FAUSTO BARREDO, petitioner,

vs.
SEVERINO GARCIA and TIMOTEA ALMARIO, respondents.
Celedonio P. Gloria and Antonio Barredo for petitioner.
Jose G. Advincula for respondents.
BOCOBO, J.:
This case comes up from the Court of Appeals which held the
petitioner herein, Fausto Barredo, liable in damages for the death
of Faustino Garcia caused by the negligence of Pedro Fontanilla,
a taxi driver employed by said Fausto Barredo.
At about half past one in the morning of May 3, 1936, on the road
between Malabon and Navotas, Province of Rizal, there was a
head-on collision between a taxi of the Malate Taxicab driven by
Pedro Fontanilla and a carretela guided by Pedro Dimapalis. The
carretela was overturned, and one of its passengers, 16-year-old
boy Faustino Garcia, suffered injuries from which he died two
days later. A criminal action was filed against Fontanilla in the
Court of First Instance of Rizal, and he was convicted and
sentenced to an indeterminate sentence of one year and one day
to two years of prision correccional. The court in the criminal case
granted the petition that the right to bring a separate civil action
be reserved. The Court of Appeals affirmed the sentence of the
lower court in the criminal case. Severino Garcia and Timotea
Almario, parents of the deceased on March 7, 1939, brought an
action in the Court of First Instance of Manila against Fausto
Barredo as the sole proprietor of the Malate Taxicab and
employer of Pedro Fontanilla. On July 8, 1939, the Court of First
Instance of Manila awarded damages in favor of the plaintiffs for
P2,000 plus legal interest from the date of the complaint. This
decision was modified by the Court of Appeals by reducing the
damages to P1,000 with legal interest from the time the action
was instituted. It is undisputed that Fontanilla 's negligence was
the cause of the mishap, as he was driving on the wrong side of

the road, and at high speed. As to Barredo's responsibility, the

Court of Appeals found:
... It is admitted that defendant is Fontanilla's employer.
There is proof that he exercised the diligence of a good
father of a family to prevent damage. (See p. 22,
appellant's brief.) In fact it is shown he was careless in
employing Fontanilla who had been caught several times
for violation of the Automobile Law and speeding (Exhibit
A) violation which appeared in the records of the
Bureau of Public Works available to be public and to
himself. Therefore, he must indemnify plaintiffs under the
provisions of article 1903 of the Civil Code.
The main theory of the defense is that the liability of Fausto
Barredo is governed by the Revised Penal Code; hence, his
liability is only subsidiary, and as there has been no civil action
against Pedro Fontanilla, the person criminally liable, Barredo
cannot be held responsible in the case. The petitioner's brief
states on page 10:
... The Court of Appeals holds that the petitioner is being
sued for his failure to exercise all the diligence of a good
father of a family in the selection and supervision of Pedro
Fontanilla to prevent damages suffered by the
respondents. In other words, The Court of Appeals insists
on applying in the case article 1903 of the Civil Code.
Article 1903 of the Civil Code is found in Chapter II, Title
16, Book IV of the Civil Code. This fact makes said article
to a civil liability arising from a crime as in the case at bar
simply because Chapter II of Title 16 of Book IV of the
Civil Code, in the precise words of article 1903 of the Civil
Code itself, is applicable only to "those (obligations)
arising from wrongful or negligent acts or commission
not punishable by law.
The gist of the decision of the Court of Appeals is expressed thus:

... We cannot agree to the defendant's contention. The

liability sought to be imposed upon him in this action is
not a civil obligation arising from a felony or a
misdemeanor (the crime of Pedro Fontanilla,), but an
obligation imposed in article 1903 of the Civil Code by
reason of his negligence in the selection or supervision of
his servant or employee.
The pivotal question in this case is whether the plaintiffs may
bring this separate civil action against Fausto Barredo, thus
making him primarily and directly, responsible under article 1903
of the Civil Code as an employer of Pedro Fontanilla. The
defendant maintains that Fontanilla's negligence being
punishable by the Penal Code, his (defendant's) liability as an
employer is only subsidiary, according to said Penal code, but
Fontanilla has not been sued in a civil action and his property has
not been exhausted. To decide the main issue, we must cut
through the tangle that has, in the minds of many confused and
jumbled together delitos and cuasi delitos, or crimes under the
Penal Code and fault or negligence under articles 1902-1910 of
the Civil Code. This should be done, because justice may be lost
in a labyrinth, unless principles and remedies are distinctly
envisaged. Fortunately, we are aided in our inquiry by the
luminous presentation of the perplexing subject by renown jurists
and we are likewise guided by the decisions of this Court in
previous cases as well as by the solemn clarity of the
consideration in several sentences of the Supreme Tribunal of
Spain.
Authorities support the proposition that a quasi-delict or "culpa
aquiliana " is a separate legal institution under the Civil Code with
a substantivity all its own, and individuality that is entirely apart
and independent from delict or crime. Upon this principle and on
the wording and spirit article 1903 of the Civil Code, the primary
and direct responsibility of employers may be safely anchored.
The pertinent provisions of the Civil Code and Revised Penal
Code are as follows:

CIVIL CODE
ART. 1089 Obligations arise from law, from contracts and
quasi-contracts, and from acts and omissions which are
unlawful or in which any kind of fault or negligence
intervenes.
xxx

xxx

xxx

ART. 1092. Civil obligations arising from felonies or

misdemeanors shall be governed by the provisions of the
Penal Code.
ART. 1093. Those which are derived from acts or
omissions in which fault or negligence, not punishable by
law, intervenes shall be subject to the provisions of
Chapter II, Title XVI of this book.
xxx

xxx

xxx

ART 1902. Any person who by an act or omission causes

damage to another by his fault or negligence shall be
liable for the damage so done.
ART. 1903. The obligation imposed by the next preceding
article is enforcible, not only for personal acts and
omissions, but also for those of persons for whom another
is responsible.
The father and in, case of his death or incapacity, the
mother, are liable for any damages caused by the minor
children who live with them.
Guardians are liable for damages done by minors or
incapacitated persons subject to their authority and living
with them.

Owners or directors of an establishment or business are

equally liable for any damages caused by their employees
while engaged in the branch of the service in which
employed, or on occasion of the performance of their
duties.
The State is subject to the same liability when it acts
through a special agent, but not if the damage shall have
been caused by the official upon whom properly devolved
the duty of doing the act performed, in which case the
provisions of the next preceding article shall be
applicable.
Finally, teachers or directors of arts trades are liable for
any damages caused by their pupils or apprentices while
they are under their custody.
The liability imposed by this article shall cease in case the
persons mentioned therein prove that they are exercised
all the diligence of a good father of a family to prevent the
damage.
ART. 1904. Any person who pays for damage caused by
his employees may recover from the latter what he may
have paid.

exemption from civil liability, which shall be enforced to

the following rules:
First. In cases of subdivision, 1, 2 and 3 of article 12 the
civil liability for acts committed by any imbecile or insane
person, and by a person under nine years of age, or by
one over nine but under fifteen years of age, who has
acted without discernment shall devolve upon those
having such person under their legal authority or control,
unless it appears that there was no fault or negligence on
their part.
Should there be no person having such insane, imbecile
or minor under his authority, legal guardianship, or
control, or if such person be insolvent, said insane,
imbecile, or minor shall respond with their own property,
excepting property exempt from execution, in accordance
with the civil law.
Second. In cases falling within subdivision 4 of article 11,
the person for whose benefit the harm has been
prevented shall be civilly liable in proportion to the benefit
which they may have received.
The courts shall determine, in their sound discretion, the
proportionate amount for which each one shall be liable.

REVISED PENAL CODE

ART. 100. Civil liability of a person guilty of felony.
Every person criminally liable for a felony is also civilly
liable.
ART. 101. Rules regarding civil liability in certain cases.
The exemption from criminal liability established in
subdivisions 1, 2, 3, 5, and 6 of article 12 and in
subdivision 4 of article 11 of this Code does not include

When the respective shares can not be equitably determined,

even approximately, or when the liability also attaches to the
Government, or to the majority of the inhabitants of the town, and,
in all events, whenever the damage has been caused with the
consent of the authorities or their agents, indemnification shall be
made in the manner prescribed by special laws or regulations.
Third. In cases falling within subdivisions 5 and 6 of article 12, the
persons using violence or causing the fear shall be primarily liable
and secondarily, or, if there be no such persons, those doing the

act shall be liable, saving always to the latter that part of their
property exempt from execution.
ART. 102. Subsidiary civil liability of innkeepers, tavern
keepers and proprietors of establishment. In default of
persons criminally liable, innkeepers, tavern keepers, and
any other persons or corporation shall be civilly liable for
crimes committed in their establishments, in all cases
where a violation of municipal ordinances or some
general or special police regulation shall have been
committed by them or their employees.
Innkeepers are also subsidiarily liable for the restitution of
goods taken by robbery or theft within their houses
lodging therein, or the person, or for the payment of the
value thereof, provided that such guests shall have
notified in advance the innkeeper himself, or the person
representing him, of the deposit of such goods within the
inn; and shall furthermore have followed the directions
which such innkeeper or his representative may have
given them with respect to the care of and vigilance over
such goods. No liability shall attach in case of robbery
with violence against or intimidation against or
intimidation of persons unless committed by the
innkeeper's employees.
ART. 103. Subsidiary civil liability of other persons. The
subsidiary liability established in the next preceding article
shall also apply to employers, teachers, persons, and
corporations engaged in any kind of industry for felonies
committed by their servants, pupils, workmen,
apprentices, or employees in the discharge of their duties.
xxx

xxx

xxx

ART. 365. Imprudence and negligence. Any person

who, by reckless imprudence, shall commit any act which,

had it been intentional, would constitute a grave felony,

shall suffer the penalty of arresto mayor in its maximum
period to prision correccional in its minimum period; if it
would have constituted a less grave felony, the penalty of
arresto mayor in its minimum and medium periods shall
be imposed.
Any person who, by simple imprudence or negligence,
shall commit an act which would otherwise constitute a
grave felony, shall suffer the penalty of arresto mayor in
its medium and maximum periods; if it would have
constituted a less serious felony, the penalty of arresto
mayor in its minimum period shall be imposed."
It will thus be seen that while the terms of articles 1902 of the
Civil Code seem to be broad enough to cover the driver's
negligence in the instant case, nevertheless article 1093
limits cuasi-delitos to acts or omissions "not punishable by law."
But inasmuch as article 365 of the Revised Penal Code punishes
not only reckless but even simple imprudence or negligence, the
fault or negligence under article 1902 of the Civil Code has
apparently been crowded out. It is this overlapping that makes the
"confusion worse confounded." However, a closer study shows
that such a concurrence of scope in regard to negligent acts does
not destroy the distinction between the civil liability arising from a
crime and the responsibility for cuasi-delitos or culpa extracontractual. The same negligent act causing damages may
produce civil liability arising from a crime under article 100 of the
Revised Penal Code, or create an action for cuasi-delito or culpa
extra-contractual under articles 1902-1910 of the Civil Code.
The individuality of cuasi-delito or culpa extra-contractual looms
clear and unmistakable. This legal institution is of ancient lineage,
one of its early ancestors being the Lex Aquilia in the Roman
Law. In fact, in Spanish legal terminology, this responsibility is
often referred to as culpa aquiliana. The Partidas also contributed
to the genealogy of the present fault or negligence under the Civil
Code; for instance, Law 6, Title 15, of Partida 7, says: "Tenudo es

de fazer emienda, porque, como quier que el non fizo a

sabiendas en dao al otro, pero acaescio por su culpa."
The distinctive nature of cuasi-delitos survives in the Civil Code.
According to article 1089, one of the five sources of obligations is
this legal institution of cuasi-delito or culpa extra-contractual: "los
actos . . . en que intervenga cualquier genero de culpa o
negligencia." Then article 1093 provides that this kind of
obligation shall be governed by Chapter II of Title XVI of Book IV,
meaning articles 1902-0910. This portion of the Civil Code is
exclusively devoted to the legal institution of culpa aquiliana.
Some of the differences between crimes under the Penal Code
and the culpa aquiliana or cuasi-delito under the Civil Code are:
1. That crimes affect the public interest, while cuasi-delitos are
only of private concern.
2. That, consequently, the Penal Code punishes or corrects the
criminal act, while the Civil Code, by means of indemnification,
merely repairs the damage.
3. That delicts are not as broad as quasi-delicts, because the
former are punished only if there is a penal law clearly covering
them, while the latter, cuasi-delitos, include all acts in which "any
king of fault or negligence intervenes." However, it should be
noted that not all violations of the penal law produce civil
responsibility, such as begging in contravention of ordinances,
violation of the game laws, infraction of the rules of traffic when
nobody is hurt. (See Colin and Capitant, "Curso Elemental de
Derecho Civil," Vol. 3, p. 728.)
Let us now ascertain what some jurists say on the separate
existence of quasi-delicts and the employer's primary and direct
liability under article 1903 of the Civil Code.

Dorado Montero in his essay on "Responsibilidad" in the

"Enciclopedia Juridica Espaola" (Vol. XXVII, p. 414) says:
El concepto juridico de la responsabilidad civil abarca
diversos aspectos y comprende a diferentes personas.
Asi, existe una responsabilidad civil propiamente dicha,
que en ningun casl lleva aparejada responsabilidad
criminal alguna, y otra que es consecuencia indeclinable
de la penal que nace de todo delito o falta."
The juridical concept of civil responsibility has various
aspects and comprises different persons. Thus, there is a
civil responsibility, properly speaking, which in no case
carries with it any criminal responsibility, and another
which is a necessary consequence of the penal liability as
a result of every felony or misdemeanor."
Maura, an outstanding authority, was consulted on the following
case: There had been a collision between two trains belonging
respectively to the Ferrocarril Cantabrico and the Ferrocarril del
Norte. An employee of the latter had been prosecuted in a
criminal case, in which the company had been made a party as
subsidiarily responsible in civil damages. The employee had been
acquitted in the criminal case, and the employer, the Ferrocarril
del Norte, had also been exonerated. The question asked was
whether the Ferrocarril Cantabrico could still bring a civil action
for damages against the Ferrocarril del Norte. Maura's opinion
was in the affirmative, stating in part (Maura, Dictamenes, Vol. 6,
pp. 511-513):
Quedando las cosas asi, a proposito de la realidad pura y
neta de los hechos, todavia menos parece sostenible que
exista cosa juzgada acerca de la obligacion civil de
indemnizar los quebrantos y menoscabos inferidos por el
choque de los trenes. El titulo en que se funda la accion
para demandar el resarcimiento, no puede confundirse
con las responsabilidades civiles nacidas de delito,
siquiera exista en este, sea el cual sea, una culpa

rodeada de notas agravatorias que motivan sanciones

penales, mas o menos severas. La lesion causada por
delito o falta en los derechos civiles, requiere
restituciones, reparaciones o indemnizaciones, que cual
la pena misma ataen al orden publico; por tal motivo
vienen encomendadas, de ordinario, al Ministerio Fiscal;
y claro es que si por esta via se enmiendan los
quebrantos y menoscabos, el agraviado excusa procurar
el ya conseguido desagravio; pero esta eventual
coincidencia de los efectos, no borra la diversidad
originaria de las acciones civiles para pedir
indemnizacion.
Estas, para el caso actual (prescindiendo de
culpas contractuales, que no vendrian a cuento y que
tiene otro regimen), dimanan, segun el articulo 1902 del
Codigo Civil, de toda accion u omision, causante de
daos o perjuicios, en que intervenga culpa o
negligencia. Es trivial que acciones semejantes son
ejercitadas ante los Tribunales de lo civil cotidianamente,
sin que la Justicia punitiva tenga que mezclarse en los
asuntos. Los articulos 18 al 21 y 121 al 128 del Codigo
Penal, atentos al espiritu y a los fines sociales y politicos
del mismo, desenvuelven y ordenan la materia de
responsabilidades civiles nacidas de delito, en terminos
separados del regimen por ley comun de la culpa que se
denomina aquiliana, por alusion a precedentes
legislativos del Corpus Juris. Seria intempestivo un
paralelo entre aquellas ordenaciones, y la de la
obligacion de indemnizar a titulo de culpa civil; pero viene
al caso y es necesaria una de las diferenciaciones que en
el tal paralelo se notarian.
Los articulos 20 y 21 del Codigo Penal, despues de
distribuir a su modo las responsabilidades civiles, entre
los que sean por diversos conceptos culpables del delito
o falta, las hacen extensivas a las empresas y los
establecimientos al servicio de los cuales estan los

delincuentes; pero con caracter subsidiario, o sea, segun

el texto literal, en defecto de los que sean responsables
criminalmente. No coincide en ello el Codigo Civil, cuyo
articulo 1903, dice; La obligacion que impone el articulo
anterior es exigible, no solo por los actos y omisiones
propios, sino por los de aquellas personas de quienes se
debe responder; personas en la enumeracion de las
cuales figuran los dependientes y empleados de los
establecimientos o empresas, sea por actos del servicio,
sea con ocasion de sus funciones. Por esto acontece, y
se observa en la jurisprudencia, que las empresas,
despues de intervenir en las causas criminales con el
caracter subsidiario de su responsabilidad civil por razon
del delito, son demandadas y condenadas directa y
aisladamente, cuando se trata de la obligacion, ante los
tribunales civiles.
Siendo como se ve, diverso el titulo de esta obligacion, y
formando verdadero postulado de nuestro regimen
judicial la separacion entre justicia punitiva y tribunales de
lo civil, de suerte que tienen unos y otros normas de
fondo en distintos cuerpos legales, y diferentes modos de
proceder, habiendose, por aadidura, abstenido de asistir
al juicio criminal la Compaia del Ferrocarril Cantabrico,
que se reservo ejercitar sus acciones, parece innegable
que la de indemnizacion por los daos y perjuicios que le
irrogo el choque, no estuvo sub judice ante el Tribunal del
Jurado, ni fue sentenciada, sino que permanecio intacta,
al pronunciarse el fallo de 21 de marzo. Aun cuando el
veredicto no hubiese sido de inculpabilidad, mostrose
mas arriba, que tal accion quedaba legitimamente
reservada para despues del proceso; pero al declararse
que no existio delito, ni responsabilidad dimanada de
delito, materia unica sobre que tenian jurisdiccion
aquellos juzgadores, se redobla el motivo para la
obligacion civil ex lege, y se patentiza mas y mas que la
accion para pedir su cumplimiento permanece incolume,
extraa a la cosa juzgada.

As things are, apropos of the reality pure and simple of

the facts, it seems less tenable that there should beres
judicata with regard to the civil obligation for damages on
account of the losses caused by the collision of the trains.
The title upon which the action for reparation is based
cannot be confused with the civil responsibilities born of a
crime, because there exists in the latter, whatever each
nature, a culpasurrounded with aggravating aspects
which give rise to penal measures that are more or less
severe. The injury caused by a felony or misdemeanor
upon civil rights requires restitutions, reparations, or
indemnifications which, like the penalty itself, affect public
order; for this reason, they are ordinarily entrusted to the
office of the prosecuting attorney; and it is clear that if by
this means the losses and damages are repaired, the
injured party no longer desires to seek another relief; but
this coincidence of effects does not eliminate the peculiar
nature of civil actions to ask for indemnity.
Such civil actions in the present case (without referring to
contractual faults which are not pertinent and belong to
another scope) are derived, according to article 1902 of
the Civil Code, from every act or omission causing losses
and damages in which culpa or negligence intervenes. It
is unimportant that such actions are every day filed before
the civil courts without the criminal courts interfering
therewith. Articles 18 to 21 and 121 to 128 of the Penal
Code, bearing in mind the spirit and the social and
political purposes of that Code, develop and regulate the
matter of civil responsibilities arising from a crime,
separately from the regime under common law,
of culpa which is known as aquiliana, in accordance with
legislative precedent of the Corpus Juris. It would be
unwarranted to make a detailed comparison between the
former provisions and that regarding the obligation to
indemnify on account of civil culpa; but it is pertinent and
necessary to point out to one of such differences.

Articles 20 and 21 of the Penal Code, after distriburing in

their own way the civil responsibilities among those who,
for different reasons, are guilty of felony or misdemeanor,
make such civil responsibilities applicable to enterprises
and establishments for which the guilty parties render
service, but with subsidiary character, that is to say,
according to the wording of the Penal Code, in default of
those who are criminally responsible. In this regard, the
Civil Code does not coincide because article 1903 says:
"The obligation imposed by the next preceding article is
demandable, not only for personal acts and omissions,
but also for those of persons for whom another is
responsible." Among the persons enumerated are the
subordinates and employees of establishments or
enterprises, either for acts during their service or on the
occasion of their functions. It is for this reason that it
happens, and it is so observed in judicial decisions, that
the companies or enterprises, after taking part in the
criminal cases because of their subsidiary civil
responsibility by reason of the crime, are sued and
sentenced directly and separately with regard to
theobligation, before the civil courts.
Seeing that the title of this obligation is different, and the
separation between punitive justice and the civil courts
being a true postulate of our judicial system, so that they
have different fundamental norms in different codes, as
well as different modes of procedure, and inasmuch as
the Compaa del Ferrocarril Cantabrico has abstained
from taking part in the criminal case and has reserved the
right to exercise its actions, it seems undeniable that the
action for indemnification for the losses and damages
caused to it by the collision was not sub judice before
the Tribunal del Jurado, nor was it the subject of a
sentence, but it remained intact when the decision of
March 21 was rendered. Even if the verdict had not been
that of acquittal, it has already been shown that such
action had been legitimately reserved till after the criminal

prosecution; but because of the declaration of the nonexistence of the felony and the non-existence of the
responsibility arising from the crime, which was
the sole subject matter upon which the Tribunal del
Juradohad jurisdiction, there is greater reason for the civil
obligation ex lege, and it becomes clearer that the action
for its enforcement remain intact and is not res judicata.
Laurent, a jurist who has written a monumental work on the
French Civil Code, on which the Spanish Civil Code is largely
based and whose provisions on cuasi-delito or culpa extracontractual are similar to those of the Spanish Civil Code, says,
referring to article 1384 of the French Civil Code which
corresponds to article 1903, Spanish Civil Code:
The action can be brought directly against the person
responsible (for another), without including the author of
the act. The action against the principal is accessory in
the sense that it implies the existence of a prejudicial act
committed by the employee, but it is not subsidiary in the
sense that it can not be instituted till after the judgment
against the author of the act or at least, that it is
subsidiary to the principal action; the action for
responsibility (of the employer) is in itself a principal
action. (Laurent, Principles of French Civil Law, Spanish
translation, Vol. 20, pp. 734-735.)
Amandi, in his "Cuestionario del Codigo Civil Reformado" (Vol. 4,
pp. 429, 430), declares that the responsibility of the employer is
principal and not subsidiary. He writes:
Cuestion 1. La responsabilidad declarada en el articulo
1903 por las acciones u omisiones de aquellas personas
por las que se debe responder, es subsidiaria? es
principal? Para contestar a esta pregunta es necesario
saber, en primer lugar, en que se funda el precepto legal.
Es que realmente se impone una responsabilidad por una
falta ajena? Asi parece a primera vista; pero semejante

afirmacion seria contraria a la justicia y a la maxima

universal, segun la que las faltas son personales, y cada
uno responde de aquellas que le son imputables. La
responsabilidad de que tratamos se impone con ocasion
de un delito o culpa, pero no por causa de ellos, sino por
causa del causi delito, esto es, de la imprudencia o de la
negligencia del padre, del tutor, del dueo o director del
establecimiento, del maestro, etc. Cuando cualquiera de
las personas que enumera el articulo citado (menores de
edad, incapacitados, dependientes, aprendices) causan
un dao, la ley presume que el padre, el tutor, el maestro,
etc., han cometido una falta de negligencia para prevenir
o evitar el dao. Esta falta es la que la ley castiga. No
hay, pues, responsabilidad por un hecho ajeno, sino en la
apariencia; en realidad la responsabilidad se exige por un
hecho propio. La idea de que esa responsabilidad sea
subsidiaria es, por lo tanto, completamente inadmisible.
Question No. 1. Is the responsibility declared in article
1903 for the acts or omissions of those persons for who
one is responsible, subsidiary or principal? In order to
answer this question it is necessary to know, in the first
place, on what the legal provision is based. Is it true that
there is a responsibility for the fault of another person? It
seems so at first sight; but such assertion would be
contrary to justice and to the universal maxim that all
faults are personal, and that everyone is liable for those
faults that can be imputed to him. The responsibility in
question is imposed on the occasion of a crime or fault,
but not because of the same, but because of the cuasidelito, that is to say, the imprudence or negligence of the
father, guardian, proprietor or manager of the
establishment, of the teacher, etc. Whenever anyone of
the persons enumerated in the article referred to (minors,
incapacitated persons, employees, apprentices) causes
any damage, the law presumes that the father, guardian,
teacher, etc. have committed an act of negligence in not
preventing or avoiding the damage. It is this fault that is

condemned by the law. It is, therefore, only apparent that

there is a responsibility for the act of another; in reality the
responsibility exacted is for one's own act. The idea that
such responsibility is subsidiary is, therefore, completely
inadmissible.
Oyuelos, in his "Digesto: Principios, Doctrina y Jurisprudencia,
Referentes al Codigo Civil Espaol," says in Vol. VII, p. 743:
Es decir, no responde de hechos ajenos, porque se
responde solo de su propia culpa, doctrina del articulo
1902; mas por excepcion, se responde de la ajena
respecto de aquellas personas con las que media algun
nexo o vinculo, que motiva o razona la responsabilidad.
Esta responsabilidad, es directa o es subsidiaria? En el
orden penal, el Codigo de esta clase distingue entre
menores e incapacitados y los demas, declarando directa
la primera (articulo 19) y subsidiaria la segunda (articulos
20 y 21); pero en el orden civil, en el caso del articulo
1903, ha de entenderse directa, por el tenor del articulo
que impone la responsabilidad precisamente "por los
actos de aquellas personas de quienes se deba
responder."
That is to say, one is not responsible for the acts of
others, because one is liable only for his own faults, this
being the doctrine of article 1902; but, by exception, one
is liable for the acts of those persons with whom there is a
bond or tie which gives rise to the responsibility. Is this
responsibility direct or subsidiary? In the order of the
penal law, the Penal Code distinguishes between minors
and incapacitated persons on the one hand, and other
persons on the other, declaring that the responsibility for
the former is direct (article 19), and for the latter,
subsidiary (articles 20 and 21); but in the scheme of the
civil law, in the case of article 1903, the responsibility
should be understood as direct, according to the tenor of
that articles, for precisely it imposes responsibility "for the

acts of those persons for whom one should be

responsible."
Coming now to the sentences of the Supreme Tribunal of Spain,
that court has upheld the principles above set forth: that a quasidelict or culpa extra-contractual is a separate and distinct legal
institution, independent from the civil responsibility arising from
criminal liability, and that an employer is, under article 1903 of the
Civil Code, primarily and directly responsible for the negligent
acts of his employee.
One of the most important of those Spanish decisions is that of
October 21, 1910. In that case, Ramon Lafuente died as the
result of having been run over by a street car owned by the
"compaia Electric Madrilea de Traccion." The conductor was
prosecuted in a criminal case but he was acquitted. Thereupon,
the widow filed a civil action against the street car company,
paying for damages in the amount of 15,000 pesetas. The lower
court awarded damages; so the company appealed to the
Supreme Tribunal, alleging violation of articles 1902 and 1903 of
the Civil Code because by final judgment the non-existence of
fault or negligence had been declared. The Supreme Court of
Spain dismissed the appeal, saying:
Considerando que el primer motivo del recurso se funda
en el equivocado supuesto de que el Tribunal a quo, al
condonar a la compaia Electrica Madrilea al pago del
dao causado con la muerte de Ramon La fuente
Izquierdo, desconoce el valor y efectos juridicos de la
sentencia absolutoria deictada en la causa criminal que
se siguio por el mismo hecho, cuando es lo cierto que de
este han conocido las dos jurisdicciones bajo diferentes
as pectos, y como la de lo criminal declrao dentro de los
limites de su competencia que el hecho de que se trata
no era constitutivo de delito por no haber mediado
descuido o negligencia graves, lo que no excluye, siendo
este el unico fundamento del fallo absolutorio, el
concurso de la culpa o negligencia no califacadas, fuente

de obligaciones civiles segun el articulo 1902 del Codigo,

y que alcanzan, segun el 1903, netre otras perosnas, a
los Directores de establecimientos o empresas por los
daos causados por sus dependientes en determinadas
condiciones, es manifesto que la de lo civil, al conocer del
mismo hehco baho este ultimo aspecto y al condenar a la
compaia recurrente a la indemnizacion del dao
causado por uno de sus empleados, lejos de infringer los
mencionados textos, en relacion con el articulo 116 de la
Ley de Enjuciamiento Criminal, se ha atenido
estrictamente a ellos, sin invadir atribuciones ajenas a su
jurisdiccion propia, ni contrariar en lo mas minimo el fallo
recaido en la causa.
Considering that the first ground of the appeal is based on
the mistaken supposition that the trial court, in sentencing
the Compaia Madrilea to the payment of the damage
caused by the death of Ramon Lafuente Izquierdo,
disregards the value and juridical effects of the sentence
of acquittal rendered in the criminal case instituted on
account of the same act, when it is a fact that the two
jurisdictions had taken cognizance of the same act in its
different aspects, and as the criminal jurisdiction declared
within the limits of its authority that the act in question did
not constitute a felony because there was no grave
carelessness or negligence, and this being the only basis
of acquittal, it does no exclude the co-existence of fault or
negligence which is not qualified, and is a source of civil
obligations according to article 1902 of the Civil Code,
affecting, in accordance with article 1903, among other
persons, the managers of establishments or enterprises
by reason of the damages caused by employees under
certain conditions, it is manifest that the civil jurisdiccion
in taking cognizance of the same act in this latter aspect
and in ordering the company, appellant herein, to pay an
indemnity for the damage caused by one of its
employees, far from violating said legal provisions, in
relation with article 116 of the Law of Criminal

Procedure, strictly followed the same, without invading

attributes which are beyond its own jurisdiction, and
without in any way contradicting the decision in that
cause. (Emphasis supplied.)
It will be noted, as to the case just cited:
First. That the conductor was not sued in a civil case, either
separately or with the street car company. This is precisely what
happens in the present case: the driver, Fontanilla, has not been
sued in a civil action, either alone or with his employer.
Second. That the conductor had been acquitted of grave criminal
negligence, but the Supreme Tribunal of Spain said that this did
not exclude the co-existence of fault or negligence, which is not
qualified, on the part of the conductor, under article 1902 of the
Civil Code. In the present case, the taxi driver was found guilty of
criminal negligence, so that if he had even sued for his civil
responsibility arising from the crime, he would have been held
primarily liable for civil damages, and Barredo would have been
held subsidiarily liable for the same. But the plaintiffs are directly
suing Barredo, on his primary responsibility because of his own
presumed negligence which he did not overcome under
article 1903. Thus, there were two liabilities of Barredo: first, the
subsidiary one because of the civil liability of the taxi driver arising
from the latter's criminal negligence; and, second, Barredo's
primary liability as an employer under article 1903. The plaintiffs
were free to choose which course to take, and they preferred the
second remedy. In so doing, they were acting within their rights. It
might be observed in passing, that the plaintiff choose the more
expeditious and effective method of relief, because Fontanilla
was either in prison, or had just been released, and besides, he
was probably without property which might be seized in enforcing
any judgment against him for damages.
Third. That inasmuch as in the above sentence of October 21,
1910, the employer was held liable civilly, notwithstanding the
acquittal of the employee (the conductor) in a previous criminal

case, with greater reason should Barredo, the employer in the

case at bar, be held liable for damages in a civil suit filed against
him because his taxi driver had been convicted. The degree of
negligence of the conductor in the Spanish case cited was less
than that of the taxi driver, Fontanilla, because the former was
acquitted in the previous criminal case while the latter was found
guilty of criminal negligence and was sentenced to an
indeterminate sentence of one year and one day to two years
of prision correccional.
(See also Sentence of February 19, 1902, which is similar to the
one above quoted.)
In the Sentence of the Supreme Court of Spain, dated February
14, 1919, an action was brought against a railroad company for
damages because the station agent, employed by the company,
had unjustly andfraudulently, refused to deliver certain articles
consigned to the plaintiff. The Supreme Court of Spain held that
this action was properly under article 1902 of the Civil Code, the
court saying:
Considerando que la sentencia discutida reconoce, en
virtud de los hechos que consigna con relacion a las
pruebas del pleito: 1., que las expediciones facturadas
por la compaia ferroviaria a la consignacion del actor de
las vasijas vacias que en su demanda relacionan tenian
como fin el que este las devolviera a sus remitentes con
vinos y alcoholes; 2., que llegadas a su destino tales
mercanias no se quisieron entregar a dicho consignatario
por el jefe de la estacion sin motivo justificado y con
intencion dolosa, y 3., que la falta de entrega de estas
expediciones al tiempo de reclamarlas el demandante le
originaron daos y perjuicios en cantidad de bastante
importancia como expendedor al por mayor que era de
vinos y alcoholes por las ganancias que dejo de obtener
al verse privado de servir los pedidos que se le habian
hecho por los remitentes en los envases:

Considerando que sobre esta base hay necesidad de

estimar los cuatro motivos que integran este recurso,
porque la demanda inicial del pleito a que se contrae no
contiene accion que nazca del incumplimiento del
contrato de transporte, toda vez que no se funda en el
retraso de la llegada de las mercancias ni de ningun otro
vinculo contractual entre las partes contendientes,
careciendo, por tanto, de aplicacion el articulo 371 del
Codigo de Comercio, en que principalmente descansa el
fallo recurrido, sino que se limita a pedir la reparaction de
los daos y perjuicios producidos en el patrimonio del
actor por la injustificada y dolosa negativa del porteador a
la entrega de las mercancias a su nombre consignadas,
segun lo reconoce la sentencia, y cuya responsabilidad
esta claramente sancionada en el articulo 1902 del
Codigo Civil, que obliga por el siguiente a la Compaia
demandada como ligada con el causante de aquellos por
relaciones de caracter economico y de jurarquia
administrativa.
Considering that the sentence, in question recognizes, in
virtue of the facts which it declares, in relation to the
evidence in the case: (1) that the invoice issued by the
railroad company in favor of the plaintiff contemplated that
the empty receptacles referred to in the complaint should
be returned to the consignors with wines and liquors; (2)
that when the said merchandise reached their destination,
their delivery to the consignee was refused by the station
agent without justification and with fraudulent intent, and
(3) that the lack of delivery of these goods when they
were demanded by the plaintiff caused him losses and
damages of considerable importance, as he was a
wholesale vendor of wines and liquors and he failed to
realize the profits when he was unable to fill the orders
sent to him by the consignors of the receptacles:
Considering that upon this basis there is need of
upholding the four assignments of error, as the original

complaint did not contain any cause of action arising from

non-fulfillment of a contract of transportation, because the
action was not based on the delay of the goods nor on
any contractual relation between the parties litigant and,
therefore, article 371 of the Code of Commerce, on which
the decision appealed from is based, is not applicable; but
it limits to asking for reparation for losses and damages
produced on the patrimony of the plaintiff on account of
the unjustified and fraudulent refusal of the carrier to
deliver the goods consigned to the plaintiff as stated by
the sentence, and the carrier's responsibility is clearly laid
down in article 1902 of the Civil Code which binds, in
virtue of the next article, the defendant company, because
the latter is connected with the person who caused the
damage by relations of economic character and by
administrative hierarchy. (Emphasis supplied.)
The above case is pertinent because it shows that the same act
may come under both the Penal Code and the Civil Code. In that
case, the action of the agent was unjustified and fraudulent and
therefore could have been the subject of a criminal action. And
yet, it was held to be also a proper subject of a civil action under
article 1902 of the Civil Code. It is also to be noted that it was the
employer and not the employee who was being sued.
Let us now examine the cases previously decided by this Court.
In the leading case of Rakes vs. Atlantic Gulf and Pacific Co. (7
Phil., 359, 362-365 [year 1907]), the trial court awarded damages
to the plaintiff, a laborer of the defendant, because the latter had
negligently failed to repair a tramway in consequence of which
the rails slid off while iron was being transported, and caught the
plaintiff whose leg was broken. This Court held:
It is contended by the defendant, as its first defense to the
action that the necessary conclusion from these collated
laws is that the remedy for injuries through negligence lies
only in a criminal action in which the official criminally

responsible must be made primarily liable and his

employer held only subsidiarily to him. According to this
theory the plaintiff should have procured the arrest of the
representative of the company accountable for not
repairing the track, and on his prosecution a suitable fine
should have been imposed, payable primarily by him and
secondarily by his employer.
This reasoning misconceived the plan of the Spanish
codes upon this subject. Article 1093 of the Civil Code
makes obligations arising from faults or negligence not
punished by the law, subject to the provisions of Chapter
II of Title XVI. Section 1902 of that chapter reads:
"A person who by an act or omission causes
damage to another when there is fault or
negligence shall be obliged to repair the damage
so done.
"SEC. 1903. The obligation imposed by the
preceeding article is demandable, not only for
personal acts and omissions, but also for those of
the persons for whom they should be responsible.
"The father, and on his death or incapacity, the
mother, is liable for the damages caused by the
minors who live with them.
xxx

xxx

xxx

"Owners or directors of an establishment or

enterprise are equally liable for the damages
caused by their employees in the service of the
branches in which the latter may be employed or
in the performance of their duties.
xxx

xxx

xxx

"The liability referred to in this article shall cease

when the persons mentioned therein prove that
they employed all the diligence of a good father of
a family to avoid the damage."
As an answer to the argument urged in this particular
action it may be sufficient to point out that nowhere in our
general statutes is the employer penalized for failure to
provide or maintain safe appliances for his workmen. His
obligation therefore is one 'not punished by the laws' and
falls under civil rather than criminal jurisprudence. But the
answer may be a broader one. We should be reluctant,
under any conditions, to adopt a forced construction of
these scientific codes, such as is proposed by the
defendant, that would rob some of these articles of effect,
would shut out litigants against their will from the civil
courts, would make the assertion of their rights dependent
upon the selection for prosecution of the proper criminal
offender, and render recovery doubtful by reason of the
strict rules of proof prevailing in criminal actions. Even if
these articles had always stood alone, such a
construction would be unnecessary, but clear light is
thrown upon their meaning by the provisions of the Law of
Criminal Procedure of Spain (Ley de Enjuiciamiento
Criminal), which, though never in actual force in these
Islands, was formerly given a suppletory or explanatory
effect. Under article 111 of this law, both classes of action,
civil and criminal, might be prosecuted jointly or
separately, but while the penal action was pending the
civil was suspended. According to article 112, the penal
action once started, the civil remedy should be sought
therewith, unless it had been waived by the party injured
or been expressly reserved by him for civil proceedings
for the future. If the civil action alone was prosecuted,
arising out of a crime that could be enforced only on
private complaint, the penal action thereunder should be
extinguished. These provisions are in harmony with those

of articles 23 and 133 of our Penal Code on the same

subject.
An examination of this topic might be carried much
further, but the citation of these articles suffices to show
that the civil liability was not intended to be merged in the
criminal nor even to be suspended thereby, except as
expressly provided in the law. Where an individual is
civilly liable for a negligent act or omission, it is not
required that the injured party should seek out a third
person criminally liable whose prosecution must be a
condition precedent to the enforcement of the civil right.
Under article 20 of the Penal Code the responsibility of an
employer may be regarded as subsidiary in respect of
criminal actions against his employees only while they are
in process of prosecution, or in so far as they determine
the existence of the criminal act from which liability arises,
and his obligation under the civil law and its enforcement
in the civil courts is not barred thereby unless by the
election of the injured person. Inasmuch as no criminal
proceeding had been instituted, growing our of the
accident in question, the provisions of the Penal Code
can not affect this action. This construction renders it
unnecessary to finally determine here whether this
subsidiary civil liability in penal actions has survived the
laws that fully regulated it or has been abrogated by the
American civil and criminal procedure now in force in the
Philippines.
The difficulty in construing the articles of the code above
cited in this case appears from the briefs before us to
have arisen from the interpretation of the words of article
1093, "fault or negligence not punished by law," as
applied to the comprehensive definition of offenses in
articles 568 and 590 of the Penal Code. It has been
shown that the liability of an employer arising out of his
relation to his employee who is the offender is not to be

regarded as derived from negligence punished by the law,

within the meaning of articles 1902 and 1093. More than
this, however, it cannot be said to fall within the class of
acts unpunished by the law, the consequence of which
are regulated by articles 1902 and 1903 of the Civil Code.
The acts to which these articles are applicable are
understood to be those not growing out of pre-existing
duties of the parties to one another. But where relations
already formed give rise to duties, whether springing from
contract or quasi contract, then breaches of those duties
are subject to articles 1101, 1103, and 1104 of the same
code. A typical application of this distinction may be found
in the consequences of a railway accident due to
defective machinery supplied by the employer. His liability
to his employee would arise out of the contract of
employment, that to the passengers out of the contract for
passage, while that to the injured bystander would
originate in the negligent act itself.
In Manzanares vs. Moreta, 38 Phil., 821 (year 1918), the mother
of the 8 of 9-year-old child Salvador Bona brought a civil action
against Moreta to recover damages resulting from the death of
the child, who had been run over by an automobile driven and
managed by the defendant. The trial court rendered judgment
requiring the defendant to pay the plaintiff the sum of P1,000 as
indemnity: This Court in affirming the judgment, said in part:
If it were true that the defendant, in coming from the
southern part of Solana Street, had to stop his auto
before crossing Real Street, because he had met vehicles
which were going along the latter street or were coming
from the opposite direction along Solana Street, it is to be
believed that, when he again started to run his auto
across said Real Street and to continue its way along
Solana Street northward, he should have adjusted the
speed of the auto which he was operating until he had
fully crossed Real Street and had completely reached a
clear way on Solana Street. But, as the child was run over

by the auto precisely at the entrance of Solana Street, this

accident could not have occurred if the auto had been
running at a slow speed, aside from the fact that the
defendant, at the moment of crossing Real Street and
entering Solana Street, in a northward direction, could
have seen the child in the act of crossing the latter street
from the sidewalk on the right to that on the left, and if the
accident had occurred in such a way that after the
automobile had run over the body of the child, and the
child's body had already been stretched out on the
ground, the automobile still moved along a distance of
about 2 meters, this circumstance shows the fact that the
automobile entered Solana Street from Real Street, at a
high speed without the defendant having blown the horn.
If these precautions had been taken by the defendant, the
deplorable accident which caused the death of the child
would not have occurred.
It will be noticed that the defendant in the above case could have
been prosecuted in a criminal case because his negligence
causing the death of the child was punishable by the Penal Code.
Here is therefore a clear instance of the same act of negligence
being a proper subject-matter either of a criminal action with its
consequent civil liability arising from a crime or of an entirely
separate and independent civil action for fault or negligence
under article 1902 of the Civil Code. Thus, in this jurisdiction, the
separate individually of a cuasi-delito or culpa aquilianaunder the
Civil Code has been fully and clearly recognized, even with
regard to a negligent act for which the wrongdoer could have
been prosecuted and convicted in a criminal case and for which,
after such a conviction, he could have been sued for this civil
liability arising from his crime.
Years later (in 1930) this Court had another occasion to apply the
same doctrine. In Bernal and Enverso vs. House and Tacloban
Electric & Ice Plant, Ltd., 54 Phil., 327, the parents of the fiveyear-old child, Purificacion Bernal, brought a civil action to
recover damages for the child's death as a result of burns caused

by the fault and negligence of the defendants. On the evening of

April 10, 1925, the Good Friday procession was held in Tacloban,
Leyte. Fortunata Enverso with her daughter Purificacion Bernal
had come from another municipality to attend the same. After the
procession the mother and the daughter with two others were
passing along Gran Capitan Street in front of the offices of the
Tacloban Electric & Ice Plant, Ltd., owned by defendants J. V.
House, when an automobile appeared from the opposite
direction. The little girl, who was slightly ahead of the rest, was so
frightened by the automobile that she turned to run, but
unfortunately she fell into the street gutter where hot water from
the electric plant was flowing. The child died that same night from
the burns. The trial courts dismissed the action because of the
contributory negligence of the plaintiffs. But this Court held, on
appeal, that there was no contributory negligence, and allowed
the parents P1,000 in damages from J. V. House who at the time
of the tragic occurrence was the holder of the franchise for the
electric plant. This Court said in part:
Although the trial judge made the findings of fact
hereinbefore outlined, he nevertheless was led to order
the dismissal of the action because of the contributory
negligence of the plaintiffs. It is from this point that a
majority of the court depart from the stand taken by the
trial judge. The mother and her child had a perfect right to
be on the principal street of Tacloban, Leyte, on the
evening when the religious procession was held. There
was nothing abnormal in allowing the child to run along a
few paces in advance of the mother. No one could
foresee the coincidence of an automobile appearing and
of a frightened child running and falling into a ditch filled
with hot water. The doctrine announced in the much
debated case of Rakes vs. Atlantic Gulf and Pacific Co.
([1907]), 7 Phil., 359), still rule. Article 1902 of the Civil
Code must again be enforced. The contributory
negligence of the child and her mother, if any, does not
operate as a bar to recovery, but in its strictest sense
could only result in reduction of the damages.

It is most significant that in the case just cited, this Court

specifically applied article 1902 of the Civil Code. It is thus that
although J. V. House could have been criminally prosecuted for
reckless or simple negligence and not only punished but also
made civilly liable because of his criminal negligence,
nevertheless this Court awarded damages in an independent civil
action for fault or negligence under article 1902 of the Civil Code.
In Bahia vs. Litonjua and Leynes (30 Phil., 624 [year 1915), the
action was for damages for the death of the plaintiff's daughter
alleged to have been caused by the negligence of the servant in
driving an automobile over the child. It appeared that the cause of
the mishap was a defect in the steering gear. The defendant
Leynes had rented the automobile from the International Garage
of Manila, to be used by him in carrying passengers during the
fiesta of Tuy, Batangas. Leynes was ordered by the lower court to
pay P1,000 as damages to the plaintiff. On appeal this Court
reversed the judgment as to Leynes on the ground that he had
shown that the exercised the care of a good father of a family,
thus overcoming the presumption of negligence under article
1903. This Court said:
As to selection, the defendant has clearly shown that he
exercised the care and diligence of a good father of a
family. He obtained the machine from a reputable garage
and it was, so far as appeared, in good condition. The
workmen were likewise selected from a standard garage,
were duly licensed by the Government in their particular
calling, and apparently thoroughly competent. The
machine had been used but a few hours when the
accident occurred and it is clear from the evidence that
the defendant had no notice, either actual or constructive,
of the defective condition of the steering gear.
The legal aspect of the case was discussed by this Court thus:

Article 1903 of the Civil Code not only establishes liability

in cases of negligence, but also provides when the liability
shall cease. It says:
"The liability referred to in this article shall cease
when the persons mentioned therein prove that
they employed all the diligence of a good father of
a family to avoid the damage."
From this article two things are apparent: (1) That when
an injury is caused by the negligence of a servant or
employee there instantly arises a presumption of law that
there was negligence on the part of the matter or
employer either in the selection of the servant or
employee, or in supervision over him after the selection,
or both; and (2) that presumption is juris tantum and
not juris et de jure, and consequently, may be rebutted. It
follows necessarily that if the employer shows to the
satisfaction of the court that in selection and supervision
he has exercised the care and diligence of a good father
of a family, the presumption is overcome and he is relieve
from liability.
This theory bases the responsibility of the master
ultimately on his own negligence and not on that of his
servant.
The doctrine of the case just cited was followed by this Court
in Cerf vs. Medel (33 Phil., 37 [year 1915]). In the latter case, the
complaint alleged that the defendant's servant had so negligently
driven an automobile, which was operated by defendant as a
public vehicle, that said automobile struck and damaged the
plaintiff's motorcycle. This Court, applying article 1903 and
following the rule in Bahia vs. Litonjua and Leynes, said in part (p.
41) that:

The master is liable for the negligent acts of his servant

where he is the owner or director of a business or
enterprise and the negligent acts are committed while the
servant is engaged in his master's employment as such
owner.
Another case which followed the decision in Bahia vs. Litonjua
and Leynes was Cuison vs. Norton & Harrison Co., 55 Phil., 18
(year 1930). The latter case was an action for damages brought
by Cuison for the death of his seven-year-old son Moises. The
little boy was on his way to school with his sister Marciana. Some
large pieces of lumber fell from a truck and pinned the boy
underneath, instantly killing him. Two youths, Telesforo Binoya
and Francisco Bautista, who were working for Ora, an employee
of defendant Norton & Harrison Co., pleaded guilty to the crime of
homicide through reckless negligence and were sentenced
accordingly. This Court, applying articles 1902 and 1903, held:
The basis of civil law liability is not respondent
superior but the relationship of pater familias. This theory
bases the liability of the master ultimately on his own
negligence and not on that of his servant.
(Bahia vs.Litonjua and Leynes [1915], 30 Phil., 624;
Cangco vs. Manila Railroad Co. [1918], 38 Phil., 768.)
In Walter A. Smith & Co. vs. Cadwallader Gibson Lumber Co., 55
Phil., 517 (year 1930) the plaintiff brought an action for damages
for the demolition of its wharf, which had been struck by the
steamer Helen C belonging to the defendant. This Court held (p.
526):
The evidence shows that Captain Lasa at the time the
plaintiff's wharf collapsed was a duly licensed captain,
authorized to navigate and direct a vessel of any tonnage,
and that the appellee contracted his services because of
his reputation as a captain, according to F. C.
Cadwallader. This being so, we are of the opinion that the
presumption of liability against the defendant has been

overcome by the exercise of the care and diligence of a

good father of a family in selecting Captain Lasa, in
accordance with the doctrines laid down by this court in
the cases cited above, and the defendant is therefore
absolved from all liability.
It is, therefore, seen that the defendant's theory about his
secondary liability is negatived by the six cases above set forth.
He is, on the authority of these cases, primarily and directly
responsible in damages under article 1903, in relation to article
1902, of the Civil Code.
Let us now take up the Philippine decisions relied upon by the
defendant. We study first, City of Manila vs. Manila Electric Co.,
52 Phil., 586 (year 1928). A collision between a truck of the City of
Manila and a street car of the Manila Electric Co. took place on
June 8, 1925. The truck was damaged in the amount of
P1,788.27. Sixto Eustaquio, the motorman, was prosecuted for
the crime of damage to property and slight injuries through
reckless imprudence. He was found guilty and sentenced to pay a
fine of P900, to indemnify the City of Manila for P1,788.27, with
subsidiary imprisonment in case of insolvency. Unable to collect
the indemnity from Eustaquio, the City of Manila filed an action
against the Manila Electric Company to obtain payment, claiming
that the defendant was subsidiarily liable. The main defense was
that the defendant had exercised the diligence of a good father of
a family to prevent the damage. The lower court rendered
judgment in favor of the plaintiff. This Court held, in part, that this
case was governed by the Penal Code, saying:
With this preliminary point out of the way, there is no
escaping the conclusion that the provisions of the Penal
Code govern. The Penal Code in easily understandable
language authorizes the determination of subsidiary
liability. The Civil Code negatives its application by
providing that civil obligations arising from crimes or
misdemeanors shall be governed by the provisions of the
Penal Code. The conviction of the motorman was a

misdemeanor falling under article 604 of the Penal Code.

The act of the motorman was not a wrongful or negligent
act or omission not punishable by law. Accordingly, the
civil obligation connected up with the Penal Code and not
with article 1903 of the Civil Code. In other words, the
Penal Code affirms its jurisdiction while the Civil Code
negatives its jurisdiction. This is a case of criminal
negligence out of which civil liability arises and not a case
of civil negligence.
xxx

xxx

xxx

Our deduction, therefore, is that the case relates to the

Penal Code and not to the Civil Code. Indeed, as pointed
out by the trial judge, any different ruling would permit the
master to escape scot-free by simply alleging and proving
that the master had exercised all diligence in the selection
and training of its servants to prevent the damage. That
would be a good defense to a strictly civil action, but
might or might not be to a civil action either as a part of or
predicated on conviction for a crime or misdemeanor. (By
way of parenthesis, it may be said further that the
statements here made are offered to meet the argument
advanced during our deliberations to the effect that article
0902 of the Civil Code should be disregarded and codal
articles 1093 and 1903 applied.)
It is not clear how the above case could support the defendant's
proposition, because the Court of Appeals based its decision in
the present case on the defendant's primary responsibility under
article 1903 of the Civil Code and not on his subsidiary liability
arising from Fontanilla's criminal negligence. In other words, the
case of City of Manila vs. Manila Electric Co., supra, is predicated
on an entirely different theory, which is the subsidiary liability of
an employer arising from a criminal act of his employee, whereas
the foundation of the decision of the Court of Appeals in the
present case is the employer's primary liability under article 1903

of the Civil Code. We have already seen that this is a proper and
independent remedy.
Arambulo vs. Manila Electric Co. (55 Phil., 75), is another case
invoked by the defendant. A motorman in the employ of the
Manila Electric Company had been convicted o homicide by
simple negligence and sentenced, among other things, to pay the
heirs of the deceased the sum of P1,000. An action was then
brought to enforce the subsidiary liability of the defendant as
employer under the Penal Code. The defendant attempted to
show that it had exercised the diligence of a good father of a
family in selecting the motorman, and therefore claimed
exemption from civil liability. But this Court held:
In view of the foregoing considerations, we are of opinion
and so hold, (1) that the exemption from civil liability
established in article 1903 of the Civil Code for all who
have acted with the diligence of a good father of a family,
is not applicable to the subsidiary civil liability provided in
article 20 of the Penal Code.
The above case is also extraneous to the theory of the defendant
in the instant case, because the action there had for its purpose
the enforcement of the defendant's subsidiary liability under the
Penal Code, while in the case at bar, the plaintiff's cause of action
is based on the defendant's primary and direct responsibility
under article 1903 of the Civil Code. In fact, the above case
destroys the defendant's contention because that decision
illustrates the principle that the employer's primary responsibility
under article 1903 of the Civil Code is different in character from
his subsidiary liability under the Penal Code.
In trying to apply the two cases just referred to, counsel for the
defendant has failed to recognize the distinction between civil
liability arising from a crime, which is governed by the Penal
Code, and the responsibility for cuasi-delito or culpa
aquiliana under the Civil Code, and has likewise failed to give the
importance to the latter type of civil action.

The defendant-petitioner also cites Francisco vs. Onrubia (46

Phil., 327). That case need not be set forth. Suffice it to say that
the question involved was also civil liability arising from a crime.
Hence, it is as inapplicable as the two cases above discussed.
The foregoing authorities clearly demonstrate the separate
individuality of cuasi-delitos or culpa aquiliana under the Civil
Code. Specifically they show that there is a distinction between
civil liability arising from criminal negligence (governed by the
Penal Code) and responsibility for fault or negligence under
articles 1902 to 1910 of the Civil Code, and that the same
negligent act may produce either a civil liability arising from a
crime under the Penal Code, or a separate responsibility for fault
or negligence under articles 1902 to 1910 of the Civil Code. Still
more concretely, the authorities above cited render it inescapable
to conclude that the employer in this case the defendantpetitioner is primarily and directly liable under article 1903 of
the Civil Code.
The legal provisions, authors, and cases already invoked should
ordinarily be sufficient to dispose of this case. But inasmuch as
we are announcing doctrines that have been little understood in
the past, it might not be inappropriate to indicate their
foundations.
Firstly, the Revised Penal Code in article 365 punishes not only
reckless but also simple negligence. If we were to hold that
articles 1902 to 1910 of the Civil Code refer only to fault or
negligence not punished by law, according to the literal import of
article 1093 of the Civil Code, the legal institution of culpa
aquiliana would have very little scope and application in actual
life. Death or injury to persons and damage to property through
any degree of negligence even the slightest would have to
be indemnified only through the principle of civil liability arising
from a crime. In such a state of affairs, what sphere would remain
for cuasi-delito or culpa aquiliana? We are loath to impute to the
lawmaker any intention to bring about a situation so absurd and
anomalous. Nor are we, in the interpretation of the laws, disposed

to uphold the letter that killeth rather than the spirit that giveth life.
We will not use the literal meaning of the law to smother and
render almost lifeless a principle of such ancient origin and such
full-grown development as culpa aquiliana or cuasi-delito, which
is conserved and made enduring in articles 1902 to 1910 of the
Spanish Civil Code.
Secondly, to find the accused guilty in a criminal case, proof of
guilt beyond reasonable doubt is required, while in a civil case,
preponderance of evidence is sufficient to make the defendant
pay in damages. There are numerous cases of criminal
negligence which can not be shown beyond reasonable doubt,
but can be proved by a preponderance of evidence. In such
cases, the defendant can and should be made responsible in a
civil action under articles 1902 to 1910 of the Civil Code.
Otherwise, there would be many instances of unvindicated civil
wrongs. Ubi jus ibi remedium.
Thirdly, to hold that there is only one way to make defendant's
liability effective, and that is, to sue the driver and exhaust his
(the latter's) property first, would be tantamount to compelling the
plaintiff to follow a devious and cumbersome method of obtaining
relief. True, there is such a remedy under our laws, but there is
also a more expeditious way, which is based on the primary and
direct responsibility of the defendant under article 1903 of the
Civil Code. Our view of the law is more likely to facilitate remedy
for civil wrongs, because the procedure indicated by the
defendant is wasteful and productive of delay, it being a matter of
common knowledge that professional drivers of taxis and similar
public conveyance usually do not have sufficient means with
which to pay damages. Why, then, should the plaintiff be required
in all cases to go through this roundabout, unnecessary, and
probably useless procedure? In construing the laws, courts have
endeavored to shorten and facilitate the pathways of right and
justice.
At this juncture, it should be said that the primary and direct
responsibility of employers and their presumed negligence are

principles calculated to protect society. Workmen and employees

should be carefully chosen and supervised in order to avoid injury
to the public. It is the masters or employers who principally reap
the profits resulting from the services of these servants and
employees. It is but right that they should guarantee the latter's
careful conduct for the personnel and patrimonial safety of others.
As Theilhard has said, "they should reproach themselves, at
least, some for their weakness, others for their poor selection and
all for their negligence." And according to Manresa, "It is much
more equitable and just that such responsibility should fall upon
the principal or director who could have chosen a careful and
prudent employee, and not upon the injured person who could not
exercise such selection and who used such employee because of
his confidence in the principal or director." (Vol. 12, p. 622, 2nd
Ed.) Many jurists also base this primary responsibility of the
employer on the principle of representation of the principal by the
agent. Thus, Oyuelos says in the work already cited (Vol. 7, p.
747) that before third persons the employer and employee
"vienen a ser como una sola personalidad, por refundicion de la
del dependiente en la de quien le emplea y utiliza." ("become as
one personality by the merging of the person of the employee in
that of him who employs and utilizes him.") All these observations
acquire a peculiar force and significance when it comes to motor
accidents, and there is need of stressing and accentuating the
responsibility of owners of motor vehicles.
Fourthly, because of the broad sweep of the provisions of both
the Penal Code and the Civil Code on this subject, which has
given rise to the overlapping or concurrence of spheres already
discussed, and for lack of understanding of the character and
efficacy of the action for culpa aquiliana, there has grown up a
common practice to seek damages only by virtue of the civil
responsibility arising from a crime, forgetting that there is another
remedy, which is by invoking articles 1902-1910 of the Civil Code.
Although this habitual method is allowed by our laws, it has
nevertheless rendered practically useless and nugatory the more
expeditious and effective remedy based on culpa
aquiliana or culpa extra-contractual. In the present case, we are

asked to help perpetuate this usual course. But we believe it is

high time we pointed out to the harm done by such practice and
to restore the principle of responsibility for fault or negligence
under articles 1902 et seq. of the Civil Code to its full rigor. It is
high time we caused the stream of quasi-delict or culpa
aquiliana to flow on its own natural channel, so that its waters
may no longer be diverted into that of a crime under the Penal
Code. This will, it is believed, make for the better safeguarding of
private rights because it re-establishes an ancient and additional
remedy, and for the further reason that an independent civil
action, not depending on the issues, limitations and results of a
criminal prosecution, and entirely directed by the party wronged
or his counsel, is more likely to secure adequate and efficacious
redress.
In view of the foregoing, the judgment of the Court of Appeals
should be and is hereby affirmed, with costs against the
defendant-petitioner.

SONG FO & COMPANY, plaintiff-appellee,

vs.
HAWAIIAN PHILIPPINE CO., defendant-appellant.
Hilado and Hilado, Ross, Lawrence and Selph and Antonio T.
Carrascoso, Jr., for appellant.
Arroyo, Gurrea and Muller for appellee.
MALCOLM, J.:
In the court of First Instance of Iloilo, Song Fo & Company,
plaintiff, presented a complaint with two causes of action for
breach of contract against the Hawaiian-Philippine Co.,
defendant, in which judgment was asked for P70,369.50, with
legal interest, and costs. In an amended answer and crosscomplaint, the defendant set up the special defense that since the
plaintiff had defaulted in the payment for the molasses delivered
to it by the defendant under the contract between the parties, the
latter was compelled to cancel and rescind the said contract. The
case was submitted for decision on a stipulation of facts and the
exhibits therein mentioned. The judgment of the trial court
condemned the defendant to pay to the plaintiff a total of
P35,317.93, with legal interest from the date of the presentation
of the complaint, and with costs.
From the judgment of the Court of First Instance the defendant
only has appealed. In this court it has made the following
assignment of errors: "I. The lower court erred in finding that
appellant had agreed to sell to the appellee 400,000, and not only
300,000, gallons of molasses. II. The lower court erred in finding
that the appellant rescinded without sufficient cause the contract
for the sale of molasses executed by it and the appellee. III. The
lower court erred in rendering judgment in favor of the appellee
and not in favor of the appellant in accordance with the prayer of
its answer and cross-complaint. IV. The lower court erred in
denying appellant's motion for a new trial." The specified errors
raise three questions which we will consider in the order
suggested by the appellant.

1. Did the defendant agree to sell to the plaintiff 400,000

gallons of molasses or 300,000 gallons of molasses? The
trial court found the former amount to be correct. The
appellant contends that the smaller amount was the basis
of the agreement.
The contract of the parties is in writing. It is found
principally in the documents, Exhibits F and G. The First
mentioned exhibit is a letter addressed by the
administrator of the Hawaiian-Philippine Co. to Song Fo &
Company on December 13, 1922. It reads:
SILAY, OCC. NEGROS, P.I.
December 13, 1922
Messrs. SONG FO AND CO.
Iloilo, Iloilo.
DEAR SIRS: Confirming our conversation we had today
with your Mr. Song Fo, who visited this Central, we wish
to state as follows:
He agreed to the delivery of 300,000 gallons of molasses
at the same price as last year under the same condition,
and the same to start after the completion of our grinding
season. He requested if possible to let you have
molasses during January, February and March or in other
words, while we are grinding, and we agreed with him that
we would to the best of our ability, altho we are somewhat
handicapped. But we believe we can let you have 25,000
gallons during each of the milling months, altho it interfere
with the shipping of our own and planters sugars to Iloilo.
Mr. Song Fo also asked if we could supply him with
another 100,000 gallons of molasses, and we stated we
believe that this is possible and will do our best to let you
have these extra 100,000 gallons during the next year the

same to be taken by you before November 1st, 1923,

along with the 300,000, making 400,000 gallons in all.
Regarding the payment for our molasses, Mr. Song Fo
gave us to understand that you would pay us at the end of
each month for molasses delivered to you.

With reference to the contents of your letter dated the

13th inst. we confirm all the arrangements you have
stated and in order to make the contract clear, we hereby
quote below our old contract as amended, as per our new
arrangements.
(a) Price, at 2 cents per gallon delivered at the central.

Hoping that this is satisfactory and awaiting your answer

regarding this matter, we remain.

(b) All handling charges and expenses at the central and

at the dock at Mambaguid for our account.

Yours very truly,

HAWAIIAN-PHILIPPINE COMPANY
BY R. C. PITCAIRN
Administrator.

(c) For services of one locomotive and flat cars necessary

for our six tanks at the rate of P48 for the round trip dock
to central and central to dock. This service to be restricted
to one trip for the six tanks.
Yours very truly,

Exhibit G is the answer of the manager of Song Fo & Company to

the Hawaiian-Philippine Co. on December 16, 1922. This letter
reads:

SONG FO & COMPANY

By __________________________
Manager.

December 16th, 1922.

Messrs. HAWAIIAN-PHILIPPINE CO.,
Silay, Neg. Occ., P.I.
DEAR SIRS: We are in receipt of your favours dated the
9th and the 13th inst. and understood all their contents.
In connection to yours of the 13th inst. we regret to hear
that you mentioned Mr. Song Fo the one who visited your
Central, but it was not for he was Mr. Song Heng, the
representative and the manager of Messrs. Song Fo &
Co.

We agree with appellant that the above quoted correspondence is

susceptible of but one interpretation. The Hawaiian-Philippine Co.
agreed to deliver to Song Fo & Company 300,000 gallons of
molasses. The Hawaiian-Philippine Co. also believed it possible
to accommodate Song Fo & Company by supplying the latter
company with an extra 100,000 gallons. But the language used
with reference to the additional 100,000 gallons was not a definite
promise. Still less did it constitute an obligation.
If Exhibit T relied upon by the trial court shows anything, it is
simply that the defendant did not consider itself obliged to deliver
to the plaintiff molasses in any amount. On the other hand,
Exhibit A, a letter written by the manager of Song Fo & Company
on October 17, 1922, expressly mentions an understanding

between the parties of a contract for P300,000 gallons of

molasses.

1923

We sustain appellant's point of view on the first question and rule

that the contract between the parties provided for the delivery by
the Hawaiian-Philippine Co. to song Fo & Company of 300,000
gallons of molasses.
2. Had the Hawaiian-Philippine Co. the right to rescind the
contract of sale made with Song Fo & Company? The trial judge
answers No, the appellant Yes.
Turning to Exhibit F, we note this sentence: "Regarding the
payment for our molasses, Mr. Song Fo (Mr. Song Heng) gave us
to understand that you would pay us at the end of each month for
molasses delivered to you." In Exhibit G, we find Song Fo &
Company stating that they understand the contents of Exhibit F,
and that they confirm all the arrangements you have stated, and
in order to make the contract clear, we hereby quote below our
old contract as amended, as per our new arrangements. (a)
Price, at 2 cents per gallon delivered at the central." In connection
with the portion of the contract having reference to the payment
for the molasses, the parties have agree on a table showing the
date of delivery of the molasses, the amount and date thereof, the
date of receipt of account by plaintiff, and date of payment. The
table mentioned is as follows:

Date of
delivery

Account and date thereof

Date of
receipt of
account by
plaintiff

1922

1923

Dec. 18

P206.16

Dec. 26/22

Jan. 5

Dec. 29

206.16

Jan. 3/23

do

Jan. 5

206.16

Jan. 9/23

Mar. 7 or 8

Mar. 31

Feb. 12

206.16

Mar. 12/23

do

Do

Feb. 27

206.16

do

do

Do

Mar. 5

206.16

do

do

Do

Mar. 16

206.16

Mar. 20/23

Apr. 2/23

Apr. 19

Mar. 24

206.16

Mar. 31/23

do

Do

Mar. 29

206.16

do

do

Do

Some doubt has risen as to when Song Fo & Company was

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

presentation of accounts at the end of each month. Under this

hypothesis, Song Fo & Company should have paid for the
molasses delivered in December, 1922, and for which accounts
were received by it on January 5, 1923, not later than January 31
of that year. Instead, payment was not made until February 20,
1923. All the rest of the molasses was paid for either on time or
ahead of time.
The terms of payment fixed by the parties are controlling. The
time of payment stipulated for in the contract should be treated as
of the essence of the contract. Theoretically, agreeable to certain
conditions which could easily be imagined, the HawaiianPhilippine Co. would have had the right to rescind the contract
because of the breach of Song Fo & Company. But actually, there
is here present no outstanding fact which would legally sanction
the rescission of the contract by the Hawaiian-Philippine Co.
The general rule is that rescission will not be permitted for a slight
or casual breach of the contract, but only for such breaches as
are so substantial and fundamental as to defeat the object of the
parties in making the agreement. A delay in payment for a small
quantity of molasses for some twenty days is not such a violation
of an essential condition of the contract was warrants rescission
for non-performance. Not only this, but the Hawaiian-Philippine
Co. waived this condition when it arose by accepting payment of
the overdue accounts and continuing with the contract.
Thereafter, Song Fo & Company was not in default in payment so
that the Hawaiian-Philippine co. had in reality no excuse for
writing its letter of April 2, 1923, cancelling the contract. (Warner,
Barnes & Co. vs. Inza [1922], 43 Phil., 505.)
We rule that the appellant had no legal right to rescind the
contract of sale because of the failure of Song Fo & Company to
pay for the molasses within the time agreed upon by the parties.
We sustain the finding of the trial judge in this respect.
3. On the basis first, of a contract for 300,000 gallons of
molasses, and second, of a contract imprudently breached by the

Hawaiian-Philippine Co., what is the measure of damages? We

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

Song Heng, the manager of Song Fo & Company, been called as

a witness, he would have testified that the plaintiff would have
realized a profit of P14,948.43, if the contract of December 13,
1922, had been fulfilled by the defendant. Indisputably, this
statement falls far short of presenting proof on which to make a
finding as to damages.
In the first place, the testimony which Mr. Song Heng would have
given undoubtedly would follow the same line of thought as found
in the decision of the trial court, which we have found to be
unsustainable. In the second place, had Mr. Song Heng taken the
witness-stand and made the statement attributed to him, it would
have been insufficient proof of the allegations of the complaint,
and the fact that it is a part of the stipulation by counsel does not
change this result. And lastly, the testimony of the witness Song
Heng, it we may dignify it as such, is a mere conclusion, not a
proven fact. As to what items up the more than P14,000 of
alleged lost profits, whether loss of sales or loss of customers, or
what not, we have no means of knowing.
We rule that the plaintiff is entitled to recover damages from the
defendant for breach of contract on the first cause of action in the
amount of P3,000 and on the second cause of action in no
amount. Appellant's assignments of error are accordingly found to
be well taken in part and not well taken in part.
Agreeable to the foregoing, the judgment appealed from shall be
modified and the plaintiff shall have and recover from the
defendant the sum of P3,000, with legal interest form October 2,
1923, until payment. Without special finding as to costs in either
instance, it is so ordered.

Spouses

MARIANO Z. VELARDE and AVELINA D.

VELARDE, petitioners, vs. COURT OF APPEALS, DAVID
A. RAYMUNDO and GEORGE RAYMUNDO, respondents.
DECISION

PANGANIBAN, J.:
A substantial breach of a reciprocal obligation, like failure to pay
the price in the manner prescribed by the contract, entitles the injured
party to rescind the obligation. Rescission abrogates the contract from
its inception and requires a mutual restitution of benefits received.

The Case

Before us is a Petition for Review on Certiorari [1] questioning the

Decision[2] of the Court of Appeals (CA) in CA-GR CV No. 32991 dated
October 9, 1992, as well as its Resolution [3] dated December 29, 1992
denying petitioners motion for reconsideration.[4]
The dispositive portion of the assailed Decision reads:
WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED
and SET ASIDE and the Decision dated November 14, 1990 dismissing
the [C]omplaint is REINSTATED. The bonds posted by plaintiffsappellees and defendants-appellants are hereby RELEASED.[5]

The Facts

The factual antecedents of the case, as found by the CA, are as

follows:

x x x. David Raymundo [herein private respondent] is the absolute and

registered owner of a parcel of land, together with the house and other
improvements thereon, located at 1918 Kamias St., Dasmarias Village,
Makati and covered by TCT No. 142177. Defendant George Raymundo
[herein private respondent] is Davids father who negotiated
with plaintiffs Avelina and Mariano Velarde [herein petitioners] for the
sale of said property, which was, however, under lease (Exh. 6, p. 232,
Record of Civil Case No. 15952).
On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh.
A; Exh. 1, pp. 11-12, Record) was executed by defendant David
Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as vendee,
with the following terms and conditions:
xxxxxxxxx
That for and in consideration of the amount of EIGHT HUNDRED
THOUSAND PESOS (P800,000.00), Philippine currency, receipt of
which in full is hereby acknowledged by the VENDOR from
the VENDEE, to his entire and complete satisfaction, by these presents
the VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS
AND DELIVERS, freely and voluntarily, with full warranty of a legal
and valid title as provided by law, unto the VENDEE, her heirs,
successors and assigns, the parcel of land mentioned and described
above, together with the house and other improvements thereon.
That the aforesaid parcel of land, together with the house and other
improvements thereon, were mortgaged by the VENDOR to the BANK
OF THE PHILIPPINE ISLANDS, Makati, Metro Manila, to secure the
payment of a loan of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, as
evidenced by a Real Estate Mortgage signed and executed by the
VENDOR in favor of the said Bank of the Philippine Islands, on______

and which Real Estate Mortgage was ratified before Notary Public for
Makati, _______, as Doc. No. ____, Page No. ___, Book No. ___,
Series of 1986 of his Notarial Register.
That as part of the consideration of this sale, the VENDEE hereby
assumes to pay the mortgage obligations on the property herein sold in
the amount of ONE MILLION EIGHT HUNDRED THOUSAND
PESOS (P1,800,000.00), Philippine currency, in favor of Bank of the
Philippine Islands, in the name of the VENDOR, and further agrees to
strictly and faithfully comply with all the terms and conditions
appearing in the Real Estate Mortgage signed and executed by the
VENDOR in favor of BPI, including interests and other charges for late
payment levied by the Bank, as if the same were originally signed and
executed by the VENDEE.
It is further agreed and understood by the parties herein that the capital
gains tax and documentary stamps on the sale shall be for the account of
the VENDOR; whereas, the registration fees and transfer tax thereon
shall be for the account of the VENDEE. (Exh. A, pp. 11-12, Record).
On the same date, and as part of the above-document, plaintiff Avelina
Velarde, with the consent of her husband, Mariano, executed an
Undertaking (Exh. C, pp. 13-14, Record), the pertinent portions of
which read, as follows:

terms and conditions of the Deed of Real Estate Mortgage dated

_________, signed and executed by Mr. David A. Raymundo with the
said Bank, acknowledged before Notary Public for Makati, _____, as
Doc. No. ___, Page No. ___, Book No. __, Series of 1986 of his
Notarial Register.
WHEREAS, while my application for the assumption of the mortgage
obligations on the property is not yet approved by the mortgagee Bank, I
have agreed to pay the mortgage obligations on the property with the
Bank in the name of Mr. David A. Raymundo, in accordance with the
terms and conditions of the said Deed of Real Estate Mortgage,
including all interests and other charges for late payment.
WHEREAS, this undertaking is being executed in favor of Mr. David A.
Raymundo, for purposes of attesting and confirming our private
understanding concerning the said mortgage obligations to be assumed.
NOW, THEREFORE, for and in consideration of the foregoing
premises, and the assumption of the mortgage obligations of ONE
MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, with the Bank of the Philippine islands, I, Mrs.
Avelina D. Velarde, with the consent of my husband, Mariano Z.
Velarde, do hereby bind and obligate myself, my heirs, successors and
assigns, to strictly and faithfully comply with the following terms and
conditions:

xxxxxxxxx
Whereas, as per Deed of Sale with Assumption of Mortgage, I paid Mr.
David A. Raymundo the sum of EIGHT HUNDRED THOUSAND
PESOS (P800,000.00), Philippine currency, and assume the mortgage
obligations on the property with the Bank of the Philippine Islands in
the amount of ONE MILLION EIGHT HUNDRED THOUSAND
PESOS (P1,800,000.00), Philippine currency, in accordance with the

1. That until such time as my assumption of the mortgage obligations on

the property purchased is approved by the mortgagee bank, the Bank of
the Philippine Islands, I shall continue to pay the said loan in accordance
with the terms and conditions of the Deed of Real Estate Mortgage in
the name of Mr. David A. Raymundo, the original Mortgagor.

2. That, in the event I violate any of the terms and conditions of the said
Deed of Real Estate Mortgage, I hereby agree that my downpayment
of P800,000.00, plus all payments made with the Bank of the Philippine
Islands on the mortgage loan, shall be forfeited in favor of Mr. David A.
Raymundo, as and by way of liquidated damages, without necessity of
notice or any judicial declaration to that effect, and Mr. David A
Raymundo shall resume total and complete ownership and possession of
the property sold by way of Deed of Sale with Assumption of Mortgage,
and the same shall be deemed automatically cancelled and be of no
further force or effect, in the same manner as if (the) same had never
been executed or entered into.
3. That I am executing this Undertaking for purposes of binding myself,
my heirs, successors and assigns, to strictly and faithfully comply with
the terms and conditions of the mortgage obligations with the Bank of
the Philippine Islands, and the covenants, stipulations and provisions of
this Undertaking.
That, David A. Raymundo, the vendor of the property mentioned and
identified above, [does] hereby confirm and agree to the undertakings of
the Vendee pertinent to the assumption of the mortgage obligations by
the Vendee with the Bank of the Philippine Islands. (Exh. C, pp. 13-14,
Record).
This undertaking was signed by Avelina and Mariano Velarde and David
Raymundo.
It appears that the negotiated terms for the payment of the balance
of P1.8 million was from the proceeds of a loan that plaintiffs were to
secure from a bank with defendants help. Defendants had a standing
approved credit line with the Bank of the Philippine Islands (BPI). The
parties agreed to avail of this, subject to BPIs approval of an application
for assumption of mortgage by plaintiffs. Pending BPIs approval o[f] the

application, plaintiffs were to continue paying the monthly interests of

the loan secured by a real estate mortgage.
Pursuant to said agreements, plaintiffs paid BPI the monthly interest on
the loan secured by the aforementioned mortgage for three (3) months as
follows: September 19, 1986 at P27,225.00; October 20, 1986
at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. E, H & J,
pp. 15, 17 and 18, Record).
On December 15, 1986, plaintiffs were advised that the Application for
Assumption of Mortgage with BPI was not approved (Exh. J, p. 133,
Record). This prompted plaintiffs not to make any further payment.
On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing
the latter that their non-payment to the mortgage bank constitute[d] nonperformance of their obligation (Exh. 3, p. 220, Record).
In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as
follows:
This is to advise you, therefore, that our client is willing to pay the
balance in cash not later than January 21, 1987 provided: (a) you deliver
actual possession of the property to her not later than January 15, 1987
for her immediate occupancy; (b) you cause the release of title and
mortgage from the Bank of P.I. and make the title available and free
from any liens and encumbrances; and (c) you execute an absolute deed
of sale in her favor free from any liens or encumbrances not later than
January 21, 1987. (Exhs. K, 4, p. 223, Record).
On January 8, 1987, defendants sent plaintiffs a notarial notice of
cancellation/rescission of the intended sale of the subject property
allegedly due to the latters failure to comply with the terms and

conditions of the Deed of Sale with Assumption of Mortgage and the

Undertaking (Exh. 5, pp. 225-226, Record).[6]
Consequently, petitioners filed on February 9, 1987 a Complaint
against private respondents for specific performance, nullity of
cancellation, writ of possession and damages. This was docketed as
Civil Case No. 15952 at the Regional Trial Court of Makati, Branch
149. The case was tried and heard by then Judge Consuelo YnaresSantiago (now an associate justice of this Court), who dismissed the
Complaint in a Decision dated November 14, 1990. [7] Thereafter,
petitioners filed a Motion for Reconsideration.[8]
Meanwhile, then Judge Ynares-Santiago was promoted to the
Court of Appeals and Judge Salvador S. A. Abad Santos was assigned to
the sala she vacated. In an Order dated May 15, 1991,[9] Judge Abad
Santos granted petitioners Motion for Reconsideration and directed the
parties to proceed with the sale. He instructed petitioners to pay the
balance of P1.8 million to private respondents who, in turn, were
ordered to execute a deed of absolute sale and to surrender possession of
the disputed property to petitioners.
Private respondents appealed to the CA.

Ruling of the Court of Appeals

The CA set aside the Order of Judge Abad Santos and reinstated
then Judge Ynares-Santiagos earlier Decision dismissing petitioners
Complaint. Upholding the validity of the rescission made by private
respondents, the CA explained its ruling in this wise:
In the Deed of Sale with Assumption of Mortgage, it was stipulated that
as part of the consideration of this sale, the VENDEE (Velarde) would
assume to pay the mortgage obligation on the subject property in the

amount of P1.8 million in favor of BPI in the name of the Vendor

(Raymundo). Since the price to be paid by the Vendee Velarde includes
the downpayment of P800,000.00 and the balance of P1.8 million, and
the balance of P1.8 million cannot be paid in cash, Vendee Velarde, as
part of the consideration of the sale, had to assume the mortgage
obligation on the subject property. In other words, the assumption of the
mortgage obligation is part of the obligation of Velarde, as vendee,
under the contract. Velarde further agreed to strictly and faithfully
comply with all the terms and conditions appearing in the Real Estate
Mortgage signed and executed by the VENDOR in favor of BPI x x x as
if the same were originally signed and executed by the Vendee. (p.2,
thereof, p.12, Record). This was reiterated by Velarde in the document
entitled Undertaking wherein the latter agreed to continue paying said
loan in accordance with the terms and conditions of the Deed of Real
Estate Mortgage in the name of Raymundo. Moreover, it was stipulated
that in the event of violation by Velarde of any terms and conditions of
said deed of real estate mortgage, the downpayment of P800,000.00 plus
all payments made with BPI or the mortgage loan would be forfeited
and the [D]eed of [S]ale with [A]ssumption of [M]ortgage would
thereby be cancelled automatically and of no force and effect (pars. 2 &
3, thereof, pp. 13-14, Record).
From these 2 documents, it is therefore clear that part of the
consideration of the sale was the assumption by Velarde of the mortgage
obligation of Raymundo in the amount of P1.8 million. This would
mean that Velarde had to make payments to BPI under the [D]eed of
[R]eal [E]state [M]ortgage in the name of Raymundo. The application
with BPI for the approval of the assumption of mortgage would mean
that, in case of approval, payment of the mortgage obligation will now
be in the name of Velarde. And in the event said application is
disapproved, Velarde had to pay in full. This is alleged and admitted in
Paragraph 5 of the Complaint. Mariano Velarde likewise admitted this
fact during the hearing on September 15, 1997 (p. 47, t.s.n., September

15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This being the
case, the non-payment of the mortgage obligation would result in a
violation of the contract. And, upon Velardes failure to pay the agreed
price, the[n] Raymundo may choose either of two (2) actions - (1)
demand fulfillment of the contract, or (2) demand its rescission (Article
1191, Civil Code).
The disapproval by BPI of the application for assumption of mortgage
cannot be used as an excuse for Velardes non-payment of the balance of
the purchase price. As borne out by the evidence, Velarde had to pay in
full in case of BPIs disapproval of the application for assumption of
mortgage. What Velarde should have done was to pay the balance
of P1.8 million. Instead, Velarde sent Raymundo a letter dated January
7, 1987 (Exh. K, 4) which was strongly given weight by the lower court
in reversing the decision rendered by then Judge Ynares-Santiago. In
said letter, Velarde registered their willingness to pay the balance in cash
but enumerated 3 new conditions which, to the mind of this Court,
would constitute a new undertaking or new agreement which is subject
to the consent or approval of Raymundo. These 3 conditions were not
among those previously agreed upon by Velarde and Raymundo. These
are mere offers or, at most, an attempt to novate.But then again, there
can be no novation because there was no agreement of all the parties to
the new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).
It was likewise agreed that in case of violation of the mortgage
obligation, the Deed of Sale with Assumption of Mortgage would be
deemed automatically cancelled and of no further force and effect, as if
the same had never been executed or entered into. While it is true that
even if the contract expressly provided for automatic rescission upon
failure to pay the price, the vendee may still pay, he may do so only for
as long as no demand for rescission of the contract has been made upon
him either judicially or by a notarial act (Article 1592, Civil Code). In
the case at bar, Raymundo sent Velarde a notarial notice dated January

8, 1987 of cancellation/rescission of the contract due to the latters

failure to comply with their obligation. The rescission was justified in
view of Velardes failure to pay the price (balance) which is substantial
and fundamental as to defeat the object of the parties in making the
agreement. As adverted to above, the agreement of the parties involved
a reciprocal obligation wherein the obligation of one is a resolutory
condition of the obligation of the other, the non-fulfillment of which
entitles the other party to rescind the contract (Songcuan vs. IAC, 191
SCRA 28). Thus, the non-payment of the mortgage obligation by
appellees Velarde would create a right to demand payment or to rescind
the contract, or to criminal prosecution (Edca Publishing & Distribution
Corporation vs. Santos, 184 SCRA 614). Upon appellees failure,
therefore, to pay the balance, the contract was properly rescinded (Ruiz
vs. IAC, 184 SCRA 720). Consequently, appellees Velarde having
violated the contract, they have lost their right to its enforcement and
hence, cannot avail of the action for specific performance (Voysaw vs.
Interphil Promotions, Inc., 148 SCRA 635).[10]
Hence, this appeal.[11]

The Issues

Petitioners, in their Memorandum,[12] interpose the following

assignment of errors:
I.
The Court of Appeals erred in holding that the non-payment of the
mortgage obligation resulted in a breach of the contract.
II.

The Court of Appeals erred in holding that the rescission

(resolution) of the contract by private respondents was justified.
III.
The Court of Appeals erred in holding that petitioners January 7,
1987 letter gave three new conditions constituting mere offers or
an attempt to novate necessitating a new agreement between the
parties.

The Courts Ruling

The Petition is partially meritorious.

First Issue:
Breach of Contract

Petitioners aver that their nonpayment of private respondents

mortgage obligation did not constitute a breach of contract, considering
that their request to assume the obligation had been disapproved by the
mortgagee bank. Accordingly, payment of the monthly amortizations
ceased to be their obligation and, instead, it devolved upon private
respondents again.
However, petitioners did not merely stop paying the mortgage
obligations; they also failed to pay the balance of the purchase price. As
admitted by both parties, their agreement mandated that petitioners
should pay the purchase price balance of P1.8 million to private
respondents in case the request to assume the mortgage would be
disapproved. Thus, on December 15, 1986, when petitioners received
notice of the banks disapproval of their application to assume

respondents mortgage, they should have paid the balance of the P1.8
million loan.
Instead of doing so, petitioners sent a letter to private respondents
offering to make such payment only upon the fulfillment of certain
conditions not originally agreed upon in the contract of sale. Such
conditional offer to pay cannot take the place of actual payment as
would discharge the obligation of a buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer the
ownership of and deliver a determinate thing, and the buyer to pay
therefor a price certain in money or its equivalent. [13] Private respondents
had already performed their obligation through the execution of the
Deed of Sale, which effectively transferred ownership of the property to
petitioner through constructive delivery. Prior physical delivery or
possession is not legally required, and the execution of the Deed of Sale
is deemed equivalent to delivery.[14]
Petitioners, on the other hand, did not perform their correlative
obligation of paying the contract price in the manner agreed
upon. Worse, they wanted private respondents to perform obligations
beyond those stipulated in the contract before fulfilling their own
obligation to pay the full purchase price.

Second Issue
Validity of the Rescission

Petitioners likewise claim that the rescission of the contract by

private respondents was not justified, inasmuch as the former had
signified their willingness to pay the balance of the purchase price only
a little over a month from the time they were notified of the disapproval
of their application for assumption of mortgage. Petitioners also aver
that the breach of the contract was not substantial as would warrant a

rescission. They cite several cases[15] in which this Court declared that
rescission of a contract would not be permitted for a slight or casual
breach. Finally, they argue that they have substantially performed their
obligation in good faith, considering that they have already made the
initial payment of P800,000 and three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by petitioners was not
so much their nonpayment of the mortgage obligations, as their
nonperformance of their reciprocal obligation to pay the purchase price
under the contract of sale. Private respondents right to rescind the
contract finds basis in Article 1191 of the Civil Code, which explicitly
provides as follows:
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 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 right of rescission of a party to an obligation under Article
1191 of the Civil Code is predicated on a breach of faith by the other
party who violates the reciprocity between them. [16] The breach
contemplated in the said provision is the obligors failure to comply with
an existing obligation.[17] When the obligor cannot comply with what is
incumbent upon it, the obligee may seek rescission and, in the absence
of any just cause for the court to determine the period of compliance, the
court shall decree the rescission.[18]
In the present case, private respondents validly exercised their right
to rescind the contract, because of the failure of petitioners to comply
with their obligation to pay the balance of the purchase

price. Indubitably, the latter violated the very essence of reciprocity in

the contract of sale, a violation that consequently gave rise to private
respondents right to rescind the same in accordance with law.
True, petitioners expressed their willingness to pay the balance of
the purchase price one month after it became due; however, this was not
equivalent to actual payment as would constitute a faithful compliance
of their reciprocal obligation.Moreover, the offer to pay was conditioned
on the performance by private respondents of additional burdens that
had not been agreed upon in the original contract. Thus, it cannot be said
that the breach committed by petitioners was merely slight or casual as
would preclude the exercise of the right to rescind.
Misplaced is petitioners reliance on the cases[19] they cited because
the factual circumstances in those cases are not analogous to those in the
present one. In Song Fo there was, on the part of the buyer, only a delay
of twenty (20) days to pay for the goods delivered. Moreover, the buyers
offer to pay was unconditional and was accepted by the
seller. In Zepeda, the breach involved a mere one-week delay in paying
the balance of P1,000, which was actually paid. In Tan, the alleged
breach was private respondents delay of only a few days, which was for
the purpose of clearing the title to the property; there was no reference
whatsoever to the nonpayment of the contract price.
In the instant case, the breach committed did not merely consist of
a slight delay in payment or an irregularity; such breach would not
normally defeat the intention of the parties to the contract. Here,
petitioners not only failed to pay theP1.8 million balance, but they also
imposed upon private respondents new obligations as preconditions to
the performance of their own obligation. In effect, the qualified offer to
pay was a repudiation of an existing obligation, which was legally due
and demandable under the contract of sale. Hence, private respondents
were left with the legal option of seeking rescission to protect their own
interest.

Mutual Restitution
Required in Rescission

As discussed earlier, the breach committed by petitioners was the

nonperformance of a reciprocal obligation, not a violation of the terms
and conditions of the mortgage contract. Therefore, the automatic
rescission and forfeiture of payment clauses stipulated in the contract
does not apply. Instead, Civil Code provisions shall govern and regulate
the resolution of this controversy.
Considering that the rescission of the contract is based on Article
1191 of the Civil Code, mutual restitution is required to bring back the
parties to their original situation prior to the inception of the
contract. Accordingly, the initial payment of P800,000 and the
corresponding mortgage payments in the amounts of P27,225, P23,000
and P23,925 (totaling P874,150.00) advanced by petitioners should be
returned by private respondents, lest the latter unjustly enrich
themselves at the expense of the former.

In view of the foregoing discussion, the Court finds it no longer

necessary to discuss the third issue raised by petitioners. Suffice it to say
that the three conditions appearing on the January 7, 1987 letter of
petitioners to private respondents were not part of the original
contract. By that time, it was already incumbent upon the former to pay
the balance of the sale price. They had no right to demand preconditions
to the fulfillment of their obligation, which had become due.
WHEREFORE, the assailed Decision is hereby AFFIRMED with
the MODIFICATION that private respondents are ordered to return to
petitioners the amount of P874,150, which the latter paid as a
consequence of the rescinded contract, with legal interest thereon from
January 8, 1987, the date of rescission. No pronouncement as to costs.
SO ORDERED.

Rescission creates the obligation to return the object of the

contract. It can be carried out only when the one who demands
rescission can return whatever he may be obliged to restore. [20] To
rescind is to declare a contract void at its inception and to put an end to
it as though it never was. It is not merely to terminate it and release the
parties from further obligations to each other, but to abrogate it from the
beginning and restore the parties to their relative positions as if no
contract has been made.[21]

Third Issue
Attempt to Novate

CHARLES F. WOODHOUSE, plaintiff-

appellant,
vs.
FORTUNATO F. HALILI, defendantappellant.
Taada, Pelaez & Teehankee for defendant
and appellant.
Gibbs, Gibbs, Chuidian & Quasha for plaintiff
and appellant.
LABRADOR, J.:
On November 29, 1947, the plaintiff entered
on a written agreement, Exhibit A, with the
defendant, the most important provisions of
which are (1) that they shall organize a
partnership for the bottling and distribution of
Mision soft drinks, plaintiff to act as industrial
partner or manager, and the defendant as a
capitalist, furnishing the capital necessary
therefor; (2) that the defendant was to decide
matters of general policy regarding the
business, while the plaintiff was to attend to
the operation and development of the
bottling plant; (3) that the plaintiff was to
secure the Mission Soft Drinks franchise for
and in behalf of the proposed partnership;
and (4) that the plaintiff was to receive 30 per
cent of the net profits of the business. The
above agreement was arrived at after
various conferences and consultations by
and between them, with the assistance of
their respective attorneys. Prior to entering
into this agreement, plaintiff had informed the
Mission Dry Corporation of Los Angeles,
California, U.S.A., manufacturers of the
bases and ingridients of the beverages

bearing its name, that he had interested a

prominent financier (defendant herein) in the
business, who was willing to invest half a
million dollars in the bottling and distribution
of the said beverages, and requested, in
order that he may close the deal with him,
that the right to bottle and distribute be
granted him for a limited time under the
condition that it will finally be transferred to
the corporation (Exhibit H). Pursuant for this
request, plaintiff was given "a thirty-days"
option on exclusive bottling and distribution
rights for the Philippines" (Exhibit J). Formal
negotiations between plaintiff and defendant
began at a meeting on November 27, 1947,
at the Manila Hotel, with their lawyers
attending. Before this meeting plaintiff's
lawyer had prepared the draft of the
agreement, Exhibit II or OO, but this was not
satisfactory because a partnership, instead
of a corporation, was desired. Defendant's
lawyer prepared after the meeting his own
draft, Exhibit HH. This last draft appears to
be the main basis of the agreement, Exhibit
A.
The contract was finally signed by plaintiff on
December 3, 1947. Plaintiff did not like to go
to the United States without the agreement
being not first signed. On that day plaintiff
and defendant went to the United States,
and on December 10, 1947, a franchise
agreement (Exhibit V) was entered into the
Mission Dry Corporation and Fortunato F.
Halili and/or Charles F. Woodhouse, granted
defendant the exclusive right, license, and
authority to produce, bottle, distribute, and

sell Mision beverages in the Philippines. The

plaintiff and the defendant thereafter returned
to the Philippines. Plaintiff reported for duty
in January, 1948, but operations were not
begun until the first week of February, 1948.
In January plaintiff was given as advance, on
account of profits, the sum of P2,000,
besides the use of a car; in February, 1948,
also P2,000, and in March only P1,000. The
car was withdrawn from plaintiff on March 9,
1948.
When the bottling plant was already on
operation, plaintiff demanded of defendant
that the partnership papers be executed. At
first defendant executed himself, saying
there was no hurry. Then he promised to do
so after the sales of the product had been
increased to P50,000. As nothing definite
was forthcoming, after this condition was
attained, and as defendant refused to give
further allowances to plaintiff, the latter
caused his attorneys to take up the matter
with the defendant with a view to a possible
settlement. as none could be arrived at, the
present action was instituted.
In his complaint plaintiff asks for the
execution of the contract of partnership, an
accounting of the profits, and a share thereof
of 30 per cent, as well as damages in the
amount of P200,000. In his answer
defendant alleges by way of defense (1) that
defendant's consent to the agreement,
Exhibit A, was secured by the representation
of plaintiff that he was the owner, or was
about to become owner of an exclusive

bottling franchise, which representation was

false, and plaintiff did not secure the
franchise, but was given to defendant
himself; (2) that defendant did not fail to
carry out his undertakings, but that it was
plaintiff who failed; (3) that plaintiff agreed to
contribute the exclusive franchise to the
partnership, but plaintiff failed to do so. He
also presented a counter-claim for P200,000
as damages. On these issues the parties
went to trial, and thereafter the Court of First
Instance rendered judgment ordering
defendant to render an accounting of the
profits of the bottling and distribution
business, subject of the action, and to pay
plaintiff 15 percent thereof. it held that the
execution of the contract of partnership could
not be enforced upon the parties, but it also
held that the defense of fraud was not
proved. Against this judgment both parties
have appealed.
The most important question of fact to be
determined is whether defendant had falsely
represented that he had an exclusive
franchise to bottle Mission beverages, and
whether this false representation or fraud, if it
existed, annuls the agreement to form the
partnership. The trial court found that it is
improbable that defendant was never shown
the letter, Exhibit J, granting plaintiff had; that
the drafts of the contract prior to the final one
can not be considered for the purpose of
determining the issue, as they are presumed
to have been already integrated into the final
agreement; that fraud is never presumed and
must be proved; that the parties were

represented by attorneys, and that if any

party thereto got the worse part of the
bargain, this fact alone would not invalidate
the agreement. On this appeal the
defendant, as appellant, insists that plaintiff
did represent to the defendant that he had an
exclusive franchise, when as a matter of fact,
at the time of its execution, he no longer had
it as the same had expired, and that,
therefore, the consent of the defendant to the
contract was vitiated by fraud and it is,
consequently, null and void.
Our study of the record and a consideration
of all the surrounding circumstances lead us
to believe that defendant's contention is not
without merit. Plaintiff's attorney, Mr. Laurea,
testified that Woodhouse presented himself
as being the exclusive grantee of a
franchise, thus:
A. I don't recall any discussion about
that matter. I took along with me the
file of the office with regards to this
matter. I notice from the first draft of
the document which I prepared which
calls for the organization of a
corporation, that the manager, that is,
Mr. Woodhouse, is represented as
being the exclusive grantee of a
franchise from the Mission Dry
Corporation. . . . (t.s.n., p.518)
As a matter of fact, the first draft that Mr.
Laurea prepared, which was made before
the Manila Hotel conference on November
27th, expressly states that plaintiff had the

exclusive franchise. Thus, the first paragraph

states:
Whereas, the manager is the
exclusive grantee of a franchise from
the Mission Dry Corporation San
Francisco, California, for the bottling
of Mission products and their sale to
the public throughout the Philippines;
....
3. The manager, upon the
organization of the said corporation,
shall forthwith transfer to the said
corporation his exclusive right to
bottle Mission products and to sell
them throughout the Philippines. . . . .
(Exhibit II; emphasis ours)
The trial court did not consider this draft on
the principle of integration of jural acts. We
find that the principle invoked is inapplicable,
since the purpose of considering the prior
draft is not to vary, alter, or modify the
agreement, but to discover the intent of the
parties thereto and the circumstances
surrounding the execution of the contract.
The issue of fact is: Did plaintiff represent to
defendant that he had an exclusive
franchise? Certainly, his acts or statements
prior to the agreement are essential and
relevant to the determination of said issue.
The act or statement of the plaintiff was not
sought to be introduced to change or alter
the terms of the agreement, but to prove how

he induced the defendant to enter into it to

prove the representations or inducements, or
fraud, with which or by which he secured the
other party's consent thereto. These are
expressly excluded from the parol evidence
rule. (Bough and Bough vs. Cantiveros and
Hanopol, 40 Phil., 209; port Banga Lumber
Co. vs. Export & Import Lumber Co., 26 Phil.,
602; III Moran 221,1952 rev. ed.) Fraud and
false representation are an incident to the
creation of a jural act, not to its integration,
and are not governed by the rules on
integration. Were parties prohibited from
proving said representations or inducements,
on the ground that the agreement had
already been entered into, it would be
impossible to prove misrepresentation or
fraud. Furthermore, the parol evidence rule
expressly allows the evidence to be
introduced when the validity of an instrument
is put in issue by the pleadings (section 22,
par. (a), Rule 123, Rules of Court),as in this
case.
That plaintiff did make the representation can
also be easily gleaned from his own letters
and his own testimony. In his letter to Mission
Dry Corporation, Exhibit H, he said:.
. . . He told me to come back to him
when I was able to speak with
authority so that we could come to
terms as far as he and I were
concerned. That is the reason why
the cable was sent. Without this
authority, I am in a poor bargaining

position. . .
I would propose that you grant me
the exclusive bottling and distributing
rights for a limited period of time,
during which I may consummate my
plants. . . .
By virtue of this letter the option on exclusive
bottling was given to the plaintiff on October
14, 1947. (See Exhibit J.) If this option for an
exclusive franchise was intended by plaintiff
as an instrument with which to bargain with
defendant and close the deal with him, he
must have used his said option for the
above-indicated purpose, especially as it
appears that he was able to secure, through
its use, what he wanted.
Plaintiff's own version of the preliminary
conversation he had with defendant is to the
effect that when plaintiff called on the latter,
the latter answered, "Well, come back to me
when you have the authority to operate. I am
definitely interested in the bottling business."
(t. s. n., pp. 60-61.) When after the elections
of 1949 plaintiff went to see the defendant
(and at that time he had already the option),
he must have exultantly told defendant that
he had the authority already. It is improbable
and incredible for him to have disclosed the
fact that he had only an option to the
exclusive franchise, which was to last thirty
days only, and still more improbable for him
to have disclosed that, at the time of the
signing of the formal agreement, his option
had already expired. Had he done so, he

would have destroyed all his bargaining

power and authority, and in all probability lost
the deal itself.
The trial court reasoned, and the plaintiff on
this appeal argues, that plaintiff only
undertook in the agreement "to secure the
Mission Dry franchise for and in behalf of the
proposed partnership." The existence of this
provision in the final agreement does not
militate against plaintiff having represented
that he had the exclusive franchise; it rather
strengthens belief that he did actually make
the representation. How could plaintiff assure
defendant that he would get the franchise for
the latter if he had not actually obtained it for
himself? Defendant would not have gone into
the business unless the franchise was raised
in his name, or at least in the name of the
partnership. Plaintiff assured defendant he
could get the franchise. Thus, in the draft
prepared by defendant's attorney, Exhibit
HH, the above provision is inserted, with the
difference that instead of securing the
franchise for the defendant, plaintiff was to
secure it for the partnership. To show that the
insertion of the above provision does not
eliminate the probability of plaintiff
representing himself as the exclusive
grantee of the franchise, the final agreement
contains in its third paragraph the following:
. . . and the manager is ready and
willing to allow the capitalists to use
the exclusive franchise . . .

and in paragraph 11 it also expressly states:

1. In the event of the dissolution or
termination of the partnership, . . . the
franchise from Mission Dry
Corporation shall be reassigned to
the manager.
These statements confirm the conclusion
that defendant believed, or was made to
believe, that plaintiff was the grantee of an
exclusive franchise. Thus it is that it was also
agreed upon that the franchise was to be
transferred to the name of the partnership,
and that, upon its dissolution or termination,
the same shall be reassigned to the plaintiff.
Again, the immediate reaction of defendant,
when in California he learned that plaintiff did
not have the exclusive franchise, was to
reduce, as he himself testified, plaintiff's
participation in the net profits to one half of
that agreed upon. He could not have had
such a feeling had not plaintiff actually made
him believe that he (plaintiff) was the
exclusive grantee of the franchise.
The learned trial judge reasons in his
decision that the assistance of counsel in the
making of the contract made fraud
improbable. Not necessarily, because the
alleged representation took place before the
conferences were had, in other words,
plaintiff had already represented to
defendant, and the latter had already
believed in, the existence of plaintiff's

exclusive franchise before the formal

negotiations, and they were assisted by their
lawyers only when said formal negotiations
actually took place. Furthermore, plaintiff's
attorney testified that plaintiff had said that
he had the exclusive franchise; and
defendant's lawyer testified that plaintiff
explained to him, upon being asked for the
franchise, that he had left the papers
evidencing it.(t.s.n., p. 266.)
We conclude from all the foregoing that
plaintiff did actually represent to defendant
that he was the holder of the exclusive
franchise. The defendant was made to
believe, and he actually believed, that
plaintiff had the exclusive franchise.
Defendant would not perhaps have gone to
California and incurred expenses for the trip,
unless he believed that plaintiff did have that
exclusive privilege, and that the latter would
be able to get the same from the Mission Dry
Corporation itself. Plaintiff knew what
defendant believed about his (plaintiff's)
exclusive franchise, as he induced him to
that belief, and he may not be allowed to
deny that defendant was induced by that
belief. (IX Wigmore, sec. 2423; Sec. 65, Rule
123, Rules of Court.)
We now come to the legal aspect of the false
representation. Does it amount to a fraud
that would vitiate the contract? It must be
noted that fraud is manifested in illimitable
number of degrees or gradations, from the
innocent praises of a salesman about the
excellence of his wares to those malicious

machinations and representations that the

law punishes as a crime. In consequence,
article 1270 of the Spanish Civil Code
distinguishes two kinds of (civil) fraud, the
causal fraud, which may be a ground for the
annulment of a contract, and the incidental
deceit, which only renders the party who
employs it liable for damages. This Court had
held that in order that fraud may vitiate
consent, it must be the causal (dolo
causante), not merely the incidental (dolo
causante), inducement to the making of the
contract. (Article 1270, Spanish Civil Code;
Hill vs. Veloso, 31 Phil. 160.) The record
abounds with circumstances indicative that
the fact that the principal consideration, the
main cause that induced defendant to enter
into the partnership agreement with plaintiff,
was the ability of plaintiff to get the exclusive
franchise to bottle and distribute for the
defendant or for the partnership. The original
draft prepared by defendant's counsel was to
the effect that plaintiff obligated himself to
secure a franchise for the defendant.
Correction appears in this same original
draft, but the change is made not as to the
said obligation but as to the grantee. In the
corrected draft the word "capitalist"(grantee)
is changed to "partnership." The contract in
its final form retains the substituted term
"partnership." The defendant was, therefore,
led to the belief that plaintiff had the
exclusive franchise, but that the same was to
be secured for or transferred to the
partnership. The plaintiff no longer had the
exclusive franchise, or the option thereto, at
the time the contract was perfected. But

while he had already lost his option thereto

(when the contract was entered into), the
principal obligation that he assumed or
undertook was to secure said franchise for
the partnership, as the bottler and distributor
for the Mission Dry Corporation. We declare,
therefore, that if he was guilty of a false
representation, this was not the causal
consideration, or the principal inducement,
that led plaintiff to enter into the partnership
agreement.
But, on the other hand, this supposed
ownership of an exclusive franchise was
actually the consideration or price plaintiff
gave in exchange for the share of 30 percent
granted him in the net profits of the
partnership business. Defendant agreed to
give plaintiff 30 per cent share in the net
profits because he was transferring his
exclusive franchise to the partnership. Thus,
in the draft prepared by plaintiff's lawyer,
Exhibit II, the following provision exists:
3. That the MANAGER, upon the
organization of the said corporation,
shall forthwith transfer to the said
corporation his exclusive right to
bottle Mission products and to sell
them throughout the Philippines. As
a consideration for such transfer, the
CAPITALIST shall transfer to the
Manager fully paid non assessable
shares of the said corporation . . .
twenty-five per centum of the capital
stock of the said corporation. (Par. 3,

Exhibit II; emphasis ours.)

Plaintiff had never been a bottler or a
chemist; he never had experience in the
production or distribution of beverages. As a
matter of fact, when the bottling plant being
built, all that he suggested was about the
toilet facilities for the laborers.
We conclude from the above that while the
representation that plaintiff had the exclusive
franchise did not vitiate defendant's consent
to the contract, it was used by plaintiff to get
from defendant a share of 30 per cent of the
net profits; in other words, by pretending that
he had the exclusive franchise and promising
to transfer it to defendant, he obtained the
consent of the latter to give him (plaintiff) a
big slice in the net profits. This is the dolo
incidentedefined in article 1270 of the
Spanish Civil Code, because it was used to
get the other party's consent to a big share in
the profits, an incidental matter in the
agreement.
El dolo incidental no es el que puede
producirse en el cumplimiento del
contrato sino que significa aqui, el
que concurriendoen el
consentimiento, o precediendolo, no
influyo para arrancar porsi solo el
consentimiento ni en la totalidad de
la obligacion, sinoen algun extremo o
accidente de esta, dando lugar tan
solo a una accion para reclamar
indemnizacion de perjuicios. (8

Manresa 602.)
Having arrived at the conclusion that the
agreement may not be declared null and
void, the question that next comes before us
is, May the agreement be carried out or
executed? We find no merit in the claim of
plaintiff that the partnership was already
a fait accompli from the time of the operation
of the plant, as it is evident from the very
language of the agreement that the parties
intended that the execution of the agreement
to form a partnership was to be carried out at
a later date. They expressly agreed that they
shall form a partnership. (Par. No. 1, Exhibit
A.) As a matter of fact, from the time that the
franchise from the Mission Dry Corporation
was obtained in California, plaintiff himself
had been demanding that defendant comply
with the agreement. And plaintiff's present
action seeks the enforcement of this
agreement. Plaintiff's claim, therefore, is both
inconsistent with their intention and
incompatible with his own conduct and suit.
As the trial court correctly concluded, the
defendant may not be compelled against his
will to carry out the agreement nor execute
the partnership papers. Under the Spanish
Civil Code, the defendant has an
obligation to do, not to give. The law
recognizes the individual's freedom or liberty
to do an act he has promised to do, or not to
do it, as he pleases. It falls within what
Spanish commentators call a very
personal act (acto personalismo), of which
courts may not compel compliance, as it is

considered an act of violence to do so.

Efectos de las obligaciones
consistentes en hechos
personalismo.Tratamos de la
ejecucion de las obligaciones de
hacer en el solocaso de su
incumplimiento por parte del deudor,
ya sean los hechos personalisimos,
ya se hallen en la facultad de un
tercero; porque el complimiento
espontaneo de las mismas esta
regido por los preceptos relativos al
pago, y en nada les afectan las
disposiciones del art. 1.098.
Esto supuesto, la primera dificultad
del asunto consiste en resolver si el
deudor puede ser precisado a
realizar el hecho y porque medios.
Se tiene por corriente entre los
autores, y se traslada generalmente
sin observacion el principio
romanonemo potest precise cogi ad
factum. Nadie puede ser obligado
violentamente a haceruna cosa. Los
que perciben la posibilidad de la
destruccion deeste principio, aaden
que, aun cuando se pudiera obligar
al deudor, no deberia hacerse,
porque esto constituiria una
violencia, y noes la violenciamodo
propio de cumplir las obligaciones
(Bigot, Rolland, etc.). El maestro
Antonio Gomez opinaba lo mismo
cuandodecia que obligar por la

violencia seria infrigir la libertad

eimponer una especie de esclavitud.
xxx

xxx

xxx

En efecto; las obligaciones

contractuales no se acomodan
biencon el empleo de la fuerza fisica,
no ya precisamente porque
seconstituya de este modo una
especie de esclavitud, segun el
dichode Antonio Gomez, sino porque
se supone que el acreedor tuvo
encuenta el caracter personalisimo
del hecho ofrecido, y calculo sobre
laposibilidad de que por alguna razon
no se realizase. Repugna,ademas, a
la conciencia social el empleo de la
fuerza publica, mediante coaccion
sobre las personas, en las relaciones
puramente particulares; porque la
evolucion de las ideas ha ido
poniendo masde relieve cada dia el
respeto a la personalidad humana, y
nose admite bien la violencia sobre
el individuo la cual tiene caracter
visiblemente penal, sino por motivos
que interesen a la colectividad de
ciudadanos. Es, pues, posible y licita
esta violencia cuando setrata de las
obligaciones que hemos llamado ex
lege, que afectanal orden social y a
la entidad de Estado, y aparecen
impuestas sinconsideracion a las
conveniencias particulares, y sin que
por estemotivo puedan tampoco ser
modificadas; pero no debe serlo

cuandola obligacion reviste un

interes puramente particular, como
sucedeen las contractuales, y
cuando, por consecuencia, paraceria
salirseel Estado de su esfera propia,
entrado a dirimir, con apoyo dela
fuerza colectiva, las diferencias
producidas entre los ciudadanos. (19
Scaevola 428, 431-432.)
The last question for us to decide is that of
damages,damages that plaintiff is entitled to
receive because of defendant's refusal to
form the partnership, and damages that
defendant is also entitled to collect because
of the falsity of plaintiff's representation.
(Article 1101, Spanish Civil Code.) Under
article 1106 of the Spanish Civil Code the
measure of damages is the actual loss
suffered and the profits reasonably expected
to be received, embraced in the terms dao
emergente and lucro cesante. Plaintiff is
entitled under the terms of the agreement to
30 per cent of the net profits of the business.
Against this amount of damages, we must
set off the damage defendant suffered by
plaintiff's misrepresentation that he had
obtained a very high percentage of share in
the profits. We can do no better than follow
the appraisal that the parties themselves had
adopted.
When defendant learned in Los Angeles that
plaintiff did not have the exclusive franchise
which he pretended he had and which he
had agreed to transfer to the partnership, his
spontaneous reaction was to reduce

plaintiff's share form 30 per cent to 15 per

cent only, to which reduction defendant
appears to have readily given his assent. It
was under this understanding, which
amounts to a virtual modification of the
contract, that the bottling plant was
established and plaintiff worked as Manager
for the first three months. If the contract may
not be considered modified as to plaintiff's
share in the profits, by the decision of
defendant to reduce the same to one-half
and the assent thereto of plaintiff, then we
may consider the said amount as a fair
estimate of the damages plaintiff is entitled to
under the principle enunciated in the case
of Varadero de Manila vs. Insular Lumber
Co., 46 Phil. 176. Defendant's decision to
reduce plaintiff's share and plaintiff's consent
thereto amount to an admission on the part
of each of the reasonableness of this amount
as plaintiff's share. This same amount was
fixed by the trial court. The agreement
contains the stipulation that upon the
termination of the partnership, defendant
was to convey the franchise back to plaintiff
(Par. 11, Exhibit A). The judgment of the trial
court does not fix the period within which
these damages shall be paid to plaintiff. In
view of paragraph 11 of Exhibit A, we declare
that plaintiff's share of 15 per cent of the net
profits shall continue to be paid while
defendant uses the franchise from the
Mission Dry Corporation.

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

DECISION

AUSTRIA-MARTINEZ, J.:

Before us is a petition for review on certiorari under Rule 45 of

the Rules of Court assailing the Decision,[5] dated September 27, 2000,
of the Court of Appeals (CA) in CA-G.R. SP No. 50520 which declared
petitioner Manila Electric Company (MERALCO) as the direct
employer of individual respondents Rogelio Benamira, Ernie De Sagun,
Diosdado Yogare, Francisco Moro, Oscar Lagonoy, Rolando Beni, Alex
Beni and Raul De Guia (individual respondents for brevity).
The factual background of the case is as follows:

MANILA ELECTRIC COMPANY,

Petitioner,
- versus Present:
ROGELIO BENAMIRA, ERNIE
DE SAGUN[1], DIOSDADO
YOGARE, FRANCISCO MORO[2],
OSCAR LAGONOY[3],ROLANDO
BENI, ALEX BENI, RAUL[4] DE
GUIA, ARMED SECURITY &
DETECTIVE AGENCY, INC.,
(ASDAI) and ADVANCE FORCES
SECURITY & INVESTIGATION
SERVICES, INC., (AFSISI),
Respondents.

The individual respondents are licensed security guards

formerly employed by Peoples Security, Inc. (PSI) and deployed as such
at MERALCOs head office in Ortigas Avenue, Pasig, Metro Manila.

PUNO, Chairman,
On November 30, 1990, the security service agreement between
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
PSI and MERALCO was terminated.
TINGA, and
CHICO-NAZARIO,
Immediately thereafter, fifty-six of PSIs security guards,
including herein eight individual respondents, filed a complaint for
unpaid monetary benefits against PSI and MERALCO, docketed as
Promulgated:
NLRC-NCR Case No. 05-02746-90.
July 14, 2005

Meanwhile, the security service agreement between respondent

Armed Security & Detective Agency, Inc., (ASDAI) and MERALCO
took effect on December 1, 1990. In the agreement, ASDAI was
designated as the AGENCY while MERALCO was designated as the
COMPANY. The pertinent terms and conditions of the agreement are as
follows:
1. The AGENCY shall initially provide the
COMPANY with TWO HUNDRED TWENTY (220)
licensed, uniformed, bonded and armed security guards
to be assigned at the COMPANYs MERALCO
CENTER, complete with nightsticks, flashlights,
raincoats, and other paraphernalias to work on eight (8)
hours duty. The COMPANY shall determine the
number of security guards in accordance with its needs
and the areas of responsibility assigned to each, and
shall have the option to increase or decrease the
number of guards at any time provided the AGENCY is
notified within twenty four (24) hours of the
contemplated reduction or increase of the guards in
which case the cost or consideration shall be adjusted
accordingly.
2. The COMPANY shall furnish the AGENCY
copies of written specific instruction to be followed or
implemented by the latters personnel in the discharge
of their duties and responsibilities and the AGENCY
shall be responsible for the faithful compliance
therewith by its personnel together with such general
and specific orders which shall be issued from time to
time.

3. For and in consideration of the services to

be rendered by the AGENCY to the COMPANY, the
COMPANY during the term of this contract shall pay
the AGENCY the amount of THREE THOUSAND
EIGHT HUNDRED PESOS (P3,800.00) a month per
guard, FOUR THOUSAND PESOS (P4,000.00) for
the Shift Leader and FOUR THOUSAND TWO
HUNDRED PESOS (P4,200.00) for the Detachment
Commander for eight (8) hours work/day, Saturdays,
Sundays and Holidays included, payable semi-monthly.
xxx
5. The AGENCY shall assume the
responsibility for the proper and efficient performance
of duties by the security guards employed by it and it
shall be solely responsible for any act of said security
guards during their watch hours, the COMPANY being
specifically released from any and all liability to third
parties arising from the acts or omission of the security
guards of the AGENCY.
6. The AGENCY also agrees to hold the
COMPANY entirely free from any liability, cause or
causes of action or claims which may be filed by said
security guards by reason of their employment with the
AGENCY pursuant to this Agreement or under the
provisions of the Labor Code, the Social Security Act,
and other laws, decrees or social legislations now
enacted or which hereafter may be enacted.
7. Discipline and Administration of the
security guards shall conform with the rules and

regulations of the AGENCY, and the COMPANY

reserves the right to require without explanation the
replacement of any guard whose behavior, conduct or
appearance is not satisfactory to the COMPANY and
that the AGENCY cannot pull-out any security guard
from the COMPANY without the consent of the latter.

compliance with all pertinent labor laws and

regulations included but not limited to the Labor Code,
Social Security Act, and all other applicable laws and
regulations including that providing for a withholding
tax on income.
xxx

8. The AGENCY shall conduct inspections

through its duly authorized inspector at least two (2)
times a week of guards assigned to all COMPANY
installations secured by the AGENCY located in the
Metropolitan Manila area and at least once a week of
the COMPANYs installations located outside of the
Metropolitan Manila area and to further submit its
inspection reports to the COMPANY. Likewise, the
COMPANY shall have the right at all times to inspect
the guards of the AGENCY assigned to the
COMPANY.
9. The said security guards shall be hired by
the AGENCY and this contract shall not be deemed in
any way to constitute a contract of employment
between the COMPANY and any of the security guards
hired by the AGENCY but merely as a contract
specifying the conditions and manner under which the
AGENCY shall render services to the COMPANY.
10. Nothing herein contained shall be
understood to make the security guards under this
Agreement, employees of the COMPANY, it being
clearly understood that such security guards shall be
considered as they are, employees of the AGENCY
alone, so that the AGENCY shall be responsible for

13. This contract shall take effect on the 1 st day

of December, 1990 and shall continue from year to
year unless sooner terminated by the COMPANY for
cause or otherwise terminated by either party without
cause upon thirty (30) days written notice by one party
to the other.[6]

Subsequently, the individual respondents were absorbed by

ASDAI and retained at MERALCOs head office.
On June 29, 1992, Labor Arbiter Manuel P. Asuncion rendered
a decision in NLRC-NCR Case No. 05-02746-90 in favor of the former
PSI security guards, including the individual respondents.
Less than a month later, or on July 21, 1992, the individual
respondents filed another complaint for unpaid monetary benefits, this
time against ASDAI and MERALCO, docketed as NLRC-NCR Case
No. 00-07-03953-92.
On July 25, 1992, the security service agreement between
respondent Advance Forces Security & Investigation Services, Inc.
(AFSISI) and MERALCO took effect, terminating the previous security
service agreement with ASDAI.[7] Except as to the number of security
guards,[8] the amount to be paid the agency,[9] and the effectivity of the

agreement,[10] the terms and conditions were substantially identical with

the security service agreement with ASDAI.
On July 29, 1992, the individual respondents amended their
complaint to implead AFSISI as party respondent. On August 11,
1992 they again amended their complaint to allege that AFSISI
terminated their services on August 6, 1992 without notice and just
cause and therefore guilty of illegal dismissal.
The individual respondents alleged that: MERALCO and
ASDAI never paid their overtime pay, service incentive leave pay,
premium pay for Sundays and Holidays, P50.00 monthly uniform
allowance and underpaid their 13th month pay; on July 24, 1992, when
the security service agreement of ASDAI was terminated and AFSISI
took over the security functions of the former on July 25, 1992,
respondent security guard Benamira was no longer given any work
assignment when AFSISI learned that the former has a pending case
against PSI, in effect, dismissing him from the service without just
cause; and, the rest of the individual respondents were absorbed by
AFSISI but were not given any assignments, thereby dismissing them
from the service without just cause.
ASDAI denied in general terms any liability for the claims of
the individual respondents, claiming that there is nothing due them in
connection with their services.
On the other hand, MERALCO denied liability on the ground
of lack of employer-employee relationship with individual respondents.
It averred that the individual respondents are the employees of the
security agencies it contracted for security services; and that it has no
existing liability for the individual respondents claims since said
security agencies have been fully paid for their services per their
respective security service agreement.

For its part, AFSISI asserted that: it is not liable for illegal
dismissal since it did not absorb or hire the individual respondents, the
latter were merely hold-over guards from ASDAI; it is not obliged to
employ or absorb the security guards of the agency it replaced since
there is no provision in its security service agreement with MERALCO
or in law requiring it to absorb and hire the guards of ASDAI as it has its
own guards duly trained to service its various clients.
On January 3, 1994, after the submission of their respective
evidence and position papers, Labor Arbiter Pablo C. Espiritu, Jr.
rendered a Decision holding ASDAI and MERALCO jointly and
solidarily liable to the monetary claims of individual respondents and
dismissing the complaint against AFSISI. The dispositive portion of the
decision reads as follows:
WHEREFORE, conformably with the above
premises, judgment is hereby rendered:
1. Declaring ASDAI as the employer of the
complainants and as such complainants should be
reinstated as regular security guards of ASDAI without
loss of seniority rights, privileges and benefits and for
ASDAI to immediately post the complainants as
security guards with their clients. The complaint
against AFSISI is Dismissed for lack of merit.
2. Ordering both respondents, ASDAI and
MERALCO to jointly and solidarily pay complainants
monetary claims (underpayment of actual regular hours
and overtime hours rendered, and premium pay for
holiday and rest day) in the following amounts:

NAME OVERTIME
DIFFERENTIALS
AND
PREMIUM PAY FOR HOLIDAY & REST DAY
1. Rogelio Benamira
P14,615.75
2. Ernie De Sagun
21,164.31
3. Diosdado Yogare
7,108.77
4. Francisco Maro
26,567.11
5. Oscar Lagonay
18,863.36
6. Rolando Beni
21,834.12
7. Alex Beni
21,648.80
8. Ruel De Guia
14,200.33
3. Ordering Respondents ASDAI and
MERALCO to jointly and solidarily pay complainants
10% attorneys fees in the amount of P14,600.25 based
on the total monetary award due to the complainants in
the amount ofP146,002.55.
All other claims of the complainants are
hereby DISMISSED for lack of merit.
The counter-claim of respondent AFSISI for
damages is hereby dismissed for want of substantial
evidence to justify the grant of damages.
SO ORDERED.[11]

All the parties, except AFSISI, appealed to the National Labor

Relations Commission (NLRC).
Individual respondents partial appeal assailed solely the Labor
Arbiters declaration that ASDAI is their employer. They insisted that
AFSISI is the party liable for their illegal dismissal and should be the
party directed to reinstate them.

For its part, MERALCO attributed grave abuse of discretion on

the part of the Labor Arbiter in failing to consider the absence of
employer-employee relationship between MERALCO and individual
respondents.
On the other hand, ASDAI took exception from the Labor
Arbiters finding that it is the employer of the individual respondents and
therefore liable for the latters unpaid monetary benefits.
On April 10, 1995, the NLRC affirmed in toto the decision of
the Labor Arbiter.[12] On April 19, 1995, the individual respondents filed
a motion for partial reconsideration but it was denied by the NLRC in a
Resolution dated May 23, 1995.[13]
On August 11, 1995, the individual respondents filed a petition
for certiorari before us, docketed as G.R. No. 121232.[14] They insisted
that they were absorbed by AFSISI and the latter effected their
termination without notice and just cause.
After the submission of the responsive pleadings and
memoranda, we referred the petition, in accordance with St. Martin
Funeral Homes vs. NLRC,[15] to the CA which, on September 27, 2000,
modified the decision of the NLRC by declaring MERALCO as the
direct employer of the individual respondents.
The CA held that: MERALCO changed the security agency
manning its premises three times while engaging the services of the
same people, the individual respondents; MERALCO employed a
scheme of hiring guards through an agency and periodically entering
into service contract with one agency after another in order to evade the
security of tenure of individual respondents; individual respondents are
regular employees of MERALCO since their services as security guards
are usually necessary or desirable in the usual business or trade of

MERALCO and they have been in the service of MERALCO for no less
than six years; an employer-employee relationship exists between
MERALCO and the individual respondents because: (a) MERALCO
had the final say in the selection and hiring of the guards, as when its
advice was proved to have carried weight in AFSISIs decision not to
absorb the individual respondents into its workforce; (b) MERALCO
paid the wages of individual respondents through ASDAI and AFSISI;
(c) MERALCOs discretion on matters of dismissal of guards was given
great weight and even finality since the record shows that the individual
respondents were replaced upon the advice of MERALCO; and, (d)
MERALCO has the right, at any time, to inspect the guards, to require
without explanation the replacement of any guard whose behavior,
conduct or appearance is not satisfactory and ASDAI and AFSISI cannot
pull out any security guard from MERALCO without the latters consent;
and, a labor-only contract existed between ASDAI and AFSISI and
MERALCO, such that MERALCO is guilty of illegal dismissal without
just cause and liable for reinstatement of individual respondents to its
workforce.
The dispositive portion of the CAs Decision reads as follows:

2. To pay the petitioners full backwages,

inclusive of allowances, and other benefits or their
monetary equivalent computed from the time their
compensation was withheld from them up to the time
of their actual reinstatement, for which the Labor
Arbiter Pablo C. Espiritu, Jr. is hereby directed to
undertake the necessary computation and enforcement
thereof.
With respect to the rest of the dispositive
portion of the assailed Resolution which affirmed the
decision of the Labor Arbiter Pablo C. Espiritu, Jr.,
particularly the joint and solidary liabilities of both
ASDAI and MERALCO to the petitioners, the same
are hereby AFFIRMED.
SO ORDERED.[16]
Hence, the present petition for review on certiorari, filed by
MERALCO, anchored on the following grounds:

WHEREFORE, in view of the foregoing

premises, the Resolution subject of this petition is
hereby AFFIRMED with MODIFICATION in the
sense that MERALCO is declared the employer of the
petitioners.
Accordingly,
private
respondent
MERALCO is hereby ordered as follows:

A. THE COURT OF APPEALS COMMITTED

SERIOUS REVERSIBLE ERROR AND GRAVE
ABUSE OF DISCRETION IN HOLDING THAT AN
EMPLOYER-EMPLOYEE RELATIONSHIP EXISTS
BETWEEN
PETITIONER
MERALCO
AND
INDIVIDUAL RESPONDENTS.

1. To reinstate petitioners into MERALCOs

work force as regular security guards without loss of
seniority rights and other privileges; and

B. THE COURT OF APPEALS GRAVELY ABUSED

ITS
DISCRETION
IN
HOLDING
THAT
INDIVIDUAL RESPONDENTS ARE REGULAR
EMPLOYEES OF PETITIONER MERALCO.

C. THE COURT OF APPEALS COMMITTED

SERIOUS REVERSIBLE ERROR IN ALLOWING
INDIVIDUAL RESPONDENTS TO RAISE FOR THE
FIRST TIME ON APPEAL, THE ISSUE THAT
PETITIONER WAS THEIR DIRECT EMPLOYER.

influenced the decision of PSI and ASDAI to hire or absorb the

individual respondents.

D. THE COURT OF APPEALS COMMITTED

SERIOUS ERROR IN FINDING THAT PETITIONER
MERALCO IS GUILTY OF ILLEGAL DISMISSAL.

With regard to the power to dismiss, MERALCO argues that

the security service agreement clearly provided that the discipline and
administration of the security guards shall conform to the rules and
regulations of the agency.

E. THE COURT OF APPEALS GRAVELY ERRED IN

HOLDING THAT INDIVIDUAL RESPONDENTS
ARE ENTITLED TO REINSTATEMENT INTO
PETITIONERS WORKFORCE.
F. THE COURT OF APPEALS SERIOUSLY ERRED
IN NOT FINDING THAT PETITIONER MERALCO
IS ENTITLED TO REIMBURSEMENT FROM
RESPONDENT ASDAI FOR THE MONETARY
CLAIMS PETITIONER PAID TO INDIVIDUAL
RESPONDENTS PURSUANT TO THE SECURITY
SERVICE AGREEMENT.[17]

Anent the first ground, MERALCO submits that the elements

of four-fold test to determine the existence of an employer-employee
relation, namely: (1) the power to hire, (2) the payment of wages, (3) the
power to dismiss, and (4) the power to control, are not present in the
instant case.
Regarding the power to hire, MERALCO contends that the
records are bereft of any evidence that shows that it participated in or

As to the payment of wages, MERALCO maintains that the

individual respondents received their wages from their agency.

Concerning the power of control, MERALCO asserts that there

is no evidence that individual respondents were subjected to its control
as to the manner or method by which they conduct or perform their
work of guarding of MERALCOs premises.
Furthermore, MERALCO insists that ASDAI and AFSISI are
not labor-only contractors since they have their own equipment,
machineries and work premises which are necessary in the conduct of
their business and the duties performed by the security guards are not
necessary in the conduct of MERALCOs principal business.
With respect to the second ground, MERALCO argues that the
individual respondents cannot be considered as regular employees as the
duties performed by them as security guards are not necessary in the
conduct of MERALCOs principal business which is the distribution of
electricity.
As regards the third ground, MERALCO argues that it was
denied due process when the individual respondents raised for the first
time in the CA the issue that MERALCO is their direct employer since
the individual respondents have always considered themselves as

employees of AFSISI and nowhere in the Labor Arbiter or the NLRC

did they raise the argument that MERALCO is their direct employer.
Regarding the fourth ground, MERALCO asserts that it is not
guilty of illegal dismissal because it had no direct hand or participation
in the termination of the employment of individual respondents, who
even insisted in their petition for certiorari in the CA that it was AFSISI
which terminated their employment.
As to the fifth ground, MERALCO maintains that the
individual respondents are not entitled to reinstatement into its
workforce because no employer-employee relationship exists between it
and the individual respondents.
With regard to the sixth ground, MERALCO asserts that since it
is not the direct employer of the individual respondents, it has a right of
reimbursement from ASDAI for the full amount it may pay to the
individual respondents under Articles 106 and 107 of the Labor Code.
In contrast, the individual respondents maintain that the CA
aptly found that all the elements in employer-employee relationship
exist between them and MERALCO and there is no cogent reason to
deviate from such factual findings.
For its part, ASDAI contends that the instant petition raises
factual matters beyond the jurisdiction of this Court to resolve since
only questions of law may be raised in a petition for review
on certiorari.It submits that while the rule admits of exceptions,
MERALCO failed to establish that the present case falls under any of
the exceptions.

On the other hand, AFSISI avers that there is no employeremployee relationship between MERALCO and the security guards of
any of the security agencies under contract with MERALCO.
It is a settled rule that in the exercise of the Supreme Courts
power of review, the Court is not a trier of facts and does not normally
undertake the re-examination of the evidence presented by the
contending parties during the trial of the case considering that the
findings of facts of the CA are conclusive and binding on the Court.
However, jurisprudence has recognized several exceptions in which
factual issues may be resolved by this Court, to wit:
(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 Court of Appeals
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 petitioners 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 Court of Appeals manifestly overlooked certain
relevant facts not disputed by the parties, which, if
properly considered, would justify a different
conclusion.[18]

change of theory on appeal is objectionable because it is contrary to the

rules of fair play, justice and due process.[21]
In the present case, the existence of an employeremployee relationship is a question of fact which is well within the
province of the CA. Nonetheless, given the reality that the CAs findings
are at odds to those of the NLRC, the Court is constrained to look
deeper into the attendant circumstances obtaining in the present case, as
appearing on record.
At the outset, we note that the individual respondents never
alleged in their complaint in the Labor Arbiter, in their appeal in the
NLRC and even in their petition for certiorari in the CA that
MERALCO was their employer. They have always advanced the theory
that AFSISI is their employer. A perusal of the records shows it was only
in their Memorandum in the CA that this thesis was presented and
discussed for the first time. We cannot ignore the fact that this position
of individual respondents runs contrary to their earlier submission in
their pleadings filed in the Labor Arbiter, NLRC and even in the petition
for certiorari in the CA that AFSISI is their employer and liable for their
termination. As the object of the pleadings is to draw the lines of battle,
so to speak, between the litigants and to indicate fairly the nature of the
claims or defenses of both parties, a party cannot subsequently take a
position contrary to, or inconsistent, with his pleadings.[19]
Moreover, it is a fundamental rule of procedure that higher
courts are precluded from entertaining matters neither alleged in the
pleadings nor raised during the proceedings below, but ventilated for the
first time only in a motion for reconsideration or on appeal. [20] The
individual respondents are bound by their submissions that AFSISI is
their employer and they should not be permitted to change their theory.
Such a change of theory cannot be tolerated on appeal, not due to the
strict application of procedural rules but as a matter of fairness. A

Thus, the CA should not have considered the new theory

offered by the individual respondents in their memorandum.
The present petition for review on certiorari is far from novel
and, in fact, not without precedence. We have ruled in Social Security
System vs. Court of Appeals[22] that:
...The guards or watchmen render their
services to private respondent by allowing themselves
to be assigned by said respondent, which furnishes
them arms and ammunition, to guard and protect the
properties and interests of private respondent's clients,
thus enabling that respondent to fulfill its contractual
obligations. Who the clients will be, and under what
terms and conditions the services will be rendered, are
matters determined not by the guards or watchmen, but
by private respondent. On the other hand, the client
companies have no hand in selecting who among the
guards or watchmen shall be assigned to them. It is
private respondent that issues assignment orders and
instructions and exercises control and supervision over
the guards or watchmen, so much so that if, for one
reason or another, the client is dissatisfied with the
services of a particular guard, the client cannot himself
terminate the services of such guard, but has to notify
private respondent, which either substitutes him with
another or metes out to him disciplinary measures. That
in the course of a watchman's assignment the client
conceivably issues instructions to him, does not in the
least detract from the fact that private respondent is the

employer of said watchman, for in legal contemplation

such instructions carry no more weight than mere
requests, the privity of contract being between the
client and private respondent, not between the client
and the guard or watchman. Corollarily, such giving
out of instructions inevitably spring from the client's
right predicated on the contract for services entered
into by it with private respondent.
In the matter of compensation, there can be no
question at all that the guards or watchmen receive
compensation from private respondent and not from
the companies or establishments whose premises they
are guarding. The fee contracted for to be paid by the
client is admittedly not equal to the salary of a guard or
watchman; such fee is arrived at independently of the
salary to which the guard or watchman is entitled under
his arrangements with private respondent.[23]

consideration of the latter's service is much more than

the wages of any one watchman. In point of fact, it is
the agency that quantifies and pays the wages to which
a watchman is entitled.
Neither does the petitioner have any power to
dismiss the security guards. In fact, We fail to see any
evidence in the record that it wielded such a power. It
is true that it may request the agency to change a
particular guard. But this, precisely, is proof that the
power lies in the hands of the agency.
Since the petitioner has to deal with the
agency, and not the individual watchmen, on matters
pertaining to the contracted task, it stands to reason that
the petitioner does not exercise any power over the
watchmen's conduct. Always, the agency stands
between the petitioner and the watchmen; and it is the
agency that is answerable to the petitioner for the
conduct of its guards.[25]

and reiterated in American President Lines vs. Clave,[24] thus:

In the light of the foregoing standards, We fail
to see how the complaining watchmen of the Marine
Security Agency can be considered as employees of the
petitioner. It is the agency that recruits, hires, and
assigns the work of its watchmen. Hence, a watchman
can not perform any security service for the petitioner's
vessels unless the agency first accepts him as its
watchman. With respect to his wages, the amount to be
paid to a security guard is beyond the power of the
petitioner to determine. Certainly, the lump sum
amount paid by the petitioner to the agency in

In this case, the terms and conditions embodied in the security

service agreement between MERALCO and ASDAI expressly
recognized ASDAI as the employer of individual respondents.
Under the security service agreement, it was ASDAI which (a)
selected, engaged or hired and discharged the security guards; (b)
assigned them to MERALCO according to the number agreed upon; (c)
provided the uniform, firearms and ammunition, nightsticks, flashlights,
raincoats and other paraphernalia of the security guards; (d) paid them
salaries or wages; and, (e) disciplined and supervised them or
principally controlled their conduct. The agreement even explicitly
provided that [n]othing herein contained shall be understood to make the

security guards under this Agreement, employees of the COMPANY, it

being clearly understood that such security guards shall be considered as
they are, employees of the AGENCY alone. Clearly, the individual
respondents are the employees of ASDAI.
As to the provision in the agreement that MERALCO reserved
the right to seek replacement of any guard whose behavior, conduct or
appearance is not satisfactory, such merely confirms that the power to
discipline lies with the agency. It is a standard stipulation in security
service agreements that the client may request the replacement of the
guards to it. Service-oriented enterprises, such as the business of
providing security services, generally adhere to the business adage that
the customer or client is always right and, thus, must satisfy the
interests, conform to the needs, and cater to the reasonable impositions
of its clients.
Neither is the stipulation that the agency cannot pull out any
security guard from MERALCO without its consent an indication of
control. It is simply a security clause designed to prevent the agency
from unilaterally removing its security guards from their assigned posts
at MERALCOs premises to the latters detriment.
The clause that MERALCO has the right at all times to inspect
the guards of the agency detailed in its premises is likewise not
indicative of control as it is not a unilateral right. The agreement
provides that the agency is principally mandated to conduct inspections,
without prejudice to MERALCOs right to conduct its own inspections.
Needless to stress, for the power of control to be present, the
person for whom the services are rendered must reserve the right to
direct not only the end to be achieved but also the means for reaching
such end.[26] Not all rules imposed by the hiring party on the hired party
indicate that the latter is an employee of the former.[27] Rules which

serve as general guidelines towards the achievement of the mutually

desired result are not indicative of the power of control.[28]
Verily, the security service agreements in the present case
provided that all specific instructions by MERALCO relating to the
discharge by the security guards of their duties shall be directed to the
agency and not directly to the individual respondents. The individual
respondents failed to show that the rules of MERALCO controlled their
performance.
Moreover, ASDAI and AFSISI are not labor-only contractors.
There is labor only contract when the person acting as contractor is
considered merely as an agent or intermediary of the principal who is
responsible to the workers in the same manner and to the same extent as
if they had been directly employed by him. On the other hand, job
(independent) contracting is present if the following conditions are met:
(a) the contractor carries on an independent business and undertakes the
contract work on his own account under his own responsibility
according to his own manner and method, free from the control and
direction of his employer or principal in all matters connected with the
performance of the work except to the result thereof; and (b) the
contractor has substantial capital or investments in the form of tools,
equipment, machineries, work premises and other materials which are
necessary in the conduct of his business. [29] Given the above distinction
and the provisions of the security service agreements entered into by
petitioner with ASDAI and AFSISI, we are convinced that ASDAI and
AFSISI were engaged in job contracting.
The individual respondents can not be considered as regular
employees of the MERALCO for, although security services are
necessary and desirable to the business of MERALCO, it is not directly
related to its principal business and may even be considered unnecessary

in the conduct of MERALCOs principal business, which is the

distribution of electricity.
Furthermore, the fact that the individual respondents filed their
claim for unpaid monetary benefits against ASDAI is a clear indication
that the individual respondents acknowledge that ASDAI is their
employer.
We cannot give credence to individual respondents insistence
that they were absorbed by AFSISI when MERALCOs security service
agreement with ASDAI was terminated. The individual respondents
failed to present any evidence to confirm that AFSISI absorbed them
into its workforce. Thus, respondent Benamira was not retained in his
post at MERALCO since July 25, 1992 due to the termination of the
security service agreement of MERALCO with ASDAI. As for the rest
of the individual respondents, they retained their post only as hold-over
guards until the security guards of AFSISI took over their post onAugust
6, 1992.[30]
In the present case, respondent Benamira has been off-detail for
seventeen days while the rest of the individual respondents have only
been off- detail for five days when they amended their complaint
onAugust 11, 1992 to include the charge of illegal dismissal. The
inclusion of the charge of illegal dismissal then was premature.
Nonetheless, bearing in mind that ASDAI simply stopped giving the
individual respondents any assignment and their inactivity clearly
persisted beyond the six-month period allowed by Article 286 [31] of the
Labor Code, the individual respondents were, in effect, constructively
dismissed by ASDAI from employment, hence, they should be
reinstated.
The fact that there is no actual and direct employer-employee
relationship between MERALCO and the individual respondents does
not exonerate MERALCO from liability as to the monetary claims of the

individual respondents. When MERALCO contracted for security

services with ASDAI as the security agency that hired individual
respondents to work as guards for it, MERALCO became an indirect
employer of individual respondents pursuant to Article 107 of the Labor
Code, which reads:
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.
When ASDAI as contractor failed to pay the individual respondents,
MERALCO as principal becomes jointly and severally liable for the
individual respondents wages, under Articles 106 and 109 of the Labor
Code, which provide:
ART. 106. Contractor or subcontractor.
- Whenever an employer enters into a contract with
another person for the performance of the former[s]
work, the employees of the contractor and of the
latter[s] 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. 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 purpose of
determining the extent of their civil liability under this
Chapter, they shall be considered as direct employers.

payment is made before the debt is due, no interest for

the intervening period may be demanded.

ASDAI is held liable by virtue of its status as direct employer,

while MERALCO is deemed the indirect employer of the individual
respondents for the purpose of paying their wages in the event of failure
of ASDAI to pay them. This statutory scheme gives the workers the
ample protection

ASDAI may not seek exculpation by claiming that

MERALCOs payments to it were inadequate for the individual
respondents lawful compensation. As an employer, ASDAI 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.[35]

consonant with labor and social justice provisions of the 1987

Constitution.[32]
However, as held in Mariveles Shipyard Corp. vs. Court of
Appeals,[33] the solidary liability of MERALCO with that of ASDAI
does not preclude the application of Article 1217 of the Civil Code on
theright of reimbursement from his co-debtor by the one who paid,
[34]
which provides:
ART. 1217. Payment made by one of the
solidary debtors extinguishes the obligation. If two or
more solidary debtors offer to pay, the creditor may
choose which offer to accept.
He who made the payment may claim from his
co-debtors only the share which corresponds to each,
with the interest for the payment already made. If the

When one of the solidary debtors cannot,

because of his insolvency, reimburse his share to the
debtor paying the obligation, such share shall be borne
by all his co-debtors, in proportion to the debt of each.

WHEREFORE, the present petition is GRANTED. The assailed

Decision, dated September 27, 2000, of the CA is REVERSED and SET
ASIDE. The Decision of the Labor Arbiter dated January 3, 1994 and
the Resolution of the NLRC dated April 10, 1995 are AFFIRMED with
the MODIFICATION that the joint and solidary liability of ASDAI and
MERALCO to pay individual respondents monetary claims for
underpayment of actual regular hours and overtime hours rendered, and
premium pay for holiday and rest day, as well as attorneys fees, shall be
without prejudice to MERALCOs right of reimbursement from ASDAI.
SO ORDERED.

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

DECISION
FRANCISCO CHAVEZ,
Petitioner,

G.R. No. 168338

Present:

- versus -

RAUL M. GONZALES,
in his capacity as the
Secretary of the
Department of Justice;
and NATIONAL TELECOMMUNICATIONS
COMMISSION (NTC),
Respondents.

PUNO, C.J.,
QUISUMBING,
YNARES-SANTIAGO,
SANDOVAL-GUTIERREZ,
CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
CARPIO MORALES,
AZCUNA,
TINGA,
CHICO-NAZARIO,
VELASCO, JR.,
NACHURA,
REYES, and
LEONARDO-DE CASTRO, JJ.
Promulgated:
February 15, 2008

PUNO, C.J.:
A. Precis
In this jurisdiction, it is established that
freedom of the press is crucial and so
inextricably woven into the right to free
speech and free expression, that any attempt
to restrict it must be met with an
examination so critical that only a danger
that is clear and present would be allowed to
curtail it.
Indeed, we have not wavered in the
duty to uphold this cherished freedom. We
have struck down laws and issuances meant
to curtail this right, as in Adiong v.
COMELEC,[1] Burgos v. Chief of Staff,
[2]
Social Weather Stations v. COMELEC,
[3]
and Bayan v. Executive Secretary Ermita.
[4]
When on its face, it is clear that a

governmental act is nothing more than a naked means to prevent the free
exercise of speech, it must be nullified.

Wiretapping Act. These persons included Secretary Bunye and

Atty. Paguia. He also stated that persons possessing or airing
said tapes were committing a continuing offense, subject to
arrest by anybody who had personal knowledge if the crime
was committed or was being committed in their presence. [9]

B. The Facts
1.

2.

3.

The case originates from events that occurred a year after the
2004 national and local elections. On June 5, 2005, Press
Secretary Ignacio Bunye told reporters that the opposition was
planning to destabilize the administration by releasing an
audiotape of a mobile phone conversation allegedly between the
President of the Philippines, Gloria Macapagal Arroyo, and a
high-ranking official of the Commission on Elections
(COMELEC). The conversation was audiotaped allegedly
through wire-tapping.[5] Later, in a Malacaang press briefing,
Secretary Bunye produced two versions of the tape, one
supposedly the complete version, and the other, a spliced,
doctored or altered version, which would suggest that the
President had instructed the COMELEC official to manipulate
the election results in the Presidents favor. [6] It seems that
Secretary Bunye admitted that the voice was that of President
Arroyo, but subsequently made a retraction. [7]
On June 7, 2005, former counsel of deposed President Joseph
Estrada, Atty. Alan Paguia, subsequently released an alleged
authentic tape recording of the wiretap. Included in the tapes
were purported conversations of the President, the First
Gentleman Jose Miguel Arroyo, COMELEC Commissioner
Garcillano, and the late Senator Barbers.[8]
On June 8, 2005, respondent Department of Justice (DOJ)
Secretary Raul Gonzales warned reporters that those who had
copies of the compact disc (CD) and those broadcasting or
publishing its contents could be held liable under the Anti-

4.

On June 9, 2005, in another press briefing, Secretary Gonzales

ordered the National Bureau of Investigation (NBI) to go after
media organizations found to have caused the spread, the
playing and the printing of the contents of a tape of an alleged
wiretapped conversation involving the President about fixing
votes in the 2004 national elections. Gonzales said that he was
going to start with Inq7.net, a joint venture between
the Philippine Daily Inquirer and GMA7 television network,
because by the very nature of the Internet medium, it was able
to disseminate the contents of the tape more widely.He then
expressed his intention of inviting the editors and managers of
Inq7.net and GMA7 to a probe, and supposedly declared, I
[have] asked the NBI to conduct a tactical interrogation of all
concerned. [10]
5. On June 11, 2005, the NTC issued this press release: [11]
NTC GIVES FAIR WARNING TO RADIO
AND TELEVISION OWNERS/OPERATORS
TO OBSERVE ANTI-WIRETAPPING LAW
AND
PERTINENT
CIRCULARS
ON
PROGRAM STANDARDS
xxx xxx xxx
Taking into consideration the countrys unusual
situation, and in order not to unnecessarily
aggravate the same, the NTC warns all radio
stations
and
television
network

owners/operators that the conditions of the

authorization and permits issued to them by
Government like the Provisional Authority
and/or Certificate of Authority explicitly
provides that said companies shall not use
[their] stations for the broadcasting or
telecasting of false information or willful
misrepresentation. Relative thereto, it has come
to the attention of the [NTC] that certain
personalities are in possession of alleged taped
conversations which they claim involve the
President of the Philippines and a
Commissioner of the COMELEC regarding
supposed violation of election laws.
These personalities have admitted that the
taped conversations are products of illegal
wiretapping operations.
Considering that these taped conversations
have not been duly authenticated nor could it
be said at this time that the tapes contain an
accurate or truthful representation of what was
recorded therein, it is the position of the [NTC]
that the continuous airing or broadcast of the
said taped conversations by radio and television
stations is a continuing violation of the AntiWiretapping Law and the conditions of the
Provisional Authority and/or Certificate of
Authority issued to these radio and television
stations. It has been subsequently established
that the said tapes are false and/or fraudulent
after a prosecution or appropriate investigation,

the concerned radio and television companies

are
hereby warned
that
their
broadcast/airing of such false information
and/or willful misrepresentation shall be just
cause for the suspension, revocation and/or
cancellation of the licenses or authorizations
issued to the said companies.
In addition to the above, the [NTC] reiterates
the pertinent NTC circulars on program
standards to be observed by radio and
television stations. NTC Memorandum Circular
111-12-85 explicitly states, among others, that
all radio broadcasting and television stations
shall, during any broadcast or telecast, cut off
from the air the speech, play, act or scene or
other matters being broadcast or telecast the
tendency thereof is to disseminate false
information
or
such
other
willful
misrepresentation, or to propose and/or incite
treason, rebellion or sedition. The foregoing
directive had been reiterated by NTC
Memorandum Circular No. 22-89, which, in
addition thereto, prohibited radio, broadcasting
and television stations from using their stations
to broadcast or telecast any speech, language or
scene disseminating false information or willful
misrepresentation, or inciting, encouraging or
assisting in subversive or treasonable acts.
The [NTC] will not hesitate, after observing
the requirements of due process, to apply
with full force the provisions of said

Circulars and their accompanying sanctions

on erring radio and television stations and
their owners/operators.
6.

verification of sources, non-airing of

materials that would constitute inciting to
sedition and/or rebellion.

On June 14, 2005, NTC held a dialogue with the Board of

Directors of the Kapisanan ng mga Brodkaster sa Pilipinas
(KBP). NTC allegedly assured the KBP that the press release
did not violate the constitutional freedom of speech, of
expression, and of the press, and the right to
information. Accordingly, NTC and KBP issued a Joint Press
Statement which states, among others, that: [12]
NTC respects and will not hinder freedom of the
press and the right to information on matters
of public concern. KBP & its members have
always been committed to the exercise of
press freedom with high sense of
responsibility and discerning judgment of
fairness and honesty.
NTC did not issue any MC [Memorandum
Circular] or Order constituting a restraint of
press freedom or censorship. The NTC
further denies and does not intend to limit or
restrict the interview of members of the
opposition or free expression of views.

The KBP Codes also require that no false

statement or willful misrepresentation is
made in the treatment of news or
commentaries.
The supposed wiretapped tapes should be treated
with sensitivity and handled responsibly
giving due consideration to the process being
undertaken to verify and validate the
authenticity and actual content of the same.

C. The Petition
Petitioner Chavez filed a petition under Rule 65 of the Rules of
Court against respondents Secretary Gonzales and the NTC, praying for
the issuance of the writs of certiorari and prohibition, as extraordinary
legal remedies, to annul void proceedings, and to prevent the unlawful,
unconstitutional and oppressive exercise of authority by the respondents.
[13]

What is being asked by NTC is that the exercise

of press freedom [be] done responsibly.

Alleging that the acts of respondents are violations of the

freedom on expression and of the press, and the right of the people to
information on matters of public concern, [14] petitioner specifically asked
this Court:

KBP has program standards that KBP members

will observe in the treatment of news and
public affairs programs. These include

[F]or [the] nullification of acts, issuances, and orders

of respondents committed or made since June 6, 2005
until the present that curtail the publics rights to

freedom of expression and of the press, and to

information on matters of public concern specifically
in relation to information regarding the controversial
taped conversion of President Arroyo and for
prohibition of the further commission of such acts, and
making of such issuances, and orders by
respondents. [15]
Respondents[16] denied that the acts transgress the Constitution,
and questioned petitioners legal standing to file the petition. Among the
arguments they raised as to the validity of the fair warning issued by
respondent NTC, is that broadcast media enjoy lesser constitutional
guarantees compared to print media, and the warning was issued
pursuant to the NTCs mandate to regulate the telecommunications
industry. [17] It was also stressed that most of the [television] and radio
stations continue, even to this date, to air the tapes, but of late within the
parameters agreed upon between the NTC and KBP. [18]
D. THE PROCEDURAL THRESHOLD: LEGAL STANDING
To be sure, the circumstances of this case make the
constitutional challenge peculiar. Petitioner, who is not a member of the
broadcast media, prays that we strike down the acts and statements
made by respondents as violations of the right to free speech, free
expression and a free press. For another, the recipients of the press
statements have not come forwardneither intervening nor joining
petitioner in this action. Indeed, as a group, they issued a joint statement
with respondent NTC that does not complain about restraints on
freedom of the press.
It would seem, then, that petitioner has not met the requisite
legal standing, having failed to allege such a personal stake in the
outcome of the controversy as to assure that concrete adverseness which

sharpens the presentation of issues upon which the Court so largely

depends for illumination of difficult constitutional questions. [19]
But as early as half a century ago, we have already held that where
serious constitutional questions are involved, the transcendental
importance to the public of these cases demands that they be settled
promptly and definitely, brushing aside if we must, technicalities of
procedure. [20] Subsequently, this Court has repeatedly and consistently
refused to wield procedural barriers as impediments to its addressing
and resolving serious legal questions that greatly impact on public
interest,[21] in keeping with the Court's duty under the 1987 Constitution
to determine whether or not other branches of government have kept
themselves within the limits of the Constitution and the laws and that
they have not abused the discretion given to them.
Thus, in line with the liberal policy of this Court on locus standi when a
case involves an issue of overarching significance to our society,[22] we
therefore brush aside technicalities of procedure and take cognizance of
this petition,[23] seeing as it involves a challenge to the most exalted of
all the civil rights, the freedom of expression. The petition raises other
issues like the extent of the right to information of the public. It is
fundamental, however, that we need not address all issues but only
the most decisive one which in the case at bar is whether the acts of
the respondents abridge freedom of speech and of the press.
But aside from the primordial issue of determining whether
free speech and freedom of the press have been infringed, the case at
bar also gives this Court the opportunity: (1) to distill the essence of
freedom of speech and of the press now beclouded by the vagaries of
motherhood statements; (2) to clarify the types of speeches and their
differing restraints allowed by law; (3) to discuss the core concepts
of prior restraint, content-neutral and content-based regulations
and their constitutional standard of review; (4) to examine the

historical difference in the treatment of restraints between print and

broadcast media and stress the standard of review governing both;
and (5) to call attention to the ongoing blurring of the lines of
distinction between print and broadcast media.

is only when the people have unbridled access to information and the
press that they will be capable of rendering enlightened judgments. In
the oft-quoted words of Thomas Jefferson, we cannot both be free and
ignorant.

E. RE-EXAMINING THE LAW ON FREEDOM OF SPEECH,

OF EXPRESSION AND OF THE PRESS

E.1. ABSTRACTION OF FREE SPEECH

No law shall be passed abridging the freedom of

speech, of expression, or of the press, or the right of
the people peaceably to assemble and petition the
government for redress of grievances.[24]
Freedom of expression has gained recognition as a fundamental
principle of every democratic government, and given a preferred right
that stands on a higher level than substantive economic freedom or other
liberties. The cognate rights codified by Article III, Section 4 of the
Constitution, copied almost verbatim from the First Amendment of the
U.S. Bill of Rights,[25] were considered the necessary consequence of
republican institutions and the complement of free speech. [26] This
preferred status of free speech has also been codified at the international
level, its recognition now enshrined in international law as a customary
norm that binds all nations.[27]
In the Philippines, the primacy and high esteem accorded
freedom of expression is a fundamental postulate of our constitutional
system. [28] This right was elevated to constitutional status in the 1935,
the 1973 and the 1987 Constitutions, reflecting our own lesson of
history, both political and legal, that freedom of speech is an
indispensable condition for nearly every other form of freedom.
[29]
Moreover, our history shows that the struggle to protect the freedom
of speech, expression and the press was, at bottom, the struggle for the
indispensable preconditions for the exercise of other freedoms. [30] For it

Surrounding the freedom of speech clause are various concepts

that we have adopted as part and parcel of our own Bill of Rights
provision on this basic freedom. [31] What is embraced under this
provision was discussed exhaustively by the Court in Gonzales v.
Commission on Elections, [32] in which it was held:
At the very least, free speech and free press may be
identified with the liberty to discuss publicly and
truthfully any matter of public interest without
censorship and punishment. There is to be no
previous restraint on the communication of views or
subsequent liability whether in libel suits,
prosecution for sedition, or action for damages, or
contempt proceedings unless there be a clear and
present danger of substantive evil that Congress has
a right to prevent. [33]
Gonzales further explained that the vital need of a constitutional
democracy for freedom of expression is undeniable, whether as a means
of assuring individual self-fulfillment; of attaining the truth; of assuring
participation by the people in social, including political, decisionmaking; and of maintaining the balance between stability and change.
[34]
As early as the 1920s, the trend as reflected in Philippine and
American decisions was to recognize the broadest scope and assure the
widest latitude for this constitutional guarantee. The trend represents a

profound commitment to the principle that debate on public issue should

be uninhibited, robust, and wide-open. [35]
Freedom of speech and of the press means something more than
the right to approve existing political beliefs or economic arrangements,
to lend support to official measures, and to take refuge in the existing
climate of opinion on any matter of public consequence. [36] When
atrophied, the right becomes meaningless.[37] The right belongs as well -if not more to those who question, who do not conform, who differ.
[38]
The ideas that may be expressed under this freedom are confined not
only to those that are conventional or acceptable to the majority. To be
truly meaningful, freedom of speech and of the pressshould allow and
even encourage the articulation of the unorthodox view, though it be
hostile to or derided by others; or though such view induces a condition
of unrest, creates dissatisfaction with conditions as they are, or even stirs
people to anger.[39] To paraphrase Justice Holmes, it is freedom for the
thought that we hate, no less than for the thought that agrees with us. [40]
The scope of freedom of expression is so broad that it extends protection
to nearly all forms of communication. It protects speech, print and
assembly regarding secular as well as political causes, and is not
confined to any particular field of human interest. The protection covers
myriad matters of public interest or concern embracing all issues, about
which information is needed or appropriate, so as to enable members of
society to cope with the exigencies of their period. The constitutional
protection assures the broadest possible exercise of free speech and free
press for religious, political, economic, scientific, news, or informational
ends, inasmuch as the Constitution's basic guarantee of freedom to
advocate ideas is not confined to the expression of ideas that are
conventional or shared by a majority.
The constitutional protection is not limited to the exposition of
ideas. The protection afforded free speech extends to speech or

publications that are entertaining as well as instructive or

informative.Specifically, in Eastern Broadcasting Corporation (DYRE)
v. Dans,[41] this Court stated that all forms of media, whether print or
broadcast, are entitled to the broad protection of the clause on freedom
of speech and of expression.
While all forms of communication are entitled to the broad
protection of freedom of expression clause, the freedom of film,
television and radio broadcasting is somewhat lesser in scope than
the freedom accorded to newspapers and other print media, as will
be subsequently discussed.
E.2. DIFFERENTIATION: THE LIMITS & RESTRAINTS OF
FREE SPEECH
From the language of the specific constitutional provision, it would
appear that the right to free speech and a free press is not susceptible of
any limitation. But the realities of life in a complex society preclude a
literal interpretation of the provision prohibiting the passage of a law
that would abridge such freedom. For freedom of expression is not an
absolute, [42] nor is it an unbridled license that gives immunity for every
possible use of language and prevents the punishment of those who
abuse this freedom.
Thus, all speech are not treated the same. Some types of speech may
be subjected to some regulation by the State under its pervasive police
power, in order that it may not be injurious to the equal right of others or
those of the community or society.[43] The difference in treatment is
expected because the relevant interests of one type of speech, e.g.,
political speech, may vary from those of another, e.g., obscene
speech. Distinctions have therefore been made in the treatment, analysis,
and evaluation of the permissible scope of restrictions on various
categories of speech. [44] We have ruled, for example, that in our
jurisdiction slander or libel, lewd and obscene speech, as well as

fighting words are not entitled to constitutional protection and may be

penalized.[45]
Moreover, the techniques of reviewing alleged restrictions on
speech (overbreadth, vagueness, and so on) have been applied
differently to each category, either consciously or unconsciously. [46] A
study of free speech jurisprudencewhether here or abroadwill reveal that
courts have developed different tests as to specific types or categories of
speech in concrete situations; i.e., subversive speech; obscene speech;
the speech of the broadcast media and of the traditional print media;
libelous speech; speech affecting associational rights; speech before
hostile audiences; symbolic speech; speech that affects the right to a fair
trial; and speech associated with rights of assembly and petition. [47]
Generally, restraints on freedom of speech and expression are
evaluated by either or a combination of three tests, i.e., (a)
the dangerous tendency doctrine which permits limitations on speech
once a rational connection has been established between the speech
restrained and the danger contemplated; [48] (b) the balancing of
interests tests, used as a standard when courts need to balance
conflicting social values and individual interests, and requires a
conscious and detailed consideration of the interplay of interests
observable in a given situation of type of situation; [49] and (c) the clear
and present danger rule which rests on the premise that speech may be
restrained because there is substantial danger that the speech will likely
lead to an evil the government has a right to prevent. This rule requires
that the evil consequences sought to be prevented must be substantive,
extremely serious and the degree of imminence extremely high. [50]
As articulated in our jurisprudence, we have applied either
the dangerous tendency doctrine or clear and present danger test to
resolve free speech challenges. More recently, we have concluded that
we have generally adhered to the clear and present danger test. [51]

E.3. IN FOCUS: FREEDOM OF THE PRESS

Much has been written on the philosophical basis of press
freedom as part of the larger right of free discussion and expression. Its
practical importance, though, is more easily grasped. It is the chief
source of information on current affairs. It is the most pervasive and
perhaps most powerful vehicle of opinion on public questions. It is the
instrument by which citizens keep their government informed of their
needs, their aspirations and their grievances. It is the sharpest weapon in
the fight to keep government responsible and efficient. Without a
vigilant press, the mistakes of every administration would go
uncorrected and its abuses unexposed. As Justice Malcolm wrote
in United States v. Bustos:[52]
The interest of society and the maintenance of good
government demand a full discussion of public
affairs. Complete liberty to comment on the conduct
of public men is a scalpel in the case of free speech.
The sharp incision of its probe relieves the abscesses
of officialdom. Men in public life may suffer under a
hostile and unjust accusation; the wound can be
assuaged with the balm of clear conscience.
Its contribution to the public weal makes freedom of the press deserving
of extra protection. Indeed, the press benefits from certain ancillary
rights. The productions of writers are classified as intellectual and
proprietary. Persons who interfere or defeat the freedom to write for the
press or to maintain a periodical publication are liable for damages, be
they private individuals or public officials.
E.4. ANATOMY OF RESTRICTIONS: PRIOR RESTRAINT,
CONTENT-NEUTRAL AND CONTENT-BASED REGULATIONS

Philippine jurisprudence, even as early as the period under the 1935

Constitution, has recognized four aspects of freedom of the press. These
are (1) freedom from prior restraint; (2) freedom from punishment
subsequent
to
publication; [53] (3)
freedom
of
access
to
[54]
[55]
information; and (4) freedom of circulation.
Considering that petitioner has argued that respondents press statement
constitutes a form of impermissible prior restraint, a closer scrutiny of
this principle is in order, as well as its sub-specie of content-based (as
distinguished from content-neutral) regulations.
At this point, it should be noted that respondents in this case
deny that their acts constitute prior restraints. This presents a unique
tinge to the present challenge, considering that the cases in our
jurisdiction involving prior restrictions on speech never had any issue of
whether the governmental act or issuance actually constituted prior
restraint. Rather, the determinations were always about whether the
restraint was justified by the Constitution.
Be that as it may, the determination in every case of whether there is an
impermissible restraint on the freedom of speech has always been based
on the circumstances of each case, including the nature of the
restraint. And in its application in our jurisdiction, the parameters of
this principle have been etched on a case-to-case basis, always tested
by scrutinizing the governmental issuance or act against the
circumstances in which they operate, and then determining the
appropriate test with which to evaluate.
Prior restraint refers to official governmental restrictions on the press or
other forms of expression in advance of actual publication or
dissemination.[56] Freedom from prior restraint is largely freedom from
government censorship of publications, whatever the form of
censorship, and regardless of whether it is wielded by the executive,

legislative or judicial branch of the government. Thus, it precludes

governmental acts that required approval of a proposal to publish;
licensing or permits as prerequisites to publication including the
payment of license taxes for the privilege to publish; and even
injunctions against publication. Even the closure of the business and
printing offices of certain newspapers, resulting in the discontinuation of
their printing and publication, are deemed as previous restraint or
censorship.[57] Any law or official that requires some form of permission
to be had before publication can be made, commits an infringement of
the constitutional right, and remedy can be had at the courts.
Given that deeply ensconced in our fundamental law is the hostility
against all prior restraints on speech, and any act that restrains speech is
presumed invalid,[58] and any act that restrains speech is hobbled by the
presumption of invalidity and should be greeted with furrowed
brows, [59] it is important to stress not all prior restraints on speech are
invalid. Certain previous restraints may be permitted by the
Constitution, but determined only upon a careful evaluation of the
challenged act as against the appropriate test by which it should be
measured against.
Hence, it is not enough to determine whether the challenged act
constitutes some form of restraint on freedom of speech. A distinction
has to be made whether the restraint is (1) a contentneutral regulation,i.e., merely concerned with the incidents of the
speech, or one that merely controls the time, place or manner, and under
well defined standards;[60] or (2) a content-based restraint or
censorship, i.e., the restriction is based on the subject matter of the
utterance or speech. [61] The cast of the restriction determines the test by
which the challenged act is assayed with.
When the speech restraints take the form of a content-neutral
regulation, only a substantial governmental interest is required for its

validity.[62] Because regulations of this type are not designed to suppress

any particular message, they are not subject to the strictest form of
judicial scrutiny but an intermediate approachsomewhere between the
mere rationality that is required of any other law and the compelling
interest standard applied to content-based restrictions. [63] The test is
called intermediate because the Court will not merely rubberstamp the
validity of a law but also require that the restrictions be narrowlytailored to promote an important or significant governmental interest
that is unrelated to the suppression of expression. The intermediate
approach has been formulated in this manner:
A governmental regulation is sufficiently justified if
it is within the constitutional power of the
Government, if it furthers an important or substantial
governmental interest; if the governmental interest is
unrelated to the suppression of free expression; and
if the incident restriction on alleged [freedom of
speech & expression] is no greater than is essential
to the furtherance of that interest. [64]

based on its content cannot be justified by hypothetical fears, but only

by showing a substantive and imminent evil that has taken the life of a
reality already on ground.[67] As formulated, the question in every case is
whether the words used are used in such circumstances and are of such a
nature
as
to create a clear and present danger thatthey will bring about the
substantive evils that Congress has a right to prevent. It is a question of
proximity and degree.[68]
The regulation which restricts the speech content must also serve an
important or substantial government interest, which is unrelated to the
suppression of free expression. [69]
Also, the incidental restriction on speech must be no greater than what is
essential to the furtherance of that interest. [70] A restriction that is so
broad that it encompasses more than what is required to satisfy the
governmental interest will be invalidated. [71] The regulation, therefore,
must be reasonable and narrowly drawn to fit the regulatory
purpose, with the least restrictive means undertaken. [72]

On the other hand, a governmental action that restricts freedom of

speech or of the press based on content is given the strictest
scrutiny in light of its inherent and invasive impact. Only when the
challenged act has overcome the clear and present danger rule will it
pass constitutional muster,[65] with the government having the burden of
overcoming the presumed unconstitutionality.

Thus, when the prior restraint partakes of a content-neutral

regulation, it is subjected to an intermediate review. A content-based
regulation,[73] however, bears a heavy presumption of invalidity and is
measured against the clear and present danger rule. The latter will
pass constitutional muster only if justified by a compelling reason, and
the restrictions imposed are neither overbroad nor vague. [74]

Unless the government can overthrow this presumption, the contentbased restraint will be struck down.[66]
With respect to content-based restrictions, the government must also
show the type of harm the speech sought to be restrained would bring
about especially the gravity and the imminence of the threatened harm
otherwise the prior restraint will be invalid. Prior restraint on speech

Applying the foregoing, it is clear that the challenged acts in the case at
bar need to be subjected to the clear and present danger rule, as they
are content-based restrictions. The acts of respondents focused solely
on but one objecta specific content fixed as these were on the alleged
taped conversations between the President and a COMELEC official.

Undoubtedly these did not merely provide regulations as to the time,

place or manner of the dissemination of speech or expression.
E.5. Dichotomy of Free Press: Print v. Broadcast Media
Finally, comes respondents argument that the challenged act is
valid on the ground that broadcast media enjoys free speech rights that
are lesser in scope to that of print media. We next explore and test the
validity of this argument, insofar as it has been invoked to validate a
content-based restriction on broadcast media.
The regimes presently in place for each type of media differ
from one other. Contrasted with the regime in respect of books,
newspapers, magazines and traditional printed matter, broadcasting, film
and video have been subjected to regulatory schemes.
The dichotomy between print and broadcast media traces its
origins in the United States. There, broadcast radio and television have
been held to have limited First Amendment protection,[75] and U.S.
Courts have excluded broadcast media from the application of the strict
scrutiny standard that they would otherwise apply to content-based
restrictions.[76] According to U.S. Courts, the three major reasonswhy
broadcast media stands apart from print media are: (a) the scarcity of the
frequencies by which the medium operates [i.e., airwaves are physically
limited while print medium may be limitless]; [77] (b) its pervasiveness as
a medium; and (c) its unique accessibility to children. [78] Because cases
involving broadcast media need not follow precisely the same approach
that [U.S. courts] have applied to other media, nor go so far as to
demand that such regulations serve compelling government interests,
[79]
they are decided on whether the governmental restriction is
narrowly tailored to further a substantial governmental interest,
[80]
or the intermediate test.

As pointed out by respondents, Philippine jurisprudence has

also echoed a differentiation in treatment between broadcast and print
media. Nevertheless, a review of Philippine case law on broadcast
media will show thatas we have deviated with the American
conception of the Bill of Rights[81] we likewise did not adopt en
masse the U.S. conception of free speech as it relates to broadcast
media,particularly as to which test would govern content-based
prior restraints.
Our cases show two distinct features of this
dichotomy. First, the difference in treatment, in the main, is in the
regulatory scheme applied to broadcast media that is not imposed on
traditional print media, and narrowly confined to unprotected speech
(e.g., obscenity, pornography, seditious and inciting speech), or is based
on a compelling government interest that also has constitutional
protection, such as national security or the electoral process.
Second, regardless of the regulatory schemes that broadcast
media is subjected to, the Court has consistently held that the clear and
present danger test applies to content-based restrictions on media,
without making a distinction as to traditional print or broadcast media.
The distinction between broadcast and traditional print media was
first enunciated in Eastern Broadcasting Corporation (DYRE) v. Dans,
[82]
wherein it was held that [a]ll forms of media, whether print or
broadcast, are entitled to the broad protection of the freedom of speech
and expression clause. The test for limitations on freedom of expression
continues to be the clear and present danger rule[83]
Dans was a case filed to compel the reopening of a radio station
which had been summarily closed on grounds of national security.
Although the issue had become moot and academic because the owners
were no longer interested to reopen, the Court still proceeded to do an

analysis of the case and made formulations to serve as guidelines for all
inferior courts and bodies exercising quasi-judicial functions.
Particularly, the Court made a detailed exposition as to what needs be
considered in cases involving broadcast media. Thus:[84]
xxx xxx xxx
(3) All forms of media, whether print or broadcast, are
entitled to the broad protection of the freedom
of speech and expression clause. The test for
limitations on freedom of expression
continues to be the clear and present
danger rule, that words are used in such
circumstances and are of such a nature as to
create a clear and present danger that they will
bring about the substantive evils that the
lawmaker has a right to prevent, In
his Constitution of the Philippines (2nd
Edition, pp. 569-570) Chief Justice Enrique
M. Fernando cites at least nine of our
decisions which apply the test. More recently,
the clear and present danger test was applied
in J.B.L. Reyes in behalf of the Anti-Bases
Coalition v. Bagatsing. (4) The clear and
present danger test, however, does not lend
itself to a simplistic and all embracing
interpretation applicable to all utterances in all
forums.
Broadcasting has to be licensed. Airwave
frequencies have to be allocated among
qualified users. A broadcast corporation
cannot simply appropriate a certain frequency

without regard for government regulation or

for the rights of others.
All forms of communication are entitled to the
broad protection of the freedom of expression
clause. Necessarily, however, the freedom of
television and radio broadcasting is somewhat
lesser in scope than the freedom accorded to
newspaper and print media.
The American
Court
in
Federal
Communications Commission v. Pacifica
Foundation (438 U.S. 726), confronted with a
patently offensive and indecent regular radio
program, explained why radio broadcasting,
more than other forms of communications,
receives the most limited protection from the
free expression clause. First, broadcast media
have established a uniquely pervasive
presence in the lives of all citizens, Material
presented over the airwaves confronts the
citizen, not only in public, but in the privacy
of his home. Second, broadcasting is uniquely
accessible to children. Bookstores and motion
picture theaters may be prohibited from
making certain material available to children,
but the same selectivity cannot be done in
radio or television, where the listener or
viewer is constantly tuning in and out.
Similar considerations apply in the area of
national security.
The broadcast media have also established a
uniquely pervasive presence in the lives of all

Filipinos. Newspapers and current books are

found only in metropolitan areas and in the
poblaciones of municipalities accessible to
fast and regular transportation. Even here,
there are low income masses who find the cost
of books, newspapers, and magazines beyond
their humble means. Basic needs like food and
shelter perforce enjoy high priorities.
On the other hand, the transistor radio is found
everywhere. The television set is also
becoming universal. Their message may be
simultaneously received by a national or
regional audience of listeners including the
indifferent or unwilling who happen to be
within reach of a blaring radio or television
set. The materials broadcast over the airwaves
reach every person of every age, persons of
varying susceptibilities to persuasion, persons
of different I.Q.s and mental capabilities,
persons whose reactions to inflammatory or
offensive speech would be difficult to monitor
or predict. The impact of the vibrant speech is
forceful and immediate. Unlike readers of the
printed work, the radio audience has lesser
opportunity to cogitate analyze, and reject the
utterance.
(5) The clear and present danger test, therefore, must
take the particular circumstances of broadcast
media into account. The supervision of radio
stations-whether by government or through
self-regulation by the industry itself calls for

thoughtful,
handling.

intelligent

and

sophisticated

The government has a right to be protected

against broadcasts which incite the listeners to
violently overthrow it. Radio and television
may not be used to organize a rebellion or to
signal the start of widespread uprising. At the
same time, the people have a right to be
informed. Radio and television would have
little reason for existence if broadcasts are
limited to bland, obsequious, or pleasantly
entertaining utterances. Since they are the
most convenient and popular means of
disseminating varying views on public issues,
they also deserve special protection.
(6) The freedom to comment on public affairs is
essential to the vitality of a representative
democracy. In the 1918 case of United States
v. Bustos (37 Phil. 731) this Court was already
stressing that.
The interest of society and the maintenance of
good government demand a full discussion of
public affairs. Complete liberty to comment on
the conduct of public men is a scalpel in the
case of free speech. The sharp incision of its
probe relieves the abscesses of officialdom.
Men in public life may suffer under a hostile
and an unjust accusation; the wound can be
assuaged with the balm of a clear conscience.
A public officer must not be too thin-skinned
with reference to comment upon his official

acts. Only thus can the intelligence and dignity

of the individual be exalted.
(7) Broadcast stations deserve the special protection
given to all forms of media by the due process
and freedom of expression clauses of the
Constitution. [Citations omitted]
It is interesting to note that the Court in Dans adopted the arguments
found in U.S. jurisprudence to justify differentiation of treatment (i.e.,
the scarcity, pervasiveness and accessibility to children), but only after
categorically declaring that the test for limitations on freedom of
expression continues to be the clear and present danger rule, for all
forms of media, whether print or broadcast. Indeed, a close reading
of the above-quoted provisions would show that the differentiation that
the Court in Dans referred to was narrowly restricted to what is
otherwise deemed as unprotected speech (e.g., obscenity, national
security, seditious and inciting speech), or to validate a licensing or
regulatory scheme necessary to allocate the limited broadcast
frequencies, which is absent in print media. Thus, when this Court
declared in Dans that the freedom given to broadcast media was
somewhat lesser in scope than the freedom accorded to newspaper and
print media, it was not as to what test should be applied, but the context
by which requirements of licensing, allocation of airwaves, and
application of norms to unprotected speech. [85]
In the same year that the Dans case was decided, it was reiterated
in Gonzales v. Katigbak,[86] that the test to determine free expression
challenges was the clear and present danger, again without
distinguishing the media.[87] Katigbak, strictly speaking, does not treat of
broadcast media but motion pictures. Although the issue involved
obscenity standards as applied to movies, [88] the Court concluded its
decision with the following obiter dictum that a less liberal approach

would be used to resolve obscenity issues in television as opposed to

motion pictures:
All that remains to be said is that the ruling is to be
limited to the concept of obscenity applicable to
motion pictures. It is the consensus of this Court that
where television is concerned, a less liberal approach
calls for observance. This is so because unlike
motion pictures where the patrons have to pay their
way, television reaches every home where there is a
set. Children then will likely be among the avid
viewers of the programs therein shown..It cannot be
denied though that the State as parens patriae is
called upon to manifest an attitude of caring for the
welfare of the young.
More recently, in resolving a case involving the conduct of exit polls
and dissemination of the results by a broadcast company, we reiterated
that the clear and present danger rule is the test we unquestionably
adhere to issues that involve freedoms of speech and of the press. [89]
This is not to suggest, however, that the clear and present danger
rule has been applied to all cases that involve the broadcast
media. The rule applies to all media, including broadcast, but only when
the challenged act is a content-based regulation that infringes on free
speech, expression and the press. Indeed, in Osmena v. COMELEC,
[90]
which also involved broadcast media, the Court refused to apply the
clear and present danger rule to a COMELEC regulation of time and
manner of advertising of political advertisements because the challenged
restriction was content-neutral.[91] And in a case involving due process
and equal protection issues, the Court in Telecommunications and
Broadcast Attorneys of the Philippines v. COMELEC [92] treated a
restriction imposed on a broadcast media as a reasonable condition for

the grant of the medias franchise, without going into which test would
apply.
That broadcast media is subject to a regulatory regime absent in print
media is observed also in other jurisdictions, where the statutory
regimes in place over broadcast media include elements of licensing,
regulation by administrative bodies, and censorship. As explained by a
British author:

The reasons behind treating broadcast and films

differently from the print media differ in a number
of respects, but have a common historical basis. The
stricter system of controls seems to have been
adopted in answer to the view that owing to
their particular impact on audiences, films, videos
and broadcasting require a system of prior restraints,
whereas it is now accepted that books and other
printed media do not. These media are viewed as
beneficial to the public in a number of respects, but
are also seen as possible sources of harm.[93]
Parenthetically, these justifications are now the subject of
debate. Historically, the scarcity of frequencies was thought to provide
a rationale. However, cable and satellite television have enormously
increased the number of actual and potential channels. Digital
technology will further increase the number of channels available. But
still, the argument persists that broadcasting is the most influential
means of communication, since it comes into the home, and so much
time is spent watching television. Since it has a unique impact on people
and affects children in a way that the print media normally does not, that
regulation is said to be necessary in order to preserve pluralism. It has
been argued further that a significant main threat to free expressionin
terms of diversitycomes not from government, but from private

corporate bodies. These developments show a need for a reexamination

of the traditional notions of the scope and extent of broadcast media
regulation. [94]
The emergence of digital technology -- which has led to the convergence
of broadcasting, telecommunications and the computer industry -- has
likewise led to the question of whether the regulatory model for
broadcasting will continue to be appropriate in the converged
environment.[95] Internet, for example, remains largely unregulated,
yet the Internet and the broadcast media share similarities, [96] and the
rationales used to support broadcast regulation apply equally to the
Internet.[97] Thus, it has been argued that courts, legislative bodies and
the government agencies regulating media must agree to regulate both,
regulate neither or develop a new regulatory framework and rationale to
justify the differential treatment. [98]
F. The Case At Bar
Having settled the applicable standard to content-based restrictions on
broadcast media, let us go to its application to the case at bar. To
recapitulate, a governmental action that restricts freedom of
speech
or ofthe press based on content is given
the strictest
scrutiny, with the government having the burden of overcoming the
presumed unconstitutionality by the clear and present danger
rule. This
rule
applies
equally
to all kinds
of
media, including broadcast media.
This outlines the procedural map to follow in cases like the one at bar
as it spells out the following: (a) the test; (b) the presumption; (c) the
burden of proof; (d) the party to discharge the burden; and (e) the
quantum of evidence necessary. On the basis of the records of the case
at bar, respondents who have the burden to show that these acts do not
abridge freedom of speech and of the press failed to hurdle the clear and

present danger test. It appears that the great evil which government
wants to prevent is the airing of a tape recording in alleged violation of
the anti-wiretapping law. The records of the case at bar, however, are
confused and confusing, and respondents evidence falls short of
satisfying the clear and present danger test. Firstly, the various
statements of the Press Secretary obfuscate the identity of the voices in
the tape recording. Secondly, the integrity of the taped conversation is
also suspect. The Press Secretary showed to the public two versions, one
supposed to be a complete version and the other, an altered
version. Thirdly, the evidence of the respondents on the whos and the
hows of the wiretapping act is ambivalent, especially considering the
tapes different versions. The identity of the wire-tappers, the manner of
its commission and other related and relevant proofs are some of the
invisibles of this case. Fourthly, given all these unsettled facets of the
tape, it is even arguable whether its airing would violate the antiwiretapping law.
We rule that not every violation of a law will justify
straitjacketing the exercise of freedom of speech and of the press.
Our laws are of different kinds and doubtless, some of them provide
norms of conduct which even if violated have only an adverse effect on
a persons private comfort but does not endanger national security. There
are laws of great significance but their violation, by itself and without
more, cannot support suppression of free speech and free press. In
fine, violation of law is just a factor, a vital one to be sure, which
should be weighed in adjudging whether to restrain freedom of speech
and of the press. The totality of the injurious effects of the violation to
private and public interest must be calibrated in light of the preferred
status accorded by the Constitution and by related international
covenants protecting freedom of speech and of the press. In calling for a
careful and calibrated measurement of the circumference of all these
factors to determine compliance with the clear and present danger
test, the
Court
should
not
be
misinterpreted
as

devaluing violations of
law. By
all
means, violations of law should be vigorously prosecuted by the
State for they breed their own evil consequence. But to repeat, the need
to prevent their violation cannot per se trump the exercise of
free speech and free press, a preferred right whose breach can
lead to greater evils. For this failure of the respondents alone to offer
proof to satisfy the clear and present danger test, the Court has no option
but to uphold the exercise of free speech and free press. There is no
showing that the feared violation of the anti-wiretapping law clearly
endangers the national security of the State.
This is not all the faultline in the stance of the respondents. We slide to
the issue of whether the mere press statements of the Secretary of
Justice and of the NTC in question constitute a form of content-based
prior restraint that has transgressed the Constitution. In
resolving this issue, we hold that it is not decisive that the press
statements made by respondents were not reduced in or followed up
with formal orders or circulars. It is sufficient that the press
statements were made by respondents while in the exercise of their
official functions. Undoubtedly, respondent Gonzales made his
statements as Secretary of Justice, while the NTC issued its statement as
the regulatory body of media. Any act done, such as a speech uttered,
for and on behalf of the government in an official capacity is
covered by the rule on prior restraint. The concept of an act does
not limit itself to acts already converted to a formal order or official
circular. Otherwise, the non formalization of an act into an official
order or circular will result in the easy circumvention of the
prohibition on prior restraint. The press statements at bar are acts that
should be struck down as they constitute impermissible forms of prior
restraints on the right to free speech and press.
There is enough evidence of chilling effect of the complained
acts on record. The warnings given to media came from no less the

NTC, a regulatory agency that can cancel the Certificate of Authority of

the radio and broadcast media. They also came from the Secretary of
Justice, the alter ego of the Executive, who wields the awesome power
to prosecute those perceived to be violating the laws of the land.After
the warnings, the KBP inexplicably joined the NTC in issuing an
ambivalent Joint Press Statement. After the warnings, petitioner Chavez
was left alone to fight this battle for freedom of speech and of the
press. This silence on the sidelines on the part of some media
practitioners is too deafening to be the subject of misinterpretation.
The constitutional imperative for us to strike down unconstitutional acts
should always be exercised with care and in light of the distinct facts of
each case. For there are no hard and fast rules when it comes to slippery
constitutional questions, and the limits and construct of relative
freedoms are never set in stone. Issues revolving on their construct must
be decided on a case to case basis, always based on the peculiar shapes
and shadows of each case. But in cases where the challenged acts are
patent invasions of a constitutionally protected right, we should be
swift in striking them down as nullities per se. A blow too soon struck
for freedom is preferred than a blow too late.
In VIEW WHEREOF, the petition is GRANTED. The writs
of certiorari and prohibition are hereby issued, nullifying the official
statements made by respondents on June 8, and 11, 2005 warning
the media on airing the alleged wiretapped conversation between the
President and other personalities, for constituting unconstitutional prior
restraint on the exercise of freedom of speech and of the press
SO ORDERED.

PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffsappellees,

vs.
NATIONAL RICE AND CORN CORPORATION,
defendant-appellant,
MANILA UNDERWRITERS INSURANCE CO., INC.,
defendant-appellee.

REGALA, J.:
This is an appeal of the defendant-appellant NARIC from
the decision of the trial court dated February 20, 1958,
awarding to the plaintiffs-appellees the amount of
$286,000.00 as damages for breach of contract and
dismissing the counterclaim and third party complaint of
the defendant-appellant NARIC.
In accordance with Section 13 of Republic Act No. 3452,
"the National Rice and Corn Administration (NARIC) is
hereby abolished and all its assets, liabilities, functions,
powers which are not inconsistent with the provisions of
this Act, and all personnel are transferred "to the Rice
and Corn Administration (RCA).
All references, therefore, to the NARIC in this decision
must accordingly be adjusted and read as RCA pursuant
to the aforementioned law.

On May 19, 1952, plaintiff-appellee participated in the

public bidding called by the NARIC for the supply of
20,000 metric tons of Burmese rice. As her bid of
$203.00 per metric ton was the lowest, she was awarded
the contract for the same. Accordingly, on July 1, 1952,
plaintiff-appellee Paz P. Arrieta and the appellant
corporation entered into a Contract of Sale of Rice, under
the terms of which the former obligated herself to deliver
to the latter 20,000 metric tons of Burmess Rice at
$203.00 per metric ton, CIF Manila. In turn, the defendant
corporation committed itself to pay for the imported rice
"by means of an irrevocable, confirmed and assignable
letter of credit in U.S. currency in favor of the plaintiffappellee and/or supplier in Burma, immediately." Despite
the commitment to pay immediately "by means of an
irrevocable, confirmed and assignable Letter of Credit,"
however, it was only on July 30, 1952, or a full month
from the execution of the contract, that the defendant
corporation, thru its general manager, took the first to
open a letter of credit by forwarding to the Philippine
National Bank its Application for Commercial Letter
Credit. The application was accompanied by a transmittal
letter, the relevant paragraphs of which read:
In view of the fact that we do not have sufficient deposit
with your institution with which to cover the amount
required to be deposited as a condition for the opening of
letters of credit, we will appreciate it if this application
could be considered special case.
We understand that our supplier, Mrs. Paz P. Arrieta, has a
deadline to meet which is August 4, 1952, and in order to
comply therewith, it is imperative that the L/C be opened

prior to that date. We would therefore request your full

cooperation on this matter.

position to meet." (Emphasis supplied. Exh. 9-Def.; Exh.

1-Pe., p. 18, Folder of Exhibits)

On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru
counsel, advised the appellant corporation of the
extreme necessity for the immediate opening of the
letter credit since she had by then made a tender to her
supplier in Rangoon, Burma, "equivalent to 5% of the
F.O.B. price of 20,000 tons at $180.70 and in compliance
with the regulations in Rangoon this 5% will be
confiscated if the required letter of credit is not received
by them before August 4, 1952."

Consequently, the credit instrument applied for was

opened only on September 8, 1952 "in favor of Thiri
Setkya, Rangoon, Burma, and/or assignee for
$3,614,000.00," (which is more than two months from
the execution of the contract) the party named by the
appellee as beneficiary of the letter of credit.1wph1.t

On August 4, 1952, the Philippine National Bank informed

the appellant corporation that its application, "for a letter
of credit for $3,614,000.00 in favor of Thiri Setkya has
been approved by the Board of Directors with the
condition that marginal cash deposit be paid and that
drafts are to be paid upon presentment." (Exh. J-pl.; Exh.
10-def., p. 19, Folder of Exhibits). Furthermore, the Bank
represented that it "will hold your application in abeyance
pending compliance with the above stated requirement."
As it turned out, however, the appellant corporation not
in any financial position to meet the condition. As matter
of fact, in a letter dated August 2, 1952, the NARIC
bluntly confessed to the appellee its dilemma: "In this
connection, please be advised that our application for
opening of the letter of credit has been presented to the
bank since July 30th but the latter requires that we first
deposit 50% of the value of the letter amounting to
aproximately $3,614,000.00 which we are not in a

As a result of the delay, the allocation of appellee's

supplier in Rangoon was cancelled and the 5% deposit,
amounting to 524,000 kyats or approximately
P200,000.00 was forfeited. In this connection, it must be
made of record that although the Burmese authorities
had set August 4, 1952, as the deadline for the
remittance of the required letter of credit, the
cancellation of the allocation and the confiscation of the
5% deposit were not effected until August 20, 1952, or, a
full half month after the expiration of the deadline. And
yet, even with the 15-day grace, appellant corporation
was unable to make good its commitment to open the
disputed letter of credit.
The appellee endeavored, but failed, to restore the
cancelled Burmese rice allocation. When the futility of
reinstating the same became apparent, she offered to
substitute Thailand rice instead to the defendant NARIC,
communicating at the same time that the offer was "a
solution which should be beneficial to the NARIC and to
us at the same time." (Exh. X-Pe., Exh. 25Def., p. 38,
Folder of Exhibits). This offer for substitution, however,

was rejected by the appellant in a resolution dated

November 15, 1952.
On the foregoing, the appellee sent a letter to the
appellant, demanding compensation for the damages
caused her in the sum of $286,000.00, U.S. currency,
representing unrealized profit. The demand having been
rejected she instituted this case now on appeal.
At the instance of the NARIC, a counterclaim was filed
and the Manila Underwriters Insurance Company was
brought to the suit as a third party defendant to hold it
liable on the performance bond it executed in favor of the
plaintiff-appellee.
We find for the appellee.
It is clear upon the records that the sole and principal
reason for the cancellation of the allocation contracted by
the appellee herein in Rangoon, Burma, was the failure of
the letter of credit to be opened with the contemplated
period. This failure must, therefore, be taken as the
immediate cause for the consequent damage which
resulted. As it is then, the disposition of this case
depends on a determination of who was responsible for
such failure. Stated differently, the issue is whether
appellant's failure to open immediately the letter of credit
in dispute amounted to a breach of the contract of July 1,
1952 for which it may be held liable in damages.
Appellant corporation disclaims responsibility for the
delay in the opening of the letter of credit. On the
contrary, it insists that the fault lies with the appellee.

Appellant contends that the disputed negotiable

instrument was not promptly secured because the
appellee , failed to seasonably furnish data necessary
and required for opening the same, namely, "(1) the
amount of the letter of credit, (2) the person, company or
corporation in whose favor it is to be opened, and (3) the
place and bank where it may be negotiated." Appellant
would have this Court believe, therefore, that had these
informations been forthwith furnished it, there would
have been no delay in securing the instrument.
Appellant's explanation has neither force nor merit. In the
first place, the explanation reaches into an area of the
proceedings into which We are not at liberty to encroach.
The explanation refers to a question of fact. Nothing in
the record suggests any arbitrary or abusive conduct on
the part of the trial judge in the formulation of the ruling.
His conclusion on the matter is sufficiently borne out by
the evidence presented. We are denied, therefore, the
prerogative to disturb that finding, consonant to the timehonored tradition of this Tribunal to hold trial judges
better situated to make conclusions on questions of fact.
For the record, We quote hereunder the lower court's
ruling on the point:
The defense that the delay, if any in opening the letter of
credit was due to the failure of plaintiff to name the
supplier, the amount and the bank is not tenable. Plaintiff
stated in Court that these facts were known to defendant
even before the contract was executed because these
facts were necessarily revealed to the defendant before
she could qualify as a bidder. She stated too that she had
given the necessary data immediately after the execution

of Exh. "A" (the contract of July 1, 1952) to Mr. GABRIEL

BELMONTE, General Manager of the NARIC, both orally
and in writing and that she also pressed for the opening
of the letter of credit on these occasions. These
statements have not been controverted and defendant
NARIC, notwithstanding its previous intention to do so,
failed to present Mr. Belmonte to testify or refute this. ...
Secondly, from the correspondence and communications
which form part of the record of this case, it is clear that
what singularly delayed the opening of the stipulated
letter of credit and which, in turn, caused the cancellation
of the allocation in Burma, was the inability of the
appellant corporation to meet the condition importation
by the Bank for granting the same. We do not think the
appellant corporation can refute the fact that had it been
able to put up the 50% marginal cash deposit demanded
by the bank, then the letter of credit would have been
approved, opened and released as early as August 4,
1952. The letter of the Philippine National Bank to the
NARIC was plain and explicit that as of the said date,
appellant's "application for a letter of credit ... has been
approved by the Board of Directors with the condition
that 50% marginal cash deposit be paid and that drafts
are to be paid upon presentment." (Emphasis supplied)
The liability of the appellant, however, stems not alone
from this failure or inability to satisfy the requirements of
the bank. Its culpability arises from its willful and
deliberate assumption of contractual obligations even as
it was well aware of its financial incapacity to undertake
the prestation. We base this judgment upon the letter
which accompanied the application filed by the appellant

with the bank, a part of which letter was quoted earlier in

this decision. In the said accompanying correspondence,
appellant admitted and owned that it did "not have
sufficient deposit with your institution (the PNB) with
which to cover the amount required to be deposited as a
condition for the opening of letters of credit. ... .
A number of logical inferences may be drawn from the
aforementioned admission. First, that the appellant knew
the bank requirements for opening letters of credit;
second, that appellant also knew it could not meet those
requirement. When, therefore, despite this awareness
that was financially incompetent to open a letter of credit
immediately, appellant agreed in paragraph 8 of the
contract to pay immediately "by means of an irrevocable,
confirm and assignable letter of credit," it must be
similarly held to have bound itself to answer for all and
every consequences that would result from the
representation. aptly observed by the trial court:
... Having called for bids for the importation of rice
involving millions, $4,260,000.00 to be exact, it should
have a certained its ability and capacity to comply with
the inevitably requirements in cash to pay for such
importation. Having announced the bid, it must be
deemed to have impliedly assured suppliers of its
capacity and facility to finance the importation within the
required period, especially since it had imposed the
supplier the 90-day period within which the shipment of
the rice must be brought into the Philippines. Having
entered in the contract, it should have taken steps
immediately to arrange for the letter of credit for the

large amount involved and inquired into the possibility of

its issuance.
In relation to the aforequoted observation of the trial
court, We would like to make reference also to Article 11
of the Civil Code which provides:
Those who in the performance of their obligation are
guilty of fraud, negligence, or delay, and those who in
any manner contravene the tenor thereof, are liable in
damages.
Under this provision, not only debtors guilty of fraud,
negligence or default in the performance of obligations a
decreed liable; in general, every debtor who fails in
performance of his obligations is bound to indemnify for
the losses and damages caused thereby (De la Cruz
Seminary of Manila, 18 Phil. 330; Municipality of Moncada
v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz, 37 Phil.
982; Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v.
Chong, 49 Phil. 1003; Pando v. Gimenez, 54 Phil. 459;
Acme Films v. Theaters Supply, 63 Phil. 657). The phrase
"any manner contravene the tenor" of the obligation
includes any illicit act which impairs the strict and faithful
fulfillment of the obligation or every kind or defective
performance. (IV Tolentino, Civil Code of the Philippines,
citing authorities, p. 103.)
The NARIC would also have this Court hold that the
subsequent offer to substitute Thailand rice for the
originally contracted Burmese rice amounted to a waiver
by the appellee of whatever rights she might have
derived from the breach of the contract. We disagree.

Waivers are not presumed, but must be clearly and

convincingly shown, either by express stipulation or acts
admitting no other reasonable explanation. (Ramirez v.
Court of Appeals, 52 O.G. 779.) In the case at bar, no
such intent to waive has been established.
We have carefully examined and studied the oral and
documentary evidence presented in this case and upon
which the lower court based its award. Under the
contract, the NARIC bound itself to buy 20,000 metric
tons of Burmese rice at "$203.00 U.S. Dollars per metric
ton, all net shipped weight, and all in U.S. currency, C.I.F.
Manila ..." On the other hand, documentary and other
evidence establish with equal certainty that the plaintiffappellee was able to secure the contracted commodity at
the cost price of $180.70 per metric ton from her supplier
in Burma. Considering freights, insurance and charges
incident to its shipment here and the forfeiture of the 5%
deposit, the award granted by the lower court is fair and
equitable. For a clearer view of the equity of the damages
awarded, We reproduce below the testimony of the
appellee, adequately supported by the evidence and
record:
Q. Will you please tell the court, how much is the damage
you suffered?
A. Because the selling price of my rice is $203.00 per
metric ton, and the cost price of my rice is $180.00 We
had to pay also $6.25 for shipping and about $164 for
insurance. So adding the cost of the rice, the freight, the
insurance, the total would be about $187.99 that would
be $15.01 gross profit per metric ton, multiply by 20,000

equals $300,200, that is my supposed profit if I went

through the contract.
The above testimony of the plaintiff was a general
approximation of the actual figures involved in the
transaction. A precise and more exact demonstration of
the equity of the award herein is provided by Exhibit HH
of the plaintiff and Exhibit 34 of the defendant, hereunder
quoted so far as germane.
It is equally of record now that as shown in her request
dated July 29, 1959, and other communications
subsequent thereto for the opening by your corporation
of the required letter of credit, Mrs. Arrieta was supposed
to pay her supplier in Burma at the rate of One Hundred
Eighty Dollars and Seventy Cents ($180.70) in U.S.
Currency, per ton plus Eight Dollars ($8.00) in the same
currency per ton for shipping and other handling
expenses, so that she is already assured of a net profit of
Fourteen Dollars and Thirty Cents ($14.30), U.S.,
Currency, per ton or a total of Two Hundred and Eighty
Six Thousand Dollars ($286,000.00), U.S. Currency, in the
aforesaid transaction. ...
Lastly, herein appellant filed a counterclaim asserting
that it has suffered, likewise by way of unrealized profit
damages in the total sum of $406,000.00 from the failure
of the projected contract to materialize. This
counterclaim was supported by a cost study made and
submitted by the appellant itself and wherein it was
illustrated how indeed had the importation pushed thru,
NARIC would have realized in profit the amount asserted
in the counterclaim. And yet, the said amount of

P406,000.00 was realizable by appellant despite a

number of expenses which the appellee under the
contract, did not have to incur. Thus, under the cost
study submitted by the appellant, banking and unloading
charges were to be shouldered by it, including an Import
License Fee of 2% and superintendence fee of $0.25 per
metric ton. If the NARIC stood to profit over P400 000.00
from the disputed transaction inspite of the extra
expenditures from which the herein appellee was exempt,
we are convicted of the fairness of the judgment
presently under appeal.
In the premises, however, a minor modification must be
effected in the dispositive portion of the decision appeal
from insofar as it expresses the amount of damages in
U.S. currency and not in Philippine Peso. Republic Act 529
specifically requires the discharge of obligations only "in
any coin or currency which at the time of payment is
legal tender for public and private debts." In view of that
law, therefore, the award should be converted into and
expressed in Philippine Peso.
This brings us to a consideration of what rate of
exchange should apply in the conversion here decreed.
Should it be at the time of the breach, at the time the
obligation was incurred or at the rate of exchange
prevailing on the promulgation of this decision.
In the case of Engel v. Velasco & Co., 47 Phil. 115, We
ruled that in an action for recovery of damages for
breach of contract, even if the obligation assumed by the
defendant was to pay the plaintiff a sum of money
expressed in American currency, the indemnity to be

allowed should be expressed in Philippine currency at the

rate of exchange at the time of the judgment rather than
at the rate of exchange prevailing on the date of
defendant's breach. This ruling, however, can neither be
applied nor extended to the case at bar for the same was
laid down when there was no law against stipulating
foreign currencies in Philippine contracts. But now we
have Republic Act No. 529 which expressly declares such
stipulations as contrary to public policy, void and of no
effect. And, as We already pronounced in the case of
Eastboard Navigation, Ltd. v. Juan Ysmael & Co., Inc., G.R.
No. L-9090, September 10, 1957, if there is any
agreement to pay an obligation in a currency other than
Philippine legal tender, the same is null and void as
contrary to public policy (Republic Act 529), and the most
that could be demanded is to pay said obligation in
Philippine currency "to be measured in the prevailing rate
of exchange at the time the obligation was incurred (Sec.
1, idem)."
UPON ALL THE FOREGOING, the decision appealed from is
hereby affirmed, with the sole modification that the
award should be converted into the Philippine peso at the
rate of exchange prevailing at the time the obligation was
incurred or on July 1, 1952 when the contract was
executed. The appellee insurance company, in the light
of this judgment, is relieved of any liability under this
suit. No pronouncement as to costs.

JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners,

vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION
COMPANY, INC., JUAN J. CARLOS, and the PHILIPPINE BAR
ASSOCIATION, respondents.
G.R. No. L-47863 October 3, 1986
THE UNITED CONSTRUCTION CO., INC., petitioner,
vs.
COURT OF APPEALS, ET AL., respondents.
G.R. No. L-47896 October 3, 1986
PHILIPPINE BAR ASSOCIATION, ET AL., petitioners,
vs.
COURT OF APPEALS, ET AL., respondents.

(e) Ordering defendant United Construction Co.,

Inc. and third-party defendants (except Roman
Ozaeta) to pay the costs in equal shares.

PARAS, J.:
These are petitions for review on certiorari of the November 28,
1977 decision of the Court of Appeals in CA-G.R. No. 51771-R
modifying the decision of the Court of First Instance of Manila,
Branch V, in Civil Case No. 74958 dated September 21, 1971 as
modified by the Order of the lower court dated December 8, 1971.
The Court of Appeals in modifying the decision of the lower court
included an award of an additional amount of P200,000.00 to the
Philippine Bar Association to be paid jointly and severally by the
defendant United Construction Co. and by the third-party
defendants Juan F. Nakpil and Sons and Juan F. Nakpil.
The dispositive portion of the modified decision of the lower court
reads:
WHEREFORE, judgment is hereby rendered:
(a) Ordering defendant United Construction Co.,
Inc. and third-party defendants (except Roman
Ozaeta) to pay the plaintiff, jointly and severally,
the sum of P989,335.68 with interest at the legal
rate from November 29, 1968, the date of the
filing of the complaint until full payment;
(b) Dismissing the complaint with respect to
defendant Juan J. Carlos;
(c) Dismissing the third-party complaint;
(d) Dismissing the defendant's and third-party
defendants' counterclaims for lack of merit;

SO ORDERED. (Record on Appeal p. 521; Rollo,

L- 47851, p. 169).
The dispositive portion of the decision of the Court of Appeals
reads:
WHEREFORE, the judgment appealed from is
modified to include an award of P200,000.00 in
favor of plaintiff-appellant Philippine Bar
Association, with interest at the legal rate from
November 29, 1968 until full payment to be paid
jointly and severally by defendant United
Construction Co., Inc. and third party defendants
(except Roman Ozaeta). In all other respects, the
judgment dated September 21, 1971 as modified
in the December 8, 1971 Order of the lower court
is hereby affirmed with COSTS to be paid by the
defendant and third party defendant (except
Roman Ozaeta) in equal shares.
SO ORDERED.
Petitioners Juan F. Nakpil & Sons in L-47851 and United
Construction Co., Inc. and Juan J. Carlos in L-47863 seek the
reversal of the decision of the Court of Appeals, among other
things, for exoneration from liability while petitioner Philippine Bar
Association in L-47896 seeks the modification of aforesaid
decision to obtain an award of P1,830,000.00 for the loss of the
PBA building plus four (4) times such amount as damages
resulting in increased cost of the building, P100,000.00 as
exemplary damages; and P100,000.00 as attorney's fees.

These petitions arising from the same case filed in the Court of
First Instance of Manila were consolidated by this Court in the
resolution of May 10, 1978 requiring the respective respondents
to comment. (Rollo, L-47851, p. 172).
The facts as found by the lower court (Decision, C.C. No. 74958;
Record on Appeal, pp. 269-348; pp. 520-521; Rollo, L-47851, p.
169) and affirmed by the Court of Appeals are as follows:
The plaintiff, Philippine Bar Association, a civic-non-profit
association, incorporated under the Corporation Law, decided to
construct an office building on its 840 square meters lot located at
the comer of Aduana and Arzobispo Streets, Intramuros, Manila.
The construction was undertaken by the United Construction, Inc.
on an "administration" basis, on the suggestion of Juan J. Carlos,
the president and general manager of said corporation. The
proposal was approved by plaintiff's board of directors and signed
by its president Roman Ozaeta, a third-party defendant in this
case. The plans and specifications for the building were prepared
by the other third-party defendants Juan F. Nakpil & Sons. The
building was completed in June, 1966.
In the early morning of August 2, 1968 an unusually strong
earthquake hit Manila and its environs and the building in
question sustained major damage. The front columns of the
building buckled, causing the building to tilt forward dangerously.
The tenants vacated the building in view of its precarious
condition. As a temporary remedial measure, the building was
shored up by United Construction, Inc. at the cost of P13,661.28.
On November 29, 1968, the plaintiff commenced this action for
the recovery of damages arising from the partial collapse of the
building against United Construction, Inc. and its President and
General Manager Juan J. Carlos as defendants. Plaintiff alleges
that the collapse of the building was accused by defects in the
construction, the failure of the contractors to follow plans and
specifications and violations by the defendants of the terms of the
contract.

Defendants in turn filed a third-party complaint against the

architects who prepared the plans and specifications, alleging in
essence that the collapse of the building was due to the defects in
the said plans and specifications. Roman Ozaeta, the then
president of the plaintiff Bar Association was included as a thirdparty defendant for damages for having included Juan J. Carlos,
President of the United Construction Co., Inc. as party defendant.
On March 3, 1969, the plaintiff and third-party defendants Juan F.
Nakpil & Sons and Juan F. Nakpil presented a written stipulation
which reads:
1. That in relation to defendants' answer with
counterclaims and third- party complaints and the
third-party defendants Nakpil & Sons' answer
thereto, the plaintiff need not amend its complaint
by including the said Juan F. Nakpil & Sons and
Juan F. Nakpil personally as parties defendant.
2. That in the event (unexpected by the
undersigned) that the Court should find after the
trial that the above-named defendants Juan J.
Carlos and United Construction Co., Inc. are free
from any blame and liability for the collapse of the
PBA Building, and should further find that the
collapse of said building was due to defects
and/or inadequacy of the plans, designs, and
specifications p by the third-party defendants, or
in the event that the Court may find Juan F. Nakpil
and Sons and/or Juan F. Nakpil contributorily
negligent or in any way jointly and solidarily liable
with the defendants, judgment may be rendered in
whole or in part. as the case may be, against
Juan F. Nakpil & Sons and/or Juan F. Nakpil in
favor of the plaintiff to all intents and purposes as
if plaintiff's complaint has been duly amended by
including the said Juan F. Nakpil & Sons and Juan
F. Nakpil as parties defendant and by alleging

causes of action against them including, among

others, the defects or inadequacy of the plans,
designs, and specifications prepared by them
and/or failure in the performance of their contract
with plaintiff.
3. Both parties hereby jointly petition this
Honorable Court to approve this stipulation.
(Record on Appeal, pp. 274-275; Rollo, L47851,p.169).
Upon the issues being joined, a pre-trial was conducted on March
7, 1969, during which among others, the parties agreed to refer
the technical issues involved in the case to a Commissioner. Mr.
Andres O. Hizon, who was ultimately appointed by the trial court,
assumed his office as Commissioner, charged with the duty to try
the following issues:
1. Whether the damage sustained by the PBA
building during the August 2, 1968 earthquake
had been caused, directly or indirectly, by:
(a) The inadequacies or defects in the plans and
specifications prepared by third-party defendants;
(b) The deviations, if any, made by the defendants
from said plans and specifications and how said
deviations contributed to the damage sustained;
(c) The alleged failure of defendants to observe
the requisite quality of materials and workmanship
in the construction of the building;
(d) The alleged failure to exercise the requisite
degree of supervision expected of the architect,
the contractor and/or the owner of the building;

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

(f) Any other cause not herein above specified.
2. If the cause of the damage suffered by the
building arose from a combination of the aboveenumerated factors, the degree or proportion in
which each individual factor contributed to the
damage sustained;
3. Whether the building is now a total loss and
should be completely demolished or whether it
may still be repaired and restored to a tenantable
condition. In the latter case, the determination of
the cost of such restoration or repair, and the
value of any remaining construction, such as the
foundation, which may still be utilized or availed of
(Record on Appeal, pp. 275-276; Rollo, L-47851,
p. 169).
Thus, the issues of this case were divided into technical issues
and non-technical issues. As aforestated the technical issues
were referred to the Commissioner. The non-technical issues
were tried by the Court.
Meanwhile, plaintiff moved twice for the demolition of the building
on the ground that it may topple down in case of a strong
earthquake. The motions were opposed by the defendants and
the matter was referred to the Commissioner. Finally, on April 30,
1979 the building was authorized to be demolished at the
expense of the plaintiff, but not another earthquake of high
intensity on April 7, 1970 followed by other strong earthquakes on
April 9, and 12, 1970, caused further damage to the property. The
actual demolition was undertaken by the buyer of the damaged
building. (Record on Appeal, pp. 278-280; Ibid.)

After the protracted hearings, the Commissioner eventually

submitted his report on September 25, 1970 with the findings that
while the damage sustained by the PBA building was caused
directly by the August 2, 1968 earthquake whose magnitude was
estimated at 7.3 they were also caused by the defects in the
plans and specifications prepared by the third-party defendants'
architects, deviations from said plans and specifications by the
defendant contractors and failure of the latter to observe the
requisite workmanship in the construction of the building and of
the contractors, architects and even the owners to exercise the
requisite degree of supervision in the construction of subject
building.
All the parties registered their objections to aforesaid findings
which in turn were answered by the Commissioner.
The trial court agreed with the findings of the Commissioner
except as to the holding that the owner is charged with full nine
supervision of the construction. The Court sees no legal or
contractual basis for such conclusion. (Record on Appeal, pp.
309-328; Ibid).
Thus, on September 21, 1971, the lower court rendered the
assailed decision which was modified by the Intermediate
Appellate Court on November 28, 1977.
All the parties herein appealed from the decision of the
Intermediate Appellate Court. Hence, these petitions.
On May 11, 1978, the United Architects of the Philippines, the
Association of Civil Engineers, and the Philippine Institute of
Architects filed with the Court a motion to intervene as amicus
curiae. They proposed to present a position paper on the liability
of architects when a building collapses and to submit likewise a
critical analysis with computations on the divergent views on the
design and plans as submitted by the experts procured by the

parties. The motion having been granted, the amicus curiaewere

granted a period of 60 days within which to submit their position.
After the parties had all filed their comments, We gave due
course to the petitions in Our Resolution of July 21, 1978.
The position papers of the amicus curiae (submitted on
November 24, 1978) were duly noted.
The amicus curiae gave the opinion that the plans and
specifications of the Nakpils were not defective. But the
Commissioner, when asked by Us to comment, reiterated his
conclusion that the defects in the plans and specifications indeed
existed.
Using the same authorities availed of by the amicus curiae such
as the Manila Code (Ord. No. 4131) and the 1966 Asep Code, the
Commissioner added that even if it can be proved that the defects
in theconstruction alone (and not in the plans and design) caused
the damage to the building, still the deficiency in the original
design and jack of specific provisions against torsion in the
original plans and the overload on the ground floor columns
(found by an the experts including the original designer) certainly
contributed to the damage which occurred. (Ibid, p. 174).
In their respective briefs petitioners, among others, raised the
following assignments of errors: Philippine Bar Association
claimed that the measure of damages should not be limited to
P1,100,000.00 as estimated cost of repairs or to the period of six
(6) months for loss of rentals while United Construction Co., Inc.
and the Nakpils claimed that it was an act of God that caused the
failure of the building which should exempt them from
responsibility and not the defective construction, poor
workmanship, deviations from plans and specifications and other
imperfections in the case of United Construction Co., Inc. or the
deficiencies in the design, plans and specifications prepared by
petitioners in the case of the Nakpils. Both UCCI and the Nakpils

object to the payment of the additional amount of P200,000.00

imposed by the Court of Appeals. UCCI also claimed that it
should be reimbursed the expenses of shoring the building in the
amount of P13,661.28 while the Nakpils opposed the payment of
damages jointly and solidarity with UCCI.
The pivotal issue in this case is whether or not an act of God-an
unusually strong earthquake-which caused the failure of the
building, exempts from liability, parties who are otherwise liable
because of their negligence.
The applicable law governing the rights and liabilities of the
parties herein is Article 1723 of the New Civil Code, which
provides:
Art. 1723. The engineer or architect who drew up
the plans and specifications for a building is liable
for damages if within fifteen years from the
completion of the structure the same should
collapse by reason of a defect in those plans and
specifications, or due to the defects in the ground.
The contractor is likewise responsible for the
damage if the edifice fags within the same period
on account of defects in the construction or the
use of materials of inferior quality furnished by
him, or due to any violation of the terms of the
contract. If the engineer or architect supervises
the construction, he shall be solidarily liable with
the contractor.
Acceptance of the building, after completion, does
not imply waiver of any of the causes of action by
reason of any defect mentioned in the preceding
paragraph.
The action must be brought within ten years
following the collapse of the building.

On the other hand, the general rule is that no person shall be

responsible for events which could not be foreseen or which
though foreseen, were inevitable (Article 1174, New Civil Code).
An act of God has been defined as an accident, due directly and
exclusively to natural causes without human intervention, which
by no amount of foresight, pains or care, reasonably to have been
expected, could have been prevented. (1 Corpus Juris 1174).
There is no dispute that the earthquake of August 2, 1968 is a
fortuitous event or an act of God.
To exempt the obligor from liability under Article 1174 of the Civil
Code, for a breach of an obligation due to an "act of God," the
following must concur: (a) the cause of the breach of the
obligation must be independent of the will of the debtor; (b) the
event must be either unforseeable or unavoidable; (c) the event
must be such as to render it impossible for the debtor to fulfill his
obligation in a normal manner; and (d) the debtor must be free
from any participation in, or aggravation of the injury to the
creditor. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v.
Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA
527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA
279; Lasam v. Smith, 45 Phil. 657).
Thus, if upon the happening of a fortuitous event or an act of
God, there concurs a corresponding fraud, negligence, delay or
violation or contravention in any manner of the tenor of the
obligation as provided for in Article 1170 of the Civil Code, which
results in loss or damage, the obligor cannot escape liability.
The principle embodied in the act of God doctrine strictly requires
that the act must be one occasioned exclusively by the violence
of nature and all human agencies are to be excluded from
creating or entering into the cause of the mischief. When the
effect, the cause of which is to be considered, is found to be in
part the result of the participation of man, whether it be from

active intervention or neglect, or failure to act, the whole

occurrence is thereby humanized, as it were, and removed from
the rules applicable to the acts of God. (1 Corpus Juris, pp. 11741175).
Thus it has been held that when the negligence of a person
concurs with an act of God in producing a loss, such person is not
exempt from liability by showing that the immediate cause of the
damage was the act of God. To be exempt from liability for loss
because of an act of God, he must be free from any previous
negligence or misconduct by which that loss or damage may
have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55
Phil. 129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v.
Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45
Phil. 657).
The negligence of the defendant and the third-party defendants
petitioners was established beyond dispute both in the lower
court and in the Intermediate Appellate Court. Defendant United
Construction Co., Inc. was found to have made substantial
deviations from the plans and specifications. and to have failed to
observe the requisite workmanship in the construction as well as
to exercise the requisite degree of supervision; while the thirdparty defendants were found to have inadequacies or defects in
the plans and specifications prepared by them. As correctly
assessed by both courts, the defects in the construction and in
the plans and specifications were the proximate causes that
rendered the PBA building unable to withstand the earthquake of
August 2, 1968. For this reason the defendant and third-party
defendants cannot claim exemption from liability. (Decision, Court
of Appeals, pp. 30-31).
It is well settled that the findings of facts of the Court of Appeals
are conclusive on the parties and on this court (cases cited in
Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs. Sandiganbayan,
January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion
is a finding grounded entirely on speculation, surmise and
conjectures; (2) the inference made is manifestly mistaken; (3)

there is grave abuse of discretion; (4) the judgment is based on

misapprehension of facts; (5) the findings of fact are conflicting ,
(6) the Court of Appeals went beyond the issues of the case and
its findings are contrary to the admissions of both appellant and
appellees (Ramos vs. Pepsi-Cola Bottling Co., February 8, 1967,
19 SCRA 289, 291-292; Roque vs. Buan, Oct. 31, 1967, 21
SCRA 648, 651); (7) the findings of facts of the Court of Appeals
are contrary to those of the trial court; (8) said findings of facts
are conclusions without citation of specific evidence on which
they are based; (9) the facts set forth in the petition as well as in
the petitioner's main and reply briefs are not disputed by the
respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; AlsuaBett vs. Court of Appeals, July 30, 1979, 92 SCRA 322, 366); (10)
the finding of fact of the Court of Appeals is premised on the
supposed absence of evidence and is contradicted by evidence
on record (Salazar vs. Gutierrez, May 29, 1970, 33 SCRA 243,
247; Cited in G.R. No. 66497-98, Sacay v. Sandiganbayan, July
10, 1986).
It is evident that the case at bar does not fall under any of the
exceptions above-mentioned. On the contrary, the records show
that the lower court spared no effort in arriving at the correct
appreciation of facts by the referral of technical issues to a
Commissioner chosen by the parties whose findings and
conclusions remained convincingly unrebutted by the
intervenors/amicus curiae who were allowed to intervene in the
Supreme Court.
In any event, the relevant and logical observations of the trial
court as affirmed by the Court of Appeals that "while it is not
possible to state with certainty that the building would not have
collapsed were those defects not present, the fact remains that
several buildings in the same area withstood the earthquake to
which the building of the plaintiff was similarly subjected," cannot
be ignored.

The next issue to be resolved is the amount of damages to be

awarded to the PBA for the partial collapse (and eventual
complete collapse) of its building.

There should be no question that the NAKPILS and UNITED are

liable for the damage resulting from the partial and eventual
collapse of the PBA building as a result of the earthquakes.

The Court of Appeals affirmed the finding of the trial court based
on the report of the Commissioner that the total amount required
to repair the PBA building and to restore it to tenantable condition
was P900,000.00 inasmuch as it was not initially a total loss.
However, while the trial court awarded the PBA said amount as
damages, plus unrealized rental income for one-half year, the
Court of Appeals modified the amount by awarding in favor of
PBA an additional sum of P200,000.00 representing the damage
suffered by the PBA building as a result of another earthquake
that occurred on April 7, 1970 (L-47896, Vol. I, p. 92).

We quote with approval the following from the erudite decision

penned by Justice Hugo E. Gutierrez (now an Associate Justice
of the Supreme Court) while still an Associate Justice of the Court
of Appeals:

The PBA in its brief insists that the proper award should be
P1,830,000.00 representing the total value of the building (L47896, PBA's No. 1 Assignment of Error, p. 19), while both the
NAKPILS and UNITED question the additional award of
P200,000.00 in favor of the PBA (L- 47851, NAKPIL's Brief as
Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The PBA
further urges that the unrealized rental income awarded to it
should not be limited to a period of one-half year but should be
computed on a continuing basis at the rate of P178,671.76 a year
until the judgment for the principal amount shall have been
satisfied L- 47896, PBA's No. 11 Assignment of Errors, p. 19).
The collapse of the PBA building as a result of the August 2, 1968
earthquake was only partial and it is undisputed that the building
could then still be repaired and restored to its tenantable
condition. The PBA, however, in view of its lack of needed
funding, was unable, thru no fault of its own, to have the building
repaired. UNITED, on the other hand, spent P13,661.28 to shore
up the building after the August 2, 1968 earthquake (L-47896, CA
Decision, p. 46). Because of the earthquake on April 7, 1970, the
trial court after the needed consultations, authorized the total
demolition of the building (L-47896, Vol. 1, pp. 53-54).

There is no question that an earthquake and other

forces of nature such as cyclones, drought,
floods, lightning, and perils of the sea are acts of
God. It does not necessarily follow, however, that
specific losses and suffering resulting from the
occurrence of these natural force are also acts of
God. We are not convinced on the basis of the
evidence on record that from the thousands of
structures in Manila, God singled out the
blameless PBA building in Intramuros and around
six or seven other buildings in various parts of the
city for collapse or severe damage and that God
alone was responsible for the damages and
losses thus suffered.
The record is replete with evidence of defects and
deficiencies in the designs and plans, defective
construction, poor workmanship, deviation from
plans and specifications and other imperfections.
These deficiencies are attributable to negligent
men and not to a perfect God.
The act-of-God arguments of the defendantsappellants and third party defendants-appellants
presented in their briefs are premised on legal
generalizations or speculations and on theological
fatalism both of which ignore the plain facts. The
lengthy discussion of United on ordinary
earthquakes and unusually strong earthquakes

and on ordinary fortuitous events and

extraordinary fortuitous events leads to its
argument that the August 2, 1968 earthquake was
of such an overwhelming and destructive
character that by its own force and independent of
the particular negligence alleged, the injury would
have been produced. If we follow this line of
speculative reasoning, we will be forced to
conclude that under such a situation scores of
buildings in the vicinity and in other parts of
Manila would have toppled down. Following the
same line of reasoning, Nakpil and Sons alleges
that the designs were adequate in accordance
with pre-August 2, 1968 knowledge and appear
inadequate only in the light of engineering
information acquired after the earthquake. If this
were so, hundreds of ancient buildings which
survived the earthquake better than the two-year
old PBA building must have been designed and
constructed by architects and contractors whose
knowledge and foresight were unexplainably
auspicious and prophetic. Fortunately, the facts on
record allow a more down to earth explanation of
the collapse. The failure of the PBA building, as a
unique and distinct construction with no reference
or comparison to other buildings, to weather the
severe earthquake forces was traced to design
deficiencies and defective construction, factors
which are neither mysterious nor esoteric. The
theological allusion of appellant United that God
acts in mysterious ways His wonders to perform
impresses us to be inappropriate. The evidence
reveals defects and deficiencies in design and
construction. There is no mystery about these
acts of negligence. The collapse of the PBA
building was no wonder performed by God. It was
a result of the imperfections in the work of the
architects and the people in the construction

company. More relevant to our mind is the lesson

from the parable of the wise man in the Sermon
on the Mount "which built his house upon a rock;
and the rain descended and the floods came and
the winds blew and beat upon that house; and it
fen not; for it was founded upon a rock" and of the
"foolish upon the sand. And the rain descended
and man which built his house the floods came,
and the winds blew, and beat upon that house;
and it fell and great was the fall of it. (St. Matthew
7: 24-27)." The requirement that a building should
withstand rains, floods, winds, earthquakes, and
natural forces is precisely the reason why we
have professional experts like architects, and
engineers. Designs and constructions vary under
varying circumstances and conditions but the
requirement to design and build well does not
change.
The findings of the lower Court on the cause of
the collapse are more rational and accurate.
Instead of laying the blame solely on the motions
and forces generated by the earthquake, it also
examined the ability of the PBA building, as
designed and constructed, to withstand and
successfully weather those forces.
The evidence sufficiently supports a conclusion
that the negligence and fault of both United and
Nakpil and Sons, not a mysterious act of an
inscrutable God, were responsible for the
damages. The Report of the Commissioner,
Plaintiff's Objections to the Report, Third Party
Defendants' Objections to the Report, Defendants'
Objections to the Report, Commissioner's Answer
to the various Objections, Plaintiffs' Reply to the
Commissioner's Answer, Defendants' Reply to the
Commissioner's Answer, Counter-Reply to

Defendants' Reply, and Third-Party Defendants'

Reply to the Commissioner's Report not to
mention the exhibits and the testimonies show
that the main arguments raised on appeal were
already raised during the trial and fully considered
by the lower Court. A reiteration of these same
arguments on appeal fails to convince us that we
should reverse or disturb the lower Court's factual
findings and its conclusions drawn from the facts,
among them:
The Commissioner also found merit in the
allegations of the defendants as to the physical
evidence before and after the earthquake showing
the inadequacy of design, to wit:
Physical evidence before the earthquake
providing (sic) inadequacy of design;
1. inadequate design was the cause of the failure
of the building.
2. Sun-baffles on the two sides and in front of the
building;
a. Increase the inertia forces that move the
building laterally toward the Manila Fire
Department.
b. Create another stiffness imbalance.
3. The embedded 4" diameter cast iron down
spout on all exterior columns reduces the crosssectional area of each of the columns and the
strength thereof.

4. Two front corners, A7 and D7 columns were

very much less reinforced.
Physical Evidence After the Earthquake, Proving
Inadequacy of design;
1. Column A7 suffered the severest fracture and
maximum sagging. Also D7.
2. There are more damages in the front part of the
building than towards the rear, not only in columns
but also in slabs.
3. Building leaned and sagged more on the front
part of the building.
4. Floors showed maximum sagging on the sides
and toward the front corner parts of the building.
5. There was a lateral displacement of the building
of about 8", Maximum sagging occurs at the
column A7 where the floor is lower by 80 cm. than
the highest slab level.
6. Slab at the corner column D7 sagged by 38 cm.
The Commissioner concluded that there were
deficiencies or defects in the design, plans and
specifications of the PBA building which involved
appreciable risks with respect to the accidental
forces which may result from earthquake shocks.
He conceded, however, that the fact that those
deficiencies or defects may have arisen from an
obsolete or not too conservative code or even a
code that does not require a design for
earthquake forces mitigates in a large measure

the responsibility or liability of the architect and

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

The issue presently considered is admittedly a

technical one of the highest degree. It involves
questions not within the ordinary competence of
the bench and the bar to resolve by themselves.
Counsel for the third-party defendants has aptly
remarked that "engineering, although dealing in
mathematics, is not an exact science and that the
present knowledge as to the nature of
earthquakes and the behaviour of forces
generated by them still leaves much to be
desired; so much so "that the experts of the
different parties, who are all engineers, cannot
agree on what equation to use, as to what
earthquake co-efficients are, on the codes to be
used and even as to the type of structure that the
PBA building (is) was (p. 29, Memo, of third- party
defendants before the Commissioner).
The difficulty expected by the Court if tills
technical matter were to be tried and inquired into
by the Court itself, coupled with the intrinsic
nature of the questions involved therein,
constituted the reason for the reference of the
said issues to a Commissioner whose
qualifications and experience have eminently
qualified him for the task, and whose competence
had not been questioned by the parties until he
submitted his report. Within the pardonable limit of
the Court's ability to comprehend the meaning of
the Commissioner's report on this issue, and the
objections voiced to the same, the Court sees no
compelling reasons to disturb the findings of the
Commissioner that there were defects and
deficiencies in the design, plans and
specifications prepared by third-party defendants,
and that said defects and deficiencies involved
appreciable risks with respect to the accidental
forces which may result from earthquake shocks.

(2) (a) The deviations, if any, made by the

defendants from the plans and specifications, and
how said deviations contributed to the damage
sustained by the building.
(b) The alleged failure of defendants to observe
the requisite quality of materials and workmanship
in the construction of the building.
These two issues, being interrelated with each
other, will be discussed together.
The findings of the Commissioner on these issues
were as follows:
We now turn to the construction of the PBA
Building and the alleged deficiencies or defects in
the construction and violations or deviations from
the plans and specifications. All these may be
summarized as follows:

(5) Prevalence of honeycombs,

(6) Contraband construction joints,
(7) Absence, or omission, or over spacing of spiral
hoops,
(8) Deliberate severance of spirals into semicircles in noted on Col. A-5, ground floor,
(9) Defective construction joints in Columns A-3,
C-7, D-7 and D-4, ground floor,
(10) Undergraduate concrete is evident,
(11) Big cavity in core of Column 2A-4, second
floor,

a. Summary of alleged defects as reported by

Engineer Mario M. Bundalian.

(12) Columns buckled at different planes.

Columns buckled worst where there are no spirals
or where spirals are cut. Columns suffered worst
displacement where the eccentricity of the
columnar reinforcement assembly is more acute.

(1) Wrongful and defective placing of reinforcing

bars.

b. Summary of alleged defects as reported by

Engr. Antonio Avecilla.

(2) Absence of effective and desirable integration

of the 3 bars in the cluster.

Columns are first (or ground) floor, unless

otherwise stated.

(3) Oversize coarse aggregates: 1-1/4 to 2" were

used. Specification requires no larger than 1 inch.

(1) Column D4 Spacing of spiral is changed

from 2" to 5" on centers,

(4) Reinforcement assembly is not concentric with

the column, eccentricity being 3" off when on one
face the main bars are only 1 1/2' from the
surface.

(2) Column D5 No spiral up to a height of 22"

from the ground floor,

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

c. Summary of alleged defects as reported by the

experts of the Third-Party defendants.

(4) Column D7 Lack of lateral ties,

Ground floor columns.
(5) Column C7 Absence of spiral to a height of
20" from the ground level, Spirals are at 2" from
the exterior column face and 6" from the inner
column face,
(6) Column B6 Lack of spiral on 2 feet below
the floor beams,
(7) Column B5 Lack of spirals at a distance of
26' below the beam,
(8) Column B7 Spirals not tied to vertical
reinforcing bars, Spirals are uneven 2" to 4",
(9) Column A3 Lack of lateral ties,
(10) Column A4 Spirals cut off and welded to
two separate clustered vertical bars,
(11) Column A4 (second floor Column is
completely hollow to a height of 30"
(12) Column A5 Spirals were cut from the floor
level to the bottom of the spandrel beam to a
height of 6 feet,

(1) Column A4 Spirals are cut,

(2) Column A5 Spirals are cut,
(3) Column A6 At lower 18" spirals are absent,
(4) Column A7 Ties are too far apart,
(5) Column B5 At upper fourth of column
spirals are either absent or improperly spliced,
(6) Column B6 At upper 2 feet spirals are
absent,
(7) Column B7 At upper fourth of column
spirals missing or improperly spliced.
(8) Column C7 Spirals are absent at lowest 18"
(9) Column D5 At lowest 2 feet spirals are
absent,
(10) Column D6 Spirals are too far apart and
apparently improperly spliced,

(13) Column A6 No spirals up to a height of 30'

above the ground floor level,

(11) Column D7 Lateral ties are too far apart,

spaced 16" on centers.

(14) Column A7 Lack of lateralties or spirals,

There is merit in many of these allegations. The

explanations given by the engineering experts for
the defendants are either contrary to general

principles of engineering design for reinforced

concrete or not applicable to the requirements for
ductility and strength of reinforced concrete in
earthquake-resistant design and construction.

certainly result in the loss of the plastic range or

ductility in the column and it is precisely this
plastic range or ductility which is desirable and
needed for earthquake-resistant strength.

We shall first classify and consider defects which

may have appreciable bearing or relation to' the
earthquake-resistant property of the building.

There is no excuse for the cavity or hollow portion

in the column A4, second floor, and although this
column did not fail, this is certainly an evidence on
the part of the contractor of poor construction.

As heretofore mentioned, details which insure

ductility at or near the connections between
columns and girders are desirable in earthquake
resistant design and construction. The omission of
spirals and ties or hoops at the bottom and/or tops
of columns contributed greatly to the loss of
earthquake-resistant strength. The plans and
specifications required that these spirals and ties
be carried from the floor level to the bottom
reinforcement of the deeper beam (p. 1,
Specifications, p. 970, Reference 11). There were
several clear evidences where this was not done
especially in some of the ground floor columns
which failed.
There were also unmistakable evidences that the
spacings of the spirals and ties in the columns
were in many cases greater than those called for
in the plans and specifications resulting again in
loss of earthquake-resistant strength. The
assertion of the engineering experts for the
defendants that the improper spacings and the
cutting of the spirals did not result in loss of
strength in the column cannot be maintained and
is certainly contrary to the general principles of
column design and construction. And even
granting that there be no loss in strength at the
yield point (an assumption which is very doubtful)
the cutting or improper spacings of spirals will

The effect of eccentricities in the columns which

were measured at about 2 1/2 inches maximum
may be approximated in relation to column loads
and column and beam moments. The main effect
of eccentricity is to change the beam or girder
span. The effect on the measured eccentricity of 2
inches, therefore, is to increase or diminish the
column load by a maximum of about 1% and to
increase or diminish the column or beam
movements by about a maximum of 2%. While
these can certainly be absorbed within the factor
of safety, they nevertheless diminish said factor of
safety.
The cutting of the spirals in column A5, ground
floor is the subject of great contention between
the parties and deserves special consideration.
The proper placing of the main reinforcements
and spirals in column A5, ground floor, is the
responsibility of the general contractor which is
the UCCI. The burden of proof, therefore, that this
cutting was done by others is upon the
defendants. Other than a strong allegation and
assertion that it is the plumber or his men who
may have done the cutting (and this was flatly
denied by the plumber) no conclusive proof was
presented. The engineering experts for the

defendants asserted that they could have no

motivation for cutting the bar because they can
simply replace the spirals by wrapping around a
new set of spirals. This is not quite correct. There
is evidence to show that the pouring of concrete
for columns was sometimes done through the
beam and girder reinforcements which were
already in place as in the case of column A4
second floor. If the reinforcement for the girder
and column is to subsequently wrap around the
spirals, this would not do for the elasticity of steel
would prevent the making of tight column spirals
and loose or improper spirals would result. The
proper way is to produce correct spirals down
from the top of the main column bars, a procedure
which can not be done if either the beam or girder
reinforcement is already in place. The engineering
experts for the defendants strongly assert and
apparently believe that the cutting of the spirals
did not materially diminish the strength of the
column. This belief together with the difficulty of
slipping the spirals on the top of the column once
the beam reinforcement is in place may be a
sufficient motivation for the cutting of the spirals
themselves. The defendants, therefore, should be
held responsible for the consequences arising
from the loss of strength or ductility in column A5
which may have contributed to the damages
sustained by the building.

accumulated so that they can contribute to an

appreciable loss in earthquake-resistant strength.
The engineering experts for the defendants
submitted an estimate on some of these defects
in the amount of a few percent. If accumulated,
therefore, including the effect of eccentricity in the
column the loss in strength due to these minor
defects may run to as much as ten percent.
To recapitulate: the omission or lack of spirals and
ties at the bottom and/or at the top of some of the
ground floor columns contributed greatly to the
collapse of the PBA building since it is at these
points where the greater part of the failure
occurred. The liability for the cutting of the spirals
in column A5, ground floor, in the considered
opinion of the Commissioner rests on the
shoulders of the defendants and the loss of
strength in this column contributed to the damage
which occurred.

The lack of proper length of splicing of spirals was

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

It is reasonable to conclude, therefore, that the

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

The effects of all the other proven and visible

defects although nor can certainly be

Since the execution and supervision of the

construction work in the hands of the contractor is

direct and positive, the presence of existence of

all the major defects and deficiencies noted and
proven manifests an element of negligence which
may amount to imprudence in the construction
work. (pp. 42-49, Commissioners Report).
As the parties most directly concerned with this portion of the
Commissioner's report, the defendants voiced their objections to
the same on the grounds that the Commissioner should have
specified the defects found by him to be "meritorious"; that the
Commissioner failed to indicate the number of cases where the
spirals and ties were not carried from the floor level to the bottom
reinforcement of the deeper beam, or where the spacing of the
spirals and ties in the columns were greater than that called for in
the specifications; that the hollow in column A4, second floor, the
eccentricities in the columns, the lack of proper length of splicing
of spirals, and the cut in the spirals in column A5, ground floor, did
not aggravate or contribute to the damage suffered by the
building; that the defects in the construction were within the
tolerable margin of safety; and that the cutting of the spirals in
column A5, ground floor, was done by the plumber or his men,
and not by the defendants.
Answering the said objections, the Commissioner stated that,
since many of the defects were minor only the totality of the
defects was considered. As regards the objection as to failure to
state the number of cases where the spirals and ties were not
carried from the floor level to the bottom reinforcement, the
Commissioner specified groundfloor columns B-6 and C-5 the
first one without spirals for 03 inches at the top, and in the latter,
there were no spirals for 10 inches at the bottom. The
Commissioner likewise specified the first storey columns where
the spacings were greater than that called for in the specifications
to be columns B-5, B-6, C-7, C-6, C-5, D-5 and B-7. The
objection to the failure of the Commissioner to specify the number
of columns where there was lack of proper length of splicing of
spirals, the Commissioner mentioned groundfloor columns B-6
and B-5 where all the splices were less than 1-1/2 turns and were

not welded, resulting in some loss of strength which could be

critical near the ends of the columns. He answered the
supposition of the defendants that the spirals and the ties must
have been looted, by calling attention to the fact that the missing
spirals and ties were only in two out of the 25 columns, which
rendered said supposition to be improbable.
The Commissioner conceded that the hollow in column A-4,
second floor, did not aggravate or contribute to the damage, but
averred that it is "evidence of poor construction." On the claim
that the eccentricity could be absorbed within the factor of safety,
the Commissioner answered that, while the same may be true, it
also contributed to or aggravated the damage suffered by the
building.
The objection regarding the cutting of the spirals in Column A-5,
groundfloor, was answered by the Commissioner by reiterating
the observation in his report that irrespective of who did the
cutting of the spirals, the defendants should be held liable for the
same as the general contractor of the building. The
Commissioner further stated that the loss of strength of the cut
spirals and inelastic deflections of the supposed lattice work
defeated the purpose of the spiral containment in the column and
resulted in the loss of strength, as evidenced by the actual failure
of this column.
Again, the Court concurs in the findings of the Commissioner on
these issues and fails to find any sufficient cause to disregard or
modify the same. As found by the Commissioner, the "deviations
made by the defendants from the plans and specifications caused
indirectly the damage sustained and that those deviations not
only added but also aggravated the damage caused by the
defects in the plans and specifications prepared by third-party
defendants. (Rollo, Vol. I, pp. 128-142)
The afore-mentioned facts clearly indicate the wanton negligence
of both the defendant and the third-party defendants in effecting
the plans, designs, specifications, and construction of the PBA

building and We hold such negligence as equivalent to bad

faith in the performance of their respective tasks.
Relative thereto, the ruling of the Supreme Court in Tucker v.
Milan (49 O.G. 4379, 4380) which may be in point in this case
reads:
One who negligently creates a dangerous condition cannot
escape liability for the natural and probable consequences
thereof, although the act of a third person, or an act of God for
which he is not responsible, intervenes to precipitate the loss.
As already discussed, the destruction was not purely an act of
God. Truth to tell hundreds of ancient buildings in the vicinity were
hardly affected by the earthquake. Only one thing spells out the
fatal difference; gross negligence and evident bad faith, without
which the damage would not have occurred.
WHEREFORE, the decision appealed from is hereby MODIFIED
and considering the special and environmental circumstances of
this case, We deem it reasonable to render a decision imposing,
as We do hereby impose, upon the defendant and the third-party
defendants (with the exception of Roman Ozaeta) a solidary (Art.
1723, Civil Code, Supra, p. 10) indemnity in favor of the
Philippine Bar Association of FIVE MILLION (P5,000,000.00)
Pesos to cover all damages (with the exception of attorney's fees)
occasioned by the loss of the building (including interest charges
and lost rentals) and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney's fees, the total sum
being payable upon the finality of this decision. Upon failure to
pay on such finality, twelve (12%) per cent interest per annum
shall be imposed upon afore-mentioned amounts from finality
until paid. Solidary costs against the defendant and third-party
defendants (except Roman Ozaeta).
SO ORDERED.

G.R. No. L-21749

September 29, 1967

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
LUZON STEVEDORING CORPORATION, defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.
H. San Luis and L.V. Simbulan for defendant-appellant.

P192,561.72, with legal interest thereon from the date of the filing
of the complaint.
REYES, J.B.L., J.:
The present case comes by direct appeal from a decision of the
Court of First Instance of Manila (Case No. 44572) adjudging the
defendant-appellant, Luzon Stevedoring Corporation, liable in
damages to the plaintiff-appellee Republic of the Philippines.
In the early afternoon of August 17, 1960, barge L-1892, owned
by the Luzon Stevedoring Corporation was being towed down the
Pasig river by tugboats "Bangus" and "Barbero"1 also belonging
to the same corporation, when the barge rammed against one of
the wooden piles of the Nagtahan bailey bridge, smashing the
posts and causing the bridge to list. The river, at the time, was
swollen and the current swift, on account of the heavy downpour
of Manila and the surrounding provinces on August 15 and 16,
1960.
Sued by the Republic of the Philippines for actual and
consequential damage caused by its employees, amounting to
P200,000 (Civil Case No. 44562, CFI of Manila), defendant Luzon
Stevedoring Corporation disclaimed liability therefor, on the
grounds that it had exercised due diligence in the selection and
supervision of its employees; that the damages to the bridge were
caused by force majeure; that plaintiff has no capacity to sue; and
that the Nagtahan bailey bridge is an obstruction to navigation.
After due trial, the court rendered judgment on June 11, 1963,
holding the defendant liable for the damage caused by its
employees and ordering it to pay to plaintiff the actual cost of the
repair of the Nagtahan bailey bridge which amounted to

Defendant appealed directly to this Court assigning the following

errors allegedly committed by the court a quo, to wit:
I The lower court erred in not holding that the herein
defendant-appellant had exercised the diligence required
of it in the selection and supervision of its personnel to
prevent damage or injury to others.1awphl.nt
II The lower court erred in not holding that the ramming
of the Nagtahan bailey bridge by barge L-1892 was
caused by force majeure.
III The lower court erred in not holding that the
Nagtahan bailey bridge is an obstruction, if not a menace,
to navigation in the Pasig river.
IV The lower court erred in not blaming the damage
sustained by the Nagtahan bailey bridge to the improper
placement of the dolphins.
V The lower court erred in granting plaintiff's motion to
adduce further evidence in chief after it has rested its
case.
VI The lower court erred in finding the plaintiff entitled
to the amount of P192,561.72 for damages which is
clearly exorbitant and without any factual basis.
However, it must be recalled that the established rule in this
jurisdiction is that when a party appeals directly to the Supreme

Court, and submits his case there for decision, he is deemed to

have waived the right to dispute any finding of fact made by the
trial Court. The only questions that may be raised are those of law
(Savellano vs. Diaz, L-17441, July 31, 1963; Aballe vs. Santiago,
L-16307, April 30, 1963; G.S.I.S. vs. Cloribel, L-22236, June 22,
1965). A converso, a party who resorts to the Court of Appeals,
and submits his case for decision there, is barred from
contending later that his claim was beyond the jurisdiction of the
aforesaid Court. The reason is that a contrary rule would
encourage the undesirable practice of appellants' submitting their
cases for decision to either court in expectation of favorable
judgment, but with intent of attacking its jurisdiction should the
decision be unfavorable (Tyson Tan, et al. vs. Filipinas Compaia
de Seguros) et al., L-10096, Res. on Motion to Reconsider, March
23, 1966). Consequently, we are limited in this appeal to the
issues of law raised in the appellant's brief.
Taking the aforesaid rules into account, it can be seen that the
only reviewable issues in this appeal are reduced to two:
1) Whether or not the collision of appellant's barge with
the supports or piers of the Nagtahan bridge was in law
caused by fortuitous event or force majeure, and
2) Whether or not it was error for the Court to have
permitted the plaintiff-appellee to introduce additional
evidence of damages after said party had rested its case.
As to the first question, considering that the Nagtahan bridge was
an immovable and stationary object and uncontrovertedly
provided with adequate openings for the passage of water craft,
including barges like of appellant's, it is undeniable that the
unusual event that the barge, exclusively controlled by appellant,

rammed the bridge supports raises a presumption of negligence

on the part of appellant or its employees manning the barge or
the tugs that towed it. For in the ordinary course of events, such a
thing does not happen if proper care is used. In Anglo American
Jurisprudence, the inference arises by what is known as the "res
ipsa loquitur" rule (Scott vs. London Docks Co., 2 H & C 596; San
Juan Light & Transit Co. vs. Requena, 224 U.S. 89, 56 L. Ed.,
680; Whitwell vs. Wolf, 127 Minn. 529, 149 N.W. 299; Bryne vs.
Great Atlantic & Pacific Tea Co., 269 Mass. 130; 168 N.E. 540;
Gribsby vs. Smith, 146 S.W. 2d 719).
The appellant strongly stresses the precautions taken by it on the
day in question: that it assigned two of its most powerful tugboats
to tow down river its barge L-1892; that it assigned to the task the
more competent and experienced among its patrons, had the
towlines, engines and equipment double-checked and inspected;
that it instructed its patrons to take extra precautions; and
concludes that it had done all it was called to do, and that the
accident, therefore, should be held due to force majeure or
fortuitous event.
These very precautions, however, completely destroy the
appellant's defense. For caso fortuito or force majeure(which in
law are identical in so far as they exempt an obligor from
liability) 2 by definition, are extraordinary events not foreseeable or
avoidable, "events that could not be foreseen, or which, though
foreseen, were inevitable" (Art. 1174, Civ. Code of the
Philippines). It is, therefore, not enough that the event should not
have been foreseen or anticipated, as is commonly believed, but
it must be one impossible to foresee or to avoid. The
mere difficulty to foresee the happening is not impossibility to
foresee the same: "un hecho no constituye caso fortuito por la
sola circunstancia de que su existencia haga mas dificil o mas

onerosa la accion diligente del presento ofensor" (Peirano

Facio, Responsibilidad Extra-contractual, p. 465; Mazeaud Trait
de la Responsibilite Civil, Vol. 2, sec. 1569). The very measures
adopted by appellant prove that the possibility of danger was not
only foreseeable, but actually foreseen, and was not caso fortuito.
Otherwise stated, the appellant, Luzon Stevedoring Corporation,
knowing and appreciating the perils posed by the swollen stream
and its swift current, voluntarily entered into a situation involving
obvious danger; it therefore assured the risk, and can not shed
responsibility merely because the precautions it adopted turned
out to be insufficient. Hence, the lower Court committed no error
in holding it negligent in not suspending operations and in holding
it liable for the damages caused.
It avails the appellant naught to argue that the dolphins, like the
bridge, were improperly located. Even if true, these
circumstances would merely emphasize the need of even higher
degree of care on appellant's part in the situation involved in the
present case. The appellant, whose barges and tugs travel up
and down the river everyday, could not safely ignore the danger
posed by these allegedly improper constructions that had been
erected, and in place, for years.
On the second point: appellant charges the lower court with
having abused its discretion in the admission of plaintiff's
additional evidence after the latter had rested its case. There is
an insinuation that the delay was deliberate to enable the
manipulation of evidence to prejudice defendant-appellant.
We find no merit in the contention. Whether or not further
evidence will be allowed after a party offering the evidence has
rested his case, lies within the sound discretion of the trial Judge,

and this discretion will not be reviewed except in clear case of

abuse.3
In the present case, no abuse of that discretion is shown. What
was allowed to be introduced, after plaintiff had rested its
evidence in chief, were vouchers and papers to support an item
of P1,558.00 allegedly spent for the reinforcement of the panel of
the bailey bridge, and which item already appeared in Exhibit GG.
Appellant, in fact, has no reason to charge the trial court of being
unfair, because it was also able to secure, upon written motion, a
similar order dated November 24, 1962, allowing reception of
additional evidence for the said defendant-appellant. 4
WHEREFORE, finding no error in the decision of the lower Court
appealed from, the same is hereby affirmed. Costs against the
defendant-appellant.

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE
COMPANY, INC., respondents.
VITUG, J.:

The issues, albeit not completely novel, are: (a) whether or not a
claim for damage sustained on a shipment of goods can be a
solidary, or joint and several, liability of the common carrier, the
arrastre operator and the customs broker; (b) whether the
payment of legal interest on an award for loss or damage is to be
computed from the time the complaint is filed or from the date the
decision appealed from is rendered; and (c) whether the
applicable rate of interest, referred to above, is twelve percent
(12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals,
on the antecedent and undisputed facts that have led to the
controversy are hereunder reproduced:
This is an action against defendants shipping
company, arrastre operator and broker-forwarder
for damages sustained by a shipment while in
defendants' custody, filed by the insurer-subrogee
who paid the consignee the value of such
losses/damages.
On December 4, 1981, two fiber drums of
riboflavin were shipped from Yokohama, Japan for
delivery vessel "SS EASTERN COMET" owned
by defendant Eastern Shipping Lines under Bill of
Lading
No. YMA-8 (Exh. B). The shipment was insured
under plaintiff's Marine Insurance Policy No.
81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on
December 12, 1981, it was discharged unto the
custody of defendant Metro Port Service, Inc. The

latter excepted to one drum, said to be in bad

order, which damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage
Corporation received the shipment from
defendant Metro Port Service, Inc., one drum
opened and without seal (per "Request for Bad
Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied
Brokerage Corporation made deliveries of the
shipment to the consignee's warehouse. The
latter excepted to one drum which contained
spillages, while the rest of the contents was
adulterated/fake (per "Bad Order Waybill" No.
10649, Exh. E).
Plaintiff contended that due to the losses/damage
sustained by said drum, the consignee suffered
losses totaling P19,032.95, due to the fault and
negligence of defendants. Claims were presented
against defendants who failed and refused to pay
the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained,
plaintiff was compelled to pay the consignee
P19,032.95 under the aforestated marine
insurance policy, so that it became subrogated to
all the rights of action of said consignee against
defendants (per "Form of Subrogation", "Release"
and Philbanking check, Exhs. M, N, and O). (pp.
85-86, Rollo.)

There were, to be sure, other factual issues that confronted both

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

while in the custody of defendants

(in whose respective custody, if
determinable);
3. Whether or not defendant(s)
should be held liable for the
losses/damages (see plaintiff's
pre-Trial Brief, Records, p. 34;
Allied's pre-Trial Brief, adopting
plaintiff's Records, p. 38).
As to the first issue, there can be
no doubt that the shipment
sustained losses/damages. The
two drums were shipped in good
order and condition, as clearly
shown by the Bill of Lading and
Commercial Invoice which do not
indicate any damages drum that
was shipped (Exhs. B and C). But
when on December 12, 1981 the
shipment was delivered to
defendant Metro Port Service,
Inc., it excepted to one drum in
bad order.
Correspondingly, as to the second
issue, it follows that the
losses/damages were sustained
while in the respective and/or
successive custody and
possession of defendants carrier
(Eastern), arrastre operator (Metro

Port) and broker (Allied

Brokerage). This becomes evident
when the Marine Cargo Survey
Report (Exh. G), with its
"Additional Survey Notes", are
considered. In the latter notes, it is
stated that when the shipment was
"landed on vessel" to dock of Pier
# 15, South Harbor, Manila on
December 12, 1981, it was
observed that "one (1) fiber drum
(was) in damaged condition,
covered by the vessel's Agent's
Bad Order Tally Sheet No. 86427."
The report further states that when
defendant Allied Brokerage
withdrew the shipment from
defendant arrastre operator's
custody on January 7, 1982, one
drum was found opened without
seal, cello bag partly torn but
contents intact. Net unrecovered
spillages was
15 kgs. The report went on to
state that when the drums reached
the consignee, one drum was
found with adulterated/faked
contents. It is obvious, therefore,
that these losses/damages
occurred before the shipment
reached the consignee while
under the successive custodies of
defendants. Under Art. 1737 of the

New Civil Code, the common

carrier's duty to observe
extraordinary diligence in the
vigilance of goods remains in full
force and effect even if the goods
are temporarily unloaded and
stored in transit in the warehouse
of the carrier at the place of
destination, until the consignee
has been advised and has had
reasonable opportunity to remove
or dispose of the goods (Art. 1738,
NCC). Defendant Eastern
Shipping's own exhibit, the "TurnOver Survey of Bad Order
Cargoes" (Exhs. 3-Eastern) states
that on December 12, 1981 one
drum was found "open".
and thus held:
WHEREFORE, PREMISES
CONSIDERED, judgment is
hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and
severally:
1. The amount of P19,032.95, with
the present legal interest of
12% per annum from October 1,
1982, the date of filing of this
complaints, until fully paid (the

liability of defendant Eastern

Shipping, Inc. shall not exceed
US$500 per case or the CIF value
of the loss, whichever is lesser,
while the liability of defendant
Metro Port Service, Inc. shall be to
the extent of the actual invoice
value of each package, crate box
or container in no case to exceed
P5,000.00 each, pursuant to
Section 6.01 of the Management
Contract);
2. P3,000.00 as attorney's fees,
and

After a careful scrutiny of the evidence on record.

We find that the conclusion drawn therefrom is
correct. As there is sufficient evidence that the
shipment sustained damage while in the
successive possession of appellants, and
therefore they are liable to the appellee, as
subrogee for the amount it paid to the consignee.
(pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the
court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier,
attributes error and grave abuse of discretion on the part of the
appellate court when

3. Costs.
B. Dismissing the
counterclaims and
crossclaim of
defendant/crossclaimant Allied
Brokerage
Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.

I. IT HELD PETITIONER CARRIER JOINTLY

AND SEVERALLY LIABLE WITH THE
ARRASTRE OPERATOR AND CUSTOMS
BROKER FOR THE CLAIM OF PRIVATE
RESPONDENT AS GRANTED IN THE
QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST
ON THE CLAIM OF PRIVATE RESPONDENT
SHOULD COMMENCE FROM THE DATE OF
THE FILING OF THE COMPLAINT AT THE RATE
OF TWELVE PERCENT PER ANNUM INSTEAD
OF FROM THE DATE OF THE DECISION OF
THE TRIAL COURT AND ONLY AT THE RATE
OF SIX PERCENT PER ANNUM, PRIVATE

RESPONDENT'S CLAIM BEING INDISPUTABLY

UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions
raised by petitioner carrier are not all that novel. Indeed, we do
have a fairly good number of previous decisions this Court can
merely tack to.
The common carrier's duty to observe the requisite diligence in
the shipment of goods lasts from the time the articles are
surrendered to or unconditionally placed in the possession of, and
received by, the carrier for transportation until delivered to, or until
the lapse of a reasonable time for their acceptance by, the person
entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs.
Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship
Lines, 52 Phil. 863). When the goods shipped either are lost or
arrive in damaged condition, a presumption arises against the
carrier of its failure to observe that diligence, and there need not
be an express finding of negligence to hold it liable (Art. 1735,
Civil Code; Philippine National Railways vs. Court of Appeals, 139
SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA
365). There are, of course, exceptional cases when such
presumption of fault is not observed but these cases, enumerated
in Article 1734 1 of the Civil Code, are exclusive, not one of which
can be applied to this case.
The question of charging both the carrier and the arrastre
operator with the obligation of properly delivering the goods to the
consignee has, too, been passed upon by the Court. In Fireman's
Fund Insurance vs. Metro Port Services (182 SCRA 455), we

have explained, in holding the carrier and the arrastre operator

liable in solidum,thus:
The legal relationship between the consignee and
the arrastre operator is akin to that of a depositor
and warehouseman (Lua Kian v. Manila Railroad
Co., 19 SCRA 5 [1967]. The relationship between
the consignee and the common carrier is similar
to that of the consignee and the arrastre operator
(Northern Motors, Inc. v. Prince Line, et al., 107
Phil. 253 [1960]). Since it is the duty of the
ARRASTRE to take good care of the goods that
are in its custody and to deliver them in good
condition to the consignee, such responsibility
also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore
charged with the obligation to deliver the goods in
good condition to the consignee.
We do not, of course, imply by the above pronouncement that the
arrastre operator and the customs broker are themselves always
and necessarily liable solidarily with the carrier, or vice-versa, nor
that attendant facts in a given case may not vary the rule. The
instant petition has been brought solely by Eastern Shipping
Lines, which, being the carrier and not having been able to rebut
the presumption of fault, is, in any event, to be held liable in this
particular case. A factual finding of both the court a quo and the
appellate court, we take note, is that "there is sufficient evidence
that the shipment sustained damage while in the successive
possession of appellants" (the herein petitioner among them).
Accordingly, the liability imposed on Eastern Shipping Lines, Inc.,
the sole petitioner in this case, is inevitable regardless of whether
there are others solidarily liable with it.

It is over the issue of legal interest adjudged by the appellate

court that deserves more than just a passing remark.
Let us first see a chronological recitation of the major rulings of
this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery
of money arising out of short deliveries and pilferage of goods. In
this case, appellee Malayan Insurance (the plaintiff in the lower
court) averred in its complaint that the total amount of its claim for
the value of the undelivered goods amounted to P3,947.20. This
demand, however, was neither established in its totality nor
definitely ascertained. In the stipulation of facts later entered into
by the parties, in lieu of proof, the amount of P1,447.51 was
agreed upon. The trial court rendered judgment ordering the
appellants (defendants) Manila Port Service and Manila Railroad
Company to pay appellee Malayan Insurance the sum of
P1,447.51 with legal interest thereon from the date the complaint
was filed on 28 December 1962 until full payment thereof. The
appellants then assailed,inter alia, the award of legal interest. In
sustaining the appellants, this Court ruled:
Interest upon an obligation which calls for the
payment of money, absent a stipulation, is the
legal rate. Such interest normally is allowable
from the date of demand, judicial or extrajudicial.
The trial court opted for judicial demand as the
starting point.
But then upon the provisions of Article 2213 of the
Civil Code, interest "cannot be recovered upon
unliquidated claims or damages, except when the

demand can be established with reasonable

certainty." And as was held by this Court in Rivera
vs. Perez, 4 L-6998, February 29, 1956, if the suit
were for damages, "unliquidated and not known
until definitely ascertained, assessed and
determined by the courts after proof (Montilla
c. Corporacion de P.P. Agustinos, 25 Phil. 447;
Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the
date of the decision." (Emphasis supplied)
The case of Reformina vs. Tomol, 5 rendered on 11 October 1985,
was for "Recovery of Damages for Injury to Person and Loss of
Property." After trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in
favor of the plaintiffs and third party defendants
and against the defendants and third party
plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell
and Michael, Incorporated to pay jointly and
severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco
Reformina the sum of P131,084.00 which is the
value of the boat F B Pacita III together with its
accessories, fishing gear and equipment minus
P80,000.00 which is the value of the insurance
recovered and the amount of P10,000.00 a month
as the estimated monthly loss suffered by them as

a result of the fire of May 6, 1969 up to the time

they are actually paid or already the total sum of
P370,000.00 as of June 4, 1972 with legal interest
from the filing of the complaint until paid and to
pay attorney's fees of P5,000.00 with costs
against defendants and third party plaintiffs.
(Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the
amount of damages awarded but sustained the trial court
in adjudging legal interest from the filing of the complaint
until fully paid. When the appellate court's decision
became final, the case was remanded to the lower court
for execution, and this was when the trial court issued its
assailed resolution which applied the 6% interest per
annum prescribed in Article 2209 of the Civil Code. In
their petition for review on certiorari, the petitioners
contended that Central Bank Circular
No. 416, providing thus
By virtue of the authority granted to it under
Section 1 of Act 2655, as amended, Monetary
Board in its Resolution No. 1622 dated July 29,
1974, has prescribed that the rate of interest for
the loan, or forbearance of any money, goods, or
credits and the rate allowed in judgments, in the
absence of express contract as to such rate of
interest, shall be twelve (12%) percent per
annum. This Circular shall take effect immediately.
(Emphasis found in the text)
should have, instead, been applied. This Court 6 ruled:

The judgments spoken of and referred to are

judgments in litigations involving loans or
forbearance of any money, goods or credits. Any
other kind of monetary judgment which has
nothing to do with, nor involving loans or
forbearance of any money, goods or credits does
not fall within the coverage of the said law for it is
not within the ambit of the authority granted to the
Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein
sought to be executed is one rendered in an
Action for Damages for injury to persons and loss
of property and does not involve any loan, much
less forbearances of any money, goods or credits.
As correctly argued by the private respondents,
the law applicable to the said case is Article 2209
of the New Civil Code which reads
Art. 2209. If the obligation
consists in the payment of a sum
of money, and the debtor incurs in
delay, the indemnity for damages,
there being no stipulation to the
contrary, shall be the payment of
interest agreed upon, and in the
absence of stipulation, the legal
interest which is six percent per
annum.

The above rule was reiterated in Philippine Rabbit Bus Lines,

Inc., v. Cruz, 7 promulgated on 28 July 1986. The case was for
damages occasioned by an injury to person and loss of property.
The trial court awarded private respondent Pedro Manabat actual
and compensatory damages in the amount of P72,500.00
with legal interest thereon from the filing of the complaint until
fully paid. Relying on the Reformina v. Tomol case, this
Court 8 modified the interest award from 12% to 6% interest per
annum but sustained the time computation thereof, i.e., from the
filing of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an
action for the recovery of damages arising from the collapse of a
building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the
petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest
at the legal rate from November 29, 1968, the date of the filing of
the complaint until full payment . . . ." Save from the modification
of the amount granted by the lower court, the Court of Appeals
sustained the trial court's decision. When taken to this Court for
review, the case, on 03 October 1986, was decided, thus:
WHEREFORE, the decision appealed from is
hereby MODIFIED and considering the special
and environmental circumstances of this case, we
deem it reasonable to render a decision imposing,
as We do hereby impose, upon the defendant and
the third-party defendants (with the exception of
Roman Ozaeta) a solidary (Art. 1723, Civil
Code, Supra.
p. 10) indemnity in favor of the Philippine Bar
Association of FIVE MILLION (P5,000,000.00)

Pesos to cover all damages (with the exception to

attorney's fees) occasioned by the loss of the
building (including interest charges and lost
rentals) and an additional ONE HUNDRED
THOUSAND (P100,000.00) Pesos as and for
attorney's fees, the total sum being payable upon
the finality of this decision. Upon failure to pay on
such finality, twelve (12%) per cent interest per
annum shall be imposed upon aforementioned
amounts from finality until paid. Solidary costs
against the defendant and third-party defendants
(Except Roman Ozaeta). (Emphasis supplied)
A motion for reconsideration was filed by United
Construction, contending that "the interest of twelve
(12%) per cent per annum imposed on the total amount of
the monetary award was in contravention of law." The
Court 10 ruled out the applicability of the Reformina and
Philippine Rabbit Bus Lines cases and, in its resolution of
15 April 1988, it explained:
There should be no dispute that the imposition of
12% interest pursuant to Central Bank Circular
No. 416 . . . is applicable only in the following: (1)
loans; (2) forbearance of any money, goods or
credit; and
(3) rate allowed in judgments (judgments spoken
of refer to judgments involving loans or
forbearance of any money, goods or credits.
(Philippine Rabbit Bus Lines Inc. v. Cruz, 143
SCRA 160-161 [1986]; Reformina v. Tomol, Jr.,
139 SCRA 260 [1985]). It is true that in the instant
case, there is neither a loan or a forbearance, but

then no interest is actually imposed provided the

sums referred to in the judgment are paid upon
the finality of the judgment. It is delay in the
payment of such final judgment, that will cause
the imposition of the interest.
It will be noted that in the cases already adverted
to, the rate of interest is imposed on the total sum,
from the filing of the complaint until paid; in other
words, as part of the judgment for damages.
Clearly, they are not applicable to the instant
case. (Emphasis supplied.)
The subsequent case of American Express International, Inc.,
vs. Intermediate Appellate Court 11 was a petition for review
on certiorari from the decision, dated 27 February 1985, of the
then Intermediate Appellate Court reducing the amount of moral
and exemplary damages awarded by the trial court, to
P240,000.00 and P100,000.00, respectively, and its resolution,
dated 29 April 1985, restoring the amount of damages awarded
by the trial court, i.e., P2,000,000.00 as moral damages and
P400,000.00 as exemplary damages with interest thereon at 12%
per annum from notice of judgment, plus costs of suit. In a
decision of 09 November 1988, this Court, while recognizing the
right of the private respondent to recover damages, held the
award, however, for moral damages by the trial court, later
sustained by the IAC, to be inconceivably large. The Court 12 thus
set aside the decision of the appellate court and rendered a new
one, "ordering the petitioner to pay private respondent the sum of
One Hundred Thousand (P100,000.00) Pesos as moral
damages, with
six (6%) percent interest thereon computed from the finality of
this decision until paid. (Emphasis supplied)

Reformina came into fore again in the 21 February 1989 case

of Florendo v. Ruiz 13 which arose from a breach of employment
contract. For having been illegally dismissed, the petitioner was
awarded by the trial court moral and exemplary damages without,
however, providing any legal interest thereon. When the decision
was appealed to the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove
the decision of the CFI of Negros Oriental dated
October 31, 1972 is affirmed in all respects, with
the modification that defendants-appellants,
except defendant-appellant Merton Munn, are
ordered to pay, jointly and severally, the amounts
stated in the dispositive portion of the decision,
including the sum of P1,400.00 in concept of
compensatory damages, with interest at the legal
rate from the date of the filing of the complaint
until fully paid(Emphasis supplied.)
The petition for review to this Court was denied. The
records were thereupon transmitted to the trial court, and
an entry of judgment was made. The writ of execution
issued by the trial court directed that only compensatory
damages should earn interest at 6% per annum from the
date of the filing of the complaint. Ascribing grave abuse
of discretion on the part of the trial judge, a petition
for certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals
ordered the payment of interest "at the legal
rate"from the time of the filing of the complaint. . .
Said circular [Central Bank Circular No. 416] does
not apply to actions based on a breach of

employment contract like the case at bar.

(Emphasis supplied)
The Court reiterated that the 6% interest per annum on
the damages should be computed from the time the
complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the
matter. National Power Corporation vs. Angas, 14decided on 08
May 1992, involved the expropriation of certain parcels of land.
After conducting a hearing on the complaints for eminent
domain, the trial court ordered the petitioner to pay the private
respondents certain sums of money as just compensation for
their lands so expropriated "with legal interest thereon . . . until
fully paid." Again, in applying the 6% legal interest per
annum under the Civil Code, the Court 15 declared:
. . . , (T)he transaction involved is clearly not a
loan or forbearance of money, goods or credits
but expropriation of certain parcels of land for a
public purpose, the payment of which is without
stipulation regarding interest, and the interest
adjudged by the trial court is in the nature of
indemnity for damages. The legal interest required
to be paid on the amount of just compensation for
the properties expropriated is manifestly in the
form of indemnity for damages for the delay in the
payment thereof. Therefore, since the kind of
interest involved in the joint judgment of the lower
court sought to be enforced in this case is interest
by way of damages, and not by way of earnings
from loans, etc. Art. 2209 of the Civil Code shall
apply.

Concededly, there have been seeming variances in the above

holdings. The cases can perhaps be classified into two groups
according to the similarity of the issues involved and the
corresponding rulings rendered by the court. The "first group"
would consist of the cases of Reformina v. Tomol (1985),
Philippine Rabbit Bus Lines v. Cruz(1986), Florendo
v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second
group" would be Malayan Insurance Company v.Manila Port
Service (1969), Nakpil and Sons v. Court of
Appeals (1988), and American Express International
v.Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of
either the 6% (under the Civil Code) or 12% (under the Central
Bank Circular) interest per annum. It is easily discernible in these
cases that there has been a consistent holding that the Central
Bank Circular imposing the 12% interest per annum applies only
to loans or forbearance 16 of money, goods or credits, as well as to
judgments involving such loan or forbearance of money, goods or
credits, and that the 6% interest under the Civil Code governs
when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the
performance of obligations in general. Observe, too, that in these
cases, a common time frame in the computation of the 6%
interest per annum has been applied, i.e., from the time the
complaint is filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the
application of the 6% or 12% interest per annum, 17depending on
whether or not the amount involved is a loan or forbearance, on
the one hand, or one of indemnity for damage, on the other hand.
Unlike, however, the "first group" which remained consistent in

holding that the running of the legal interest should be from the
time of the filing of the complaint until fully paid, the "second
group" varied on the commencement of the running of the legal
interest.
Malayan held that the amount awarded should bear legal interest
from the date of the decision of the court a quo,explaining that "if
the suit were for damages, 'unliquidated and not known until
definitely ascertained, assessed and determined by the courts
after proof,' then, interest 'should be from the date of the
decision.'" American Express International v. IAC, introduced a
different time frame for reckoning the 6% interest by ordering it to
be "computed from the finality of (the) decision until paid." The
Nakpil and Sons case ruled that 12% interest per annum should
be imposed from the finality of the decision until the judgment
amount is paid.
The ostensible discord is not difficult to explain. The factual
circumstances may have called for different applications, guided
by the rule that the courts are vested with discretion, depending
on the equities of each case, on the award of interest.
Nonetheless, it may not be unwise, by way of clarification and
reconciliation, to suggest the following rules of thumb for future
guidance.
I. When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts 18 is breached, the
contravenor can be held liable for damages. 19 The provisions
under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages. 20

II. With regard particularly to an award of interest in the concept

of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment
of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. 21 Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. 22 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 23 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 24 at the
rate of 6% per annum. 25 No interest, however, shall be adjudged
on unliquidated claims or damages except when or until the
demand can be established with reasonable
certainty. 26 Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made
(at which time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether

the case falls under paragraph 1 or paragraph 2, above, shall be

12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a
forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed
decision is AFFIRMED with the MODIFICATION that the legal
interest to be paid is SIX PERCENT (6%) on the amount due
computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT
(12%) interest, in lieu of SIX PERCENT (6%), shall be imposed
on such amount upon finality of this decision until the payment
thereof.
SO ORDERED.

Spouses PONCIANO ALMEDA and EUFEMIA P.

ALMEDA, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE NATIONAL
BANK, respondents.

KAPUNAN, J.:p

On various dates in 1981, the Philippine National Bank granted to

herein petitioners, the spouses Ponciano L. Almeda and Eufemia
P. Almeda several loan/credit accommodations totaling P18.0
Million pesos payable in a period of six years at an interest rate of
21% per annum. To secure the loan, the spouses Almeda
executed a Real Estate Mortgage Contract covering a 3,500
square meter parcel of land, together with the building erected
thereon (the Marvin Plaza) located at Pasong Tamo, Makati,
Metro Manila. A credit agreement embodying the terms and
conditions of the loan was executed between the parties.
Pertinent portions of the said agreement are quoted below:
SPECIAL CONDITIONS
xxx xxx xxx
The loan shall be subject to interest at the rate of
twenty one per cent (21%) per annum, payable
semi-annually in arrears, the first interest payment
to become due and payable six (6) months from
date of initial release of the loan. The loan shall
likewise be subject to the appropriate service
charge and a penalty charge of three per cent
(30%) per annum to be imposed on any amount
remaining unpaid or not rendered when due.
xxx xxx xxx
III. OTHER CONDITIONS
(c) Interest and Charges
(1) The Bank reserves the right to
increase the interest rate within
the limits allowed by law at any
time depending on whatever policy
it may adopt in the future;

provided, that the interest rate on

this/these accommodations shall
be correspondingly decreased in
the event that the applicable
maximum interest rate is reduced
by law or by the Monetary Board.
In either case, the adjustment in
the interest rate agreed upon shall
take effect on the effectivity date of
the increase or decrease of the
maximum interest rate. 1
Between 1981 and 1984, petitioners made several partial
payments on the loan totaling. P7,735,004.66, 2 a substantial
portion of which was applied to accrued interest. 3 On March 31,
1984, respondent bank, over petitioners' protestations, raised the
interest rate to 28%, allegedly pursuant to Section III-c (1) of its
credit agreement. Said interest rate thereupon increased from an
initial 21% to a high of 68% between March of 1984 to
September, 1986. 4
Petitioner protested the increase in interest rates, to no avail.
Before the loan was to mature in March, 1988, the spouses filed
on February 6, 1988 a petition for declaratory relief with prayer for
a writ of preliminary injunction and temporary restraining order
with the Regional Trial Court of Makati, docketed as Civil Case
No. 18872. In said petition, which was raffled to Branch 134
presided by Judge Ignacio Capulong, the spouses sought
clarification as to whether or not the PNB could unilaterally raise
interest rates on the loan, pursuant to the credit agreement's
escalation clause, and in relation to Central Bank Circular No.
905. As a preliminary measure, the lower court, on March 3,
1988, issued a writ of preliminary injunction enjoining the
Philippine National Bank from enforcing an interest rate above the
21% stipulated in the credit agreement. By this time the spouses
were already in default of their loan obligations.

Invoking the Law on Mandatory Foreclosure (Act 3135, as

amended and P.D. 385), the PNB countered by ordering the
extrajudicial foreclosure of petitioner's mortgaged properties and
scheduled an auction sale for March 14, 1989. Upon motion by
petitioners, however, the lower court, on April 5, 1989, granted a
supplemental writ of preliminary injunction, staying the public
auction of the mortgaged property.
On January 15, 1990, upon the posting of a counterbond by the
PNB, the trial court dissolved the supplemental writ of preliminary
injunction. Petitioners filed a motion for reconsideration. In the
interim, respondent bank once more set a new date for the
foreclosure sale of Marvin Plaza which was March 12, 1990. Prior
to the scheduled date, however, petitioners tendered to
respondent bank the amount of P40,142,518.00, consisting of the
principal (P18,000,000.00) and accrued interest calculated at the
originally stipulated rate of 21%. The PNB refused to accept the
payment. 5
As a result of PNB's refusal of the tender of payment, petitioners,
on March 8, 1990, formally consigned the amount of
P40,142,518.00 with the Regional Trial Court in Civil Case No.
90-663. They prayed therein for a writ of preliminary injunction
with a temporary restraining order. The case was raffled to
Branch 147, presided by Judge Teofilo Guadiz. On March 15,
1990, respondent bank sought the dismissal of the case.
On March 30, 1990 Judge Guadiz in Civil Case No. 90-663
issued an order granting the writ of preliminary injunction
enjoining the foreclosure sale of "Marvin Plaza" scheduled on
March 12, 1990. On April 17, 1990 respondent bank filed a
motion for reconsideration of the said order.
On August 16, 1991, Civil Case No. 90-663 we transferred to
Branch 66 presided by Judge Eriberto Rosario who issued an
order consolidating said case with Civil Case 18871 presided by
Judge Ignacio Capulong.

For Judge Ignacio's refusal to lift the writ of preliminary injunction

issued March 30, 1990, respondent bank filed a petition
for Certiorari, Prohibition and Mandamus with respondent Court
of Appeals, assailing the following orders of the Regional Trial
Court:
1. Order dated March 30, 1990 of Judge Guadiz
granting the writ of preliminary injunction
restraining the foreclosure sale of Mavin Plaza set
on March 12, 1990;
2. Order of Judge Ignacio Capulong dated
January 10, 1992 denying respondent bank's
motion to lift the writ of injunction issued by Judge
Guadiz as well as its motion to dismiss Civil Case
No. 90-663;
3. Order of Judge Capulong dated July 3, 1992
denying respondent bank's subsequent motion to
lift the writ of preliminary injunction; and
4. Order of Judge Capulong dated October 20,
1992 denying respondent bank's motion for
reconsideration.
On August 27, 1993, respondent court rendered its decision
setting aside the assailed orders and upholding respondent
bank's right to foreclose the mortgaged property pursuant to Act
3135, as amended and P.D. 385. Petitioners' Motion for
Reconsideration and Supplemental Motion for Reconsideration,
dated September 15, 1993 and October 28, 1993, respectively,
were denied by respondent court in its resolution dated January
10, 1994.
Hence the instant petition.

This appeal by certiorari from the respondent court's decision

dated August 27, 1993 raises two principal issues namely: 1)
Whether or not respondent bank was authorized to raise its
interest rates from 21% to as high as 68% under the credit
agreement; and 2) Whether or not respondent bank is granted the
authority to foreclose the Marvin Plaza under the mandatory
foreclosure provisions of P.D. 385.
In its comment dated April 19, 1994, respondent bank vigorously
denied that the increases in the interest rates were illegal,
unilateral, excessive and arbitrary, it argues that the escalated
rates of interest it imposed was based on the agreement of the
parties. Respondent bank further contends that it had a right to
foreclose the mortgaged property pursuant to P.D. 385, after
petitioners were unable to pay their loan obligations to the bank
based on the increased rates upon maturity in 1984.
The instant petition is impressed with merit.
The binding effect of any agreement between parties to a contract
is premised on two settled principles: (1) that any obligation
arising from contract has the force of law between the parties;
and (2) that there must be mutuality between the parties based
on their essential equality. 6 Any contract which appears to be
heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the
validity or compliance of the contract which is left solely to the will
of one of the parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the
case that respondent bank unilaterally altered the terms of its
contract with petitioners by increasing the interest rates on the
loan without the prior assent of the latter. In fact, the manner of
agreement is itself explicitly stipulated by the Civil Code when it
provides, in Article 1956 that "No interest shall be due unless it
has been expressly stipulated in writing." What has been
"stipulated in writing" from a perusal of interest rate provision of
the credit agreement signed between the parties is that

petitioners were bound merely to pay 21% interest, subject to a

possible escalation or de-escalation, when 1) the circumstances
warrant such escalation or de-escalation; 2) within the limits
allowed by law; and 3) upon agreement.
Indeed, the interest rate which appears to have been agreed
upon by the parties to the contract in this case was the 21% rate
stipulated in the interest provision. Any doubt about this is in fact
readily resolved by a careful reading of the credit agreement
because the same plainly uses the phrase "interest rate agreed
upon," in reference to the original 21% interest rate. The interest
provision states:
(c) interest and Charges
(1) The Bank reserves the right to increase the
interest rate within the limits allowed by law at any
time depending on whatever policy it may adopt in
the future; provided, that the interest rate on
this/these accommodations shall be
correspondingly decreased in the event that the
applicable maximum interest rate is reduced by
law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall
take effect on the effectivity date of the increase
or decrease of the maximum interest rate.
In Philippine National Bank v. Court of Appeals, 7 this Court
disauthorized respondent bank from unilaterally raising the
interest rate in the borrower's loan from 18% to 32%, 41% and
48% partly because the aforestated increases violated the
principle of mutuality of contracts expressed in Article 1308 of the
Civil Code. The Court held:
CB Circular No. 905, Series of
1982 (Exh. 11) removed the Usury
Law ceiling on interest rates

. . . increases in interest rates are

not subject to any ceiling
prescribed by the Usury Law.
but it did not authorize the PNB, or any bank for
that matter, to unilaterally and successively
increase the agreed interest rates from 18% to
48% within a span of four (4) months, in violation
of P.D. 116 which limits such changes to once
every twelve months.
Besides violating P.D. 116, the unilateral action of
the PNB in increasing the interest rate on the
private respondent's loan, violated the mutuality of
contracts ordained in Article 1308 of the Civil
Code:
Art. 308. The contract must bind both contracting
parties; its validity or compliance cannot be left to
the will of one of them.
In order that obligations arising from contracts
may have the force of law between the parties,
there must be mutuality between the parties
based on their essential equality. A contract
containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will
of one of the contracting parties, is void (Garcia
vs. Rita Legarda, Inc., 21 SCRA 555). Hence,
even assuming that the P1.8 million loan
agreement between the PNB and the private
respondent gave the PNB a license (although in
fact there was none) to increase the interest rate
at will during the term of the loan, that license
would have been null and void for being violative
of the principle of mutuality essential in contracts.
It would have invested the loan agreement with
the character of a contract of adhesion, where the

parties do not bargain on equal footing, the

weaker party's (the debtor) participation being
reduced to the alternative "to take it or lease it"
(Qua vs. Law Union & Rock Insurance Co., 95
Phil. 85). Such a contract is a veritable trap for the
weaker party whom the courts of justice must
protect against abuse and imposition.
PNB's successive increases of the interest rate on
the private respondent's loan, over the latter's
protest, were arbitrary as they violated an express
provision of the Credit Agreement (Exh. 1) Section
9.01 that its terms "may be amended only by an
instrument in writing signed by the party to be
bound as burdened by such amendment." The
increases imposed by PNB also contravene Art.
1956 of the Civil Code which provides that "no
interest shall be due unless it has been expressly
stipulated in writing."
The debtor herein never agreed in writing to pay
the interest increases fixed by the PNB beyond
24%per annum, hence, he is not bound to pay a
higher rate than that.
That an increase in the interest rate from 18% to
48% within a period of four (4) months is
excessive, as found by the Court of Appeals, is
indisputable.
Clearly, the galloping increases in interest rate imposed by
respondent bank on petitioners' loan, over the latter's vehement
protests, were arbitrary.
Moreover, respondent bank's reliance on C.B. Circular No. 905,
Series of 1982 did not authorize the bank, or any lending
institution for that matter, to progressively increase interest rates

on borrowings to an extent which would have made it virtually

impossible for debtors to comply with their own obligations. True,
escalation clauses in credit agreements are perfectly valid and do
not contravene public policy. Such clauses, however, (as are
stipulations in other contracts) are nonetheless still subject to
laws and provisions governing agreements between parties,
which agreements while they may be the law between the
contracting parties implicitly incorporate provisions of existing
law. Consequently, while the Usury Law ceiling on interest rates
was lifted by C.B. Circular 905, nothing in the said circular could
possibly be read as granting respondent bank carte
blanche authority to raise interest rates to levels which would
either enslave its borrowers or lead to a hemorrhaging of their
assets. Borrowing represents a transfusion of capital from lending
institutions to industries and businesses in order to stimulate
growth. This would not, obviously, be the effect of PNB's
unilateral and lopsided policy regarding the interest rates of
petitioners' borrowings in the instant case.
Apart from violating the principle of mutuality of contracts, there is
authority for disallowing the interest rates imposed by respondent
bank, for the credit agreement specifically requires that the
increase be "within the limits allowed by law". In the case of PNB
v. Court of Appeals, cited above, this Court clearly emphasized
that C.B. Circular No. 905 could not be properly invoked to justify
the escalation clauses of such contracts, not being a grant of
specific authority.
Furthermore, the escalation clause of the credit agreement
requires that the same be made "within the limits allowed by law,"
obviously referring specifically to legislative enactments not
administrative circulars. Note that the phrase "limits imposed by
law," refers only to the escalation clause. However, the same
agreement allows reduction on the basis of law or the Monetary
Board. Had the parties intended the word "law" to refer to both
legislative enactments and administrative circulars and
issuances, the agreement would not have gone as far as making
a distinction between "law or the Monetary Board Circulars" in

referring to mutually agreed upon reductions in interest rates.

This distinction was the subject of the Court's disquisition in the
case of Banco Filipino Savings and Mortgage Bank
v. Navarro 8 where the Court held that:
What should be resolved is whether BANCO
FILIPINO can increase the interest rate on the
LOAN from 12% to 17% per annum under the
Escalation Clause. It is our considered opinion
that it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino
to correspondingly increase.
the interest rate stipulated in this contract without
advance notice to me/us in the event.
a law
increasing
the lawful rates of interest that may be charged
on this particular
kind of loan. (Paragraphing and emphasis
supplied)
It is clear from the stipulation between the parties
that the interest rate may be increased "in the
event a law should be enacted increasing the
lawful rate of interest that may be charged on this
particular kind of loan." The Escalation Clause
was dependent on an increase of rate made by
"law" alone.

CIRCULAR No. 494, although it has the effect of

law, is not a law. "Although a circular duly
issued is not strictly a statute or a law, it has,
however, the force and effect of law." (Emphasis
supplied). "An administrative regulation adopted
pursuant to law has the force and effect of law."
"That administrative rules and regulations have
the force of law can no longer be questioned."
The distinction between a law and an
administrative regulation is recognized in the
Monetary Board guidelines quoted in the latter to
the BORROWER of Ms. Paderes of September
24, 1976 (supra). According to the guidelines, for
a loan's interest to be subject to the increases
provided in CIRCULAR No. 494, there must be an
Escalation Clause allowing the increase "in the
event that any law or Central Bank regulation is
promulgated increasing the maximum rate for
loans." The guidelines thus presuppose that a
Central Bank regulation is not within the term "any
law."
The distinction is again recognized by P.D. No.
1684, promulgated on March 17, 1980, adding
section 7-a to the Usury Law, providing that
parties to an agreement pertaining to a loan could
stipulate that the rate of interest agreed upon may
be increased in the event that the applicable
maximum rate of interest is increased "by law or
by the Monetary Board." To quote:
Sec. 7-a. Parties to an agreement
pertaining to a loan or forbearance
of money, goods or credits may
stipulate that the rate of interest
agreed upon may be increased in

the event that the applicable

maximum rate of interest
is increased by law or by the
Monetary Board:
Provided, That such stipulation
shall be valid only if there is also a
stipulation in the agreement that
the rate of interest agreed upon
shall be reduced in the event that
the applicable maximum rate of
interest is reduced by law or by
the Monetary Board;
Provided, further, That the
adjustment in the rate of interest
agreed upon shall take effect on or
after the effectivity of the increase
or decrease in the maximum rate
of interest.' (Paragraphing and
emphasis supplied).
It is now clear that from March 17, 1980,
escalation clauses to be valid should specifically
provide: (1) that there can be an increase in
interest if increased by law or by the Monetary
Board; and (2) in order for such stipulation to be
valid, it must include a provision for reduction of
the stipulated interest "in the event that the
applicable maximum rate of interest is reduced by
law or by the Monetary Board."
Petitioners never agreed in writing to pay the increased interest
rates demanded by respondent bank in contravention to the tenor
of their credit agreement. That an increase in interest rates from
18% to as much as 68% is excessive and unconscionable is

indisputable. Between 1981 and 1984, petitioners had paid an

amount equivalent to virtually half of the entire principal
(P7,735,004.66) which was applied to interest alone. By the time
the spouses tendered the amount of P40,142,518.00 in
settlement of their obligations; respondent bank was demanding
P58,377,487.00 over and above those amounts already
previously paid by the spouses.
Escalation clauses are not basically wrong or legally
objectionable so long as they are not solely potestative but based
on reasonable and valid grounds. 9 Here, as clearly demonstrated
above, not only the increases of the interest rates on the basis of
the escalation clause patently unreasonable and unconscionable,
but also there are no valid and reasonable standards upon which
the increases are anchored.
We go now to respondent bank's claim that the principal issue in
the case at bench involves its right to foreclose petitioners'
properties under P.D. 385. We find respondent's pretense
untenable.
Presidential Decree No. 385 was issued principally to guarantee
that government financial institutions would not be denied
substantial cash inflows necessary to finance the government's
development projects all over the country by large borrowers who
resort to litigation to prevent or delay the government's collection
of their debts or loans. 10 In facilitating collection of debts through
its automatic foreclosure provisions, the government is however,
not exempted from observing basic principles of law, and ordinary
fairness and decency under the due process clause of the
Constitution. 11
In the first place, because of the dispute regarding the interest
rate increases, an issue which was never settled on merit in the
courts below, the exact amount of petitioner's obligations could
not be determined. Thus, the foreclosure provisions of P.D. 385
could be validly invoked by respondent only after settlement of
the question involving the interest rate on the loan, and only after

the spouses refused to meet their obligations following such

determination. In Filipinas Marble Corporation v. Intermediate
Appellate Court, 12 involving P.D. 385's provisions on mandatory
foreclosure, we held that:
We cannot, at this point, conclude that respondent
DBP together with the Bancom people actually
misappropriated and misspent the $5 million loan
in whole or in part although the trial court found
that there is "persuasive" evidence that such acts
were committed by the respondent. This matter
should rightfully be litigated below in the main
action. Pending the outcome of such litigation,
P.D. 385 cannot automatically be applied for if it is
really proven that respondent DBP is responsible
for the misappropriation of the loan, even if only in
part, then the foreclosure of the petitioner's
properties under the provisions of P.D. 385 to
satisfy the whole amount of the loan would be a
gross mistake. It would unduly prejudice the
petitioner, its employees and their families.
Only after trial on the merits of the main case can
the true amount of the loan which was applied
wisely or not, for the benefit of the petitioner be
determined. Consequently, the extent of the loan
where there was no failure of consideration and
which may be properly satisfied by foreclosure
proceedings under P.D. 385 will have to await the
presentation of evidence in a trial on the merits.
In Republic Planters Bank v. Court of Appeals 13 the Court
reiterating the dictum in Filipinas Marble Corporation, held:
The enforcement of P.D. 385 will sweep under the
rug' this iceberg of a scandal in the sugar industry
during the Marcos Martial Law years. This we can
not allow to happen. For the benefit of future

generations, all the dirty linen in the

PHILSUCUCOM/NASUTRA/RPB closets have to
be exposed in public so that the same may
NEVER be repeated.

SO ORDERED.

It is of paramount national interest, that we allow

the trial court to proceed with dispatch to allow the
parties below to present their evidence.
Furthermore, petitioners made a valid consignation of what they,
in good faith and in compliance with the letter of the Credit
Agreement, honestly believed to be the real amount of their
remaining obligations with the respondent bank. The latter could
not therefore claim that there was no honest-to-goodness attempt
on the part of the spouse to settle their obligations. Respondent's
rush to inequitably invoke the foreclosure provisions of P.D. 385
through its legal machinations in the courts below, in spite of the
unsettled differences in interpretation of the credit agreement was
obviously made in bad faith, to gain the upper hand over
petitioners.
In the face of the unequivocal interest rate provisions in the credit
agreement and in the law requiring the parties to agree to
changes in the interest rate in writing, we hold that the unilateral
and progressive increases imposed by respondent PNB were null
and void. Their effect was to increase the total obligation on an
eighteen million peso loan to an amount way over three times that
which was originally granted to the borrowers. That these
increases, occasioned by crafty manipulations in the interest
rates is unconscionable and neutralizes the salutary policies of
extending loans to spur business cannot be disputed.
WHEREFORE, PREMISES CONSIDERED, the decision of the
Court of Appeals dated August 27, 1993, as well as the resolution
dated February 10, 1994 is hereby REVERSED AND SET ASIDE.
The case is remanded to the Regional Trial Court of Makati for
further proceedings.

FERNANDO A. GAITE, plaintiff-appellee,

vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES
& SMELTING CO., INC., SEGUNDINA VIVAS, FRNACISCO
DANTE, PACIFICO ESCANDOR and FERNANDO
TY, defendants-appellants.

Alejo Mabanag for plaintiff-appellee.

Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for
defendants-appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First Instance
because the claims involved aggregate more than P200,000.00.
Defendant-appellant Isabelo Fonacier was the owner and/or
holder, either by himself or in a representative capacity, of 11 iron
lode mineral claims, known as the Dawahan Group, situated in
the municipality of Jose Panganiban, province of Camarines
Norte.
By a "Deed of Assignment" dated September 29, 1952(Exhibit
"3"), Fonacier constituted and appointed plaintiff-appellee
Fernando A. Gaite as his true and lawful attorney-in-fact to enter
into a contract with any individual or juridical person for the
exploration and development of the mining claims
aforementioned on a royalty basis of not less than P0.50 per ton
of ore that might be extracted therefrom. On March 19, 1954,
Gaite in turn executed a general assignment (Record on Appeal,
pp. 17-19) conveying the development and exploitation of said
mining claims into the Larap Iron Mines, a single proprietorship
owned solely by and belonging to him, on the same royalty basis
provided for in Exhibit "3". Thereafter, Gaite embarked upon the
development and exploitation of the mining claims in question,
opening and paving roads within and outside their boundaries,
making other improvements and installing facilities therein for use
in the development of the mines, and in time extracted therefrom
what he claim and estimated to be approximately 24,000 metric
tons of iron ore.

For some reason or another, Isabelo Fonacier decided to revoke

the authority granted by him to Gaite to exploit and develop the
mining claims in question, and Gaite assented thereto subject to
certain conditions. As a result, a document entitled "Revocation of
Power of Attorney and Contract" was executed on December 8,
1954 (Exhibit "A"),wherein Gaite transferred to Fonacier, for the
consideration of P20,000.00, plus 10% of the royalties that
Fonacier would receive from the mining claims, all his rights and
interests on all the roads, improvements, and facilities in or
outside said claims, the right to use the business name "Larap
Iron Mines" and its goodwill, and all the records and documents
relative to the mines. In the same document, Gaite transferred to
Fonacier all his rights and interests over the "24,000 tons of iron
ore, more or less" that the former had already extracted from the
mineral claims, in consideration of the sum of P75,000.00,
P10,000.00 of which was paid upon the signing of the agreement,
and
b. The balance of SIXTY-FIVE THOUSAND PESOS
(P65,000.00) will be paid from and out of the first letter of
credit covering the first shipment of iron ores and of the
first amount derived from the local sale of iron ore made
by the Larap Mines & Smelting Co. Inc., its assigns,
administrators, or successors in interests.
To secure the payment of the said balance of P65,000.00,
Fonacier promised to execute in favor of Gaite a surety bond, and
pursuant to the promise, Fonacier delivered to Gaite a surety
bond dated December 8, 1954 with himself (Fonacier) as
principal and the Larap Mines and Smelting Co. and its
stockholders George Krakower, Segundina Vivas, Pacifico
Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit
"A-1"). Gaite testified, however, that when this bond was

presented to him by Fonacier together with the "Revocation of

Power of Attorney and Contract", Exhibit "A", on December 8,
1954, he refused to sign said Exhibit "A" unless another bond
under written by a bonding company was put up by defendants to
secure the payment of the P65,000.00 balance of their price of
the iron ore in the stockpiles in the mining claims. Hence, a
second bond, also dated December 8, 1954 (Exhibit "B"),was
executed by the same parties to the first bond Exhibit "A-1", with
the Far Eastern Surety and Insurance Co. as additional surety,
but it provided that the liability of the surety company would
attach only when there had been an actual sale of iron ore by the
Larap Mines & Smelting Co. for an amount of not less then
P65,000.00, and that, furthermore, the liability of said surety
company would automatically expire on December 8, 1955. Both
bonds were attached to the "Revocation of Power of Attorney and
Contract", Exhibit "A", and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he
gave to Gaite and the two executed and signed the "Revocation
of Power of Attorney and Contract", Exhibit "A", Fonacier entered
into a "Contract of Mining Operation", ceding, transferring, and
conveying unto the Larap Mines and Smelting Co., Inc. the right
to develop, exploit, and explore the mining claims in question,
together with the improvements therein and the use of the name
"Larap Iron Mines" and its good will, in consideration of certain
royalties. Fonacier likewise transferred, in the same document,
the complete title to the approximately 24,000 tons of iron ore
which he acquired from Gaite, to the Larap & Smelting Co., in
consideration for the signing by the company and its stockholders
of the surety bonds delivered by Fonacier to Gaite (Record on
Appeal, pp. 82-94).

Up to December 8, 1955, when the bond Exhibit "B" expired with

respect to the Far Eastern Surety and Insurance Company, no
sale of the approximately 24,000 tons of iron ore had been made
by the Larap Mines & Smelting Co., Inc., nor had the P65,000.00
balance of the price of said ore been paid to Gaite by Fonacier
and his sureties payment of said amount, on the theory that they
had lost right to make use of the period given them when their
bond, Exhibit "B" automatically expired (Exhibits "C" to "C-24").
And when Fonacier and his sureties failed to pay as demanded
by Gaite, the latter filed the present complaint against them in the
Court of First Instance of Manila (Civil Case No. 29310) for the
payment of the P65,000.00 balance of the price of the ore,
consequential damages, and attorney's fees.
All the defendants except Francisco Dante set up the uniform
defense that the obligation sued upon by Gaite was subject to a
condition that the amount of P65,000.00 would be payable out of
the first letter of credit covering the first shipment of iron ore
and/or the first amount derived from the local sale of the iron ore
by the Larap Mines & Smelting Co., Inc.; that up to the time of the
filing of the complaint, no sale of the iron ore had been made,
hence the condition had not yet been fulfilled; and that
consequently, the obligation was not yet due and demandable.
Defendant Fonacier also contended that only 7,573 tons of the
estimated 24,000 tons of iron ore sold to him by Gaite was
actually delivered, and counterclaimed for more than
P200,000.00 damages.
At the trial of the case, the parties agreed to limit the presentation
of evidence to two issues:
(1) Whether or not the obligation of Fonacier and his sureties to
pay Gaite P65,000.00 become due and demandable when the

defendants failed to renew the surety bond underwritten by the

Far Eastern Surety and Insurance Co., Inc. (Exhibit "B"), which
expired on December 8, 1955; and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff
Gaite to defendant Fonacier were actually in existence in the
mining claims when these parties executed the "Revocation of
Power of Attorney and Contract", Exhibit "A."
On the first question, the lower court held that the obligation of
the defendants to pay plaintiff the P65,000.00 balance of the price
of the approximately 24,000 tons of iron ore was one with a term:
i.e., that it would be paid upon the sale of sufficient iron ore by
defendants, such sale to be effected within one year or before
December 8, 1955; that the giving of security was a condition
precedent to Gait's giving of credit to defendants; and that as the
latter failed to put up a good and sufficient security in lieu of the
Far Eastern Surety bond (Exhibit "B") which expired on
December 8, 1955, the obligation became due and demandable
under Article 1198 of the New Civil Code.
As to the second question, the lower court found that plaintiff
Gaite did have approximately 24,000 tons of iron ore at the
mining claims in question at the time of the execution of the
contract Exhibit "A."
Judgment was, accordingly, rendered in favor of plaintiff Gaite
ordering defendants to pay him, jointly and severally, P65,000.00
with interest at 6% per annum from December 9, 1955 until
payment, plus costs. From this judgment, defendants jointly
appealed to this Court.

During the pendency of this appeal, several incidental motions

were presented for resolution: a motion to declare the appellants
Larap Mines & Smelting Co., Inc. and George Krakower in
contempt, filed by appellant Fonacier, and two motions to dismiss
the appeal as having become academic and a motion for new trial
and/or to take judicial notice of certain documents, filed by
appellee Gaite. The motion for contempt is unmeritorious
because the main allegation therein that the appellants Larap
Mines & Smelting Co., Inc. and Krakower had sold the iron ore
here in question, which allegedly is "property in litigation", has not
been substantiated; and even if true, does not make these
appellants guilty of contempt, because what is under litigation in
this appeal is appellee Gaite's right to the payment of the balance
of the price of the ore, and not the iron ore itself. As for the
several motions presented by appellee Gaite, it is unnecessary to
resolve these motions in view of the results that we have reached
in this case, which we shall hereafter discuss.
The main issues presented by appellants in this appeal are:
(1) that the lower court erred in holding that the obligation of
appellant Fonacier to pay appellee Gaite the P65,000.00 (balance
of the price of the iron ore in question)is one with a period or term
and not one with a suspensive condition, and that the term
expired on December 8, 1955; and
(2) that the lower court erred in not holding that there were only
10,954.5 tons in the stockpiles of iron ore sold by appellee Gaite
to appellant Fonacier.
The first issue involves an interpretation of the following provision
in the contract Exhibit "A":

7. That Fernando Gaite or Larap Iron Mines hereby

transfers to Isabelo F. Fonacier all his rights and interests
over the 24,000 tons of iron ore, more or less, abovereferred to together with all his rights and interests to
operate the mine in consideration of the sum of
SEVENTY-FIVE THOUSAND PESOS (P75,000.00) which
the latter binds to pay as follows:
a. TEN THOUSAND PESOS (P10,000.00) will be paid
upon the signing of this agreement.
b. The balance of SIXTY-FIVE THOUSAND PESOS
(P65,000.00)will be paid from and out of the first letter of
credit covering the first shipment of iron ore made by the
Larap Mines & Smelting Co., Inc., its assigns,
administrators, or successors in interest.
We find the court below to be legally correct in holding that the
shipment or local sale of the iron ore is not a condition precedent
(or suspensive) to the payment of the balance of P65,000.00, but
was only a suspensive period or term. What characterizes a
conditional obligation is the fact that its efficacy or obligatory force
(as distinguished from its demandability) is subordinated to the
happening of a future and uncertain event; so that if the
suspensive condition does not take place, the parties would stand
as if the conditional obligation had never existed. That the parties
to the contract Exhibit "A" did not intend any such state of things
to prevail is supported by several circumstances:
1) The words of the contract express no contingency in the
buyer's obligation to pay: "The balance of Sixty-Five Thousand
Pesos (P65,000.00) will be paid out of the first letter of credit
covering the first shipment of iron ores . . ." etc. There is no

uncertainty that the payment will have to be made sooner or later;

what is undetermined is merely the exact date at which it will be
made. By the very terms of the contract, therefore, the existence
of the obligation to pay is recognized; only
its maturity or demandability is deferred.
2) A contract of sale is normally commutative and onerous: not
only does each one of the parties assume a correlative obligation
(the seller to deliver and transfer ownership of the thing sold and
the buyer to pay the price),but each party anticipates
performance by the other from the very start. While in a sale the
obligation of one party can be lawfully subordinated to an
uncertain event, so that the other understands that he assumes
the risk of receiving nothing for what he gives (as in the case of a
sale of hopes or expectations, emptio spei), it is not in the usual
course of business to do so; hence, the contingent character of
the obligation must clearly appear. Nothing is found in the record
to evidence that Gaite desired or assumed to run the risk of losing
his right over the ore without getting paid for it, or that Fonacier
understood that Gaite assumed any such risk. This is proved by
the fact that Gaite insisted on a bond a to guarantee payment of
the P65,000.00, an not only upon a bond by Fonacier, the Larap
Mines & Smelting Co., and the company's stockholders, but also
on one by a surety company; and the fact that appellants did put
up such bonds indicates that they admitted the definite existence
of their obligation to pay the balance of P65,000.00.
3) To subordinate the obligation to pay the remaining P65,000.00
to the sale or shipment of the ore as a condition precedent, would
be tantamount to leaving the payment at the discretion of the
debtor, for the sale or shipment could not be made unless the
appellants took steps to sell the ore. Appellants would thus be
able to postpone payment indefinitely. The desireability of

avoiding such a construction of the contract Exhibit "A" needs no

stressing.
4) Assuming that there could be doubt whether by the wording of
the contract the parties indented a suspensive condition or a
suspensive period (dies ad quem) for the payment of the
P65,000.00, the rules of interpretation would incline the scales in
favor of "the greater reciprocity of interests", since sale is
essentially onerous. The Civil Code of the Philippines, Article
1378, paragraph 1, in fine, provides:
If the contract is onerous, the doubt shall be settled in
favor of the greatest reciprocity of interests.

We agree with the court below that the appellant have forfeited
the right court below that the appellants have forfeited the right to
compel Gaite to wait for the sale of the ore before receiving
payment of the balance of P65,000.00, because of their failure to
renew the bond of the Far Eastern Surety Company or else
replace it with an equivalent guarantee. The expiration of the
bonding company's undertaking on December 8, 1955
substantially reduced the security of the vendor's rights as
creditor for the unpaid P65,000.00, a security that Gaite
considered essential and upon which he had insisted when he
executed the deed of sale of the ore to Fonacier (Exhibit "A"). The
case squarely comes under paragraphs 2 and 3 of Article 1198 of
the Civil Code of the Philippines:

and there can be no question that greater reciprocity obtains if the

buyer' obligation is deemed to be actually existing, with only its
maturity (due date) postponed or deferred, that if such obligation
were viewed as non-existent or not binding until the ore was sold.

"ART. 1198. The debtor shall lose every right to make use
of the period:

The only rational view that can be taken is that the sale of the ore
to Fonacier was a sale on credit, and not an aleatory contract
where the transferor, Gaite, would assume the risk of not being
paid at all; and that the previous sale or shipment of the ore was
not a suspensive condition for the payment of the balance of the
agreed price, but was intended merely to fix the future date of the
payment.

(2) When he does not furnish to the creditor the

guaranties or securities which he has promised.

This issue settled, the next point of inquiry is whether appellants,

Fonacier and his sureties, still have the right to insist that Gaite
should wait for the sale or shipment of the ore before receiving
payment; or, in other words, whether or not they are entitled to
take full advantage of the period granted them for making the
payment.

(1) . . .

(3) When by his own acts he has impaired said guaranties

or securities after their establishment, and when through
fortuitous event they disappear, unless he immediately
gives new ones equally satisfactory.
Appellants' failure to renew or extend the surety company's bond
upon its expiration plainly impaired the securities given to the
creditor (appellee Gaite), unless immediately renewed or
replaced.

There is no merit in appellants' argument that Gaite's acceptance

of the surety company's bond with full knowledge that on its face
it would automatically expire within one year was a waiver of its
renewal after the expiration date. No such waiver could have
been intended, for Gaite stood to lose and had nothing to gain
barely; and if there was any, it could be rationally explained only if
the appellants had agreed to sell the ore and pay Gaite before the
surety company's bond expired on December 8, 1955. But in the
latter case the defendants-appellants' obligation to pay became
absolute after one year from the transfer of the ore to Fonacier by
virtue of the deed Exhibit "A.".
All the alternatives, therefore, lead to the same result: that Gaite
acted within his rights in demanding payment and instituting this
action one year from and after the contract (Exhibit "A") was
executed, either because the appellant debtors had impaired the
securities originally given and thereby forfeited any further time
within which to pay; or because the term of payment was
originally of no more than one year, and the balance of
P65,000.00 became due and payable thereafter.
Coming now to the second issue in this appeal, which is whether
there were really 24,000 tons of iron ore in the stockpiles sold by
appellee Gaite to appellant Fonacier, and whether, if there had
been a short-delivery as claimed by appellants, they are entitled
to the payment of damages, we must, at the outset, stress two
things:first, that this is a case of a sale of a specific mass of
fungible goods for a single price or a lump sum, the quantity of
"24,000 tons of iron ore, more or less," stated in the contract
Exhibit "A," being a mere estimate by the parties of the total
tonnage weight of the mass; and second, that the evidence
shows that neither of the parties had actually measured of
weighed the mass, so that they both tried to arrive at the total

quantity by making an estimate of the volume thereof in cubic

meters and then multiplying it by the estimated weight per ton of
each cubic meter.
The sale between the parties is a sale of a specific mass or iron
ore because no provision was made in their contract for the
measuring or weighing of the ore sold in order to complete or
perfect the sale, nor was the price of P75,000,00 agreed upon by
the parties based upon any such measurement.(see Art. 1480,
second par., New Civil Code). The subject matter of the sale is,
therefore, a determinate object, the mass, and not the actual
number of units or tons contained therein, so that all that was
required of the seller Gaite was to deliver in good faith to his
buyer all of the ore found in the mass, notwithstanding that the
quantity delivered is less than the amount estimated by them
(Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage
Co., Inc. 171 So. 872, applying art. 2459 of the Louisiana Civil
Code). There is no charge in this case that Gaite did not deliver to
appellants all the ore found in the stockpiles in the mining claims
in questions; Gaite had, therefore, complied with his promise to
deliver, and appellants in turn are bound to pay the lump price.
But assuming that plaintiff Gaite undertook to sell and appellants
undertook to buy, not a definite mass, but approximately 24,000
tons of ore, so that any substantial difference in this quantity
delivered would entitle the buyers to recover damages for the
short-delivery, was there really a short-delivery in this case?
We think not. As already stated, neither of the parties had actually
measured or weighed the whole mass of ore cubic meter by cubic
meter, or ton by ton. Both parties predicate their respective claims
only upon an estimated number of cubic meters of ore multiplied
by the average tonnage factor per cubic meter.

Now, appellee Gaite asserts that there was a total of 7,375 cubic
meters in the stockpiles of ore that he sold to Fonacier, while
appellants contend that by actual measurement, their witness
Cirpriano Manlagit found the total volume of ore in the stockpiles
to be only 6.609 cubic meters. As to the average weight in tons
per cubic meter, the parties are again in disagreement, with
appellants claiming the correct tonnage factor to be 2.18 tons to a
cubic meter, while appellee Gaite claims that the correct tonnage
factor is about 3.7.
In the face of the conflict of evidence, we take as the most
reliable estimate of the tonnage factor of iron ore in this case to
be that made by Leopoldo F. Abad, chief of the Mines and
Metallurgical Division of the Bureau of Mines, a government
pensionado to the States and a mining engineering graduate of
the Universities of Nevada and California, with almost 22 years of
experience in the Bureau of Mines. This witness placed the
tonnage factor of every cubic meter of iron ore at between 3
metric tons as minimum to 5 metric tons as maximum. This
estimate, in turn, closely corresponds to the average tonnage
factor of 3.3 adopted in his corrected report (Exhibits "FF" and
FF-1") by engineer Nemesio Gamatero, who was sent by the
Bureau of Mines to the mining claims involved at the request of
appellant Krakower, precisely to make an official estimate of the
amount of iron ore in Gaite's stockpiles after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of
ore in the stockpiles made by appellant's witness Cipriano
Manlagit is correct, if we multiply it by the average tonnage
factor of 3.3 tons to a cubic meter, the product is 21,809.7 tons,
which is not very far from the estimate of 24,000 tons made by
appellee Gaite, considering that actual weighing of each unit of
the mass was practically impossible, so that a reasonable

percentage of error should be allowed anyone making an

estimate of the exact quantity in tons found in the mass. It must
not be forgotten that the contract Exhibit "A" expressly stated the
amount to be 24,000 tons, more or less. (ch. Pine River Logging
& Improvement Co. vs U.S., 279, 46 L. Ed. 1164).
There was, consequently, no short-delivery in this case as would
entitle appellants to the payment of damages, nor could Gaite
have been guilty of any fraud in making any misrepresentation to
appellants as to the total quantity of ore in the stockpiles of the
mining claims in question, as charged by appellants, since Gaite's
estimate appears to be substantially correct.
WHEREFORE, finding no error in the decision appealed from, we
hereby affirm the same, with costs against appellants.
GEORGE L. PARKS, plaintiff-appellant,
vs.
PROVINCE OF TARLAC, MUNICIPALITY OF TARLAC,
CONCEPCION CIRER, and JAMES HILL, her
husband, defendants-appellees.
Jos. N. Wolfson for appellant.
Provincial Fiscal Lopez de Jesus for the Province and
Municipality of Tarlac.
No appearance for the other appellees.
AVANCEA, C. J.:
On October 18, 1910, Concepcion Cirer and James Hill, the
owners of parcel of land No. 2 referred to in the complaint,
donated it perpetually to the municipality of Tarlac, Province of
Tarlac, under certain conditions specified in the public document

in which they made this donation. The donation was accepted by

Mr. Santiago de Jesus in the same document on behalf of the
municipal council of Tarlac of which he was the municipal
president. The parcel thus donated was later registered in the
name of the donee, the municipality of Tarlac. On January 15,
1921, Concepcion Cirer and James Hill sold this parcel to the
herein plaintiff George L. Parks. On August 24, 1923, the
municipality of Tarlac transferred the parcel to the Province of
Tarlac which, by reason of this transfer, applied for and obtained
the registration thereof in its name, the corresponding certificate
of title having been issued to it.
The plaintiff, George L. Parks, alleging that the conditions of the
donation had not been complied with and invoking the sale of this
parcel of land made by Concepcion Cirer and James Hill in his
favor, brought this action against the Province of Tarlac, the
municipality of Tarlac, Concepcion Cirer and James Hill and
prayed that he be declared the absolute owner entitled to the
possession of this parcel, that the transfer of the same by the
municipality of Tarlac to the Province of Tarlac be annulled, and
the transfer certificate issued to the Province of Tarlac cancelled.
The lower court dismissed the complaint.
The plaintiff has no right of action. If he has any, it is only by
virtue of the sale of this parcel made by Concepcion Cirer and
James Hill in his favor on January 15, 1921, but that sale cannot
have any effect. This parcel having been donated by Concepcion
Cirer and James Hill to the municipality of Tarlac, which donation
was accepted by the latter, the title to the property was
transferred to the municipality of Tarlac. It is true that the donation
might have been revoked for the causes, if any, provided by the
law, but the fact is that it was not revoked when Concepcion Cirer

and James Hill made the sale of this parcel to the plaintiff. Even
supposing that causes existed for the revocation of this donation,
still, it was necessary, in order to consider it revoked, either that
the revocation had been consented to by the donee, the
municipality of Tarlac, or that it had been judicially decreed. None
of these circumstances existed when Concepcion Cirer and
James Hill sold this parcel to the plaintiff. Consequently, when the
sale was made Concepcion Cirer and James Hill were no longer
the owners of this parcel and could not have sold it to the plaintiff,
nor could the latter have acquired it from them.
But the appellant contends that a condition precedent having
been imposed in the donation and the same not having been
complied with, the donation never became effective. We find no
merit in this contention. The appellant refers to the condition
imposed that one of the parcels donated was to be used
absolutely and exclusively for the erection of a central school and
the other for a public park, the work to commence in both cases
within the period of six months from the date of the ratification by
the partes of the document evidencing the donation. It is true that
this condition has not been complied with. The allegation,
however, that it is a condition precedent is erroneous. The
characteristic of a condition precedent is that the acquisition of
the right is not effected while said condition is not complied with
or is not deemed complied with. Meanwhile nothing is acquired
and there is only an expectancy of right. Consequently, when a
condition is imposed, the compliance of which cannot be effected
except when the right is deemed acquired, such condition cannot
be a condition precedent. In the present case the condition that a
public school be erected and a public park made of the donated
land, work on the same to commence within six months from the
date of the ratification of the donation by the parties, could not be
complied with except after giving effect to the donation. The

donee could not do any work on the donated land if the donation
had not really been effected, because it would be an invasion of
another's title, for the land would have continued to belong to the
donor so long as the condition imposed was not complied with.
The appellant also contends that, in any event, the condition not
having been complied with, even supposing that it was not a
condition precedent but subsequent, the non-compliance thereof
is sufficient cause for the revocation of the donation. This is
correct. But the period for bringing an action for the revocation of
the donation has prescribed. That this action is prescriptible,
there is no doubt. There is no legal provision which excludes this
class of action from the statute of limitations. And not only this,
the law itself recognizes the prescriptibility of the action for the
revocation of a donation, providing a special period of five years
for the revocation by the subsequent birth of children (art. 646,
Civil Code), and one year for the revocation by reason of
ingratitude. If no special period is provided for the prescription of
the action for revocation for noncompliance of the conditions of
the donation (art. 647, Civil Code), it is because in this respect
the donation is considered onerous and is governed by the law of
contracts and the general rules of prescription. Under the law in
force (sec. 43, Code of Civ. Proc.) the period of prescription of
this class of action is ten years. The action for the revocation of
the donation for this cause arose on April 19, 1911, that is six
months after the ratification of the instrument of donation of
October 18, 1910. The complaint in this action was presented
July 5, 1924, more than ten years after this cause accrued.
By virtue of the foregoing, the judgment appealed from is
affirmed, with the costs against the appellant. So ordered.

CENTRAL PHILIPPINE UNIVERSITY, petitioner,

vs.
COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N.
LOPEZ, CECILIA P. VDA. DE LOPEZ, REDAN LOPEZ AND
REMARENE LOPEZ, respondents.

BELLOSILLO, J.:
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.
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
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.
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 itself cannot be
demanded until after the court has fixed the period for compliance
therewith and such period has arrived. 8
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. T-3910-A
within thirty (30) days from the finality of this judgment.
Costs against petitioner.
SO ORDERED.

TOMAS OSMEA, plaintiff-appellee,

vs.
CENONA RAMA, defendant-appellant.
Filemon Sotto for appellant.
J. H. Junquera for appellee.
JOHNSON, J.:

It appears from the record that upon the 15th day of November,
1890, the defendant herein executed and delivered to Victoriano
Osmea the following contract:

Witnesses:
FAUSTO PEALOSA.
FRANCISCO MEDALLE.

EXHIBIT A.
On the 27th day of October, 1891, the defendant executed and
delivered to the said Victoriano Osmea the following contract:

P200.00.
CEBU, November 15, 1890.
I, Doa Cenona Rama, a resident of this city, and of legal
age, have received from Don Victoriano Osmea the sum
of two hundred pesos in cash which I will pay in sugar in
the month of January or February of the coming year, at
the price ruling on the day of delivering the sugar into his
warehouse, and I will pay him interest at the rate of half
a cuartillo per month on each peso, beginning on this date
until the day of the settlement; and if I can not pay in full,
a balance shall be struck, showing the amount
outstanding at the end of each June, including interest,
and such as may be outstanding against me shall be
considered as capital which I will always pay in sugar,
together with the interest mentioned above. I further
promise that I will sell to the said Seor Osmea all the
sugar that I may harvest, and as a guarantee, pledge as
security all of my present and future property, and as
special security the house with tile roof and ground floor
of stone in which I live in Pagina; in proof whereof, I sign
this document, and he shall be entitled to make claim
against me at the expiration of the term stated in this
document.
(Signed) CENON RAMA.

EXHIBIT B.
CEBU, October 27, 1891.
On this date I have asked for further loan and have
received from Don Victoriano Osmea the sum of seventy
pesos in cash, fifty pesos of which I have loaned to Don
Evaristo Peares, which we will pay in sugar in the month
of January of the coming year according to the former
conditions.
(Signed) CENONA RAMA.
From Don Evaristo Peares
Doa Cenona Rama

P50
20
P70

Received Evaristo Peares.

Some time after the execution and delivery of the above
contracts, the said Victoriano Osmea died. In the settlement and
division of the property of his estate the above contracts became
the property of one of his estate the above contracts became the

property of one of his heirs, Agustina Rafols. Later, the date does
not appear, the said Agustina Rafols ceded to the present plaintiff
all of her right and interest in said contracts.
On the 15th day of March, 1902 the plaintiff presented the
contracts to the defendant for payment and she acknowledged
her responsibility upon said contracts by an indorsement upon
them in the following language:
EXHIBIT C.
CEBU, March 15, 1902.
On this date I hereby promise, in the presence of two
witness, that if the house of strong materials in which I
live in Pagina is sold, I will pay my indebtedness to Don
Tomas Osmea as set forth in this document.
(Signed) CENONA RAMA.
The defendant not having paid the amount due on said contracts;
the plaintiff, upon the 26th day of June, 1906, commenced the
present action in the Court of First Instance of the Province of
Cebu. The complaint filed in said cause alleged the execution and
delivery of the above contracts, the demand for payment, and the
failure to pay on the part of the defendant, and the prayer for a
judgment for the amount due on the said contracts. The
defendant answered by filing a general denial and setting up the
special defense of prescription.
The case was finally brought on to trial in the Court of First
Instance, and the only witness produced during the trial was the

plaintiff himself. The defendant did not offer any proof whatever in
the lower court.
After hearing the evidence adduced during the trial, the lower
court rendered a judgment in favor of the plaintiff and against the
defendant for the sum of P200 with interest at the rate of 18 3/4
per cent per annum, from the 15th day of November, 1890, and
for the sum of P20 with interest at the rate of 18 3/4 per cent per
annum, from the 27th day of October, 1891, until the said sums
were paid. From this judgment the defendant appealed.
The lower court found that P50 of the P70 mentioned in Exhibit B
had been borrowed by the defendant, but by one Evaristo
Peares; therefore the defendant had no responsibility for the
payment of the said P50.
The only questions raised by the appellant were questions of fact.
The appellant alleges that the proof adduced during the trial of
the cause was not sufficient to support the findings of the lower
court. It was suggested during the discussion of the case in this
court that, in the acknowledgment above quoted of the
indebtedness made by the defendant, she imposed the condition
that she would pay the obligation if she sold her house. If that
statement found in her acknowledgment of the indebtedness
should be regarded as a condition, it was a condition which
depended upon her exclusive will, and is therefore, void. (Art.
1115, Civil Code.) The acknowledgment, therefore, was an
absolute acknowledgment of the obligation and was sufficient to
prevent the statute of limitation from barring the action upon the
original contract.

We are satisfied, from all of the evidence adduced during the trial,
that the judgment of the lower court should be affirmed. So
ordered.

RUSTAN PULP & PAPER MILLS, INC., BIENVENIDO R.

TANTOCO, SR., and ROMEO S. VERGARA, petitioners,
vs.
THE INTERMEDIATE APPELLATE COURT and ILIGAN
DIVERSIFIED PROJECTS, INC., ROMEO A. LLUCH and
ROBERTO G. BORROMEO, respondents.

PROMPTED BY SERIOUS AND UNFORESEEN

DEFECTS IN THE MILL, WAS NOT IN THE
LAWFUL EXERCISE OF ITS RIGHTS UNDER
THE CONTRACT OF SALE; and

MELO, J.:
When petitioners informed herein private respondents to stop the
delivery of pulp wood supplied by the latter pursuant to a contract
of sale between them, private respondents sued for breach of
their covenant. The court of origin dismissed the complaint but at
the same time enjoined petitioners to respect the contract of sale
if circumstances warrant the full operation in a commercial scale
of petitioners' Baloi plant and to continue accepting and paying
for deliveries of pulp wood products from Romeo Lluch (page 14,
Petition; page 20, Rollo). On appeal to the then Intermediate
Appellate Court, Presiding Justice Ramon G. Gaviola, Jr., who
spoke for the First Civil Cases Division, with Justices Caguioa,
Quetulio-Losa, and Luciano, concurring, modified the judgment
by directing herein petitioners to pay private respondents, jointly
and severally, the sum of P30,000.00 as moral damages and
P15,000.00 as attorney's fees (pages 48-58, Rollo).
In the petition at bar, it is argued that the Appellate Court erred;
A. . . . IN HOLDING PERSONALLY LIABLE
UNDER THE CONTRACT OF SALE
PETITIONER TANTOCO WHO SIGNED MERELY
AS REPRESENTATIVE OF PETITIONER
RUSTAN, AND PETITIONER VERGARA WHO
DID NOT SIGN AT ALL;
B. . . . IN HOLDING THAT PETITIONER
RUSTAN'S DECISION TO SUSPEND TAKING
DELIVERY OF PULP WOOD FROM
RESPONDENT LLUCH, WHICH WAS

C. . . . IN AWARDING MORAL DAMAGES AND

ATTORNEY'S FEES IN THE ABSENCE OF
FRAUD OR BAD FAITH.
(page 18, Petition; page 24, Rollo)
The generative facts of the controversy, as gathered from the
pleadings, are fairly simple.
Sometime in 1966, petitioner Rustan established a pulp and
paper mill in Baloi, Lano del Norte. On March 20, 1967,
respondent Lluch, who is a holder of a forest products license,
transmitted a letter to petitioner Rustan for the supply of raw
materials by the former to the latter. In response thereto,
petitioner Rustan proposed, among other things, in the letterreply:
2. That the contract to supply is not exclusive
because Rustan shall have the option to buy from
other suppliers who are qualified and holder of
appropriate government authority or license to sell
and dispose pulp wood.
These prefatory business proposals culminated in the execution,
during the month of April, 1968, of a contract of sale whereby
Romeo A. Lluch agreed to sell, and Rustan Pulp and Paper Mill,
Inc. undertook to pay the price of P30.00 per cubic meter of pulp
wood raw materials to be delivered at the buyer's plant in Baloi,

Lanao del Norte. Of pertinent significance to the issue at hand are

the following stipulations in the bilateral undertaking:
3. That BUYER shall have the option to buy from
other SELLERS who are equally qualified and
holders of appropriate government authority or
license to sell or dispose, that BUYER shall not
buy from any other seller whose pulp woods being
sold shall have been established to have
emanated from the SELLER'S lumber and/or
firewood concession. . . .
And that SELLER has the priority to supply the
pulp wood materials requirement of the BUYER;
xxx xxx xxx
7. That the BUYER shall have the right to stop
delivery of the said raw materials by the seller
covered by this contract when supply of the same
shall become sufficient until such time when need
for said raw materials shall have become
necessarily provided, however, that the SELLER
is given sufficient notice.
(pages 8-9, Petition; pages 14-15, Rollo)
In the installation of the plant facilities, the technical staff of
Rustan Pulp and Paper Mills, Inc. recommended the acceptance
of deliveries from other suppliers of the pulp wood materials for
which the corresponding deliveries were made. But during the
test run of the pulp mill, the machinery line thereat had major
defects while deliveries of the raw materials piled up, which

prompted the Japanese supplier of the machinery to recommend

the stoppage of the deliveries. The suppliers were informed to
stop deliveries and the letter of similar advice sent by petitioners
to private respondents reads:
Iligan Diversified Projects, Inc.
Iligan City
Attention: Mr. Romeo A. Lluch
Dear Mr. Lluch:
This is to inform you that the supply of raw
materials to us has become sufficient and we will
not be needing further delivery from you. As per
the terms of our contract, please stop delivery
thirty (30) days from today.

Private respondent Romeo Lluch sought to clarify the tenor of the

letter as to whether stoppage of delivery or termination of the
contract of sale was intended, but the query was not answered by
petitioners. This alleged ambiguity notwithstanding, Lluch and the
other suppliers resumed deliveries after the series of talks
between Romeo S. Vergara and Romeo Lluch.
On January 23, 1969, the complaint for contractual breach was
filed which, as earlier noted, was dismissed. In the process of
discussing the merits of the appeal interposed therefrom,
respondent Court clarified the eleven errors assigned below by
herein petitioners and it seems that petitioners were quite
satisfied with the Appellate Court's in seriatim response since

petitioners trimmed down their discourse before this Court to

three basic matters, relative to the nature of liability, the propriety
of the stoppage, and the feasibility of awarding moral damages
including attorney's fees.
Respondent Court found it ironic that petitioners had to exercise
the prerogative regarding the stoppage of deliveries via the letter
addressed to Iligan Diversified Project, Inc. on September 30,
1968 because petitioners never really stopped accepting
deliveries from private respondents until December 23, 1968.
Petitioner's paradoxial stance portrayed in this manner:
. . . We cannot accept the reasons given by
appellees as to why they were stopping deliveries
of pulp wood materials. First, We find it
preposterous for a business company like the
appellee to accumulate stockpiles of cut wood
even after its letter to appellants dated September
30, 1968 stopping the deliveries because the
supply of raw materials has become sufficient.
The fact that appellees were buying and
accepting pulp wood materials from other sources
other than the appellants even after September
30, 1968 belies that they have more than
sufficient supply of pulp wood materials, or that
they are unable to go into full commercial
operation or that their machineries are defective
or even that the pulp wood materials coming from
appellants are sub-standard. Second, We likewise
find the courta quo's finding that "even with one
predicament in which defendant Rustan found
itself wherein commercial operation was delayed,
it accommodated all its suppliers of raw materials,

including plaintiff, Romeo Lluch, by allowing them

to deliver all its stockpiles of cut wood" (Decision,
page 202, Record on Appeal) to be both illogical
and inconsistent. Illogical, because as appellee
Rustan itself claimed "if the plant could not be
operated on a commercial scale, it would then be
illogical for defendant Rustan to continue
accepting deliveries of raw materials."
Inconsistent because this kind of "concern" or
"accommodation" is not usual or consistent with
ordinary business practice considering that this
would mean adequate losses to the company.
More so, if We consider that appellee is a new
company and could not therefore afford to absorb
more losses than it already allegedly incurred by
the consequent defects in the machineries.
Clearly therefore, this is a breach of the contract
entered into by and between appellees and
appellants which warrants the intervention of this
Court.
xxx xxx xxx
. . . The letter of September 30, 1968, Exh. "D"
shows that defendants were terminating the
contract of sale (Exh. "A"), and refusing any future
or further delivery whether on the ground that
they had sufficient supply of pulp wood materials
or that appellants cannot meet the standard of
quality of pulp wood materials that Rustan needs
or that there were defects in appellees'

machineries resulting in an inability to continue full

commercial operations.
Furthermore, there is evidence on record that
appellees have been accepting deliveries of pulp
wood materials from other sources, i.e. Salem
Usman, Fermin Villanueva and Pacasum even
after September 30, 1968.
Lastly, it would be unjust for the court a quo to rule
that the contract of sale be temporarily suspended
until Rustan, et al., are ready to accept deliveries
from appellants. This would make the resumption
of the contract purely dependent on the will of one
party the appellees, and they could always
claim, as they did in the instant case, that they
have more than sufficient supply of pulp wood
when in fact they have been accepting the same
from other sources. Added to this, the court a
quo was imposing a new condition in the contract,
one that was not agreed upon by the parties.
(Pages B-10, Decision; Pages 55-57, Rollo)
The matter of Tantoco's and Vergara's joint and several liability as
a result of the alleged breach of the contract is dependent, first of
all, on whether Rustan Pulp and Paper Mills may legally exercise
the right of stoppage should there be a glut of raw materials at its
plant.
And insofar as the express discretion on the part of petitioners is
concerned regarding the right of stoppage, We feel that there is
cogent basis for private respondent's apprehension on the illusory

resumption of deliveries inasmuch as the prerogative suggests a

condition solely dependent upon the will of petitioners. Petitioners
can stop delivery of pulp wood from private respondents if the
supply at the plant is sufficient as ascertained by petitioners,
subject to re-delivery when the need arises as determined
likewise by petitioners. This is Our simple understanding of the
literal import of paragraph 7 of the obligation in question. A purely
potestative imposition of this character must be obliterated from
the face of the contract without affecting the rest of the
stipulations considering that the condition relates to the fulfillment
of an already existing obligation and not to its inception (Civil
Code Annotated, by Padilla, 1987 Edition, Volume 4, Page 160).
It is, of course, a truism in legal jurisprudence that a condition
which is both potestative (or facultative) and resolutory may be
valid, even though the saving clause is left to the will of the
obligor like what this Court, through Justice Street, said in Taylor
vs. Uy Tieng Piao and Tan Liuan (43 Phil. 873; 879; cited in
Commentaries and Jurisprudence on the Civil Code, by Tolentino,
Volume 4, 1991 edition, page 152). But the conclusion drawn
from the Taylor case, which allowed a condition for unilateral
cancellation of the contract when the machinery to be installed on
the factory did not arrive in Manila, is certainly inappropriate for
application to the case at hand because the factual milieu in the
legal tussle dissected by Justice Street conveys that the proviso
relates to the birth of the undertaking and not to the fulfillment of
an existing obligation.
In support of the second ground for allowance of the petition,
petitioners are of the impression that the letter dated September
30, 1968 sent to private respondents is well within the right of
stoppage guaranteed to them by paragraph 7 of the contract of
sale which was construed by petitioners to be a temporary
suspension of deliveries. There is no doubt that the contract

speaks loudly about petitioners' prerogative but what diminishes

the legal efficacy of such right is the condition attached to it
which, as aforesaid, is dependent exclusively on their will for
which reason, We have no alternative but to treat the
controversial stipulation as inoperative (Article 1306, New Civil
Code). It is for this same reason that We are not inclined to follow
the interpretation of petitioners that the suspension of delivery
was merely temporary since the nature of the suspension itself is
again conditioned upon petitioner's determination of the
sufficiency of supplies at the plant.
Neither are We prepared to accept petitioners' exculpation
grounded on frustration of the commercial object under Article
1267 of the New Civil Code, because petitioners continued
accepting deliveries from the suppliers. This conduct will estop
petitioners from claiming that the breakdown of the machinery line
was an extraordinary obstacle to their compliance to the
prestation. It was indeed incongruous for petitioners to have sent
the letters calling for suspension and yet, they in effect
disregarded their own advice by accepting the deliveries from the
suppliers. The demeanor of petitioners along this line was sought
to be justified as an act of generous accommodation, which
entailed greater loss to them and "was not motivated by the usual
businessman's obsession with profit" (Page 34, Petition; Page 40,
Rollo). Altruism may be a noble gesture but petitioners' stance in
this respect hardly inspires belief for such an excuse is
inconsistent with a normal business enterprise which takes
ordinary care of its concern in cutting down on expenses (Section
3, (d), Rule 131, Revised Rules of Court). Knowing fully well that
they will encounter difficulty in producing output because of the
defective machinery line, petitioners opted to open the plant to
greater loss, thus compounding the costs by accepting additional
supply to the stockpile. Verily, the petitioner's action when they

acknowledged that "if the plant could not be operated on a

commercial scale, it would then be illogical for defendant Rustan
to continue accepting deliveries of raw materials." (Page 202,
Record on Appeal; Page 8, Decision; Page 55, Rollo).
Petitioners argue next that Tantoco and Vergara should not have
been adjudged to pay moral damages and attorney's fees
because Tantoco merely represented the interest of Rustan Pulp
and Paper Mills, Inc. while Romeo S. Vergara was not privy to the
contract of sale. On this score, We have to agree with petitioners'
citation of authority to the effect that the President and Manager
of a corporation who entered into and signed a contract in his
official capacity, cannot be made liable thereunder in his
individual capacity in the absence of stipulation to that effect due
to the personality of the corporation being separate and distinct
from the person composing it (Bangued Generale Belge vs.
Walter Bull and Co., Inc., 84 Phil. 164). And because of this
precept, Vergara's supposed non-participation in the contract of
sale although he signed the letter dated September 30, 1968 is
completely immaterial. The two exceptions contemplated by
Article 1897 of the New Civil Code where agents are directly
responsible are absent and wanting.
WHEREFORE, the decision appealed from is hereby MODIFIED
in the sense that only petitioner Rustan Pulp and Paper Mills is
ordered to pay moral damages and attorney's fees as awarded by
respondent Court.
SO ORDERED.

THE ROMAN CATHOLIC ARCHBISHOP OF MANILA, THE

ROMAN CATHOLIC BISHOP OF IMUS, and the SPOUSES
FLORENCIO IGNAO and SOLEDAD C. IGNAO, petitioners,
vs.
HON. COURT OF APPEALS, THE ESTATE OF DECEASED
SPOUSES EUSEBIO DE CASTRO and MARTINA RIETA,
represented by MARINA RIETA GRANADOS and THERESA
RIETA TOLENTINO, respondents.
G.R. No. 77450

June 19, 1991

THE ROMAN CATHOLIC ARCHBISHOP OF MANILA, THE

ROMAN CATHOLIC BISHOP OF IMUS, and the SPOUSES

FLORENCIO IGNAO and SOLEDAD C. IGNAO, petitioners,

vs.
HON. COURT OF APPEALS, THE ESTATE OF DECEASED
SPOUSES EUSEBIO DE CASTRO and MARTINA RIETA,
represented by MARINA RIETA GRANADOS and THERESA
RIETA TOLENTINO, respondents.
Severino C. Dominguez for petitioner Roman Catholic Bishop of
Imus, Cavite.
Dolorfino and Dominguez Law Offices for Sps. Ignao.
Joselito R. Enriquez for private respondents.

REGALADO, J.:
These two petitions for review on certiorari1 seek to overturn the
decision of the Court of Appeals in CA-G.R. CV No. 05456 2 which
reversed and set aside the order of the Regional Trial Court of
Imus, Cavite dismissing Civil Case No. 095-84, as well as the
order of said respondent court denying petitioner's motions for the
reconsideration of its aforesaid decision.
On November 29, 1984, private respondents as plaintiffs, filed a
complaint for nullification of deed of donation, rescission of
contract and reconveyance of real property with damages against
petitioners Florencio and Soledad C. Ignao and the Roman
Catholic Bishop of Imus, Cavite, together with the Roman
Catholic Archbishop of Manila, before the Regional Trial Court,
Branch XX, Imus, Cavite and which was docketed as Civil Case
No. 095-84 therein.3

In their complaint, private respondents alleged that on August 23,

1930, the spouses Eusebio de Castro and Martina Rieta, now
both deceased, executed a deed of donation in favor of therein
defendant Roman Catholic Archbishop of Manila covering a
parcel of land (Lot No. 626, Cadastral Survey of Kawit), located at
Kawit, Cavite, containing an area of 964 square meters, more or
less. The deed of donation allegedly provides that the donee shall
not dispose or sell the property within a period of one hundred
(100) years from the execution of the deed of donation, otherwise
a violation of such condition would render ipso facto null and void
the deed of donation and the property would revert to the estate
of the donors.
It is further alleged that on or about June 30, 1980, and while still
within the prohibitive period to dispose of the property, petitioner
Roman Catholic Bishop of Imus, in whose administration all
properties within the province of Cavite owned by the
Archdiocese of Manila was allegedly transferred on April 26,
1962, executed a deed of absolute sale of the property subject of
the donation in favor of petitioners Florencio and Soledad C.
Ignao in consideration of the sum of P114,000. 00. As a
consequence of the sale, Transfer Certificate of Title No. 115990
was issued by the Register of Deeds of Cavite on November 15,
1980 in the name of said petitioner spouses.
What transpired thereafter is narrated by respondent court in its
assailed decision.4
On December 17, 1984, petitioners Florencio Ignao and Soledad
C. Ignao filed a motion to dismiss based on the grounds that (1)
herein private respondents, as plaintiffs therein, have no legal
capacity to sue; and (2) the complaint states no cause of action.

On December 19, 1984, petitioner Roman Catholic Bishop of

Imus also filed a motion to dismiss on three (3) grounds, the first
two (2) grounds of which were identical to that of the motion to
dismiss filed by the Ignao spouses, and the third ground being
that the cause of action has prescribed.
On January 9, 1985, the Roman Catholic Archbishop of Manila
likewise filed a motion to dismiss on the ground that he is not a
real party in interest and, therefore, the complaint does not state
a cause of action against him.
After private respondents had filed their oppositions to the said
motions to dismiss and the petitioners had countered with their
respective replies, with rejoinders thereto by private respondents,
the trial court issued an order dated January 31, 1985, dismissing
the complaint on the ground that the cause of action has
prescribed.5
Private respondents thereafter appealed to the Court of Appeals
raising the issues on (a) whether or not the action for rescission
of contracts (deed of donation and deed of sale) has prescribed;
and (b) whether or not the dismissal of the action for rescission of
contracts (deed of donation and deed of sale) on the ground of
prescription carries with it the dismissal of the main action for
reconveyance of real property.6
On December 23, 1986, respondent Court of Appeals, holding
that the action has not yet prescibed, rendered a decision in favor
of private respondents, with the following dispositive portion:
WHEREFORE, the Order of January 31, 1985 dismissing
appellants' complaint is SET ASIDE and Civil Case No.

095-84 is hereby ordered REINSTATED and REMANDED

to the lower court for further proceedings. No Costs.7
Petitioners Ignao and the Roman Catholic Bishop of Imus then
filed their separate motions for reconsideration which were denied
by respondent Court of Appeals in its resolution dated February 6,
1987,8 hence, the filing of these appeals by certiorari.
It is the contention of petitioners that the cause of action of herein
private respondents has already prescribed, invoking Article 764
of the Civil Code which provides that "(t)he donation shall be
revoked at the instance of the donor, when the donee fails to
comply with any of the conditions which the former imposed upon
the latter," and that "(t)his action shall prescribe after four years
from the non-compliance with the condition, may be transmitted
to the heirs of the donor, and may be exercised against the
donee's heirs.
We do not agree.
Although it is true that under Article 764 of the Civil Code an
action for the revocation of a donation must be brought within four
(4) years from the non-compliance of the conditions of the
donation, the same is not applicable in the case at bar. The deed
of donation involved herein expressly provides for automatic
reversion of the property donated in case of violation of the
condition therein, hence a judicial declaration revoking the same
is not necessary, As aptly stated by the Court of Appeals:
By the very express provision in the deed of donation
itself that the violation of the condition thereof would
render ipso facto null and void the deed of donation, WE
are of the opinion that there would be no legal necessity

anymore to have the donation judicially declared null and

void for the reason that the very deed of donation itself
declares it so. For where (sic) it otherwise and that the
donors and the donee contemplated a court action during
the execution of the deed of donation to have the
donation judicially rescinded or declared null and void
should the condition be violated, then the phrase
reading "would render ipso facto null and void" would not
appear in the deed of donation.9
In support of its aforesaid position, respondent court relied on the
rule that a judicial action for rescission of a contract is not
necessary where the contract provides that it may be revoked
and cancelled for violation of any of its terms and conditions. 10 It
called attention to the holding that there is nothing in the law that
prohibits the parties from entering into an agreement that a
violation of the terms of the contract would cause its cancellation
even without court intervention, and that it is not always
necessary for the injured party to resort to court for rescission of
the contract.11 It reiterated the doctrine that a judicial action is
proper only when there is absence of a special provision granting
the power of cancellation.12
It is true that the aforesaid rules were applied to the contracts
involved therein, but we see no reason why the same should not
apply to the donation in the present case. Article 732 of the Civil
Code provides that donationsinter vivos shall be governed by the
general provisions on contracts and obligations in all that is not
determined in Title III, Book III on donations. Now, said Title III
does not have an explicit provision on the matter of a donation
with a resolutory condition and which is subject to an express
provision that the same shall be considered ipso facto revoked
upon the breach of said resolutory condition imposed in the deed

therefor, as is the case of the deed presently in question. The

suppletory application of the foregoing doctrinal rulings to the
present controversy is consequently justified.
The validity of such a stipulation in the deed of donation providing
for the automatic reversion of the donated property to the donor
upon non-compliance of the condition was upheld in the recent
case of De Luna, et al. vs. Abrigo, et al.13 It was held therein that
said stipulation is in the nature of an agreement granting a party
the right to rescind a contract unilaterally in case of breach,
without need of going to court, and that, upon the happening of
the resolutory condition or non-compliance with the conditions of
the contract, the donation is automatically revoked without need
of a judicial declaration to that effect. While what was the subject
of that case was an onerous donation which, under Article 733 of
the Civil Code is governed by the rules on contracts, since the
donation in the case at bar is also subject to the same rules
because of its provision on automatic revocation upon the
violation of a resolutory condition, from parity of reasons said
pronouncements in De Luna pertinently apply.
The rationale for the foregoing is that in contracts providing for
automatic revocation, judicial intervention is necessary not for
purposes of obtaining a judicial declaration rescinding a contract
already deemed rescinded by virtue of an agreement providing
for rescission even without judicial intervention, but in order to
determine whether or not the rescission was proper.14
When a deed of donation, as in this case, expressly provides for
automatic revocation and reversion of the property donated, the
rules on contract and the general rules on prescription should
apply, and not Article 764 of the Civil Code. Since Article 1306 of
said Code authorizes the parties to a contract to establish such

stipulations, clauses, terms and conditions not contrary to law,

morals, good customs, public order or public policy, we are of the
opinion that, at the very least, that stipulation of the parties
providing for automatic revocation of the deed of donation,
without prior judicial action for that purpose, is valid subject to the
determination of the propriety of the rescission sought. Where
such propriety is sustained, the decision of the court will be
merely declaratory of the revocation, but it is not in itself the
revocatory act.
On the foregoing ratiocinations, the Court of Appeals committed
no error in holding that the cause of action of herein private
respondents has not yet prescribed since an action to enforce a
written contract prescribes in ten (10) years.15 It is our view that
Article 764 was intended to provide a judicial remedy in case of
non-fulfillment or contravention of conditions specified in the deed
of donation if and when the parties have not agreed on the
automatic revocation of such donation upon the occurrence of the
contingency contemplated therein. That is not the situation in the
case at bar.
Nonetheless, we find that although the action filed by private
respondents may not be dismissed by reason of prescription, the
same should be dismissed on the ground that private
respondents have no cause of action against petitioners.
The cause of action of private respondents is based on the
alleged breach by petitioners of the resolutory condition in the
deed of donation that the property donated should not be sold
within a period of one hundred (100) years from the date of
execution of the deed of donation. Said condition, in our opinion,
constitutes an undue restriction on the rights arising from

ownership of petitioners and is, therefore, contrary to public

policy.
Donation, as a mode of acquiring ownership, results in an
effective transfer of title over the property from the donor to the
donee. Once a donation is accepted, the donee becomes the
absolute owner of the property donated. Although the donor may
impose certain conditions in the deed of donation, the same must
not be contrary to law, morals, good customs, public order and
public policy. The condition imposed in the deed of donation in
the case before us constitutes a patently unreasonable and
undue restriction on the right of the donee to dispose of the
property donated, which right is an indispensable attribute of
ownership. Such a prohibition against alienation, in order to be
valid, must not be perpetual or for an unreasonable period of
time.
Certain provisions of the Civil Code illustrative of the aforesaid
policy may be considered applicable by analogy.1wphi1Under
the third paragraph of Article 494, a donor or testator may prohibit
partition for a period which shall not exceed twenty (20) years.
Article 870, on its part, declares that the dispositions of the
testator declaring all or part of the estate inalienable for more
than twenty (20) years are void.
It is significant that the provisions therein regarding a testator also
necessarily involve, in the main, the devolution of property by
gratuitous title hence, as is generally the case of donations, being
an act of liberality, the imposition of an unreasonable period of
prohibition to alienate the property should be deemed anathema
to the basic and actual intent of either the donor or testator. For
that reason, the regulatory arm of the law is or must be
interposed to prevent an unreasonable departure from the

normative policy expressed in the aforesaid Articles 494 and 870

of the Code.

assignment of error since both issues are grounded on and refer

to the very same provision.

In the case at bar, we hold that the prohibition in the deed of

donation against the alienation of the property for an entire
century, being an unreasonable emasculation and denial of an
integral attribute of ownership, should be declared as an illegal or
impossible condition within the contemplation of Article 727 of the
Civil Code. Consequently, as specifically stated in said statutory
provision, such condition shall be considered as not imposed. No
reliance may accordingly be placed on said prohibitory paragraph
in the deed of donation. The net result is that, absent said
proscription, the deed of sale supposedly constitutive of the
cause of action for the nullification of the deed of donation is not
in truth violative of the latter hence, for lack of cause of action, the
case for private respondents must fail.

This Court is clothed with ample authority to review matters, even

if they are not assigned as errors on appeal, if it finds that their
consideration is necessary in arriving at a just decision of the
case:16 Thus, we have held that an unassigned error closely
related to an error properly assigned, 17 or upon which the
determination of the question properly assigned is dependent, will
be considered by the appellate court notwithstanding the failure to
assign it as error.18

It may be argued that the validity of such prohibitory provision in

the deed of donation was not specifically put in issue in the
pleadings of the parties. That may be true, but such oversight or
inaction does not prevent this Court from passing upon and
resolving the same.
It will readily be noted that the provision in the deed of donation
against alienation of the land for one hundred (100) years was the
very basis for the action to nullify the deed of d donation. At the
same time, it was likewise the controverted fundament of the
motion to dismiss the case a quo, which motion was sustained by
the trial court and set aside by respondent court, both on the
issue of prescription. That ruling of respondent court interpreting
said provision was assigned as an error in the present petition.
While the issue of the validity of the same provision was not
squarely raised, it is ineluctably related to petitioner's aforesaid

Additionally, we have laid down the rule that the remand of the
case to the lower court for further reception of evidence is not
necessary where the Court is in a position to resolve the dispute
based on the records before it. On many occasions, the Court, in
the public interest and for the expeditious administration of
justice, has resolved actions on the merits instead of remanding
them to the trial court for further proceedings, such as where the
ends of justice, would not be subserved by the remand of the
case.19 The aforestated considerations obtain in and apply to the
present case with respect to the matter of the validity of the
resolutory condition in question.
WHEREFORE, the judgment of respondent court is SET ASIDE
and another judgment is hereby rendered DISMISSING Civil
Case No. 095-84 of the Regional Trial Court, Branch XX, Imus,
Cavite.
SO ORDERED.

SOLOMON BOYSAW and ALFREDO M. YULO, JR., plaintiffsappellants,

vs.
INTERPHIL PROMOTIONS, INC., LOPE SARREAL, SR., and
MANUEL NIETO, JR., defendants-appellees.
Felipe Torres and Associates for plaintiffs-appellants.

V.E. Del Rosario & Associates for defendant-appellee M. Nieto,

Jr.

a boxing contest for the junior lightweight championship of the

world.

A.R. Naravasa & Pol Tiglao, Jr. for defendant-appellee Interphil

Promotions, Inc.

It was stipulated that the bout would be held at the Rizal Memorial
Stadium in Manila on September 30, 1961 or not later than thirty
[30] days thereafter should a postponement be mutually agreed
upon, and that Boysaw would not, prior to the date of the boxing
contest, engage in any other such contest without the written
consent of Interphil Promotions, Inc.

RESOLUTION

FERNAN, J.:
This is an appeal interposed by Solomon Boysaw and Alfredo
Yulo, Jr., from the decision dated July 25, 1963 and other rulings
and orders of the then Court of First Instance [CFI] of Rizal,
Quezon City, Branch V in Civil Case No. Q-5063, entitled
"Solomon Boysaw and Alfredo M. Yulo, Jr., Plaintiffs versus
Interphil Promotions, Inc., Lope Sarreal, Sr. and Manuel Nieto, Jr.,
Defendants," which, among others, ordered them to jointly and
severally pay defendant-appellee Manuel Nieto, Jr., the total sum
of P25,000.00, broken down into P20,000.00 as moral damages
and P5,000.00 as attorney's fees; the defendants-appellees
Interphil Promotions, Inc. and Lope Sarreal, Sr., P250,000.00 as
unrealized profits, P33,369.72 as actual damages and P5,000.00
as attorney's fees; and defendant-appellee Lope Sarreal, Sr., the
additional amount of P20,000.00 as moral damages aside from
costs.
The antecedent facts of the case are as follows:
On May 1, 1961, Solomon Boysaw and his then Manager, Willie
Ketchum, signed with Interphil Promotions, Inc. represented by
Lope Sarreal, Sr., a contract to engage Gabriel "Flash" Elorde in

On May 3, 1961, a supplemental agreement on certain details not

covered by the principal contract was entered into by Ketchum
and Interphil. Thereafter, Interphil signed Gabriel "Flash" Elorde
to a similar agreement, that is, to engage Boysaw in a title fight at
the Rizal Memorial Stadium on September 30, 1961.
On June 19, 1961, Boysaw fought and defeated Louis Avila in a
ten-round non-title bout held in Las Vegas, Nevada, U.S.A. [pp.
26-27, t.s.n., session of March 14, 1963].
On July 2, 1961, Ketchum on his own behalf and on behalf of his
associate Frank Ruskay, assigned to J. Amado Araneta the
managerial rights over Solomon Boysaw.
Presumably in preparation for his engagement with Interphil,
Solomon Boysaw arrived in the Philippines on July 31, 1961.
On September 1, 1961, J. Amado Araneta assigned to Alfredo J.
Yulo, Jr. the managerial rights over Boysaw that he earlier
acquired from Ketchum and Ruskay. The next day, September 2,
1961, Boysaw wrote Lope Sarreal, Sr. informing him of his arrival
and presence in the Philippines.

On September 5, 1961, Alfredo Yulo, Jr. wrote to Sarreal

informing him of his acquisition of the managerial rights over
Boysaw and indicating his and Boysaw's readiness to comply
with the boxing contract of May 1, 1961. On the same date, on
behalf of Interphil Sarreal wrote a letter to the Games and
Amusement Board [GAB] expressing concern over reports that
there had been a switch of managers in the case of Boysaw, of
which he had not been formally notified, and requesting that
Boysaw be called to an inquiry to clarify the situation.
The GAB called a series of conferences of the parties concerned
culminating in the issuance of its decision to schedule the ElordeBoysaw fight for November 4, 1961. The USA National Boxing
Association which has supervisory control of all world title fights
approved the date set by the GAB
Yulo, Jr. refused to accept the change in the fight date,
maintaining his refusal even after Sarreal on September 26,
1961, offered to advance the fight date to October 28, 1961 which
was within the 30-day period of allowable postponements
provided in the principal boxing contract of May 1, 1961.
Early in October 1961, Yulo, Jr. exchanged communications with
one Mamerto Besa, a local boxing promoter, for a possible
promotion of the projected Elorde-Boysaw title bout. In one of
such communications dated October 6, 1961, Yulo informed Besa
that he was willing to approve the fight date of November 4,1961
provided the same was promoted by Besa.
While an Elorde-Boysaw fight was eventually staged, the fight
contemplated in the May 1, 1961 boxing contract never
materialized.

As a result of the foregoing occurrences, on October 12, 1961,

Boysaw and Yulo, Jr. sued Interphil, Sarreal, Sr. and Manuel
Nieto, Jr. in the CFI of Rizal [Quezon City Branch] for damages
allegedly occasioned by the refusal of Interphil and Sarreal, aided
and abetted by Nieto, Jr., then GAB Chairman, to honor their
commitments under the boxing contract of May 1,1961.
On the first scheduled date of trial, plaintiff moved to disqualify
Solicitor Jorge Coquia of the Solicitor General's Office and Atty.
Romeo Edu of the GAB Legal Department from appearing for
defendant Nieto, Jr. on the ground that the latter had been sued
in his personal capacity and, therefore, was not entitled to be
represented by government counsel. The motion was denied
insofar as Solicitor General Coquia was concerned, but was
granted as regards the disqualification of Atty. Edu.
The case dragged into 1963 when sometime in the early part of
said year, plaintiff Boysaw left the country without informing the
court and, as alleged, his counsel. He was still abroad when, on
May 13, 1963, he was scheduled to take the witness stand. Thus,
the lower court reset the trial for June 20, 1963. Since Boysaw
was still abroad on the later date, another postponement was
granted by the lower court for July 23, 1963 upon assurance of
Boysaw's counsel that should Boysaw fail to appear on said date,
plaintiff's case would be deemed submitted on the evidence thus
far presented.
On or about July 16, 1963, plaintiffs represented by a new
counsel, filed an urgent motion for postponement of the July 23,
1963 trial, pleading anew Boysaw's inability to return to the
country on time. The motion was denied; so was the motion for
reconsideration filed by plaintiffs on July 22, 1963.

The trial proceeded as scheduled on July 23, 1963 with plaintiff's

case being deemed submitted after the plaintiffs declined to
submit documentary evidence when they had no other witnesses
to present. When defendant's counsel was about to present their
case, plaintiff's counsel after asking the court's permission, took
no further part in the proceedings.
After the lower court rendered its judgment dismissing the
plaintiffs' complaint, the plaintiffs moved for a new trial. The
motion was denied, hence, this appeal taken directly to this Court
by reason of the amount involved.
From the errors assigned by the plaintiffs, as having been
committed by the lower court, the following principal issues can
be deduced:

appellees damages of the character and amount

stated in the decision.
On the issue pertaining to the violation of the May 1, 1961 fight
contract, the evidence established that the contract was violated
by appellant Boysaw himself when, without the approval or
consent of Interphil, he fought Louis Avila on June 19, 1961 in
Las Vegas Nevada. Appellant Yulo admitted this fact during the
trial. [pp. 26-27, t.s.n., March 14, 1963].
While the contract imposed no penalty for such violation, this
does not grant any of the parties the unbridled liberty to breach it
with impunity. Our law on contracts recognizes the principle that
actionable injury inheres in every contractual breach. Thus:
Those who in the performance of their obligations
are guilty of fraud, negligence or delay, and those
who in any manner contravene the terms thereof,
are liable for damages. [Art. 1170, Civil Code].

1. Whether or not there was a violation of the fight

contract of May 1, 1961; and if there was, who
was guilty of such violation.
2. Whether or not there was legal ground for the
postponement of the fight date from September 1,
1961, as stipulated in the May 1, 1961 boxing
contract, to November 4,1961,
3. Whether or not the lower court erred in the
refusing a postponement of the July 23, 1963 trial.
4. Whether or not the lower court erred in denying
the appellant's motion for a new trial.
5. Whether or not the lower court, on the basis of
the evidence adduced, erred in awarding the

Also:
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. [Part
1, Art. 1191, Civil Code].
There is no doubt that the contract in question gave rise to
reciprocal obligations. "Reciprocal obligations are those which
arise from the same cause, and in which each party is a debtor
and a creditor of the other, such that the obligation of one is
dependent upon the obligation of the other. They are to be
performed simultaneously, so that the performance of one is

conditioned upon the simultaneous fulfillment of the other"

[Tolentino, Civil Code of the Philippines, Vol. IV, p. 175.1
The power to rescind is given to the injured party. "Where the
plaintiff is the party who did not perform the undertaking which he
was bound by the terms of the agreement to perform 4 he is not
entitled to insist upon the performance of the contract by the
defendant, or recover damages by reason of his own breach "
[Seva vs. Alfredo Berwin 48 Phil. 581, Emphasis supplied].
Another violation of the contract in question was the assignment
and transfer, first to J. Amado Araneta, and subsequently, to
appellant Yulo, Jr., of the managerial rights over Boysaw without
the knowledge or consent of Interphil.
The assignments, from Ketchum to Araneta, and from Araneta to
Yulo, were in fact novations of the original contract which, to be
valid, should have been consented to by Interphil.
Novation which consists in substituting a new
debtor in the place of the original one, may be
made even without the knowledge or against the
will of the latter, but not without the consent of the
creditor. [Art. 1293, Civil Code, emphasis
supplied].
That appellant Yulo, Jr., through a letter, advised Interphil on
September 5, 1961 of his acquisition of the managerial rights over
Boysaw cannot change the fact that such acquisition, and the
prior acquisition of such rights by Araneta were done without the
consent of Interphil. There is no showing that Interphil, upon
receipt of Yulo's letter, acceded to the "substitution" by Yulo of the
original principal obligor, who is Ketchum. The logical

presumption can only be that, with Interphil's letter to the GAB

expressing concern over reported managerial changes and
requesting for clarification on the matter, the appellees were not
reliably informed of the changes of managers. Not being reliably
informed, appellees cannot be deemed to have consented to
such changes.
Under the law when a contract is unlawfully novated by an
applicable and unilateral substitution of the obligor by another, the
aggrieved creditor is not bound to deal with the substitute.
The consent of the creditor to the change of
debtors, whether in expromision or delegacion is
an, indispensable requirement . . . Substitution of
one debtor for another may delay or prevent the
fulfillment of the obligation by reason of the
inability or insolvency of the new debtor, hence,
the creditor should agree to accept the
substitution in order that it may be binding on him.
Thus, in a contract where x is the creditor and y is
the debtor, if y enters into a contract with z, under
which he transfers to z all his rights under the first
contract, together with the obligations thereunder,
but such transfer is not consented to or approved
by x, there is no novation. X can still bring his
action against y for performance of their contract
or damages in case of breach. [Tolentino, Civil
Code of the Philippines, Vol. IV, p. 3611.
From the evidence, it is clear that the appellees, instead of
availing themselves of the options given to them by law of
rescission or refusal to recognize the substitute obligor Yulo,

really wanted to postpone the fight date owing to an injury that

Elorde sustained in a recent bout. That the appellees had the
justification to renegotiate the original contract, particularly the
fight date is undeniable from the facts aforestated. Under the
circumstances, the appellees' desire to postpone the fight date
could neither be unlawful nor unreasonable.
We uphold the appellees' contention that since all the rights on
the matter rested with the appellees, and appellants' claims, if
any, to the enforcement of the contract hung entirely upon the
former's pleasure and sufferance, the GAB did not act arbitrarily
in acceding to the appellee's request to reset the fight date to
November 4, 1961. It must be noted that appellant Yulo had
earlier agreed to abide by the GAB ruling.
In a show of accommodation, the appellees offered to advance
the November 4, 1961 fight to October 28, 1961 just to place it
within the 30- day limit of allowable postponements stipulated in
the original boxing contract.
The refusal of appellants to accept a postponement without any
other reason but the implementation of the terms of the original
boxing contract entirely overlooks the fact that by virtue of the
violations they have committed of the terms thereof, they have
forfeited any right to its enforcement.
On the validity of the fight postponement, the violations of the
terms of the original contract by appellants vested the appellees
with the right to rescind and repudiate such contract altogether.
That they sought to seek an adjustment of one particular
covenant of the contract, is under the circumstances, within the
appellee's rights.

While the appellants concede to the GAB's authority to regulate

boxing contests, including the setting of dates thereof, [pp. 44-49,
t.s.n., Jan. 17, 1963], it is their contention that only Manuel Nieto,
Jr. made the decision for postponement, thereby arrogating to
himself the prerogatives of the whole GAB Board.
The records do not support appellants' contention. Appellant Yulo
himself admitted that it was the GAB Board that set the
questioned fight date. [pp. 32-42, t.s.n., Jan. 17, 1963]. Also, it
must be stated that one of the strongest presumptions of law is
that official duty has been regularly performed. In this case, the
absence of evidence to the contrary, warrants the full application
of said presumption that the decision to set the Elorde-Boysaw
fight on November 4, 1961 was a GAB Board decision and not of
Manuel Nieto, Jr. alone.
Anent the lower court's refusal to postpone the July 23, 1963 trial,
suffice it to say that the same issue had been raised before Us by
appellants in a petition for certiorari and prohibition docketed as
G.R. No. L-21506. The dismissal by the Court of said petition had
laid this issue to rest, and appellants cannot now hope to
resurrect the said issue in this appeal.
On the denial of appellant's motion for a new trial, we find that the
lower court did not commit any reversible error.
The alleged newly discovered evidence, upon which the motion
for new trial was made to rest, consists merely of clearances
which Boysaw secured from the clerk of court prior to his
departure for abroad. Such evidence cannot alter the result of the
case even if admitted for they can only prove that Boysaw did not
leave the country without notice to the court or his counsel.

The argument of appellants is that if the clearances were

admitted to support the motion for a new trial, the lower court
would have allowed the postponement of the trial, it being
convinced that Boysaw did not leave without notice to the court or
to his counsel. Boysaw's testimony upon his return would, then,
have altered the results of the case.
We find the argument without merit because it confuses the
evidence of the clearances and the testimony of Boysaw. We
uphold the lower court's ruling that:
The said documents [clearances] are not
evidence to offset the evidence adduced during
the hearing of the defendants. In fact, the
clearances are not even material to the issues
raised. It is the opinion of the Court that the 'newly
discovered evidence' contemplated in Rule 37 of
the Rules of Court, is such kind of evidence which
has reference to the merits of the case, of such a
nature and kind, that if it were presented, it would
alter the result of the judgment. As admitted by
the counsel in their pleadings, such clearances
might have impelled the Court to grant the
postponement prayed for by them had they been
presented on time. The question of the denial of
the postponement sought for by counsel for
plaintiffs is a moot issue . . . The denial of the
petition for certiorari and prohibition filed by them,
had he effect of sustaining such ruling of the court
. . . [pp. 296-297, Record on Appeal].
The testimony of Boysaw cannot be considered newly discovered
evidence for as appellees rightly contend, such evidence has

been in existence waiting only to be elicited from him by

questioning.
We cite with approval appellee's contention that "the two qualities
that ought to concur or dwell on each and every of evidence that
is invoked as a ground for new trial in order to warrant the
reopening . . . inhered separately on two unrelated species of
proof" which "creates a legal monstrosity that deserves no
recognition."
On the issue pertaining to the award of excessive damages, it
must be noted that because the appellants wilfully refused to
participate in the final hearing and refused to present
documentary evidence after they no longer had witnesses to
present, they, by their own acts prevented themselves from
objecting to or presenting proof contrary to those adduced for the
appellees.
On the actual damages awarded to appellees, the appellants
contend that a conclusion or finding based upon the
uncorroborated testimony of a lone witness cannot be sufficient.
We hold that in civil cases, there is no rule requiring more than
one witness or declaring that the testimony of a single witness will
not suffice to establish facts, especially where such testimony has
not been contradicted or rebutted. Thus, we find no reason to
disturb the award of P250,000.00 as and for unrealized profits to
the appellees.
On the award of actual damages to Interphil and Sarreal, the
records bear sufficient evidence presented by appellees of actual
damages which were neither objected to nor rebutted by
appellants, again because they adamantly refused to participate
in the court proceedings.

The award of attorney's fees in the amount of P5,000.00 in favor

of defendant-appellee Manuel Nieto, Jr. and another P5,000.00 in
favor of defendants-appellees Interphil Promotions, Inc. and Lope
Sarreal, Sr., jointly, cannot also be regarded as excessive
considering the extent and nature of defensecounsels' services
which involved legal work for sixteen [16] months.
However, in the matter of moral damages, we are inclined to
uphold the appellant's contention that the award is not sanctioned
by law and well- settled authorities. Art. 2219 of the Civil Code
provides:
Art. 2219. Moral damages may be recovered in
the following analogous cases:
1) A criminal offense resulting in physical injuries;
2) Quasi-delict causing physical injuries;
3) Seduction, abduction, rape or other lascivious
acts;
4) Adultery or concubinage;
5) Illegal or arbitrary detention or arrest;
6) Illegal search;
7) Libel, slander or any other form of defamation;
8) Malicious prosecution;
9) Acts mentioned in Art. 309.

10) Acts and actions referred to in Arts., 21, 26,

27, 28, 29, 30, 32, 34 and 35.
The award of moral damages in the instant case is not based on
any of the cases enumerated in Art. 2219 of the Civil Code. The
action herein brought by plaintiffs-appellants is based on a
perceived breach committed by the defendants-appellees of the
contract of May 1, 1961, and cannot, as such, be arbitrarily
considered as a case of malicious prosecution.
Moral damages cannot be imposed on a party litigant although
such litigant exercises it erroneously because if the action has
been erroneously filed, such litigant may be penalized for costs.
The grant of moral damages is not subject to the
whims and caprices of judges or courts. The
court's discretion in granting or refusing it is
governed by reason and justice. In order that a
person may be made liable to the payment of
moral damages, the law requires that his act be
wrongful. The adverse result of an action does not
per se make the act wrongful and subject the
actor to the payment of moral damages. The law
could not have meant to impose a penalty on the
right to litigate; such right is so precious that moral
damages may not be charged on those who may
exercise it erroneously. For these the law taxes
costs. [Barreto vs. Arevalo, et. al. No. L-7748,
Aug. 27, 1956, 52 O.G., No. 13, p. 5818.]
WHEREFORE, except for the award of moral damages which is
herein deleted, the decision of the lower court is hereby affirmed.

SO ORDERED.

UNIVERSITY OF THE PHILIPPINES, petitioner,

vs.
WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of
the COURT OF FIRST INSTANCE IN QUEZON CITY, et
al., respondents.
Office of the Solicitor General Antonio P. Barredo, Solicitor
Augusto M. Amores and Special Counsel Perfecto V. Fernandez
for petitioner.
Norberto J. Quisumbing for private respondents.

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

Three (3) orders of the Court of First Instance of Rizal (Quezon
City), issued in its Civil Case No. 9435, are sought to be annulled
in this petition for certiorari and prohibition, filed by herein
petitioner University of the Philippines (or UP) against the abovenamed respondent judge and the Associated Lumber
Manufacturing Company, Inc. (or ALUMCO). The first order, dated
25 February 1966, enjoined UP from awarding logging rights over
its timber concession (or Land Grant), situated at the Lubayat
areas in the provinces of Laguna and Quezon; the second order,
dated 14 January 1967, adjudged UP in contempt of court, and
directed Sta. Clara Lumber Company, Inc. to refrain from
exercising logging rights or conducting logging operations on the
concession; and the third order, dated 12 December 1967, denied
reconsideration of the order of contempt.

royalties, forest fees, etc.; that ALUMCO cut and removed timber
therefrom but, as of 8 December 1964, it had incurred an unpaid
account of P219,362.94, which, despite repeated demands, it had
failed to pay; that after it had received notice that UP would
rescind or terminate the logging agreement, ALUMCO executed
an instrument, entitled "Acknowledgment of Debt and Proposed
Manner of Payments," dated 9 December 1964, which was
approved by the president of UP, and which stipulated the
following:
3. In the event that the payments called for in
Nos. 1 and 2 of this paragraph are not sufficient to
liquidate the foregoing indebtedness of the
DEBTOR in favor of the CREDITOR, the balance
outstanding after the said payments have been
applied shall be paid by the DEBTOR in full no
later than June 30, 1965;
xxx xxx xxx

As prayed for in the petition, a writ of preliminary injunction

against the enforcement or implementation of the three (3)
questioned orders was issued by this Court, per its resolution on
9 February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was segregated from the
public domain and given as an endowment to UP, an institution of
higher learning, to be operated and developed for the purpose of
raising additional income for its support, pursuant to Act 3608;
That on or about 2 November 1960, UP and ALUMCO entered
into a logging agreement under which the latter was granted
exclusive authority, for a period starting from the date of the
agreement to 31 December 1965, extendible for a further period
of five (5) years by mutual agreement, to cut, collect and remove
timber from the Land Grant, in consideration of payment to UP of

5. In the event that the DEBTOR fails to comply

with any of its promises or undertakings in this
document, the DEBTOR agrees without
reservation that the CREDITOR shall have the
right and the power to consider the Logging
Agreement dated December 2, 1960 as rescinded
without the necessity of any judicial suit, and the
CREDITOR shall be entitled as a matter of right to
Fifty Thousand Pesos (P50,000.00) by way of and
for liquidated damages;
ALUMCO continued its logging operations, but again incurred an
unpaid account, for the period from 9 December 1964 to 15 July
1965, in the amount of P61,133.74, in addition to the
indebtedness that it had previously acknowledged.

That on 19 July 1965, petitioner UP informed respondent

ALUMCO that it had, as of that date, considered as rescinded
and of no further legal effect the logging agreement that they had
entered in 1960; and on 7 September 1965, UP filed a complaint
against ALUMCO, which was docketed as Civil Case No. 9435 of
the Court of First Instance of Rizal (Quezon City), for the
collection or payment of the herein before stated sums of money
and alleging the facts hereinbefore specified, together with other
allegations; it prayed for and obtained an order, dated 30
September 1965, for preliminary attachment and preliminary
injunction restraining ALUMCO from continuing its logging
operations in the Land Grant.
That before the issuance of the aforesaid preliminary injunction
UP had taken steps to have another concessionaire take over the
logging operation, by advertising an invitation to bid; that bidding
was conducted, and the concession was awarded to Sta. Clara
Lumber Company, Inc.; the logging contract was signed on 16
February 1966.
That, meantime, ALUMCO had filed several motions to discharge
the writs of attachment and preliminary injunction but were denied
by the court;
That on 12 November 1965, ALUMCO filed a petition to enjoin
petitioner University from conducting the bidding; on 27
November 1965, it filed a second petition for preliminary
injunction; and, on 25 February 1966, respondent judge issued
the first of the questioned orders, enjoining UP from awarding
logging rights over the concession to any other party.
That UP received the order of 25 February 1966 after it had
concluded its contract with Sta. Clara Lumber Company, Inc., and
said company had started logging operations.
That, on motion dated 12 April 1966 by ALUMCO and one Jose
Rico, the court, in an order dated 14 January 1967, declared

petitioner UP in contempt of court and, in the same order,

directed Sta. Clara Lumber Company, Inc., to refrain from
exercising logging rights or conducting logging operations in the
concession.
The UP moved for reconsideration of the aforesaid order, but the
motion was denied on 12 December 1967.
Except that it denied knowledge of the purpose of the Land Grant,
which purpose, anyway, is embodied in Act 3608 and, therefore,
conclusively known, respondent ALUMCO did not deny the
foregoing allegations in the petition. In its answer, respondent
corrected itself by stating that the period of the logging agreement
is five (5) years - not seven (7) years, as it had alleged in its
second amended answer to the complaint in Civil Case No. 9435.
It reiterated, however, its defenses in the court below, which
maybe boiled down to: blaming its former general manager,
Cesar Guy, in not turning over management of ALUMCO, thereby
rendering it unable to pay the sum of P219,382.94; that it failed to
pursue the manner of payments, as stipulated in the
"Acknowledgment of Debt and Proposed Manner of Payments"
because the logs that it had cut turned out to be rotten and could
not be sold to Sta. Clara Lumber Company, Inc., under its
contract "to buy and sell" with said firm, and which contract was
referred and annexed to the "Acknowledgment of Debt and
Proposed Manner of Payments"; that UP's unilateral rescission of
the logging contract, without a court order, was invalid; that
petitioner's supervisor refused to allow respondent to cut new
logs unless the logs previously cut during the management of
Cesar Guy be first sold; that respondent was permitted to cut logs
in the middle of June 1965 but petitioner's supervisor stopped all
logging operations on 15 July 1965; that it had made several
offers to petitioner for respondent to resume logging operations
but respondent received no reply.
The basic issue in this case is whether petitioner U.P. can treat its
contract with ALUMCO rescinded, and may disregard the same
before any judicial pronouncement to that effect. Respondent

ALUMCO contended, and the lower court, in issuing the

injunction order of 25 February 1966, apparently sustained it
(although the order expresses no specific findings in this regard),
that it is only after a final court decree declaring the contract
rescinded for violation of its terms that U.P. could disregard
ALUMCO's rights under the contract and treat the agreement as
breached and of no force or effect.
We find that position untenable.
In the first place, UP and ALUMCO had expressly stipulated in
the "Acknowledgment of Debt and Proposed Manner of
Payments" that, upon default by the debtor ALUMCO, the creditor
(UP) has "the right and the power to consider, the Logging
Agreement dated 2 December 1960 as rescinded without the
necessity of any judicial suit." As to such special stipulation, and
in connection with Article 1191 of the Civil Code, this Court stated
in Froilan vs. Pan Oriental Shipping Co., et al., L-11897, 31
October 1964, 12 SCRA 276:
there is nothing in the law that prohibits the
parties from entering into agreement that violation
of the terms of the contract would cause
cancellation thereof, even without court
intervention. In other words, it is not always
necessary for the injured party to resort to court
for rescission of the contract.
Of course, it must be understood that the act of party in treating a
contract as cancelled or resolved on account of infractions by the
other contracting party must be made known to the other and is
always provisional, being ever subject to scrutiny and review by
the proper court. If the other party denies that rescission is
justified, it is free to resort to judicial action in its own behalf, and
bring the matter to court. Then, should the court, after due
hearing, decide that the resolution of the contract was not
warranted, the responsible party will be sentenced to damages; in

the contrary case, the resolution will be affirmed, and the

consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is only
the final judgment of the corresponding court that will conclusively
and finally settle whether the action taken was or was not correct
in law. But the law definitely does not require that the contracting
party who believes itself injured must first file suit and wait for a
judgment before taking extrajudicial steps to protect its interest.
Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the
pendency of the suit until the final judgment of rescission is
rendered when the law itself requires that he should exercise due
diligence to minimize its own damages (Civil Code, Article 2203).
We see no conflict between this ruling and the previous
jurisprudence of this Court invoked by respondent declaring that
judicial action is necessary for the resolution of a reciprocal
obligation, 1 since in every case where the extrajudicial resolution
is contested only the final award of the court of competent
jurisdiction can conclusively settle whether the resolution was
proper or not. It is in this sense that judicial action will be
necessary, as without it, the extrajudicial resolution will remain
contestable and subject to judicial invalidation, unless attack
thereon should become barred by acquiescence, estoppel or
prescription.
Fears have been expressed that a stipulation providing for a
unilateral rescission in case of breach of contract may render
nugatory the general rule requiring judicial action (v. Footnote,
Padilla, Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140)
but, as already observed, in case of abuse or error by the
rescinder the other party is not barred from questioning in court
such abuse or error, the practical effect of the stipulation being
merely to transfer to the defaulter the initiative of instituting suit,
instead of the rescinder.

In fact, even without express provision conferring the power of

cancellation upon one contracting party, the Supreme Court of
Spain, in construing the effect of Article 1124 of the Spanish Civil
Code (of which Article 1191 of our own Civil; Code is practically a
reproduction), has repeatedly held that, a resolution of reciprocal
or synallagmatic contracts may be made extrajudicially unless
successfully impugned in court.
El articulo 1124 del Codigo Civil establece la
facultad de resolver las obligaciones reciprocas
para el caso de que uno de los obligados no
cumpliese lo que le incumbe, facultad que, segun
jurisprudencia de este Tribunal, surge
immediatamente despuesque la otra parte
incumplio su deber, sin necesidad de una
declaracion previa de los Tribunales. (Sent. of the
Tr. Sup. of Spain, of 10 April 1929; 106 Jur. Civ.
897).
Segun reiterada doctrina de esta Sala, el Art.
1124 regula la resolucioncomo una "facultad"
atribuida a la parte perjudicada por el
incumplimiento del contrato, la cual tiene derecho
do opcion entre exigir el cumplimientoo la
resolucion de lo convenido, que puede
ejercitarse, ya en la via judicial, ya fuera de ella,
por declaracion del acreedor, a reserva, claro es,
que si la declaracion de resolucion hecha por una
de las partes se impugna por la otra, queda
aquella sometida el examen y sancion de los
Tribunale, que habran de declarar, en definitiva,
bien hecha la resolucion o por el contrario, no
ajustada a Derecho. (Sent. TS of Spain, 16
November 1956; Jurisp. Aranzadi, 3, 447).
La resolucion de los contratos sinalagmaticos,
fundada en el incumplimiento por una de las
partes de su respectiva prestacion, puedetener

lugar con eficacia" 1. o Por la declaracion de

voluntad de la otra hecha extraprocesalmente, si
no es impugnada en juicio luego con exito. y
2. 0 Por la demanda de la perjudicada, cuando no
opta por el cumplimientocon la indemnizacion de
danos y perjuicios realmente causados, siempre
quese acredite, ademas, una actitud o conducta
persistente y rebelde de laadversa o la
satisfaccion de lo pactado, a un hecho obstativo
que de un modoabsoluto, definitivo o irreformable
lo impida, segun el art. 1.124, interpretado por la
jurisprudencia de esta Sala, contenida en las Ss.
de 12 mayo 1955 y 16 Nov. 1956, entre otras,
inspiradas por el principio del Derecho intermedio,
recogido del Canonico, por el cual fragenti fidem,
fides non est servanda. (Ss. de 4 Nov. 1958 y 22
Jun. 1959.) (Emphasis supplied).
In the light of the foregoing principles, and considering that the
complaint of petitioner University made out aprima facie case of
breach of contract and defaults in payment by respondent
ALUMCO, to the extent that the court below issued a writ of
preliminary injunction stopping ALUMCO's logging operations,
and repeatedly denied its motions to lift the injunction; that it is
not denied that the respondent company had profited from its
operations previous to the agreement of 5 December 1964
("Acknowledgment of Debt and Proposed Manner of Payment");
that the excuses offered in the second amended answer, such as
the misconduct of its former manager Cesar Guy, and the rotten
condition of the logs in private respondent's pond, which said
respondent was in a better position to know when it executed the
acknowledgment of indebtedness, do not constitute on their face
sufficient excuse for non-payment; and considering that whatever
prejudice may be suffered by respondent ALUMCO is
susceptibility of compensation in damages, it becomes plain that
the acts of the court a quo in enjoining petitioner's measures to
protect its interest without first receiving evidence on the issues
tendered by the parties, and in subsequently refusing to dissolve

the injunction, were in grave abuse of discretion, correctible by

certiorari, since appeal was not available or adequate. Such
injunction, therefore, must be set aside.
For the reason that the order finding the petitioner UP in contempt
of court has open appealed to the Court of Appeals, and the case
is pending therein, this Court abstains from making any
pronouncement thereon.
WHEREFORE, the writ of certiorari applied for is granted, and the
order of the respondent court of 25 February 1966, granting the
Associated Lumber Company's petition for injunction, is hereby
set aside. Let the records be remanded for further proceedings
conformably to this opinion.

JOSE PONCE DE LEON, plaintiff-appellant,

vs.
SANTIAGO SYJUCO, INC., defendant-appellant,
PHILIPPINE NATIONAL BANK, defendant-appellee.
Jose D. Cortes and Claro M. Recto for plaintiff and appellant.
Ramon Diokno and Jose Diokno for defendant and appellant.
Hilarion U. Jarencio for defendant and appellee.

BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of
Manila absolving defendant Santiago Syjuco, Inc. of the
complaint and condemning the plaintiff to pay to said defendant
the sum of P18,000 as principal and the further sum of P5,130 as
interest thereon from August 6, 1944, to May 5, 1949, or a total of
P23,130, Philippine currency, with interest thereon at the rate of
6% per annum from May 6, 1949, until said amount is paid in full,
with costs against the plaintiff.
The facts of this case as reflected in the pleadings and the
evidence, stripped of unnecessary details, are well narrated in the
brief submitted by counsel for the Philippine National Bank, and
which for purposes of this decision are hereunder reproduced:
The appellee, Philippine National Bank, hereinafter to be
referred to as the Bank, was the owner of two (2) parcels
of land known as Lots 871 and 872 of the Murcia
Cadastre, Negros Occidental, more particularly described
in Transfer Certificates of Titles Nos. 17176 and 17175,
respectively. On March 9, 1936 the Bank executed a
contract to sell the said properties to the plaintiff, Jose
Ponce de Leon, hereinafter to be referred to as Ponce de
Leon, the total price of P26,300, payable as follows: (a)
P2,630 upon the execution of the said deed; and (b) the
balance P23,670 in ten (10) annual amortizations, the first
amortization to fall due one year after the execution of the
said contract (See annex "A" Syjuco's Segunda
Contestacion Enmendada).
On May 5, 1944, Ponce de Leon obtained a loan from
Santiago Syjuco, Inc., hereinafter to be referred to a s
Syjuco, in the amount of P200,000 in Japanese Military
Notes, payable within one (1) year from May 5, 1948. It
was also provided in said promissory note that the
promisor (Ponce de Leon) could not pay, and the payee
(Syjuco) could not demand, the payment of said note

except within the aforementioned period. To secure the

payment of said obligation, Ponce de Leon mortgaged in
favor of Syjuco the parcels of land which he agreed to
purchase from the Bank (See Annex "B", Syjuco's
Segunda Contestacion Enmendada).
On May 6, 1944, Ponce de Leon paid the Bank of the
balance of the purchase price amounting to P23,670 in
Japanese Military notes and, on the same date, the Bank
executed in favor of Ponce de Leon, a deed of absolute
sale of the aforementioned parcels of land (See Annex
"F", Syjuco's Segunda Contectacion Enmendada).
The deed of sale executed by the Bank in favor of Ponce
de Leon and the deed of mortgage executed by Ponce de
Leon in favor of Syjuco were registered in the Office of
the Register of Deeds of Negros Occidental and, as a
consequence of such registration, Transfer Certificate of
Title Nos. 17175 and 17176 in the name of the Bank were
cancelled and Transfer Certificate of Title No. 398 (P.R.)
and No. 399 (P.R.), respectively, were issued in the name
of Ponce de Leon. The mortgage in favor of Syjuco was
annotated on the back of said certificates.
On July 31, 1944, Ponce de Leon obtained an additional
loan from Syjuco in the amount of P16,000 in Japanese
Military notes and executed in the latter's favor of
promissory note of the same tenor as the one had
previously executed (R. on Appeal, pp. 23-24)
On several occasions in October, 1944, Ponce de Leon
tendered to Syjuco the amount of P254,880 in Japanese
military notes in full payment of his indebtedness to
Syjuco. The amount tendered included not only the
interest up to the time of the tender, but also all the
interest up to May 5, 1948. Ponce de Leon also wrote to
Syjuco a letter tendering the payment of his
indebtedness, including interests up to May 5, 1948,

Syjuco, however, refused to accept such repeated

tenders. During the trial, Ponce de Leon explained that he
wanted to settle his obligations because as a member of
the guerilla forces he was being hunted by the Japanese
and he was afraid of getting caught and killed (t.s.n. pp.
14-15).
In view of Syjuco's refusal to accept the payment
tendered by Ponce de Leon, the latter deposited with the
Clerk of Court, of First Instance of Manila the amount of
P254,880 and, on November 4, 1944, he filed a complaint
consigning the amount so deposited to Syjuco. To this
complaint Syjuco filed his answer. The records of this
case were destroyed as a result of the war and after the
liberation the same were reconstituted (R. on A., pp. 1-17)
On May 15, 1946, Ponce de Leon filed a petition in the
Court of First Instance of Negros Occidental for the
reconstitution of transfer Certificates of Titles Nos. 17175
and 17176 in the name of the Bank and, in an order dated
June 4, 1946, the Court ordered the reconstitution of said
titles. In compliance with said order, the Register of
Deeds of Negros Occidental issued Certificates of Title
Nos. 1297-R and 1298-R in the names of the Bank.
Ponce de Leon then filed with the Register of Deeds a
copy of the deed of sale of the properties covered by the
said certificates of title issued by the Bank in his (Ponce
de Leon's) favor and the Register of Deeds cancelled the
said Certificates of Title Nos. 1297-R and 1298-R and
issued in favor of Ponce de Leon Transfer Certificates of
Title Nos. 526-N and 527-N (R. on A., pp. 48-50).
On August 16, 1946, Ponce de Leon obtained an
overdraft account from the Bank in an amount not
exceeding P135,000 and, on the same date, he executed
a mortgage of the two parcels of land covered by the
reconstituted Transfer Certificates of Title Nos. 526-N and
527-N in favor of the said Bank to secure the payment of

any amount which he may obtain from the Bank under

aforementioned overdraft account. The overdraft account
was granted by the Bank to Ponce de Leon in good faith,
said Bank not being aware of the mortgage which Ponce
de Leon had executed in favor of Syjuco during the
Japanese occupation, and said Bank believing that the
said properties had no lien or encumbrance appeared
annotated on the reconstituted certificates of Title Nos.
526-N and 527-N in the name of Ponce de Leon (See
Testimony of Atty. Endriga).
On September 28, 1946, Syjuco filed a second amended
answer to Ponce de Leon's complaint and, in its "Tercera
Reconvention", it claimed that Ponce de Leon, by
reconstituting the titles in the name of the Bank, by
causing the Register of Deeds to have the said titles
transferred in his (Ponce de Leon's name, and by
subsequently mortgaging the said properties to the Bank
as a guaranty for his overdraft account, had violated the
conditions of the morgage which Ponce de Leon has
executed in its favor during the Japanese occupation.
Syjuco then prayed that the mortgage executed by Ponce
de Leon in favor of the Bank be declared null and void.
(R. on A., pp. 32-53).
Ponce de Leon objected to the inclusion of the Bank as a
cross-defendant. (R on A. pp. 55-58). Notwithstanding
said objection, however, the lower court ordered the
inclusion of the Bank as a cross-defendant (R. on A., pp.
59-60).
On June 28, 1947, the Bank filed a motion to drop on the
ground that it had been misjoined and to dismiss on the
ground that the venue was improperly laid and there is
another action pending between the same parties for the
same cause (R. on A., pp. 65-75). The said motion was
denied by the lower court in its order dated October 7,
1947 (R. on A., pp. 95-100). In view of such denial, the

Bank filed its answer on October 29, 1947 (R. on A., pp.
101-106).
On June 24, 1949, the lower court rendered a decision
absolving Syjuco from Ponce de Leon's complaint and
condemning Ponce de Leon to pay Syjuco the total
amount of P23,130 with interest at the legal rate from May
6, 1949, until fully paid (R. on A., pp. 107-135). Both
Ponce de Leon and Syjuco file their appeal from this
decision.
The principal questions to be determined in this appeal are: (1)
Did the lower court err in not giving validity to the consignation
made by the plaintiff of the principal and interest of his two
promissory notes with the clerk of court?; (2) did the lower court
err in reducing the principal and interest of said promissory notes
to their just proportions using as a pattern the Ballantyne
schedule in effecting the reduction?; (3) did the lower court err in
disregarding the defense of moratorium set up by the plaintiff
against the counterclaim of defendant Syjuco?; and (4) did the
lower court err in not passing on the question of priority between
the mortgage claim of defendant Syjuco and that of the Philippine
National Bank on the same set of properties on the ground that
they are situated in a province different from that in which this
action was brought? We will discuss these issues in the order in
which they are propounded.
1. It appears that plaintiff obtained from defendant Syjuco two
loans in 944. One is for P200,000 obtained on May 5, 1944, and
another for P16,000 obtained on July 31, 1944. These two loans
appear in two promissory notes signed by the plaintiff which were
couched in practically the same terms and conditions and were
secured by two deeds of mortgage covering the same parcels of
land. In said promissory notes it was expressly agreed upon that
plaintiff shall pay the loans "within one year from May 5, 1948, . . .
peso for peso in the coin or currency of the Government of the
Philippines that, at the time of payment above fixed it is the legal
tender for public and private debts, with interests at the rate of 6%

per annum, payable in advance for the first year, and semiannually in advance during the succeeding years", and that, the
period above set forth having been established for the mutual
benefit of the debtor and creditor, the former binds himself to pay,
and the latter not to demand the payment of, the loans except
within the period above mentioned. And as corollary to have the
above stipulations, it was likewise agreed upon in the two deeds
of mortgage that "if either party should attempt to annul or alter
any of the stipulations of this deed or of the note which it secures,
or do anything which has for its purpose or effect an alteration or
annulment of any of said stipulations, he binds himself to
indemnify the other for the losses and damages, which the parties
hereby liquidate and fix at the amount of P200,000".
The facts show that, on November 15, 1944, or thereabouts,
contrary to the stipulation above mentioned, plaintiff offered to
pay to the defendant not only the principal sum due on the two
promissory notes but also all the interests which said principal
sum may earn up to the dates of maturity of the two notes, and as
the defendant refused to accept the payment so tendered, plaintiff
deposited the money with the clerk of court and brought this
action to compel the defendant to accept it to relieve himself of
further liability.
The question now to be determined is, is the consignation made
by the plaintiff valid in the light of the law and the stipulations
agreed upon in the two promissory notes signed by the plaintiff?
Our answer is in the negative.
In order that cogsignation may be effective, the debtor must first
comply with certain requirements prescribed by law. The debtor
must show (1) that there was a debt due; (2) that the consignation
of the obligation had been made bacause the creditor to whom
tender of payment was made refused to accept it, or because he
was absent for incapacitated, or because several persons
claimed to be entitled to receive the amount due (Art. 1176, Civil
Code); (3) that previous notice of the consignation have been
given to the person interested in the performance of the obligation

(Art. 1177, Civil Code); (4) that the amount due was placed at the
disposal of the court (Art 1178, Civil Code); and (5) that after the
consignation had been made the person interested was notified
thereof (Art. 1178, Civil Code). In the instant case, while it is
admitted a debt existed, that the consignation was made because
of the refusal of the creditor to accept it, and the filing of the
complaint to compel its acceptance on the part of the creditor can
be considered sufficient notice of the consignation to the creditor,
nevertheless, it appears that at least two of the above
requirements have not been complied with. Thus, it appears that
plaintiff, before making the consignation with the clerk of the
court, failed to give previous notice thereof to the person
interested in the performance of the obligation. It also appears
that the obligation was not yet due and demandable when the
money was consigned, because, as already stated, by the very
express provisions of the document evidencing the same, the
obligation was to be paid within one year after May 5, 1948, and
the consignation was made before this period matured. The
failure of these two requirements is enough ground to render the
consignation ineffective. And it cannot be contended that plaintiff
is justified in accelerating the payment of the obligation because
he was willing to pay the interests due up to the date of its
maturity, because, under the law, in a monetary obligation
contracted with a period, the presumption is that the same is
deemed constituted in favor of both the creditor and the debtor
unless from its tenor or from other circumstances it appears that
the period has been established for the benefit of either one of
them (Art. 1127, Civil Code). Here no such exception or
circumstance exists.
It may be argued that the creditor has nothing to lose but
everything to gain by the acceleration of payment of the obligation
because the debtor has offered to pay all the interests up to the
date it would become due, but this argument loses force if we
consider that the payment of interests is not the only reason why
a creditor cannot be forced to accept payment contrary to the
stipulation. There are other reasons why this cannot be done.
One of them is that the creditor may want to keep his money

invested safely instead of having it in his hands (Moore vs. Cord

14 Wis. 231). Another reason is that the creditor by fixing a period
protects himself against sudden decline in the purchasing power
of the currency loaned specially at a time when there are many
factors that influence the fluctuation of the currency (Kemmerer
on Money, pp. 9-10). And all available authorities on the matter
are agreed that, unless the creditor consents, the debtor has no
right to accelerate the time of payment even if the premature
tender "included an offer to pay principal and interest in full" (17
A.L.R. 866-867; 23 L.R.A. (N.S.) 403; see ruling of this Court in
the recent case of Ilusorio vs. Busuego, 84 Phil., 630).
Tested by the law and authorities we have cited above, the
conclusion is inescapable that the consignation made by the
plaintiff is invalid and, therefore, did not have the effect of
relieving him of his obligation.
2. The next question to be determined is whether the lower court
erred in reducing the amount of the loans by applying the
Ballantyne schedule.
This is not the first time that this question has been raised. On
two previous occasions this Court had been called upon to rule
on a similar question and has decided that when the creditor and
the debtor have agreed on a term within which payment of the
obligation should be paid and on the currency in which payment
should be made, that stipulation should be given force and effect
unless it appears contrary to law, moral or public order. Thus, in
one case this Court said: "One who borrowed P4,000 in
Japanese military notes on October 5, 1944, to be paid one year
after, in currency then prevailing, was ordered by the Supreme
Court to pay said sum after October 5, 1945, that is, after
liberation, in Philippine currency (Roo vs. Gomez et al., 83 Phil.,
890). In another case, wherein the parties executed a deed of
sale with pacto de retro of a parcel of land for the sum of P5,000
in Japanese military notes agreeing that within 30 days after the
expiration of one year from June 24, 1944, the aforementioned
land may be redeemed sa ganito ding halaga (at the same price),

the Court held that the "phrase sa ganito ding halaga meant the
same price of P5,000 in Japanese war notes". The Court further
said, "The parties herein gambled and speculated on the date of
the termination of the war and the liberation of the Philippines by
America. This can be gleaned from the stipulation about
redemption, particularly that portion to the effect that redemption
could be effected not before the expiration of one year from June
24, 1844. This kind of agreement is permitted by law. We find
nothing immoral or unlawful in it" (Gomez vs. Tabia Off. Gaz.,
641; 84 Phil., 269).
In this particular case, the terms agreed upon are clearer and
more conclusive than the ones cited because the plaintiff agreed
not only to pay the obligation within one year from May 5, 1948,
but also to pay peso for peso in the coin or currency of the
Government that at the time of payment it is the legal tender for
public and private debts. This stipulation is permitted by law
because there is nothing immoral or improper in it. And it is not
oppressive because it appears that plaintiff used a great portion
of that money to pay his obligations during the Japanese
occupation as shown by the fact that he settled his account with
the Philippine National Bank and other accounts to the tune of
P100,000. It would seem therefore clear that plaintiff has no other
alternative than to pay the defendant his obligation peso for peso
in the present currency as expressly agreed upon in the two
promissory notes in question. The decision of the lower court on
this point should, therefore, be modified.
As regards the penal clause contained in the two deeds of
mortgage herein involved, we agree to the following finding of the
court a quo: "The attempt made by the plaintiff to pay the
obligation before the arrival of the term fixed for the purpose may
be wrong; but it may be attributed to an honest belief that the
term was not binding and not to a desire to modify the contract".
This penal clause should be strictly construed.
3. As regards the third question, we find that the lower court erred
in disregarding the defense of moratorium set up by the plaintiff

against the counterclaim of the defendant on the sole ground that

this defense was not raised by the plaintiff in his pleadings. An
examination of the record shows that the plaintiff raised this
question in his pleadings. This must have been overlooked by the
court.
The lower court, therefore, should have passed upon this defense
in the light of Executive Order No. 32, which suspended payment
of all obligations contracted before March 10, 1945. We note,
however, that said moratorium orders have already been modified
by Republic Act No. 342 in the sense of limiting the ban on
obligations contracted before the outbreak of the war to creditors
who have filed claims for reparations with the Philippine War
Damage Commission, leaving them open to obligations
contracted during the Japanese occupation (Uy vs. Kalaw
Katigbak, G.R. No. L-1830, December 1, 1949). As the obligation
in question has been contracted during enemy occupation the
same is still covered by the moratorium orders. The claim of
counsel for the defendant that the moratorium orders cannot be
invoked because they are unconstitutional cannot now be
determined it appearing that it has been raised for the first time in
this instance. This defense of moratorium was raised by plaintiff
in his reply to the amended answer of the defendant dated August
1, 1946, and in his motion to dismiss the counterclaim dated
October 29, 1946, but the defendant did not traverse that
allegation nor raise the constitutionality of the moratorium orders
in any of its pleadings filed in the lower court. It is a well known
rule that this Court can only considera question of constitutionality
when it has been raised by any of the parties in the lower court
(Laperal vs. City of Manila, 62 Phil., 352; Macondray and Co. vs.
Benito and Ocampo, 62 Phil., 137).
4. The facts relative to the execution of the deed of mortgage in
favor of the Philippine National Bank on the two lots in question
are as follows: On March 9, 1936, the Philippine National Bank
was the owner of the lots Nos. 872 and 871 of the Murcia
Cadastre, Negros Occidental, covered by Certificates of Titles
Nos. 17175 and 17176 respectively. On the same date, the Bank

sold the two lots to the plaintiff and as a result Transfer

Certificates of Titles Nos. 398 and 399 were issued in the name of
the plaintiff. On May 5, 1944, plaintiff mortgaged these two lots to
defendant Syjuco to guarantee the payment of two loans, one for
P200,000 and another for P16,000. The mortgage was registered
in accordance with the law. Then liberation came. Plaintiff taking
advantage of the destruction of the records of the office of the
Register of Deeds of Negros Occidental, obtained from the Court
of First Instance of said province the 33 reconstitution of Transfer
Certificate of Titles Nos. 17175 and 17176 and by virtue thereof,
the register of deeds issued transfer certificates of titles Nos.
1297-R and 1298-R in the name of the Philippine National Bank.
Then he secured the cancellation of the titles last named and the
issuance of Transfer Certificates of Titles Nos. 526-N and 527-N
in his name without informing the court of the encumbrance
existing in favor of defendant Syjuco. After securing the new titles
in his name, plaintiff obtained a loan from the Philippine National
Bank for the sum of P135,000 on the security of the property
covered by said reconstituted titles. On said titles no
encumbrance appears annotated, but it was noted thereon that
they would be subject to whatever claim may be filed by virtue of
documents or instruments previously registered but which, for
some reason, do not appear annotated thereon, as required by a
circular of the Department of Justice.

as security the titles offered by the plaintiff without any further

inquiry, it assumed the risk and the consequences resulting
therefrom. Moreover, it also appears that this same question of
priority has already been threshed out and determined by the
Court of First Instance of Negros Occidental in the cadastral
proceedings covered the two lots in question wherein the court
ordered the cancellation of the reconstituted titles issued in the
name of the plaintiff and the reconstitution of the former titles
copies of which were in the possession of defendant Syjuco,
subject only to the requirement that the mortgage in favor of the
Philippine National Bank be annotated on said new titles. In other
words, the court declared valid the titles originally issued in the
name of the plaintiff wherein the encumbrance in favor of the
defendant Syjuco appears and declared invalid the reconstituted
titles secured by plaintiff through fraud and misinterpretation. This
order is now final because no appeal has been taken therefrom
by any interested party.

From the foregoing facts, it clearly appears that the mortgage

executed in favor of the defendant Syjuco is prior in point of time
and in point of registration to that executed in favor of the
Philippine National Bank, let alone the fact that when the later
mortgage was executed, the Bank must have known, as it was its
duty to find out, that there was a warning appearing in
reconstituted titles that the same were subject to whatever
encumbrance may exist which for one reason or another does not
appear in said titles. With such warning, the Bank should have
taken the necessary precaution to inquire into the existence of
any hidden transaction or encumbrance that might affect the
property that was being offered in security such as the one
existing in favor of the defendant, and when the Bank accepted

In view of the foregoing, the decision appealed from should be

modified in the sense of ordering the plaintiff to pay the defendant
Syjuco the sum of P216,000, Philippine currency, value of two
promissory notes, with interest thereon at the rate of 6% per
annum from May 6, 1949, until said amount is paid in full. It is
further ordered that should said amount, together with the
corresponding interests, be not paid within 90 days from the date
this judgment in accordance with law, with costs against the
plaintiff.

We have, therefore, no other alternative than to declare that the

mortgage claim of the defendant Syjuco is entitled to priority over
that of the Philippine National Bank. This question can be
threshed out here regardless of venue because the counterclaim
is but ancillary to the main case (1 Moran, Comments on the
Rules of Court, 2nd ed., 201).

However, this judgment shall be held in abeyance, or no order for

the execution thereof shall be issued, until after the moratorium
orders shall have been lifted.

Feria, Bengzon, Tuason, Reyes, and Jugo, JJ., concur.

Separate Opinions
PARAS, C.J., dissenting:
The plaintiff obtained from defendant Syjuco on May 5, 1944, a
loan of P200,000 and on July 31, 1944, another loan of P16,000,
payable within one year from May 5, 1948." On November 15,
1944, the plaintiff offered to pay the entire indebtedness plus all
the interest up to the date of maturity. Upon Syjuco's refusal to
accept the tendered payment, the plaintiff deposited the amount
with the clerk of the Court of First Instance of Manila and
instituted the present action to compel Syjuco to accept payment.
The records of the case were destroyed during the war, but they
were duly reconstituted after the liberation. The trial court
sentenced the plaintiff to pay Syjuco the total sum of P23,130,
representing the whole indebtedness plus all the interest from
August 6, 1944, to May 5, 1949, computed according to the
Ballantyne scale of values. From this judgment Syjuco has
appealed, claiming his right to be paid the sum of P216,000,
actual Philippine currency, plus P200,000, as penalty agreed
upon in the contract. The majority of this Court sustains Syjuco's
claim for P216,000.
As the same question has been resolved in Ilusorio vs. Busuego,
G.R. No. L-822, September 30, 1949 1, Roo vs. Gomez, May 31,
19492, 46 Off. Gaz., Supp. to No. 11, p. 339, and Gomez vs.
Tabia, August 5, 19493, 47 Off. Gaz., 644, in which I dissented, I
have to disagree with the majority in the case at bar.
On the question whether a debtor can pay an indebtedness
before the date of maturity provided corresponding interest is
paid, I said the following in Ilusorio vs. Busuego:

In other words, I hold that the mortgagor has the right to

pay the indebtedness at any time within three years
provided that, as in this case, he pays the interest for the
whole term of the mortgage. In the ordinary course of
things, a loan is granted in consideration of interest, and if
by the early payment of the obligation, the creditor would
not lose any part of the stipulated interest, both
paragraphs 3 and 4 would practically be enforced. It
cannot be alleged that the creditor herein, in addition to
interest, wanted to have his money in the safekeeping of
the debtor because the contract is one of the loan and not
of deposit. It is to be remembered, moreover, that the
debt was being paid in the same currency loaned
(Japanese money). The effect of inflation is one of the
risks naturally incident to the money-lending business,
and the lender should protect himself against it by plain
covenants.
On the matter of requiring a loan obtained in Japanese war notes
to be paid after the liberation in equivalent Philippine currency, I
am hereinbelow reproducing at length what I stated in Roo vs,
Gomez which should have greater application and force, because
while in the Roo case the amount of the loan is only P4,000, in
the case at bar the debtor is being ordered to pay the large sum
of P216,000:
The principal defense set up by Roo in that the note is
contrary to law, morals or public order. This defense was
flatly overruled in the court of origin, seconded by the
Court of Appeals. The judgment of the latter court is now
before us upon appeal by certiorari of Cristobal Roo.
The situation in which a borrower of P4,000 in Japanese
war notes is made to pay the same amount in currency of
the present Philippine Republic. In other words, the
borrower of P4,000 during the latter part of the Japanese
Military occupation which, in ordinary practical terms,
could hardly purchase a cavan of rice, is now compelled

to pay P4,000 in actual Philippine currency which, in the

same ordinary practical terms, may be held equivalent to
at least 100 cavanes of rice. Said borrower is compelled
to do so, merely because in his promissory note he
agreed to pay after one year in pesos of the Philippine
Currency, and expressly waived any postwar arraignment
devaluating the amount borrowed in October, 1944.
The Court of Appeals held that the commitment of
Cristobal Roo settle his indebtedness in the legal tender
at the time of payment is not against the law, morals or
public order. We readily acquiesce in the proposition that
the contract is not contrary to law or public order, for we
are aware of no statute or public policy which prohibits a
person from bringing about or causing his own financial
reverses. But we are of the opinion that, if enforced to the
letter, it is against morals. If the contract was entered into
in times of peace, its obligations should have the force of
law between the parties and must be performed in
accordance with their stipulations (Art. 1091, Civil Code).
But when as in the case at bar, the borrower had to obtain
a loan during war time, when living conditions were
abnormal and oppressive, everything was uncertain, and
everybody was fighting for his survival, our conscience
and common sense demand that his acts be judged by
compatible standards.
The Court of Appeals found that everybody was aware of
the developments of the war outside of official
propaganda and that, in so far as knowledge of war
events is concerned, Roo was on more or less on an
equal footing with Gomez. This means that all knew the
bombings by the american air forces of various parts of
the islands in September, 1944, and of the decisive
defeats of the Axis powers in Europe, and that the mighty
forces of the Allies would soon, as in fact they did,
concentrate on and crush Japan, with the result that the
Japanese war notes would accordingly become

worthless. It may of course be opposed that Roo

knowingly bound himself to his pact. But this is true
merely in theory. Although, as found also by the Court of
Appeals, Roo was not entirely an ignorant man because
he is a mechanic and knows English, the fact
nevertheless remains that the lender, Jose L. Gomez,
was a lawyer, and the exaggerated way the promissory
word is worded plainly shows that the latter must have
thoroughly studied the transaction with Roo imposed the
conditions evidenced therein to his one-sided advantage.
It is needless to say that borrowers are always at the
mercy of unscrupulous money lenders. "Neccesitous men
are not, truly speaking, free men; but, to answer a present
emergency, will submit to any terms that the crafty may
impose upon them." (Marquez et al. vs. Valencia, 44 Off.
Gaz., pp. 895, 897*, quoting Villa vs. Santiago, 38 Phil.,
157, 164). We cannot believe, as intimated in the
testimony of Sinforosa A. de Gomez (wife of Jose L.
Gomez), that Roo informed them that he would use the
money to purchase a jitney, for the simple reason that, in
view of the inflated value of the Japanese war notes on
October, 1944, the amount of P4,000 could not possibly
purchase a jitney. At any rate, even accepting the
conjecture that said amount was invested by Roo in his
business, the circumstance still makes him a necessitous
man that had to submit to the terms of his lender. That a
contract like the one in question is shocking to the
conscience and therefore immoral becomes patent when
we resort to the example of a borrower of P2,000 just
before the liberation, when a kilo of sugar already cost
P2,000, being compelled to pay the same in Philippine
currency now when a kilo of sugar hardly costs P0.50.
Where is the conscience of anyone who will collect
P2,000 for a loan of virtually fifty centavos?
The Court of Appeals argued that the parties took equal
risks, since it was impossible to predict the exact time at
which the Philippines would be liberated and that,

supposing that the liberation had been delayed for more

than one year, Gomez might have been the loser and
Roo the winner, for the Japanese currency might have
further diminished in value. To this we would answer that
Gomez would then be paid in the same currency that was
borrowed and during the same war time when the loan
was extended. This would not be unusual, as the parties
are still under the very environments that surrounded the
execution of the contract.
I may add the following observations contained in my dissenting
opinion in Gomez vs, Tabia:
The majority also hold that the contract here in question is
aleatory. This is open to doubt. Aleatory contracts, or
those depending on chance, are covered by Title XII,
Book IV, of the Civil Code. It is to be noted that, under
article 1790, an aleatory contract involves the occurrence
of an event which is uncertain or will happen at an
indeterminate time. Moreover, the contracts contemplated
by the Code as being aleatory, are grouped under
insurance, contracts, gambling and betting, and life
annuities. It follows that the contract now under
consideration, which is one of loan does not fall under any
of those groups of aleatory contracts. At any rate, the
contract of loan herein involved is clearly not dependent
upon any uncertain event. The loan was granted on a
definite date and has to be paid on a definite date. Both
dates are certain. The payment of the loan has to be
effected regardless of the result of the war.
As the contract in question contemplated that the
payment is to be made in the same currency that was
loaned, and the parties are presumed never to have
intended that said payment would be made in what has
become valueless money, justice demands that the
indebtedness be paid in actual Philippine currency at an
equivalent amount determined in the Ballantyne schedule,

in the absence of evidence as to such value. The

exceptions mentioned in the Ballantyne schedule refers to
contracts in which the obligation is payable by something
other than legal tender. Indeed, the majority in Hilado vs.
De la Costa et al.,** G.R. No. L-150, decided on April 30,
1949, held that "what the debtor should pay is the value of
the Japanese war notes in relation the peso of Philippine
currency obtaining on the date when at the place where
the obligation was incurred, unless the parties had
agreed otherwise." This underscored clause undoubtedly
contemplates an agreement to pay in a consideration
other than legal tender of the Philippines, such as gold
dollars, pounds sterling, Spanish pesetas, or the like. It
cannot be otherwise, since if the intention is merely to pay
in legal tenders, no express stipulation is necessary,
because under section 1612 of the Revised
Administrative Code, the Philippine currency is the legal
tender for all debts.
In reiteration of my stand in the case of Roo vs.
Gomez, supra, I wish to emphasize that to require the
herein respondent to pay the sum of P5,000 actual
Philippine currency, in return for an indebtedness
obtained in Japanese military notes equivalent in actual
Philippine currency according to the Ballantyne schedule,
to only P790.26 as found by the Court of Appeals, is
unconscionable.
In my considered opinion, the appealed judgment should at most
be affirmed.
Pablo, J., concurs:

PADILLA, J., dissenting:

I dissent. A loan of a sum of money is usually made for the

purpose of earning interest. The creditor should not be allowed to
exact and impose unfair terms and conditions, such as that of
barring the debtor from paying the principal of the loan before the
time agreed upon. By the payment of the principal of the loan
together with the stipulated interests accrued and to accrue up to
the time agreed upon for the payment of the principal, the
purpose or aim of the loan is attained all to the advantage and
benefit of the creditor. The stipulated sum to be paid by the debtor
as penalty or liquidated damages equal to the principal of the loan
if payment thereof be made before the time agreed upon, even if
the debtor pays at the same time the stipulated interests accrued
and to accrue up to the time agreed upon for the payment of the
principal, is contra bonos mores, against public policy, and should
be disregarded and deemed as not written in the contract.
A loan of P200,000 in Japanese war notes was made on 5 May
1944, payable within one year from 5 May 1948. An additional
loan of P16,000 in Japanese war notes was made on 31 July
1944, payable within the same period of time as the previous one.
On different occasions in October 1944, the debtor tendered the
sum of P254,880 in full payment of the principal of the loan and
the stipulated interests up to 5 May 1948, a tender refused by the
creditor. In view of this refusal, the debtor deposited the sum and
filed a complaint in the competent court to compel the creditor to
accept the sum thus tendered and deposited.
To compel the debtor after the moratorium shall have been
removed to pay in the present currency the principal of the loan
made in Japanese war notes which at the time of the loan had
very little value or purchasing power, and the stipulated interests
up to the date of payment thereof, is so shocking to the
conscience of a fair-minded person that it will constitute a blot on
the administration of justice in this Republic. To that I cannot give
my assent.
The requirement that previous notice of consignation be made to
the creditor was practically complied with by the deposit in court

of the sum of money tendered and the filing of the complaint by

the debtor against the creditor to compel the latter to accept the
payment of the sum of money thus tendered and deposited. The
notice of consignation is superflous where a complaint is filed and
the sum of money tendered for the payment of the principal of the
loan and stipulated interests is deposited in court, because to
avoid litigation the creditor or any party interested in the fulfillment
of the obligation may still accept the payment of the sum of
money deposited after he receives the summons. It does not
appear in the case that any party other than the creditor was
interested in the fulfillment of the obligation at the time the
consignation was made.
The cross-claim of the creditor should have been dismissed. The
consignation made by the debtor should have been upheld, or if
the provisions as to consignation were not adhered to or complied
with, then the creditor should be entitled at most to the sum
awarded by the trial court.
EXCERPTS FROM THE MINUTES OF MARCH 27, 1952
xxx

xxx

xxx

This concerns the motions for reconsideration filed both

by plaintiff and defendant in G.R. No. L-3316, Jose Ponce
de Leon vs. Santiago Syjuco, Inc.
Plaintiff predicates his motion for reconsideration on the
following grounds: (1) the difference of P192,870 between
the value of the promissory notes in litigation calculated
on the basis of the Ballantyne schedule and their value on
the basis of one Japanese military peso constitutes an
unjust enrichment (enriquecimiento torticero) unsupported
by any true consideration, and cannot be sanctioned by
this Court; (2) the limitation on the right to pay the loans
as stipulated in the promissory notes was contrary to law
and public order at the time the notes were executed; and

(3) the aforesaid difference of P192,870 constitutes

defendant's winnings in gambling, and cannot be
recovered.
Defendant seeks the reconsideration of the decision on
the following grounds: (1) the moratorium law has been
erroneously applied in this case; (2) the decision has
erroneously condoned the interest stipulated from August
6, 1944, to May 5, 1949; and (3) the Court has
erroneously absolved the plaintiff from his obligation
under the penal clause.
We will first take up the grounds of the motion for
reconsideration of the plaintiff.
Claiming that the real value of the loan made by
defendant to plaintiff in 1944, measured in terms of
genuine currency, is P34,130, including interests, and if
plaintiff is made to pay to defendant P216,000, with
interests, in genuine currency, the difference between the
actual value of the loan received by plaintiff and the value
set in the decision is P192,870, which represents the
value actually transferred from plaintiff to defendant. It is
claimed that this is an unjust enrichment which cannot be
sanctioned in equity.
The fundamental doctrine of unjust enrichment is the
transfer of value without just cause or consideration. The
transfer is usually made in accordance with law, but the
determining factor is the lack of cause or consideration.
The elements of this doctrine are: enrichment on the part
of the defendant; impoverishment on the part of the
plaintiff; and lack of cause. The main objective is to
prevent that one may enrich himself at the expense of
another. If this situation is obtained, equity steps in to
protect the one prejudiced.

This doctrine is sound. It is based upon equity, and

though not expressly recognized on our old Civil Code, it
is reflected in some of its provisions. Example: payments
received though not owing, indebiti solutio, wherein an
obligation to restore the thing received arises (Art. 1895).
This relation is considered by treatisers as a kind
of quasi-contract. (Castan, Derecho Civil Espaol, tomo
3, pag. 424).
But we doubt the application of this doctrine to the
present case, if we view it in the light of its fundamental
purpose, which is lack of cause or consideration. Here we
find that the money given to the plaintiff in May and July,
1944, was invested by him not only to pay his pre-war
obligations but also those contracted by him during the
Japanese occupation. According to his own admission,
these accounts reached a total of P105,000. The rest he
used to promote his guerilla activities. He, therefore,
made use of the money in the light of his most pressing
needs and made use of it for his personal enrichment.
This being so, it is fallacious now to claim that to make
plaintiff return the money he made use of to advantage in
the manner he stipulated constitutes an unjust enrichment
on the part of the giver. Nor is it fair and logical to
conclude, after plaintiff had made use of the money to suit
his purpose, that the transaction should be voided simply
because the advantage has gone the other way. This is a
venture in which both have speculated. It may work one
way of the other and as such both must abide by it.
The claim that the speculation which limits the right to pay
the loans within a certain period of time was contrary to
the law and public order at the time the notes were
executed is untenable. We find nothing in the law or in the
orders issued by the military authorities in force at the
time the notes in controversy were executed that could
prevent anyone from stipulating as to the time within
which certain obligation is to be paid. The military orders

regarding the use and circulation of military notes do not

contain any prohibition of this nature. They merely contain
an injunction that those notes should be accepted as legal
tender in making payments of all kinds, under pain of
severe punishment for those who may infringe it. The
stipulation in question does run counter to this injunction
for it merely limits the time of payment of the obligation.
We find nothing in this stipulation which may be said to be
contrary to the law or public order prevailing at the time.
Whether the stipulation in question involves a gambling
transaction or not, and as a consequence, the winnings
resulting therefrom should be prescribed, as the law
requires, is a closed matter. In Roo vs. Gomez, May 31,
1949, 46 Off. Gaz., Supp. (Nov. 1950), 333 this Court
said: "Our legislation has a word for these contracts:
aleatory. The civil code recognizes their validity (See
article 1790 and Manresa's comment thereon) on a par
with insurance policies and annuities". And in Gomez vs,
Tabia, Aug. 5, 1949, 47 Off. Gaz., (Feb. 1951) 641, this
Court also said: "This kind of agreement is permitted by
law. We find nothing immoral or unlawful in it. It may be
viewed in the same light as insurance contracts, or sales
of grain, sugar or other commodities to be delivered at
some future date, whose price is subject to fluctuation,
and may, at the time of delivery, be way above or below
the sales price." It should be stated here with a sense of
finality that contracts of this nature are valid and are not
contrary to law, moral, or public order.
Let us come to the motion for reconsideration of
defendant.
It is claimed that the Court has erroneously applied the
moratorium law because of the pretense that the plaintiff
has failed to invoke it in his favor in the lower court, and
that while it is true that plaintiff has invoked the
moratorium law he did so only in connection with his

obligation to pay the interests and damages, and not in

connection with the principal.
It should be noted that one of the errors assigned by
plaintiff in his brief that the lower court erred in finding that
he did not invoke the benefits of said moratorium law in
his pleadings, and the defendant, in meeting this
imputation, never claimed that plaintiff did not invoke the
moratorium law, but merely limited his argument to the
contention that plaintiff cannot invoke it because he failed
to prove that he is a war victim, and that said law is
unconstitutional. It is only now that the defendant makes
the claim that plaintiff limited his objection to interests and
damages. Surprisingly, defendants makes this claim for
the first time in its motion for reconsideration.
We are of the opinion that the defense of moratorium set
up by the plaintiff in the lower court applies both to the
principal obligation as well as to the interests and
damages, as it was so understood by the defendant. And
this being so, defendant is now estopped from claiming
otherwise, especially if it is considered that, to apply
moratorium to interests without at the same time applying
it to the principal is incongrous. This claim, therefore, has
no merit.
There is merit in the claim that the interests the plaintiff
should pay on the obligation should be counted from the
date plaintiff has ceased to pay said interests, or from
August 6, 1944. This should be corrected.
We find no reason to disturb the finding of this Court in so
far as the penal clause is concerned. All things
considered, this finding should be maintained.
Wherefore, the motion for reconsideration filed by the
plaintiff is denied.

The motion for reconsideration filed by the defendant is

also denied. However, the dispositive part of the decision
rendered in this case should be modified as follows:
In view of the foregoing, the decision appealed from
should be modified in the sense of ordering the plaintiff to
pay the defendant Syjuco the sum of P216,000, Philippine
currency, value of two promissory notes, with interest
thereon at the rate of 6 per cent per annum from August
6, 1944, up to May 5, 1949, and with similar interest from
May 6, 1949 until said amount is paid in full. It is further
ordered that should the amount of this judgment
principal and interests, be not paid within ninety (90)
days from the date this judgment becomes final, the
properties mortgaged should be sold at public auction,
and the proceeds applied to the payment of this judgment
in accordance with law, with costs against the plaintiff.
However, this judgment shall be held in abeyance, or no
order for the execution thereof shall be issued, until after
the moratorium orders shall have been lifted.
The Chief Justice and Justices Pablo and Padilla dissented and
voted also to let the case be set for hearing.