G.R. No.

109125 December 2, 1994

ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners,
vs.
THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENT CORPORATION, respondents.
Antonio M. Albano for petitioners.
Umali, Soriano & Associates for private respondent.

WHEREFORE, judgment is hereby rendered in favor of the defendants and

against the plaintiffs summarily dismissing the complaint subject to the
aforementioned condition that if the defendants subsequently decide to offer
their property for sale for a purchase price of Eleven Million Pesos or lower,
then the plaintiffs has the option to purchase the property or of first refusal,
otherwise, defendants need not offer the property to the plaintiffs if the
purchase price is higher than Eleven Million Pesos.
SO ORDERED.
Aggrieved by the decision, plaintiffs appealed to this Court in
CA-G.R. CV No. 21123. In a decision promulgated on September 21, 1990 (penned by Justice
Segundino G. Chua and concurred in by Justices Vicente V. Mendoza and Fernando A.
Santiago), this Court affirmed with modification the lower court's judgment, holding:

VITUG, J.:
Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04 December 1991, in CA-G.R. SP
No. 26345 setting aside and declaring without force and effect the orders of execution of the trial court, dated 30
August 1991 and 27 September 1991, in Civil Case No. 87-41058.
The antecedents are recited in good detail by the appellate court thusly:
On July 29, 1987 a Second Amended Complaint for Specific Performance was filed by Ang Yu
Asuncion and Keh Tiong, et al., against Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan
before the Regional Trial Court, Branch 31, Manila in Civil Case No. 87-41058, alleging, among
others, that plaintiffs are tenants or lessees of residential and commercial spaces owned by
defendants described as Nos. 630-638 Ongpin Street, Binondo, Manila; that they have occupied
said spaces since 1935 and have been religiously paying the rental and complying with all the
conditions of the lease contract; that on several occasions before October 9, 1986, defendants
informed plaintiffs that they are offering to sell the premises and are giving them priority to
acquire the same; that during the negotiations, Bobby Cu Unjieng offered a price of P6-million
while plaintiffs made a counter offer of P5-million; that plaintiffs thereafter asked the defendants
to put their offer in writing to which request defendants acceded; that in reply to defendant's
letter, plaintiffs wrote them on October 24, 1986 asking that they specify the terms and
conditions of the offer to sell; that when plaintiffs did not receive any reply, they sent another
letter dated January 28, 1987 with the same request; that since defendants failed to specify the
terms and conditions of the offer to sell and because of information received that defendants
were about to sell the property, plaintiffs were compelled to file the complaint to compel
defendants to sell the property to them.
Defendants filed their answer denying the material allegations of the complaint and interposing a
special defense of lack of cause of action.
After the issues were joined, defendants filed a motion for summary judgment which was
granted by the lower court. The trial court found that defendants' offer to sell was never accepted
by the plaintiffs for the reason that the parties did not agree upon the terms and conditions of the
proposed sale, hence, there was no contract of sale at all. Nonetheless, the lower court ruled
that should the defendants subsequently offer their property for sale at a price of P11-million or
below, plaintiffs will have the right of first refusal. Thus the dispositive portion of the decision
states:

In resume, there was no meeting of the minds between the parties

concerning the sale of the property. Absent such requirement, the claim for
specific performance will not lie. Appellants' demand for actual, moral and
exemplary damages will likewise fail as there exists no justifiable ground for
its award. Summary judgment for defendants was properly granted. Courts
may render summary judgment when there is no genuine issue as to any
material fact and the moving party is entitled to a judgment as a matter of
law (Garcia vs. Court of Appeals, 176 SCRA 815). All requisites obtaining,
the decision of the court a quo is legally justifiable.
WHEREFORE, finding the appeal unmeritorious, the judgment appealed
from is hereby AFFIRMED, but subject to the following modification: The
court a quo in the aforestated decision gave the plaintiffs-appellants the
right of first refusal only if the property is sold for a purchase price of Eleven
Million pesos or lower; however, considering the mercurial and uncertain
forces in our market economy today. We find no reason not to grant the
same right of first refusal to herein appellants in the event that the subject
property is sold for a price in excess of Eleven Million pesos. No
pronouncement as to costs.
SO ORDERED.
The decision of this Court was brought to the Supreme Court by petition for review on certiorari.
The Supreme Court denied the appeal on May 6, 1991 "for insufficiency in form and substances"
(Annex H, Petition).
On November 15, 1990, while CA-G.R. CV No. 21123 was pending consideration by this Court,
the Cu Unjieng spouses executed a Deed of Sale (Annex D, Petition) transferring the property in
question to herein petitioner Buen Realty and Development Corporation, subject to the following
terms and conditions:
1. That for and in consideration of the sum of FIFTEEN MILLION PESOS
(P15,000,000.00), receipt of which in full is hereby acknowledged, the

VENDORS hereby sells, transfers and conveys for and in favor of the
VENDEE, his heirs, executors, administrators or assigns, the abovedescribed property with all the improvements found therein including all the
rights and interest in the said property free from all liens and encumbrances
of whatever nature, except the pending ejectment proceeding;
2. That the VENDEE shall pay the Documentary Stamp Tax, registration
fees for the transfer of title in his favor and other expenses incidental to the
sale of above-described property including capital gains tax and accrued
real estate taxes.

P11 Million or lower, and considering the mercurial and uncertain forces in
our market economy today, the same right of first refusal to herein
plaintiffs/appellants in the event that the subject property is sold for a price
in excess of Eleven Million pesos or more.
WHEREFORE, defendants are hereby ordered to execute the necessary
Deed of Sale of the property in litigation in favor of plaintiffs Ang Yu
Asuncion, Keh Tiong and Arthur Go for the consideration of P15 Million
pesos in recognition of plaintiffs' right of first refusal and that a new Transfer
Certificate of Title be issued in favor of the buyer.

As a consequence of the sale, TCT No. 105254/T-881 in the name of the Cu Unjieng spouses
was cancelled and, in lieu thereof, TCT No. 195816 was issued in the name of petitioner on
December 3, 1990.

All previous transactions involving the same property notwithstanding the

issuance of another title to Buen Realty Corporation, is hereby set aside as
having been executed in bad faith.

On July 1, 1991, petitioner as the new owner of the subject property wrote a letter to the lessees
demanding that the latter vacate the premises.

SO ORDERED.

On July 16, 1991, the lessees wrote a reply to petitioner stating that petitioner brought the
property subject to the notice of lis pendens regarding Civil Case No. 87-41058 annotated on
TCT No. 105254/T-881 in the name of the Cu Unjiengs.
The lessees filed a Motion for Execution dated August 27, 1991 of the Decision in Civil Case No.
87-41058 as modified by the Court of Appeals in CA-G.R. CV No. 21123.
On August 30, 1991, respondent Judge issued an order (Annex A, Petition) quoted as follows:
Presented before the Court is a Motion for Execution filed by plaintiff
represented by Atty. Antonio Albano. Both defendants Bobby Cu Unjieng
and Rose Cu Unjieng represented by Atty. Vicente Sison and Atty. Anacleto
Magno respectively were duly notified in today's consideration of the motion
as evidenced by the rubber stamp and signatures upon the copy of the
Motion for Execution.
The gist of the motion is that the Decision of the Court dated September 21,
1990 as modified by the Court of Appeals in its decision in CA G.R. CV21123, and elevated to the Supreme Court upon the petition for review and
that the same was denied by the highest tribunal in its resolution dated May
6, 1991 in G.R. No.
L-97276, had now become final and executory. As a consequence, there
was an Entry of Judgment by the Supreme Court as of June 6, 1991, stating
that the aforesaid modified decision had already become final and
executory.
It is the observation of the Court that this property in dispute was the subject
of the Notice of Lis Pendens and that the modified decision of this Court
promulgated by the Court of Appeals which had become final to the effect
that should the defendants decide to offer the property for sale for a price of

On September 22, 1991 respondent Judge issued another order, the dispositive portion of which
reads:
WHEREFORE, let there be Writ of Execution issue in the above-entitled
case directing the Deputy Sheriff Ramon Enriquez of this Court to
implement said Writ of Execution ordering the defendants among others to
comply with the aforesaid Order of this Court within a period of one (1) week
from receipt of this Order and for defendants to execute the necessary
Deed of Sale of the property in litigation in favor of the plaintiffs Ang Yu
Asuncion, Keh Tiong and Arthur Go for the consideration of P15,000,000.00
and ordering the Register of Deeds of the City of Manila, to cancel and set
aside the title already issued in favor of Buen Realty Corporation which was
previously executed between the latter and defendants and to register the
new title in favor of the aforesaid plaintiffs Ang Yu Asuncion, Keh Tiong and
Arthur Go.
SO ORDERED.
On the same day, September 27, 1991 the corresponding writ of execution (Annex C, Petition)
was issued. 1
On 04 December 1991, the appellate court, on appeal to it by private respondent, set aside and declared without
force and effect the above questioned orders of the court a quo.
In this petition for review on certiorari, petitioners contend that Buen Realty can be held bound by the writ of
execution by virtue of the notice of lis pendens, carried over on TCT No. 195816 issued in the name of Buen Realty,
at the time of the latter's purchase of the property on 15 November 1991 from the Cu Unjiengs.
We affirm the decision of the appellate court.

A not too recent development in real estate transactions is the adoption of such arrangements as the right of first
refusal, a purchase option and a contract to sell. For ready reference, we might point out some fundamental precepts
that may find some relevance to this discussion.
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation is constituted
upon the concurrence of the essential elements thereof, viz: (a) The vinculum juris or juridical tie which is the efficient
cause established by the various sources of obligations (law, contracts, quasi-contracts, delicts and quasi-delicts);
(b) the object which is the prestation or conduct; required to be observed (to give, to do or not to do); and (c)
the subject-persons who, viewed from the demandability of the obligation, are the active (obligee) and the passive
(obligor) subjects.
Among the sources of an obligation is a contract (Art. 1157, Civil Code), which is a meeting of minds between two
persons whereby one binds himself, with respect to the other, to give something or to render some service (Art.
1305, Civil Code). A contract undergoes various stages that include its negotiation or preparation, its perfection and,
finally, its consummation. Negotiation covers the period from the time the prospective contracting parties indicate
interest in the contract to the time the contract is concluded (perfected). The perfection of the contract takes place
upon the concurrence of the essential elements thereof. A contract which is consensual as to perfection is so
established upon a mere meeting of minds, i.e., the concurrence of offer and acceptance, on the object and on the
cause thereof. A contract which requires, in addition to the above, the delivery of the object of the agreement, as in a
pledge or commodatum, is commonly referred to as a real contract. In a solemn contract, compliance with certain
formalities prescribed by law, such as in a donation of real property, is essential in order to make the act valid, the
prescribed form being thereby an essential element thereof. The stage of consummation begins when the parties
perform their respective undertakings under the contract culminating in the extinguishment thereof.
Until the contract is perfected, it cannot, as an independent source of obligation, serve as a binding juridical relation.
In sales, particularly, to which the topic for discussion about the case at bench belongs, the contract is perfected
when a person, called the seller, obligates himself, for a price certain, to deliver and to transfer ownership of a thing
or right to another, called the buyer, over which the latter agrees. Article 1458 of the Civil Code provides:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in
money or its equivalent.

An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with a
valuable consideration distinct and separate from the price, is what may properly be termed a perfected contract
of option. This contract is legally binding, and in sales, it conforms with the second paragraph of Article 1479 of the
Civil Code, viz:
Art. 1479. . . .
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding
upon the promissor if the promise is supported by a consideration distinct from the price.
(1451a) 6
Observe, however, that the option is not the contract of sale itself. 7 The optionee has the right, but not the obligation,
to buy. Once the option is exercised timely, i.e., the offer is accepted before a breach of the option, a bilateral
promise to sell and to buy ensues and both parties are then reciprocally bound to comply with their respective
undertakings. 8
Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is merely an
offer. Public advertisements or solicitations and the like are ordinarily construed as mere invitations to make offers or
only as proposals. These relations, until a contract is perfected, are not considered binding commitments. Thus, at
any time prior to the perfection of the contract, either negotiating party may stop the negotiation. The offer, at this
stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and
not necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given to
the offeree within which to accept the offer, the following rules generally govern:
(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to
withdraw the offer before its acceptance, or, if an acceptance has been made, before the offeror's coming to know of
such fact, by communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs.
Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral promise to sell under Art. 1479, modifying the
previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank
of Paraaque, Inc., vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw,
however, must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim under
Article 19 of the Civil Code which ordains that "every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe honesty and good faith."

A contract of sale may be absolute or conditional.

When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the ownership of the
thing sold is retained until the fulfillment of a positive suspensive condition (normally, the full payment of the purchase
price), the breach of the condition will prevent the obligation to convey title from acquiring an obligatory
force. 2 In Dignos vs. Court of Appeals (158 SCRA 375), we have said that, although denominated a "Deed of
Conditional Sale," a sale is still absolute where the contract is devoid of any proviso that title is reserved or the right
to unilaterally rescind is stipulated, e.g., until or unless the price is paid. Ownership will then be transferred to the
buyer upon actual or constructive delivery (e.g., by the execution of a public document) of the property sold. Where
the condition is imposed upon the perfection of the contract itself, the failure of the condition would prevent such
perfection. 3 If the condition is imposed on the obligation of a party which is not fulfilled, the other party may either
waive the condition or refuse to proceed with the sale (Art. 1545, Civil Code). 4
An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is fixed,
can be obligatory on the parties, and compliance therewith may accordingly be exacted. 5

(2) If the period has a separate consideration, a contract of "option" is deemed perfected, and it would be a breach of
that contract to withdraw the offer during the agreed period. The option, however, is an independent contract by itself,
and it is to be distinguished from the projected main agreement (subject matter of the option) which is obviously yet
to be concluded. If, in fact, the optioner-offeror withdraws the offer before its acceptance(exercise of the option) by
the optionee-offeree, the latter may not sue for specific performance on the proposed contract ("object" of the option)
since it has failed to reach its own stage of perfection. The optioner-offeror, however, renders himself liable for
damages for breach of the option. In these cases, care should be taken of the real nature of the consideration given,
for if, in fact, it has been intended to be part of the consideration for the main contract with a right of withdrawal on
the part of the optionee, the main contract could be deemed perfected; a similar instance would be an "earnest
money" in a contract of sale that can evidence its perfection (Art. 1482, Civil Code).
In the law on sales, the so-called "right of first refusal" is an innovative juridical relation. Needless to point out, it
cannot be deemed a perfected contract of sale under Article 1458 of the Civil Code. Neither can the right of first
refusal, understood in its normal concept, per se be brought within the purview of an option under the second
paragraph of Article 1479, aforequoted, or possibly of an offer under Article 1319 9 of the same Code. An option or an

offer would require, among other things, 10 a clear certainty on both the object and the cause or consideration of the
envisioned contract. In a right of first refusal, while the object might be made determinate, the exercise of the right,
however, would be dependent not only on the grantor's eventual intention to enter into a binding juridical relation with
another but also on terms, including the price, that obviously are yet to be later firmed up. Prior thereto, it can at best
be so described as merely belonging to a class of preparatory juridical relations governed not by contracts (since the
essential elements to establish the vinculum juris would still be indefinite and inconclusive) but by, among other laws
of general application, the pertinent scattered provisions of the Civil Code on human conduct.
Even on the premise that such right of first refusal has been decreed under a final judgment, like here, its breach
cannot justify correspondingly an issuance of a writ of execution under a judgment that merely recognizes its
existence, nor would it sanction an action for specific performance without thereby negating the indispensable
element of consensuality in the perfection of contracts. 11 It is not to say, however, that the right of first refusal would
be inconsequential for, such as already intimated above, an unjustified disregard thereof, given, for instance, the
circumstances expressed in Article 19 12 of the Civil Code, can warrant a recovery for damages.
The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded a "right of first refusal" in
favor of petitioners. The consequence of such a declaration entails no more than what has heretofore been said. In
fine, if, as it is here so conveyed to us, petitioners are aggrieved by the failure of private respondents to honor the
right of first refusal, the remedy is not a writ of execution on the judgment, since there is none to execute, but an
action for damages in a proper forum for the purpose.
Furthermore, whether private respondent Buen Realty Development Corporation, the alleged purchaser of the
property, has acted in good faith or bad faith and whether or not it should, in any case, be considered bound to
respect the registration of the lis pendens in Civil Case No. 87-41058 are matters that must be independently
addressed in appropriate proceedings. Buen Realty, not having been impleaded in Civil Case No. 87-41058, cannot
be held subject to the writ of execution issued by respondent Judge, let alone ousted from the ownership and
possession of the property, without first being duly afforded its day in court.
We are also unable to agree with petitioners that the Court of Appeals has erred in holding that the writ of execution
varies the terms of the judgment in Civil Case No. 87-41058, later affirmed in CA-G.R. CV-21123. The Court of
Appeals, in this regard, has observed:
Finally, the questioned writ of execution is in variance with the decision of the trial court as
modified by this Court. As already stated, there was nothing in said decision 13 that decreed the
execution of a deed of sale between the Cu Unjiengs and respondent lessees, or the fixing of
the price of the sale, or the cancellation of title in the name of petitioner (Limpin vs. IAC, 147
SCRA 516; Pamantasan ng Lungsod ng Maynila vs. IAC, 143 SCRA 311; De Guzman vs. CA,
137 SCRA 730; Pastor vs. CA, 122 SCRA 885).
It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not have decreed at the time the
execution of any deed of sale between the Cu Unjiengs and petitioners.
WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside the questioned Orders, dated 30 August
1991 and 27 September 1991, of the court a quo. Costs against petitioners.
SO ORDERED.

Petition against herein petitioners Makati Stock Exchange, Inc. (MKSE) and MKSE directors, Ma. Vivian Yuchengco,
Adolfo M. Duarte, Myron C. Papa, Norberto C. Nazareno, George Uy-Tioco, Antonio A, Lopa, Ramon B. Arnaiz, Luis
J.L. Virata, and Antonio Garcia, Jr. Respondent, in said Petition, sought: (1) the nullification of the Resolution dated 3
June 1993 of the MKSE Board of Directors, which allegedly deprived him of his right to participate equally in the
allocation of Initial Public Offerings (IPO) of corporations registered with MKSE; (2) the delivery of the IPO shares he
was allegedly deprived of, for which he would pay IPO prices; and (3) the payment of P2 million as moral
damages, P1 million as exemplary damages, and P500,000.00 as attorneys fees and litigation expenses.
On 14 February 1994, the SICD issued an Order granting respondents prayer for the issuance of a Temporary
Restraining Order to enjoin petitioners from implementing or enforcing the 3 June 1993 Resolution of the MKSE
Board of Directors.
The SICD subsequently issued another Order on 10 March 1994 granting respondents application for a Writ of
Preliminary Injunction, to continuously enjoin, during the pendency of SEC Case No. 02-94-4678, the implementation
or enforcement of the MKSE Board Resolution in question. Petitioners assailed this SICD Order dated 10 March
1994 in a Petition for Certiorari filed with the SEC en banc, docketed as SEC-EB No. 393.
On 11 March 1994, petitioners filed a Motion to Dismiss respondents Petition in SEC Case No. 02-94-4678, based
on the following grounds: (1) the Petition became moot due to the cancellation of the license of MKSE; (2) the SICD
had no jurisdiction over the Petition; and (3) the Petition failed to state a cause of action.
The SICD denied petitioners Motion to Dismiss in an Order dated 4 May 1994. Petitioners again challenged the 4
May 1994 Order of SICD before the SEC en banc through another Petition for Certiorari, docketed as SEC-EB No.
403.

G.R. No. 138814

In an Order dated 31 May 1995 in SEC-EB No. 393, the SEC en banc nullified the 10 March 1994 Order of SICD in
SEC Case No. 02-94-4678 granting a Writ of Preliminary Injunction in favor of respondent. Likewise, in an Order
dated 14 August 1995 in SEC-EB No. 403, the SEC en banc annulled the 4 May 1994 Order of SICD in SEC Case
No. 02-94-4678 denying petitioners Motion to Dismiss, and accordingly ordered the dismissal of respondents
Petition before the SICD.

April 16, 2009

MAKATI STOCK EXCHANGE, INC., MA. VIVIAN YUCHENGCO, ADOLFO M. DUARTE, MYRON C. PAPA,
NORBERTO C. NAZARENO, GEORGE UY-TIOCO, ANTONIO A. LOPA, RAMON B. ARNAIZ, LUIS J.L. VIRATA,
and ANTONIO GARCIA, JR. Petitioners,
vs.
MIGUEL V. CAMPOS, substituted by JULIA ORTIGAS VDA. DE CAMPOS, 1 Respondent.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 seeking the reversal of the Decision 2 dated 11 February
1997 and Resolution dated 18 May 1999 of the Court of Appeals in CA-G.R. SP No. 38455.
The facts of the case are as follows:
SEC Case No. 02-94-4678 was instituted on 10 February 1994 by respondent Miguel V. Campos, who filed with the
Securities, Investigation and Clearing Department (SICD) of the Securities and Exchange Commission (SEC), a

Respondent filed a Petition for Certiorari with the Court of Appeals assailing the Orders of the SEC en banc dated 31
May 1995 and 14 August 1995 in SEC-EB No. 393 and SEC-EB No. 403, respectively. Respondents Petition before
the appellate court was docketed as CA-G.R. SP No. 38455.
On 11 February 1997, the Court of Appeals promulgated its Decision in CA-G.R. SP No. 38455, granting
respondents Petition for Certiorari, thus:
WHEREFORE, the petition in so far as it prays for annulment of the Orders dated May 31, 1995 and August 14, 1995
in SEC-EB Case Nos. 393 and 403 is GRANTED. The said orders are hereby rendered null and void and set aside.
Petitioners filed a Motion for Reconsideration of the foregoing Decision but it was denied by the Court of Appeals in a
Resolution dated 18 May 1999.
Hence, the present Petition for Review raising the following arguments:
I.

THE SEC EN BANC DID NOT COMMIT GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS
OF JURISDICTION WHEN IT DISMISSED THE PETITION FILED BY RESPONDENT BECAUSE ON ITS FACE, IT
FAILED TO STATE A CAUSE OF ACTION.

Given the foregoing, the issue of whether respondents Petition in SEC Case No. 02-94-4678 sufficiently states a
cause of action may be alternatively stated as whether, hypothetically admitting to be true the allegations in
respondents Petition in SEC Case No. 02-94-4678, the SICD may render a valid judgment in accordance with the
prayer of said Petition.

II.
THE GRANT OF THE IPO ALLOCATIONS IN FAVOR OF RESPONDENT WAS A MERE ACCOMMODATION GIVEN
TO HIM BY THE BOARD OF [DIRECTORS] OF THE MAKATI STOCK EXCHANGE, INC.

A reading of the exact text of respondents Petition in SEC Case No. 02-94-4678 is, therefore, unavoidable. Pertinent
portions of the said Petition reads:
7. In recognition of petitioners invaluable services, the general membership of respondent corporation [MKSE]
passed a resolution sometime in 1989 amending its Articles of Incorporation, to include the following provision
therein:

III.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE SEC EN BANC COMMITTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT MADE AN EXTENDED INQUIRY
AND PROCEEDED TO MAKE A DETERMINATION AS TO THE TRUTH OF RESPONDENTS ALLEGATIONS IN
HIS PETITION AND USED AS BASIS THE EVIDENCE ADDUCED DURING THE HEARING ON THE APPLICATION
FOR THE WRIT OF PRELIMINARY INJUNCTION TO DETERMINE THE EXISTENCE OR VALIDITY OF A STATED
CAUSE OF ACTION.
IV.

"ELEVENTH WHEREAS, Mr. Miguel Campos is the only surviving incorporator of the Makati Stock Exchange, Inc.
who has maintained his membership;
"WHEREAS, he has unselfishly served the Exchange in various capacities, as governor from 1977 to the present
and as President from 1972 to 1976 and again as President from 1988 to the present;
"WHEREAS, such dedicated service and leadership which has contributed to the advancement and well being not
only of the Exchange and its members but also to the Securities industry, needs to be recognized and appreciated;

IPO ALLOCATIONS GRANTED TO BROKERS ARE NOT TO BE BOUGHT BY THE BROKERS FOR THEMSELVES
BUT ARE TO BE DISTRIBUTED TO THE INVESTING PUBLIC. HENCE, RESPONDENTS CLAIM FOR DAMAGES
IS ILLUSORY AND HIS PETITION A NUISANCE SUIT.3
On 18 September 2001, counsel for respondent manifested to this Court that his client died on 7 May 2001. In a
Resolution dated 24 October 2001, the Court directed the substitution of respondent by his surviving spouse, Julia
Ortigas vda. de Campos.
Petitioners want this Court to affirm the dismissal by the SEC en banc of respondents Petition in SEC Case No. 0294-4678 for failure to state a cause of action. On the other hand, respondent insists on the sufficiency of his Petition
and seeks the continuation of the proceedings before the SICD.
4

A cause of action is the act or omission by which a party violates a right of another. A complaint states a cause of
action where it contains three essential elements of a cause of action, namely: (1) the legal right of the plaintiff, (2)
the correlative obligation of the defendant, and (3) the act or omission of the defendant in violation of said legal right.
If these elements are absent, the complaint becomes vulnerable to dismissal on the ground of failure to state a
cause of action.
If a defendant moves to dismiss the complaint on the ground of lack of cause of action, he is regarded as having
hypothetically admitted all the averments thereof. The test of sufficiency of the facts found in a complaint as
constituting a cause of action is whether or not admitting the facts alleged, the court can render a valid judgment
upon the same in accordance with the prayer thereof. The hypothetical admission extends to the relevant and
material facts well pleaded in the complaint and inferences fairly deducible therefrom. Hence, if the allegations in the
complaint furnish sufficient basis by which the complaint can be maintained, the same should not be dismissed
regardless of the defense that may be assessed by the defendant.5

"WHEREAS, as such, the Board of Governors in its meeting held on February 09, 1989 has correspondingly adopted
a resolution recognizing his valuable service to the Exchange, reward the same, and preserve for posterity such
recognition by proposing a resolution to the membership body which would make him as Chairman Emeritus for life
and install in the Exchange premises a commemorative bronze plaque in his honor;
"NOW, THEREFORE, for and in consideration of the above premises, the position of the "Chairman Emeritus" to be
occupied by Mr. Miguel Campos during his lifetime and irregardless of his continued membership in the Exchange
with the Privilege to attend all membership meetings as well as the meetings of the Board of Governors of the
Exchange, is hereby created."
8. Hence, to this day, petitioner is not only an active member of the respondent corporation, but its Chairman
Emeritus as well.
9. Correspondingly, at all times material to this petition, as an active member and Chairman Emeritus of respondent
corporation, petitioner has always enjoyed the right given to all the other members to participate equally in the Initial
Public Offerings (IPOs for brevity) of corporations.
10. IPOs are shares of corporations offered for sale to the public, prior to the listing in the trading floor of the
countrys two stock exchanges. Normally, Twenty Five Percent (25%) of these shares are divided equally between
the two stock exchanges which in turn divide these equally among their members, who pay therefor at the offering
price.

11. However, on June 3, 1993, during a meeting of the Board of Directors of respondent-corporation, individual
respondents passed a resolution to stop giving petitioner the IPOs he is entitled to, based on the ground that these
shares were allegedly benefiting Gerardo O. Lanuza, Jr., who these individual respondents wanted to get even with,
for having filed cases before the Securities and Exchange (SEC) for their disqualification as member of the Board of
Directors of respondent corporation.
12. Hence, from June 3, 1993 up to the present time, petitioner has been deprived of his right to subscribe to the
IPOs of corporations listing in the stock market at their offering prices.
13. The collective act of the individual respondents in depriving petitioner of his right to a share in the IPOs for the
aforementioned reason, is unjust, dishonest and done in bad faith, causing petitioner substantial financial damage. 6
There is no question that the Petition in SEC Case No. 02-94-4678 asserts a right in favor of respondent, particularly,
respondents alleged right to subscribe to the IPOs of corporations listed in the stock market at their offering prices;
and stipulates the correlative obligation of petitioners to respect respondents right, specifically, by continuing to allow
respondent to subscribe to the IPOs of corporations listed in the stock market at their offering prices.
However, the terms right and obligation in respondents Petition are not magic words that would automatically lead to
the conclusion that such Petition sufficiently states a cause of action. Right and obligation are legal terms with
specific legal meaning. A right is a claim or title to an interest in anything whatsoever that is enforceable by law.7An
obligation is defined in the Civil Code as a juridical necessity to give, to do or not to do.8 For every right enjoyed by
any person, there is a corresponding obligation on the part of another person to respect such right. Thus, Justice
J.B.L. Reyes offers9 the definition given by Arias Ramos as a more complete definition:
An obligation is a juridical relation whereby a person (called the creditor) may demand from another (called the
debtor) the observance of a determinative conduct (the giving, doing or not doing), and in case of breach, may
demand satisfaction from the assets of the latter.
The Civil Code enumerates the sources of obligations:
Art. 1157. Obligations arise from:
(1) Law;
(2) Contracts;

to the Office of the President of this Republic, but without stating the source of his purported right, cannot be said to
have sufficiently stated a cause of action. Also, a person claiming to be the owner of a parcel of land cannot merely
state that he has a right to the ownership thereof, but must likewise assert in the Complaint either a mode of
acquisition of ownership or at least a certificate of title in his name.
In the case at bar, although the Petition in SEC Case No. 02-94-4678 does allege respondents right to subscribe to
the IPOs of corporations listed in the stock market at their offering prices, and petitioners obligation to continue
respecting and observing such right, the Petition utterly failed to lay down the source or basis of respondents right
and/or petitioners obligation.
Respondent merely quoted in his Petition the MKSE Board Resolution, passed sometime in 1989, granting him the
position of Chairman Emeritus of MKSE for life. However, there is nothing in the said Petition from which the Court
can deduce that respondent, by virtue of his position as Chairman Emeritus of MKSE, was granted by law, contract,
or any other legal source, the right to subscribe to the IPOs of corporations listed in the stock market at their offering
prices.
A meticulous review of the Petition reveals that the allocation of IPO shares was merely alleged to have been done in
accord with a practice normally observed by the members of the stock exchange, to wit:
IPOs are shares of corporations offered for sale to the public, prior to their listing in the trading floor of the countrys
two stock exchanges. Normally, Twenty-Five Percent (25%) of these shares are divided equally between the two
stock exchanges which in turn divide these equally among their members, who pay therefor at the offering
price.11 (Emphasis supplied)
A practice or custom is, as a general rule, not a source of a legally demandable or enforceable right.12 Indeed, in
labor cases, benefits which were voluntarily given by the employer, and which have ripened into company practice,
are considered as rights that cannot be diminished by the employer.13 Nevertheless, even in such cases, the source
of the employees right is not custom, but ultimately, the law, since Article 100 of the Labor Code explicitly prohibits
elimination or diminution of benefits.
There is no such law in this case that converts the practice of allocating IPO shares to MKSE members, for
subscription at their offering prices, into an enforceable or demandable right. Thus, even if it is hypothetically
admitted that normally, twenty five percent (25%) of the IPOs are divided equally between the two stock exchanges -which, in turn, divide their respective allocation equally among their members, including the Chairman Emeritus, who
pay for IPO shares at the offering price -- the Court cannot grant respondents prayer for damages which allegedly
resulted from the MKSE Board Resolution dated 3 June 1993 deviating from said practice by no longer allocating
any shares to respondent.1avvphi1

(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.
Therefore, an obligation imposed on a person, and the corresponding right granted to another, must be rooted in at
least one of these five sources. The mere assertion of a right and claim of an obligation in an initiatory pleading,
whether a Complaint or Petition, without identifying the basis or source thereof, is merely a conclusion of fact and
law. A pleading should state the ultimate facts essential to the rights of action or defense asserted, as distinguished
from mere conclusions of fact or conclusions of law.10 Thus, a Complaint or Petition filed by a person claiming a right

Accordingly, the instant Petition should be granted. The Petition in SEC Case No. 02-94-4678 should be dismissed
for failure to state a cause of action. It does not matter that the SEC en banc, in its Order dated 14 August 1995 in
SEC-EB No. 403, overstepped its bounds by not limiting itself to the issue of whether respondents Petition before
the SICD sufficiently stated a cause of action. The SEC en banc may have been mistaken in considering extraneous
evidence in granting petitioners Motion to Dismiss, but its discussion thereof are merely superfluous and obiter
dictum. In the main, the SEC en banc did correctly dismiss the Petition in SEC Case No. 02-94-4678 for its failure to
state the basis for respondents alleged right, to wit:
Private respondent Campos has failed to establish the basis or authority for his alleged right to participate equally in
the IPO allocations of the Exchange. He cited paragraph 11 of the amended articles of incorporation of the Exchange

in support of his position but a careful reading of the said provision shows nothing therein that would bear out his
claim. The provision merely created the position of chairman emeritus of the Exchange but it mentioned nothing
about conferring upon the occupant thereof the right to receive IPO allocations.14
With the dismissal of respondents Petition in SEC Case No. 02-94-4678, there is no more need for this Court to
resolve the propriety of the issuance by SCID of a writ of preliminary injunction in said case.
G.R. No. 167519
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 11 February 1997 and its
Resolution dated 18 May 1999 in CA-G.R. SP No. 38455 are REVERSED and SET ASIDE. The Orders dated 31
May 1995 and 14 August 1995 of the Securities and Exchange Commission en banc in SEC-EB Case No. 393 and
No. 403, respectively, are hereby reinstated. No pronouncement as to costs.

January 14, 2015

THE WELLEX GROUP, INC., Petitioner,

vs.
U-LAND AIRLINES, CO., LTD., Respondent.
DECISION

SO ORDERED.
LEONEN, J.:

This is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court. The Wellex Group, Inc. (Wellex)
prays that the Decision2 dated July 30, 2004 of the Court of Appeals in CA-GR. CV No. 74850 be reversed and set
aside.3
The Court of Appeals affirmed the Decision4 of the Regional Trial Court, Branch 62 of Makati City in Civil Case No.
99-1407. The Regional Trial Court rendered judgment in favor of U-Land Airlines, Co., Ltd. (ULand) and ordered the
rescission of the Memorandum of Agreement5 between Wellex and U-Land.6
Wellex is a corporation established under Philippine law and it maintains airline operations in the Philippines. 7 It owns
shares of stock in several corporations including Air Philippines International Corporation (APIC), Philippine Estates
Corporation (PEC), and Express Savings Bank (ESB).8 Wellex alleges that it owns all shares of stock of Air
Philippines Corporation (APC).9
U-Land Airlines Co. Ltd. (U-Land) "is a corporation duly organized and existing under the laws of Taiwan, registered
to do business . . . in the Philippines."10 It is engaged in the business of air transportation in Taiwan and in other
Asian countries.11
On May 16, 1998, Wellex and U-Land entered into a Memorandum of Agreement12 (First Memorandum of
Agreement) to expand their respective airline operations in Asia.13
Terms of the First Memorandum of Agreement
The preambular clauses of the First Memorandum of Agreement state:
WHEREAS, U-LAND is engaged in the business of airline transportation in Taiwan, Philippines and/or in other
countries in the Asian region, and desires to expand its operation and increase its market share by, among others,
pursuing a long-term involvement in the growing Philippine airline industry;
WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its majority-owned
subsidiary Air Philippines International Corporation and the latters subsidiary, Air Philippines Corporation, and in like
manner also desires to expand its operation in the Asian regional markets, a Memorandum of Agreement on ______,
a certified copy of which is attached hereto as Annex "A" and is hereby made an integral part hereof, which sets
forth, among others, the basis for WELLEXs present ownership of shares in Air Philippines International Corporation.
WHEREAS, the parties recognize the opportunity to develop a long-term profitable relationship by combining such of

their respective resources in an expanded airline operation as well as in property development and in other allied
business activities in the Philippines, and desire to set forth herein the basic premises and their understanding with
respect to their joint cooperation and undertakings.14
In the First Memorandum of Agreement, Wellex and U-Land agreed to develop a long-term business relationship
through the creation of joint interest in airline operations and property development projects in the Philippines. 15This
long-term business relationship would be implemented through the following transactions, stated in Section 1 of the
First Memorandum of Agreement:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES INTERNATIONAL
CORPORATION ("APIC") equivalent to at least 35% of the outstanding capital stock of APIC, but in any
case, not less than 1,050,000,000 shares . . . [;]
(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE ESTATES CORPORATION
("PEC") equivalent to at least 35% of the outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares . . . [;]
(c) U-LAND shall enter into a joint development agreement with PEC . . . [; and]
(d) U-LAND shall be given the option to acquire from WELLEX shares of stock of EXPRESS SAVINGS
BANK ("ESB") up to 40% of the outstanding capital stock of ESB . . . under terms to be mutually agreed.16
I. Acquisition of APIC and PEC shares
The First Memorandum of Agreement stated that within 40 days from its execution date, Wellex and U-Land would
execute a share purchase agreement covering U-Lands acquisition of the shares of stock of both APIC (APIC
shares) and PEC (PEC shares).17 In this share purchase agreement, U-Land would purchase from Wellex its APIC
shares and PEC shares.18
Wellex and U-Land agreed to an initial purchase price of P0.30 per share of APIC and 0.65 per share of PEC.
However, they likewise agreed that the final price of the shares of stock would be reflected in the actual share
purchase agreement.19
Both parties agreed that the purchase price of APIC shares and PEC shares would be paid upon the execution of the
share purchase agreement and Wellexs delivery of the stock certificates covering the shares of stock. The transfer
of APIC shares and PEC shares to U-Land was conditioned on the full remittance of the final purchase price as
reflected in the share purchase agreement. Further, the transfer was conditioned on the approval of the Securities
and Exchange Commission of the issuance of the shares of stock and the approval by the Taiwanese government of
U-Lands acquisition of these shares of stock.20
Thus, Section 2 of the First Memorandum of Agreement reads:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless extended by mutual
agreement), U-LAND and WELLEX shall execute a Share Purchase Agreement ("SHPA") covering the acquisition by
U-LAND of the APIC Shares and PEC Shares (collectively, the "Subject Shares"). Without prejudice to any
subsequent agreement between the parties, the purchase price for the APIC Shares to be reflected in the SHPA shall
be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares at SIXTY FIVE CENTAVOS (P0.65) per
share.
The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full upon execution of the SHPA
against delivery of the Subject Shares. The parties may agree on such other terms and conditions governing the
acquisition of the Subject Shares to be provided in a separate instrument.

The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the purchase price reflected in the
SHPA has been fully paid; (ii) the Philippine Securities & Exchange Commission (SEC) shall have approved the
issuance of the Subject Shares; and (iii) any required approval by the Taiwanese government of the acquisition by ULAND of the Subject Shares shall likewise have been obtained.21
II. Operation and management of APIC/PEC/APC
U-Land was "entitled to a proportionate representation in the Board of Directors of APIC and PEC in accordance with
Philippine law."22 Operational control of APIC and APC would be exercised jointly by Wellex and U-Land "on the basis
of mutual agreement and consultations."23 The parties intended that U-Land would gain primary control and
responsibility for the international operations of APC.24 Wellex manifested that APC is a subsidiary of APIC in the
second preambular clause of the First Memorandum of Agreement.25
Section 3 of the First Memorandum of Agreement reads:
3. Operation/Management of APIC/APC. - U-LAND shall be entitled to a proportionate representation in the Board of
Directors of APIC and PEC in accordance with Philippine law. For this purpose, WELLEX shall cause the resignation
of its nominated Directors in APIC and PEC to accommodate U-LANDs pro rata number of Directors. Subject to
applicable Philippine law and regulations, operational control of APIC and Air Philippines Corporation ("APC") shall
be lodged jointly to WELLEX and U-LAND on the basis of mutual agreement and consultations. Further, U-LAND
may second technical and other consultants into APIC and/or APC with the view to increasing service, productivity
and efficiency, identifying and implementing profit-service opportunities, developing technical capability and
resources, and installing adequate safety systems and procedures. In addition, U-LAND shall arrange for the lease
by APC of at least three (3) aircrafts owned by ULAND under such terms as the parties shall mutually agree upon. It
is the intent of the parties that U-LAND shall have primary control and responsibility for APCs international
operations.26
III. Entering into and funding a joint development agreement
Wellex and U-Land also agreed to enter into a joint development agreement simultaneous with the execution of the
share purchase agreement. The joint development agreement shall cover housing and other real estate development
projects.27
U-Land agreed to remit the sum ofUS$3 million not later than May 22, 1998. This sum was to serve as initial funding
for the development projects that Wellex and U-Land were to undertake pursuant to the joint development
agreement. In exchange for the US$3 million, Wellex would deliver stock certificates covering 57,000,000 PEC
shares to U-Land.28
The execution of a joint development agreement was also conditioned on the execution of a share purchase
agreement.29
Section 4 of the First Memorandum of Agreement reads:
4. Joint Development Agreement with PEC. Simultaneous with the execution of the SHPA, U-LAND and PEC shall
execute a joint development agreement ("JDA") to pursue property development projects in the Philippines. The JDA
shall cover specific housing and other real estate development projects as the parties shall agree. All profits derived
from the projects covered by the JDA shall be shared equally between ULAND and PEC. U-LAND shall, not later
than May 22, 1998, remit the sum of US$3.0 million as initial funding for the aforesaid development projects against
delivery by WELLEX of 57,000,000 shares of PEC as security for said amount in accordance with Section 9 below.30
In case of conflict between the provisions of the First Memorandum of Agreement and the provisions of the share
purchase agreement or its implementing agreements, the terms of the First Memorandum of Agreement would

prevail, unless the parties specifically stated otherwise or the context of any agreement between the parties would
reveal a different intent.31 Thus, in Section 6 of the First Memorandum of Agreement:
6. Primacy of Agreement. It is agreed that in case of conflict between the provisions of this Agreement and those of
the SHPA and the implementing agreements of the SHPA, the provisions of this Agreement shall prevail, unless the
parties specifically state otherwise, or the context clearly reveal a contrary intent. 32
Finally, Wellex and U-Land agreed that if they were unable to agree on the terms of the share purchase agreement
and the joint development agreement within 40 days from signing, then the First Memorandum of Agreement would
cease to be effective.33
In case no agreements were executed, the parties would be released from their respective undertakings, except that
Wellex would be required to refund within three (3) days the US$3 million given as initial funding by U-Land for the
development projects. If Wellex was unable to refund the US$3 million to U-Land, U-Land would have the right to
recover on the 57,000,000 PEC shares that would be delivered to it.34 Section 9 of the First Memorandum of
Agreement reads:
9. Validity. - In the event the parties are unable to agree on the terms of the SHPA and/or the JDA within forty (40)
days from date hereof (or such period as the parties shall mutually agree), this Memorandum of Agreement shall
cease to be effective and the parties released from their respective undertakings herein, except that WELLEX shall
refund the US$3.0 million provided under Section 4 within three (3) days therefrom, otherwise U-LAND shall have
the right to recover on the 57,000,000 PEC shares delivered to U-LAND under Section 4.35
The First Memorandum of Agreement was signed by Wellex Chairman and President William T. Gatchalian (Mr.
Gatchalian) and U-Land Chairman Ker Gee Wang (Mr. Wang) on May 16, 1998.36

WHEREAS, TWGI is the registered and beneficial owner, or has otherwise acquired _____ (illegible in rollo) rights to
the entire issued and outstanding capital stock (the "APC SHARES") of AIR PHILIPPINES CORPORATION ("APC")
and has made stockholder advances to APC for the _____ (illegible in rollo) of aircraft, equipment and for working
capital used in the latters operations (the "_____ (illegible in rollo) ADVANCES").
WHEREAS, APIC desires to obtain full ownership and control of APC, including all of _____ (illegible in rollo) assets,
franchise, goodwill and operations, and for this purpose has offered to acquire the _____ (illegible in rollo)
302SHARES of TWGI in APC, including the APC ADVANCES due to TWGI from APC, with _____ (illegible in rollo) of
acquiring all the assets, franchise, goodwill and operations of APC; and TWGI has _____ (illegible in rollo) to the
same in consideration of the conveyance by APIC to TWGI of certain investments, _____ (illegible in rollo) issuance
of TWGI of shares of stock of APIC in exchange for said APC SHARES and the _____ (illegible in rollo) ADVANCES,
as more particularly described hereunder.
NOW, THEREFORE, the parties agree as follows:
1. TWGI agrees to transfer the APC ADVANCES in APIC in exchange for the _____ (illegible in
rollo) by APIC to TWGI of investment shares of APIC in Express Bank, Petro Chemical _____
(illegible in rollo) of Asia Pacific, Republic Resources & Development Corporation and Philippine
_____ (illegible in rollo) Corporation (the "APIC INVESTMENTS").
2. TWGI likewise agrees to transfer the APC SHARES to APIC in exchange solely _____
(illegible in rollo) the issuance by APIC of One Billion Seven Hundred Ninety-Seven Million Eight
Hundred Fifty Seven Thousand Three Hundred Sixty Four (1,797,857,364) shares of its capital
stock of a _____ (illegible in rollo) value of P1.00 per share (the "APIC SHARES"), taken from
the currently authorized but _____ (illegible in rollo) shares of the capital stock of APIC, as well
as from the increase in the authorized capital _____ (illegible in rollo) of APIC from P2.0 billion
to P3.5 billion.

Annex "A" or the Second Memorandum of Agreement

Attached and made an integral part of the First Memorandum of Agreement was Annex "A," as stated in the second
preambular clause. It is a document denoted as a "Memorandum of Agreement" entered into by Wellex, APIC, and
APC.37
The Second Memorandum of Agreement states:
This Memorandum of Agreement, made and executed this ___th day of ______ at Makati City, by and between:
THE WELLEX GROUP, INC., a corporation duly organized and existing under the laws of the Philippines, with offices
at 22F Citibank Tower, 8741 Paseo de Roxas, Makati City (hereinafter referred to as "TWGI"),
AIR PHILIPPINES INTERNATIONAL CORPORATION (formerly FORUM PACIFIC, INC.), likewise a corporation duly
organized and existing under the laws of the Philippines, with offices at 8F Rufino Towers, Ayala Avenue, Makati City
(hereinafter referred to as "APIC"),
- and
AIR PHILIPPINES CORPORATION, corporation duly organized and existing under the laws of the Philippines, with
offices at Multinational Building, Ayala Avenue, Makati City (hereinafter referred to as "APC").
W I T N E S S E T H: That -

3. It is the basic understanding of the parties hereto that the transfer of the APC _____ (illegible
in rollo) as well as the APC ADVANCES to APIC shall be intended to enable APIC to obtain
_____ (illegible in rollo) and control of APC, including all of APCs assets, franchise, goodwill and
_____ (illegible in rollo).
4. Unless the parties agree otherwise, the effectivity of this Agreement and transfers _____
(illegible in rollo) APC ADVANCES in exchange for the APIC INVESTMENTS, and the transfer of
the _____ (illegible in rollo) SHARES in exchange for the issuance of new APIC SHARES, shall
be subject to _____ (illegible in rollo) due diligence as the parties shall see fit, and the condition
subsequent that the _____ (illegible in rollo) for increase in the authorized capital stock of the
APIC from P2.0 billion to P3.5 _____ (illegible in rollo) shall have been approved by the
Securities and Exchange Commission.
IN WITNESS WHEREOF, the parties have caused these presents to be signed on the date
_____ (illegible in rollo) first above written.38 (Emphasis supplied)
This Second Memorandum of Agreement was allegedly incorporated into the First Memorandum of Agreement as a
"disclosure to [U-Land] [that] . . . [Wellex] was still in the process of acquiring and consolidating its title to shares of
stock of APIC."39 It "included the terms of a share swap whereby [Wellex] agreed to transfer to APIC its
shareholdings and advances to APC in exchange for the issuance by APIC of shares of stock to [Wellex]."40
The Second Memorandum of Agreement was signed by Mr. Gatchalian, APIC President Salud,41 and APC President
Augustus C. Paiso.42 It was not dated, and no place was indicated as the place of signing.43 It was not notarized
either, and no other witnesses signed the document.44

The 40-day period lapsed on June 25, 1998.45 Wellex and U-Land were not able to enter into any share purchase
agreement although drafts were exchanged between the two.

Despite these transactions, Wellex and U-Land still failed to enter into the share purchase agreement and the joint
development agreement.

Despite the absence of a share purchase agreement, U-Land remitted to Wellex a total of US$7,499,945.00. 46These
were made in varying amounts and through the issuance of post-dated checks.47 The dates of remittances were the
following:

In the letter56 dated July 22, 1999, 10 months57 after the last formal communication between the two parties, U-Land,
through counsel, demanded the return of the US$7,499,945.00.58 This letter was sent 14 months after the signing of
the First Memorandum of Agreement.

Date

Amount (in US$)

June 30, 1998

990,000.00

July 2, 1998

990,000.00
20,000.00

July 30, 1998

990,000.00
490,000.00
490,000.00

August 1, 1998

990,000.00
490,000.00
490,000.00

August 3, 1998

990,000.00
70,000.00

September 25, 1998

399,972.50
99, 972.50

Total

US$7,499,945.0048

Wellex acknowledged the receipt of these remittances in a confirmation letter addressed to U-Land dated September
30, 1998.49
According to Wellex, the parties agreed to enter into a security arrangement. If the sale of the shares of stock failed
to push through, the partial payments or remittances U-Land made were to be secured by these shares of stock and
parcels of land.50 This meant that U-Land could recover the amount it paid to Wellex by selling these shares of stock
and land titles or using them to generate income.
Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land stock certificates representing 60,770,000
PEC shares and 72,601,000 APIC shares.51 These were delivered to U-Land on July 1, 1998, September 1, 1998,
and October 1, 1998.52
In addition, Wellex delivered to U-Land Transfer Certificates of Title (TCT) Nos. T-216769, T-216771, T-228231, T228227, T-211250, and T-216775 covering properties owned by Westland Pacific Properties Corporation in Bulacan;
and TCT Nos. T-107306, T-115667, T-105910, T-120250, T-1114398, and T-120772 covering properties owned by
Rexlon Realty Group, Inc.53 On October 1, 1998,54 U-Land received a letter from Wellex, indicating a list of stock
certificates that the latter was giving to the former by way of "security."55

Counsel for U-Land claimed that "[Wellex] ha[d] unjustifiably refused to enter into the. . . Share Purchase
Agreement."59 As far as U-Land was concerned, the First Memorandum of Agreement was no longer in effect,
pursuant to Section 9.60 As such, U-Land offered to return all the stock certificates covering APIC shares and PEC
shares as well as the titles to real property given by Wellex as security for the amount remitted by U-Land.61
Wellex sent U-Land a letter62 dated August 2, 1999, which refuted U-Lands claims. Counsel for Wellex stated that
the two parties carried out several negotiations that included finalizing the terms of the share purchase agreement
and the terms of the joint development agreement. Wellex asserted that under the joint development agreement, ULand agreed to remit the sum of US$3 million by May 22,1998 as initial funding for the development projects. 63
Wellex further asserted that it conducted extended discussions with U-Land in the hope of arriving at the final terms
of the agreement despite the failure of the remittance of the US$3 million on May 22, 1998.64 That remittance
pursuant to the joint development agreement "would have demonstrated [U-Lands] good faith in finalizing the
agreements."65
Wellex averred that, "[s]ave for a few items, [Wellex and U-Land] virtually agreed on the terms of both [the share
purchase agreement and the joint development agreement.]"66 Wellex believed that the parties had already "gone
beyond the intent stage of the [First Memorandum of Agreement] and [had already] effected partial implementation
of an over-all agreement."67 U-Land even delivered a total of 12 post-dated checks to Wellex as payment for the
APIC shares and PEC shares.68 "[Wellex] on the other hand, had [already] delivered to[U-Land] certificates of stock
of APEC [sic] and PEC as well as various land titles to cover actual remittances."69 Wellex alleged that the
agreements were not finalized because U-Land was "forced to suspend operations because of financial problems
spawned by the regional economic turmoil."70
Thus, Wellex maintained that "the inability of the parties to execute the [share purchase agreement] and the [joint
development agreement] principally arose from problems at [U-Lands] side, and not due to [Wellexs] unjustified
refusal to enter into [the] [share purchase agreement][.]"71
On July 30, 1999, U-Land filed a Complaint72 praying for rescission of the First Memorandum of Agreement and
damages against Wellex and for the issuance of a Writ of Preliminary Attachment.73 From U-Lands point of view, its
primary reason for purchasing APIC shares from Wellex was APICs majority ownership of shares of stock in APC
(APC shares).74 After verification with the Securities and Exchange Commission, U-Land discovered that "APIC did
not own a single share of stock in APC."75 U-Land alleged that it repeatedly requested that the parties enter into the
share purchase agreement.76 U-Land attached the demand letter dated July 22, 1999 to the Complaint. 77 However,
the 40-day period lapsed, and no share purchase agreement was finalized. 78
U-Land alleged that, as of the date of filing of the Complaint, Wellex still refused to return the amount of
US$7,499,945.00 while refusing to enter into the share purchase agreement. 79 U-Land stated that it was induced by
Wellex to enter into and execute the First Memorandum of Agreement, as well as release the amount of
US$7,499,945.00.80
In its Answer with Compulsory Counterclaim,81 Wellex countered that U-Land had no cause of action.82 Wellex
maintained that under the First Memorandum of Agreement, the parties agreed to enter into a share purchase
agreement and a joint development agreement.83 Wellex alleged that to bring the share purchase agreement to
fruition, it would have to acquire the corresponding shares in APIC. 84 It claimed that U-Land was fully aware that the
former "still ha[d] to consolidate its title over these shares."85 This was the reason for Wellexs attachment of the

Second Memorandum of Agreement to the First Memorandum of Agreement. Wellex attached the Second
Memorandum of Agreement as evidence to refute U-Lands claim of misrepresentation.86

shares of APIC and ownership by APIC of a majority of the shares of [APC,] a domestic carrier in the
Philippines."108 Wellex, through Mr. Gatchalian, offered to sell to U-Land PEC shares as well. 109

Wellex further alleged that U-Land breached the First Memorandum of Agreement since the payment for the shares
was to begin during the 40-day period, which began on May 16, 1998.87 In addition, U-Land failed to remit the US$3
million by May 22, 1998 that would serve as initial funding for the development projects.88 Wellex claimed that the
remittance of the US$3 million on May 22, 1998 was a mandatory obligation on the part of U-Land.89 Wellex averred
that it presented draft versions of the share purchase agreement, which were never finalized.90 Thus, it believed that
there was an implied extension of the 40-day period within which to enter into the share purchase agreement and the
joint development agreement since U-Land began remitting sums of money in partial payment for the purchase of
the shares of stock.91

According to Mr. Tseng, the parties agreed to enter into the First Memorandum of Agreement after their second
meeting.110 Mr. Tseng testified that under this memorandum of agreement, the parties would enter into a share
purchase agreement "within forty (40) days from its execution which [would] put into effect the sale of the shares [of
stock] of APIC and PEC[.]"111 However, the "[s]hare [p]urchase [a]greement was not executed within the forty-day
period despite the draft . . . given [by U-Land to Wellex]."112

In its counterclaim against U-Land, Wellex alleged that it had already set in motion building and development of real
estate projects on four (4) major sites in Cavite, Iloilo, and Davao. It started initial construction on the basis of its
agreement with U-Land to pursue real estate development projects.92

Mr. Tseng further testified that it was only after the lapse of the 40-day period that U-Land discovered that Wellex
needed money for the transfer of APC shares to APIC. This allegedly shocked U-Land since under the First
Memorandum of Agreement, APIC was supposed to own a majority of APC shares. Thus, U-Land remitted to Wellex
a total of US$7,499,945.00 because of its intent to become involved in the aviation business in the Philippines.
These remittances were confirmed by Wellex through a confirmation letter. Despite the remittance of this amount, no
share purchase agreement was entered into by the parties.113

Wellex claims that, had the development projects pushed through, the parties would have shared equally in the
profits of these projects.93 These projects would have yielded an income of P2,404,948,000.00, as per the study
Wellex conducted, which was duly recognized by U-Land.94 Half of that amount, P1,202,474,000.00, would have
redounded to Wellex.95 Wellex, thus, prayed for the rescission of the First Memorandum of Agreement and the
payment of P1,202,474,000 in damages for loss of profit.96 It prayed for the payment of moral damages, exemplary
damages, attorneys fees, and costs of suit.97

Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice President of Wellex. She admitted her knowledge
of the First Memorandum of Agreement as she was involved in its drafting. She testified that the First Memorandum
of Agreement made reference, under its second preambular clause, to the Second Memorandum of Agreement
entered into by Wellex, APIC, and APC. She testified that under the First Memorandum of Agreement, U-Lands
purchase of APIC shares and PEC shares from Wellex would take place within 40 days, with the execution of a
share purchase agreement.114

In its Reply,98 U-Land denied that there was an extension of the 40-day period within which to enter into the share
purchase agreement and the joint development agreement. It also denied requesting for an extension of the 40-day
period. It further raised that there was no provision in the First Memorandum of Agreement that required it to remit
payments for Wellexs shares of stock in APIC and PEC within the 40-day period. Rather, the remittances were
supposed to begin upon the execution of the share purchase agreement.99

According to Ms. Ting, after the 40-day period lapsed, U-Land Chairman Mr. Wang requested sometime in June of
1998 for an extension for the execution of the share purchase agreement and the remittance of the US$3 million. As
proof that Mr. Wang made this request, Ms. Ting testified that Mr. Wang sent several post-dated checks to cover the
payment of the APIC shares and PEC shares and the initial funding of US$3 million for the joint development
agreement. She testified that Mr. Wang presented a draft of the share purchase agreement, which Wellex rejected.
Wellex drafted a new version of the share purchase agreement.115 However, the share purchase agreement was not
executed because during the period of negotiation, Wellex learned from other sources that U-Land "encountered
difficulties starting October of 1998."116 Ms. Ting admitted that U-Land made the remittances to Wellex in the amount
of US$7,499,945.00.117

As for the remittance of the US$3 million, U-Land stated that the issuance of this amount on May 22, 1998 was
supposed to be simultaneously made with Wellexs delivery of the stock certificates for 57,000,000 PEC shares.
These stock certificates were not delivered on that date.100
With regard to the drafting of the share purchase agreement, U-Land denied that it was Wellex that presented
versions of the agreement. U-Land averred that it was its own counsel who drafted versions of the share purchase
agreement and the joint development agreement, which Wellex refused to sign.101
U-Land specifically denied that it had any knowledge prior to or during the execution of the First Memorandum of
Agreement that Wellex still had to "consolidate its title over" its shares in APIC. U-Land averred that it relied on
Wellexs representation that it was a majority owner of APIC shares and that APIC owned a majority of APC
shares.102
Moreover, U-Land denied any knowledge of the initial steps that Wellex undertook to pursue the development
projects and denied any awareness of a study conducted by Wellex regarding the potential profit of these projects. 103
The case proceeded to trial.
U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief Executive Officer, as its sole witness. 104Mr.
Tseng testified that "[s]ometime in 1997, Mr. William Gatchalian who was in Taiwan invited [U-Land] to join in the
operation of his airline company[.]"105 U-Land did not accept the offer at that time.106 During the first quarter of 1998,
Mr. Gatchalian "went to Taiwan and invited [U-Land] to invest in Air Philippines[.]"107 This time, U-Land alleged that
subsequent meetings were held where Mr. Gatchalian, representing Wellex, "claimed ownership of a majority of the

Ms. Ting testified that U-Land was supposed to make an initial payment of US$19 million under the First
Memorandum of Agreement. However, U-Land only paid US$7,499,945.00. The total payments should have
amounted to US$41 million.118
Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a meeting to thresh out the problems of the First
Memorandum of Agreement, but U-Land did not reply. Instead, Wellex only received communication from U-Land
regarding their subsequent negotiations through the latters demand letter dated July 22, 1999. In response, Wellex
wrote to U-Land requesting another meeting to discuss the demands. However, U-Land already filed the Complaint
for rescission and caused the attachment against the properties of Wellex, causing embarrassment to Wellex. 119
In the Decision dated April 10, 2001, the Regional Trial Court of Makati City held that rescission of the First
Memorandum of Agreement was proper:
The first issue must be resolved in the negative. Preponderance of evidence leans in favor of plaintiff that it is entitled
to the issuance of the writ of preliminary attachment. Plaintiffs evidence establishes the facts that it is engaged in the
airline business in Taiwan, was approached by defendant, through its Chairman William Gatchalian, and was invited
by the latter to invest in an airline business in the Philippines, Air Philippines Corporation (APC); that plaintiff became
interested in the invitation of defendant; that during the negotiations between plaintiff and defendant, defendant
induced plaintiff to buy shares in Air Philippines International Corporation (APIC) since it owns majority of the shares
of APC; that defendant also induced plaintiff to buy shares of APIC in Philippine Estates Corporation (PEC); that the
negotiations between plaintiff and defendant culminated into the parties executing a MOA (Exhs. "C" to "C-3", also

Exh. "1"); that in the second "Whereas" clause of the MOA, defendant represented that it has a current airline
operation through its majority-owned subsidiary APIC, that under the MOA, the parties were supposed to enter into a
Share Purchase Agreement (SPA) within forty (40) days from May 16, 1998, the date the MOA in order to effect the
transfer of APIC and PEC shares of defendant to plaintiff; that plaintiff learned from defendant that APIC does not
actually own a single share in APC; that plaintiff verified with the Securities and Exchange Commission (SEC), by
obtaining a General Information Sheet therefrom (Exh. "C-Attachment"); that APIC does not in fact own APC; that
defendant induced plaintiff to still remit its investment to defendant, which plaintiff did as admitted by defendant per
its Confirmation Letter (Exh. "D") in order that APC shares could be transferred to APIC; that plaintiff remitted a total
of US$7,499,945.00 to defendant; and that during the forty-day period stipulated in the MOA and even after the lapse
of the said period, defendant has not entered into the SPA, nor has defendant caused the transfer of APC shares to
APIC.

Q How much shares of Air Philippines Corporation is owned by Wellex Group?

In the second "Whereas" clause of the MOA (Exh. "C"), defendants misrepresentation that APIC owns APC is made
clear, as follows:

A As of this moment, no sir."

"WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its majority-owned
subsidiary Air Philippines International Corporation (Exh. "C") and the latters subsidiary, Air Philippines Corporation,
and in like manner also desires to expand its operation in the Asian regional markets; x x x" (Second Whereas of
Exh. "C")
On the other hand, defendants evidence failed to disprove plaintiffs evidence. The testimony of defendants sole
witness Elvira Ting, that plaintiff knew at the time of the signing of the MOA that APIC does not own a majority of the
shares of APC because another Memorandum of Agreement was attached to the MOA (Exh "1") pertaining to the
purchase of APC shares by APIC is unavailing. The second "Whereas" clause of the MOA leaves no room for
interpretation. . . . The second MOA purportedly attached as Annex "A" of this MOA merely enlightens the parties on
the manner by which APIC acquired the shares of APC. Besides, . . . the second MOA was not a certified copy and
did not contain a marking that it is an Annex "A" when it was supposed to be an Annex "A" and a certified copy per
the MOA between plaintiff and defendant. As can be also gathered from her testimony, Ms. Ting does not have
personal knowledge that plaintiff was not informed that APIC did not own shares of APC during the negotiations as
she was not present during the negotiations between plaintiff and defendants William Gatchalian. Her participation in
the agreement between the parties [was] merely limited to the preparation of the documents to be signed. Ms. Ting
testified, as follows:
"Q During the negotiation, you did not know anything about that?"
A I was not involved in the negotiation, sir.

A Around twenty...at this moment around twenty five percent (25%).

Q Can you tell us if you know who are the other owners of the shares of Air Philippines?
A There are several individual owners, I cannot recall the names.
Q Could [sic] you know if Air Philippines Intl. Corporation is one of the owners?

(lbid, p. 16)
That defendant represented to plaintiff that it needed the remittances of plaintiff, even if no SPA was executed yet
between the parties, to effect the transfer of APC shares to APIC is admitted by its same witness also in this wise:
"Q You said that remittances were made to the Wellex Group, Incorporated by plaintiff for the period from June 1998
to September 1998[,] is that correct?
A Yes, Sir.
Q During all these times, that remittances were made in the total amount of more than seven million dollars, did you
ever know if plaintiff asked for evidence from your company that AIR PHILIPPINES INTERNATIONAL
CORPORATION has already acquired shares of AIR PHILIPPINES CORPORATION?
A There were queries on the matter.
Q And what was your answer to those queries, Madam Witness?
A We informed them that the decision was still in the process.

Q And you are just making your statement that U-Land knew about the intended transfer of shares from APC to APIC
because of this WHEREAS CLAUSE and the Annex to this Memorandum of Agreement?

Q Even up to the time that plaintiff U-Land stopped the remittances sometime in September 1998 you have not
effected the transfer of shares of AIR PHILIPPINES CORPORATION to AIR PHILIPPINES INTERNATIONCAL [sic]
CORPORATION[,] am I correct?

A Yes, it was part of the contract."

A APC to APIC, well at that time its still in the process.

(TSN, Elvira Ting, June 6, 2000, pp. 8-10)

Q In fact, Madam Witness, is it not correct for me to say that one of the reasons why U-Land Incorporated was
convinced to remit the amounts of money totalling seven million dollars plus,

Defendants fraud in the performance of its obligation under the MOA is further revealed when Ms. Ting testified on
cross-examination that notwithstanding the remittances made by plaintiff in the total amountn [sic] of US$7,499,
945.00 to partially defray the cost of transferring APC shares to APIC even as of the year 2000, as follows:
"Q Ms. Ting, can you please tell the Court if you know who owns shares of Air Philippines Corporation at this time?
A Air Philippines Corporation right now is own [sic] by Wellex Group and certain individual.

was that your company said that it needed funds to effect these transfers, is that correct?
A Yes, sir."
(lbid, pp. 25-29)

As the evidence adduced by the parties stand, plaintiff has established the fact that it had made remittances in the
total amount of US$7,499,945.00 to defendant in order that defendant will make good its representation that APC is
a subsidiary of APIC. The said remittances are admitted by defendant.
Notwithstanding the said remittances, APIC does not own a single share of APC. On the other hand, defendant could
not even satisfactorily substantiate its claim that at least it had the intention to cause the transfer of APC shares to
APIC. [D]efendant obviously did not enter into the stipulated SPA because it did not have the shares of APC
transferred to APIC despite its representations. Under the circumstances, it is clear that defendant fraudulently
violated the provisions of the MOA.120 (Emphasis supplied)
On appeal, the Court of Appeals affirmed the ruling of the Regional Trial Court.121 In its July 30, 2004 Decision, the
Court of Appeals held that the Regional Trial Court did not err in granting the rescission:
Records show that in the answer filed by defendant-appellant, the latter itself asked for the rescission of the MOA.
Thus, in effect, it prays for the return of what has been given or paid under the MOA, as the law creates said
obligation to return the things which were the object of the contract, and the same could be carried out only when he
who demands rescission can return whatever he may be obliged to restore. The law says:
"Rescission creates the obligation to return the things which were the object of the contract, together with their fruits,
and the price with its interest; consequently, it can be carried out only when he who demands rescission can return
whatever he may be obliged to restore."
Appellant, therefore, cannot ask for rescission of the MOA and yet refuse to return what has been paid to it. Further,
appellants claim that the lower court erred in ruling for the rescission of the MOA is absurd and ridiculous because
rescission thereof is prayed for by the former. . . . This Court agrees with the lower court that appellee is the injured
party in this case, and therefore is entitled to rescission, because the rescission referred to here is predicated on the
breach of faith by the appellant which breach is violative of the reciprocity between the parties. It is noted that
appellee has partly complied with its own obligation, while the appellant has not. It is, therefore, the right of the
injured party to ask for rescission because the guilty party cannot ask for rescission.
The lower court . . . correctly ruled that:
". . . This Court agrees with plaintiff that defendants misrepresentations regarding APICs not owning shares in APC
vitiates its consent to the MOA. Defendants continued misrepresentation that it will cause the transfer of APC shares
in APIC inducing plaintiff to remit money despite the lapse of the stipulated forty day period, further establishes
plaintiffs right to have the MOA rescinded.
Section 9 of the MOA itself provides that in the event of the non-execution of an SPA within the 40 day period, or
within the extensions thereof, the payments made by plaintiff shall be returned to it, to wit:
"9 Validity.- In the event that the parties are unable to agree on the terms of the SHPA and/or JDA within forty (40)
days from the date hereof (or such period as the parties shall mutually agree), this Memorandum of Agreement shall
cease to be effective and the parties released from their respective undertakings herein, except that WELLEX shall
refund the US$3.0 million under Section 4 within three (3) days therefrom, otherwise U-LAND shall have the right to
recover the 57,000,000 PEC shares delivered to ULAND under Section 4."
Clearly, the parties were not able to agree on the terms of the SPA within and even after the lapse of the stipulated
40 day period. There being no SPA entered into by and between the plaintiff and defendant, defendants return of the
remittances [of] plaintiff in the total amount of US$7,499,945 is only proper, in the same vein, plaintiff should return to
defendant the titles and certificates of stock given to it by defendant.122 (Citations omitted)
Hence, this Petition was filed.

Petitioners Arguments
Petitioner Wellex argues that contrary to the finding of the Court of Appeals, respondent U-Land was not entitled to
rescission because the latter itself violated the First Memorandum of Agreement. Petitioner Wellex states that
respondent U-Land was actually bound to pay US$17.5 million for all of APIC shares and PEC shares under the First
Memorandum of Agreement and the US$3 million to pursue the development projects under the joint development
agreement. In sum, respondent U-Land was liable to petitioner Wellex for the total amount of US$20.5 million.
Neither the Court of Appeals nor the Regional Trial Court made any mention of the legal effect of respondent ULands failure to pay the full purchase price.123
On the share purchase agreement, petitioner Wellex asserts that its obligation to deliver the totality of the shares of
stock would become demandable only upon remittance of the full purchase price of US$17.5 million.124 The full
remittance of the purchase price of the shares of stock was a suspensive condition for the execution of the share
purchase agreement and delivery of the shares of stock. Petitioner Wellex argues that the use of the term "upon" in
Section 2 of the First Memorandum of Agreement clearly provides that the full payment of the purchase price must
be given "simultaneously" or "concurrent" with the execution of the share purchase agreement. 125
Petitioner Wellex raises that the Court of Appeals erred in saying that the rescission of the First Memorandum of
Agreement was proper because petitioner Wellex itself asked for this in its Answer before the trial court. 126 It asserts
that "there can be no rescission of a non-existent obligation, such as [one] whose suspensive condition has not yet
happened[,]"127 as held in Padilla v. Spouses Paredes.128 Citing Villaflor v. Court of Appeals129 and Spouses Agustin v.
Court of Appeals,130 it argues that "the vendor. . . has no obligation to deliver the thing sold. . . if the buyer. . . fails to
fully pay the price as required by the contract."131 In this case, petitioner Wellex maintains that respondent U-Lands
remittance of US$7,499,945.00 constituted mere partial performance of a reciprocal obligation. 132 Thus, respondent
U-Land was not entitled to rescission. The nature of this reciprocal obligation requires both parties simultaneous
fulfillment of the totality of their reciprocal obligations and not only partial performance on the part of the allegedly
injured party.
As to the finding of misrepresentations, petitioner Wellex raises that a seller may sell a thing not yet belonging to him
at the time of the transaction, provided that he will become the owner at the time of delivery so that he can transfer
ownership to the buyer. Contrary to the finding of the lower courts, petitioner Wellex was obliged to be the owner of
the shares only when the time came to deliver these to respondent U-Land and not during the perfection of the
contract itself.133
Finally, petitioner Wellex argues that respondent U-Land could have recovered through the securities given to the
latter.134 Petitioner Wellex invokes Suria v. Intermediate Appellate Court,135 which held that an "action for rescission is
not a principal action that is retaliatory in character [under Article 1191 of the Civil Code, but] a subsidiary one
which. . . is available only in the absence of any other legal remedy [under Article 1384 of the Civil
Code]."136 Respondents Arguments
Respondent U-Land argues that it was the execution of the share purchase agreement that would result in its
purchase of the APIC shares and PEC shares.137 It was not the full remittance of the purchase price of the shares of
stock as indicated in the First Memorandum of Agreement, as alleged by petitioner Wellex.138 Respondent U-Land
asserts that the First Memorandum of Agreement provides that the exact number of APIC shares and PEC shares to
be purchased under the share purchase agreement and the final price of these shares were not yet determined by
the parties.139
Respondent U-Land reiterates that it was petitioner Wellex that requested for the remittances amounting to
US$7,499,945.00 to facilitate APICs purchase of APC shares.140 Thus, it was petitioner Wellexs refusal to enter into
the share purchase agreement that led to respondent U-Land demanding rescission of the First Memorandum of
Agreement and the return of the US$7,499,945.00.141 Respondent U-Land further argues before this court that
petitioner Wellex failed to present evidence as to how the money was spent, stating that Ms. Ting admitted that the
Second Memorandum of Agreement "was not consummated at any time."142 Respondent U-Land raises that
petitioner Wellex was guilty of fraud by making it appear that APC was a subsidiary of APIC.143 It reiterates that, as
an airline company, its primary reason for entering into the First Memorandum of Agreement was to acquire

management of APC, another airline company.144 Under Article 1191 of the Civil Code, respondent U-Land, as the
injured party, was entitled to rescission due to the fatal misrepresentations committed by petitioner Wellex. 145
Respondent U-Land further asserts that the "shareholdings in APIC and APC were never in question."146 Rather, it
was petitioner Wellexs misrepresentation that APIC was a majority shareholder of APC that compelled it to enter into
the agreement.147
As for Suria, respondent U-land avers that this case was inapplicable because the pertinent provision in Suria was
not Article 1191 but rescission under Article 1383 of the Civil Code.148 The "rescission" referred to in Article 1191
referred to "resolution" of a contract due to a breach of a mutual obligation, while Article 1384 spoke of "rescission"
because of lesion and damage.149 Thus, the rescission that is relevant to the present case is that of Article 1191,
which involves breach in a reciprocal obligation. It is, in fact, resolution, and not rescission as a result of fraud or
lesion, as found in Articles 1381, 1383, and 1384 of the Civil Code.150
The Issue
The question presented in this case is whether the Court of Appeals erred in affirming the Decision of the Regional
Trial Court that granted the rescission of the First Memorandum of Agreement prayed for by U-Land.
The Petition must be denied.
I
The requirement of a share
purchase agreement
The Civil Code provisions on the interpretation of contracts are controlling to this case, particularly Article 1370,
which reads:
ART. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control.

As held in Norton, this court must first determine whether a provision or stipulation contained in a contract is
ambiguous. Absent any ambiguity, the provision on its face will be read as it is written and treated as the binding law
of the parties to the contract.
The parties have differing interpretations of the terms of the First Memorandum of Agreement. Petitioner Wellex even
admits that "the facts of the case are fairly undisputed [and that] [i]t is only the parties respective [understanding] of
these facts that are not in harmony."153
The second preambular clause of the First Memorandum of Agreement reads:
WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its majority-owned
subsidiary Air Philippines International Corporation and the latters subsidiary, Air Philippines Corporation, and in like
manner also desires to expand its operation in the Asian regional markets; a Memorandum of Agreement on ______,
a certified copy of which is attached hereto as Annex "A" and is hereby made an integral part hereof, which sets
forth, among others, the basis for WELLEXs present ownership of shares in Air Philippines International
Corporation.154 (Emphasis supplied)
Section 1 of the First Memorandum of Agreement reads:
I. Basic Agreement. - The parties agree to develop a long-term business relationship initially through the creation of
joint interest in airline operations as well as in property development projects in the Philippines to be implemented as
follows:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES INTERNATIONAL
CORPORATION ("APIC") equivalent to at least 35% of the outstanding capital stock of APIC, but in any
case, not less than 1,050,000,000 shares (the "APIC Shares").
(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE ESTATES CORPORATION
("PEC") equivalent to at least 35% of the outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares (the "PEC Shares").
(c) U-LAND shall enter into a joint development agreement with PEC to jointly pursue property
development projects in the Philippines.

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former.
In Norton Resources and Development Corporation v. All Asia Bank Corporation:151
The cardinal rule in the interpretation of contracts is embodied in the first paragraph of Article 1370 of the Civil Code:
"[i]f the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulations shall control." This provision is akin to the "plain meaning rule" applied by Pennsylvania
courts, which assumes that the intent of the parties to an instrument is "embodied in the writing itself, and when the
words are clear and unambiguous the intent is to be discovered only from the express language of the agreement." It
also resembles the "four corners" rule, a principle which allows courts in some cases to search beneath the semantic
surface for clues to meaning. A court's purpose in examining a contract is to interpret the intent of the contracting
parties, as objectively manifested by them. The process of interpreting a contract requires the court to make a
preliminary inquiry as to whether the contract before it is ambiguous. A contract provision is ambiguous if it is
susceptible of two reasonable alternative interpretations. Where the written terms of the contract are not ambiguous
and can only be read one way, the court will interpret the contract as a matter of law. If the contract is determined to
be ambiguous, then the interpretation of the contract is left to the court, to resolve the ambiguity in the light of the
intrinsic evidence.152 (Emphasis supplied)

(d) U-LAND shall be given the option to acquire from WELLEX shares of stock of EXPRESS SAVINGS
BANK ("ESB") up to 40% of the outstanding capital stock of ESB (the "ESB Shares") under terms to be
mutually agreed.155
The First Memorandum of Agreement contained the following stipulations regarding the share purchase agreement:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless extended by mutual
agreement), U-LAND and WELLEX shall execute a Share Purchase Agreement ("SHPA") covering the acquisition by
U-LAND of the APIC Shares and PEC Shares (collectively, the "Subject Shares"). Without prejudice to any
subsequent agreement between the parties, the purchase price for the APIC Shares to be reflected in the SHPA shall
be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares at SIXTY FIVE CENTAVOS (P0.65) per
share.
The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full upon execution of the SHPA
against delivery of the Subject Shares. The parties may agree on such other terms and conditions governing the
acquisition of the Subject Shares to be provided in a separate instrument.

The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the purchase price reflected in the
SHPA has been fully paid; (ii) the Philippine Securities & Exchange Commission (SEC) shall have approved the
issuance of the Subject Shares; and (iii) any required approval by the Taiwanese government of the acquisition by ULAND of the Subject Shares shall likewise have been obtained.156 (Emphasis supplied)

Petitioner Wellex argues that the use of "upon" in Section 2162 of the First Memorandum of Agreement means that
respondent U-Land must pay the purchase price of the shares of stock in its entirety when they are transferred. This
argument has no merit.
Article 1373 of the Civil Code provides:

As for the joint development agreement, the First Memorandum of Agreement contained the following stipulation:
4. Joint Development Agreement with PEC. Simultaneous with the execution of the SHPA, U-LAND and PEC shall
execute a joint development agreement ("JDA") to pursue property development projects in the Philippines. The JDA
shall cover specific housing and other real estate development projects as the parties shall agree. All profits derived
from the projects covered by the JDA shall be shared equally between ULAND and PEC. U-LAND shall, not later
than May 22, 1998, remit the sum of US$3.0 million as initial funding for the aforesaid development projects against
delivery by WELLEX of 57,000,000 shares of PEC as security for said amount in accordance with Section 9
below.157 (Emphasis provided)
Finally, the parties included the following stipulation in case of a failure to agree on the terms of the share purchase
agreement or the joint development agreement:
9. Validity. - In the event the parties are unable to agree on the terms of the SHPA and/or the JDA within forty (40)
days from date hereof (or such period as the parties shall mutually agree), this Memorandum of Agreement shall
cease to be effective and the parties released from their respective undertakings herein, except that WELLEX shall
refund the US$3.0 million provided under Section 4 within three (3) days therefrom, otherwise U-LAND shall have
the right to recover on the 57,000,000 PEC shares delivered to U-LAND under Section 4.158
Section 2 of the First Memorandum of Agreement clearly provides that the execution of a share purchase agreement
containing mutually agreeable terms and conditions must first be accomplished by the parties before respondent ULand purchases any of the shares owned by petitioner Wellex. A perusal of the stipulation on its face allows for no
other interpretation.
The need for a share purchase agreement to be entered into before payment of the full purchase price can further be
discerned from the other stipulations of the First Memorandum of Agreement.
In Section 1, the parties agreed to enter into a joint business venture, through entering into two (2) agreements: a
share purchase agreement and a joint development agreement. However, Section 1 provides that in the share
purchase agreement, "U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES INTERNATIONAL
CORPORATION (APIC) equivalent to at least 35% of the outstanding capital stock of APIC, but in any case, not
less than 1,050,000,000 shares (the APIC Shares)."159
As for the PEC shares, Section 1 provides that respondent U-Land shall purchase from petitioner Wellex "shares of
stock of PHILIPPINE ESTATES CORPORATION (PEC) equivalent to at least 35% of the outstanding capital stock
of PEC, but in any case, not less than 490,000,000 shares(the PEC Shares)." 160
The use of the terms "at least 35% of the outstanding capital stock of APIC, but in any case, not less than
1,050,000,000 shares" and "at least 35% of the outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares" means that the parties had yet to agree on the number of shares of stock to be purchased.
The need to execute a share purchase agreement before payment of the purchase price of the shares is further
shown by the clause, "[w]ithout prejudice to any subsequent agreement between the parties, the purchase price for
the APIC Shares to be reflected in the [share purchase agreement] shall be... P0.30 per share and that for the PEC
Shares at... P0.65 per share."161 This phrase clearly shows that the final price of the shares of stock was to be
reflected in the share purchase agreement. There being no share purchase agreement executed, respondent ULand was under no obligation to begin payment or remittance of the purchase price of the shares of stock.

ART. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing
that import which is most adequate to render it effectual.
It is necessary for the parties to first agree on the final purchase price and the number of shares of stock to be
purchased before respondent U-Land is obligated to pay or remit the entirety of the purchase price. Thus, petitioner
Wellexs argument cannot be sustained since the parties to the First Memorandum of Agreement were clearly unable
to agree on all the terms concerning the share purchase agreement. It would be absurd for petitioner Wellex to
expect payment when respondent U-Land did not yet agree to the final amount to be paid for the totality of an
indeterminate number of shares of stock.
The third paragraph of Section 2163 provides that the "transfer of the Subject Shares" shall take place upon the
fulfillment of certain conditions, such as full payment of the purchase price "as reflected in the [share purchase
agreement]." The transfer of the shares of stock is different from the execution of the share purchase agreement.
The transfer of the shares of stock requires full payment of the final purchase price. However, that final purchase
price must be reflected in the share purchase agreement. The execution of the share purchase agreement will
require the existence of a final agreement.
In its Answer with counterclaim before the trial court, petitioner Wellex argued that the payment of the shares of stock
was to begin within the 40-day period. Petitioner Wellexs claim is not in any of the stipulations of the contract. Its
subsequent claim that respondent U-Land was actually required to remit a total of US$20.5 million is likewise bereft
of basis since there was no final purchase price of the shares of stock that was agreed upon, due to the failure of the
parties to execute a share purchase agreement. In addition, the parties had yet to agree on the final number of APIC
shares and PEC shares that respondent U-Land would acquire from petitioner Wellex.
Therefore, the understanding of the parties captured in the First Memorandum of Agreement was to continue their
negotiation to determine the price and number of the shares to be purchased. Had it been otherwise, the specific
number or percentage of shares and its price should already have been provided clearly and unambiguously. Thus,
they agreed to a 40-day period of negotiation.
Section 9 of the First Memorandum of Agreement explicitly provides that:
In the event the parties are unable to agree on the terms of the SHPA and/or the JDA within forty (40)days from date
hereof (or such period as the parties shall mutually agree), this Memorandum of Agreement shall cease to be
effective and the parties released from their respective undertakings herein . . .164
The First Memorandum of Agreement was, thus, an agreement to enter into a share purchase agreement. The share
purchase agreement should have been executed by the parties within 40 days from May 16, 1998, the date of the
signing of the First Memorandum of Agreement.
When the 40-day period provided for in Section 9 lapsed, the efficacy of the First Memorandum of Agreement
ceased. The parties were "released from their respective undertakings." Thus, from June 25, 1998, the date when
the 40-day period lapsed, the parties were no longer obliged to negotiate with each other in order to enter into a
share purchase agreement.
However, Section 9 provides for another period within which the parties could still be required to negotiate. The
clause "or such period as the parties shall mutually agree" means that the parties should agree on a period within

which to continue negotiations for the execution of an agreement. This means that after the 40-day period, the
parties were still allowed to negotiate, provided that they could mutually agree on a new period of negotiation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

Based on the records and the findings of the lower courts, the parties were never able to arrive at a specific period
within which they would bind themselves to enter into an agreement. There being no other period specified, the
parties were no longer under any obligation to negotiate and enter into a share purchase agreement. Section 9
clearly freed them from this undertaking.
II
There was no express or implied
novation of the First Memorandum
of Agreement
The subsequent acts of the parties after the 40-day period were, therefore, independent of the First Memorandum of
Agreement.
In its Appellants Brief before the Court of Appeals, petitioner Wellex mentioned that there was an "implied partial
objective or real novation"165 of the First Memorandum of Agreement. Petititoner did not raise this argument of
novation before this court. In Gayos v. Gayos,166 this court held that "it is a cherished rule of procedure that a court
should always strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the
seeds of future litigation[.]"167
Articles 1291 and 1292 of the Civil Code provides how obligations may be modified:
Article 1291. Obligations may be modified by:

4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that
the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every
point. The test of incompatibility is whether the two obligations can stand together, each one with its own
independent existence. (Emphasis from the original omitted)
Because novation requires that it be clear and unequivocal, it is never presumed, thus:
In the civil law setting, novatiois literally construed as to make new. So it is deeply rooted in the Roman Law
jurisprudence, the principle novatio non praesumitur that novation is never presumed. At bottom, for novation to
be a jural reality, its animus must be ever present, debitum pro debito basically extinguishing the old obligation for
the new one.169 (Emphasis from the original omitted, citations omitted)
Applying Arco, it is clear that there was no novation of the original obligation.
After the 40-day period, the parties did not enter into any subsequent written agreement that was couched in
unequivocal terms. The transaction of the First Memorandum of Agreement involved large amounts of money from
both parties. The parties sought to participate in the air travel industry, which has always been highly regulated and
subject to the strictest commercial scrutiny. Both parties admitted that their counsels participated in the crafting and
execution of the First Memorandum of Agreement as well as in the efforts to enter into the share purchase
agreement. Any subsequent agreement would be expected to be clearly agreed upon with their counsels assistance
and in writing, as well.

(1) Changing their object or principal conditions;

Given these circumstances, there was no express novation.
(2) Substituting the person of the debtor;
There was also no implied novation of the original obligation. In Quinto v. People:170
(3) Subrogating a third person in the rights of the creditor.
Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative
that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible
with each other.
In Arco Pulp and Paper Co. v. Lim,168 this court discussed the concept of novation:
Novation extinguishes an obligation between two parties when there is a substitution of objects or debtors or when
there is subrogation of the creditor. It occurs only when the new contract declares so "in unequivocal terms" or that
"the old and the new obligations be on every point incompatible with each other."
....
For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.

[N]o specific form is required for an implied novation, and all that is prescribed by law would be an incompatibility
between the two contracts. While there is really no hard and fast rule to determine what might constitute to be a
sufficient change that can bring about novation, the touchstone for contrariety, however, would be an irreconcilable
incompatibility between the old and the new obligations.
....
. . . The test of incompatibility is whether or not the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and the latter obligation novates the first. Corollarily,
changes that breed incompatibility must be essential in nature and not merely accidental. The incompatibility must
take place in any of the essential elements of the obligation, such as its object, cause or principal conditions thereof;
otherwise, the change would be merely modificatory in nature and insufficient to extinguish the original
obligation.171 (Citations omitted)
There was no incompatibility between the original terms of the First Memorandum of Agreement and the remittances
made by respondent U-Land for the shares of stock. These remittances were actually made with the view that both
parties would subsequently enter into a share purchase agreement. It is clear that there was no subsequent
agreement inconsistent with the provisions of the First Memorandum of Agreement.

Thus, no implied novation took place. In previous cases,172 this court has consistently ruled that presumed novation
or implied novation is not deemed favorable. In United Pulp and Paper Co., Inc. v. Acropolis Central Guaranty
Corporation:173

It became evident that, once again, the parties would not enter into the share purchase agreement. This is the
second circumstance provided for in Article 1185. Thus, the obligation to free each other from their respective
undertakings remained.

Neither can novation be presumed in this case. As explained in Dugo v. Lopena:

As such, petitioner Wellex is obligated to return the remittances made by respondent U-Land, in the same way that
respondent U-Land is obligated to return the certificates of shares of stock and the land titles to petitioner Wellex.

"Novation by presumption has never been favored. To be sustained, it need be established that the old and new
contracts are incompatible in all points, or that the will to novate appears by express agreement of the parties or in
acts of similar import."174 (Emphasis supplied)
There being no novation of the First Memorandum of Agreement, respondent U-Land is entitled to the return of the
amount it remitted to petitioner Wellex. Petitioner Wellex is likewise entitled to the return of the certificates of shares
of stock and titles of land it delivered to respondent U-Land. This is simply an enforcement of Section 9 of the First
Memorandum of Agreement. Pursuant to Section 9, only the execution of a final share purchase agreement within
either of the periods contemplated by this stipulation will justify the parties retention of what they received or would
receive from each other.

IV
Respondent U-Land is praying for
rescission or resolution under
Article 1191, and not rescission
under Article 1381
The arguments of the parties generally rest on the propriety of the rescission of the First Memorandum of
Agreement. This requires a clarification of rescission under Article 1191, and rescission under Article 1381 of the Civil
Code.

III
Article 1191 of the Civil Code provides:
Applying Article 1185 of the Civil
Code, the parties are obligated to
return to each other all they have
received
Article 1185 of the Civil Code provides that:
ART. 1185. The condition that some event will not happen at a determinate time shall render the obligation effective
from the moment the time indicated has elapsed, or if it has become evident that the event cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been
contemplated, bearing in mind the nature of the obligation.
Article 1185 provides that if an obligation is conditioned on the nonoccurrence of a particular event at a determinate
time, that obligation arises (a) at the lapse of the indicated time, or(b) if it has become evident that the event cannot
occur.
Petitioner Wellex and respondent U-Land bound themselves to negotiate with each other within a 40-day period to
enter into a share purchase agreement. If no share purchase agreement was entered into, both parties would be
freed from their respective undertakings.
It is the non-occurrence or non-execution of the share purchase agreement that would give rise to the obligation to
both parties to free each other from their respective undertakings. This includes returning to each other all that they
received in pursuit of entering into the share purchase agreement.
At the lapse of the 40-day period, the parties failed to enter into a share purchase agreement. This lapse is the first
circumstance provided for in Article 1185 that gives rise to the obligation. Applying Article 1185, the parties were then
obligated to return to each other all that they had received in order to be freed from their respective undertakings.
However, the parties continued their negotiations after the lapse of the 40-day period. They made subsequent
transactions with the intention to enter into the share purchase agreement. Despite that, they still failed to enter into
a share purchase agreement. Communication between the parties ceased, and no further transactions took place.

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance
with articles 1385 and 1388 and the Mortgage Law.
Articles 1380 and 1381, on the other hand, provide an enumeration of rescissible contracts: ART. 1380. Contracts
validly agreed upon may be rescinded in the cases established by law. ART. 1381. The following contracts are
rescissible:
(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by
more than one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding
number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims
due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.

Article 1383 expressly provides for the subsidiary nature of rescission:

ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage
has no other legal means to obtain reparation for the same.

This article applies only to reciprocal obligations. It has no application to every case where two persons are mutually
debtor and creditor of each other. There must be reciprocity between them. Both relations must arise from the same
cause, such that one obligation is correlative to the other. Thus, a person may be the debtor of another by reason of
an agency, and his creditor by reason of a loan. They are mutually obligated, but the obligations are not reciprocal.
Reciprocity arises from identity of cause, and necessarily the two obligations are created at the same
time.178 (Citation omitted)

Rescission itself, however, is defined by Article 1385:

ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with
their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission
can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss. Gotesco Properties v.
Fajardo175 categorically stated that Article 1385 is applicable to Article 1191:
At this juncture, it is noteworthy to point out that rescission does not merely terminate the contract and release the
parties from further obligations to each other, but abrogates the contract from its inception and restores the parties to
their original positions as if no contract has been made. Consequently, mutual restitution, which entails the return of
the benefits that each party may have received as a result of the contract, is thus required. To be sure, it has been
settled that the effects of rescission as provided for in Article 1385 of the Code are equally applicable to cases under
Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving rescission under Article 1191. This means bringing the parties back to
their original status prior to the inception of the contract. Article 1385 of the Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with
their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission
can return whatever he may be obligated to restore. Neither shall rescission take place when the things which are
the object of the contract are legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.
This Court has consistently ruled that this provision applies to rescission under Article 1191: [S]ince Article 1385 of
the Civil Code expressly and clearly states that "rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest," the Court finds no justification to
sustain petitioners position that said Article 1385 does not apply to rescission under Article 1191. x x x176(Emphasis
from the original, citations omitted)
Rescission, as defined by Article 1385, mandates that the parties must return to each other everything that they may
have received as a result of the contract. This pertains to rescission or resolution under Article 1191, as well as the
provisions governing all forms of rescissible contracts.
For Article 1191 to be applicable, however, there must be reciprocal prestations as distinguished from mutual
obligations between or among the parties. A prestation is the object of an obligation, and it is the conduct required by
the parties to do or not to do, or to give.177 Parties may be mutually obligated to each other, but the prestations of
these obligations are not necessarily reciprocal. The reciprocal prestations must necessarily emanate from the same
cause that gave rise to the existence of the contract. This distinction is best illustrated by an established authority in
civil law, the late Arturo Tolentino:

Ang Yu Asuncion v. Court of Appeals179 provides a clear necessity of the cause in perfecting the existence of an
obligation:
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation is constituted
upon the concurrence of the essential elements thereof, viz: (a) The vinculum juris or juridical tie which is the efficient
cause established by the various sources of obligations (law, contracts, quasi-contracts, delicts and quasi-delicts);
(b) the object which is the prestation or conduct, required to be observed (to give, to do or not to do); and (c) the
subject-persons who, viewed from the demandability of the obligation, are the active (obligee) and the passive
(obligor) subjects.180
The cause is the vinculum juris or juridical tie that essentially binds the parties to the obligation. This linkage between
the parties is a binding relation that is the result of their bilateral actions, which gave rise to the existence of the
contract.
The failure of one of the parties to comply with its reciprocal prestation allows the wronged party to seek the remedy
of Article 1191. The wronged party is entitled to rescission or resolution under Article 1191, and even the payment of
damages. It is a principal action precisely because it is a violation of the original reciprocal prestation.
Article 1381 and Article 1383, on the other hand, pertain to rescission where creditors or even third persons not privy
to the contract can file an action due to lesion or damage as a result of the contract. In Ong v. Court of
Appeals,181 this court defined rescission:
Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by law to the
contracting parties and even to third persons, to secure the reparation of damages caused to them by a contract,
even if this should be valid, by restoration of things to their condition at the moment prior to the celebration of the
contract. It implies a contract, which even if initially valid, produces a lesion or a pecuniary damage to
someone.182(Citations omitted)
Ong elaborated on the confusion between "rescission" or resolution under Article 1191 and rescission under Article
1381:
On the other hand, Article 1191 of the New Civil Code refers to rescission applicable 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 such that the performance of one is conditioned upon the simultaneous fulfillment of the other.
Rescission of reciprocal obligations under Article 1191 of the New Civil Code should be distinguished from rescission
of contracts under Article 1383. Although both presuppose contracts validly entered into and subsisting and both
require mutual restitution when proper, they are not entirely identical.
While Article 1191 uses the term "rescission," the original term which was used in the old Civil Code, from which the
article was based, was "resolution." Resolution is a principal action which is based on breach of a party, while
rescission under Article 1383 is a subsidiary action limited to cases of rescissionfor lesion under Article 1381 of the
New Civil Code, which expressly enumerates the following rescissible contracts:
1. Those which are entered into by guardians whenever the wards whom they represent suffer lesion by
more than one fourth of the value of the things which are the object thereof;

2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding
number;
3. Those undertaken in fraud of creditors when the latter cannot in any manner collect the claims due
them;
4. Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority; [and]
5. All other contracts specially declared by law to be subject to rescission. 183 (Citations omitted)
When a party seeks the relief of rescission as provided in Article 1381, there is no need for reciprocal prestations to
exist between or among the parties. All that is required is that the contract should be among those enumerated in
Article 1381 for the contract to be considered rescissible. Unlike Article 1191, rescission under Article 1381 must be a
subsidiary action because of Article 1383.
Contrary to petitioner Wellexs argument, this is not rescission under Article 1381 of the Civil Code. This case does
not involve prejudicial transactions affecting guardians, absentees, or fraud of creditors. Article 1381(3) pertains in
particular to a series of fraudulent actions on the part of the debtor who is in the process of transferring or alienating
property that can be used to satisfy the obligation of the debtor to the creditor. There is no allegation of fraud for
purposes of evading obligations to other creditors. The actions of the parties involving the terms of the First
Memorandum of Agreement do not fall under any of the enumerated contracts that may be subject of rescission.
Further, respondent U-Land is pursuing rescission or resolution under Article 1191, which is a principal action. Justice
J.B.L. Reyes concurring opinion in the landmark case of Universal Food Corporation v. Court of Appeals 184 gave a
definitive explanation on the principal character of resolution under Article 1191 and the subsidiary nature of actions
under Article 1381:
The rescission on account of breach of stipulations is not predicated on injury to economic interests of the party
plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties. It is not a
subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action for rescission
thereunder is subordinated to anything other than the culpable breach of his obligations by the defendant. This
rescission is a principal action retaliatory in character, it being unjust that a party be held bound to fulfill his promises
when the other violates his. As expressed in the old Latin aphorism: "Non servanti fidem, non est fides servanda."
Hence, the reparation of damages for the breach is purely secondary.
On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is subordinated to
the existence of that prejudice, because it is the raison detre as well as the measure of the right to rescind. Hence,
where the defendant makes good the damages caused, the action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission for
lesin enumerated in Article 1381 of the Civil Code of the Philippines, and does not apply to cases under Article
1191.185
Rescission or resolution under Article 1191, therefore, is a principal action that is immediately available to the party at
the time that the reciprocal prestation was breached. Article 1383 mandating that rescission be deemed a subsidiary
action cannot be applicable to rescission or resolution under Article 1191. Thus, respondent U-Land correctly sought
the principal relief of rescission or resolution under Article 1191.
The obligations of the parties gave rise to reciprocal prestations, which arose from the same cause: the desire of
both parties to enter into a share purchase agreement that would allow both parties to expand their respective airline
operations in the Philippines and other neighboring countries.

V
The jurisprudence relied upon by
petitioner Wellex is not applicable
The cases that petitioner Wellex cited to advance its arguments against respondent U-Lands right to rescission are
not in point.
Suria v. Intermediate Appellate Court is not applicable. In that case, this court specifically stated that the parties
entered into a contract of sale, and their reciprocal obligations had already been fulfilled: 186
There is no dispute that the parties entered into a contract of sale as distinguished from a contract to sell.
By the contract of sale, the vendor obligates himself to transfer the ownership of and to deliver a determinate thing to
the buyer, who in turn, is obligated to pay a price certain in money or its equivalent (Art. 1458, Civil Code). From the
respondents own arguments, we note that they have fully complied with their part of the reciprocal obligation. As a
matter of fact, they have already parted with the title as evidenced by the transfer certificate of title in the petitioners
name as of June 27, 1975.
The buyer, in turn, fulfilled his end of the bargain when he executed the deed of mortgage. The payments on an
installment basis secured by the execution of a mortgage took the place of a cash payment. In other words, the
relationship between the parties is no longer one of buyer and seller because the contract of sale has been perfected
and consummated. It is already one of a mortgagor and a mortgagee. In consideration of the petitioners promise to
pay on installment basis the sum they owe the respondents, the latter have accepted the mortgage as security for
the obligation.
The situation in this case is, therefore, different from that envisioned in the cited opinion of Justice J.B.L. Reyes. The
petitioners breach of obligations is not with respect to the perfected contract of sale but in the obligations created by
the mortgage contract. The remedy of rescission is not a principal action retaliatory in character but becomes a
subsidiary one which by law is available only in the absence of any other legal remedy. (Art. 1384, Civil Code).
Foreclosure here is not only a remedy accorded by law but, as earlier stated, is a specific provision found in the
contract between the parties.187 (Emphasis supplied)
In Suria, this court clearly applied rescission under Article 1384 and not rescission or resolution under Article 1191. In
addition, the First Memorandum of Agreement is not a contract to sell shares of stock. It is an agreement to negotiate
with the view of entering into a share purchase agreement.
Villaflor v. Court of Appealsis not applicable either. In Villaflor, this court held that non-payment of consideration of
contracts only gave rise to the right to sue for collection, but this non-payment cannot serve as proof of a simulated
contract.188 The case did not rule that the vendor has no obligation to deliver the thing sold if the buyer fails to fully
pay the price required by the contract. In Villaflor:
Petitioner insists that nonpayment of the consideration in the contracts proves their simulation. We disagree.
Nonpayment, at most, gives him only the right to sue for collection. Generally, in a contract of sale, payment of the
price is a resolutory condition and the remedy of the seller is to exact fulfillment or, in case of a substantial breach, to
rescind the contract under Article 1191 of the Civil Code. However, failure to pay is not even a breach, but merely an
event which prevents the vendors obligation to convey title from acquiring binding force. 189(Citations omitted) This
courts statement in Villaflor regarding rescission under Article 1191 was a mere obiter dictum. In Land Bank of the
Philippines v. Suntay,190 this court discussed the nature of an obiter dictum:
An obiter dictum has been defined as an opinion expressed by a court upon some question of law that is not
necessary in the determination of the case before the court. It is a remark made, or opinion expressed, by a judge, in

his decision upon a cause by the way, that is, incidentally or collaterally, and not directly upon the question before
him, or upon a point not necessarily involved in the determination of the cause, or introduced by way of illustration, or
analogy or argument. It does not embody the resolution or determination of the court, and is made without argument,
or full consideration of the point. It lacks the force of an adjudication, being a mere expression of an opinion with no
binding force for purposes of res judicata.191 (Citations omitted)
Petitioner Wellexs reliance on Padilla v. Spouses Paredes and Spouses Agustin v. Court of Appeals is also
misplaced. In these cases, this court held that there can be no rescission for an obligation that is nonexistent,
considering that the suspensive condition that will give rise to the obligation has not yet happened. This is based on
an allegation that the contract involved is a contract to sell. In a contract to sell, the failure of the buyer to pay
renders the contract without effect. A suspensive condition is one whose non-fulfillment prevents the existence of the
obligation.192 Payment of the purchase price, therefore, constitutes a suspensive condition in a contract to sell. Thus,
this court held that non-remittance of the full price allowed the seller to withhold the transfer of the thing to be sold.
In this case, the First Memorandum of Agreement is not a contract to sell. Entering into the share purchase
agreement or the joint development agreement remained a stipulation that the parties themselves agreed to pursue
in the First Memorandum of Agreement.
Based on the First Memorandum of Agreement, the execution of the share purchase agreement was necessary to
put into effect respondent U-Lands purchase of the shares of stock. This is the stipulation indicated in this
memorandum of agreement. There was no suspensive condition of full payment of the purchase price needed to
execute either the share purchase agreement or the joint development agreement. Upon the execution of the share
purchase, the obligation of petitioner Wellex to transfer the shares of stock and of respondent U-Land to pay the
price of these shares would have arisen.
Enforcement of Section 9 of the First Memorandum of Agreement has the same effect as rescission or resolution
under Article 1191 of the Civil Code. The parties are obligated to return to each other all that they may have received
as a result of the breach by petitioner Wellex of the reciprocal obligation. Therefore, the Court of Appeals did not err
in affirming the rescission granted by the trial court.
VI
Petitioner Wellex was not guilty of
fraud but of violating Article 1159
of the Civil Code
In the issuance of the Writ of Preliminary Attachment, the lower court found that petitioner Wellex committed fraud by
inducing respondent U-Land to purchase APIC shares and PEC shares and by leading the latter to believe that APC
was a subsidiary of APIC.

x x x fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to
enter into a contract which, without them, he would not have agreed to.
This is followed by the articles which provide legal examples and illustrations of fraud.
....
Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in
themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has
relied on the formers special knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created
substantial mistake and the same is mutual. (n)
Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n) The distinction between
fraud as a ground for rendering a contract voidable or as basis for an award of damages is provided in Article 1344:
In order that fraud may make a contract voidable, it should be serious and should not have been employed by both
contracting parties.
Incidental fraud only obliges the person employing it to pay damages. (1270)194
Tankeh further discussed the degree of evidence needed to prove the existence of fraud:
[T]he standard of proof required is clear and convincing evidence. This standard of proof is derived from American
common law. It is less than proof beyond reasonable doubt (for criminal cases) but greater than preponderance of
evidence (for civil cases). The degree of believability is higher than that of an ordinary civil case. Civil cases only
require a preponderance of evidence to meet the required burden of proof. However, when fraud is alleged in an
ordinary civil case involving contractual relations, an entirely different standard of proof needs to be satisfied. The
imputation of fraud in a civil case requires the presentation of clear and convincing evidence. Mere allegations will
not suffice to sustain the existence of fraud. The burden of evidence rests on the part of the plaintiff or the party
alleging fraud. The quantum of evidence is such that fraud must be clearly and convincingly shown.195

Determining the existence of fraud is not necessary in an action for rescission or resolution under Article 1191. The
existence of fraud must be established if the rescission prayed for is the rescission under Article 1381.

To support its allegation of fraud, Mr. Tseng, respondent U-Lands witness before the trial court, testified that Mr.
Gatchalian approached respondent U-Land on two (2) separate meetings to propose entering into an agreement for
joint airline operations in the Philippines. Thus, the parties entered into the First Memorandum of Agreement.
Respondent U-Land primarily anchors its allegation of fraud against petitioner Wellex on the existence of the second
preambular clause of the First Memorandum of Agreement.

However, the existence of fraud is a question that the parties have raised before this court. To settle this question
with finality, this court will examine the established facts and determine whether petitioner Wellex indeed defrauded
respondent U-Land.

In its Appellants Brief before the Court of Appeals, petitioner Wellex admitted that "[t]he amount of US$7,499,945.00
was remitted for the purchase of APIC and PEC shares."196 In that brief, it argued that the parties were already in the
process of partially executing the First Memorandum of Agreement.

In Tankeh v. Development Bank of the Philippines,193 this court enumerated the relevant provisions of the Civil Code
on fraud:

As held in Tankeh, there must be clear and convincing evidence of fraud. Based on the established facts, respondent
U-Land was unable to clearly convince this court of the existence of fraud.

Fraud is defined in Article 1338 of the Civil Code as:

Respondent U-Land had every reasonable opportunity to ascertain whether APC was indeed a subsidiary of APIC.
This is a multimillion dollar transaction, and both parties admitted that the share purchase agreement underwent
several draft creations. Both parties admitted the participation of their respective counsels in the drafting of the First

Memorandum of Agreement. Respondent U-Land had every opportunity to ascertain the ownership of the shares of
stock. Respondent U-Land itself admitted that it was not contesting petitioner Wellexs ownership of the APIC shares
or APC shares; hence, it was not contesting the existence of the Second Memorandum of Agreement. Upon
becoming aware of petitioner Wellexs representations concerning APICs ownership or control of APC as a
subsidiary, respondent U-Land continued to make remittances totalling the amount sought to be rescinded. It had the
option to opt out of negotiations after the lapse of the 40-day period. However, it proceeded to make the remittances
to petitioner Wellex and proceed with negotiations.
Respondent U-Land was not defrauded by petitioner Wellex to agree to the First Memorandum of Agreement.1awp+
+i1To constitute fraud under Article 1338, the words and machinations must have been so insidious or deceptive that
the party induced to enter into the contract would not have agreed to be bound by its terms if that party had an
opportunity to be aware of the truth.197 Respondent U-Land was already aware that APC was not a subsidiary of
APIC after the 40-day period. Still, it agreed to be bound by the First Memorandum of Agreement by making the
remittances from June 30 to September 25, 1998.198 Thus, petitioner Wellexs failure to inform respondent U-Land
that APC was not a subsidiary of APIC when the First Memorandum of Agreement was being executed did not
constitute fraud.
However, the absence of fraud does not mean that petitioner Wellex is free of culpability. By failing to inform
respondent U-Land that APC was not yet a subsidiary of APIC at the time of the execution of the First Memorandum
of Agreement, petitioner Wellex violated Article 1159 of the Civil Code. Article 1159 reads:
ART. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith.

Article 1374 of the Civil Code provides that:

ART. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that
sense which may result from all of them taken jointly.
The execution of the joint development agreement was contingent on the execution of the share purchase
agreement.1wphi1 This is provided for in Section 4 of the First Memorandum of Agreement, which stated that the
execution of the two agreements is "[s]imultaneous."201 Thus, the failure of the share purchase agreements
execution would necessarily mean the failure of the joint development agreements execution.
Section 9 of the First Memorandum of Agreement provides that should the parties fail to execute the agreement, they
would be released from their mutual obligations. Had respondent U-Land paid the US$3 million and petitioner Wellex
delivered the 57,000,000 PEC shares for the purpose of the joint development agreement, they would have been
obligated to return these to each other.
Section 4 and Section 9 of the First Memorandum of Agreement must be interpreted together. Since the parties were
unable to agree on a final share purchase agreement and there was no exchange of money or shares of stock due to
the continuing negotiations, respondent U-Land was no longer obliged to provide the money for the real estate
development projects. The payment of the US$3 million was for pursuing the real estate development projects under
the joint development agreement. There being no joint development agreement, the obligation to deliver the US$3
million and the delivery of the PEC shares for that purpose were no longer incumbent upon the parties.
VIII

In Ochoa v. Apeta,199 this court defined good faith:

Good faith is an intangible and abstract quality with no technical meaning or statutory definition, and it encompasses,
among other things, an honest belief, the absence of malice and the absence of design to defraud or to seek an
unconscionable advantage. It implies honesty of intention, and freedom from knowledge of circumstances which
ought to put the holder upon inquiry. The essence of good faith lies in an honest belief in the validity of ones right,
ignorance of a superior claim and absence of intention to overreach another.200 (Citations omitted)
It was incumbent upon petitioner Wellex to negotiate the terms of the pending share purchase agreement in good
faith. This duty included providing a full disclosure of the nature of the ownership of APIC in APC. Unilaterally
compelling respondent U-Land to remit money to finalize the transactions indicated in the Second Memorandum of
Agreement cannot constitute good faith.
The absence of fraud in a transaction does not mean that rescission under Article 1191 is not proper. This case is not
an action to declare the First Memorandum of Agreement null and void due to fraud at the inception of the contract or
dolo causante. This case is not an action for fraud based on Article 1381 of the Civil Code. Rescission or resolution
under Article 1191 is predicated on the failure of one of the parties in a reciprocal obligation to fulfill the prestation as
required by that obligation. It is not based on vitiation of consent through fraudulent misrepresentations.
VII
Respondent U-Land was not bound
to pay the US$3 million under the
joint development agreement
The alleged failure of respondent U-Land to pay the amount of US$3 million to petitioner Wellex does not justify the
actions of the latter in refusing to return the US$7,499,945.00.

Respondent U-Land was not

obligated to exhaust the "securities"
given by petitioner Wellex
Contrary to petitioner Wellexs assertion, there is no obligation on the part of respondent U-Land to exhaust the
"securities" given by petitioner Wellex. No such meeting of the minds to create a guarantee or surety or any other
form of security exists. The principal obligation is not a loan or an obligation subject to the conditions of sureties or
guarantors under the Civil Code. Thus, there is no need to exhaust the securities given to respondent U-Land, and
there is no need for a legal condition where respondent U-Land should pursue other remedies.
Neither petitioner Wellex nor respondent U-Land stated that there was already a transfer of ownership of the shares
of stock or the land titles. Respondent U-Land itself maintained that the delivery of the shares of stock and the land
titles were not in the nature of a pledge or mortgage.202 It received the certificates of shares of stock and the land
titles with an understanding that the parties would subsequently enter a share purchase agreement. There being no
share purchase agreement, respondent U-Land is obligated to return the certificates of shares of stock and the land
titles to petitioner Wellex.
The parties are bound by the 40-day period provided for in the First Memorandum of Agreement. Adherence by the
parties to Section 9 of the First Memorandum of Agreement has the same effect as the rescission or resolution
prayed for and granted by the trial court.
Informal acts are prone to ambiguous legal interpretation. This will be based on the say-so of each party and is a
fragile setting for good business transactions. It will contribute to the unpredictability of the market as it would provide
courts with extraordinary expectations to determine the business actor's intentions. The parties appear to be
responsible businessmen who know that their expectations and obligations should be clearly articulated between
them. They have the resources to engage legal representation. Indeed, they have reduced their agreement in
writing.

Petitioner Wellex now wants this court to define obligations that do not appear in these instruments. We cannot do
so. This court cannot interfere in the bargains, good or bad, entered into by the parties. Our duty is to affirm legal
expectations, not to guarantee good business judgments.
WHEREFORE, the petition is DENIED. The Decision of the Regional Trial Court in Civil Case No. 99-1407 and the
Decision of the Court of Appeals in CA-G.R. CV No. 74850 are AFFIRMED. Costs against petitioner The Wellex
Group, Inc.
G.R. No. L-50242 May 2l, 1988
SO ORDERED.
E. RAZON, INC., petitioner,
vs.
THE COURT OF APPEALS and PIONEER INSURANCE & SURETY CORPORATION, respondents.
Cruz, Durian & Academia Law Office for petitioner.
Inocencio R. Serranilla for private respondent.

GUTIERREZ, JR., J.:

This is a petition to review by certiorari the decision of the -court of Appeals in CA-G.R. No. 56751-R, affirming in toto
the decision of the Court of First Instance of Manila in Civil Case No. 81460, entitled "Pioneer Insurance and Surety
Corporation v. Northern Lines, Inc. and/or E. Razon, Inc. The dispositive portion of the decision reads:
WHEREFORE, judgment is hereby rendered ordering defendant E. Razon, Inc. to pay plaintiff
the sum of P10,899.28 with legal interest from date of filing of the complaint, November 13,
1970, until fully paid, and costs.
The complaint is dismissed as against defendant Northern Lines, Inc. (Rollo, p. 13)
Civil Case No. 81460 was filed by respondent Pioneer Insurance as insurer-subrogee, to recover from either or both
defendants, jointly and severally, the sum of P21,937.75 representing the invoice value, freight costs and other
importation expenses of three (3) cases of radio and phonograph parts short-delivered from a total of eighty-six (86)
cases of said articles from Kobe, Japan, shipped aboard the SS "Don Jacinto II" of the defendant Northern Lines,
Inc., for delivery to the consignee MGM Importers Corporation at Manila. The total shipment was insured by Pioneer.
On November 14, 1969, the shipment was discharged from the carrying vessel into the custody of E. Razon, Inc.,
one of the arrastre operators in the Port of Manila, charged with the obligation of handling, custody and delivery of all
cargo discharged at the government piers of Manila. The shipment was delivered to its consignee, MGM Importers
with losses and damages valued at P 21,937.75.
On December 12, 1969, E. Razon certified that out of 86 cases of radio parts loaded on board the SS 'DON
JACINTO II" under Bill of Lading No. KM-18, only 83 cases had been delivered to the consignee.

Formal claims were thus filed by MGM Importers with Northern Lines and E. Razon, as well as the Pioneer
Insurance Company. The latter indemnified the assured in the sum of P 21,937.75 covering the full value of the lost
cargo.
In its Answer, E. Razon denied ability on the grounds that (a) the whole cargo was not received from the carrying
vessel and (b) the shipment was delivered to the consignee in the same quantity and condition that E. Razon, Inc.
received the same from the vessel. However, it alleged that in the remote possibility it is held liable, its liability must
be limited to the amount fixed under the provisions of the Revised Management Contract, that is, P2,000 per
package.
On the other hand, Northern Lines alleged that the shipment had been completely unloaded and received by E.
Razon, Inc.; that it exercised extraordinary diligence; and that the complaint has no cause of action.
Thereafter, the parties entered into a stipulation of fact, under which the defendants Northern Lines and E. Razon,
Inc. admitted, among others, that (a) the entire shipment of 86 radio parts were unloaded from the vessel "DON
JACINTO II" unto the custody of E. Razon as shown by the Statement of Deliveries and the cargo receipts; (b) E.
Razon certified that out of 86 cases only 83 cases had been delivered to the consignee; (e) on November 25,1969,
the consignee, MGM Importers, filed a formal claim for the missing cases; and (d) Plaintiff Pioneer indemnified the
consignee in the sum of P 21,937.75.
On July 24, 1972, after filing their respective memoranda, defendant Northern Lines, Inc. filed a Motion to Dismiss on
the ground that under the Stipulation of Facts, E. Razon admitted that it received from the vessel the complete
shipment as follows:
III. Plaintiff and defendant E. Razon admit that the entire shipment of 86 cases radio parts were
unloaded from the vessel 'Don Jacinto II or unto the custody of E. Razon as shown by the
summary of deliveries (Statement of deliveries) a copy of which being herewith attached and
Exh. 'I' (Northern Lines) and under the cargo receipts stated herein which are likewise attached
herewith and marked as Exh. '2' to Exhibit `2-V' (Northern Lines" (Rollo, p. 25)
After hearing, the Court of First Instance of Manila rendered its decision ordering defendant E. Razon to indemnify
plaintiff Pioneer the sum of P 10,899.28 with legal interest and dismissing the case against defendant Northern
Lines, leaving the controversy against E. Razon, Inc. alone.
On December 18, 1974, E. Razon, Inc. filed its appeal with the Court of Appeals which rendered its decision on
January 4, 1978, affirming in toto the trial court's decision. On March 9, 1979, the Court of Appeals denied the
petitioner's motion for reconsideration. Hence, this petition.
The sole issue raised by the petitioner is the general limitation of its liability to P 2,000 per case lost or destroyed as
provided in Paragraph or Clause XX of the Revised Management Contract it had entered into with the Bureau of
Customs which reads:
The CONTRACTOR shall at its own expense handle all merchandise upon or over said piers,
wharves, and other designated places and at its own expense perform all work undertaken by it
hereunder diligently and in a skillful workman like and efficient manner; that the contractor shall
be solely responsible as an independent CONTRACTOR, and hereby agrees to accept liability
and to promptly pay to the steamship company, consignee consignor, or other interested party or
parties for the loss, damage, or non-delivery of cargoes to the extent of the actual invoice value

of each package which in no case shall be more than Two Thousand Pesos (P 2,000.00) for
each package unless the value of the importation is otherwise specified or communicated in
writing together with the invoice value and supported by a certified packing list to the
CONTRACTOR by the interested party or parties before the arrival of the goods, as well as all
damages that may be suffered on account of loss, damage or destruction of any merchandise
while in custody or under the control of the CONTRACTOR upon any pier, wharf or other
designated place under the supervision of the Bureau, but said CONTRACTOR shall not be
respoxisible for the condition of any package received nor for the weight, nor for any loss, injury
or damage to the said cargo before or while the goods are being received or remain on the piers
or wharves, or if the loss, injury or damage is caused by force majeure, or other causes beyond
the CONTRACTOR's control, or capacity to prevent or remedy. (Rollo, P. 26)
It is the petitioner's contention that the unequivocal text of the aforequoted provision of the Revised Management
Contract denotes a clear rule in the limited liability of E. Razon, Inc., that is, it should not exceed P 2,000 per
package , except only in case the value of the importation is specified, manifested or communicated in writing
together with the certified packing list to the contractor before the arrival of the goods. Petitioner reads the same to
mean notification before arrival of the vessel. Thus, not having been notified prior to the docking of the SS "Don
Jacinto II," E. Razon denies its liability to MGM Importers or to its subrogee Pioneer Insurance.
The respondent maintains otherwise. It argues that "Under the provisions of the Tariff and Customs Code, for
purposes of clearing cargo from the Bureau of Customs, the Invoice, Packing List, Bill of Lading and other
documents must be submitted for processing and computation of customs duties, arrastre charges," satisfying the
condition of exception to the P2,000 limitation of liability of the arrastre operator.
We rule in favor of the respondents.
It is unrebutted that MGM Importers, upon arrival of the shipment , declared the same for tax purposes, as well as for
the assessment of arrastre charges and other fees (Plaintiff 's Memorandum), Civil Case No. 81460, page 26. CA,
Record on Appeal of E. Razon, Inc.). For the purpose, the invoice, packing list and other shipping documents were
presented to the Bureau of Customs as well as to petitioner E. Razon for the proper assessment of the arrastre
charges and other fees. Such manifestation satisfies the condition of declaration of the actual invoices of the value of
the goods before arrival of the goods, to overcome the limitation of liability of the arrastre operator.
Indeed, the provision in the management contract regarding the declaration of the actual invoice value "before the
arrival of the goods" must be understood to mean a declaration before the arrival of the goods in the custody of the
arrastre operator, whether it be done long before the landing of the shipment at port, or immediately before turn-over
thereof to the arrastre operator's custody. What is essential is knowledge beforehand of the extent of the risk to be
undertaken by the arrastre operator, as determined by the value of the property committed to its care that it may
define its responsibility for loss or damage to such cargo and to ascertain compensation commensurate to such risk
assumed (Northern Motors, Inc. v. Prince Lines, 107 Phil. 253).<re||an1w> Having been duly informed of the
actual invoice value of the merchandise under its custody and having received payment of arrastre charges based
thereon, E. Razon, Inc., as arrastre operator, cannot in justice insist on a limitation of its liability, under the contract,
to less than the value of each undelivered case or package consigned to MGM Importers, Inc. The lower courts
judgment finding the petitioner liable for the full declared value of the three (3) undelivered cases in question must be
upheld.
The petitioner further contends that only two (2) cases of radio parts were missing, the third case having been
delivered with some shortages, thus reducing its liability. There is nothing on record to sufficiently sustain such
allegation. The petitioner's own certification of delivery refutes its claim. Exhibit "E" (p. 8 Folder of Exhibits) shows

that out of the manifested quantity of Eighty-Six (86) cases of radio parts, speaker parts and phonograph parts, only
(83) cases were delivered by E. Razon as of said date, in accordance with its records. No further deliveries were
made to the consignee MGM Importers, Inc.
Finally, we reiterate the Court of Appeals pronouncements regarding the petitioner's obligation as arrastre operator.
The petitioner avers that:
... The reason for the requirement of advance notice in writing before the arrival of the goods is
to put the defendant-appellant arrastre operator on the alert about the arrival of the goods so
that they could exert extraordinary care and supervision in seeing that the goods should be
taken care of and ultimately delivered to the consignee ...
Reacting thereto, the respondent court held:
... under appellant's interpretation, the Contractor would only exercise care and caution in the
handling of goods announced to it beforehand to be of sizeable value. Appellant, in other words,
spurns the public service nature of its business. What difference, in care and consideration,
should there be between a package containing goods worth, say, one hundred pesos and one
containing goods worth one thousand pesos, for as long as the charges are duly paid? Why
should appellant require consignors/consignees to undergo extra time and expenses to
advise/warn him beforehand to handle his cargo 'with care' because it is worth more than
P2,000.00? Would failure to so notify the Contractor give the latter the liscence to treat the cargo
with less than the attention ordinarily expected of it?. . . (Rollo, pp. 29-30)
Rightly so.
The stipulation requiring a consignee to inform the contractor or arrastre operator and give the advance notice of the
actual invoice value of the goods to be put in its custody is for the purpose of determining its liability, that it may
obtain compensation commensurable to the risk it assumes, not for the purpose of determining the degree of care or
diligence it must exercise as a depository or warehouseman (Lua Kian v. Manila Railroad, Co., et al., 19 SCRA 5).
Article 1163, vis-a-vis Article 1972 of the Civil Code on obligations of the depository provides:
Every person obliged to give something is also obliged to take care of it with the proper diligence
of a good father of a family, unless the law or stipulation of the parties requires another standard
of care.
With its further responsibility as a public service operator, the obligation of the petitioner to exercise care and
diligence can be no less.
WHEREFORE, in view of the foregoing, the petition is hereby DISMISSED. The judgment appealed from ordering
the petitioner to pay the respondent Pioneer Insurance and Surety Corporation "the sum of P10,899.28 with legal
interest from the date of filing of the complaint, November 13, 1970, until fully paid and costs" is hereby AFFIRMED.
SO ORDERED.

G.R. No. 170202

July 14, 2008

OPTIMUM MOTOR CENTER CORPORATION, Petitioner,

vs.
ANNIE TAN, doing business under the name & style "AJ & T Trading," Respondent.
DECISION
TINGA, J.:
This Petition for Review1 seeks to reverse the Decision2 and Resolution3 of the Court of Appeals in CA-G.R. CV No.
63985. The decision affirmed with modification the judgment4 of the Regional Trial Court (RTC) of Manila, Branch 19
in Civil Case No. 94-71847.
The case originated from a Complaint5 for recovery of possession filed by Annie Tan (respondent) against Optimum
Motor Center Corporation (Optimum) and Cesar Pea (Pea) with the RTC of Manila. Respondent is doing business
under the name and style, "AJ & T Trading" which is engaged in transportation of cargoes.6 AJ & T Trading is the
registered owner7 of an Isuzu cargo truck with Plate No. NWM 418, the subject of this complaint. Optimum is a

domestic corporation which owned and operated an auto repair shop located at 120 Del Monte Avenue, Quezon
City.8
Respondents version of the facts is as follows.
On 14 January 1994, she brought the subject truck to Optimum for body repair and painting. Pea introduced himself
as the owner and manager of Optimum. Respondent verbally contracted with Pea for the repair of the damaged
portions of the truck, repainting and upholstery replacement. It was then agreed that the work would take thirty (30)
days to complete and would thus be finished on 15 February 1994.9 Leopoldo Daza, a security guard assigned to
Optimum, received the truck and prepared a checklist10 of the items found therein. On 20 January 1994, an
estimate11 detailing the description and price rates for the repair was sent to respondent. To bring down the repair
costs, the parties agreed that respondent would supply the necessari materials such as windshield glasses for the
front and back of the truck, rubber strip and quartered glass panel.12
On 15 February 1994, respondent went to Optimum but was told to come back in March as the repair was not yet
finished.13 On several occasions, respondent tried to claim her truck from Optimum14 to no avail. On 4 March 1994,
she again went to Optimums repair shop and was surprised to see that the trade name "AJ & T Trading" painted in
the middle and side doors of the truck had been scraped off. She also noticed that the 100-meter skyline rope, oil
stick gauge and right side mirror were missing.15 On 22 April 1994, she found her truck abandoned and unrepaired at
Optimums compound. On 16 May 1994, she discovered that Optimum had already vacated its shop in Del Monte
and that her truck was nowhere to be found.16 Later, she learned that Optimum had transferred to a new location but
her still unrepaired truck was found in Valenzuela City.
This prompted respondent to file the instant complaint with the trial court on 5 October 1994.17 She prayed for the
recovery of possession of the truck or, in the alternative, the payment of the value thereof. She also sought the
award of attorneys fees, moral damages and costs of suit.18 At the trial of the case, two witnesses, Maximo
Merigildo19 and Bel Eduardo Nitafan,20 testified on the dilapidated condition of the truck when they saw it on separate
occasions.
On 20 October 1994, the trial court issued an order directing the seizure of the vehicle upon respondents filing of a
bond in the amount of P1,200,000.00.21 Respondent posted the required bond.22 Optimum posted a counterbond to
lift said order.23

On 31 May 1999, the trial court rendered a decision in favor of respondent, thus:
WHEREFORE, premises considered, judgment is hereby rendered ordering defendants Optimum Motor Center
Corporation and/or any person acting for and in its behalf, to surrender in good running condition the Isuzu Cargo
Truck, subject matter of this complaint and if this is not feasible, to jointly and severally pay the sum of P600,000.00
with legal interest from the date (October 5, 1994) the complaint was filed, until fully satisfied, moral damages
of P50,000.00 and litigation expenses of P30,000.00 plus 25% of the amount awarded from defendants as and for
attorneys fees. The counterclaim of defendants is hereby DISMISSED for lack of merit.
SO ORDERED.30
Of the two opposing contentions, the trial court accepted the version of respondent that the repairs on her truck had
not been accomplished. It observed:
x x x Plaintiff claimed that even after the thirty (30) day period for the completion of the repair on the truck, the same
remained unrepaired. This was supported by the testimonies of the Courts personnel, namely: Maximo Merigildo of
the RTC, Branch 31, Quezon City, who served on April 25, 1994 the Writ of Execution in the Ejectment case against
defendants and implemented the same on May 14, 1994. He observed that the three (3) tires were not installed and
there were no left side mirror and door. Eduardo Bel Nitafan, Process Server, declared in open court that the Isuzu
Cargo Truck was now parked at the I.I.C. Compound in Valenzuela, Metro Manila. The truck was surrounded with
piles of lumber, about eight (8) feet in height. Missing were the two (2) batteries, one spare tire, front side glass,
skyline rope and the light on top of the cowl. The electrical wirings were not in order. The interior portion appeared to
be newly-painted but the outer portion looked rusty. He could not categorically tell if the truck was in good running
condition, because the batteries and ignition key were missing. The testimonies of these witnesses were not rebutted
by the defendants. They are independent witnesses whose testimonies deserve full faith and credit being neutral
parties to the case. Even defendant Cesar Pea admitted that the repair was not completed after thirty (30) days
from receipt of the Cargo Truck.31
Furthermore, the trial court held Optimum liable for damages for its failure to execute its part of the contract on time,
pursuant to Article 1170 of the Civil Code.32

Optimum controverted the allegations of respondent. In its own account of the facts, it denied guaranteeing that the
repair work would be completed within 30 days from 15 January 1994. It claimed that the repairs were completed
only on 8 May 1994 due to delay in

Optimum filed a Notice of Appeal,33 whereas respondent moved for reconsideration on the ground that the trial court
failed to award actual damages and that Oriental Assurance Corporation, the bonding company of Optimum, should
have been adjudged liable for damages payable by the latter.34 On 5 August 1999, the trial court issued an order
denying the motion for reconsideration on the ground that it has already lost jurisdiction over the case. 35 Thus,
respondent filed her Notice of Appeal36 on 25 August 1999.

respondents delivery of the parts.24 It presented as its witnesses the employees who had undertaken the
tinsmithing25 painting26 and electrical works27 on the truck.

On 28 June 2005, the Court of Appeals promulgated its Decision affirming with modification the ruling of the RTC, to
wit:

Optimum also explained that by virtue of a writ of execution28 issued against it by the Metropolitan Trial Court of
Quezon City, it was forced to vacate its repair shop and to transfer all its equipment, tools and all the vehicles in its
possession and custody, including respondents truck, to the IIC Compound in Sitio Malinis, Bagbaguin, Valenzuela
City. It claimed that it tried to get in touch with respondent to ask her to claim the truck but she was not available.

WHEREFORE, the appealed Decision is hereby AFFIRMED with the following MODIFICATIONS:

Optimum claimed its right to retain possession of the truck, by virtue of Article 1731 of the Civil Code, until the cost of
repairs is paid. By way of counterclaim, it asked for the payment of P79,370.00 as the unpaid cost of repairs
and P25,000.00 as attorneys fees.29

1. Appellant Optimum is ordered to return the cargo truck or to reimburse its value in the amount
of P600,000.00 plus legal interest from the time of the commencement of the action until fully satisfied;
2. Temperate or moderate damages in the amount of Thirty Thousand Pesos (P30,000.00) is awarded;

3. Twenty percent (20%) of the total award is hereby given to appellee/appellant Tan for both attorneys
fees and litigation expenses; and

payment of the cost of repairs amounting to P69,145.00 in exchange for the return of the subject truck, as well as for
the award of temperate damages in the sum of P30,000.00 and attorneys fees.41

4. The award of moral damages is deleted.

Respondent counters that Optimum cannot avail of the mechanics lien because it was found by the lower courts that
the repairs on the truck had not been accomplished.

SO ORDERED.37
Respondent prevails.
The Court of Appeals adhered to the trial courts findings that the repairs on the truck had not been completed and
that Optimum is liable for damages. It likewise ordered the return of the truck to respondent. It noted:

The concept of a mechanics lien is articulated in Article 1731 of the Civil Code, which provides:

The trial court, in giving credence to the claim of appellee/appellant Tan that the repair of the cargo truck was not in
accordance with her agreement with appellant Optimum, found the testimonies of a court personnel and a process
server to be deserving of full faith and credit, being neutral parties. These witnesses categorically declared in favor of
appellee/appellant Tan that the cargo truck was not yet repaired as of April 25, 1994 and May 14, 1994, respectively.
Thus, even if We admit appellant Optimums defense that the repair was delayed by the late delivery on May 7, 1994
of the quarter glass panel and the rubber strips, the fact remains that even after the said delivery on May 7, 1994, no
such repair was yet done. The trial court found the defense of late delivery to be even toppled by a rebuttal witness
for appellee/appellant Tan who testified that the said glass need not even be repaired or that it was not necessary for
the complete repair of the cargo truck since they were not damaged at the time he had inspected the cargo truck
prior to its delivery for repair to appellant Optimum.

ARTICLE 1731. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid.

Necessarily then, appellant Optimum was already liable to appellee/appellant Tan for damages from the time the
latter demanded delivery of the cargo truck and the latter could not as yet deliver the same despite the lapse of the
agreed period. The trial court rightly concluded that appellant Optimum was already remiss in the performance of its
part of the contract for repair from the time of such demand. Hence, its liability accrues by virtue of Article 1170 of the
Civil Code that states: 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 for damages. Thus, appellant Optimum may be
compelled to deliver the cargo truck to appellee/appellant Tan despite that the agreed repair was not totally made or
to reimburse the value thereof in the claimed amount of Six Hundred Thousand Pesos (P600,000.00), plus the legal
interest of six percent (6%) thereof from the filing of the complaint for recovery.38

Optimums invocation of the mechanics lien is apparently based on the repairs it executed on the
truck.1awphilHowever, the lower courts had already come up with a categorical finding based on testimonies of
independent witnesses that the repairs had not been accomplished in accordance with the agreement of the parties.
We have to sustain these factual findings, for basic is the tenet that the trial court's findings of facts as affirmed by
the Court of Appeals are binding on this Court, unless the lower courts overlooked, misconstrued or misinterpreted
facts and circumstances of substance which, if considered, would change the outcome of the case. 45

Both parties moved for reconsideration. For her part, respondent reiterated that her claim for compensatory damages
is supported by statement of accounts showing the earnings of the truck before it was brought to Optimum for repair.
She likewise expressed disinterest in the return of the truck as it was no longer in good condition. Instead, she
sought merely the reimbursement of its value at P600,000.00 with interest. Both motions were denied in a Resolution
dated 17 October 2005. The appellate court however made the following clarifications:
Nonetheless, this Court wishes to clarify that the order for the return of the cargo truck must be qualified by the
phrase "if feasible" AND that the payment of legal interest applies in both circumstances, i.e., whether there would be
the return of such truck OR there would be mere reimbursement of its value pegged at Six Hundred Thousand Pesos
(P600,000.00), with the same amount being the basis of the computation of legal interest.39

The mechanics lien is akin to a contractors or warehousemans lien in that by way of pledge, the repairman has the
right to retain possession of the movable until he is paid. However, the right of retention is conditioned upon the
execution of work upon the movable. The creation of a mechanic's lien does not depend upon the owner's
nonpayment. Rather, the contractor "creates" his or her own lien by performing the work or furnishing the materials. 42
In Bachrach Motor Co. v. Mendoza,43 the Court had the occasion to rule that a person who has made repairs upon an
automobile at the request of the owner is entitled to retain it until he has been paid the price of the work executed. 44

As a result of the failure to accomplish the repairs on the truck, the right to retain the truck in accordance with Article
1731 did not arise. Optimums continuous possession or detention of the truck turned to be that of a deforciant and
so respondent has every right to recover possession of it.
From another perspective, Optimum is obliged to take care of the truck with the proper diligence of a good father to a
family while the same is in its possession.46 Records show that the subject truck had already deteriorated while in the
possession of Optimum. Taking into consideration the last known condition of the truck in tandem with the fact that
the court proceedings have spanned almost a decade, it can be readily inferred that the truck has become wholly
useless. Since restitution is no longer feasible, Optimum is bound to pay the value of the truck.
The value of the truck should be based on the fair market value that the property would command at the time it was
entrusted to Optimum. Such recoverable value is fair and reasonable considering that the value of a motor vehicle
depreciates. This value may be recovered without prejudice to such other damages a claimant is entitled to under
applicable laws.47

Unfazed by the unfavorable judgment, Optimum now comes to this Court via a petition for review.
In refusing to abide by the appellate courts ruling, Optimum reiterates its claim for mechanics lien to justify its
retention of the truck. It advances the view that by virtue of the repairs it has actually performed on respondents
truck, it has the right under Article 1731 of the Civil Code40 to enforce the mechanics lien. It maintains that the lien
applies and can be availed of whether or not the repair work was completely executed. Accordingly, it prays for the

In this case, however, respondent did not appeal the appellate courts denial of compensatory damages. Hence, the
issue has obtained finality and this Court need not pass upon the same.

Nevertheless, temperate damages have been properly imposed by the appellate court. Under Article 2224 of the
Civil Code, temperate damages may be recovered when the court finds that some pecuniary loss has been suffered
but its amount cannot, from the nature of the case, be proved with certainty.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated 28 June 2005 is AFFIRMED.
SO ORDERED.

Private respondent then filed an action for damages based on quasi-delict with the Court of First Instance of Rizal,
Branch VII against petitioner Civil Aeronautics Administration or CAA as the entity empowered "to administer,
operate, manage, control, maintain and develop the Manila International Airport ... ." [Sec. 32 (24), R.A. 776].

G.R. No. L-51806 November 8, 1988

Said claim for damages included, aside from the medical and hospital bills, consequential damages for the expenses
of two lawyers who had to go abroad in private respondent's stead to finalize certain business transactions and for
the publication of notices announcing the postponement of private respondent's daughter's wedding which had to be
cancelled because of his accident [Record on Appeal, p. 5].

CIVIL AERONAUTICS ADMINISTRATION, petitioner,

vs.
COURT OF APPEALS and ERNEST E. SIMKE, respondents.

Judgment was rendered in private respondent's favor prompting petitioner to appeal to the Court of Appeals. The
latter affirmed the trial court's decision. Petitioner then filed with the same court a Motion for, Reconsideration but this
was denied.

The Solicitor General for petitioner.

Petitioner now comes before this Court raising the following assignment of errors:

Ledesma, Guytingco, Veleasco & Associates for respondent Ernest E. Simke.

1. The Court of Appeals gravely erred in not holding that the present the CAA is really a suit
against the Republic of the Philippines which cannot be sued without its consent, which was not
given in this case.

CORTES, J.:

2. The Court of Appeals gravely erred in finding that the injuries of respondent Ernest E. Simke
were due to petitioner's negligence although there was no substantial evidence to support
such finding; and that the inference that the hump or elevation the surface of the floor area of the
terrace of the fold) MIA building is dangerous just because said respondent tripped over it is
manifestly mistaken circumstances that justify a review by this Honorable Court of the said
finding of fact of respondent appellate court (Garcia v. Court of Appeals, 33 SCRA 622; Ramos v.
CA, 63 SCRA 331.)

Assailed in this petition for review on certiorari is the decision of the Court of Appeals affirming the trial court decision
which reads as follows:
WHEREFORE, judgment is hereby rendered ordering defendant to pay plaintiff the amount of
P15,589.55 as full reimbursement of his actual medical and hospital expenses, with interest at
the legal rate from the commencement of the suit; the amount of P20,200.00 as consequential
damages; the amount of P30,000.00 as moral damages; the amount of P40,000.00 as
exemplary damages; the further amount of P20,000.00 as attorney's fees and the costs [Rollo,
p. 24].

3. The Court of Appeals gravely erred in ordering petitioner to pay actual, consequential, moral
and exemplary damages, as well as attorney's fees to respondent Simke although there was
no substantial and competent proof to support said awards I Rollo, pp. 93-94 1.

The facts of the case are as follows:

Private respondent is a naturalized Filipino citizen and at the time of the incident was the Honorary Consul Geileral of
Israel in the Philippines.

Invoking the rule that the State cannot be sued without its consent, petitioner contends that being an agency of the
government, it cannot be made a party-defendant in this case.

In the afternoon of December 13, 1968, private respondent with several other persons went to the Manila
International Airport to meet his future son-in-law. In order to get a better view of the incoming passengers, he and
his group proceeded to the viewing deck or terrace of the airport.

This Court has already held otherwise in the case of National Airports Corporation v. Teodoro, Sr. [91 Phil. 203
(1952)]. Petitioner contends that the said ruling does not apply in this case because: First, in the Teodoro case, the
CAA was sued only in a substituted capacity, the National Airports Corporation being the original party. Second, in
the Teodoro case, the cause of action was contractual in nature while here, the cause of action is based on a quasidelict. Third, there is no specific provision in Republic Act No. 776, the law governing the CAA, which would justify
the conclusion that petitioner was organized for business and not for governmental purposes. [Rollo, pp. 94-97].

While walking on the terrace, then filled with other people, private respondent slipped over an elevation about four
(4) inches high at the far end of the terrace. As a result, private respondent fell on his back and broke his thigh bone.
The next day, December 14, 1968, private respondent was operated on for about three hours.

Such arguments are untenable.

First, the Teodoro case, far from stressing the point that the CAA was only substituted for the National Airports
Corporation, in fact treated the CAA as the real party in interest when it stated that:

xxx xxx xxx

(24) To administer, operate, manage, control, maintain and develop the Manila International
Airport and all government-owned aerodromes except those controlled or operated by the
Armed Forces of the Philippines including such powers and duties as: (a) to plan, design,
construct, equip, expand, improve, repair or alter aerodromes or such structures, improvement
or air navigation facilities; (b) to enter into, make and execute contracts of any kind with any
person, firm, or public or private corporation or entity; ... .

... To all legal intents and practical purposes, the National Airports Corporation is dead and the
Civil Aeronautics Administration is its heir or legal representative, acting by the law of its creation
upon its own rights and in its own name. The better practice there should have been to make the
Civil Aeronautics Administration the third party defendant instead of the National Airports
Corporation. [National Airports Corp. v. Teodoro, supra, p. 208.]

(25) To determine, fix, impose, collect and receive landing fees, parking space fees, royalties on
sales or deliveries, direct or indirect, to any aircraft for its use of aviation gasoline, oil and
lubricants, spare parts, accessories and supplies, tools, other royalties, fees or rentals for the
use of any of the property under its management and control.

xxx xxx xxx

Second, the Teodoro case did not make any qualification or limitation as to whether or not the CAA's power to sue
and be sued applies only to contractual obligations. The Court in the Teodoro case ruled that Sections 3 and 4 of
Executive Order 365 confer upon the CAA, without any qualification, the power to sue and be sued, albeit only by
implication. Accordingly, this Court's pronouncement that where such power to sue and be sued has been granted
without any qualification, it can include a claim based on tort or quasi-delict [Rayo v. Court of First Instance of
Bulacan, G.R. Nos. 55273-83, December 19,1981, 1 1 0 SCRA 4561 finds relevance and applicability to the present
case.

xxx xxx xxx

From the foregoing, it can be seen that the CAA is tasked with private or non-governmental functions which operate
to remove it from the purview of the rule on State immunity from suit. For the correct rule as set forth in the Tedoro
case states:

Third, it has already been settled in the Teodoro case that the CAA as an agency is not immune from suit, it being
engaged in functions pertaining to a private entity.

xxx xxx xxx

Not all government entities, whether corporate or non-corporate, are immune from
suits. Immunity functions suits is determined by the character of the objects for which the entity
was organized. The rule is thus stated in Corpus Juris:

xxx xxx xxx

The Civil Aeronautics Administration comes under the category of a private entity. Although not a
body corporate it was created, like the National Airports Corporation, not to maintain a
necessary function of government, but to run what is essentially a business, even if revenues be
not its prime objective but rather the promotion of travel and the convenience of the travelling
public. It is engaged in an enterprise which, far from being the exclusive prerogative of state,
may, more than the construction of public roads, be undertaken by private concerns. [National
Airports Corp. v. Teodoro, supra, p. 207.]

Suits against State agencies with relation to matters in which they have
assumed to act in private or non-governmental capacity, and various suits
against certain corporations created by the state for public purposes, but to
engage in matters partaking more of the nature of ordinary business rather
than functions of a governmental or political character, are not regarded as
suits against the state. The latter is true, although the state may own stock
or property of such a corporation for by engaging in business operations
through a corporation, the state divests itself so far of its sovereign
character, and by implication consents to suits against the corporation. (59
C.J., 313) [National Airport Corporation v. Teodoro, supra, pp. 206-207;
Emphasis supplied.]

xxx xxx xxx

True, the law prevailing in 1952 when the Teodoro case was promulgated was Exec. Order 365 (Reorganizing the
Civil Aeronautics Administration and Abolishing the National Airports Corporation). Republic Act No. 776 (Civil
Aeronautics Act of the Philippines), subsequently enacted on June 20, 1952, did not alter the character of the CAA's
objectives under Exec, Order 365. The pertinent provisions cited in the Teodoro case, particularly Secs. 3 and 4 of
Exec. Order 365, which led the Court to consider the CAA in the category of a private entity were retained
substantially in Republic Act 776, Sec. 32 (24) and (25).<re||an1w> Said Act provides:
Sec. 32. Powers and Duties of the Administrator. Subject to the general control and
supervision of the Department Head, the Administrator shall have among others, the following
powers and duties:
xxx xxx xxx

This doctrine has been reaffirmed in the recent case of Malong v. Philippine National Railways [G.R. No. L-49930,
August 7, 1985, 138 SCRA 631, where it was held that the Philippine National Railways, although owned and
operated by the government, was not immune from suit as it does not exercise sovereign but purely proprietary and
business functions. Accordingly, as the CAA was created to undertake the management of airport operations which
primarily involve proprietary functions, it cannot avail of the immunity from suit accorded to government agencies
performing strictly governmental functions.
II
Petitioner tries to escape liability on the ground that there was no basis for a finding of negligence. There can be no
negligence on its part, it alleged, because the elevation in question "had a legitimate purpose for being on the terrace

and was never intended to trip down people and injure them. It was there for no other purpose but to drain water on
the floor area of the terrace" [Rollo, P. 99].
To determine whether or not the construction of the elevation was done in a negligent manner, the trial court
conducted an ocular inspection of the premises.
xxx xxx xxx
... This Court after its ocular inspection found the elevation shown in Exhs. A or 6-A where
plaintiff slipped to be a step, a dangerous sliding step, and the proximate cause of plaintiffs
injury...

The legal foundation of CAA's liability for quasi-delict can be found in Article 2176 of the Civil Code which provides
that "(w)hoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for
the damage done... As the CAA knew of the existence of the dangerous elevation which it claims though, was made
precisely in accordance with the plans and specifications of the building for proper drainage of the open terrace [See
Record on Appeal, pp. 13 and 57; Rollo, p. 391, its failure to have it repaired or altered in order to eliminate the
existing hazard constitutes such negligence as to warrant a finding of liability based on quasi-delict upon CAA.
The Court finds the contention that private respondent was, at the very least, guilty of contributory negligence, thus
reducing the damages that plaintiff may recover, unmeritorious. Contributory negligence under Article 2179 of the
Civil Code contemplates a negligent act or omission on the part of the plaintiff, which although not the proximate
cause of his injury, contributed to his own damage, the proximate cause of the plaintiffs own injury being the
defendant's lack of due care. In the instant case, no contributory negligence can be imputed to the private
respondent, considering the following test formulated in the early case of Picart v. Smith, 37 Phil. 809 (1918):

xxx xxx xxx

This Court during its ocular inspection also observed the dangerous and defective condition of
the open terrace which has remained unrepaired through the years. It has observed the lack of
maintenance and upkeep of the MIA terrace, typical of many government buildings and offices.
Aside from the litter allowed to accumulate in the terrace, pot holes cause by missing tiles
remained unrepaired and unattented. The several elevations shown in the exhibits presented
were verified by this Court during the ocular inspection it undertook. Among these elevations is
the one (Exh. A) where plaintiff slipped. This Court also observed the other hazard, the slanting
or sliding step (Exh. B) as one passes the entrance door leading to the terrace [Record on
Appeal, U.S., pp. 56 and 59; Emphasis supplied.]
The Court of Appeals further noted that:
The inclination itself is an architectural anomaly for as stated by the said witness, it is neither a
ramp because a ramp is an inclined surface in such a way that it will prevent people or
pedestrians from sliding. But if, it is a step then it will not serve its purpose, for pedestrian
purposes. (tsn, p. 35, Id.) [rollo, p. 29.]
These factual findings are binding and conclusive upon this Court. Hence, the CAA cannot disclaim its liability for the
negligent construction of the elevation since under Republic Act No. 776, it was charged with the duty of planning,
designing, constructing, equipping, expanding, improving, repairing or altering aerodromes or such structures,
improvements or air navigation facilities [Section 32, supra, R.A. 776]. In the discharge of this obligation, the CAA is
duty-bound to exercise due diligence in overseeing the construction and maintenance of the viewing deck or terrace
of the airport.
It must be borne in mind that pursuant to Article 1173 of the Civil Code, "(t)he fault or negligence of the obligor
consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the
circumstances of the person, of the time and of the place." Here, the obligation of the CAA in maintaining the viewing
deck, a facility open to the public, requires that CAA insure the safety of the viewers using it. As these people come
to the viewing deck to watch the planes and passengers, their tendency would be to look to where the planes and
the incoming passengers are and not to look down on the floor or pavement of the viewing deck. The CAA should
have thus made sure that no dangerous obstructions or elevations exist on the floor of the deck to prevent any
undue harm to the public.

The test by which to determine the existence of negligence in a particular case may be stated as
follows: Did the defendant in doing the alleged negligent act use that reasonable care and
caution which an ordinarily prudent man would have used in the same situation? If not, then he
is guilty of negligence. The law here in effect adopts the standard supposed to be supplied by
the imaginary conduct of the discreet paterfamilias of the Roman law. The existence of the
negligence in a given case is not determined by reference to the personal judgment of the actor
in the situation before him. The law considers what would be reckless, blameworthy, or negligent
in the man of ordinary intelligence and prudence and determines liability by that.
The question as to what would constitute the conduct of a prudent man in a given situation must
of course be always determined in the light of human experience and in view of the facts
involved in the particular case. Abstract speculations cannot be here of much value but this
much can be profitably said: Reasonable men-overn their conduct by the circumstances which
are before them or known to them. They are not, and are not supposed to be omniscient of the
future. Hence they can be expected to take care only when there is something before them to
suggest or warn of danger. Could a prudent man, in the case under consideration, foresee harm
as a result of the course actually pursued' If so, it was the duty of the actor to take precautions to
guard against that harm. Reasonable foresight of harm, followed by the ignoring of the
suggestion born of this prevision, is always necessary before negligence can be held to exist....
[Picart v. Smith, supra, p. 813; Emphasis supplied.]
The private respondent, who was the plaintiff in the case before the lower court, could not have reasonably foreseen
the harm that would befall him, considering the attendant factual circumstances. Even if the private respondent had
been looking where he was going, the step in question could not easily be noticed because of its construction. As the
trial court found:
In connection with the incident testified to, a sketch, Exhibit O, shows a section of the floorings
oil which plaintiff had tripped, This sketch reveals two pavements adjoining each other, one
being elevated by four and one-fourth inches than the other. From the architectural standpoint
the higher, pavement is a step. However, unlike a step commonly seen around, the edge of the
elevated pavement slanted outward as one walks to one interior of the terrace. The length of the
inclination between the edges of the two pavements is three inches. Obviously, plaintiff had
stepped on the inclination because had his foot landed on the lower pavement he would not
have lost his balance. The same sketch shows that both pavements including the inclined
portion are tiled in red cement, and as shown by the photograph Exhibit A, the lines of the tilings

are continuous. It would therefore be difficult for a pedestrian to see the inclination especially
where there are plenty of persons in the terrace as was the situation when plaintiff fell down.
There was no warning sign to direct one's attention to the change in the elevation of the
floorings. [Rollo, pp. 2829.]
III
Finally, petitioner appeals to this Court the award of damages to private respondent. The liability of CAA to answer
for damages, whether actual, moral or exemplary, cannot be seriously doubted in view of one conferment of the
power to sue and be sued upon it, which, as held in the case of Rayo v. Court of First Instance, supra, includes
liability on a claim for quasi-dilict. In the aforestated case, the liability of the National Power Corporation to answer for
damages resulting from its act of sudden, precipitate and simultaneous opening of the Angat Dam, which caused the
death of several residents of the area and the destruction of properties, was upheld since the o,rant of the power to
sue and be sued upon it necessarily implies that it can be held answerable for its tortious acts or any wrongful act for
that matter.
With respect to actual or compensatory damages, the law mandates that the same be proven.
Art. 2199. Except as provided by law or by stipulation, one are entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly proved. Such
compensation is referred to as actual on compensatory damages [New Civil Code].
Private respondent claims P15,589.55 representing medical and hospitalization bills. This Court finds the same to
have been duly proven through the testimony of Dr. Ambrosio Tangco, the physician who attended to private
respondent (Rollo, p. 26) and who Identified Exh. "H" which was his bill for professional services [Rollo, p. 31].
Concerning the P20,200.00 alleged to have been spent for other expenses such as the transportation of the two
lawyers who had to represent private respondent abroad and the publication of the postponement notices of the
wedding, the Court holds that the same had also been duly proven. Private respondent had adequately shown the
existence of such losses and the amount thereof in the testimonies before the trial court [CA decision, p. 81. At any
rate, the findings of the Court of Appeals with respect to this are findings of facts [One Heart Sporting Club, Inc. v.
Court of Appeals, G.R. Nos. 5379053972, Oct. 23, 1981, 108 SCRA 4161 which, as had been held time and again,
are, as a general rule, conclusive before this Court [Sese v. Intermediate Appellate Court, G.R. No. 66186, July 31,
1987,152 SCRA 585].
With respect to the P30,000.00 awarded as moral damages, the Court holds private respondent entitled thereto
because of the physical suffering and physical injuries caused by the negligence of the CAA [Arts. 2217 and 2219
(2), New Civil Code].
With respect to the award of exemplary damages, the Civil Code explicitly, states:
Art. 2229. Exemplary or corrective damages, are imposed, by way of example or correction for
the public good, in addition to the moral, liquidated or compensatory
Art. 2231. In quasi-delicts, exemplary damages may be granted if the defendant acted with
gross negligence.

Gross negligence which, according to the Court, is equivalent to the term "notorious negligence" and consists in the
failure to exercise even slight care [Caunan v. Compania General de Tabacos, 56 Phil. 542 (1932)] can be attributed
to the CAA for its failure to remedy the dangerous condition of the questioned elevation or to even post a warning
sign directing the attention of the viewers to the change in the elevation of the floorings notwithstanding its
knowledge of the hazard posed by such elevation [Rollo, pp. 28-29; Record oil Appeal, p. 57]. The wanton disregard
by the CAA of the safety of the people using the viewing deck, who are charged an admission fee, including the
petitioner who paid the entrance fees to get inside the vantage place [CA decision, p. 2; Rollo, p. 25] and are,
therefore, entitled to expect a facility that is properly and safely maintained justifies the award of exemplary
damages against the CAA, as a deterrent and by way of example or correction for the public good. The award of
P40,000.00 by the trial court as exemplary damages appropriately underscores the point that as an entity changed
with providing service to the public, the CAA. like all other entities serving the public. has the obligation to provide the
public with reasonably safe service.
Finally, the award of attorney's fees is also upheld considering that under Art. 2208 (1) of the Civil Code, the same
may be awarded whenever exemplary damages are awarded, as in this case, and,at any rate, under Art. 2208 (11),
the Court has the discretion to grant the same when it is just and equitable.
However, since the Manila International Airport Authority (MIAA) has taken over the management and operations of
the Manila International Airport [renamed Ninoy Aquino International Airport under Republic Act No. 6639] pursuant
to Executive Order No. 778 as amended by executive Orders Nos. 903 (1983), 909 (1983) and 298 (1987) and under
Section 24 of the said Exec. Order 778, the MIAA has assumed all the debts, liabilities and obligations of the now
defunct Civil Aeronautics Administration (CAA), the liabilities of the CAA have now been transferred to the MIAA.
WHEREFORE, finding no reversible error, the Petition for review on certiorari is DENIED and the decision of the
Court of Appeals in CA-G.R. No. 51172-R is AFFIRMED.
SO ORDERED.