
the new IBS.
Actual Damages, Moral and Exemplary Damages, and Attorney's Fees
As between the parties, substantial breach can clearly be attributed to GL
Enterprises.1wphi1 Consequently, it is not the injured party who can claim
damages under Article 1170 of the Civil Code. For this reason, we concur in
the result of the CA's Decision denying petitioner actual damages in the
form of lost earnings, as well as moral and exemplary damages.
With respect to attorney's fees, Article 2208 of the Civil Code allows the
grant thereof when the court deems it just and equitable that attorney's
fees should be recovered. An award of attorney's fees is proper if one was
forced to litigate and incur expenses to protect one's rights and interest by
reason of an unjustified act or omission on the part of the party from whom
the award is sought.23
Since we affirm the CA's finding that it was not Northwestern but GL
Enterprises that breached the contracts without justification, it follows that
the appellate court correctly awarded attorneys fees to respondent.
Notably, this litigation could have altogether been avoided if petitioner
heeded respondent's suggestion to amicably settle; or, better yet, if in the
first place petitioner delivered the right materials as required by the
contracts.
IN VIEW THEREOF, the assailed 27 July 2009 Decision of the Court of
Appeals in CA-G.R. CV No. 88989 is hereby AFFIRMED.

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SO ORDERED.
G.R. No. 189145

failed to file their answer within the prescribed reglementary period, thus
prompting Optimum to move for the rendition of judgment.14
December 4, 2013

OPTIMUM
DEVELOPMENT
BANK,
Petitioner,
vs.
SPOUSES BENIGNO V. JOVELLANOS and LOURDES R. JOVELLANOS,
Respondents.

Thereafter, Sps. Jovellanos filed their opposition with motion to admit

answer, questioning the jurisdiction of the court, among others. Further,
they filed a Motion to Reopen and Set the Case for Preliminary Conference,
which the MeTC denied.
The MeTC Ruling

DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari 1 are the Decision2 dated
May 29, 2009 and Resolution 3 dated August 10, 2009 of the Court of
Appeals (CA) in CA-G.R. SP No. 104487 which reversed the Decision 4 dated
December 27, 2007 of the Regional Trial Court of Caloocan City, Branch
128 (RTC) in Civil Case No. C-21867 that, in turn, affirmed the Decision 5
dated June 8, 2007 of the Metropolitan Trial Court, Branch 53 of that same
city (MeTC) in Civil Case No. 06-28830 ordering respondents-spouses
Benigno and Lourdes Jovellanos (Sps. Jovellanos) to, inter alia, vacate the
premises of the property subject of this case.
The Facts
On April 26, 2005, Sps. Jovellanos entered into a Contract to Sell 6 with
Palmera Homes, Inc. (Palmera Homes) for the purchase of a residential
house and lot situated in Block 3, Lot 14, Villa Alegria Subdivision,
Caloocan City (subject property) for a total consideration of P1,015,000.00.
Pursuant to the contract, Sps. Jovellanos took possession of the subject
property upon a down payment of P91,500.00, undertaking to pay the
remaining balance of the contract price in equal monthly installments of
P13,107.00 for a period of 10 years starting June 12, 2005. 7
On August 22, 2006, Palmera Homes assigned all its rights, title and
interest in the Contract to Sell in favor of petitioner Optimum Development
Bank (Optimum) through a Deed of Assignment of even date. 8
On April 10, 2006, Optimum issued a Notice of Delinquency and
Cancellation of Contract to Sell 9 for Sps. Jovellanoss failure to pay their
monthly installments despite several written and verbal notices. 10
In a final Demand Letter dated May 25, 2006, 11 Optimum required Sps.
Jovellanos to vacate and deliver possession of the subject property within
seven (7) days which, however, remained unheeded. Hence, Optimum
filed, on November 3, 2006, a complaint for unlawful detainer 12 before the
MeTC, docketed as Civil Case No. 06-28830. Despite having been served
with summons, together with a copy of the complaint, 13 Sps. Jovellanos

In a Decision15 dated June 8, 2007, the MeTC ordered Sps. Jovellanos to

vacate the subject property and pay Optimum reasonable compensation in
the amount of P5,000.00 for its use and occupation until possession has
been surrendered. It held that Sps. Jovellanoss possession of the said
property was by virtue of a Contract to Sell which had already been
cancelled for non-payment of the stipulated monthly installment payments.
As such, their "rights of possession over the subject property necessarily
terminated or expired and hence, their continued possession thereof
constitute[d] unlawful detainer."16
Dissatisfied, Sps. Jovellanos appealed to the RTC, claiming that Optimum
counsel made them believe that a compromise agreement was being
prepared, thus their decision not to engage the services of counsel and
their concomitant failure to file an answer.17
They also assailed the jurisdiction of the MeTC, claiming that the case did
not merely involve the issue of physical possession but rather, questions
arising from their rights under a contract to sell which is a matter that is
incapable of pecuniary estimation and, therefore, within the jurisdiction of
the RTC.18
The RTC Ruling
In a Decision19 dated December 27, 2007, the RTC affirmed the MeTCs
judgment, holding that the latter did not err in refusing to admit Sps.
Jovellanos s belatedly filed answer considering the mandatory period for
its filing. It also affirmed the MeTCs finding that the action does not
involve the rights of the respective parties under the contract but merely
the recovery of possession by Optimum of the subject property after the
spouses default.20
Aggrieved, Sps. Jovellanos moved for reconsideration which was, however,
denied in a Resolution21 dated June 27, 2008. Hence, the petition before
the CA reiterating that the RTC erred in affirming the decision of the MeTC
with respect to:
(a) the non-admission of their answer to the complaint; and

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(b) the jurisdiction of the MeTC over the complaint for

unlawful detainer.22

Corollarily, the only issue to be resolved in an unlawful detainer case is

physical or material possession of the property involved, independent of
any claim of ownership by any of the parties involved. 29

The CA Ruling
In an Amended Decision23 dated May 29, 2009, the CA reversed and set
aside the RTCs decision, ruling to dismiss the complaint for lack of
jurisdiction. It found that the controversy does not only involve the issue of
possession but also the validity of the cancellation of the Contract to Sell
and the determination of the rights of the parties thereunder as well as the
governing law, among others, Republic Act No. (RA) 6552. 24
Accordingly, it concluded that the subject matter is one which is incapable
of pecuniary estimation and thus, within the jurisdiction of the RTC. 25
Undaunted, Optimum moved for reconsideration which was denied in a
Resolution26 dated August 10, 2009. Hence, the instant petition, submitting
that the case is one for unlawful detainer, which falls within the exclusive
original jurisdiction of the municipal trial courts, and not a case incapable
of pecuniary estimation cognizable solely by the regional trial courts.
The Courts Ruling
The petition is meritorious. What is determinative of the nature of the
action and the court with jurisdiction over it are the allegations in the
complaint and the character of the relief sought, not the defenses set up in
an answer.27
A complaint sufficiently alleges a cause of action for unlawful detainer if it
recites that:
(a) initially, possession of the property by the defendant
was by contract with or by tolerance of the plaintiff;
(b) eventually, such possession became illegal upon notice
by plaintiff to defendant of the termination of the latter's
right of possession;
(c) thereafter, defendant remained in possession of the
property and deprived plaintiff of the enjoyment thereof;
and
(d) within one year from the last demand on defendant to
vacate the property, plaintiff instituted the complaint for
ejectment.28

In its complaint, Optimum alleged that it was by virtue of the April 26,
2005 Contract to Sell that Sps. Jovellanos were allowed to take possession
of the subject property. However, since the latter failed to pay the
stipulated monthly installments, notwithstanding several written and
verbal notices made upon them, it cancelled the said contract as per the
Notice of Delinquency and Cancellation dated April 10, 2006. When Sps.
Jovellanos refused to vacate the subject property despite repeated
demands, Optimum instituted the present action for unlawful detainer on
November 3, 2006, or within one year from the final demand made on May
25, 2006.
While the RTC upheld the MeTCs ruling in favor of Optimum, the CA, on the
other hand, declared that the MeTC had no jurisdiction over the complaint
for unlawful detainer, reasoning that the case involves a matter which is
incapable of pecuniary estimation i.e., the validity of the cancellation of
the Contract to Sell and the determination of the rights of the parties under
the contract and law and hence, within the jurisdiction of the RTC. The
Court disagrees. Metropolitan Trial Courts are conditionally vested with
authority to resolve the question of ownership raised as an incident in an
ejectment case where the determination is essential to a complete
adjudication of the issue of possession. 30 Concomitant to the ejectment
courts authority to look into the claim of ownership for purposes of
resolving the issue of possession is its authority to interpret the contract or
agreement upon which the claim is premised. Thus, in the case of Oronce
v. CA,31 wherein the litigants opposing claims for possession was hinged on
whether their written agreement reflected the intention to enter into a sale
or merely an equitable mortgage, the Court affirmed the propriety of the
ejectment courts examination of the terms of the agreement in question
by holding that, "because metropolitan trial courts are authorized to look
into the ownership of the property in controversy in ejectment cases, it
behooved MTC Branch 41 to examine the bases for petitioners claim of
ownership that entailed interpretation of the Deed of Sale with Assumption
of Mortgage."32 Also, in Union Bank of the Philippines v. Maunlad Homes,
Inc.33 (Union Bank), citing Sps. Refugia v. CA,34 the Court declared that
MeTCs have authority to interpret contracts in unlawful detainer cases,
viz.:35
The authority granted to the MeTC to preliminarily resolve the issue of
ownership to determine the issue of possession ultimately allows it to
interpret and enforce the contract or agreement between the plaintiff and
the defendant. To deny the MeTC jurisdiction over a complaint merely
because the issue of possession requires the interpretation of a contract
will effectively rule out unlawful detainer as a remedy. As stated, in an
action for unlawful detainer, the defendants right to possess the property
may be by virtue of a contract, express or implied;

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corollarily, the termination of the defendants right to possess would be

governed by the terms of the same contract.
Interpretation of the contract between the plaintiff and the defendant is
inevitable because it is the contract that initially granted the defendant the
right to possess the property; it is this same contract that the plaintiff
subsequently claims was violated or extinguished, terminating the
defendants right to possess. We ruled in Sps. Refugia v. CA that where
the resolution of the issue of possession hinges on a determination of the
validity and interpretation of the document of title or any other contract on
which the claim of possession is premised, the inferior court may likewise
pass upon these issues.
The MeTCs ruling on the rights of the parties based on its interpretation of
their contract is, of course, not conclusive, but is merely provisional and is
binding only with respect to the issue of possession. (Emphases supplied;
citations omitted)
In the case at bar, the unlawful detainer suit filed by Optimum against Sps.
Jovellanos for illegally withholding possession of the subject property is
similarly premised upon the cancellation or termination of the Contract to
Sell between them. Indeed, it was well within the jurisdiction of the MeTC
to consider the terms of the parties agreement in order to ultimately
determine the factual bases of Optimums possessory claims over the
subject property. Proceeding accordingly, the MeTC held that Sps.
Jovellanoss non-payment of the installments due had rendered the
Contract to Sell without force and effect, thus depriving the latter of their
right to possess the property subject of said contract. 36 The foregoing
disposition aptly squares with existing jurisprudence. As the Court similarly
held in the Union Bank case, the sellers cancellation of the contract to sell
necessarily extinguished the buyers right of possession over the property
that was the subject of the terminated agreement.37
Verily, in a contract to sell, the prospective seller binds himself to sell the
property subject of the agreement exclusively to the prospective buyer
upon fulfillment of the condition agreed upon which is the full payment of
the purchase price but reserving to himself the ownership of the subject
property despite delivery thereof to the prospective buyer. 38
The full payment of the purchase price in a contract to sell is a suspensive
condition, the non-fulfillment of which prevents the prospective sellers
obligation to convey title from becoming effective, 39 as in this case.
Further, it is significant to note that given that the Contract to Sell in this
case is one which has for its object real property to be sold on an
installment basis, the said contract is especially governed by and thus,
must be examined under the provisions of RA 6552, or the "Realty
Installment Buyer Protection Act", which provides for the rights of the
buyer in case of his default in the payment of succeeding installments.
Breaking down the provisions of the law, the Court, in the case of Rillo v.

CA,40 explained the mechanics of cancellation under RA 6552 which are

based mainly on the amount of installments already paid by the buyer
under the subject contract, to wit:41
Given the nature of the contract of the parties, the respondent court
correctly applied Republic Act No. 6552. Known as the Maceda Law, R.A.
No. 6552 recognizes in conditional sales of all kinds of real estate
(industrial, commercial, residential) the right of the seller to cancel the
contract upon non-payment of an installment by the buyer, which is simply
an event that prevents the obligation of the vendor to convey title from
acquiring binding force. It also provides the right of the buyer on
installments in case he defaults in the payment of succeeding installments,
viz.:
(1) Where he has paid at least two years of installments,
(a) To pay, without additional interest, the unpaid installments due within
the total grace period earned by him, which is hereby fixed at the rate of
one month grace period for every one year of installment payments made:
Provided, That this right shall be exercised by the buyer only once in every
five years of the life of the contract and its extensions, if any. (b) If the
contract is cancelled, the seller shall refund to the buyer the cash
surrender value of the payments on the property equivalent to fifty per
cent of the total payments made and, after five years of installments, an
additional five per cent every year but not to exceed ninety per cent of the
total payments made:
Provided, That the actual cancellation of the contract shall take place after
cancellation or the demand for rescission of the contract by a notarial act
and upon full payment of the cash surrender value to the buyer.
Down payments, deposits or options on the contract shall be included in
the computation of the total number of installments made.
(2) Where he has paid less than two years in installments, Sec. 4. x x x the
seller shall give the buyer a grace period of not less than sixty days from
the date the installment became due. If the buyer fails to pay the
installments due at the expiration of the grace period, the seller may
cancel the contract after thirty days from receipt by the buyer of the notice
of cancellation or the demand for rescission of the contract by a notarial
act. (Emphasis and underscoring supplied)
Pertinently, since Sps. Jovellanos failed to pay their stipulated monthly
installments as found by the MeTC, the Court examines Optimums
compliance with Section 4 of RA 6552, as above-quoted and highlighted,
which is the provision applicable to buyers who have paid less than two (2)
years-worth of installments. Essentially, the said provision provides for

Page | 66

three (3) requisites before the seller may actually cancel the subject
contract: first, the seller shall give the buyer a 60-day grace period to be
reckoned from the date the installment became due; second, the seller
must give the buyer a notice of cancellation/demand for rescission
by notarial act if the buyer fails to pay the installments due at the
expiration of the said grace period; and third, the seller may actually
cancel the contract only after thirty (30) days from the buyers receipt of
the said notice of cancellation/demand for rescission by notarial act. In the
present case, the 60-day grace period automatically operated 42 in favor of
the buyers, Sps. Jovellanos, and took effect from the time that the maturity
dates of the installment payments lapsed. With the said grace period
having expired bereft of any installment payment on the part of Sps.
Jovellanos,43 Optimum then issued a notarized Notice of Delinquency and
Cancellation of Contract on April 10, 2006. Finally, in proceeding with the
actual cancellation of the contract to sell, Optimum gave Sps. Jovellanos an
additional thirty (30) days within which to settle their arrears and reinstate
the contract, or sell or assign their rights to another. 44
It was only after the expiration of the thirty day (30) period did Optimum
treat the contract to sell as effectively cancelled making as it did a final
demand upon Sps. Jovellanos to vacate the subject property only on May
25, 2006. Thus, based on the foregoing, the Court finds that there was a
valid and effective cancellation of the Contract to Sell in accordance with
Section 4 of RA 6552 and since Sps. Jovellanos had already lost their right
to retain possession of the subject property as a consequence of such
cancellation, their refusal to vacate and turn over possession to Optimum
makes out a valid case for unlawful detainer as properly adjudged by the
MeTC.
WHEREFORE, the petition is GRANTED. The Decision dated May 29, 2009
and Resolution dated August 10, 2009 of the Court of Appeals in CA-G.R.
SP No. 104487 are SET ASIDE. The Decision dated June 8, 2007 of
Metropolitan Trial Court, Branch 53, Caloocan City in Civil Case No. 0628830 is hereby REINSTATED.
SO ORDERED.
G.R. No. 185798

January 13, 2014

FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK INC.,

Petitioners,
vs.
SPOUSES
CONRADO
AND
MARIA
VICTORIA
RONQUILLO,
Respondents.
DECISION
PEREZ, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the
1997 Rules .of Civil Procedure assailing the Decision 1 of the Court of
Appeals in CA-G.R. SP No. 100450 which affirmed the Decision of the Office
of the President in O.P. Case No. 06-F-216.
As culled from the records, the facts are as follow:
Petitioner Fil-Estate Properties, Inc. is the owner and developer of the
Central Park Place Tower while co-petitioner Fil-Estate Network, Inc. is its
authorized marketing agent. Respondent Spouses Conrado and Maria
Victoria Ronquillo purchased from petitioners an 82-square meter
condominium unit at Central Park Place Tower in Mandaluyong City for a
pre-selling contract price of FIVE MILLION ONE HUNDRED SEVENTY-FOUR
THOUSAND ONLY (P5,174,000.00). On 29 August 1997, respondents
executed and signed a Reservation Application Agreement wherein they
deposited P200,000.00 as reservation fee. As agreed upon, respondents
paid the full downpayment of P1,552,200.00 and had been paying the
P63,363.33 monthly amortizations until September 1998.
Upon learning that construction works had stopped, respondents likewise
stopped paying their monthly amortization. Claiming to have paid a total of
P2,198,949.96 to petitioners, respondents through two (2) successive
letters, demanded a full refund of their payment with interest. When their
demands went unheeded, respondents were constrained to file a
Complaint for Refund and Damages before the Housing and Land Use
Regulatory Board (HLURB). Respondents prayed for reimbursement/refund
of P2,198,949.96 representing the total amortization payments,
P200,000.00 as and by way of moral damages, attorneys fees and other
litigation expenses.
On 21 October 2000, the HLURB issued an Order of Default against
petitioners for failing to file their Answer within the reglementary period
despite service of summons.2
Petitioners filed a motion to lift order of default and attached their position
paper attributing the delay in construction to the 1997 Asian financial
crisis. Petitioners denied committing fraud or misrepresentation which
could entitle respondents to an award of moral damages.
On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F. Melchor,
rendered judgment ordering petitioners to jointly and severally pay
respondents the following amount:
a) The amount of TWO MILLION ONE HUNDRED NINETYEIGHT THOUSAND NINE HUNDRED FORTY NINE PESOS &
96/100 (P2,198,949.96) with interest thereon at twelve
percent (12%) per annum to be computed from the time of
the complainants demand for refund on October 08, 1998
until fully paid,

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b) ONE HUNDRED THOUSAND PESOS (P100,000.00) as

moral damages,
c) FIFTY THOUSAND PESOS (P50,000.00) as attorneys fees,
d) The costs of suit, and
e) An administrative fine of TEN THOUSAND PESOS
(P10,000.00) payable to this Office fifteen (15) days upon
receipt of this decision, for violation of Section 20 in
relation to Section 38 of PD 957.3
The Arbiter considered petitioners failure to develop the condominium
project as a substantial breach of their obligation which entitles
respondents to seek for rescission with payment of damages. The Arbiter
also stated that mere economic hardship is not an excuse for contractual
and legal delay.
Petitioners appealed the Arbiters Decision through a petition for review
pursuant to Rule XII of the 1996 Rules of Procedure of HLURB. On 17
February 2005, the Board of Commissioners of the HLURB denied 4 the
petition and affirmed the Arbiters Decision. The HLURB reiterated that the
depreciation of the peso as a result of the Asian financial crisis is not a
fortuitous event which will exempt petitioners from the performance of
their contractual obligation.
Petitioners filed a motion for reconsideration but it was denied 5 on 8 May
2006. Thereafter, petitioners filed a Notice of Appeal with the Office of the
President. On 18 April 2007, petitioners appeal was dismissed 6 by the
Office of the President for lack of merit. Petitioners moved for a
reconsideration but their motion was denied7 on 26 July 2007.
Petitioners sought relief from the Court of Appeals through a petition for
review under Rule 43 containing the same arguments they raised before
the HLURB and the Office of the President:
I.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE
DECISION OF THE HONORABLE HOUSING AND LAND USE REGULATORY
BOARD
AND
ORDERING
PETITIONERS-APPELLANTS
TO
REFUND
RESPONDENTS-APPELLEES THE SUM OF P2,198,949.96 WITH 12%
INTEREST FROM 8 OCTOBER 1998 UNTIL FULLY PAID, CONSIDERING THAT
THE COMPLAINT STATES NO CAUSE OF ACTION AGAINST PETITIONERSAPPELLANTS.
II.

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE

DECISION OF THE OFFICE BELOW ORDERING PETITIONERS-APPELLANTS TO
PAY RESPONDENTS-APPELLEES THE SUM OF P100,000.00 AS MORAL
DAMAGES AND P50,000.00 AS ATTORNEYS FEES CONSIDERING THE
ABSENCE OF ANY FACTUAL OR LEGAL BASIS THEREFOR.
III.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE
DECISION OF THE HOUSING AND LAND USE REGULATORY BOARD
ORDERING
PETITIONERS-APPELLANTS
TO
PAY
P10,000.00
AS
ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS
TO SUPPORT SUCH FINDING.8
On 30 July 2008, the Court of Appeals denied the petition for review for
lack of merit. The appellate court echoed the HLURB Arbiters ruling that "a
buyer for a condominium/subdivision unit/lot unit which has not been
developed in accordance with the approved condominium/subdivision plan
within the time limit for complying with said developmental requirement
may opt for reimbursement under Section 20 in relation to Section 23 of
Presidential Decree (P.D.) 957 x x x." 9 The appellate court supported the
HLURB Arbiters conclusion, which was affirmed by the HLURB Board of
Commission and the Office of the President, that petitioners failure to
develop the condominium project is tantamount to a substantial breach
which warrants a refund of the total amount paid, including interest. The
appellate court pointed out that petitioners failed to prove that the Asian
financial crisis constitutes a fortuitous event which could excuse them from
the performance of their contractual and statutory obligations. The
appellate court also affirmed the award of moral damages in light of
petitioners unjustified refusal to satisfy respondents claim and the legality
of the administrative fine, as provided in Section 20 of Presidential Decree
No. 957.
Petitioners sought reconsideration but it was denied in a Resolution 10 dated
11 December 2008 by the Court of Appeals.
Aggrieved, petitioners filed the instant petition advancing substantially the
same grounds for review:
A.
THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED IN TOTO
THE DECISION OF THE OFFICE OF THE PRESIDENT WHICH SUSTAINED
RESCISSION AND REFUND IN FAVOR OF THE RESPONDENTS DESPITE LACK
OF CAUSE OF ACTION.
B.

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GRANTING FOR THE SAKE OF ARGUMENT THAT THE PETITIONERS ARE

LIABLE UNDER THE PREMISES, THE HONORABLE COURT OF APPEALS
ERRED WHEN IT AFFIRMED THE HUGE AMOUNT OF INTEREST OF TWELVE
PERCENT (12%).
C.
THE HONORABLE COURT OF APPEALS LIKEWISE ERRED WHEN IT AFFIRMED
IN TOTO THE DECISION OF THE OFFICE OF THE PRESIDENT INCLUDING THE
PAYMENT OF P100,000.00 AS MORAL DAMAGES, P50,000.00 AS
ATTORNEYS FEES AND P10,000.00 AS ADMINISTRATIVE FINE IN THE
ABSENCE OF ANY FACTUAL OR LEGAL BASIS TO SUPPORT SUCH
CONCLUSIONS.11
Petitioners insist that the complaint states no cause of action because they
allegedly have not committed any act of misrepresentation amounting to
bad faith which could entitle respondents to a refund. Petitioners claim that
there was a mere delay in the completion of the project and that they only
resorted to "suspension and reformatting as a testament to their
commitment to their buyers." Petitioners attribute the delay to the 1997
Asian financial crisis that befell the real estate industry. Invoking Article
1174 of the New Civil Code, petitioners maintain that they cannot be held
liable for a fortuitous event.
Petitioners contest the payment of a huge amount of interest on account of
suspension of development on a project. They liken their situation to a
bank which this Court, in Overseas Bank v. Court of Appeals, 12 adjudged as
not liable to pay interest on deposits during the period that its operations
are ordered suspended by the Monetary Board of the Central Bank.
Lastly, petitioners aver that they should not be ordered to pay moral
damages because they never intended to cause delay, and again blamed
the Asian economic crisis as the direct, proximate and only cause of their
failure to complete the project. Petitioners submit that moral damages
should not be awarded unless so stipulated except under the instances
enumerated in Article 2208 of the New Civil Code. Lastly, petitioners refuse
to pay the administrative fine because the delay in the project was caused
not by their own deceptive intent to defraud their buyers, but due to
unforeseen circumstances beyond their control.
Three issues are presented for our resolution: 1) whether or not the Asian
financial crisis constitute a fortuitous event which would justify delay by
petitioners in the performance of their contractual obligation; 2) assuming
that petitioners are liable, whether or not 12% interest was correctly
imposed on the judgment award, and 3) whether the award of moral
damages, attorneys fees and administrative fine was proper.
It is apparent that these issues were repeatedly raised by petitioners in all
the legal fora. The rulings were consistent that first, the Asian financial

crisis is not a fortuitous event that would excuse petitioners from

performing their contractual obligation; second, as a result of the breach
committed by petitioners, respondents are entitled to rescind the contract
and to be refunded the amount of amortizations paid including interest and
damages; and third, petitioners are likewise obligated to pay attorneys
fees and the administrative fine.
This petition did not present any justification for us to deviate from the
rulings of the HLURB, the Office of the President and the Court of Appeals.
Indeed, the non-performance of petitioners obligation entitles respondents
to rescission under Article 1191 of the New Civil Code which states:
Article 1191. The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between the fulfillment and the rescission of
the obligation, with payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
More in point is Section 23 of Presidential Decree No. 957, the rule
governing the sale of condominiums, which provides:
Section 23. Non-Forfeiture of Payments.1wphi1 No installment payment
made by a buyer in a subdivision or condominium project for the lot or unit
he contracted to buy shall be forfeited in favor of the owner or developer
when the buyer, after due notice to the owner or developer, desists from
further payment due to the failure of the owner or developer to develop
the subdivision or condominium project according to the approved plans
and within the time limit for complying with the same. Such buyer may, at
his option, be reimbursed the total amount paid including amortization
interests but excluding delinquency interests, with interest thereon at the
legal rate. (Emphasis supplied).
Conformably with these provisions of law, respondents are entitled to
rescind the contract and demand reimbursement for the payments they
had made to petitioners.
Notably, the issues had already been settled by the Court in the case of FilEstate Properties, Inc. v. Spouses Go 13 promulgated on 17 August 2007,
where the Court stated that the Asian financial crisis is not an instance of
caso fortuito. Bearing the same factual milieu as the instant case, G.R. No.
165164 involves the same company, Fil-Estate, albeit about a different
condominium property. The company likewise reneged on its obligation to
respondents therein by failing to develop the condominium project despite
substantial payment of the contract price. Fil-Estate advanced the same

Page | 69

argument that the 1997 Asian financial crisis is a fortuitous event which
justifies the delay of the construction project. First off, the Court classified
the issue as a question of fact which may not be raised in a petition for
review considering that there was no variance in the factual findings of the
HLURB, the Office of the President and the Court of Appeals. Second, the
Court cited the previous rulings of Asian Construction and Development
Corporation v. Philippine Commercial International Bank 14 and Mondragon
Leisure and Resorts Corporation v. Court of Appeals 15 holding that the 1997
Asian financial crisis did not constitute a valid justification to renege on
obligations. The Court expounded:
Also, we cannot generalize that the Asian financial crisis in 1997 was
unforeseeable and beyond the control of a business corporation. It is
unfortunate that petitioner apparently met with considerable difficulty e.g.
increase cost of materials and labor, even before the scheduled
commencement of its real estate project as early as 1995. However, a real
estate enterprise engaged in the pre-selling of condominium units is
concededly a master in projections on commodities and currency
movements and business risks. The fluctuating movement of the Philippine
peso in the foreign exchange market is an everyday occurrence, and
fluctuations in currency exchange rates happen everyday, thus, not an
instance of caso fortuito.16
The aforementioned decision becomes a precedent to future cases in
which the facts are substantially the same, as in this case. The principle of
stare decisis, which means adherence to judicial precedents, applies.
In said case, the Court ordered the refund of the total amortizations paid
by respondents plus 6% legal interest computed from the date of demand.
The Court also awarded attorneys fees. We follow that ruling in the case
before us.
The resulting modification of the award of legal interest is, also, in line with
our recent ruling in Nacar v. Gallery Frames, 17 embodying the amendment
introduced by the Bangko Sentral ng Pilipinas Monetary Board in BSP-MB
Circular No. 799 which pegged the interest rate at 6% regardless of the
source of obligation.
We likewise affirm the award of attorneys fees because respondents were
forced to litigate for 14 years and incur expenses to protect their rights and
interest by reason of the unjustified act on the part of petitioners. 18 The
imposition of P10,000.00 administrative fine is correct pursuant to Section
38 of Presidential Decree No. 957 which reads:
Section 38. Administrative Fines. The Authority may prescribe and impose
fines not exceeding ten thousand pesos for violations of the provisions of
this Decree or of any rule or regulation thereunder. Fines shall be payable
to the Authority and enforceable through writs of execution in accordance
with the provisions of the Rules of Court.

Finally, we sustain the award of moral damages. In order that moral

damages may be awarded in breach of contract cases, the defendant must
have acted in bad faith, must be found guilty of gross negligence
amounting to bad faith, or must have acted in wanton disregard of
contractual obligations.19 The Arbiter found petitioners to have acted in bad
faith when they breached their contract, when they failed to address
respondents grievances and when they adamantly refused to refund
respondents' payment.
In fine, we find no reversible error on the merits in the impugned Court of
Appeals' Decision and Resolution.
WHEREFORE, the petition is PARTLY GRANTED. The appealed Decision is
AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX
PERCENT (6%) on the amount due computed from the time of respondents'
demand for refund on 8 October 1998.
SO ORDERED.
G.R. No. 72275 November 13, 1991
PACIFIC
BANKING
CORPORATION,
petitioner,
vs.
HON INTERMEDIATE APPELLATE COURT AND ROBERTO REGALA, JR.,
respondents.
Ocampo, Dizon & Domingo for petitioner.
Angara, Concepcion, Regala & Cruz for private respondent.

MEDIALDEA, J.:p
This is a petition for review on certiorari of the decision (pp 21-31, Rollo) of
the Intermediate Appellate Court (now Court of Appeals) in AC-G.R. C.V. No.
02753, 1 which modified the decision of the trial court against herein
private respondent Roberto Regala, Jr., one of the defendants in the case
for sum of money filed by Pacific Banking Corporation.
The facts of the case as adopted by the respondent appellant court from
herein petitioner's brief before said court are as follows:
On October 24, 1975, defendant Celia Syjuco Regala (hereinafter referred
to as Celia Regala for brevity), applied for and obtained from the plaintiff
the issuance and use of Pacificard credit card (Exhs. "A", "A-l",), under the
Terms and Conditions Governing the Issuance and Use of Pacificard (Exh.

Page | 70

"B" and hereinafter referred to as Terms and Conditions), a copy of which

was issued to and received by the said defendant on the date of the
application and expressly agreed that the use of the Pacificard is governed
by said Terms and Conditions. On the same date, the defendant-appelant
Robert Regala, Jr., spouse of defendant Celia Regala, executed a
"Guarantor's Undertaking" (Exh. "A-1-a") in favor of the appellee Bank,
whereby the latter agreed "jointly and severally of Celia Aurora Syjuco
Regala, to pay the Pacific Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and incurred by said
Celia Aurora Syjuco Regala with the use of the Pacificard, or renewals
thereof, issued in her favor by the Pacific Banking Corporation". It was also
agreed that "any changes of or novation in the terms and conditions in
connection with the issuance or use of the Pacificard, or any extension of
time to pay such obligations, charges or liabilities shall not in any manner
release me/us from responsibility hereunder, it being understood that I
fully agree to such charges, novation or extension, and that this
understanding is a continuing one and shall subsist and bind me until the
liabilities of the said Celia Syjuco Regala have been fully satisfied or paid.
Plaintiff-appellee Pacific Banking Corporation has contracted with
accredited business establishments to honor purchases of goods and/or
services by Pacificard holders and the cost thereof to be advanced by the
plaintiff-appellee for the account of the defendant cardholder, and the
latter undertook to pay any statements of account rendered by the
plaintiff-appellee for the advances thus made within thirty (30) days from
the date of the statement, provided that any overdue account shall earn
interest at the rate of 14% per annum from date of default.

After the presentation of plaintiff's testimonial and documentary evidence,

fire struck the City Hall of Manila, including the court where the instant
case was pending, as well as all its records.
Upon plaintiff-appellee's petition for reconstitution, the records of the
instant case were duly reconstituted. Thereafter, the case was set for pretrial conference with respect to the defendant-appellant Roberto Regala on
plaintiff-appellee's motion, after furnishing the latter a copy of the same.
No opposition thereto having been interposed by defendant-appellant, the
trial court set the case for pre-trial conference. Neither did said defendantappellant nor his counsel appear on the date scheduled by the trial court
for said conference despite due notice. Consequently, plaintiff-appellee
moved that the defendant-appellant Roberto Regala he declared as in
default and that it be allowed to present its evidence ex-parte, which
motion was granted. On July 21, 1983, plaintiff-appellee presented its
evidence ex-parte. (pp. 23-26, Rollo)
After trial, the court a quo rendered judgment on December 5, 1983, the
dispositive portion of which reads:
WHEREFORE, the Court renders judgment for the plaintiff and against the
defendants condemning the latter, jointly and severally, to pay said
plaintiff the amount of P92,803.98, with interest thereon at 14% per
annum, compounded annually, from the time of demand on November 17,
1978 until said principal amount is fully paid; plus 15% of the principal
obligation as and for attorney's fees and expense of suit; and the costs.

The defendant Celia Regala, as such Pacificard holder, had purchased

goods and/or services on credit (Exh. "C", "C-l" to "C-112") under her
Pacificard, for which the plaintiff advanced the cost amounting to
P92,803.98 at the time of the filing of the complaint.

The counterclaim of defendant Roberto Regala, Jr. is dismissed for lack of

merit.

In view of defendant Celia Regala's failure to settle her account for the
purchases made thru the use of the Pacificard, a written demand (Exh. "D")
was sent to the latter and also to the defendant Roberto Regala, Jr. (Exh. "
") under his "Guarantor's Undertaking."

The defendants appealed from the decision of the court a quo to the
Intermediate Appellate Court.

A complaint was subsequently filed in Court for defendant's (sic) repeated

failure to settle their obligation. Defendant Celia Regala was declared in
default for her failure to file her answer within the reglementary period.
Defendant-appellant Roberto Regala, Jr., on the other hand, filed his
Answer with Counterclaim admitting his execution of the "Guarantor's
Understanding", "but with the understanding that his liability would be
limited to P2,000.00 per month."
In view of the solidary nature of the liability of the parties, the presentation
of evidence ex-parte as against the defendant Celia Regala was jointly held
with the trial of the case as against defendant Roberto Regala.

SO ORDERED. (pp. 22-23, Rollo)

On August 12, 1985, respondent appellate court rendered judgment

modifying the decision of the trial court. Private respondent Roberto
Regala, Jr. was made liable only to the extent of the monthly credit limit
granted to Celia Regala, i.e., at P2,000.00 a month and only for the
advances made during the one year period of the card's effectivity counted
from October 29, 1975 up to October 29, 1976. The dispositive portion of
the decision states:
WHEREFORE, the judgment of the trial court dated December 5, 1983 is
modified only as to appellant Roberto Regala, Jr., so as to make him liable
only for the purchases made by defendant Celia Aurora Syjuco Regala with
the use of the Pacificard from October 29, 1975 up to October 29, 1976 up
to the amount of P2,000.00 per month only, with interest from the filing of

Page | 71

the complaint up to the payment at the rate of 14% per annum without
pronouncement as to costs. (p. 32, Rollo)

Banking Corporation." This undertaking was also provided as a condition in

the issuance of the Pacificard to Celia Regala, thus:

A motion for reconsideration was filed by Pacific Banking Corporation which

the respondent appellate court denied for lack of merit on September 19,
1985 (p. 33, Rollo).

5. A Pacificard is issued to a Pacificard-holder against the joint and several

signature of a third party and as such, the Pacificard holder and the
guarantor assume joint and several liabilities for any and all amount arising
out of the use of the Pacificard. (p. 14, Rollo)

On November 8, 1985, Pacificard filed this petition. The petitioner contends

that while the appellate court correctly recognized Celia Regala's obligation
to Pacific Banking Corp. for the purchases of goods and services with the
use of a Pacificard credit card in the total amount of P92,803.98 with 14%
interest per annum, it erred in limiting private respondent Roberto Regala,
Jr.'s liability only for purchases made by Celia Regala with the use of the
card from October 29, 1975 up to October 29, 1976 up to the amount of
P2,000.00 per month with 14% interest from the filing of the complaint.

The respondent appellate court held that "all the other rights of the
guarantor are not thereby lost by the guarantor becoming liable solidarily
and therefore a surety." It further ruled that although the surety's liability is
like that of a joint and several debtor, it does not make him the debtor but
still the guarantor (or the surety), relying on the case of Government of the
Philippines v. Tizon. G.R. No. L-22108, August 30, 1967, 20 SCRA 1182.
Consequently, Article 2054 of the Civil Code providing for a limited liability
on the part of the guarantor or debtor still applies.

There is merit in this petition.

The pertinent portion of the "Guarantor's Undertaking" which private
respondent Roberto Regala, Jr. signed in favor of Pacific Banking
Corporation provides:
I/We, the undersigned, hereby agree, jointly and severally with Celia Syjuco
Regala to pay the Pacific Banking Corporation upon demand any and all
indebtedness, obligations, charges or liabilities due and incurred by said
Celia Syjuco Regala with the use of the Pacificard or renewals thereof
issued in his favor by the Pacific Banking Corporation. Any changes of or
Novation in the terms and conditions in connection with the issuance or
use of said Pacificard, or any extension of time to pay such obligations,
charges or liabilities shall not in any manner release me/us from the
responsibility hereunder, it being understood that the undertaking is a
continuing one and shall subsist and bind me/us until all the liabilities of
the said Celia Syjuco Regala have been fully satisfied or paid. (p. 12, Rollo)
The undertaking signed by Roberto Regala, Jr. although denominated
"Guarantor's Undertaking," was in substance a contract of surety. As
distinguished from a contract of guaranty where the guarantor binds
himself to the creditor to fulfill the obligation of the principal debtor only in
case the latter should fail to do so, in a contract of suretyship, the surety
binds himself solidarily with the principal debtor (Art. 2047, Civil Code of
the Philippines).
We need not look elsewhere to determine the nature and extent of private
respondent Roberto Regala, Jr.'s undertaking. As a surety he bound himself
jointly and severally with the debtor Celia Regala "to pay the Pacific
Banking Corporation upon demand, any and all indebtedness, obligations,
charges or liabilities due and incurred by said Celia Syjuco Regala with the
use of Pacificard or renewals thereof issued in (her) favor by Pacific

It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind
himself for less, but not for more than the principal debtor, both as regards
the amount and the onerous nature of the conditions. 2 It is likewise not
disputed by the parties that the credit limit granted to Celia Regala was
P2,000.00 per month and that Celia Regala succeeded in using the card
beyond the original period of its effectivity, October 29, 1979. We do not
agree however, that Roberto Jr.'s liability should be limited to that extent.
Private respondent Roberto Regala, Jr., as surety of his wife, expressly
bound himself up to the extent of the debtor's (Celia) indebtedness
likewise expressly waiving any "discharge in case of any change or
novation of the terms and conditions in connection with the issuance of the
Pacificard credit card." Roberto, in fact, made his commitment as a surety
a continuing one, binding upon himself until all the liabilities of Celia
Regala have been fully paid. All these were clear under the "Guarantor's
Undertaking" Roberto signed, thus:
. . . Any changes of or novation in the terms and conditions in connection
with the issuance or use of said Pacificard, or any extension of time to pay
such obligations, charges or liabilities shall not in any manner release
me/us from the responsibility hereunder, it being understood that the
undertaking is a continuing one and shall subsist and bind me/us until all
the liabilities of the said Celia Syjuco Regala have been fully satisfied or
paid. (p. 12, supra; emphasis supplied)
Private respondent Roberto Regala, Jr. had been made aware by the terms
of the undertaking of future changes in the terms and conditions governing
the issuance of the credit card to his wife and that, notwithstanding, he
voluntarily agreed to be bound as a surety. As in guaranty, a surety may
secure additional and future debts of the principal debtor the amount of
which is not yet known (see Article 2053, supra).

Page | 72

The application by respondent court of the ruling in Government v. Tizon,

supra is misplaced. It was held in that case that:
. . . although the defendants bound themselves in solidum, the liability of
the Surety under its bond would arise only if its co-defendants, the
principal obligor, should fail to comply with the contract. To paraphrase the
ruling in the case of Municipality of Orion vs. Concha, the liability of the
Surety is "consequent upon the liability" of Tizon, or "so dependent on that
of the principal debtor" that the Surety "is considered in law as being the
same party as the debtor in relation to whatever is adjudged, touching the
obligation of the latter"; or the liabilities of the two defendants herein "are
so interwoven and dependent as to be inseparable." Changing the
expression, if the defendants are held liable, their liability to pay the
plaintiff would be solidary, but the nature of the Surety's undertaking is
such that it does not incur liability unless and until the principal debtor is
held liable.
A guarantor or surety does not incur liability unless the principal debtor is
held liable. It is in this sense that a surety, although solidarily liable with
the principal debtor, is different from the debtor. It does not mean,
however, that the surety cannot be held liable to the same extent as the
principal debtor. The nature and extent of the liabilities of a guarantor or a
surety is determined by the clauses in the contract of suretyship(see PCIB
v. CA, L-34959, March 18, 1988, 159 SCRA 24).
ACCORDINGLY, the petition is GRANTED. The questioned decision of
respondent appellate court is SET ASIDE and the decision of the trial court
is REINSTATED.
SO ORDERED.

issued by the Labor Arbiter which deviated from the dispositive portion of
the Decision dated March 10, 1987, thereby holding that the liability of the
six respondents in the case below is solidary despite the absence of the
word "solidary" in the dispositive portion of the Decision, when their
liability should merely be joint. S-jcj
The factual antecedents are undisputed: Supr-eme
In September 1984, private respondent Enrique Sulit, Socorro Mahinay,
Esmeraldo Pegarido, Tita Bacusmo, Gino Niere, Virginia Bacus, Roberto
Nemenzo, Dariogo, and Roberto Alegarbes filed a complaint with the
Department of Labor and Employment, Regional Arbitration Branch No. VII
in Cebu City against Filipinas Carbon Mining Corporation, Gerardo Sicat,
Antonio Gonzales, Chiu Chin Gin, Lo Kuan Chin, and petitioner Industrial
Management Development Corporation (INIMACO), for payment of
separation pay and unpaid wages. Sc-jj
In a Decision dated March 10, 1987, Labor Arbiter Bonifacio B. Tumamak
held that:
"RESPONSIVE, to all the foregoing, judgment is hereby entered, ordering
respondents Filipinas Carbon and Mining Corp. Gerardo Sicat, Antonio
Gonzales/Industrial Management Development Corp. (INIMACO), Chiu Chin
Gin and Lo Kuan Chin, to pay complainants Enrique Sulit, the total award of
P82,800.00; ESMERALDO PEGARIDO the full award of P19,565.00; Roberto
Nemenzo the total sum of P29,623.60 and DARIO GO the total award of
P6,599.71, or the total aggregate award of ONE HUNDRED THIRTY-EIGHT
THOUSAND FIVE
HUNDRED EIGHTY-EIGHT PESOS AND 31/100
(P138,588.31) to be deposited with this Commission within ten (10) days
from receipt of this Decision for appropriate disposition. All other claims are
hereby Dismiss (sic) for lack of merit. Jjs-c

[G.R. No. 101723. May 11, 2000]

"SO ORDERED.
INDUSTRIAL MANAGEMENT INTERNATIONAL DEVELOPMENT CORP.
(INIMACO),
petitioner,
vs.
NATIONAL
LABOR
RELATIONS
COMMISSION, (Fourth Division) Cebu City, and ENRIQUE SULIT,
SOCORRO MAHINAY, ESMERALDO PEGARIDO, TITA BACUSMO, GINO
NIERE, VIRGINIA BACUS, ROBERTO NEMENZO, DARIO GO, and
ROBERTO ALEGARBES, respondents.
DECISION
BUENA, J.:
This is a petition for certiorari assailing the Resolution dated September 4,
1991 issued by the National Labor Relations Commission in RAB-VII-071184 on the alleged ground that it committed a grave abuse of discretion
amounting to lack of jurisdiction in upholding the Alias Writ of Execution

"Cebu City, Philippines.

"10 March 1987."01
No appeal was filed within the reglementary period thus, the above
Decision became final and executory. On June 16, 1987, the Labor Arbiter
issued a writ of execution but it was returned unsatisfied. On August 26,
1987, the Labor Arbiter issued an Alias Writ of Execution which ordered
thus: Ed-pm-is

1
Page | 73

"NOW THEREFORE, by virtue of the powers vested in me by law, you are

hereby commanded to proceed to the premises of respondents Antonio
Gonzales/Industrial Management Development Corporation (INIMACO)
situated at Barangay Lahug, Cebu City, in front of La Curacha Restaurant,
and/or to Filipinas Carbon and Mining corporation and Gerardo Sicat at 4th
Floor Universal RE-Bldg. 106 Paseo de Roxas, Legaspi Village, Makati Metro
Manila and at Philippine National Bank, Escolta, Manila respectively, and
collect the aggregate award of ONE HUNDRED THIRTY-EIGHT THOUSAND
FIVE HUNDRED EIGHTY-EIGHT PESOS AND THIRTY ONE CENTAVOS
(P138,588.31) and thereafter turn over said amount to complainants
ENRIQUE SULIT, ESMERALDO PEGARIDO, ROBERTO NEMENZO AND DARIO
GO or to this Office for appropriate disposition. Should you fail to collect
the said sum in cash, you are hereby authorized to cause the satisfaction
of the same on the movable or immovable property(s) of respondents not
exempt from execution. You are to return this writ sixty (6) (sic) days from
your receipt hereof, together with your corresponding report.
"You may collect your legal expenses from the respondents as provided for
by law.
"SO ORDERED."2
On September 3, 1987, petitioner filed a "Motion to Quash Alias Writ of
Execution and Set Aside Decision,"3 alleging among others that the alias
writ of execution altered and changed the tenor of the decision by
changing the liability of therein respondents from joint to solidary, by the
insertion of the words "AND/OR" between "Antonio Gonzales/Industrial
Management Development Corporation and Filipinas Carbon and Mining
Corporation, et al." However, in an order dated September 14, 1987, the
Labor Arbiter denied the motion. Mis-oedp
On October 2, 1987, petitioner appealed 4 the Labor Arbiters Order dated
September 14, 1987 to the respondent NLRC. Mis-edp
The respondent NLRC dismissed the appeal in a Decision 5 dated August 31,
1988, the pertinent portions of which read:

"In matters affecting labor rights and labor justice, we have always
adopted the liberal approach which favors the exercise of labor rights and
which is beneficial to labor as a means to give full meaning and import to
the constitutional mandate to afford protection to labor. Considering the
factual circumstances in this case, there is no doubt in our mind that the
respondents herein are called upon to pay, jointly and severally, the claims
of the complainants as was the latters prayers. Inasmuch as respondents
herein never controverted the claims of the complainants below, there is
no reason why complainants prayer should not be granted. Further, in line
with the powers granted to the Commission under Article 218 (c) of the
Labor code, to waive any error, defect or irregularity whether in substance
or in form in a proceeding before Us, We hold that the Writ of Execution be
given due course in all respects." Ed-p
On July 31, 1989, petitioner filed a "Motion To Compel Sheriff To Accept
Payment Of P23,198.05 Representing One Sixth Pro Rata Share of
Respondent INIMACO As Full and Final Satisfaction of Judgment As to Said
Respondent."6 The private respondents opposed the motion. In an Order 7
dated August 15, 1989, the Labor Arbiter denied the motion ruling thus:
"WHEREFORE, responsive to the foregoing respondent INIMACOs Motions
are hereby DENIED. The Sheriff of this Office is order (sic) to accept
INIMACOs tender payment (sic) of the sum of P23,198.05, as partial
satisfaction of the judgment and to proceed with the enforcement of the
Alias Writ of Execution of the levied properties, now issued by this Office,
for the full and final satisfaction of the monetary award granted in the
instant case.
"SO ORDERED." Ed-psc
Petitioner appealed the above Order of the Labor Arbiter but this was again
dismissed by the respondent NLRC in its Resolution 8 dated September 4,
1991 which held that:
"The arguments of respondent on the finality of the dispositive portion of
the decision in this case is beside the point. What is important is that the
Commission has ruled that the Writ of Execution issued by the Labor
Arbiter in this case is proper. It is not really correct to say that said Writ of
Execution varied the terms of the judgment. At most, considering the
nature of labor proceedings there was, an ambiguity in said dispositive

8
Page | 74

portion which was subsequently clarified by the Labor Arbiter and the
Commission in the incidents which were initiated by INIMACO itself. By
sheer technicality and unfounded assertions, INIMACO would now reopen
the issue which was already resolved against it. It is not in keeping with the
established rules of practice and procedure to allow this attempt of
INIMACO to delay the final disposition of this case.
"WHEREFORE, in view of all the foregoing, this appeal is DISMISSED and
the Order appealed from is hereby AFFIRMED. Sce-dp
"With double costs against appellant."
Dissatisfied with the foregoing, petitioner filed the instant case, alleging
that the respondent NLRC committed grave abuse of discretion in affirming
the Order of the Labor Arbiter dated August 15, 1989, which declared the
liability of petitioner to be solidary.
The only issue in this petition is whether petitioners liability pursuant to
the Decision of the Labor Arbiter dated March 10, 1987, is solidary or not.
Calrs-pped
Upon careful examination of the pleadings filed by the parties, the Court
finds that petitioner INIMACOs liability is not solidary but merely joint and
that the respondent NLRC acted with grave abuse of discretion in
upholding the Labor Arbiters Alias Writ of Execution and subsequent
Orders to the effect that petitioners liability is solidary.
A solidary or joint and several obligation is one in which each debtor is
liable for the entire obligation, and each creditor is entitled to demand the
whole obligation.9 In a joint obligation each obligor answers only for a part
of the whole liability and to each obligee belongs only a part of the
correlative rights.10
Well-entrenched is the rule that solidary obligation cannot lightly be
inferred.11 There is a solidary liability only when the obligation expressly so
states, when the law so provides or when the nature of the obligation so
requires.12

In the dispositive portion of the Labor Arbiter, the word "solidary" does not
appear. The said fallo expressly states the following respondents therein as
liable, namely: Filipinas Carbon and Mining Corporation, Gerardo Sicat,
Antonio Gonzales, Industrial Management Development Corporation
(petitioner INIMACO), Chiu Chin Gin, and Lo Kuan Chin. Nor can it be
inferred therefrom that the liability of the six (6) respondents in the case
below is solidary, thus their liability should merely be joint.
Moreover, it is already a well-settled doctrine in this jurisdiction that, when
it is not provided in a judgment that the defendants are liable to pay jointly
and severally a certain sum of money, none of them may be compelled to
satisfy in full said judgment. In Oriental Commercial Co. vs. Abeto and
Mabanag13 this Court held:
"It is of no consequence that, under the contract of suretyship executed by
the parties, the obligation contracted by the sureties was joint and several
in character. The final judgment, which superseded the action for the
enforcement of said contract, declared the obligation to be merely joint,
and the same cannot be executed otherwise."14
Granting that the Labor Arbiter has committed a mistake in failing to
indicate in the dispositive portion that the liability of respondents therein is
solidary, the correction -- which is substantial -- can no longer be allowed in
this case because the judgment has already become final and executory.
Scc-alr
It is an elementary principle of procedure that the resolution of the court in
a given issue as embodied in the dispositive part of a decision or order is
the controlling factor as to settlement of rights of the parties. 15 Once a
decision or order becomes final and executory, it is removed from the
power or jurisdiction of the court which rendered it to further alter or
amend it.16 It thereby becomes immutable and unalterable and any

12
13

14

10

15

11

16
Page | 75

amendment or alteration which substantially affects a final and executory

judgment is null and void for lack of jurisdiction, including the entire
proceedings held for that purpose.17 An order of execution which varies the
tenor of the judgment or exceeds the terms thereof is a nullity. 18
None of the parties in the case before the Labor Arbiter appealed the
Decision dated March 10, 1987, hence the same became final and
executory. It was, therefore, removed from the jurisdiction of the Labor
Arbiter or the NLRC to further alter or amend it. Thus, the proceedings held
for the purpose of amending or altering the dispositive portion of the said
decision are null and void for lack of jurisdiction. Also, the Alias Writ of
Execution is null and void because it varied the tenor of the judgment in
that it sought to enforce the final judgment against "Antonio
Gonzales/Industrial Management Development Corp. (INIMACO) and/or
Filipinas Carbon and Mining Corp. and Gerardo Sicat," which makes the
liability solidary. Ca-lrsc
WHEREFORE, the petition is hereby GRANTED. The Resolution dated
September 4, 1991 of the respondent National Labor Relations is hereby
declared NULL and VOID. The liability of the respondents in RAB-VII-071184 pursuant to the Decision of the Labor Arbiter dated March 10, 1987
should be, as it is hereby, considered joint and petitioners payment which
has been accepted considered as full satisfaction of its liability, without
prejudice to the enforcement of the award, against the other five (5)
respondents in the said case. Sppedsc
SO ORDERED.
G.R. No. 144134

November 11, 2003

MARIVELES
SHIPYARD
CORP.,
Petitioner,
vs.HON. COURT OF APPEALS, LUIS REGONDOLA, MANUELIT
GATALAN, ORESCA AGAPITO, NOEL ALBADBAD, ROGELIO PINTUAN,
DANILO CRISOSTOMO, ROMULO MACALINAO, NESTOR FERER,
RICKY CUESTA, ROLLY ANDRADA, LARRY ROGOLA, FRANCISCO
LENOGON,
AUGUSTO
QUINTO,
ARFE
BERAMO,
BONIFACIO
TRINIDAD, ALFREDO ASCARRAGA, ERNESTO MAGNO, HONORARIO
HORTECIO, NELBERT PINEDA, GLEN ESTIPULAR, FRANCISCO
COMPUESTO, ISABELITO CORTEZ, MATURAN ROSAURO, SAMSON
CANAS, FEBIEN ISIP, JESUS RIPARIP, ALFREDO SIENES, ADOLAR
ALBERT, HONESTO CABANILLAS, AMPING CASTILLO and ELWIN
REVILLA, Respondents.

17
18

DECISION
QUISUMBING, J.:
For review on certiorari is the Resolution, 1 dated December 29, 1999, of the
Court of Appeals in CA-G.R. SP No. 55416, which dismissed outright the
petition for certiorari of Mariveles Shipyard Corp., due to a defective
certificate of non-forum shopping and non-submission of the required
documents to accompany said petition. Mariveles Shipyard Corp., had filed
a special civil action for certiorari with the Court of Appeals to nullify the
resolution2 of the National Labor Relations Commission (NLRC), dated April
22, 1999, in NLRC NCR Case No. 00-09-005440-96-A, which affirmed the
Labor Arbiters decision,3 dated May 22, 1998, holding petitioner jointly
and severally liable with Longest Force Investigation and Security Agency,
Inc., for the underpayment of wages and overtime pay due to the private
respondents. Likewise challenged in the instant petition is the resolution 4 of
the Court of Appeals, dated July 12, 2000, denying petitioners motion for
reconsideration.
The facts, as culled from records, are as follows:
Sometime on October 1993, petitioner Mariveles Shipyard Corporation
engaged the services of Longest Force Investigation and Security Agency,
Inc. (hereinafter, "Longest Force") to render security services at its
premises. Pursuant to their agreement, Longest Force deployed its security
guards, the private respondents herein, at the petitioners shipyard in
Mariveles, Bataan.
According to petitioner, it religiously complied with the terms of the
security contract with Longest Force, promptly paying its bills and the
contract rates of the latter. However, it found the services being rendered
by the assigned guards unsatisfactory and inadequate, causing it to
terminate its contract with Longest Force on April 1995. 5 Longest Force, in
turn, terminated the employment of the security guards it had deployed at
petitioners shipyard.
On September 2, 1996, private respondents filed a case for illegal
dismissal, underpayment of wages pursuant to the PNPSOSIA-PADPAO
rates, non-payment of overtime pay, premium pay for holiday and rest day,
service incentive leave pay, 13th month pay and attorneys fees, against
both Longest Force and petitioner, before the Labor Arbiter. Docketed as
NLRC NCR Case No. 00-09-005440-96-A, the case sought the guards
reinstatement with full backwages and without loss of seniority rights.
For its part, Longest Force filed a cross-claim 6 against the petitioner.
Longest Force admitted that it employed private respondents and assigned
them as security guards at the premises of petitioner from October 16,
1993 to April 30, 1995, rendering a 12 hours duty per shift for the said
period. It likewise admitted its liability as to the non-payment of the

Page | 76

alleged wage differential in the total amount of P2,618,025 but passed on

the liability to petitioner alleging that the service fee paid by the latter to it
was way below the PNPSOSIA and PADPAO rate, thus, "contrary to the
mandatory and prohibitive laws because the right to proper compensation
and benefits provided under the existing labor laws cannot be waived nor
compromised."
The petitioner denied any liability on account of the alleged illegal
dismissal, stressing that no employer-employee relationship existed
between it and the security guards. It further pointed out that it would be
the height of injustice to make it liable again for monetary claims which it
had already paid. Anent the cross-claim filed by Longest Force against it,
petitioner prayed that it be dismissed for lack of merit. Petitioner averred
that Longest Force had benefited from the contract, it was now estopped
from questioning said agreement on the ground that it had made a bad
deal.

31/94 (3.5 mos.)

Apr.
1-Dec. 7,090.00
31/94 (9 mos.)

5,810

1,280.00

11,520.00

Jan.
29/95
mos.)

5,810

1,410.00

5,597

1-Apr. 7,220.00
(3.97

On May 22, 1998, the Labor Arbiter decided NLRC NCR Case No. 00-09005440-96-A, to wit:
WHEREFORE, conformably with the foregoing, judgment is hereby rendered
ordering the respondents as follows:
1. DECLARING respondents Longest Force Investigation & Security Agency,
Inc.1wphi1 and Mariveles Shipyard Corporation jointly and severally liable
to pay the money claims of complainants representing underpayment of
wages and overtime pay in the total amount of P2,700,623.40 based on
the PADPAO rates of pay covering the period from October 16, 1993 up to
April 29, 1995 broken down as follows:

MONTHLY
ACTUA
PADPAO
L
RATES
SALARY
(8
hrs.
duty)

UNDERPAYMEN WAGE
T
DIRRERENTIAL
FOR
THE S
PERIOD

15/93 P5,485

P5,000

P485.00

x2

= P 5,485.00

x 3.5

= 11,602.50

Dec.
16/93-Mar. 6,630
31/94 (3.5 mos)
Oct.
16-Dec. P5,485.00
15/93(2 mos.)

P23,792.70

OVERTIME:

Oct.
16-Dec.
(2 mos.)

UNDERPAYMENT OF WAGES:

PERIOD
COVERED

TOTAL UNDERPAYMENTS - - - - - - - - - - - - - -

P970.00
2

Dec. 16/93-Mar. 6,630.00

5,000

1,630.00

5,705.00

Page | 77

Apr.
31/94 (9 mos.)

1-Dec. 7,090

x9

31,905.00

Jan.
29/95 (3.97 mos.)

1-Apr. 7,220

x 3.97

14,331.70

5. Rogelio Pintuan (the same)

87,116.90

6. Danilo Crisostomo (the same)

87,116.90

7. Romulo Macalinao (the same)

87,116.90

8. Nestor Ferrer (the same)

87,116.90

9. Ricky Cuesta (the same)

87,116.90

10. Andrada Ricky (the same)

87,116.90

11. Larry Rogola (the same)

87,116.90

12. Francisco Lenogon (the same)

87,116.90

13. Augosto Quinto (the same)

87,116.90

14. Arfe Beramo (the same)

87,116.90

TOTAL OVERTIME - - - - - - - - -

P63,324.20

Sub-Total of Underpayments and Overtime P87,116.90

1awp++i1

1. Luis Regondula (the same)

P 87,116.90

2. Manolito Catalan (the same)

87,116.90

3. Oresca Agapito (the same)

87,116.90

4. Noel Alibadbad (the same)

87,116.90

Page | 78

15. Bonifacio Trinidad (the same)

87,116.90

16. Alfredo Azcarraga (the same)

87,116.90

27. Alfredo Sienes (the same)

87,116.90

17. Ernesto Magno (the same)

87,116.90

28. Adolar Albert (the same)

87,116.90

18. Honario Hortecio (the same)

87,116.90

29. Cabanillas Honesto (the same)

87,116.90

19. Nelbert Pineda (the same)

87,116.90

30. Castillo Amping (the same)

87,116.90

20. Glen Estipular (the same)

87,116.90

31. Revilla Elwin (the same)

87,116.90

21. Francisco Compuesto (the same)

87,116.90
GRAND TOTAL

P 2,700,623.90

22. Isabelito Cortes (the same)

87,116.90

23. Maturan Rosauro (the same)

87,116.90

24. Samson Canas (the same)

87,116.90

25. Febien Isip (the same)

87,116.90

26. Jesus Riparip (the same)

87,116.90

2. DECLARING both respondents liable to pay complainants attorneys fees

equivalent to ten (10%) percent of the total award recovered or the sum of
P270,062.34.
3. ORDERING respondent Longest Force Investigation & Security Agency,
Inc. to reinstate all the herein complainants to their former or equivalent
positions without loss of seniority rights and privileges with full backwages
which as computed as of the date of this decision are as follows:

Backwages:

Page | 79

10/16

12/15/93
P 5,485.00 x 2 mos.

12/16/93

P 6,630.00 x 3.5 mos.

5. Rogelio Pintuan (same)

126,684.40

6. Danilo Crisostomo (same)

126,684.40

7. Romulo Macalinao (same)

126,684.40

8. Nestor Ferrer (same)

126,684.40

9. Ricky Cuesta (same)

126,684.40

10. Andrada Rolly (same)

126,684.40

11. Larry Rogola (same)

126,684.40

12. Francisco Lenogon (same)

126,684.40

13. Augosto Quinto (same)

126,684.40

14. Arfe Beramo (same)

126,684.40

15. Bonifacio Trinidad (same)

126,684.40

mos.
= 23,205.00

4/1

12/31/94
P 7,090.00 x 9 mos.

TOTAL

126,684.40

= P 10,970.00

3/31/94=3.5

1/1

4/29/95
P 7,220.00 x 3.97 mos.

mos.

4. Noel Alibadbad (same)

mos.
= 63,810.00

3.97

mos.
= 28,663.40

P 126,684.407

1. Luis Regondula (same)

P 126,684.408

2. Manolito Catalan (same)

126,684.40

3. Oresca Agapito (same)

126,684.40

Page | 80

26. Jesus Riparip (same)

126,684.40

16. Alfredo Azcarraga (same)

126,684.40

27. Alfredo Sienes (same)

126,684.40

17. Ernesto Magno (same)

126,684.40

28. Adolar Albert (same)

126,684.40

18. Honario Hortecio (same)

126,684.40

29. Cabanillas Honesto (same)

126,684.40

19. Nelbert Pineda (same)

126,684.40

30. Castillo Amping (same)

126,684.40

20. Glen Estipular (same)

126,684.40

31. Revilla Elwin (same)

126,684.40

21. Francisco Compuesto (same)

126,684.40
GRAND TOTAL

P3,927,216.409

22. Isabelito Cortes (same)

126,684.40

23. Maturan Rosauro (same)

126,684.40

24. Samson Canas (same)

126,684.40

4. ORDERING said Longest Force Investigation & Security Agency, Inc. to

pay attorneys fees equivalent to ten (10%) percent of the total award
recovered representing backwages in the amount of P392,721.64. 10
5. DISMISSING all other claims for lack of legal basis.
SO ORDERED.11

25. Febien Isip (same)

126,684.40

Petitioner appealed the foregoing to the NLRC in NLRC NCR Case No. 0009-005440-96-A. The labor tribunal, however, affirmed in toto the decision
of the Labor Arbiter. Petitioner moved for reconsideration, but this was
denied by the NLRC.

Page | 81

The petitioner then filed a special civil action for certiorari assailing the
NLRC judgment for having been rendered with grave abuse of discretion
with the Court of Appeals, docketed as CA-G.R. SP No. 55416. The Court of
Appeals, however, denied due course to the petition and dismissed it
outright for the following reasons:
1. The verification and certification on non-forum shopping is signed not by
duly authorized officer of petitioner corporation, but by counsel (Section 1,
Rule 65, 1997 Rules of Civil Procedure).
2. The petition is unaccompanied by copies of relevant and pertinent
documents, particularly the motion for reconsideration filed before the
NLRC (Section 1, Rule 65, 1997 Rules of Civil Procedure). 12
The petitioner then moved for reconsideration of the order of dismissal.
The appellate court denied the motion, pointing out that under prevailing
case law subsequent compliance with formal requirements for filing a
petition as prescribed by the Rules, does not ipso facto warrant a
reconsideration. In any event, it found no grave abuse of discretion on the
part of the NLRC to grant the writ of certiorari.
Hence, this present petition before us. Petitioner submits that THE COURT
OF APPEALS GRAVELY ERRED:
1. .IN DISMISSING THE PETITION AND DENYING THE MOTION FOR
RECONSIDERATION DESPITE THE FACT THAT PETITIONER SUBSTANTIALLY
COMPLIED WITH THE REQUIREMENTS OF SECTION 1, RULE 65, 1997 RULES
OF CIVIL PROCEDURE.
2. .IN RULING THAT PETITIONER WAS NOT DENIED DUE PROCESS OF LAW.
3. .IN AFFIRMING THE DECISION OF THE NATIONAL LABOR RELATIONS
COMMISSION THAT "LONGEST FORCE" AND PETITIONER ARE JOINTLY AND
SEVERALLY LIABLE FOR PAYMENT OF WAGES AND OVERTIME PAY DESPITE
THE CLEAR SHOWING THAT PETITIONER HAVE ALREADY PAID THE
SECURITY SERVICES THAT WAS RENDERED BY PRIVATE RESPONDENTS.
4. WHEN IT FAILED TO RULE THAT ONLY "LONGEST FORCE" SHOULD BE
SOLELY AND ULTIMATELY LIABLE IN THE INSTANT CASE. 13
We find the issues for our resolution to be: (1) Was it error for the Court of
Appeals to sustain its order of dismissal of petitioners special civil action
for certiorari, notwithstanding subsequent compliance with the
requirements under the Rules of Court by the petitioner? (2) Did the
appellate court err in not holding that petitioner was denied due process of
law by the NLRC? and (3) Did the appellate court grievously err in finding
petitioner jointly and severally liable with Longest Force for the payment of
wage differentials and overtime pay owing to the private respondents?

On the first issue, the Court of Appeals in dismissing CA-G.R. SP No. 55416
observed that: (1) the verification and certification of non-forum shopping
was not signed by any duly authorized officer of petitioner but merely by
petitioners counsel; and (2) the petition was not accompanied by a copy of
motion for reconsideration filed before the NLRC, thus violating Section 1, 14
Rule 65 of the Rules of Court. Hence, a dismissal was proper under Section
3,15 Rule 46 of the Rules.
In assailing the appellate courts ruling, the petitioner appeals to our sense
of compassion and kind consideration. It submits that the certification
signed by its counsel and attached to its petition filed with the Court of
Appeals is substantial compliance with the requirement. Moreover,
petitioner calls our attention to the fact that when it filed its motion for
reconsideration before the Court of Appeals, a joint verification and
certification of non-forum shopping duly signed by its Personnel Manager 16
and a copy of the Motion for Reconsideration 17 filed before the NLRC were
attached therein. Thus, petitioner prays that we take a liberal stance to
promote the ends of justice.
Petitioners plea for liberality, however, cannot be granted by the Court for
reasons herein elucidated.
It is settled that the requirement in the Rules that the certification of nonforum shopping should be executed and signed by the plaintiff or the
principal means that counsel cannot sign said certification unless clothed
with special authority to do so. 18 The reason for this is that the plaintiff or
principal knows better than anyone else whether a petition has previously
been filed involving the same case or substantially the same issues.
Hence, a certification signed by counsel alone is defective and constitutes
a valid cause for dismissal of the petition. 19 In the case of natural persons,
the Rule requires the parties themselves to sign the certificate of nonforum shopping. However, in the case of the corporations, the physical act
of signing may be performed, on behalf of the corporate entity, only by
specifically authorized individuals for the simple reason that corporations,
as artificial persons, cannot personally do the task themselves. 20 In this
case, not only was the originally appended certification signed by counsel,
but in its motion for reconsideration, still petitioner utterly failed to show
that Ms. Rosanna Ignacio, its Personnel Manager who signed the
verification and certification of non-forum shopping attached thereto, was
duly authorized for this purpose. It cannot be gainsaid that obedience to
the requirements of procedural rule is needed if we are to expect fair
results therefrom. Utter disregard of the rules cannot justly be rationalized
by harking on the policy of liberal construction.21
Thus, on this point, no error could be validly attributed to respondent Court
of Appeals. It did not err in dismissing the petition for non-compliance with
the requirements governing the certification of non-forum shopping.

Page | 82

Anent the second issue, petitioner avers that there was denial of due
process of law when the Labor Arbiter failed to have the case tried on the
merits. Petitioner adds that the Arbiter did not observe the mandatory
language of the then Sec. 5(b) Rule V (now Section 11, per amendment in
Resolution No. 01-02, Series of 2002) of the NLRC New Rules of Procedure
which provided that:
If the Labor Arbiter finds no necessity of further hearing after the parties
have submitted their position papers and supporting documents, he shall
issue an Order to that effect and shall inform the parties, stating the
reasons therefor. 22
Petitioners contention, in our view, lacks sufficient basis. Well settled is the
rule that the essence of due process is simply an opportunity to be heard,
or, as applied to administrative proceedings, an opportunity to explain
ones side or an opportunity to seek a reconsideration of the action or
ruling complained of.23 Not all cases require a trial-type hearing. The
requirement of due process in labor cases before a Labor Arbiter is
satisfied when the parties are given the opportunity to submit their
position papers to which they are supposed to attach all the supporting
documents or documentary evidence that would prove their respective
claims, in the event the Labor Arbiter determines that no formal hearing
would be conducted or that such hearing was not necessary. 24 In any
event, as found by the NLRC, petitioner was given ample opportunity to
present its side in several hearings conducted before the Labor Arbiter and
in the position papers and other supporting documents that it had
submitted. We find that such opportunity more than satisfies the
requirement of due process in labor cases.
On the third issue, petitioner argues that it should not be held jointly and
severally liable with Longest Force for underpayment of wages and
overtime pay because it had been religiously and promptly paying the bills
for the security services sent by Longest Force and that these are in
accordance with the statutory minimum wage. Also, petitioner contends
that it should not be held liable for overtime pay as private respondents
failed to present proof that overtime work was actually performed. Lastly,
petitioner claims that the Court of Appeals failed to render a decision that
finally disposed of the case because it did not specifically rule on the
immediate recourse of private respondents, that is, the matter of
reimbursement between petitioner and Longest Force in accordance with
Eagle Security Agency Inc. v. NLRC, 25 and Philippine Fisheries Development
Authority v. NLRC.26
Petitioners liability is joint and several with that of Longest Force, pursuant
to Articles 106, 107 and 109 of the Labor Code which provide as follows:

ART. 106. CONTRACTOR OR SUBCONTRACTOR Whenever an employer

enters into a contract with another person for the performance of the
formers work, the employees of the contractor and of the latters
subcontractor, if any, shall be paid in accordance with the provisions of this
Code.
In the event that the contractor or subcontractor fails to pay the wages of
his employees in accordance with this Code, the employer shall be jointly
and severally liable with his contractor or subcontractor to such employees
to the extent of the work performed under the contract, in the same
manner and extent that he is liable to employees directly employed by
him.
xxx
ART. 107. INDIRECT EMPLOYER. The provisions of the immediately
preceding Article shall likewise apply to any person, partnership,
association or corporation which, not being an employer, contracts with an
independent contractor for the performance of any work, task, job or
project.
ART. 109. SOLIDARY LIABILITY. The provisions of existing laws to the
contrary notwithstanding, every employer or indirect employer shall be
held responsible with his contractor or subcontractor for any violation of
any provision of this Code. For purposes of determining the extent of their
civil liability under this Chapter, they shall be considered as direct
employers.
In this case, when petitioner contracted for security services with Longest
Force as the security agency that hired private respondents to work as
guards for the shipyard corporation, petitioner became an indirect
employer of private respondents pursuant to Article 107 abovecited.
Following Article 106, when the agency as contractor failed to pay the
guards, the corporation as principal becomes jointly and severally liable for
the guards wages. This is mandated by the Labor Code to ensure
compliance with its provisions, including payment of statutory minimum
wage. The security agency is held liable by virtue of its status as direct
employer, while the corporation is deemed the indirect employer of the
guards for the purpose of paying their wages in the event of failure of the
agency to pay them. This statutory scheme gives the workers the ample
protection consonant with labor and social justice provisions of the 1987
Constitution.27
Petitioner cannot evade its liability by claiming that it had religiously paid
the compensation of guards as stipulated under the contract with the
security agency. Labor standards are enacted by the legislature to alleviate
the plight of workers whose wages barely meet the spiraling costs of their
basic needs. Labor laws are considered written in every contract.
Stipulations in violation thereof are considered null. Similarly, legislated

Page | 83

wage increases are deemed amendments to the contract. Thus, employers

cannot hide behind their contracts in order to evade their (or their
contractors or subcontractors) liability for noncompliance with the
statutory minimum wage.28

vs.
REBECCA G. ESTRELLA, RACHEL E. FLETCHER, PHILIPPINE PHOENIX
SURETY & INSURANCE INC., BATANGAS LAGUNA TAYABAS BUS CO.,
and WILFREDO DATINGUINOO, respondents.

However, we must emphasize that the solidary liability of petitioner with

that of Longest Force does not preclude the application of the Civil Code
provision on the right of reimbursement from his co-debtor by the one who
paid.29 As held in Del Rosario & Sons Logging Enterprises, Inc. v. NLRC, 30
the joint and several liability imposed on petitioner is without prejudice to a
claim for reimbursement by petitioner against the security agency for such
amounts as petitioner may have to pay to complainants, the private
respondents herein. The security agency may not seek exculpation by
claiming that the principals payments to it were inadequate for the
guards lawful compensation. As an employer, the security agency is
charged with knowledge of labor laws; and the adequacy of the
compensation that it demands for contractual services is its principal
concern and not any others.31

DECISION

On the issue of the propriety of the award of overtime pay despite the
alleged lack of proof thereof, suffice it to state that such involves a
determination and evaluation of facts which cannot be done in a petition
for review. Well established is the rule that in an appeal via certiorari, only
questions of law may be reviewed.32

On December 29, 1978, respondents Rebecca G. Estrella and her

granddaughter, Rachel E. Fletcher, boarded in San Pablo City, a BLTB bus
bound for Pasay City. However, they never reached their destination
because their bus was rammed from behind by a tractor-truck of CDCP in
the South Expressway. The strong impact pushed forward their seats and
pinned their knees to the seats in front of them. They regained
consciousness only when rescuers created a hole in the bus and extricated
their legs from under the seats. They were brought to the Makati Medical
Center where the doctors diagnosed their injuries to be as follows:

One final point. Upon review of the award of backwages and attorneys
fees, we discovered certain errors that happened in the addition of the
amount of individual backwages that resulted in the erroneous total
amount of backwages and attorneys fees. These errors ought to be
properly rectified now. Thus, the correct sum of individual backwages
should be P126,648.40 instead of P126,684.40, while the correct sum of
total backwages awarded and attorneys fees should be P3,926,100.40 and
P392,610.04, instead of P3,927,216.40 and P392,721.64, respectively.
WHEREFORE, the Resolution of the Court of Appeals in CA-G.R. SP No.
55416 is AFFIRMED with MODIFICATION. Petitioner and Longest Force are
held liable jointly and severally for underpayment of wages and overtime
pay of the security guards, without prejudice to petitioners right of
reimbursement from Longest Force Investigation and Security Agency, Inc.
The amounts payable to complaining security guards, herein private
respondents, by way of total backwages and attorneys fees are hereby set
at P3,926,100.40 and P392,610.04, respectively. Costs against petitioner.
SO ORDERED.
G.R. No. 147791
CONSTRUCTION
PHILIPPINES,

September 8, 2006
DEVELOPMENT

CORPORATION
petitioner,

OF

THE

YNARES-SANTIAGO, J.:
This petition for review assails the March 29, 2001 Decision 1 of the Court of
Appeals in CA-G.R. CV No. 46896, which affirmed with modification the
February 9, 1993 Decision2 of the Regional Trial Court of Manila, Branch 13,
in Civil Case No. R-82-2137, finding Batangas Laguna Tayabas Bus Co.
(BLTB) and Construction Development Corporation of the Philippines
(CDCP) liable for damages.
The antecedent facts are as follows:

Medical Certificate of Rebecca Estrella

Fracture,
left
tibia
Lacerated
wound,
Contusions
with
abrasions,
Fracture, 6th and 7th ribs, right3

mid
left

lower

3rd
chin
leg

Medical Certificate of Rachel Fletcher

Extensive lacerated wounds, right leg posterior aspect popliteal area
and antero-lateral aspect mid lower leg with severance of muscles.
Partial amputation BK left leg with severance of gastro-soleus and
antero-lateral
compartment
of
lower
leg.
Fracture, open comminuted, both tibial4
Thereafter, respondents filed a Complaint 5 for damages against CDCP,
BLTB, Espiridion Payunan, Jr. and Wilfredo Datinguinoo before the Regional
Trial Court of Manila, Branch 13. They alleged (1) that Payunan, Jr. and
Datinguinoo, who were the drivers of CDCP and BLTB buses, respectively,
were negligent and did not obey traffic laws; (2) that BLTB and CDCP did

Page | 84

not exercise the diligence of a good father of a family in the selection and
supervision of their employees; (3) that BLTB allowed its bus to operate
knowing that it lacked proper maintenance thus exposing its passengers to
grave danger; (4) that they suffered actual damages amounting to
P250,000.00 for Estrella and P300,000.00 for Fletcher; (5) that they
suffered physical discomfort, serious anxiety, fright and mental anguish,
besmirched reputation and wounded feelings, moral shock, and lifelong
social humiliation; (6) that defendants failed to act with justice, give
respondents their due, observe honesty and good faith which entitles them
to claim for exemplary damage; and (7) that they are entitled to a
reasonable amount of attorney's fees and litigation expenses.

Dismissing the counterclaim;

6. On the crossclaim against BLTB
Dismissing the crossclaim;
7. On the Third Party Complaint by Construction and Development
Corporation of the Philippines against Philippine Phoenix Surety and
Insurance, Incorporated
Dismissing the Third Party Complaint.

CDCP filed its Answer6 which was later amended to include a third-party
complaint against Philippine Phoenix Surety and Insurance, Inc. (Phoenix). 7
On February 9, 1993, the trial court rendered a decision finding CDCP and
BLTB and their employees liable for damages, the dispositive portion of
which, states:
WHEREFORE, judgment is rendered:
In the Complaint
1. In favor of the plaintiffs and against the defendants BLTB, Wilfredo
Datinguinoo, Construction and Development Corporation of the Philippines
(now PNCC) and Espiridion Payunan, Jr., ordering said defendants, jointly
and severally to pay the plaintiffs the sum of P79,254.43 as actual
damages and to pay the sum of P10,000.00 as attorney's fees or a total of
P89,254.43;
2. In addition, defendant Construction and Development Corporation of the
Philippines and defendant Espiridion Payunan, Jr., shall pay the plaintiffs
the amount of Fifty Thousand (P50,000.00) Pesos to plaintiff Rachel
Fletcher and Twenty Five Thousand (P25,000.00) Pesos to plaintiff Rebecca
Estrella;
3. On the counterclaim of BLTB Co. and Wilfredo Datinguinoo
Dismissing the counterclaim;
4. On the crossclaim against Construction and Development Corporation of
the Philippines (now PNCC) and Espiridion Payunan, Jr.
Dismissing the crossclaim;

SO ORDERED.8
The trial court held that BLTB, as a common carrier, was bound to observe
extraordinary diligence in the vigilance over the safety of its passengers. It
must carry the passengers safely as far as human care and foresight
provide, using the utmost diligence of very cautious persons, with a due
regard for all the circumstances. Thus, where a passenger dies or is
injured, the carrier is presumed to have been at fault or has acted
negligently. BLTB's inability to carry respondents to their destination gave
rise to an action for breach of contract of carriage while its failure to rebut
the presumption of negligence made it liable to respondents for the
breach.9
Regarding CDCP, the trial court found that the tractor-truck it owned
bumped the BLTB bus from behind. Evidence showed that CDCP's driver
was reckless and driving very fast at the time of the incident. The gross
negligence of its driver raised the presumption that CDCP was negligent
either in the selection or in the supervision of its employees which it failed
to rebut thus making it and its driver liable to respondents. 10
Unsatisfied with the award of damages and attorney's fees by the trial
court, respondents moved that the decision be reconsidered but was
denied. Respondents elevated the case11 to the Court of Appeals which
affirmed the decision of the trial court but modified the amount of
damages, the dispositive portion of which provides:
WHEREFORE, the assailed decision dated October 7, 1993 of the Regional
Trial Court, Branch 13, Manila is hereby AFFIRMED with the following
MODIFICATION:
1. The interest of six (6) percent per annum on the actual damages of
P79,354.43 should commence to run from the time the judicial demand
was made or from the filing of the complaint on February 4, 1980;

5. On the counterclaim of Construction and Development Corporation of

the Philippines (now PNCC)

Page | 85

2. Thirty (30) percent of the total amount recovered is hereby awarded as

attorney's fees;
3. Defendants-appellants Construction and Development
the Philippines (now PNCC) and Espiridion Payunan, Jr. are
plaintiff-appellants Rebecca Estrella and Rachel Fletcher
Twenty Thousand (P20,000.00) each as exemplary
P80,000.00 by way of moral damages to Rachel Fletcher.

Corporation of
ordered to pay
the amount of
damages and

SO ORDERED.12
The Court of Appeals held that the actual or compensatory damage sought
by respondents for the injuries they sustained in the form of hospital bills
were already liquidated and were ascertained. Accordingly, the 6% interest
per annum should commence to run from the time the judicial demand was
made or from the filing of the complaint and not from the date of
judgment. The Court of Appeals also awarded attorney's fees equivalent to
30% of the total amount recovered based on the retainer agreement of the
parties. The appellate court also held that respondents are entitled to
exemplary and moral damages. Finally, it affirmed the ruling of the trial
court that the claim of CDCP against Phoenix had already prescribed.

The issues for resolution are as follows: (1) whether BLTB and its driver
Wilfredo Datinguinoo are solely liable for the damages sustained by
respondents; (2) whether the damages, attorney's fees and legal interest
awarded by the CA are excessive and unfounded; (3) whether CDCP can
recover under its insurance policy from Phoenix.
Petitioner contends that since it was made solidarily liable with BLTB for
actual damages and attorney's fees in paragraph 1 of the trial court's
decision, then it should no longer be held liable to pay the amounts stated
in paragraph 2 of the same decision. Petitioner claims that the liability for
actual damages and attorney's fees is based on culpa contractual, thus,
only BLTB should be held liable. As regards paragraph 2 of the trial court's
decision, petitioner claims that it is ambiguous and arbitrary because the
dispositive portion did not state the basis and nature of such award.
Respondents, on the other hand, argue that petitioner is also at fault,
hence, it was properly joined as a party. There may be an action arising out
of one incident where questions of fact are common to all. Thus, the cause
of action based on culpa aquiliana in the civil suit they filed against it was
valid.
The petition lacks merit.

Hence, this petition raising the following issues:

I
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN NOT
HOLDING RESPONDENTS BLTB AND/OR ITS DRIVER WILFREDO
DATINGUINOO SOLELY LIABLE FOR THE DAMAGES SUSTAINED BY HEREIN
RESPONDENTS FLETCHER AND ESTRELLA.
II
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN AWARDING
EXCESSIVE OR UNFOUNDED DAMAGES, ATTORNEY'S FEES AND LEGAL
INTEREST TO RESPONDENTS FLETCHER AND ESTRELLA.
III
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN NOT
HOLDING RESPONDENT PHOENIX LIABLE UNDER ITS INSURANCE POLICY
ON THE GROUND OF PRESCRIPTION.

The case filed by respondents against petitioner is an action for culpa

aquiliana or quasi-delict under Article 2176 of the Civil Code. 13 In this
regard, Article 2180 provides that the obligation imposed by Article 2176 is
demandable for the acts or omissions of those persons for whom one is
responsible. Consequently, an action based on quasi-delict may be
instituted against the employer for an employee's act or omission. The
liability for the negligent conduct of the subordinate is direct and primary,
but is subject to the defense of due diligence in the selection and
supervision of the employee. 14 In the instant case, the trial court found that
petitioner failed to prove that it exercised the diligence of a good father of
a family in the selection and supervision of Payunan, Jr.
The trial court and the Court of Appeals found petitioner solidarily liable
with BLTB for the actual damages suffered by respondents because of the
injuries they sustained. It was established that Payunan, Jr. was driving
recklessly because of the skid marks as shown in the sketch of the police
investigator.
It is well-settled in Fabre, Jr. v. Court of Appeals,15 that the owner of the
other vehicle which collided with a common carrier is solidarily liable to the
injured passenger of the same. We held, thus:
The same rule of liability was applied in situations where the negligence of
the driver of the bus on which plaintiff was riding concurred with the
negligence of a third party who was the driver of another vehicle, thus
causing an accident. In Anuran v. Buo, Batangas Laguna Tayabas Bus Co.

Page | 86

v. Intermediate Appellate Court, and Metro Manila Transit Corporation v.

Court of Appeals, the bus company, its driver, the operator of the
other vehicle and the driver of the vehicle were jointly and
severally held liable to the injured passenger or the latter's heirs.
The basis of this allocation of liability was explained in Viluan v. Court of
Appeals, thus:
Nor should it make any difference that the liability of petitioner
[bus owner] springs from contract while that of respondents
[owner and driver of other vehicle] arises from quasi-delict. As
early as 1913, we already ruled in Gutierrez vs. Gutierrez, 56 Phil. 177, that
in case of injury to a passenger due to the negligence of the driver of the
bus on which he was riding and of the driver of another vehicle, the drivers
as well as the owners of the two vehicles are jointly and severally liable for
damages. x x x
xxxx
As in the case of BLTB, private respondents in this case and her coplaintiffs did not stake out their claim against the carrier and the driver
exclusively on one theory, much less on that of breach of contract alone.
After all, it was permitted for them to allege alternative causes of
action and join as many parties as may be liable on such causes of
action so long as private respondent and her co-plaintiffs do not
recover twice for the same injury. What is clear from the cases is the
intent of the plaintiff there to recover from both the carrier and the driver,
thus justifying the holding that the carrier and the driver were jointly and
severally liable because their separate and distinct acts concurred to
produce the same injury.16 (Emphasis supplied)
In a "joint" obligation, each obligor answers only for a part of the whole
liability; in a "solidary" or "joint and several" obligation, the relationship
between the active and the passive subjects is so close that each of them
must comply with or demand the fulfillment of the whole obligation. In
Lafarge Cement v. Continental Cement Corporation,17 we reiterated that
joint tort feasors are jointly and severally liable for the tort which they
commit. Citing Worcester v. Ocampo,18 we held that:
x x x The difficulty in the contention of the appellants is that they fail to
recognize that the basis of the present action is tort. They fail to recognize
the universal doctrine that each joint tort feasor is not only individually
liable for the tort in which he participates, but is also jointly liable with his
tort feasors. x x x
It may be stated as a general rule that joint tort feasors are all the persons
who command, instigate, promote, encourage, advise, countenance,
cooperate in, aid or abet the commission of a tort, or who approve of it
after it is done, if done for their benefit. They are each liable as principals,

to the same extent and in the same manner as if they had performed the
wrongful act themselves. x x x
Joint tort feasors are jointly and severally liable for the tort which they
commit. The persons injured may sue all of them or any number less than
all. Each is liable for the whole damages caused by all, and all together are
jointly liable for the whole damage. It is no defense for one sued alone,
that the others who participated in the wrongful act are not joined with him
as defendants; nor is it any excuse for him that his participation in the tort
was insignificant as compared to that of the others. x x x
Joint tort feasors are not liable pro rata. The damages can not be
apportioned among them, except among themselves. They cannot insist
upon an apportionment, for the purpose of each paying an aliquot part.
They are jointly and severally liable for the whole amount. x x x
A payment in full for the damage done, by one of the joint tort feasors, of
course satisfies any claim which might exist against the others. There can
be but satisfaction. The release of one of the joint tort feasors by
agreement generally operates to discharge all. x x x
Of course the court during trial may find that some of the alleged tort
feasors are liable and that others are not liable. The courts may release
some for lack of evidence while condemning others of the alleged tort
feasors. And this is true even though they are charged jointly and
severally.19
Petitioner's claim that paragraph 2 of the dispositive portion of the trial
court's decision is ambiguous and arbitrary and also entitles respondents
to recover twice is without basis. In the body of the trial court's decision, it
was clearly stated that petitioner and its driver Payunan, Jr., are jointly and
solidarily liable for moral damages in the amount of P50,000.00 to
respondent Fletcher and P25,000.00 to respondent Estrella. 20 Moreover,
there could be no double recovery because the award in paragraph 2 is for
moral damages while the award in paragraph 1 is for actual damages and
attorney's fees.
Petitioner next claims that the damages, attorney's fees, and legal interest
awarded by the Court of Appeals are excessive.
Moral damages may be recovered in quasi-delicts causing physical
injuries.21 The award of moral damages in favor of Fletcher and Estrella in
the amount of P80,000.00 must be reduced since prevailing jurisprudence
fixed the same at P50,000.00.22 While moral damages are not intended to
enrich the plaintiff at the expense of the defendant, the award should
nonetheless be commensurate to the suffering inflicted. 23

Page | 87

The Court of Appeals correctly awarded respondents exemplary damages

in the amount of P20,000.00 each. Exemplary damages may be awarded in
addition to moral and compensatory damages. 24 Article 2231 of the Civil
Code also states that in quasi-delicts, exemplary damages may be granted
if the defendant acted with gross negligence. 25 In this case, petitioner's
driver was driving recklessly at the time its truck rammed the BLTB bus.
Petitioner, who has direct and primary liability for the negligent conduct of
its subordinates, was also found negligent in the selection and supervision
of its employees. In Del Rosario v. Court of Appeals,26 we held, thus:
ART. 2229 of the Civil Code also provides that such damages may be
imposed, by way of example or correction for the public good. While
exemplary damages cannot be recovered as a matter of right, they need
not be proved, although plaintiff must show that he is entitled to moral,
temperate or compensatory damages before the court may consider the
question of whether or not exemplary damages should be awarded.
Exemplary Damages are imposed not to enrich one party or impoverish
another but to serve as a deterrent against or as a negative incentive to
curb socially deleterious actions.
Regarding attorney's fees, we held in Traders Royal Bank Employees UnionIndependent v. National Labor Relations Commission, 27 that:
There are two commonly accepted concepts of attorney's fees, the socalled ordinary and extraordinary. In its ordinary concept, an attorney's fee
is the reasonable compensation paid to a lawyer by his client for the legal
services he has rendered to the latter. The basis of this compensation is
the fact of his employment by and his agreement with the client.
In its extraordinary concept, an attorney's fee is an indemnity for
damages ordered by the court to be paid by the losing party in a
litigation. The basis of this is any of the cases provided by law where such
award can be made, such as those authorized in Article 2208, Civil Code,
and is payable not to the lawyer but to the client, unless they have
agreed that the award shall pertain to the lawyer as additional
compensation or as part thereof.28 (Emphasis supplied)
In the instant case, the Court of Appeals correctly awarded attorney's fees
and other expenses of litigation as they may be recovered as actual or
compensatory damages when exemplary damages are awarded; when the
defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiff's valid, just and demandable claim; and in any other case where
the court deems it just and equitable that attorney's fees and expenses of
litigation should be recovered.29
Regarding the imposition of legal interest at the rate of 6% from the time
of the filing of the complaint, we held in Eastern Shipping Lines, Inc. v.
Court of Appeals,30 that when an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the

contravenor can be held liable for payment of interest in the concept of

actual and compensatory damages,31 subject to the following rules, to wit
1. When the obligation is breached, and it consists in the payment of a sum
of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to
be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for
the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a
forbearance of credit.32 (Emphasis supplied)
Accordingly, the legal interest of 6% shall begin to run on February 9, 1993
when the trial court rendered judgment and not on February 4, 1980 when
the complaint was filed. This is because at the time of the filing of the
complaint, the amount of the damages to which plaintiffs may be entitled
remains unliquidated and unknown, until it is definitely ascertained,
assessed and determined by the court and only upon presentation of proof
thereon.33 From the time the judgment becomes final and executory, the
interest rate shall be 12% until its satisfaction.
Anent the last issue of whether petitioner can recover under its insurance
policy from Phoenix, we affirm the findings of both the trial court and the
Court of Appeals, thus:
As regards the liability of Phoenix, the court a quo correctly ruled that
defendant-appellant CDCP's claim against Phoenix already prescribed
pursuant to Section 384 of P.D. 612, as amended, which provides:

Page | 88

Any person having any claim upon the policy issued pursuant to this
chapter shall, without any unnecessary delay, present to the insurance
company concerned a written notice of claim setting forth the nature,
extent and duration of the injuries sustained as certified by a duly licensed
physician. Notice of claim must be filed within six months from date of the
accident, otherwise, the claim shall be deemed waived. Action or suit for
recovery of damage due to loss or injury must be brought in proper cases,
with the Commissioner or Courts within one year from denial of the claim,
otherwise, the claimant's right of action shall prescribe. (As amended by
PD 1814, BP 874.)34
The law is clear and leaves no room for interpretation. A written notice of
claim must be filed within six months from the date of the accident. Since
petitioner never made any claim within six months from the date of the
accident, its claim has already prescribed.
WHEREFORE, the instant petition is DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 46896 dated March 29, 2001, which modified
the Decision of the Regional Trial Court of Manila, Branch 13, in Civil Case
No. R-82-2137, is AFFIRMED with the MODIFICATIONS that petitioner is
held jointly and severally liable to pay (1) actual damages in the amount of
P79,354.43; (2) moral damages in the amount of P50,000.00 each for
Rachel Fletcher and Rebecca Estrella; (3) exemplary damages in the
amount of P20,000.00 each for Rebecca Estrella and Rachel Fletcher; and
(4) thirty percent (30%) of the total amount recovered as attorney's fees.
The total amount adjudged shall earn interest at the rate of 6% per annum
from the date of judgment of the trial court until finality of this judgment.
From the time this Decision becomes final and executory and the judgment
amount remains unsatisfied, the same shall earn interest at the rate of
12% per annum until its satisfaction.
SO ORDERED.
G.R. No. 157917

August 29, 2012

SPOUSES
TEODORO1
and
NANETTE
PERENA,
Petitioners,
vs.
SPOUSES TERESITA PHILIPPINE NICOLAS and L. ZARATE, NATIONAL
RAILWAYS, and the COURT OF APPEALS Respondents.
DECISION
BERSAMIN, J.:

The operator of a. school bus service is a common carrier in the eyes of the
law. He is bound to observe extraordinary diligence in the conduct of his
business. He is presumed to be negligent when death occurs to a
passenger. His liability may include indemnity for loss of earning capacity
even if the deceased passenger may only be an unemployed high school
student at the time of the accident.
The Case
By petition for review on certiorari, Spouses Teodoro and Nanette Perefia
(Perefias) appeal the adverse decision promulgated on November 13,
2002, by which the Court of Appeals (CA) affirmed with modification the
decision rendered on December 3, 1999 by the Regional Trial Court (RTC),
Branch 260, in Paraaque City that had decreed them jointly and severally
liable with Philippine National Railways (PNR), their co-defendant, to
Spouses Nicolas and Teresita Zarate (Zarates) for the death of their 15year old son, Aaron John L. Zarate (Aaron), then a high school student of
Don Bosco Technical Institute (Don Bosco).
Antecedents
The Pereas were engaged in the business of transporting students from
their respective residences in Paraaque City to Don Bosco in Pasong
Tamo, Makati City, and back. In their business, the Pereas used a KIA
Ceres Van (van) with Plate No. PYA 896, which had the capacity to
transport 14 students at a time, two of whom would be seated in the front
beside the driver, and the others in the rear, with six students on either
side. They employed Clemente Alfaro (Alfaro) as driver of the van.
In June 1996, the Zarates contracted the Pereas to transport Aaron to and
from Don Bosco. On August 22, 1996, as on previous school days, the van
picked Aaron up around 6:00 a.m. from the Zarates residence. Aaron took
his place on the left side of the van near the rear door. The van, with its airconditioning unit turned on and the stereo playing loudly, ultimately
carried all the 14 student riders on their way to Don Bosco. Considering
that the students were due at Don Bosco by 7:15 a.m., and that they were
already running late because of the heavy vehicular traffic on the South
Superhighway, Alfaro took the van to an alternate route at about 6:45 a.m.
by traversing the narrow path underneath the Magallanes Interchange that
was then commonly used by Makati-bound vehicles as a short cut into
Makati. At the time, the narrow path was marked by piles of construction
materials and parked passenger jeepneys, and the railroad crossing in the
narrow path had no railroad warning signs, or watchmen, or other
responsible persons manning the crossing. In fact, the bamboo barandilla
was up, leaving the railroad crossing open to traversing motorists.
At about the time the van was to traverse the railroad crossing, PNR
Commuter No. 302 (train), operated by Jhonny Alano (Alano), was in the
vicinity of the Magallanes Interchange travelling northbound. As the train

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neared the railroad crossing, Alfaro drove the van eastward across the
railroad tracks, closely tailing a large passenger bus. His view of the
oncoming train was blocked because he overtook the passenger bus on its
left side. The train blew its horn to warn motorists of its approach. When
the train was about 50 meters away from the passenger bus and the van,
Alano applied the ordinary brakes of the train. He applied the emergency
brakes only when he saw that a collision was imminent. The passenger bus
successfully crossed the railroad tracks, but the van driven by Alfaro did
not. The train hit the rear end of the van, and the impact threw nine of the
12 students in the rear, including Aaron, out of the van. Aaron landed in
the path of the train, which dragged his body and severed his head,
instantaneously killing him. Alano fled the scene on board the train, and
did not wait for the police investigator to arrive.
Devastated by the early and unexpected death of Aaron, the Zarates
commenced this action for damages against Alfaro, the Pereas, PNR and
Alano. The Pereas and PNR filed their respective answers, with crossclaims against each other, but Alfaro could not be served with summons.
At the pre-trial, the parties stipulated on the facts and issues, viz:
A. FACTS:
That spouses Zarate were the legitimate parents of Aaron John L.
Zarate;(1)
Spouses Zarate engaged the services of spouses Perea for the adequate
and safe transportation carriage of the former spouses' son from their
residence in Paraaque to his school at the Don Bosco Technical Institute in
Makati City;(2)
During the effectivity of the contract of carriage and in the implementation
thereof, Aaron, the minor son of spouses Zarate died in connection with a
vehicular/train collision which occurred while Aaron was riding the
contracted carrier Kia C(3)eres van of spouses Perea, then driven and
operated by the latter's employee/authorized driver Clemente Alfaro, which
van collided with the train of PNR, at around 6:45 A.M. of August 22, 1996,
within the vicinity of the Magallanes Interchange in Makati City, Metro
Manila, Philippines;
At the time of the vehicular/train collision, the subject site of the
vehicular/train collision was a railroad crossing used by motorists for
crossing the railroad tracks;(4)
During the said time of the vehicular/train collision, there were no
appropriate and safety warning signs and railings at the site commonly
used for railroad crossing;(5)

At the material time, countless number of Makati bound public utility and
private vehicles used on a daily basis the site of the collision as an
alternative route and short-cut to Makati;(6)
The train driver or operator left the scene of the incident on board the
commuter train involved without waiting for the police investigator;(7)
The site commonly used for railroad crossing by motorists was not in fact
intended by the railroad operator for railroad crossing at the time of the
vehicular collision;(8)
PNR received the demand letter of the spouses Zarate;(9)
PNR refused to acknowledge any liability for the vehicular/train
collision;(10)
The eventual closure of the railroad crossing alleged by PNR was an
internal arrangement between the former and its project contractor;
and(11)
The site of the vehicular/train collision was within the vicinity or less than
100 meters from the Magallanes station of PNR.(12)
B. ISSUES
(1) Whether or not defendant-driver of the van is, in the performance of his
functions, liable for negligence constituting the proximate cause of the
vehicular collision, which resulted in the death of plaintiff spouses' son;
(2) Whether or not the defendant spouses Perea being the employer of
defendant Alfaro are liable for any negligence which may be attributed to
defendant Alfaro;
(3) Whether or not defendant Philippine National Railways being the
operator of the railroad system is liable for negligence in failing to provide
adequate safety warning signs and railings in the area commonly used by
motorists for railroad crossings, constituting the proximate cause of the
vehicular collision which resulted in the death of the plaintiff spouses' son;
(4) Whether or not defendant spouses Perea are liable for breach of the
contract of carriage with plaintiff-spouses in failing to provide adequate
and safe transportation for the latter's son;
(5) Whether or not defendants spouses are liable for actual, moral
damages, exemplary damages, and attorney's fees;

Page | 90

(6) Whether or not defendants spouses Teodorico and Nanette Perea

observed the diligence of employers and school bus operators;

(1) (for) the death of Aaron- Php50,000.00;

(2) Actual damages in the amount of Php100,000.00;

(7) Whether or not defendant-spouses are civilly liable for the accidental
death of Aaron John Zarate;

(3) For the loss of earning capacity- Php2,109,071.00;

(8) Whether or not defendant PNR was grossly negligent in operating the
commuter train involved in the accident, in allowing or tolerating the
motoring public to cross, and its failure to install safety devices or
equipment at the site of the accident for the protection of the public;

(4) Moral damages in the amount of Php4,000,000.00;

(9) Whether or not defendant PNR should be made to reimburse defendant

spouses for any and whatever amount the latter may be held answerable
or which they may be ordered to pay in favor of plaintiffs by reason of the
action;

(6) Attorneys fees in the amount of Php200,000.00; and

(5) Exemplary damages in the amount of Php1,000,000.00;

(7) Cost of suit.

SO ORDERED.

(10) Whether or not defendant PNR should pay plaintiffs directly and fully
on the amounts claimed by the latter in their Complaint by reason of its
gross negligence;
(11) Whether or not defendant PNR is liable to defendants spouses for
actual, moral and exemplary damages and attorney's fees.2

On June 29, 2000, the RTC denied the Pereas motion for reconsideration, 4
reiterating that the cooperative gross negligence of the Pereas and PNR
had caused the collision that led to the death of Aaron; and that the
damages awarded to the Zarates were not excessive, but based on the
established circumstances.

The Zarates claim against the Pereas was upon breach of the contract of
carriage for the safe transport of Aaron; but that against PNR was based on
quasi-delict under Article 2176, Civil Code.

The CAs Ruling

In their defense, the Pereas adduced evidence to show that they had
exercised the diligence of a good father of the family in the selection and
supervision of Alfaro, by making sure that Alfaro had been issued a drivers
license and had not been involved in any vehicular accident prior to the
collision; that their own son had taken the van daily; and that Teodoro
Perea had sometimes accompanied Alfaro in the vans trips transporting
the students to school.

PNR assigned the following errors, to wit: 5

For its part, PNR tended to show that the proximate cause of the collision
had been the reckless crossing of the van whose driver had not first
stopped, looked and listened; and that the narrow path traversed by the
van had not been intended to be a railroad crossing for motorists.

Both the Pereas and PNR appealed (C.A.-G.R. CV No. 68916).

The Court a quo erred in:

1. In finding the defendant-appellant Philippine National Railways jointly
and severally liable together with defendant-appellants spouses Teodorico
and Nanette Perea and defendant-appellant Clemente Alfaro to pay
plaintiffs-appellees for the death of Aaron Zarate and damages.
2. In giving full faith and merit to the oral testimonies of plaintiffs-appellees
witnesses despite overwhelming documentary evidence on record,
supporting the case of defendants-appellants Philippine National Railways.

Ruling of the RTC

The Pereas ascribed the following errors to the RTC, namely:
On December 3, 1999, the RTC rendered its decision, disposing:
3

WHEREFORE, premises considered, judgment is hereby rendered in favor of

the plaintiff and against the defendants ordering them to jointly and
severally pay the plaintiffs as follows:

The trial court erred in finding defendants-appellants jointly and severally

liable for actual, moral and exemplary damages and attorneys fees with
the other defendants.

Page | 91

The trial court erred in dismissing the cross-claim of the appellants Pereas
against the Philippine National Railways and in not holding the latter and
its train driver primarily responsible for the incident.

Issues
In this appeal, the Pereas list the following as the errors committed by the
CA, to wit:

The trial court erred in awarding excessive damages and attorneys fees.
The trial court erred in awarding damages in the form of deceaseds loss of
earning capacity in the absence of sufficient basis for such an award.

I. The lower court erred when it upheld the trial courts decision holding the
petitioners jointly and severally liable to pay damages with Philippine
National Railways and dismissing their cross-claim against the latter.

On November 13, 2002, the CA promulgated its decision, affirming the

findings of the RTC, but limited the moral damages to P 2,500,000.00; and
deleted the attorneys fees because the RTC did not state the factual and
legal bases, to wit:6

II. The lower court erred in affirming the trial courts decision awarding
damages for loss of earning capacity of a minor who was only a high school
student at the time of his death in the absence of sufficient basis for such
an award.

WHEREFORE, premises considered, the assailed Decision of the Regional

Trial Court, Branch 260 of Paraaque City is AFFIRMED with the
modification that the award of Actual Damages is reduced to P 59,502.76;
Moral Damages is reduced to P 2,500,000.00; and the award for Attorneys
Fees is Deleted.

III. The lower court erred in not reducing further the amount of damages
awarded, assuming petitioners are liable at all.

SO ORDERED.
The CA upheld the award for the loss of Aarons earning capacity, taking
cognizance of the ruling in Cariaga v. Laguna Tayabas Bus Company and
Manila Railroad Company,7 wherein the Court gave the heirs of Cariaga a
sum representing the loss of the deceaseds earning capacity despite
Cariaga being only a medical student at the time of the fatal incident.
Applying the formula adopted in the American Expectancy Table of
Mortality:
2/3 x (80 - age at the time of death) = life expectancy
the CA determined the life expectancy of Aaron to be 39.3 years upon
reckoning his life expectancy from age of 21 (the age when he would have
graduated from college and started working for his own livelihood) instead
of 15 years (his age when he died). Considering that the nature of his work
and his salary at the time of Aarons death were unknown, it used the
prevailing minimum wage of P 280.00/day to compute Aarons gross
annual salary to be P 110,716.65, inclusive of the thirteenth month pay.
Multiplying this annual salary by Aarons life expectancy of 39.3 years, his
gross income would aggregate to P 4,351,164.30, from which his estimated
expenses in the sum of P 2,189,664.30 was deducted to finally arrive at P
2,161,500.00 as net income. Due to Aarons computed net income turning
out to be higher than the amount claimed by the Zarates, only P
2,109,071.00, the amount expressly prayed for by them, was granted.
On April 4, 2003, the CA denied the Pereas motion for reconsideration. 8

Ruling
The petition has no merit.
1.
Were
the
Pereas
and severally liable for damages?

and

PNR

jointly

The Zarates brought this action for recovery of damages against both the
Pereas and the PNR, basing their claim against the Pereas on breach of
contract of carriage and against the PNR on quasi-delict.
The RTC found the Pereas and the PNR negligent. The CA affirmed the
findings.
We concur with the CA.
To start with, the Pereas defense was that they exercised the diligence of
a good father of the family in the selection and supervision of Alfaro, the
van driver, by seeing to it that Alfaro had a drivers license and that he had
not been involved in any vehicular accident prior to the fatal collision with
the train; that they even had their own son travel to and from school on a
daily basis; and that Teodoro Perea himself sometimes accompanied
Alfaro in transporting the passengers to and from school. The RTC gave
scant consideration to such defense by regarding such defense as
inappropriate in an action for breach of contract of carriage.
We find no adequate cause to differ from the conclusions of the lower
courts that the Pereas operated as a common carrier; and that their

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standard of care was extraordinary diligence, not the ordinary diligence of

a good father of a family.
Although in this jurisdiction the operator of a school bus service has been
usually regarded as a private carrier, 9 primarily because he only caters to
some specific or privileged individuals, and his operation is neither open to
the indefinite public nor for public use, the exact nature of the operation of
a school bus service has not been finally settled. This is the occasion to lay
the matter to rest.
A carrier is a person or corporation who undertakes to transport or convey
goods or persons from one place to another, gratuitously or for hire. The
carrier is classified either as a private/special carrier or as a
common/public carrier.10 A private carrier is one who, without making the
activity a vocation, or without holding himself or itself out to the public as
ready to act for all who may desire his or its services, undertakes, by
special agreement in a particular instance only, to transport goods or
persons from one place to another either gratuitously or for hire. 11 The
provisions on ordinary contracts of the Civil Code govern the contract of
private carriage.The diligence required of a private carrier is only ordinary,
that is, the diligence of a good father of the family. In contrast, a common
carrier is a person, corporation, firm or association engaged in the business
of carrying or transporting passengers or goods or both, by land, water, or
air, for compensation, offering such services to the public. 12 Contracts of
common carriage are governed by the provisions on common carriers of
the Civil Code, the Public Service Act, 13 and other special laws relating to
transportation. A common carrier is required to observe extraordinary
diligence, and is presumed to be at fault or to have acted negligently in
case of the loss of the effects of passengers, or the death or injuries to
passengers.14
In relation to common carriers, the Court defined public use in the
following terms in United States v. Tan Piaco,15 viz:
"Public use" is the same as "use by the public". The essential feature of the
public use is not confined to privileged individuals, but is open to the
indefinite public. It is this indefinite or unrestricted quality that gives it its
public character. In determining whether a use is public, we must look not
only to the character of the business to be done, but also to the proposed
mode of doing it. If the use is merely optional with the owners, or the
public benefit is merely incidental, it is not a public use, authorizing the
exercise of the jurisdiction of the public utility commission. There must be,
in general, a right which the law compels the owner to give to the general
public. It is not enough that the general prosperity of the public is
promoted. Public use is not synonymous with public interest. The true
criterion by which to judge the character of the use is whether the public
may enjoy it by right or only by permission.

In De Guzman v. Court of Appeals,16 the Court noted that Article 1732 of

the Civil Code avoided any distinction between a person or an enterprise
offering transportation on a regular or an isolated basis; and has not
distinguished a carrier offering his services to the general public, that is,
the general community or population, from one offering his services only to
a narrow segment of the general population.
Nonetheless, the concept of a common carrier embodied in Article 1732 of
the Civil Code coincides neatly with the notion of public service under the
Public Service Act, which supplements the law on common carriers found in
the Civil Code. Public service, according to Section 13, paragraph (b) of the
Public Service Act, includes:
x x x every person that now or hereafter may own, operate, manage, or
control in the Philippines, for hire or compensation, with general or limited
clientle, whether permanent or occasional, and done for the general
business purposes, any common carrier, railroad, street railway, traction
railway, subway motor vehicle, either for freight or passenger, or both, with
or without fixed route and whatever may be its classification, freight or
carrier service of any class, express service, steamboat, or steamship line,
pontines, ferries and water craft, engaged in the transportation of
passengers or freight or both, shipyard, marine repair shop, icerefrigeration plant, canal, irrigation system, gas, electric light, heat and
power, water supply and power petroleum, sewerage system, wire or
wireless communications systems, wire or wireless broadcasting stations
and other similar public services. x x x.17
Given the breadth of the aforequoted characterization of a common carrier,
the Court has considered as common carriers pipeline operators, 18 custom
brokers and warehousemen,19 and barge operators20 even if they had
limited clientle.
As all the foregoing indicate, the true test for a common carrier is not the
quantity or extent of the business actually transacted, or the number and
character of the conveyances used in the activity, but whether the
undertaking is a part of the activity engaged in by the carrier that he has
held out to the general public as his business or occupation. If the
undertaking is a single transaction, not a part of the general business or
occupation engaged in, as advertised and held out to the general public,
the individual or the entity rendering such service is a private, not a
common, carrier. The question must be determined by the character of the
business actually carried on by the carrier, not by any secret intention or
mental reservation it may entertain or assert when charged with the duties
and obligations that the law imposes.21
Applying these considerations to the case before us, there is no question
that the Pereas as the operators of a school bus service were: (a)
engaged in transporting passengers generally as a business, not just as a
casual occupation; (b) undertaking to carry passengers over established

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roads by the method by which the business was conducted; and (c)
transporting students for a fee. Despite catering to a limited clientle, the
Pereas operated as a common carrier because they held themselves out
as a ready transportation indiscriminately to the students of a particular
school living within or near where they operated the service and for a fee.
The common carriers standard of care and vigilance as to the safety of the
passengers is defined by law. Given the nature of the business and for
reasons of public policy, the common carrier is bound "to observe
extraordinary diligence in the vigilance over the goods and for the safety of
the passengers transported by them, according to all the circumstances of
each case."22 Article 1755 of the Civil Code specifies that the common
carrier should "carry the passengers safely as far as human care and
foresight can provide, using the utmost diligence of very cautious persons,
with a due regard for all the circumstances." To successfully fend off
liability in an action upon the death or injury to a passenger, the common
carrier must prove his or its observance of that extraordinary diligence;
otherwise, the legal presumption that he or it was at fault or acted
negligently would stand.23 No device, whether by stipulation, posting of
notices, statements on tickets, or otherwise, may dispense with or lessen
the responsibility of the common carrier as defined under Article 1755 of
the Civil Code. 24
And, secondly, the Pereas have not presented any compelling defense or
reason by which the Court might now reverse the CAs findings on their
liability. On the contrary, an examination of the records shows that the
evidence fully supported the findings of the CA.
As earlier stated, the Pereas, acting as a common carrier, were already
presumed to be negligent at the time of the accident because death had
occurred to their passenger.25 The presumption of negligence, being a
presumption of law, laid the burden of evidence on their shoulders to
establish that they had not been negligent. 26 It was the law no less that
required them to prove their observance of extraordinary diligence in
seeing to the safe and secure carriage of the passengers to their
destination. Until they did so in a credible manner, they stood to be held
legally responsible for the death of Aaron and thus to be held liable for all
the natural consequences of such death.
There is no question that the Pereas did not overturn the presumption of
their negligence by credible evidence. Their defense of having observed
the diligence of a good father of a family in the selection and supervision of
their driver was not legally sufficient. According to Article 1759 of the Civil
Code, their liability as a common carrier did not cease upon proof that they
exercised all the diligence of a good father of a family in the selection and
supervision of their employee. This was the reason why the RTC treated
this defense of the Pereas as inappropriate in this action for breach of
contract of carriage.

The Pereas were liable for the death of Aaron despite the fact that their
driver might have acted beyond the scope of his authority or even in
violation of the orders of the common carrier. 27 In this connection, the
records showed their drivers actual negligence. There was a showing, to
begin with, that their driver traversed the railroad tracks at a point at
which the PNR did not permit motorists going into the Makati area to cross
the railroad tracks. Although that point had been used by motorists as a
shortcut into the Makati area, that fact alone did not excuse their driver
into taking that route. On the other hand, with his familiarity with that
shortcut, their driver was fully aware of the risks to his passengers but he
still disregarded the risks. Compounding his lack of care was that loud
music was playing inside the air-conditioned van at the time of the
accident. The loudness most probably reduced his ability to hear the
warning horns of the oncoming train to allow him to correctly appreciate
the lurking dangers on the railroad tracks. Also, he sought to overtake a
passenger bus on the left side as both vehicles traversed the railroad
tracks. In so doing, he lost his view of the train that was then coming from
the opposite side of the passenger bus, leading him to miscalculate his
chances of beating the bus in their race, and of getting clear of the train.
As a result, the bus avoided a collision with the train but the van got
slammed at its rear, causing the fatality. Lastly, he did not slow down or go
to a full stop before traversing the railroad tracks despite knowing that his
slackening of speed and going to a full stop were in observance of the right
of way at railroad tracks as defined by the traffic laws and regulations. 28 He
thereby violated a specific traffic regulation on right of way, by virtue of
which he was immediately presumed to be negligent. 29
The omissions of care on the part of the van driver constituted
negligence,30 which, according to Layugan v. Intermediate Appellate
Court,31 is "the omission to do something which a reasonable man, guided
by those considerations which ordinarily regulate the conduct of human
affairs, would do, or the doing of something which a prudent and
reasonable man would not do,32 or as Judge Cooley defines it, (t)he failure
to observe for the protection of the interests of another person, that
degree of care, precaution, and vigilance which the circumstances justly
demand, whereby such other person suffers injury."33
The test by which to determine the existence of negligence in a particular
case has been aptly stated in the leading case of Picart v. Smith, 34
thuswise:
The test by which to determine the existence of negligence in a particular
case may be stated as follows: Did the defendant in doing the alleged
negligent act use that reasonable care and caution which an ordinarily
prudent person would have used in the same situation? If not, then he is
guilty of negligence. The law here in effect adopts the standard supposed
to be supplied by the imaginary conduct of the discreet paterfamilias of the
Roman law. The existence of negligence in a given case is not determined
by reference to the personal judgment of the actor in the situation before
him. The law considers what would be reckless, blameworthy, or negligent

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in the man of ordinary intelligence and prudence and determines liability

by that.
The question as to what would constitute the conduct of a prudent man in
a given situation must of course be always determined in the light of
human experience and in view of the facts involved in the particular case.
Abstract speculation cannot here be of much value but this much can be
profitably said: Reasonable men govern their conduct by the circumstances
which are before them or known to them. They are not, and are not
supposed to be, omniscient of the future. Hence they can be expected to
take care only when there is something before them to suggest or warn of
danger. Could a prudent man, in the case under consideration, foresee
harm as a result of the course actually pursued? If so, it was the duty of
the actor to take precautions to guard against that harm. Reasonable
foresight of harm, followed by the ignoring of the suggestion born of this
prevision, is always necessary before negligence can be held to exist.
Stated in these terms, the proper criterion for determining the existence of
negligence in a given case is this: Conduct is said to be negligent when a
prudent man in the position of the tortfeasor would have foreseen that an
effect harmful to another was sufficiently probable to warrant his foregoing
the conduct or guarding against its consequences. (Emphasis supplied)
Pursuant to the Picart v. Smith test of negligence, the Pereas driver was
entirely negligent when he traversed the railroad tracks at a point not
allowed for a motorists crossing despite being fully aware of the grave
harm to be thereby caused to his passengers; and when he disregarded
the foresight of harm to his passengers by overtaking the bus on the left
side as to leave himself blind to the approach of the oncoming train that he
knew was on the opposite side of the bus.
Unrelenting, the Pereas cite Phil. National Railways v. Intermediate
Appellate Court,35 where the Court held the PNR solely liable for the
damages caused to a passenger bus and its passengers when its train hit
the rear end of the bus that was then traversing the railroad crossing. But
the circumstances of that case and this one share no similarities. In
Philippine National Railways v. Intermediate Appellate Court, no evidence
of contributory negligence was adduced against the owner of the bus.
Instead, it was the owner of the bus who proved the exercise of
extraordinary diligence by preponderant evidence. Also, the records are
replete with the showing of negligence on the part of both the Pereas and
the PNR. Another distinction is that the passenger bus in Philippine
National Railways v. Intermediate Appellate Court was traversing the
dedicated railroad crossing when it was hit by the train, but the Pereas
school van traversed the railroad tracks at a point not intended for that
purpose.
At any rate, the lower courts correctly held both the Pereas and the PNR
"jointly and severally" liable for damages arising from the death of Aaron.
They had been impleaded in the same complaint as defendants against
whom the Zarates had the right to relief, whether jointly, severally, or in

the alternative, in respect to or arising out of the accident, and questions

of fact and of law were common as to the Zarates. 36 Although the basis of
the right to relief of the Zarates (i.e., breach of contract of carriage)
against the Pereas was distinct from the basis of the Zarates right to
relief against the PNR (i.e., quasi-delict under Article 2176, Civil Code),
they nonetheless could be held jointly and severally liable by virtue of their
respective negligence combining to cause the death of Aaron. As to the
PNR, the RTC rightly found the PNR also guilty of negligence despite the
school van of the Pereas traversing the railroad tracks at a point not
dedicated by the PNR as a railroad crossing for pedestrians and motorists,
because the PNR did not ensure the safety of others through the placing of
crossbars, signal lights, warning signs, and other permanent safety barriers
to prevent vehicles or pedestrians from crossing there. The RTC observed
that the fact that a crossing guard had been assigned to man that point
from 7 a.m. to 5 p.m. was a good indicium that the PNR was aware of the
risks to others as well as the need to control the vehicular and other traffic
there. Verily, the Pereas and the PNR were joint tortfeasors.
2.
Was
the
indemnity
Aarons earning capacity proper?

for

loss

of

The RTC awarded indemnity for loss of Aarons earning capacity. Although
agreeing with the RTC on the liability, the CA modified the amount. Both
lower courts took into consideration that Aaron, while only a high school
student, had been enrolled in one of the reputable schools in the
Philippines and that he had been a normal and able-bodied child prior to
his death. The basis for the computation of Aarons earning capacity was
not what he would have become or what he would have wanted to be if not
for his untimely death, but the minimum wage in effect at the time of his
death. Moreover, the RTCs computation of Aarons life expectancy rate
was not reckoned from his age of 15 years at the time of his death, but on
21 years, his age when he would have graduated from college.
We find the considerations taken into account by the lower courts to be
reasonable and fully warranted.
Yet, the Pereas submit that the indemnity for loss of earning capacity was
speculative and unfounded.1wphi1 They cited People v. Teehankee, Jr.,37
where the Court deleted the indemnity for victim Jussi Leinos loss of
earning capacity as a pilot for being speculative due to his having
graduated from high school at the International School in Manila only two
years before the shooting, and was at the time of the shooting only
enrolled in the first semester at the Manila Aero Club to pursue his
ambition to become a professional pilot. That meant, according to the
Court, that he was for all intents and purposes only a high school graduate.
We reject the Pereas submission.

Page | 95

First of all, a careful perusal of the Teehankee, Jr. case shows that the
situation there of Jussi Leino was not akin to that of Aaron here. The CA and
the RTC were not speculating that Aaron would be some highly-paid
professional, like a pilot (or, for that matter, an engineer, a physician, or a
lawyer). Instead, the computation of Aarons earning capacity was
premised on him being a lowly minimum wage earner despite his being
then enrolled at a prestigious high school like Don Bosco in Makati, a fact
that would have likely ensured his success in his later years in life and at
work.
And, secondly, the fact that Aaron was then without a history of earnings
should not be taken against his parents and in favor of the defendants
whose negligence not only cost Aaron his life and his right to work and
earn money, but also deprived his parents of their right to his presence and
his services as well. Our law itself states that the loss of the earning
capacity of the deceased shall be the liability of the guilty party in favor of
the heirs of the deceased, and shall in every case be assessed and
awarded by the court "unless the deceased on account of permanent
physical disability not caused by the defendant, had no earning capacity at
the time of his death."38 Accordingly, we emphatically hold in favor of the
indemnification for Aarons loss of earning capacity despite him having
been unemployed, because compensation of this nature is awarded not for
loss of time or earnings but for loss of the deceaseds power or ability to
earn money.39
This favorable treatment of the Zarates claim is not unprecedented. In
Cariaga v. Laguna Tayabas Bus Company and Manila Railroad Company, 40
fourth-year medical student Edgardo Carriagas earning capacity, although
he survived the accident but his injuries rendered him permanently
incapacitated, was computed to be that of the physician that he dreamed
to become. The Court considered his scholastic record sufficient to justify
the assumption that he could have finished the medical course and would
have passed the medical board examinations in due time, and that he
could have possibly earned a modest income as a medical practitioner.
Also, in People v. Sanchez,41 the Court opined that murder and rape victim
Eileen Sarmienta and murder victim Allan Gomez could have easily landed
good-paying jobs had they graduated in due time, and that their jobs
would probably pay them high monthly salaries from P 10,000.00 to P
15,000.00 upon their graduation. Their earning capacities were computed
at rates higher than the minimum wage at the time of their deaths due to
their being already senior agriculture students of the University of the
Philippines in Los Baos, the countrys leading educational institution in
agriculture.
3.
Were the amounts of damages excessive?
The Pereas plead for the reduction of the moral and exemplary damages
awarded to the Zarates in the respective amounts of P 2,500,000.00 and P
1,000,000.00 on the ground that such amounts were excessive.

The plea is unwarranted.

The moral damages of P 2,500,000.00 were really just and reasonable
under the established circumstances of this case because they were
intended by the law to assuage the Zarates deep mental anguish over
their sons unexpected and violent death, and their moral shock over the
senseless accident. That amount would not be too much, considering that
it would help the Zarates obtain the means, diversions or amusements that
would alleviate their suffering for the loss of their child. At any rate,
reducing the amount as excessive might prove to be an injustice, given the
passage of a long time from when their mental anguish was inflicted on
them on August 22, 1996.
Anent the P 1,000,000.00 allowed as exemplary damages, we should not
reduce the amount if only to render effective the desired example for the
public good. As a common carrier, the Pereas needed to be vigorously
reminded to observe their duty to exercise extraordinary diligence to
prevent a similarly senseless accident from happening again. Only by an
award of exemplary damages in that amount would suffice to instill in them
and others similarly situated like them the ever-present need for greater
and constant vigilance in the conduct of a business imbued with public
interest.
WHEREFORE, we DENY the petition for review on certiorari; AFFIRM the
decision promulgated on November 13, 2002; and ORDER the petitioners
to pay the costs of suit.
SO ORDERED.
[G.R. No. 138677. February 12, 2002]
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON.
COURT OF APPEALS & SECURITY BANK & TRUST COMPANY, respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the
Rules of Court, assailing the decision and resolutions of the Court of
Appeals in CA-G.R. CV No. 34594, entitled "Security Bank and Trust Co. vs.
Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May
1981 a loan in the amount of P120,000.00 from respondent Security Bank
and Trust Company. Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum borrowed with an interest
of 15.189% per annum upon maturity and to pay a penalty of 5% every

Page | 96

month on the outstanding principal and interest in case of default. In

addition, petitioners agreed to pay 10% of the total amount due by way of
attorneys fees if the matter were indorsed to a lawyer for collection or if a
suit were instituted to enforce payment. The obligation matured on 8
September 1981; the bank, however, granted an extension but only up
until 29 December 1981.
Despite several demands from the bank, petitioners failed to settle the
debt which, as of 20 May 1982, amounted to P114,416.10. On 30
September 1982, the bank sent a final demand letter to petitioners
informing them that they had five days within which to make full payment.
Since petitioners still defaulted on their obligation, the bank filed on 3
November 1982, with the Regional Trial Court of Makati, Branch 143, a
complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank
presented its evidence and, on 27 March 1985, rested its case. Petitioners,
instead of introducing their own evidence, had the hearing of the case
reset on two consecutive occasions. In view of the absence of petitioners
and their counsel on 28 August 1985, the third hearing date, the bank
moved, and the trial court resolved, to consider the case submitted for
decision.
Two years later, or on 23 October 1987, petitioners filed a motion for
reconsideration of the order of the trial court declaring them as having
waived their right to present evidence and prayed that they be allowed to
prove their case. The court a quo denied the motion in an order, dated 5
September 1988, and on 20 October 1989, it rendered its decision, xxxviii the
dispositive portion of which read:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants, ordering the latter to pay, jointly and severally, to
the plaintiff, as follows:
"1.The sum of P114,416.00 with interest thereon at the rate of 15.189%
per annum, 2% service charge and 5% per month penalty charge,
commencing on 20 May 1982 until fully paid;
"2.
To pay the further sum equivalent to 10% of the total amount of
indebtedness for and as attorneys fees; and
"3.

To pay the costs of the suit.xxxix

Petitioners interposed an appeal with the Court of Appeals, questioning the

rejection by the trial court of their motion to present evidence and assailing
the imposition of the 2% service charge, the 5% per month penalty charge
and 10% attorney's fees. In its decisionxl of 7 March 1996, the appellate
court affirmed the judgment of the trial court except on the matter of the

2% service charge which was deleted pursuant to Central Bank Circular No.
783. Not fully satisfied with the decision of the appellate court, both
parties filed their respective motions for reconsideration. xli Petitioners
prayed for the reduction of the 5% stipulated penalty for being
unconscionable. The bank, on the other hand, asked that the payment of
interest and penalty be commenced not from the date of filing of complaint
but from the time of default as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
We find merit in plaintiff-appellees claim that the principal sum of
P114,416.00 with interest thereon must commence not on the date of filing
of the complaint as we have previously held in our decision but on the date
when the obligation became due.
Default generally begins from the moment the creditor demands the
performance of the obligation. However, demand is not necessary to
render the obligor in default when the obligation or the law so provides.
In the case at bar, defendants-appellants executed a promissory note
where they undertook to pay the obligation on its maturity date 'without
necessity of demand.' They also agreed to pay the interest in case of nonpayment from the date of default.
x x xx x x

xxx

While we maintain that defendants-appellants must be bound by the

contract which they acknowledged and signed, we take cognizance of their
plea for the application of the provisions of Article 1229 x x x.
Considering that defendants-appellants partially complied with their
obligation under the promissory note by the reduction of the original
amount of P120,000.00 to P114,416.00 and in order that they will finally
settle their obligation, it is our view and we so hold that in the interest of
justice and public policy, a penalty of 3% per month or 36% per annum
would suffice.
x x x

xxx

xxx

WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED.

The defendants-appellants Tolomeo Ligutan and Leonidas dela Llana are
hereby ordered to pay the plaintiff-appellee Security Bank and Trust
Company the following:
1.
The sum of P114,416.00 with interest thereon at the rate of
15.189% per annum and 3% per month penalty charge commencing May
20, 1982 until fully paid;

Page | 97

2.
The sum equivalent to 10% of
indebtedness as and for attorneys fees.xlii

the

total

amount

of

the

On 16 November 1998, petitioners filed an omnibus motion for

reconsideration and to admit newly discovered evidence, xliii alleging that
while the case was pending before the trial court, petitioner Tolomeo
Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage
on 18 January 1984 to secure the existing indebtedness of petitioners
Ligutan and dela Llana with the bank. Petitioners contended that the
execution of the real estate mortgage had the effect of novating the
contract between them and the bank. Petitioners further averred that the
mortgage was extrajudicially foreclosed on 26 August 1986, that they were
not informed about it, and the bank did not credit them with the proceeds
of the sale.
The appellate court denied the omnibus motion for
reconsideration and to admit newly discovered evidence, ratiocinating that
such a second motion for reconsideration cannot be entertained under
Section 2, Rule 52, of the 1997 Rules of Civil Procedure. Furthermore, the
appellate court said, the newly-discovered evidence being invoked by
petitioners had actually been known to them when the case was brought
on appeal and when the first motion for reconsideration was filed. xliv
Aggrieved by the decision and resolutions of the Court of Appeals,
petitioners elevated their case to this Court on 9 July 1999 via a petition for
review on certiorari under Rule 45 of the Rules of Court, submitting thusly I.The respondent Court of Appeals seriously erred in not holding that the
15.189% interest and the penalty of three (3%) percent per month or
thirty-six (36%) percent per annum imposed by private respondent bank
on petitioners loan obligation are still manifestly exorbitant, iniquitous and
unconscionable.
II.
The respondent Court of Appeals gravely erred in not reducing to a
reasonable level the ten (10%) percent award of attorneys fees which is
highly and grossly excessive, unreasonable and unconscionable.
III.
The respondent Court of Appeals gravely erred in not admitting
petitioners newly discovered evidence which could not have been timely
produced during the trial of this case.
IV.
The respondent Court of Appeals seriously erred in not holding that
there was a novation of the cause of action of private respondents
complaint in the instant case due to the subsequent execution of the real
estate mortgage during the pendency of this case and the subsequent
foreclosure of the mortgage.xlv
Respondent bank, which did not take an appeal, would, however, have it
that the penalty sought to be deleted by petitioners was even insufficient
to fully cover and compensate for the cost of money brought about by the
radical devaluation and decrease in the purchasing power of the peso,

particularly vis-a-vis the U.S. dollar, taking into account the time frame of
its occurrence. The Bank would stress that only the amount of P5,584.00
had been remitted out of the entire loan of P120,000.00. xlvi
A penalty clause, expressly recognized by law, xlvii is an accessory
undertaking to assume greater liability on the part of an obligor in case of
breach of an obligation. It functions to strengthen the coercive force of the
obligationxlviii and to provide, in effect, for what could be the liquidated
damages resulting from such a breach. The obligor would then be bound
to pay the stipulated indemnity without the necessity of proof on the
existence and on the measure of damages caused by the breach. xlix
Although a court may not at liberty ignore the freedom of the parties to
agree on such terms and conditions as they see fit that contravene neither
law nor morals, good customs, public order or public policy, a stipulated
penalty, nevertheless, may be equitably reduced by the courts if it is
iniquitous or unconscionable or if the principal obligation has been partly or
irregularly complied with.l
The question of whether a penalty is reasonable or iniquitous can be partly
subjective and partly objective. Its resolution would depend on such
factors as, but not necessarily confined to, the type, extent and purpose of
the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of
the parties, and the like, the application of which, by and large, is
addressed to the sound discretion of the court. In Rizal Commercial
Banking Corp. vs. Court of Appeals,li just an example, the Court has
tempered the penalty charges after taking into account the debtors pitiful
situation and its offer to settle the entire obligation with the creditor bank.
The stipulated penalty might likewise be reduced when a partial or
irregular performance is made by the debtor. lii The stipulated penalty might
even be deleted such as when there has been substantial performance in
good faith by the obligor, liii when the penalty clause itself suffers from fatal
infirmity, or when exceptional circumstances so exist as to warrant it. liv
The Court of Appeals, exercising its good judgment in the instant case, has
reduced the penalty interest from 5% a month to 3% a month which
petitioner still disputes. Given the circumstances, not to mention the
repeated acts of breach by petitioners of their contractual obligation, the
Court sees no cogent ground to modify the ruling of the appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the
first time, question its reasonableness and prays that the Court reduce the
amount. This contention is a fresh issue that has not been raised and
ventilated before the courts below. In any event, the interest stipulation,
on its face, does not appear as being that excessive. The essence or
rationale for the payment of interest, quite often referred to as cost of
money, is not exactly the same as that of a surcharge or a penalty. A
penalty stipulation is not necessarily preclusive of interest, if there is an
agreement to that effect, the two being distinct concepts which may
separately be demanded.lv What may justify a court in not allowing the

Page | 98

creditor to impose full surcharges and penalties, despite an express

stipulation therefor in a valid agreement, may not equally justify the nonpayment or reduction of interest. Indeed, the interest prescribed in loan
financing arrangements is a fundamental part of the banking business and
the core of a bank's existence.lvi
Petitioners next assail the award of 10% of the total amount of
indebtedness by way of attorney's fees for being grossly excessive,
exorbitant and unconscionable vis-a-vis the time spent and the extent of
services rendered by counsel for the bank and the nature of the case.
Bearing in mind that the rate of attorneys fees has been agreed to by the
parties and intended to answer not only for litigation expenses but also for
collection efforts as well, the Court, like the appellate court, deems the
award of 10% attorneys fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting
petitioners' call for a new trial or to admit newly discovered evidence. As
the appellate court so held in its resolution of 14 May 1999 Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second
motion for reconsideration of a judgment or final resolution by the same
party shall be entertained. Considering that the instant motion is already a
second motion for reconsideration, the same must therefore be denied.
Furthermore, it would appear from the records available to this court that
the newly-discovered evidence being invoked by defendants-appellants
have actually been existent when the case was brought on appeal to this
court as well as when the first motion for reconsideration was filed. Hence,
it is quite surprising why defendants-appellants raised the alleged newlydiscovered evidence only at this stage when they could have done so in
the earlier pleadings filed before this court.
The propriety or acceptability of such a second motion for reconsideration
is not contingent upon the averment of 'new' grounds to assail the
judgment, i.e., grounds other than those theretofore presented and
rejected. Otherwise, attainment of finality of a judgment might be stayed
off indefinitely, depending on the partys ingenuousness or cleverness in
conceiving and formulating 'additional flaws' or 'newly discovered errors'
therein, or thinking up some injury or prejudice to the rights of the movant
for reconsideration.lvii
At any rate, the subsequent execution of the real estate mortgage as
security for the existing loan would not have resulted in the
extinguishment of the original contract of loan because of novation.
Petitioners acknowledge that the real estate mortgage contract does not
contain any express stipulation by the parties intending it to supersede the
existing loan agreement between the petitioners and the bank. lviii
Respondent bank has correctly postulated that the mortgage is but an
accessory contract to secure the loan in the promissory note.

Extinctive novation requires, first, a previous valid obligation; second, the

agreement of all the parties to the new contract; third, the extinguishment
of the obligation; and fourth, the validity of the new one. lix In order that an
obligation may be extinguished by another which substitutes the same, it
is imperative that it be so declared in unequivocal terms, or that the old
and the new obligation be on every point incompatible with each other. lx An
obligation to pay a sum of money is not extinctively novated by a new
instrument which merely changes the terms of payment or adding
compatible covenants or where the old contract is merely supplemented
by the new one.lxi When not expressed, incompatibility is required so as to
ensure that the parties have indeed intended such novation despite their
failure to express it in categorical terms. The incompatibility, to be sure,
should take place in any of the essential elements of the obligation, i.e., (1)
the juridical relation or tie, such as from a mere commodatum to lease of
things, or from negotiorum gestio to agency, or from a mortgage to
antichresis,lxii or from a sale to one of loan; lxiii (2) the object or principal
conditions, such as a change of the nature of the prestation; or (3) the
subjects, such as the substitution of a debtor lxiv or the subrogation of the
creditor. Extinctive novation does not necessarily imply that the new
agreement should be complete by itself; certain terms and conditions may
be carried, expressly or by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.
[G.R. No. 157480. May 6, 2005]
PRYCE
CORPORATION
(formerly
PRYCE
PROPERTIES
CORPORATION), petitioner, vs. PHILIPPINE AMUSEMENT AND
GAMING CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
In legal contemplation, the termination of a contract is not equivalent to its
rescission. When an agreement is terminated, it is deemed valid at
inception. Prior to termination, the contract binds the parties, who are thus
obliged to observe its provisions. However, when it is rescinded, it is
deemed inexistent, and the parties are returned to their status quo ante.
Hence, there is mutual restitution of benefits received. The consequences
of termination may be anticipated and provided for by the contract. As
long as the terms of the contract are not contrary to law, morals, good
customs, public order or public policy, they shall be respected by courts.
The judiciary is not authorized to make or modify contracts; neither may it
rescue parties from disadvantageous stipulations. Courts, however, are
empowered to reduce iniquitous or unconscionable liquidated damages,
indemnities and penalties agreed upon by the parties.

Page | 99

The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,
assailing the May 22, 2002 Decision [2] of the Court of Appeals (CA) in CAGR CV No. 51629 and its March 4, 2003 Resolution [3] denying petitioners
Motion for Reconsideration. The assailed Decision disposed thus:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as
follows: (1) In Civil Case No. 93-68266, the appealed decision[,] is
AFFIRMED with MODIFICATION[,] ordering [Respondent] Philippine
Amusement and Gaming Corporation to pay [Petitioner] Pryce Properties
Corporation the total amount of P687,289.50 as actual damages
representing the accrued rentals for the quarter September to November
1993 with interest and penalty at the rate of two percent (2%) per month
from date of filing of the complaint until the amount shall have been fully
paid, and the sum of P50,000.00 as attorneys fees; (2) In Civil Case No.
93-68337, the appealed decision is REVERSED and SET ASIDE and a new
judgment is rendered ordering [Petitioner] Pryce Properties Corporation to
reimburse [Respondent] Philippine Amusement and Gaming Corporation
the amount of P687,289.50 representing the advanced rental deposits,
which amount may be compensated by [Petitioner] Pryce Properties
Corporation with its award in Civil Case No. 93-68266 in the equal amount
of P687,289.50.[4]
The Facts
According to the CA, the facts are as follows:
Sometime in the first half of 1992, representatives from Pryce Properties
Corporation (PPC for brevity) made representations with the Philippine
Amusement and Gaming Corporation (PAGCOR) on the possibility of setting
up a casino in Pryce Plaza Hotel in Cagayan de Oro City. [A] series of
negotiations followed. PAGCOR representatives went to Cagayan de Oro
City to determine the pulse of the people whether the presence of a casino
would be welcomed by the residents. Some local government officials
showed keen interest in the casino operation and expressed the view that
possible problems were surmountable. Their negotiations culminated with
PPCs counter-letter proposal dated October 14, 1992.
On November 11, 1992, the parties executed a Contract of Lease x x x
involving the ballroom of the Hotel for a period of three (3) years starting
December 1, 1992 and until November 30, 1995. On November 13, 1992,
they executed an addendum to the contract x x x which included a lease of
an additional 1000 square meters of the hotel grounds as living quarters
and playground of the casino personnel. PAGCOR advertised the start of
their casino operations on December 18, 1992.
Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro City
passed Resolution No. 2295 x x x dated November 19, 1990 declaring as a

matter of policy to prohibit and/or not to allow the establishment of a

gambling casino in Cagayan de Oro City. Resolution No. 2673 x x x dated
October 19, 1992 (or a month before the contract of lease was executed)
was subsequently passed reiterating with vigor and vehemence the policy
of the City under Resolution No. 2295, series of 1990, banning casinos in
Cagayan de Oro City. On December 7, 1992, the Sangguniang Panlungsod
of Cagayan de Oro City enacted Ordinance No. 3353 x x x prohibiting the
issuance of business permits and canceling existing business permits to
any establishment for using, or allowing to be used, its premises or any
portion thereof for the operation of a casino.
In the afternoon of December 18, 1992 and just hours before the actual
formal opening of casino operations, a public rally in front of the hotel was
staged by some local officials, residents and religious leaders. Barricades
were placed [which] prevented some casino personnel and hotel guests
from entering and exiting from the Hotel. PAGCOR was constrained to
suspend casino operations because of the rally. An agreement between
PPC and PAGCOR, on one hand, and representatives of the rallyists, on the
other, eventually ended the rally on the 20th of December, 1992.
On January 4, 1993, Ordinance No. 3375-93 x x x was passed by the
Sangguniang Panlungsod of Cagayan de Oro City, prohibiting the operation
of casinos and providing for penalty for violation thereof. On January 7,
1993, PPC filed a Petition for Prohibition with Preliminary Injunction x x x
against then public respondent Cagayan de Oro City and/or Mayor Pablo P.
Magtajas x x x before the Court of Appeals, docketed as CA G.R. SP No.
29851 praying inter alia, for the declaration of unconstitutionality of
Ordinance No. 3353. PAGCOR intervened in said petition and further
assailed Ordinance No. 4475-93 as being violative of the non-impairment
of contracts and equal protection clauses. On March 31, 1993, the Court of
Appeals promulgated its decision x x x, the dispositive portion of which
reads:
IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and Ordinance No.
3375-93 are hereby DECLARED UNCONSTITUTIONAL and VOID and the
respondents and all other persons acting under their authority and in their
behalf are PERMANENTLY ENJOINED from enforcing those ordinances.
SO ORDERED.
Aggrieved by the decision, then public respondents Cagayan de Oro City,
et al. elevated the case to the Supreme Court in G.R. No. 111097, where, in
an En Banc Decision dated July 20, 1994 x x x, the Supreme Court denied
the petition and affirmed the decision of the Court of Appeals.
In the meantime, PAGCOR resumed casino operations on July 15, 1993,
against which, however, another public rally was held. Casino operations
continued for some time, but were later on indefinitely suspended due to
the incessant demonstrations. Per verbal advice x x x from the Office of

Page | 100

the President of the Philippines, PAGCOR decided to stop its casino

operations in Cagayan de Oro City. PAGCOR stopped its casino operations
in the hotel prior to September, 1993. In two Statements of Account dated
September 1, 1993 x x x, PPC apprised PAGCOR of its outstanding account
for the quarter September 1 to November 30, 1993. PPC sent PAGCOR
another Letter dated September 3, 1993 x x x as a follow-up to the parties
earlier conference. PPC sent PAGCOR another Letter dated September 15,
1993 x x x stating its Board of Directors decision to collect the full rentals
in case of pre-termination of the lease.

added that the trial court erred in 1) failing to consider that PPC was
entitled to avail itself of the provisions of Article XX only when PPC was the
party terminating the Contract; 2) not finding that there were valid,
justifiable and good reasons for terminating the Contract; and 3)
dismissing the Complaint of PAGCOR in Civil Case No. 93-68337 for lack of
merit, and not finding PPC liable for the reimbursement of PAGCORS cash
deposits and of the value of improvements.

PAGCOR sent PPC a letter dated September 20, 1993 x x x [stating] that it
was not amenable to the payment of the full rentals citing as reasons
unforeseen legal and other circumstances which prevented it from
complying with its obligations. PAGCOR further stated that it had no other
alternative but to pre-terminate the lease agreement due to the relentless
and vehement opposition to their casino operations. In a letter dated
October 12, 1993 x x x, PAGCOR asked PPC to refund the total of
P1,437,582.25 representing the reimbursable rental deposits and expenses
for the permanent improvement of the Hotels parking lot. In a letter dated
November 5, 1993 x x x, PAGCOR formally demanded from PPC the
payment of its claim for reimbursement.

First, on the appeal of PAGCOR, the CA ruled that the PAGCORS

pretermination of the Contract of Lease was unjustified. The appellate
court explained that public demonstrations and rallies could not be
considered as fortuitous events that would exempt the gaming corporation
from complying with the latters contractual obligations. Therefore, the
Contract continued to be effective until PPC elected to terminate it on
November 25, 1993.

On November 15, 1993 x x x, PPC filed a case for sum of money in the
Regional Trial Court of Manila docketed as Civil Case No. 93-68266. On
November 19, 1993, PAGCOR also filed a case for sum of money in the
Regional Trial Court of Manila docketed as Civil Case No. 93-68337.
In a letter dated November 25, 1993, PPC informed PAGCOR that it was
terminating the contract of lease due to PAGCORs continuing breach of the
contract and further stated that it was exercising its rights under the
contract of lease pursuant to Article 20 (a) and (c) thereof.
On February 2, 1994, PPC filed a supplemental complaint x x x in Civil
Case No. 93-68266, which the trial court admitted in an Order dated
February 11, 1994. In an Order dated April 27, 1994, Civil Case No. 9368377 was ordered consolidated with Civil Case No. 93-68266. These
cases were jointly tried by the court a quo. On August 17, 1995, the court
a quo promulgated its decision. Both parties appealed.[5]
In its appeal, PPC faulted the trial court for the following reasons: 1) failure
of the court to award actual and moral damages; 2) the 50 percent
reduction of the amount PPC was claiming; and 3) the courts ruling that
the 2 percent penalty was to be imposed from the date of the promulgation
of the Decision, not from the date stipulated in the Contract.
On the other hand, PAGCOR criticized the trial court for the latters failure
to rule that the Contract of Lease had already been terminated as early as
September 21, 1993, or at the latest, on October 14, 1993, when PPC
received PAGCORs letter dated October 12, 1993. The gaming corporation

Ruling of the Court of Appeals

Regarding the contentions of PPC, the CA held that under Article 1659 of
the Civil Code, PPC had the right to ask for (1) rescission of the Contract
and indemnification for damages; or (2) only indemnification plus the
continuation of the Contract. These two remedies were alternative, not
cumulative, ruled the CA.
As PAGCOR had admitted its failure to pay the rentals for September to
November 1993, PPC correctly exercised the option to terminate the lease
agreement. Previously, the Contract remained effective, and PPC could
collect the accrued rentals. However, from the time it terminated the
Contract on November 25, 1993, PPC could no longer demand payment of
the remaining rentals as part of actual damages, the CA added.
Denying the claim for moral damages, the CA pointed out the failure of PPC
to show that PAGCOR had acted in gross or evident bad faith in failing to
pay the rentals from September to November 1993. Such failure was
shown especially by the fact that PPC still had in hand three (3) months
advance rental deposits of PAGCOR. The former could have simply applied
this deposit to the unpaid rentals, as provided in the Contract. Neither did
PPC adequately show that its reputation had been besmirched or the
hotels goodwill eroded by the establishment of the casino and the public
protests.
Finally, as to the claimed reimbursement for parking lot improvement, the
CA held that PAGCOR had not presented official receipts to prove the
latters alleged expenses. The appellate court, however, upheld the trial
courts award to PPC of P50,000 attorneys fees.
Hence this Petition.[6]

Page | 101

Issues
In their Memorandum, petitioner raised the following issues:

ruled, that Article 1659 of the Civil Code governs; hence, PPC is allegedly
no longer entitled to future rentals, because it chose to rescind the
Contract.

MAIN ISSUE:

Contract Provisions

Did the Honorable Court of Appeals commit x x x grave and reversible

error by holding that Pryce was not entitled to future rentals or lease
payments for the unexpired period of the Contract of Lease between Pryce
and PAGCOR?

Clear and Binding

Sub-Issues:
1.
Were the provisions of Sections 20(a) and 20(c) of the Contract of
Lease relative to the right of PRYCE to terminate the Contract for cause and
to moreover collect rentals from PAGCOR corresponding to the remaining
term of the lease valid and binding?
2.
Did not Article 1659 of the Civil Code supersede Sections 20(a) and
20(c) of the Contract, PRYCE having rescinded the Contract of Lease?
3.
Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al. and
the other cases cited by PAGCOR support its position that PRYCE was not
entitled to future rentals?
4.
Would the collection by PRYCE of future rentals not give rise to unjust
enrichment?
5.
Could we not have harmonized Article 1659 of the Civil Code and
Article 20 of the Contract of Lease?
6.
Is it not a basic rule that the law, i.e. Article 1659, is deemed written
in contracts, particularly in the PRYCE-PAGCOR Contract of Lease? [7]
The Courts Ruling
The Petition is partly meritorious.
Main Issue:

Article 1159 of the Civil Code provides that obligations arising from
contracts have the force of law between the contracting parties and should
be complied with in good faith.[8] In deference to the rights of the parties,
the law[9] allows them to enter into stipulations, clauses, terms and
conditions they may deem convenient; that is, as long as these are not
contrary to law, morals, good customs, public order or public policy.
Likewise, it is settled that if the terms of the contract clearly express the
intention of the contracting parties, the literal meaning of the stipulations
would be controlling.[10]
In this case, Article XX of the parties Contract of Lease provides in part as
follows:
XX. BREACH OR DEFAULT
a)
The LESSEE agrees that all the terms, conditions and/or covenants
herein contained shall be deemed essential conditions of this contract, and
in the event of default or breach of any of such terms, conditions and/or
covenants, or should the LESSEE become bankrupt, or insolvent, or
compounds with his creditors, the LESSOR shall have the right to terminate
and cancel this contract by giving them fifteen (15 days) prior notice
delivered at the leased premises or posted on the main door thereof. Upon
such termination or cancellation, the LESSOR may forthwith lock the
premises and exclude the LESSEE therefrom, forcefully or otherwise,
without incurring any civil or criminal liability. During the fifteen (15) days
notice, the LESSEE may prevent the termination of lease by curing the
events or causes of termination or cancellation of the lease.
b)

xxx

xxx

xxx

c)
Moreover, the LESSEE shall be fully liable to the LESSOR for the
rentals corresponding to the remaining term of the lease as well as for any
and all damages, actual or consequential resulting from such default and
termination of this contract.

Collection of Remaining Rentals

d)
PPC anchors its right to collect future rentals upon the provisions of the
Contract. Likewise, it argues that termination, as defined under the
Contract, is different from the remedy of rescission prescribed under Article
1659 of the Civil Code. On the other hand, PAGCOR contends, as the CA

xxx

xxx

x x x. (Italics supplied)

The above provisions leave no doubt that the parties have covenanted 1)
to give PPC the right to terminate and cancel the Contract in the event of a
default or breach by the lessee; and 2) to make PAGCOR fully liable for

Page | 102

rentals for the remaining term of the lease, despite the exercise of such
right to terminate. Plainly, the parties have voluntarily bound themselves
to require strict compliance with the provisions of the Contract by
stipulating that a default or breach, among others, shall give the lessee the
termination option, coupled with the lessors liability for rentals for the
remaining term of the lease.
For sure, these stipulations are valid and are not contrary to law, morals,
good customs, public order or public policy. Neither is there anything
objectionable about the inclusion in the Contract of mandatory provisions
concerning the rights and obligations of the parties. [11] Being the primary
law between the parties, it governs the adjudication of their rights and
obligations. A court has no alternative but to enforce the contractual
stipulations in the manner they have been agreed upon and written. [12] It is
well to recall that courts, be they trial or appellate, have no power to make
or modify contracts.[13] Neither can they save parties from disadvantageous
provisions.
Termination or Rescission?
Well-taken is petitioners insistence that it had the right to ask for
termination plus the full payment of future rentals under the provisions
of the Contract, rather than just rescission under Article 1659 of the Civil
Code. This Court is not unmindful of the fact that termination and
rescission are terms that have been used loosely and interchangeably in
the past. But distinctions ought to be made, especially in this controversy,
in which the terms mean differently and lead to equally different
consequences.
The term rescission is found in 1) Article 1191 [14] of the Civil Code, the
general provision on rescission of reciprocal obligations; 2) Article 1659, [15]
which authorizes rescission as an alternative remedy, insofar as the rights
and obligations of the lessor and the lessee in contracts of lease are
concerned; and 3) Article 1380[16] with regard to the rescission of contracts.
In his Concurring Opinion in Universal Food Corporation v. CA, [17] Justice J.
B. L. Reyes differentiated rescission under Article 1191 from that under
Article 1381 et seq. as follows:
x x x. The rescission on account of breach of stipulations is not predicated
on injury to economic interests of the party plaintiff but on the breach of
faith by the defendant, that violates the reciprocity between the parties. It
is not a subsidiary action, and Article 1191 may be scanned without
disclosing anywhere that the action for rescission thereunder is
subordinated to anything other than the culpable breach of his obligations
to the defendant. This rescission is a principal action retaliatory in
character, it being unjust that a party be held bound to fulfill his promises
when the other violates his. As expressed in the old Latin aphorism: Non

servanti fidem, non est fides servanda. Hence, the reparation of damages
for the breach is purely secondary.
On the contrary, in rescission by reason of lesion or economic prejudice,
the cause of action is subordinated to the existence of that prejudice,
because it is the raison detre as well as the measure of the right to
rescind. x x x.[18]
Relevantly, it has been pointed out that resolution was originally used in
Article 1124 of the old Civil Code, and that the term became the basis for
rescission under Article 1191 (and, conformably, also Article 1659). [19]
Now, as to the distinction between termination (or cancellation) and
rescission (more properly, resolution), Huibonhoa v. CA[20] held that, where
the action prayed for the payment of rental arrearages, the aggrieved
party actually sought the partial enforcement of a lease contract. Thus,
the remedy was not rescission, but termination or cancellation, of the
contract. The Court explained:
x x x. By the allegations of the complaint, the Gojoccos aim was to
cancel or terminate the contract because they sought its partial
enforcement in praying for rental arrearages. There is a distinction in law
between cancellation of a contract and its rescission. To rescind is to
declare a contract void in its inception and to put an end to it as though it
never were. It is not merely to terminate it and release parties from further
obligations to each other but to abrogate it from the beginning and restore
the parties to relative positions which they would have occupied had no
contract ever been made.
x x x. The termination or cancellation of a contract would necessarily
entail enforcement of its terms prior to the declaration of its cancellation in
the same way that before a lessee is ejected under a lease contract, he
has to fulfill his obligations thereunder that had accrued prior to his
ejectment. However, termination of a contract need not undergo judicial
intervention. x x x.[21] (Italics supplied)
Rescission has likewise been defined as the unmaking of a contract, or its
undoing from the beginning, and not merely its termination. Rescission
may be effected by both parties by mutual agreement; or unilaterally by
one of them declaring a rescission of contract without the consent of the
other, if a legally sufficient ground exists or if a decree of rescission is
applied for before the courts. [22] On the other hand, termination refers to an
end in time or existence; a close, cessation or conclusion. With respect
to a lease or contract, it means an ending, usually before the end of the
anticipated term of such lease or contract, that may be effected by mutual
agreement or by one party exercising one of its remedies as a
consequence of the default of the other. [23]

Page | 103

Thus, mutual restitution is required in a rescission (or resolution), in order

to bring back the parties to their original situation prior to the inception of
the contract.[24] Applying this principle to this case, it means that PPC would
re-acquire possession of the leased premises, and PAGCOR would get back
the rentals it paid the former for the use of the hotel space.
In contrast, the parties in a case of termination are not restored to their
original situation; neither is the contract treated as if it never existed. Prior
to its termination, the parties are obliged to comply with their contractual
obligations. Only after the contract has been cancelled will they be
released from their obligations.
In this case, the actions and pleadings of petitioner show that it never
intended to rescind the Lease Contract from the beginning. This fact was
evident when it first sought to collect the accrued rentals from September
to November 1993 because, as previously stated, it actually demanded the
enforcement of the Lease Contract prior to termination. Any intent to
rescind was not shown, even when it abrogated the Contract on November
25, 1993, because such abrogation was not the rescission provided for
under Article 1659.
Future Rentals
As to the remaining sub-issue of future rentals, Rios v. Jacinto[25] is
inapplicable, because the remedy resorted to by the lessors in that case
was rescission, not termination. The rights and obligations of the parties in
Rios were governed by Article 1659 of the Civil Code; hence, the Court held
that the damages to which the lessor was entitled could not have extended
to the lessees liability for future rentals.
Upon the other hand, future rentals cannot be claimed as compensation for
the use or enjoyment of anothers property after the termination of a
contract. We stress that by abrogating the Contract in the present case,
PPC released PAGCOR from the latters future obligations, which included
the payment of rentals. To grant that right to the former is to unjustly
enrich it at the latters expense.
However, it appears that Section XX (c) was intended to be a penalty
clause. That fact is manifest from a reading of the mandatory provision
under subparagraph (a) in conjunction with subparagraph (c) of the
Contract. A penal clause is an accessory obligation which the parties
attach to a principal obligation for the purpose of insuring the performance
thereof by imposing on the debtor a special prestation (generally
consisting in the payment of a sum of money) in case the obligation is not
fulfilled or is irregularly or inadequately fulfilled. [26]
Quite common in lease contracts, this clause functions to strengthen the
coercive force of the obligation and to provide, in effect, for what could be
the liquidated damages resulting from a breach. [27] There is nothing

immoral or illegal in such indemnity/penalty clause, absent any showing

that it was forced upon or fraudulently foisted on the obligor. [28]
In obligations with a penal clause, the general rule is that the penalty
serves as a substitute for the indemnity for damages and the payment of
interests in case of noncompliance; that is, if there is no stipulation to the
contrary,[29] in which case proof of actual damages is not necessary for the
penalty to be demanded.[30] There are exceptions to the aforementioned
rule, however, as enumerated in paragraph 1 of Article 1226 of the Civil
Code: 1) when there is a stipulation to the contrary, 2) when the obligor is
sued for refusal to pay the agreed penalty, and 3) when the obligor is
guilty of fraud. In these cases, the purpose of the penalty is obviously to
punish the obligor for the breach. Hence, the obligee can recover from the
former not only the penalty, but also other damages resulting from the
nonfulfillment of the principal obligation. [31]
In the present case, the first exception applies because Article XX (c)
provides that, aside from the payment of the rentals corresponding to the
remaining term of the lease, the lessee shall also be liable for any and all
damages, actual or consequential, resulting from such default and
termination of this contract. Having entered into the Contract voluntarily
and with full knowledge of its provisions, PAGCOR must be held bound to
its obligations. It cannot evade further liability for liquidated damages.
Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be equitably
reduced by the courts.[32] This power is explicitly sanctioned by Articles
1229 and 2227 of the Civil Code, which we quote:
Art. 1229.
The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable.
Art. 2227.
Liquidated damages, whether intended as an indemnity or a
penalty, shall be equitably reduced if they are iniquitous or
unconscionable.
The question of whether a penalty is reasonable or iniquitous is addressed
to the sound discretion of the courts. To be considered in fixing the
amount of penalty are factors such as -- but not limited to -- the type,
extent and purpose of the penalty; the nature of the obligation; the mode
of the breach and its consequences; the supervening realities; the standing
and relationship of the parties; and the like.[33]
In this case, PAGCORs breach was occasioned by events that, although not
fortuitous in law, were in fact real and pressing. From the CAs factual

Page | 104

findings, which are not contested by either party, we find that PAGCOR
conducted a series of negotiations and consultations before entering into
the Contract. It did so not only with the PPC, but also with local
government officials, who assured it that the problems were
surmountable. Likewise, PAGCOR took pains to contest the ordinances [34]
before the courts, which consequently declared them unconstitutional. On
top of these developments, the gaming corporation was advised by the
Office of the President to stop the games in Cagayan de Oro City,
prompting the former to cease operations prior to September 1993.

10 October 2003 and the Resolution,2 dated 19 April 2006 of the

Court of Appeals in CA-G.R. CV No. 73853. The appellate court, in
its assailed Decision and Resolution, modified the Decision dated
30 April 2001 of the Regional Trial Court (RTC) of Makati, Branch
57, in Civil Case No. 00-1015, finding the respondent Supervalue,
Inc., liable for the sum of P192,000.00, representing the security
deposits made by the petitioner upon the commencement of their
Contract of Lease. The dispositive portion of the assailed appellate
courts Decision thus reads:

Also worth mentioning is the CAs finding that PAGCORs casino operations
had to be suspended for days on end since their start in December 1992;
and indefinitely from July 15, 1993, upon the advice of the Office of
President, until the formal cessation of operations in September 1993.
Needless to say, these interruptions and stoppages meant that PAGCOR
suffered a tremendous loss of expected revenues, not to mention the fact
that it had fully operated under the Contract only for a limited time.

WHEREFORE, premises considered, the appeal is PARTLY

GRANTED. The April 30, 2001 Decision of the Regional Trial Court
of Makati, Branch 57 is therefore MODIFIED to wit: (a) the portion
ordering the [herein respondent] to pay the amount of
P192,000.00 representing the security deposits and P50,000.00 as
attorneys fees in favor of the [herein petitioner] as well as giving
[respondent] the option to reimburse [petitioner] of the value of
the improvements introduced by the [petitioner] on the leased
[premises] should [respondent] choose to appropriate itself or
require the [petitioner] to remove the improvements, is hereby
REVERSED and SET ASIDE; and (b) the portion ordering the return
to [petitioner] the properties seized by [respondent] after the
former settled her obligation with the latter is however
MAINTAINED.3

While petitioners right to a stipulated penalty is affirmed, we consider the

claim for future rentals to the tune of P7,037,835.40 to be highly
iniquitous. The amount should be equitably reduced. Under the
circumstances, the advanced rental deposits in the sum of P687,289.50
should be sufficient penalty for respondents breach.
WHEREFORE, the Petition is GRANTED in part. The assailed Decision and
Resolution are hereby MODIFIED to include the payment of penalty.
Accordingly, respondent is ordered to pay petitioner the additional amount
of P687,289.50 as penalty, which may be set off or applied against the
formers advanced rental deposits. Meanwhile, the CAs award to
petitioner of actual damages representing the accrued rentals for
September to November 1993 -- with interest and penalty at the rate of
two percent (2%) per month, from the date of filing of the Complaint until
the amount shall have been fully paid -- as well as the P50,000 award for
attorneys fees, is AFFIRMED. No costs.
SO ORDERED.
ERMINDA
F.
FLORENTINO,
vs.
SUPERVALUE, INC., Respondent.

Petitioner,

DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari under Rule
45 of the Revised Rules of Court, filed by petitioner Erminda F.
Florentino, seeking to reverse and set aside the Decision, 1 dated

The factual and procedural antecedents of the instant petition are

as follows:
Petitioner is doing business under the business name "Empanada
Royale," a sole proprietorship engaged in the retail of empanada
with outlets in different malls and business establishments within
Metro Manila.4
Respondent, on the other hand, is a domestic corporation engaged
in the business of leasing stalls and commercial store spaces
located inside SM Malls found all throughout the country.5
On 8 March 1999, petitioner and respondent executed three
Contracts of Lease containing similar terms and conditions over
the cart-type stalls at SM North Edsa and SM Southmall and a
store space at SM Megamall. The term of each contract is for a
period of four months and may be renewed upon agreement of the
parties.6
Upon the expiration of the original Contracts of Lease, the parties
agreed to renew the same by extending their terms until 31 March
2000.7

Page | 105

Before the expiration of said Contracts of Lease, or on 4 February

2000, petitioner received two letters from the respondent, both
dated
14
January
2000,
transmitted
through
facsimile
transmissions.8
In the first letter, petitioner was charged with violating Section 8
of the Contracts of Lease by not opening on 16 December 1999
and 26 December 1999.9
Respondent also charged petitioner with selling a new variety of
empanada called "mini-embutido" and of increasing the price of
her merchandise from P20.00 to P22.00, without the prior
approval of the respondent.10
Respondent observed that petitioner was frequently closing
earlier than the usual mall hours, either because of non-delivery
or delay in the delivery of stocks to her outlets, again in violation
of the terms of the contract. A stern warning was thus given to
petitioner to refrain from committing similar infractions in the
future in order to avoid the termination of the lease contract. 11
In the second letter, respondent informed the petitioner that it will
no longer renew the Contracts of Lease for the three outlets, upon
their expiration on 31 March 2000.12
In a letter-reply dated 11 February 2000, petitioner explained that
the "mini-embutido" is not a new variety of empanada but had
similar fillings, taste and ingredients as those of pork empanada;
only, its size was reduced in order to make it more affordable to
the buyers.13
Such explanation notwithstanding, respondent still refused to
renew its Contracts of Lease with the petitioner. To the contrary,
respondent took possession of the store space in SM Megamall
and confiscated the equipment and personal belongings of the
petitioner found therein after the expiration of the lease
contract.14
In a letter dated 8 May 2000, petitioner demanded that the
respondent release the equipment and personal belongings it
seized from the SM Megamall store space and return the security
deposits, in the sum of P192,000.00, turned over by the petitioner
upon signing of the Contracts of Lease. On 15 June 2000,
petitioner sent respondent another letter reiterating her previous
demands, but the latter failed or refused to comply therewith. 15

On 17 August 2000, an action for Specific Performance, Sum of

Money and Damages was filed by the petitioner against the
respondent before the RTC of Makati, Branch 57.16
In her Complaint docketed as Civil Case No. 00-1015, petitioner
alleged that the respondent made verbal representations that the
Contracts of Lease will be renewed from time to time and, through
the said representations, the petitioner was induced to introduce
improvements upon the store space at SM Megamall in the sum of
P200,000.00, only to find out a year later that the respondent will
no longer renew her lease contracts for all three outlets.17
In addition, petitioner alleged that the respondent, without
justifiable cause and without previous demand, refused to return
the security deposits in the amount of P192,000.00.18
Further, petitioner claimed that the respondent seized her
equipment and personal belongings found inside the store space
in SM Megamall after the lease contract for the said outlet expired
and despite repeated written demands from the petitioner,
respondent continuously refused to return the seized items.19
Petitioner thus prayed for the award of actual damages in the sum
of P472,000.00, representing the sum of security deposits, cost of
improvements and the value of the personal properties seized.
Petitioner also asked for the award of P300,000.00 as moral
damages; P50,000.00 as exemplary damages; and P80,000.00 as
attorneys fees and expenses of litigation.20
For its part, respondent countered that petitioner committed
several violations of the terms of their Contracts of Lease by not
opening from 16 December 1999 to 26 December 1999, and by
introducing a new variety of empanada without the prior consent
of the respondent, as mandated by the provision of Section 2 of
the Contract of Lease. Respondent also alleged that petitioner
infringed the lease contract by frequently closing earlier than the
agreed closing hours. Respondent finally averred that petitioner is
liable for the amount P106,474.09, representing the penalty for
selling a new variety of empanada, electricity and water bills, and
rental adjustment, among other charges incidental to the lease
agreements. Respondent claimed that the seizure of petitioners
personal belongings and equipment was in the exercise of its
retaining lien, considering that the petitioner failed to settle the
said obligations up to the time the complaint was filed. 21
Considering that petitioner already committed several breaches of
contract, the respondent thus opted not to renew its Contracts of
Lease with her anymore. The security deposits were made in order
to ensure faithful compliance with the terms of their lease

Page | 106

agreements; and since petitioner committed several infractions

thereof, respondent was justified in forfeiting the security
deposits in the latters favor.
On 30 April 2001, the RTC rendered a Judgment 22 in favor of the
petitioner and found that the physical takeover by the respondent
of the leased premises and the seizure of petitioners equipment
and personal belongings without prior notice were illegal. The
decretal part of the RTC Judgment reads:
WHEREFORE, premises duly considered, judgment is hereby
rendered ordering the [herein respondent] to pay [herein
petitioner] the amount of P192,000.00 representing the security
deposits made by the [petitioner] and P50,000.00 as and for
attorneys fees.
The [respondent] is likewise ordered to return to the [petitioner]
the various properties seized by the former after settling her
account with the [respondent].
Lastly, the [respondent] may choose either to reimburse the
[petitioner] one half (1/2) of the value of the improvements
introduced by the plaintiff at SM Megamall should [respondent]
choose to appropriate the improvements to itself or require the
[petitioner] to remove the improvements, even though the
principal thing may suffer damage thereby. [Petitioner] shall not,
however, cause anymore impairment upon the said leased
premises than is necessary.
The other damages claimed by the plaintiff are denied for lack of
merit.
Aggrieved, the respondent appealed the adverse RTC Judgment to
the Court of Appeals.
In a Decision23 dated 10 October 2003, the Court of Appeals
modified the RTC Judgment and found that the respondent was
justified in forfeiting the security deposits and was not liable to
reimburse the petitioner for the value of the improvements
introduced in the leased premises and to pay for attorneys fees.
In modifying the findings of the lower court, the appellate court
declared that in view of the breaches of contract committed by the
petitioner, the respondent is justified in forfeiting the security
deposits. Moreover, since the petitioner did not obtain the consent
of the respondent before she introduced improvements on the SM
Megamall store space, the respondent has therefore no obligation
to reimburse the petitioner for the amount expended in
connection with the said improvements. 24 The Court of Appeals,
however, maintained the order of the trial court for respondent to

return to petitioner her properties after she has settled her

obligations to the respondent. The appellate court denied
petitioners Motion for Reconsideration in a Resolution 25 dated 19
April 2006.
Hence, this instant Petition for Review on Certiorari 26 filed by the
petitioner assailing the Court of Appeals Decision. For the
resolution of this Court are the following issues:
I. Whether or not the respondent is liable to return the security
deposits to the petitions.
II. Whether or not the respondent is liable to reimburse the
petitioner for the sum of the improvements she introduced in the
leased premises.
III. Whether or not the respondent is liable for attorneys fees.27
The appellate court, in finding that the respondent is authorized
to forfeit the security deposits, relied on the provisions of
Sections 5 and 18 of the Contract of Lease, to wit:
Section 5. DEPOSIT. The LESSEE shall make a cash deposit in the
sum of SIXTY THOUSAND PESOS (P60,000.00) equivalent to three
(3) months rent as security for the full and faithful performance to
each and every term, provision, covenant and condition of this
lease and not as a pre-payment of rent. If at any time during the
term of this lease the rent is increased[,] the LESSEE on demand
shall make an additional deposit equal to the increase in rent. The
LESSOR shall not be required to keep the deposit separate from its
general funds and the deposit shall not be entitled to interest. The
deposit shall remain intact during the entire term and shall not be
applied as payment for any monetary obligations of the LESSEE
under this contract. If the LESSEE shall faithfully perform every
provision of this lease[,] the deposit shall be refunded to the
LESSEE upon the expiration of this Lease and upon satisfaction of
all monetary obligation to the LESSOR.
xxxx
Section 18. TERMINATION. Any breach, non-performance or nonobservance of the terms and conditions herein provided shall
constitute default which shall be sufficient ground to terminate
this lease, its extension or renewal. In which event, the LESSOR
shall demand that LESSEE immediately vacate the premises, and
LESSOR shall forfeit in its favor the deposit tendered without
prejudice to any such other appropriate action as may be legally
authorized.28

Page | 107

Since it was already established by the trial court that the

petitioner was guilty of committing several breaches of contract,
the Court of Appeals decreed that she cannot therefore rightfully
demand the return of the security deposits for the same are
deemed forfeited by reason of evident contractual violations.
It is undisputed that the above-quoted provision found in all
Contracts of Lease is in the nature of a penal clause to ensure
petitioners faithful compliance with the terms and conditions of
the said contracts.
A penal clause is an accessory undertaking to assume greater
liability in case of breach. It is attached to an obligation in order
to insure performance and has a double function: (1) to provide
for liquidated damages, and (2) to strengthen the coercive force
of the obligation by the threat of greater responsibility in the
event of breach.29 The obligor would then be bound to pay the
stipulated indemnity without the necessity of proof of the
existence and the measure of damages caused by the breach. 30
Article 1226 of the Civil Code states:
Art. 1226. In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of
interests in case of noncompliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if the obligor
refuses to pay the penalty or is guilty of fraud in the fulfillment of
the obligation.
The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code.
As a general rule, courts are not at liberty to ignore the freedoms
of the parties to agree on such terms and conditions as they see
fit as long as they are not contrary to law, morals, good customs,
public order or public policy. Nevertheless, courts may equitably
reduce a stipulated penalty in the contracts in two instances: (1) if
the principal obligation has been partly or irregularly complied
with; and (2) even if there has been no compliance if the penalty
is iniquitous or unconscionable in accordance with Article 1229 of
the Civil Code which clearly provides:
Art. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by
the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or
unconscionable.31

In ascertaining whether the penalty is unconscionable or not, this

court set out the following standard in Ligutan v. Court of
Appeals,32 to wit:
The question of whether a penalty is reasonable or iniquitous can
be partly subjective and partly objective. Its resolution would
depend on such factor as, but not necessarily confined to, the
type, extent and purpose of the penalty, the nature of the
obligation, the mode of breach and its consequences, the
supervening realities, the standing and relationship of the parties,
and the like, the application of which, by and large, is addressed
to the sound discretion of the court. xxx.
In the instant case, the forfeiture of the entire amount of the
security deposits in the sum of P192,000.00 was excessive and
unconscionable considering that the gravity of the breaches
committed by the petitioner is not of such degree that the
respondent was unduly prejudiced thereby. It is but equitable
therefore to reduce the penalty of the petitioner to 50% of the
total amount of security deposits.
It is in the exercise of its sound discretion that this court
tempered the penalty for the breaches committed by the
petitioner to 50% of the amount of the security deposits. The
forfeiture of the entire sum of P192,000.00 is clearly a usurious
and iniquitous penalty for the transgressions committed by the
petitioner. The respondent is therefore under the obligation to
return the 50% of P192,000.00 to the petitioner.
Turning now to the liability of the respondent to reimburse the
petitioner for one-half of the expenses incurred for the
improvements on the leased store space at SM Megamall, the
following provision in the Contracts of Lease will enlighten us in
resolving this issue:
Section 11. ALTERATIONS, ADDITIONS, IMPROVEMENTS, ETC. The
LESSEE shall not make any alterations, additions, or improvements
without the prior written consent of LESSOR; and all alterations,
additions or improvements made on the leased premises, except
movable or fixtures put in at LESSEEs expense and which are
removable, without defacing the buildings or damaging its
floorings,
shall
become
LESSORs
property
without
compensation/reimbursement but the LESSOR reserves the right
to require the removal of the said alterations, additions or
improvements upon expiration of the lease.
The foregoing provision in the Contract of Lease mandates that
before the petitioner can introduce any improvement on the
leased premises, she should first obtain respondents consent. In

Page | 108

the case at bar, it was not shown that petitioner previously

secured the consent of the respondent before she made the
improvements on the leased space in SM Megamall. It was not
even alleged by the petitioner that she obtained such consent or
she at least attempted to secure the same. On the other hand, the
petitioner asserted that respondent allegedly misrepresented to
her that it would renew the terms of the contracts from time to
time after their expirations, and that the petitioner was so
induced thereby that she expended the sum of P200,000.00 for
the improvement of the store space leased.
This argument was squarely addressed by this court in Fernandez
v. Court of Appeals,33 thus:
The Court ruled that the stipulation of the parties in their lease
contract "to be renewable" at the option of both parties stresses
that the faculty to renew was given not to the lessee alone nor to
the lessor by himself but to the two simultaneously; hence, both
must agree to renew if a new contract is to come about.
Petitioners contention that respondents had verbally agreed to
extend the lease indefinitely is inadmissible to qualify the terms of
the written contract under the parole evidence rule, and
unenforceable under the statute of frauds.34
Moreover, it is consonant with human experience that lessees,
before occupying the leased premises, especially store spaces
located inside malls and big commercial establishments, would
renovate the place and introduce improvements thereon according
to the needs and nature of their business and in harmony with
their trademark designs as part of their marketing ploy to attract
customers. Certainly, no inducement or misrepresentation from
the lessor is necessary for this purpose, for it is not only a matter
of necessity that a lessee should re-design its place of business
but a business strategy as well.
In ruling that the respondent is liable to reimburse petitioner one
half of the amount of improvements made on the leased store
space should it choose to appropriate the same, the RTC relied on
the provision of Article 1678 of the Civil Code which provides:
Art. 1678. If the lessee makes, in good faith, useful improvements
which are suitable to the use for which the lease is intended,
without altering the form or substance of the property leased, the
lessor upon the termination of the lease shall pay the lessee onehalf of the value of the improvements at that time. Should the
lessor refuse to reimburse said amount, the lessee may remove
the improvements, even though the principal thing may suffer

damage thereby. He shall not, however, cause any

impairment upon the property leased than is necessary.

more

While it is true that under the above-quoted provision of the Civil

Code, the lessor is under the obligation to pay the lessee one-half
of the value of the improvements made should the lessor choose
to appropriate the improvements, Article 1678 however should be
read together with Article 448 and Article 546 of the same statute,
which provide:
Art. 448. The owner of the land on which anything has been built,
sown or planted in good faith, shall have the right to appropriate
as his own the works, sowing or planting, after payment of the
indemnity provided for in articles 546 and 548, or to oblige the
one who built or planted to pay the price of the land, and the one
who sowed, the proper rent. However, the builder or planter
cannot be obliged to buy the land if its value is considerably more
than that of the building or trees. In such case, he shall pay
reasonable rent, if the owner of the land does not choose to
appropriate the building or trees after proper indemnity. The
parties shall agree upon the terms of the lease and in case of
disagreement, the court shall fix the terms thereof.
xxxx
Art. 546. Necessary expenses shall be refunded to every
possessor; but only possessor in good faith may retain the thing
until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good
faith with the same right of retention, the person who has
defeated him in the possession having the option of refunding the
amount of the expenses or of paying the increase in value which
the thing may have acquired by reason thereof.
Thus, to be entitled to reimbursement for improvements
introduced on the property, the petitioner must be considered a
builder in good faith. Further, Articles 448 and 546 of the Civil
Code, which allow full reimbursement of useful improvements and
retention of the premises until reimbursement is made, apply only
to a possessor in good faith, i.e., one who builds on land with the
belief that he is the owner thereof. A builder in good faith is one
who is unaware of any flaw in his title to the land at the time he
builds on it.35 In this case, the petitioner cannot claim that she was
not aware of any flaw in her title or was under the belief that she
is the owner of the subject premises for it is a settled fact that she
is merely a lessee thereof.1wphi1

Page | 109

In Geminiano v. Court of Appeals, 36 this Court was emphatic in

declaring that lessees are not possessors or builders in good faith,
thus:
Being mere lessees, the private respondents knew that their
occupation of the premises would continue only for the life of the
lease. Plainly, they cannot be considered as possessors nor
builders in good faith.
In a plethora of cases, this Court has held that Article 448 of the
Civil Code, in relation to Article 546 of the same Code, which
allows full reimbursement of useful improvements and retention
of the premises until reimbursement is made, applies only to a
possessor in good faith, i.e., one who builds on land with the
belief that he is the owner thereof. It does not apply where one's
only interest is that of a lessee under a rental contract; otherwise,
it would always be in the power of the tenant to "improve" his
landlord out of his property.
Since petitioners interest in the store space is merely that of the
lessee under the lease contract, she cannot therefore be
considered a builder in good faith. Consequently, respondent may
appropriate the improvements introduced on the leased premises
without any obligation to reimburse the petitioner for the sum
expended.

Anent the claim for attorneys fees, we resolve to likewise deny

the award of the same. Attorneys fees may be awarded when a
party is compelled to litigate or to incur expenses to protect its
interest by reason of unjustified act of the other.37
In the instant petition, it was not shown that the respondent
unjustifiably refused to grant the demands of the petitioner so as
to compel the latter to initiate legal action to enforce her right. As
we have found herein, there is basis for respondents refusal to
return to petitioner the security deposits and to reimburse the
costs of the improvements in the leased premises. The award of
attorneys fees is therefore not proper in the instant case.
WHEREFORE, premises considered, the instant Petition is PARTLY
GRANTED. The Court of Appeals Decision dated 10 October 2003 in
CA-G.R. CV No. 73853 is hereby AFFIRMED with the MODIFICATION
that the respondent may forfeit only 50% of the total amount of
the security deposits in the sum of P192,000.00, and must return
the remaining 50% to the petitioner. No costs.
SO ORDERED.

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