G.R. No. 206806 June 25, 2014 On May 5, 2007, Dan T.
On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper demanding payment of the amount of
ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners,
vs.
DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed
and may be implied only if the old and new contracts are incompatible on every point.
Before us is a petition for review on certiorari1 assailing the Court of Appeals’ decision2 in CA-G.R. CV
No. 95709, which stemmed from a complaint3 filed in the Regional Trial Court of Valenzuela City, Branch
171, for collection of sum of money.
The facts are as follows:
Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the
name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill
business.4 From February 2007 to March 2007, he delivered scrap papers worth 7,220,968.31 to Arco Pulp
and Paper Company, Inc. (Arco Pulp and Paper) through its Chief Executive Officer and President,
Candida A. Santos.5 The parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim
the value of the raw materials or deliver to him their finished products of equivalent value.6
Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated
check dated April 18, 20077 in the amount of 1,487,766.68 as partial payment, with the assurance that the
check would not bounce.8 When he deposited the check on April 18, 2007, it was dishonored for being
drawn against a closed account.9
On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of
agreement10 where Arco Pulp and Paper bound themselves to deliver their finished products to Megapack
Container Corporation, owned by Eric Sy, for his account. According to the memorandum, the raw
materials would be supplied by Dan T. Lim, through his company, Quality Paper and Plastic Products. The
memorandum of agreement reads as follows:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos
and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches at the
price of ₱18.50 per kg. to Megapack Container for Mr. Eric Sy’s account. Schedule of deliveries are as
follows:
....
It has been agreed further that the Local OCC materials to be used for the production of the above Test
Liners will be supplied by Quality Paper & Plastic Products Ent., total of 600 Metric Tons at ₱6.50 per kg.
(price subject to change per advance notice). Quantity of Local OCC delivery will be based on the quantity
of Test Liner delivered to Megapack Container Corp. based on the above production schedule. 11
7,220,968.31, but no payment was made to him.13
Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment with the
Regional Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its
answer15 but failed to have its representatives attend the pre-trial hearing. Hence, the trial court allowed
Dan T. Lim to present his evidence ex parte.16
On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and dismissed
the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the memorandum of
agreement, novation took place, which extinguished Arco Pulp and Paper’s obligation to Dan T. Lim.17
Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him, novation did not take
place since the memorandum of agreement between Arco Pulp and Paper and Eric Sy was an exclusive and
private agreement between them. He argued that if his name was mentioned in the contract, it was only for
supplying the parties their required scrap papers, where his conformity through a separate contract was
indispensable.19
On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting aside the judgment
dated September 19, 2008 and ordering Arco Pulp and Paper to jointly and severally pay Dan T. Lim the
amount of ₱7,220,968.31 with interest at 12% per annum from the time of demand; ₱50,000.00 moral
damages; ₱50,000.00 exemplary damages; and ₱50,000.00 attorney’s fees.22
The appellate court ruled that the facts and circumstances in this case clearly showed the existence of an
alternative obligation.23 It also ruled that Dan T. Lim was entitled to damages and attorney’s fees due to the
bad faith exhibited by Arco Pulp and Paper in not honoring its undertaking.24
Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its President and Chief
Executive Officer, Candida A. Santos, bring this petition for review on certiorari.
On one hand, petitioners argue that the execution of the memorandum of agreement constituted a novation
of the original obligation since Eric Sy became the new debtor of respondent. They also argue that there is
no legal basis to hold petitioner Candida A. Santos personally liable for the transaction that petitioner
corporation entered into with respondent. The Court of Appeals, they allege, also erred in awarding moral
and exemplary damages and attorney’s fees to respondent who did not show proof that he was entitled to
damages.27
Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was no
proper novation in this case. He argues that the Court of Appeals was correct in ordering the payment of
7,220,968.31 with damages since the debt of petitioners remains unpaid.28 He also argues that the Court of
Appeals was correct in holding petitioners solidarily liable since petitioner Candida A. Santos was "the
prime mover for such outstanding corporate liability."29 In their reply, petitioners reiterate that novation
took place since there was nothing in the memorandum of agreement showing that the obligation was
alternative. They also argue that when respondent allowed them to deliver the finished products to Eric Sy,
the original obligation was novated.30
A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No. 99-2-04-SC
dated November 21, 2000.31
The issues to be resolved by this court are as follows:
 1. Whether the obligation between the parties was extinguished by novation
2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.
3. Whether moral damages, exemplary damages, and attorney’s fees can be awarded
The petition is denied.
The obligation between the
parties was an alternative
obligation
The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states:
Article 1199. A person alternatively bound by different prestations shall completely perform one of them.
The creditor cannot be compelled to receive part of one and part of the other undertaking.
"In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient,
determined by the choice of the debtor who generally has the right of election." 32 The right of election is
extinguished when the party who may exercise that option categorically and unequivocally makes his or
her choice known.33
The choice of the debtor must also be communicated to the creditor who must receive notice of it since:
The object of this notice is to give the creditor . . . opportunity to express his consent, or to impugn the
election made by the debtor, and only after said notice shall the election take legal effect when consented
by the creditor, or if impugned by the latter, when declared proper by a competent court. 34
According to the factual findings of the trial court and the appellate court, the original contract between the
parties was for respondent to deliver scrap papers worth ₱7,220,968.31 to petitioner Arco Pulp and Paper.
The payment for this delivery became petitioner Arco Pulp and Paper’s obligation. By agreement,
petitioner Arco Pulp and Paper, as the debtor, had the option to either (1) pay the price or(2) deliver the
finished products of equivalent value to respondent.35
The appellate court, therefore, correctly identified the obligation between the parties as an alternative
obligation, whereby petitioner Arco Pulp and Paper, after receiving the raw materials from respondent,
would either pay him the price of the raw materials or, in the alternative, deliver to him the finished
products of equivalent value.
When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the scrap
papers, they exercised their option to pay the price. Respondent’s receipt of the check and his subsequent
act of depositing it constituted his notice of petitioner Arco Pulp and Paper’s option to pay.
This choice was also shown by the terms of the memorandum of agreement, which was executed on the
same day. The memorandum declared in clear terms that the delivery of petitioner Arco Pulp and Paper’s
finished products would be to a third person, thereby extinguishing the option to deliver the finished
products of equivalent value to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of the memorandum of agreement constituted a
novation of the contract between the parties. When petitioner Arco Pulp and Paper opted instead to deliver
the finished products to a third person, it did not novate the original obligation between the parties.
The rules on novation are outlined in the Civil Code, thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
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. (1204)
Article 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a)
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."36
Novation was extensively discussed by this court in Garcia v. Llamas:37
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor. Article 1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come from — and may even be made
without the knowledge of — the debtor, since it consists of a third person’s assumption of the obligation.
As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor
offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation;
thus, the consent of these three persons are necessary. Both modes of substitution by the debtor require the
consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by
the creation of a new one that takes the place of the former. It is merely modificatory when the old
obligation subsists to the extent that it remains compatible with the amendatory agreement. Whether
extinctive or modificatory, novation is made either by changing the object or the principal conditions,
referred to as objective or real novation; or by substituting the person of the debtor or subrogating a third
person to the rights of the creditor, an act known as subjective or personal novation. For novation to take
place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
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.38 (Emphasis supplied)
Because novation requires that it be clear and unequivocal, it is never presumed, thus:
In the civil law setting, novatio is 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 tobe a jural reality, its animus must be ever present, debitum pro debito — basically
extinguishing the old obligation for the new one.39 (Emphasis supplied) There is nothing in the
memorandum of agreement that states that with its execution, the obligation of petitioner Arco Pulp and
Paper to respondent would be extinguished. It also does not state that Eric Sy somehow substituted
petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows that petitioner Arco Pulp and Paper
opted to deliver the finished products to a third person instead.
The consent of the creditor must also be secured for the novation to be valid:
Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties
underscore the absence of any express disclosure or circumstances with which to deduce a clear and
unequivocal intent by the parties to novate the old agreement.40 (Emphasis supplied)
In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the
contract need not be secured. This is clear from the first line of the memorandum, which states:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos
and Mr. Eric Sy. . . .41
If the memorandum of agreement was intended to novate the original agreement between the parties,
respondent must have first agreed to the substitution of Eric Sy as his new debtor. The memorandum of
agreement must also state in clear and unequivocal terms that it has replaced the original obligation of
petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is present in this case.
Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with their
alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of demand to petitioner
Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither acknowledged nor consented to
the latter as his new debtor. These acts, when taken together, clearly show that novation did not take place.
Since there was no novation, petitioner Arco Pulp and Paper’s obligation to respondent remains valid and
existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full amount of
₱7,220,968.31.
Petitioners are liable for
damages
Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract where
the breach is due to fraud or bad faith:
Art. 2220. Willfull injury to property may be a legal ground for awarding moral damages if the court
should find that, under the circumstances, such damages are justly due. The same rule applies to breaches
of contract where the defendant acted fraudulently or in bad faith. (Emphasis supplied)
Moral damages are not awarded as a matter of right but only after the party claiming it proved that the
breach was due to fraud or bad faith. As this court stated:
Moral damages are not recoverable simply because a contract has been breached. They are recoverable
only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his
contractual obligations. The breach must be wanton, reckless, malicious or in bad faith, and oppressive or
abusive.42
Further, the following requisites must be proven for the recovery of moral damages:
An award of moral damages would require certain conditions to be met, to wit: (1)first, there must be an
injury, whether physical, mental or psychological, clearly sustained by the claimant; (2) second, there must
be culpable act or omission factually established; (3) third, the wrongful act or omission of the defendant is
the proximate cause of the injury sustained by the claimant; and (4) fourth, the award of damages is
predicated on any of the cases stated in Article 2219 of the Civil Code. 43
Here, the injury suffered by respondent is the loss of ₱7,220,968.31 from his business. This has remained
unpaid since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and Paper’s act of refusing
to pay its obligations.
When the obligation became due and demandable, petitioner Arco Pulp and Paper not only issued an
unfunded check but also entered into a contract with a third person in an effort to evade its liability. This
proves the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be awarded in
the following instances:
Article 2219. Moral damages may be recovered in the following and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
 (3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not specified within this enumeration. When a party
breaches a contract, he or she goes against Article 19 of the Civil Code, which states: Article 19. 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.
Persons who have the right to enter into contractual relations must exercise that right with honesty and
good faith. Failure to do so results in an abuse of that right, which may become the basis of an action for
damages. Article 19, however, cannot be its sole basis:
Article 19 is the general rule which governs the conduct of human relations. By itself, it is not the basis of
an actionable tort. Article 19 describes the degree of care required so that an actionable tort may arise when
it is alleged together with Article 20 or Article 21.44
Article 20 and 21 of the Civil Code are as follows:
Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same.
Article 21.Any person who wilfully causes loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the damage.
To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with lawful acts
that are contrary to morals, good customs, and public policy:
Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the act have
been willful or negligent. Willful may refer to the intention to do the act and the desire to achieve the
outcome which is considered by the plaintiff in tort action as injurious. Negligence may refer to a situation
where the act was consciously done but without intending the result which the plaintiff considers as
injurious.
Article 21, on the other hand, concerns injuries that may be caused by acts which are not necessarily
proscribed by law. This article requires that the act be willful, that is, that there was an intention to do the
act and a desire to achieve the outcome. In cases under Article 21, the legal issues revolve around whether
such outcome should be considered a legal injury on the part of the plaintiff or whether the commission of
the act was done in violation of the standards of care required in Article 19.45
When parties act in bad faith and do not faithfully comply with their obligations under contract, they run
the risk of violating Article 1159 of the Civil Code:
Article 1159. Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.
Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be recovered
since it only specifies, among others, Article 21. When a party reneges on his or her obligations arising
from contracts in bad faith, the act is not only contrary to morals, good customs, and public policy; it is
also a violation of Article 1159. Breaches of contract become the basis of moral damages, not only under
Article 2220, but also under Articles 19 and 20 in relation to Article 1159.
Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220 requires that
the breach be done fraudulently or in bad faith. In Adriano v. Lasala:46
To recover moral damages in an action for breach of contract, the breach must be palpably wanton,
reckless and malicious, in bad faith, oppressive, or abusive. Hence, the person claiming bad faith must
prove its existence by clear and convincing evidence for the law always presumes good faith.
Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of known duty through some motive or interest
or ill will that partakes of the nature of fraud. It is, therefore, a question of intention, which can be inferred
from one’s conduct and/or contemporaneous statements.47 (Emphasis supplied)
Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination of the
circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to respondent, it
was presumably with the knowledge that it was being drawn against a closed account. Worse, it attempted
to shift their obligations to a third person without the consent of respondent.
Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest purpose or some moral obliquity and
conscious doing of a wrong, a breach of known duty through some motive or interest or ill will that
partakes of the nature of fraud."48 Moral damages may, therefore, be awarded.
Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in the
following circumstances:
Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
Article 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide whether
or not they should be adjudicated.
Article 2234. While the amount of the exemplary damages need not be proven, the plaintiff must show that
he is entitled to moral, temperate or compensatory damages before the court may consider the question of
whether or not exemplary damages should be awarded.
In Tankeh v. Development Bank of the Philippines,49 we stated that:
The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties from the
commission of a similar offense. The case of People v. Ranteciting People v. Dalisay held that:
Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective damages are intended to serve
as a deterrent to serious wrong doings, and as a vindication of undue sufferings and wanton invasion of the
rights of an injured or a punishment for those guilty of outrageous conduct. These terms are generally, but
not always, used interchangeably. In common law, there is preference in the use of exemplary damages
when the award is to account for injury to feelings and for the sense of indignity and humiliation suffered
by a person as a result of an injury that has been maliciously and wantonly inflicted, the theory being that
there should be compensation for the hurt caused by the highly reprehensible conduct of the defendant—
associated with such circumstances as willfulness, wantonness, malice, gross negligence or recklessness,
oppression, insult or fraud or gross fraud—that intensifies the injury. The terms punitive or vindictive
damages are often used to refer to those species of damages that may be awarded against a person to
punish him for his outrageous conduct. In either case, these damages are intended in good measure to deter
the wrongdoer and others like him from similar conduct in the future. 50 (Emphasis supplied; citations
omitted)
The requisites for the award of exemplary damages are as follows:
(1) they may be imposed by way of example in addition to compensatory damages, and only
after the claimant's right to them has been established;
(2) that they cannot be recovered as a matter of right, their determination depending upon the
amount of compensatory damages that may be awarded to the claimant; and
(3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or
malevolent manner.51
Business owners must always be forthright in their dealings. They cannot be allowed to renege on their
obligations, considering that these obligations were freely entered into by them. Exemplary damages may
also be awarded in this case to serve as a deterrent to those who use fraudulent means to evade their
liabilities.
Since the award of exemplary damages is proper, attorney’s fees and cost of the suit may also be
recovered.
Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial
costs, cannot be recovered, except:
(1) When exemplary damages are awarded[.]
Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation
Petitioners argue that the finding of solidary liability was erroneous since no evidence was adduced to
prove that the transaction was also a personal undertaking of petitioner Santos. We disagree.
In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that:
Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general, from the people
comprising it. Following this principle, obligations incurred by the corporation, acting through its directors,
officers and employees, are its sole liabilities. A director, officer or employee of a corporation is generally
not held personally liable for obligations incurred by the corporation. Nevertheless, this legal fiction may
be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of
an existing obligation, the circumvention of statutes, or to confuse legitimate issues.
....
Before a director or officer of a corporation can be held personally liable for corporate obligations,
however, the following requisites must concur: (1) the complainant must allege in the complaint that the
director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of
gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove such unlawful
acts, negligence or bad faith.
While it is true that the determination of the existence of any of the circumstances that would warrant the
piercing of the veil of corporate fiction is a question of fact which cannot be the subject of a petition for
review on certiorari under Rule 45, this Court can take cognizance of factual issues if the findings of the
lower court are not supported by the evidence on record or are based on a misapprehension of
facts.53 (Emphasis supplied)
As a general rule, directors, officers, or employees of a corporation cannot be held personally liable for
obligations incurred by the corporation. However, this veil of corporate fiction may be pierced if
complainant is able to prove, as in this case, that (1) the officer is guilty of negligence or bad faith, and (2)
such negligence or bad faith was clearly and convincingly proven.
Here, petitioner Santos entered into a contract with respondent in her capacity as the President and Chief
Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment of petitioner
corporation’s obligations to respondent on behalf of petitioner Arco Pulp and Paper. This is clear on the
face of the check bearing the account name, "Arco Pulp & Paper, Co., Inc." 54 Any obligation arising from
these acts would not, ordinarily, be petitioner Santos’ personal undertaking for which she would be
solidarily liable with petitioner Arco Pulp and Paper.
We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines:55
Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the
separate corporate personality of a corporation is abused or used for wrongful purposes. Under the
doctrine, the corporate existence may be disregarded where the entity is formed or used for non-legitimate
purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud or
to carry out similar or inequitable considerations, other unjustifiable aims or intentions, in which case, the
fiction will be disregarded and the individuals composing it and the two corporations will be treated as
identical.56 (Emphasis supplied)
According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp and
Paper, stating that:
In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused to
honor their undertaking in favor of the [respondent]. After the check in the amount of 1,487,766.68 issued
by [petitioner] Santos was dishonored for being drawn against a closed account, [petitioner] corporation
denied any privity with [respondent]. These acts prompted the [respondent] to avail of the remedies
provided by law in order to protect his rights.57
begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.

We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the corporate And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall
veil.1âwphi1 When petitioner Arco Pulp and Paper’s obligation to respondent became due and not be disturbed and shall continue to be implemented applying the rate of interest fixed
demandable, she not only issued an unfunded check but also contracted with a third party in an effort to therein.61 (Emphasis supplied; citations omitted.)
shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor petitioner corporation’s
obligations to respondent. These acts clearly amount to bad faith. In this instance, the corporate veil may
According to these guidelines, the interest due on the obligation of ₱7,220,968.31 should now be at 6% per
be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco Pulp and Paper.
annum, computed from May 5, 2007, when respondent sent his letter of demand to petitioners. This
interest shall continue to be due from the finality of this decision until its full satisfaction.
The rate of interest due on
the obligation must be
WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is AFFIRMED.
reduced in view of Nacar v.
Gallery Frames58
Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay
respondent Dan T. Lim the amount of ₱7,220,968.31 with interest of 6% per annum at the time of demand
In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar v.
until finality of judgment and its full satisfaction, with moral damages in the amount of ₱50,000.00,
Gallery Frames,59 the rate of interest due on the obligation must be modified from 12% per annum to 6%
exemplary damages in the amount of ₱50,000.00, and attorney's fees in the amount of ₱50,000.00.
per annum from the time of demand.

SO ORDERED.
Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,60 and we have
laid down the following guidelines with regard to the rate of legal interest:

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Linesare
accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest

on the amount of damages awarded may be imposed at the discretion of the court at the rate of
6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages,
except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall
G.R. No. L-55138 September 28, 1984
ERNESTO V. RONQUILLO, petitioner,
vs.
HONORABLE COURT OF APPEALS AND ANTONIO P. SO, respondents.
Gloria A. Fortun for petitioner.
Roselino Reyes Isler for respondents.
CUEVAS, J.:
This is a petition to review the Resolution dated June 30, 1980 of the then Court of Appeals (now the
Intermediate Appellate Court) in CA-G.R. No. SP-10573, entitled "Ernesto V. Ronquillo versus the Hon.
Florellana Castro-Bartolome, etc." and the Order of said court dated August 20, 1980, denying petitioner's
motion for reconsideration of the above resolution.
Petitioner Ernesto V. Ronquillo was one of four (4) defendants in Civil Case No. 33958 of the then Court
of First Instance of Rizal (now the Regional Trial Court), Branch XV filed by private respondent Antonio
P. So, on July 23, 1979, for the collection of the sum of P17,498.98 plus attorney's fees and costs. The
other defendants were Offshore Catertrade Inc., Johnny Tan and Pilar Tan. The amount of P117,498.98
sought to be collected represents the value of the checks issued by said defendants in payment for
foodstuffs delivered to and received by them. The said checks were dishonored by the drawee bank.
On December 13, 1979, the lower court rendered its Decision 1 based on the compromise agreement
submitted by the parties, the pertinent portion of which reads as follows:
1. Plaintiff agrees to reduce its total claim of P117,498-95 to only P11,000 .00 and
defendants agree to acknowledge the validity of such claim and further bind
themselves to initially pay out of the total indebtedness of P10,000.00 the amount of
P55,000.00 on or before December 24, 1979, the balance of P55,000.00,
defendants individually and jointly agree to pay within a period of six months from
January 1980, or before June 30, 1980; (Emphasis supplied)
xxx xxx xxx
4. That both parties agree that failure on the part of either party to comply with the
foregoing terms and conditions, the innocent party will be entitled to an execution of
the decision based on this compromise agreement and the defaulting party agrees
and hold themselves to reimburse the innocent party for attorney's fees, execution
fees and other fees related with the execution.
xxx xxx xxx
On December 26, 1979, herein private respondent (then plaintiff filed a Motion for Execution on the
ground that defendants failed to make the initial payment of P55,000.00 on or before December 24, 1979
as provided in the Decision. Said motion for execution was opposed by herein petitioner (as one of the
defendants) contending that his inability to make the payment was due to private respondent's own act of
making himself scarce and inaccessible on December 24, 1979. Petitioner then prayed that private
respondent be ordered to accept his payment in the amount of P13,750.00. 2
During the hearing of the Motion for Execution and the Opposition thereto on January 16, 1980, petitioner,
as one of the four defendants, tendered the amount of P13,750.00, as his prorata share in the P55,000.00
initial payment. Another defendant, Pilar P. Tan, offered to pay the same amount. Because private
respondent refused to accept their payments, demanding from them the full initial installment of P
55,000.00, petitioner and Pilar Tan instead deposited the said amount with the Clerk of Court. The amount
deposited was subsequently withdrawn by private respondent. 3
On the same day, January 16, 1980, the lower court ordered the issuance of a writ of execution for the
balance of the initial amount payable, against the other two defendants, Offshore Catertrade Inc. and
Johnny Tan 4 who did not pay their shares.
On January 22, 1980, private respondent moved for the reconsideration and/or modification of the
aforesaid Order of execution and prayed instead for the "execution of the decision in its entirety against all
defendants, jointly and severally." 5 Petitioner opposed the said motion arguing that under the decision of
the lower court being executed which has already become final, the liability of the four (4) defendants was
not expressly declared to be solidary, consequently each defendant is obliged to pay only his own pro-rata
or 1/4 of the amount due and payable.
On March 17, 1980, the lower court issued an Order reading as follows:
ORDER
Regardless of whatever the compromise agreement has intended the payment
whether jointly or individually, or jointly and severally, the fact is that only
P27,500.00 has been paid. There appears to be a non-payment in accordance with
the compromise agreement of the amount of P27,500.00 on or before December 24,
1979. The parties are reminded that the payment is condition sine qua non to the
lifting of the preliminary attachment and the execution of an affidavit of desistance.
WHEREFORE, let writ of execution issue as prayed for
On March 17, 1980, petitioner moved for the reconsideration of the above order, and the same was set for
hearing on March 25,1980.
Meanwhile, or more specifically on March 19, 1980, a writ of execution was issued for the satisfaction of
the sum of P82,500.00 as against the properties of the defendants (including petitioner), "singly or jointly
hable." 6
On March 20, 1980, Special Sheriff Eulogio C. Juanson of Rizal, issued a notice of sheriff's sale, for the
sale of certain furnitures and appliances found in petitioner's residence to satisfy the sum of P82,500.00.
The public sale was scheduled for April 2, 1980 at 10:00 a.m. 7
Petitioner's motion for reconsideration of the Order of Execution dated March 17, 1980 which was set for
hearing on March 25, 1980, was upon motion of private respondent reset to April 2, 1980 at 8:30 a.m.
Realizing the actual threat to property rights poised by the re-setting of the hearing of s motion for
reconsideration for April 2, 1980 at 8:30 a.m. such that if his motion for reconsideration would be denied
he would have no more time to obtain a writ from the appellate court to stop the scheduled public sale of
his personal properties at 10:00 a.m. of the same day, April 2, 1980, petitioner filed on March 26, 1980 a
petition for certiorari and prohibition with the then Court of Appeals (CA-G.R. No. SP-10573), praying at
the same time for the issuance of a restraining order to stop the public sale. He raised the question of the
validity of the order of execution, the writ of execution and the notice of public sale of his properties to
satisfy fully the entire unpaid obligation payable by all of the four (4) defendants, when the lower court's
decision based on the compromise agreement did not specifically state the liability of the four (4)
defendants to be solidary.
On April 2, 1980, the lower court denied petitioner's motion for reconsideration but the scheduled public
sale in that same day did not proceed in view of the pendency of a certiorari proceeding before the then
Court of Appeals.
On June 30, 1980, the said court issued a Resolution, the pertinent portion of which reads as follows:
This Court, however, finds the present petition to have been filed prematurely. The
rule is that before a petition for certiorari can be brought against an order of a lower
court, all remedies available in that court must first be exhausted. In the case at bar,
herein petitioner filed a petition without waiting for a resolution of the Court on the
motion for reconsideration, which could have been favorable to the petitioner. The
fact that the hearing of the motion for reconsideration had been reset on the same
day the public sale was to take place is of no moment since the motion for
reconsideration of the Order of March 17, 1980 having been seasonably filed, the
scheduled public sale should be suspended. Moreover, when the defendants,
including herein petitioner, defaulted in their obligation based on the compromise
agreement, private respondent had become entitled to move for an execution of the
decision based on the said agreement.
WHEREFORE, the instant petition for certiorari and prohibition with preliminary
injunction is hereby denied due course. The restraining order issued in our resolution
dated April 9, 1980 is hereby lifted without pronouncement as to costs.
SO ORDERED.
Petitioner moved to reconsider the aforesaid Resolution alleging that on April 2, 1980, the lower court had
already denied the motion referred to and consequently, the legal issues being raised in the petition were
already "ripe" for determination. 8 The said motion was however denied by the Court of Appeals in its
Resolution dated August 20, 1980.
Hence, this petition for review, petitioner contending that the Court of Appeals erred in
(a) declaring as premature, and in denying due course to the petition to restrain implementation of a writ of
execution issued at variance with the final decision of the lower court filed barely four (4) days before the
scheduled public sale of the attached movable properties;
(b) denying reconsideration of the Resolution of June 30, 1980, which declared as premature the filing of
the petition, although there is proof on record that as of April 2, 1980, the motion referred to was already
denied by the lower court and there was no more motion pending therein;
(c) failing to resolve the legal issues raised in the petition and in not declaring the liabilities of the
defendants, under the final decision of the lower court, to be only joint;
(d) not holding the lower court's order of execution dated March 17, 1980, the writ of execution and the
notice of sheriff's sale, executing the lower court's decision against "all defendants, singly and jointly", to
be at variance with the lower court's final decision which did not provide for solidary obligation; and
(e) not declaring as invalid and unlawful the threatened execution, as against the properties of petitioner
who had paid his pro-rata share of the adjudged obligation, of the total unpaid amount payable by his joint
co-defendants.
The foregoing assigned errors maybe synthesized into the more important issues of —
1. Was the filing of a petition for certiorari before the then Court of Appeals against the Order of Execution
issued by the lower court, dated March 17, 1980, proper, despite the pendency of a motion for
reconsideration of the same questioned Order?
2. What is the nature of the liability of the defendants (including petitioner), was it merely joint, or was it
several or solidary?
Anent the first issue raised, suffice it to state that while as a general rule, a motion for reconsideration
should precede recourse to certiorari in order to give the trial court an opportunity to correct the error that it
may have committed, the said rule is not absolutes 9 and may be dispensed with in instances where the
filing of a motion for reconsideration would serve no useful purpose, such as when the motion for
reconsideration would raise the same point stated in the motion 10 or where the error is patent for the order
is void 11 or where the relief is extremely urgent, as in cases where execution had already been
ordered 12 where the issue raised is one purely of law. 13
In the case at bar, the records show that not only was a writ of execution issued but petitioner's properties
were already scheduled to be sold at public auction on April 2, 1980 at 10:00 a.m. The records likewise
show that petitioner's motion for reconsideration of the questioned Order of Execution was filed on March
17, 1980 and was set for hearing on March 25, 1980 at 8:30 a.m., but upon motion of private respondent,
the hearing was reset to April 2, 1980 at 8:30 a.m., the very same clay when petitioner's properties were to
be sold at public auction. Needless to state that under the circumstances, petitioner was faced with
imminent danger of his properties being immediately sold the moment his motion for reconsideration is
denied. Plainly, urgency prompted recourse to the Court of Appeals and the adequate and speedy remedy
for petitioner under the situation was to file a petition for certiorari with prayer for restraining order to stop
the sale. For him to wait until after the hearing of the motion for reconsideration on April 2, 1980 before
taking recourse to the appellate court may already be too late since without a restraining order, the public
sale can proceed at 10:00 that morning. In fact, the said motion was already denied by the lower court in its
order dated April 2, 1980 and were it not for the pendency of the petition with the Court of Appeals and the
restraining order issued thereafter, the public sale scheduled that very same morning could have proceeded.
The other issue raised refers to the nature of the liability of petitioner, as one of the defendants in Civil
Case No. 33958, that is whether or not he is liable jointly or solidarily.
In this regard, Article 1207 and 1208 of the Civil Code provides —
Art. 1207. The concurrence of two or more debtors in one and the same obligation
does not imply that each one of the former has a right to demand, or that each one of
the latter is bound to render, entire compliance with the prestation. Then is a solidary
liability only when the obligation expressly so states, or when the law or the nature
of the obligation requires solidarity.
 Art. 1208. If from the law,or the nature or the wording of the obligation to which the
preceding article refers the contrary does not appear, the credit or debt shall be
presumed to be divided into as many equal shares as there are creditors and debtors,
the credits or debts being considered distinct from one another, subject to the Rules
of Court governing the multiplicity of quits.

The decision of the lower court based on the parties' compromise agreement, provides:

1. Plaintiff agrees to reduce its total claim of P117,498.95 to only P110,000.00 and
defendants agree to acknowledge the validity of such claim and further bind
themselves to initially pay out of the total indebtedness of P110,000.00, the amount
of P5,000.00 on or before December 24, 1979, the balance of P55,000.00,
defendants individually and jointly agree to pay within a period of six months from
January 1980 or before June 30, 1980. (Emphasis supply)

Clearly then, by the express term of the compromise agreement and the decision based upon it, the
defendants obligated themselves to pay their obligation "individually and jointly".

The term "individually" has the same meaning as "collectively", "separately", "distinctively", respectively
or "severally". An agreement to be "individually liable" undoubtedly creates a several obligation, 14 and a
"several obligation is one by which one individual binds himself to perform the whole obligation. 15

In the case of Parot vs. Gemora 16 We therein ruled that "the phrase juntos or separadamente or in the
promissory note is an express statement making each of the persons who signed it individually liable for
the payment of the fun amount of the obligation contained therein." Likewise in Un Pak Leung vs.
Negorra 17 We held that "in the absence of a finding of facts that the defendants made themselves
individually hable for the debt incurred they are each liable only for one-half of said amount

The obligation in the case at bar being described as "individually and jointly", the same is therefore
enforceable against one of the numerous obligors.

IN VIEW OF THE FOREGOING CONSIDERATIONS, the instant petition is hereby DISMISSED. Cost
against petitioner.

SO ORDERED.
G.R. No. L-36413 September 26, 1988
MALAYAN INSURANCE CO., INC., petitioner,
vs.
THE HON. COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY,
SAN LEON RICE MILL, INC. and PANGASINAN TRANSPORTATION CO., INC., respondents.
Freqillana Jr. for petitioner.
B.F. Estrella & Associates for respondent Martin Vallejos.
Vicente Erfe Law Office for respondent Pangasinan Transportation Co., Inc.
Nemesio Callanta for respondent Sio Choy and San Leon Rice Mill, Inc.
PADILLA, J.:
Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No. 47319-R, dated
22 February 1973, which affirmed, with some modifications, the decision, ** dated 27 April 1970,
rendered in Civil Case No. U-2021 of the Court of First Instance of Pangasinan.
The antecedent facts of the case are as follows:
On 29 March 1967, herein petitioner, Malayan Insurance Co., Inc., issued in favor of private respondent
Sio Choy Private Car Comprehensive Policy No. MRO/PV-15753, effective from 18 April 1967 to 18
April 1968, covering a Willys jeep with Motor No. ET-03023 Serial No. 351672, and Plate No. J-21536,
Quezon City, 1967. The insurance coverage was for "own damage" not to exceed P600.00 and "third-party
liability" in the amount of P20,000.00.
During the effectivity of said insurance policy, and more particularly on 19 December 1967, at about 3:30
o'clock in the afternoon, the insured jeep, while being driven by one Juan P. Campollo an employee of the
respondent San Leon Rice Mill, Inc., collided with a passenger bus belonging to the respondent Pangasinan
Transportation Co., Inc. (PANTRANCO, for short) at the national highway in Barrio San Pedro, Rosales,
Pangasinan, causing damage to the insured vehicle and injuries to the driver, Juan P. Campollo, and the
respondent Martin C. Vallejos, who was riding in the ill-fated jeep.
As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc.
and the PANTRANCO before the Court of First Instance of Pangasinan, which was docketed as Civil Case
No. U-2021. He prayed therein that the defendants be ordered to pay him, jointly and severally, the amount
of P15,000.00, as reimbursement for medical and hospital expenses; P6,000.00, for lost income;
P51,000.00 as actual, moral and compensatory damages; and P5,000.00, for attorney's fees.
Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive speed and
bumped the PANTRANCO bus which had moved to, and stopped at, the shoulder of the highway in order
to avoid the jeep; and that it had observed the diligence of a good father of a family to prevent damage,
especially in the selection and supervision of its employees and in the maintenance of its motor vehicles. It
prayed that it be absolved from any and all liability.
Defendant Sio Choy and the petitioner insurance company, in their answer, also denied liability to the
plaintiff, claiming that the fault in the accident was solely imputable to the PANTRANCO.
Sio Choy, however, later filed a separate answer with a cross-claim against the herein petitioner wherein he
alleged that he had actually paid the plaintiff, Martin C. Vallejos, the amount of P5,000.00 for
hospitalization and other expenses, and, in his cross-claim against the herein petitioner, he alleged that the
petitioner had issued in his favor a private car comprehensive policy wherein the insurance company
obligated itself to indemnify Sio Choy, as insured, for the damage to his motor vehicle, as well as for any
liability to third persons arising out of any accident during the effectivity of such insurance contract, which
policy was in full force and effect when the vehicular accident complained of occurred. He prayed that he
be reimbursed by the insurance company for the amount that he may be ordered to pay.
Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint against the
San Leon Rice Mill, Inc. for the reason that the person driving the jeep of Sio Choy, at the time of the
accident, was an employee of the San Leon Rice Mill, Inc. performing his duties within the scope of his
assigned task, and not an employee of Sio Choy; and that, as the San Leon Rice Mill, Inc. is the employer
of the deceased driver, Juan P. Campollo, it should be liable for the acts of its employee, pursuant to Art.
2180 of the Civil Code. The herein petitioner prayed that judgment be rendered against the San Leon Rice
Mill, Inc., making it liable for the amounts claimed by the plaintiff and/or ordering said San Leon Rice
Mill, Inc. to reimburse and indemnify the petitioner for any sum that it may be ordered to pay the plaintiff.
After trial, judgment was rendered as follows:
WHEREFORE, in view of the foregoing findings of this Court judgment is hereby
rendered in favor of the plaintiff and against Sio Choy and Malayan Insurance Co.,
Inc., and third-party defendant San Leon Rice Mill, Inc., as follows:
(a) P4,103 as actual damages;
(b) P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos for
the period of three (3) years;
(c) P5,000.00 as moral damages;
(d) P2,000.00 as attomey's fees or the total of P29,103.00, plus costs.
The above-named parties against whom this judgment is rendered are hereby held
jointly and severally liable. With respect, however, to Malayan Insurance Co., Inc.,
its liability will be up to only P20,000.00.
As no satisfactory proof of cost of damage to its bus was presented by defendant
Pantranco, no award should be made in its favor. Its counter-claim for attorney's fees
is also dismissed for not being proved. 1
On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio Choy, the San
Leon Rice Mill, Inc. and the Malayan Insurance Co., Inc. are jointly and severally liable for the damages
awarded to the plaintiff Martin C. Vallejos. It ruled, however, that the San Leon Rice Mill, Inc. has no
obligation to indemnify or reimburse the petitioner insurance company for whatever amount it has been
ordered to pay on its policy, since the San Leon Rice Mill, Inc. is not a privy to the contract of insurance
between Sio Choy and the insurance company. 2
Hence, the present recourse by petitioner insurance company. xxx xxx xxx

The petitioner prays for the reversal of the appellate court's judgment, or, in the alternative, to order the Employers shall be liable for the damages caused by their employees and household
San Leon Rice Mill, Inc. to reimburse petitioner any amount, in excess of one-half (1/2) of the entire helpers acting within the scope of their assigned tasks, even though the former are
amount of damages, petitioner may be ordered to pay jointly and severally with Sio Choy. not engaged ill any business or industry.

The Court, acting upon the petition, gave due course to the same, but "only insofar as it concerns the xxx xxx xxx
alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it being understood that no other
aspect of the decision of the Court of Appeals shall be reviewed, hence, execution may already issue in
The responsibility treated in this article shall cease when the persons herein
favor of respondent Martin C. Vallejos against the respondents, without prejudice to the determination of
mentioned proved that they observed all the diligence of a good father of a family to
whether or not petitioner shall be entitled to reimbursement by respondent San Leon Rice Mill, Inc. for the
prevent damage.
whole or part of whatever the former may pay on the P20,000.00 it has been adjudged to pay respondent
Vallejos." 3
It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who
are primarily liable to respondent Vallejos. The law states that the responsibility of two or more persons
However, in order to determine the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it
who are liable for a quasi-delict is solidarily.4
is important to determine first the nature or basis of the liability of petitioner to respondent Vallejos, as
compared to that of respondents Sio Choy and San Leon Rice Mill, Inc.
On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio Choy. If
petitioner is adjudged to pay respondent Vallejos in the amount of not more than P20,000.00, this is on
Therefore, the two (2) principal issues to be resolved are (1) whether the trial court, as upheld by the Court
account of its being the insurer of respondent Sio Choy under the third party liability clause included in the
of Appeals, was correct in holding petitioner and respondents Sio Choy and San Leon Rice Mill, Inc.
private car comprehensive policy existing between petitioner and respondent Sio Choy at the time of the
"solidarily liable" to respondent Vallejos; and (2) whether petitioner is entitled to be reimbursed by
complained vehicular accident.
respondent San Leon Rice Mill, Inc. for whatever amount petitioner has been adjudged to pay respondent
Vallejos on its insurance policy.
In Guingon vs. Del Monte, 5 a passenger of a jeepney had just alighted therefrom, when he was bumped by
another passenger jeepney. He died as a result thereof. In the damage suit filed by the heirs of said
As to the first issue, it is noted that the trial court found, as affirmed by the appellate court, that petitioner
passenger against the driver and owner of the jeepney at fault as well as against the insurance company
and respondents Sio Choy and San Leon Rice Mill, Inc. are jointly and severally liable to respondent
which insured the latter jeepney against third party liability, the trial court, affirmed by this Court,
Vallejos.
adjudged the owner and the driver of the jeepney at fault jointly and severally liable to the heirs of the
victim in the total amount of P9,572.95 as damages and attorney's fees; while the insurance company was
We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy and San sentenced to pay the heirs the amount of P5,500.00 which was to be applied as partial satisfaction of the
Leon Rice Mill, Inc, (to the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for judgment rendered against said owner and driver of the jeepney. Thus, in said Guingon case, it was only
the damages awarded to Vallejos. the owner and the driver of the jeepney at fault, not including the insurance company, who were held
solidarily liable to the heirs of the victim.
It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-fated
Willys jeep, pursuant to Article 2184 of the Civil Code which provides: While it is true that where the insurance contract provides for indemnity against liability to third persons,
such third persons can directly sue the insurer, 6 however, the direct liability of the insurer under indemnity
contracts against third party liability does not mean that the insurer can be held solidarily liable with the
Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if
insured and/or the other parties found at fault. The liability of the insurer is based on contract; that of the
the former, who was in the vehicle, could have, by the use of due diligence,
insured is based on tort.
prevented the misfortune it is disputably presumed that a driver was negligent, if he
had been found guilty of reckless driving or violating traffic regulations at least
twice within the next preceding two months. In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as
incorrectly held by the trial court, be made "solidarily" liable with the two principal tortfeasors namely
respondents Sio Choy and San Leon Rice Mill, Inc. For if petitioner-insurer were solidarily liable with said
If the owner was not in the motor vehicle, the provisions of article 2180 are
two (2) respondents by reason of the indemnity contract against third party liability-under which an insurer
applicable.
can be directly sued by a third party — this will result in a violation of the principles underlying solidary
obligation and insurance contracts.
On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to plaintiff
Vallejos, the former being the employer of the driver of the Willys jeep at the time of the motor vehicle
In solidary obligation, the creditor may enforce the entire obligation against one of the solidary
mishap, is Article 2180 of the Civil Code which reads:
debtors. 7 On the other hand, insurance is defined as "a contract whereby one undertakes for a
consideration to indemnify another against loss, damage, or liability arising from an unknown or
Art. 2180. The obligation imposed by article 2176 is demandable not only for one's contingent event." 8
own acts or omissions, but also for those of persons for whom one is responsible.
In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice
Mills Inc. solidarily liable to respondent Vallejos for a total amount of P29,103.00, with the qualification
that petitioner's liability is only up to P20,000.00. In the context of a solidary obligation, petitioner may be
compelled by respondent Vallejos to pay the entire obligation of P29,013.00, notwithstanding the
qualification made by the trial court. But, how can petitioner be obliged to pay the entire obligation when
the amount stated in its insurance policy with respondent Sio Choy for indemnity against third party
liability is only P20,000.00? Moreover, the qualification made in the decision of the trial court to the effect
that petitioner is sentenced to pay up to P20,000.00 only when the obligation to pay P29,103.00 is made
solidary, is an evident breach of the concept of a solidary obligation. Thus, We hold that the trial court, as
upheld by the Court of Appeals, erred in holding petitioner, solidarily liable with respondents Sio Choy
and San Leon Rice Mill, Inc. to respondent Vallejos.
He who made the payment may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. If the payment
is made before the debt is due, no interest for the intervening period may be
demanded.
xxx xxx xxx
In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby becoming
the subrogee of solidary debtor Sio Choy, is entitled to reimbursement from respondent San Leon Rice
Mill, Inc.

As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled that
petitioner is not entitled to be reimbursed by respondent San Leon Rice Mill, Inc. on the ground that said
respondent is not privy to the contract of insurance existing between petitioner and respondent Sio Choy.
We disagree.
The appellate court overlooked the principle of subrogation in insurance contracts. Thus —
To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are solidarily
liable to the respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos may enforce the entire
obligation on only one of said solidary debtors. If Sio Choy as solidary debtor is made to pay for the entire
obligation (P29,103.00) and petitioner, as insurer of Sio Choy, is compelled to pay P20,000.00 of said
entire obligation, petitioner would be entitled, as subrogee of Sio Choy as against San Leon Rice Mills,
Inc., to be reimbursed by the latter in the amount of P14,551.50 (which is 1/2 of P29,103.00 )

WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by the Court of
... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs.
Appeals, is hereby AFFIRMED, with the modification above-mentioned. Without pronouncement as to
Moses, 287 U.S. 530, 77 L. ed. 477). Upon payment of the loss, the insurer is
costs.
entitled to be subrogated pro tanto to any right of action which the insured may have
against the third person whose negligence or wrongful act caused the loss (44 Am.
Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan Assurance SO ORDERED.
Co., 283 U.S. 284, 75 L. ed. 1037).

The right of subrogation is of the highest equity. The loss in the first instance is that
of the insured but after reimbursement or compensation, it becomes the loss of the
insurer (44 Am. Jur. 2d, 746, note 16, citing Newcomb vs. Cincinnati Ins. Co., 22
Ohio St. 382).

Although many policies including policies in the standard form, now provide for
subrogation, and thus determine the rights of the insurer in this respect, the equitable
right of subrogation as the legal effect of payment inures to the insurer without any
formal assignment or any express stipulation to that effect in the policy" (44 Am.
Jur. 2nd 746). Stated otherwise, when the insurance company pays for the loss, such
payment operates as an equitable assignment to the insurer of the property and all
remedies which the insured may have for the recovery thereof. That right is not
dependent upon , nor does it grow out of any privity of contract (emphasis supplied)
or upon written assignment of claim, and payment to the insured makes the insurer
assignee in equity (Shambley v. Jobe-Blackley Plumbing and Heating Co., 264 N.C.
456, 142 SE 2d 18). 9

It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of riot exceeding
P20,000.00, shall become the subrogee of the insured, the respondent Sio Choy; as such, it is subrogated to
whatever rights the latter has against respondent San Leon Rice Mill, Inc. Article 1217 of the Civil Code
gives to a solidary debtor who has paid the entire obligation the right to be reimbursed by his co-debtors
for the share which corresponds to each.

Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation.
If two or more solidary debtors offer to pay, the creditor may choose which offer to
accept.
G.R. No. 190696 August 3, 2010
ROLITO CALANG and PHILTRANCO SERVICE ENTERPRISES, INC., Petitioners,
vs.
PEOPLE OF THE PHILIPPINES, Respondent.
RESOLUTION
BRION, J.:
We resolve the motion for reconsideration filed by the petitioners, Philtranco Service Enterprises, Inc.
(Philtranco) and Rolito Calang, to challenge our Resolution of February 17, 2010. Our assailed Resolution
denied the petition for review on certiorari for failure to show any reversible error sufficient to warrant the
exercise of this Court’s discretionary appellate jurisdiction.
Antecedent Facts
At around 2:00 p.m. of April 22, 1989, Rolito Calang was driving Philtranco Bus No. 7001, owned by
Philtranco along Daang Maharlika Highway in Barangay Lambao, Sta. Margarita, Samar when its rear left
side hit the front left portion of a Sarao jeep coming from the opposite direction. As a result of the
collision, Cresencio Pinohermoso, the jeep’s driver, lost control of the vehicle, and bumped and killed Jose
Mabansag, a bystander who was standing along the highway’s shoulder. The jeep turned turtle three (3)
times before finally stopping at about 25 meters from the point of impact. Two of the jeep’s passengers,
Armando Nablo and an unidentified woman, were instantly killed, while the other passengers sustained
serious physical injuries.
The prosecution charged Calang with multiple homicide, multiple serious physical injuries and damage to
property thru reckless imprudence before the Regional Trial Court (RTC), Branch 31, Calbayog City. The
RTC, in its decision dated May 21, 2001, found Calang guilty beyond reasonable doubt of reckless
imprudence resulting to multiple homicide, multiple physical injuries and damage to property, and
sentenced him to suffer an indeterminate penalty of thirty days of arresto menor, as minimum, to four years
and two months of prision correccional, as maximum. The RTC ordered Calang and Philtranco, jointly and
severally, to pay ₱50,000.00 as death indemnity to the heirs of Armando; ₱50,000.00 as death indemnity to
the heirs of Mabansag; and ₱90,083.93 as actual damages to the private complainants.
The petitioners appealed the RTC decision to the Court of Appeals (CA), docketed as CA-G.R. CR No.
25522. The CA, in its decision dated November 20, 2009, affirmed the RTC decision in toto. The CA ruled
that petitioner Calang failed to exercise due care and precaution in driving the Philtranco bus. According to
the CA, various eyewitnesses testified that the bus was traveling fast and encroached into the opposite lane
when it evaded a pushcart that was on the side of the road. In addition, he failed to slacken his speed,
despite admitting that he had already seen the jeep coming from the opposite direction when it was still
half a kilometer away. The CA further ruled that Calang demonstrated a reckless attitude when he drove
the bus, despite knowing that it was suffering from loose compression, hence, not roadworthy.
The CA added that the RTC correctly held Philtranco jointly and severally liable with petitioner Calang,
for failing to prove that it had exercised the diligence of a good father of the family to prevent the accident.
The petitioners filed with this Court a petition for review on certiorari. In our Resolution dated February
17, 2010, we denied the petition for failure to sufficiently show any reversible error in the assailed decision
to warrant the exercise of this Court’s discretionary appellate jurisdiction.
The Motion for Reconsideration
In the present motion for reconsideration, the petitioners claim that there was no basis to hold Philtranco
jointly and severally liable with Calang because the former was not a party in the criminal case (for
multiple homicide with multiple serious physical injuries and damage to property thru reckless
imprudence) before the RTC.
The petitioners likewise maintain that the courts below overlooked several relevant facts, supported by
documentary exhibits, which, if considered, would have shown that Calang was not negligent, such as the
affidavit and testimony of witness Celestina Cabriga; the testimony of witness Rodrigo Bocaycay; the
traffic accident sketch and report; and the jeepney’s registration receipt. The petitioners also insist that the
jeep’s driver had the last clear chance to avoid the collision.
We partly grant the motion.
Liability of Calang
We see no reason to overturn the lower courts’ finding on Calang’s culpability. The finding of negligence
on his part by the trial court, affirmed by the CA, is a question of fact that we cannot pass upon without
going into factual matters touching on the finding of negligence. In petitions for review on certiorari under
Rule 45 of the Revised Rules of Court, this Court is limited to reviewing only errors of law, not of fact,
unless the factual findings complained of are devoid of support by the evidence on record, or the assailed
judgment is based on a misapprehension of facts.
Liability of Philtranco
We, however, hold that the RTC and the CA both erred in holding Philtranco jointly and severally liable
with Calang. We emphasize that Calang was charged criminally before the RTC. Undisputedly, Philtranco
was not a direct party in this case. Since the cause of action against Calang was based on delict, both the
RTC and the CA erred in holding Philtranco jointly and severally liable with Calang, based on quasi-delict
under Articles 21761 and 21802 of the Civil Code. Articles 2176 and 2180 of the Civil Code pertain to the
vicarious liability of an employer for quasi-delicts that an employee has committed. Such provision of law
does not apply to civil liability arising from delict.
If at all, Philtranco’s liability may only be subsidiary. Article 102 of the Revised Penal Code states the
subsidiary civil liabilities of innkeepers, tavernkeepers and proprietors of establishments, as follows:
In default of the persons criminally liable, innkeepers, tavernkeepers, and any other persons or corporations
shall be civilly liable for crimes committed in their establishments, in all cases where a violation of
municipal ordinances or some general or special police regulations shall have been committed by them or
their employees.1avvphil
Innkeepers are also subsidiary liable for the restitution of goods taken by robbery or theft within their
houses from guests lodging therein, or for the payment of the value thereof, provided that such guests shall
have notified in advance the innkeeper himself, or the person representing him, of the deposit of such
goods within the inn; and shall furthermore have followed the directions which such innkeeper or his
representative may have given them with respect to the care of and vigilance over such goods. No liability
shall attach in case of robbery with violence against or intimidation of persons unless committed by the
innkeeper’s employees.
The foregoing subsidiary liability applies to employers, according to Article 103 of the Revised Penal
Code, which reads:

The subsidiary liability established in the next preceding article shall also apply to employers, teachers,
persons, and corporations engaged in any kind of industry for felonies committed by their servants, pupils,
workmen, apprentices, or employees in the discharge of their duties.

The provisions of the Revised Penal Code on subsidiary liability – Articles 102 and 103 – are deemed
written into the judgments in cases to which they are applicable. Thus, in the dispositive portion of its
decision, the trial court need not expressly pronounce the subsidiary liability of the
employer.3 Nonetheless, before the employers’ subsidiary liability is enforced, adequate evidence must
exist establishing that (1) they are indeed the employers of the convicted employees; (2) they are engaged
in some kind of industry; (3) the crime was committed by the employees in the discharge of their duties;
and (4) the execution against the latter has not been satisfied due to insolvency. The determination of these
conditions may be done in the same criminal action in which the employee’s liability, criminal and civil,
has been pronounced, in a hearing set for that precise purpose, with due notice to the employer, as part of
the proceedings for the execution of the judgment.4

WHEREFORE, we PARTLY GRANT the present motion. The Court of Appeals decision that affirmed in
toto the RTC decision, finding Rolito Calang guilty beyond reasonable doubt of reckless imprudence
resulting in multiple homicide, multiple serious physical injuries and damage to property, is AFFIRMED,
with the MODIFICATION that Philtranco’s liability should only be subsidiary. No costs.

SO ORDERED.
G.R. No. 204866 January 21, 2015 In a Decision10 dated August 25, 2009, the RTC ultimately ruled in Adworld’s favor, and accordingly,
declared, inter alia, Transworld and Ruks jointly and severally liable to Adworld in the amount of
₱474,204.00 as actual damages, with legal interest from the date of the filing of the complaint until full
RUKS KONSULT AND CONSTRUCTION, Petitioner,
payment thereof, plus attorney’s fees in the amount of ₱50,000.00. 11 The RTC found both Transworld and
vs.
Ruks negligent in the construction of the collapsed billboard as they knew that the foundation supporting
ADWORLD SIGN AND ADVERTISING CORPORATION* and TRANSWORLD MEDIA ADS,
the same was weak and would pose danger to the safety of the motorists and the other adjacent properties,
INC., Respondents.
such as Adworld’s billboard, and yet, they did not do anything to remedy the situation.12 In particular, the
RTC explained that Transworld was made aware by Ruks that the initial construction of the lower structure
DECISION of its billboard did not have the proper foundation and would require additional columns and pedestals to
support the structure. Notwithstanding, however, Ruks proceeded with the construction of the billboard’s
upper structure and merely assumed that Transworld would reinforce its lower structure. 13 The RTC then
PERLAS-BERNABE, J.: concluded that these negligent acts were the direct and proximate cause of the damages suffered by
Adworld’s billboard.14
Assailed in this petition for review on certiorari1 are the Decision2 dated November 16, 2011 and the
Resolution3dated December 10, 2012 of the Court of Appeals (CA) in CA-G.R. CV No. 94693 which Aggrieved, both Transworld and Ruks appealed to the CA. In a Resolution dated February 3, 2011, the CA
affirmed the Decision4dated August 25, 2009 of the Regional Trial Court of Makati City, Branch 142 dismissed Transworld’s appeal for its failure to file an appellant’s brief on time.15 Transworld elevated its
(RTC) in Civil Case No. 03-1452 holding, inter alia, petitioner Ruks Konsult and Construction (Ruks) and
case before the Court, docketed as G.R. No. 197601.16 However, in a Resolution17 dated November 23,
respondent Transworld Media Ads, Inc. (Transworld) jointly and severally liable to respondent Adworld 2011, the Court declared the case closed and terminated for failure of Transworld to file the intended
Sign and Advertising Corporation (Adworld) for damages. petition for review on certiorariwithin the extended reglementary period. Subsequently, the Court issued an
Entry of Judgment18 dated February 22, 2012 in G.R. No. 197601 declaring the Court’s November 23,
The Facts 2011 Resolution final and executory.

The instant case arose from a complaint for damages filed by Adworld against Transworld and Comark The CA Ruling
International Corporation (Comark) before the RTC.5 In the complaint, Adworld alleged that it is the
owner of a 75 ft. x 60 ft. billboard structure located at EDSA Tulay, Guadalupe, Barangka Mandaluyong, In a Decision19 dated November 16, 2011, the CA denied Ruks’s appeal and affirmed the ruling of the
which was misaligned and its foundation impaired when, on August 11, 2003, the adjacent billboard
RTC. It adhered to the RTC’s finding of negligence on the part of Transworld and Ruks which brought
structure owned by Transworld and used by Comark collapsed and crashed against it. Resultantly, on about the damage to Adworld’s billboard. It found that Transworld failed to ensure that Ruks will comply
August 19, 2003, Adworld sent Transworld and Comark a letter demanding payment for the repairs of its with the approved plans and specifications of the structure, and that Ruks continued to install and finish the
billboard as well asloss of rental income. On August 29, 2003, Transworld sent its reply, admitting the
billboard structure despite the knowledge that there were no adequate columns to support the same. 20
damage caused by its billboard structure on Adworld’s billboard, but nevertheless, refused and failed to
pay the amounts demanded by Adworld. As Adworld’s final demand letter also went unheeded, it was
constrained to file the instant complaint, praying for damages in the aggregate amount of ₱474,204.00, Dissatisfied, Ruks moved for reconsideration,21 which was, however, denied in a Resolution22 dated
comprised of ₱281,204.00 for materials, ₱72,000.00 for labor, and ₱121,000.00 for indemnity for loss of December 10, 2012,hence, this petition.
income.6
On the other hand, Transworld filed another appeal before the Court, docketed as G.R. No.
In its Answer with Counterclaim, Transworld averred that the collapse of its billboard structure was due to 205120.23 However, the Court denied outright Transworld’s petition in a Resolution 24 dated April 15, 2013,
extraordinarily strong winds that occurred instantly and unexpectedly, and maintained that the damage holding that the same was already bound by the dismissal of its petition filed in G.R. No. 197601.
caused to Adworld’s billboard structure was hardly noticeable. Transworld likewise filed a Third-Party
Complaint against Ruks, the company which built the collapsed billboard structure in the former’s
The Issue Before the Court
favor.1âwphi1 It was alleged therein that the structure constructed by Ruks had a weak and poor
foundation not suited for billboards, thus, prone to collapse, and as such, Ruks should ultimately be held
liable for the damages caused to Adworld’s billboard structure.7 The primordial issue for the Court’s resolution is whether or not the CA correctly affirmed the ruling of the
RTC declaring Ruks jointly and severally liable with Transworld for damages sustained by Adworld.
For its part, Comark denied liability for the damages caused to Adworld’s billboard structure, maintaining
that it does not have any interest on Transworld’s collapsed billboard structure as it only contracted the use The Court’s Ruling
of the same. In this relation, Comark prayed for exemplary damages from Transworld for unreasonably
includingit as a party-defendant in the complaint.8
The petition is without merit.

Lastly, Ruks admitted that it entered into a contract with Transworld for the construction of the latter’s
At the outset, it must be stressed that factual findings of the RTC, when affirmed by the CA, are entitled to
billboard structure, but denied liability for the damages caused by its collapse. It contended that when
great weight by the Court and are deemed final and conclusive when supported by the evidence on
Transworld hired its services, there was already an existing foundation for the billboard and that it merely
record.25 Absent any exceptions to this rule – such as when it is established that the trial court ignored,
finished the structure according to the terms and conditions of its contract with the latter. 9
overlooked, misconstrued, or misinterpreted cogent facts and circumstances that, if considered, would
change the outcome of the case26 – such findings must stand.
The RTC Ruling
After a judicious perusal of the records, the Court sees no cogent reason to deviate from the findings of the
RTC and the CA and their uniform conclusion that both Transworld and Ruks committed acts resulting in
the collapse of the former’s billboard, which in turn, caused damage to the adjacent billboard of Adworld.

Jurisprudence defines negligence as the omission to do something which a reasonable man, guided by
those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of
something which a prudent and reasonable man would not do. 27 It is the failure to observe for the
protection of the interest of another person that degree of care, precaution, and vigilance which the
circumstances justly demand, whereby such other person suffers injury.28

In this case, the CA correctly affirmed the RTC’s finding that Transworld’s initial construction of its
billboard’s lower structure without the proper foundation, and that of Ruks’s finishing its upper structure
and just merely assuming that Transworld would reinforce the weak foundation are the two (2) successive
acts which were the direct and proximate cause of the damages sustained by Adworld. Worse, both
Transworld and Ruks were fully aware that the foundation for the former’s billboard was weak; yet, neither
of them took any positive step to reinforce the same. They merely relied on each other’s word that repairs
would be done to such foundation, but none was done at all. Clearly, the foregoing circumstances show
that both Transworld and Ruks are guilty of negligence in the construction of the former’s billboard, and
perforce, should be held liable for its collapse and the resulting damage to Adworld’s billboard structure.
As joint tortfeasors, therefore, they are solidarily liable to Adworld. Verily, "[j]oint tortfeasors are those
who command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the
commission of a tort, or approve of it after it is done, if done for their benefit. They are also referred to as
those who act together in committing wrong or whose acts, if independent of each other, unite in causing a
single injury. Under Article 219429 of the Civil Code, joint tortfeasors are solidarily liable for the resulting
damage. In other words, joint tortfeasors are each liable as principals, to the same extent and in the same
manner as if they had performed the wrongful act themselves."30 The Court’s pronouncement in People v.
Velasco31 is instructive on this matter, to wit:32

Where several causes producing an injury are concurrent and each is an efficient cause without which the
injury would not have happened, the injury may be attributed to all or any of the causes and recovery may
be had against any or all of the responsible persons although under the circumstances of the case, it may
appear that one of them was more culpable, and that the duty owed by them to the injured person was not
same. No actor's negligence ceases to be a proximate cause merely because it does not exceed the
negligence of other actors. Each wrongdoer is responsible for the entire result and is liable as though his
acts were the sole cause of the injury.

There is no contribution between joint [tortfeasors] whose liability is solidary since both of them are liable
for the total damage.1âwphi1 Where the concurrent or successive negligent acts or omissions of two or
more persons, although acting independently, are in combination the direct and proximate cause of a single
injury to a third person, it is impossible to determine in what proportion each contributed to the injury and
either of them is responsible for the whole injury. x x x. (Emphases and underscoring supplied)

In conclusion, the CA correctly affirmed the ruling of the RTC declaring Ruks jointly and severally liable
with Transworld for damages sustained by Adworld.

WHEREFORE, the petition is DENIED. The Decision dated November 16, 2011 and the Resolution dated
December 10, 2012 of the Court of Appeals in CA-G.R. CV No. 94693 are hereby AFFIRMED.

SO ORDERED.
G.R. No. 194121 TMBI notified Sony of the loss through a letter dated October 10, 2000. 11 It also sent BMT a letter dated
March 29, 2001, demanding payment for the lost shipment. BMT refused to pay, insisting that the goods
were "hijacked."
TORRES-MADRID BROKERAGE, INC., Petitioner
vs.
FEB MITSUI MARINE INSURANCE CO., INC. and BENJAMIN P. MANALAST AS, doing In the meantime, Sony filed an insurance claim with the Mitsui, the insurer of the goods. After evaluating
business under the name of BMT TRUCKING SERVICES, Respondents the merits of the claim, Mitsui paid Sony PHP7,293,386.23 corresponding to the value of the lost goods.12

DECISION After being subrogated to Sony’s rights, Mitsui sent TMBI a demand letter dated August 30, 2001 for
payment of the lost goods. TMBI refused to pay Mitsui’s claim. As a result, Mitsui filed a complaint
against TMBI on November 6, 2001,
BRION, J.:

TMBI, in turn, impleaded Benjamin Manalastas, the proprietor of BMT, as a third-party defendant. TMBI
We resolve the petition for review on certiorari challenging the Court of Appeals' (CA) October 14, 2010
alleged that BMT’s driver, Lapesura, was responsible for the theft/hijacking of the lost cargo and claimed
decision in CA-G.R. CV No. 91829.1
BMT’s negligence as the proximate cause of the loss. TMBI prayed that in the event it is held liable to
Mitsui for the loss, it should be reimbursed by BMT.
The CA affirmed the Regional Trial Court's (RTC) decision in Civil Case No. 01-1596, and found
petitioner Torres-Madrid Brokerage, Inc. (TMBI) and respondent Benjamin P. Manalastas jointly and
At the trial, it was revealed that BMT and TMBI have been doing business with each other since the early
solidarily liable to respondent FEB Mitsui Marine Insurance Co., Inc. (Mitsui) for damages from the loss of
80’s. It also came out that there had been a previous hijacking incident involving Sony’s cargo in 1997, but
transported cargo.
neither Sony nor its insurer filed a complaint against BMT or TMBI.13

Antecedents
On October 7, 2000, a shipment of various electronic goods from Thailand and Malaysia arrived at the Port
of Manila for Sony Philippines, Inc. (Sony). Previous to the arrival, Sony had engaged the services of
TMBI to facilitate, process, withdraw, and deliver the shipment from the port to its warehouse in Biñan,
Laguna.2
On August 5, 2008, the RTC found TMBI and Benjamin Manalastas jointly and solidarily liable to pay
Mitsui PHP 7,293,386.23 as actual damages, attorney’s fees equivalent to 25% of the amount claimed, and
the costs of the suit.14 The RTC held that TMBI and Manalastas were common carriers and had acted
negligently.
Both TMBI and BMT appealed the RTC’s verdict.

TMBI – who did not own any delivery trucks – subcontracted the services of Benjamin Manalastas’
TMBI denied that it was a common carrier required to exercise extraordinary diligence. It maintains that it
company, BMT Trucking Services (BMT), to transport the shipment from the port to the Biñan
exercised the diligence of a good father of a family and should be absolved of liability because the truck
warehouse.3 Incidentally, TMBI notified Sony who had no objections to the arrangement. 4
was "hijacked" and this was a fortuitous event.

Four BMT trucks picked up the shipment from the port at about 11:00 a.m. of October 7, 2000. However,
BMT claimed that it had exercised extraordinary diligence over the lost shipment, and argued as well that
BMT could not immediately undertake the delivery because of the truck ban and because the following day
the loss resulted from a fortuitous event.
was a Sunday. Thus, BMT scheduled the delivery on October 9, 2000.

On October 14, 2010, the CA affirmed the RTC’s decision but reduced the award of attorney’s fees to PHP
In the early morning of October 9, 2000, the four trucks left BMT’s garage for Laguna. 5 However, only
200,000.
three trucks arrived at Sony’s Biñan warehouse.

The CA held: (1) that "hijacking" is not necessarily a fortuitous event because the term refers to the general
At around 12:00 noon, the truck driven by Rufo Reynaldo Lapesura (NSF-391) was found abandoned
stealing of cargo during transit;15 (2) that TMBI is a common carrier engaged in the business of
along the Diversion Road in Filinvest, Alabang, Muntinlupa City.6 Both the driver and the shipment were
transporting goods for the general public for a fee;16 (3) even if the "hijacking" were a fortuitous event,
missing.
TMBI’s failure to observe extraordinary diligence in overseeing the cargo and adopting security measures
rendered it liable for the loss;17 and (4) even if TMBI had not been negligent in the handling, transport and
Later that evening, BMT’s Operations Manager Melchor Manalastas informed Victor Torres, TMBI’s the delivery of the shipment, TMBI still breached its contractual obligation to Sony when it failed to
General Manager, of the development.7 They went to Muntinlupa together to inspect the truck and to report deliver the shipment.18
the matter to the police.8
TMBI disagreed with the CA’s ruling and filed the present petition on December 3, 2010.
Victor Torres also filed a complaint with the National Bureau of Investigation (NBI) against Lapesura for
"hijacking."9The complaint resulted in a recommendation by the NBI to the Manila City Prosecutor’s
The Arguments
Office to prosecute Lapesura for qualified theft.10

TMBI’s Petition
TMBI insists that the hijacking of the truck was a fortuitous event. It contests the CA’s finding that neither
force nor intimidation was used in the taking of the cargo. Considering Lapesura was never found, the
Court should not discount the possibility that he was a victim rather than a perpetrator. 19
TMBI denies being a common carrier because it does not own a single truck to transport its shipment and it
does not offer transport services to the public for compensation.20 It emphasizes that Sony knew TMBI did
not have its own vehicles and would subcontract the delivery to a third-party.
Further, TMBI now insists that the service it offered was limited to the processing of paperwork attendant
to the entry of Sony’s goods. It denies that delivery of the shipment was a part of its obligation.21
TMBI solely blames BMT as it had full control and custody of the cargo when it was lost. 22 BMT, as a
common carrier, is presumed negligent and should be responsible for the loss.
BMT’s Comment
BMT insists that it observed the required standard of care.23 Like the petitioner, BMT maintains that the
hijacking was a fortuitous event – a force majeure – that exonerates it from liability.24 It points out that
Lapesura has never been seen again and his fate remains a mystery. BMT likewise argues that the loss of
the cargo necessarily showed that the taking was with the use of force or intimidation.25
If there was any attendant negligence, BMT points the finger on TMBI who failed to send a representative
to accompany the shipment.26 BMT further blamed TMBI for the latter’s failure to adopt security measures
to protect Sony’s cargo.27
Mitsui’s Comment
Mitsui counters that neither TMBI nor BMT alleged or proved during the trial that the taking of the cargo
was accompanied with grave or irresistible threat, violence, or force. 28 Hence, the incident cannot be
considered "force majeure" and TMBI remains liable for breach of contract.
Mitsui emphasizes that TMBI’s theory – that force or intimidation must have been used because Lapesura
was never found – was only raised for the first time before this Court.29 It also discredits the theory as a
mere conjecture for lack of supporting evidence.
Mitsui adopts the CA’s reasons to conclude that TMBI is a common carrier. It also points out Victor
Torres’ admission during the trial that TMBI’s brokerage service includes the eventual delivery of the
cargo to the consignee.30
Mitsui invokes as well the legal presumption of negligence against TMBI, pointing out that TMBI simply
entrusted the cargo to BMT without adopting any security measures despite: (1) a previous hijacking
incident when TMBI lost Sony’s cargo; and (2) TMBI’s knowledge that the cargo was worth more than 10
million pesos.31
Mitsui affirms that TMBI breached the contract of carriage through its negligent handling of the cargo,
resulting in its loss.
The Court’s Ruling
A brokerage may be considered a
common carrier if it also undertakes to
deliver the goods for its customers
Common carriers are persons, corporations, firms or associations engaged in the business of transporting
passengers or goods or both, by land, water, or air, for compensation, offering their services to the
public.32 By the nature of their business and for reasons of public policy, they are bound to observe
extraordinary diligence in the vigilance over the goods and in the safety of their passengers.33
In A.F. Sanchez Brokerage Inc. v. Court of Appeals,34we held that a customs broker – whose principal
business is the preparation of the correct customs declaration and the proper shipping documents – is still
considered a common carrier if it also undertakes to deliver the goods for its customers. The law does not
distinguish between one whose principal business activity is the carrying of goods and one who undertakes
this task only as an ancillary activity.35 This ruling has been reiterated in Schmitz Transport & Brokerage
Corp. v. Transport Venture, Inc.,36Loadmasters Customs Services, Inc. v. Glodel Brokerage
Corporation,37and Westwind Shipping Corporation v. UCPB General Insurance Co., Inc. 38
Despite TMBI’s present denials, we find that the delivery of the goods is an integral, albeit ancillary, part
of its brokerage services. TMBI admitted that it was contracted to facilitate, process, and clear the
shipments from the customs authorities, withdraw them from the pier, then transport and deliver them to
Sony’s warehouse in Laguna.39
Further, TMBI’s General Manager Victor Torres described the nature of its services as follows:
ATTY. VIRTUDAZO: Could you please tell the court what is the nature of the business of [TMBI]?
Witness MR. Victor Torres of Torres Madrid: We are engaged in customs brokerage business. We
acquire the release documents from the Bureau of Customs and eventually deliver the cargoes to the
consignee’s warehouse and we are engaged in that kind of business, sir.40
That TMBI does not own trucks and has to subcontract the delivery of its clients’ goods, is immaterial. As
long as an entity holds itself to the public for the transport of goods as a business, it is considered a
common carrier regardless of whether it owns the vehicle used or has to actually hire one.41
Lastly, TMBI’s customs brokerage services – including the transport/delivery of the cargo – are available
to anyone willing to pay its fees. Given these circumstances, we find it undeniable that TMBI is a common
carrier.
Consequently, TMBI should be held responsible for the loss, destruction, or deterioration of the goods it
transports unless it results from:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act of omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority. 42
For all other cases - such as theft or robbery – a common carrier is presumed to have been at fault or to
have acted negligently, unless it can prove that it observed extraordinary diligence.43
Simply put, the theft or the robbery of the goods is not considered a fortuitous event or a force majeure.
Nevertheless, a common carrier may absolve itself of liability for a resulting loss: (1) if it proves that it
exercised extraordinary diligence in transporting and safekeeping the goods;44 or (2) if it stipulated with
the shipper/owner of the goods to limit its liability for the loss, destruction, or deterioration of the goods to
a degree less than extraordinary diligence.45
However, a stipulation diminishing or dispensing with the common carrier’s liability for acts committed by
thieves or robbers who do not act with grave or irresistible threat, violence, or force is void under Article
1745 of the Civil Code for being contrary to public policy.46 Jurisprudence, too, has expanded Article
1734’s five exemptions. De Guzman v. Court of Appeals47 interpreted Article 1745 to mean that a robbery
attended by "grave or irresistible threat, violence or force" is a fortuitous event that absolves the common
carrier from liability.
In the present case, the shipper, Sony, engaged the services of TMBI, a common carrier, to facilitate the
release of its shipment and deliver the goods to its warehouse. In turn, TMBI subcontracted a portion of its
obligation – the delivery of the cargo – to another common carrier, BMT.
Despite the subcontract, TMBI remained responsible for the cargo. Under Article 1736, a common
carrier’s extraordinary responsibility over the shipper’s goods lasts from the time these goods are
unconditionally placed in the possession of, and received by, the carrier for transportation, until they are
delivered, actually or constructively, by the carrier to the consignee.48
That the cargo disappeared during transit while under the custody of BMT – TMBI’s subcontractor – did
not diminish nor terminate TMBI’s responsibility over the cargo. Article 1735 of the Civil Code presumes
that it was at fault.
Instead of showing that it had acted with extraordinary diligence, TMBI simply argued that it was not a
common carrier bound to observe extraordinary diligence. Its failure to successfully establish this premise
carries with it the presumption of fault or negligence, thus rendering it liable to Sony/Mitsui for breach of
contract.
Specifically, TMBI’s current theory – that the hijacking was attended by force or intimidation – is
untenable.
First, TMBI alleged in its Third Party Complaint against BMT that Lapesura was responsible for hijacking
the shipment.49 Further, Victor Torres filed a criminal complaint against Lapesura with the NBI.50 These
actions constitute direct and binding admissions that Lapesura stole the cargo. Justice and fair play dictate
that TMBI should not be allowed to change its legal theory on appeal.
Second, neither TMBI nor BMT succeeded in substantiating this theory through evidence. Thus, the theory
remained an unsupported allegation no better than speculations and conjectures. The CA therefore
correctly disregarded the defense of force majeure.
TMBI and BMT are not solidarily liable
to Mitsui
We disagree with the lower courts’ ruling that TMBI and BMT are solidarily liable to Mitsui for the loss as
joint tortfeasors. The ruling was based on Article 2194 of the Civil Code:
Art. 2194. The responsibility of two or more persons who are liable for quasi-delict is solidary.
Notably, TMBI’s liability to Mitsui does not stem from a quasi-delict (culpa aquiliana) but from its breach
of contract (culpa contractual). The tie that binds TMBI with Mitsui is contractual, albeit one that passed
on to Mitsui as a result of TMBI’s contract of carriage with Sony to which Mitsui had been subrogated as
an insurer who had paid Sony’s insurance claim. The legal reality that results from this contractual tie
precludes the application of quasi-delict based Article 2194.
A third party may recover from a
common carrier for quasi-delict but must
prove actual negligence
We likewise disagree with the finding that BMT is directly liable to Sony/Mitsui for the loss of the cargo.
While it is undisputed that the cargo was lost under the actual custody of BMT (whose employee is the
primary suspect in the hijacking or robbery of the shipment), no direct contractual relationship existed
between Sony/Mitsui and BMT. If at all, Sony/Mitsui’s cause of action against BMT could only arise from
quasi-delict, as a third party suffering damage from the action of another due to the latter’s fault or
negligence, pursuant to Article 2176 of the Civil Code.51
We have repeatedly distinguished between an action for breach of contract (culpa contractual) and an
action for quasi-delict (culpa aquiliana).
In culpa contractual, the plaintiff only needs to establish the existence of the contract and the obligor’s
failure to perform his obligation. It is not necessary for the plaintiff to prove or even allege that the
obligor’s non-compliance was due to fault or negligence because Article 1735 already presumes that the
common carrier is negligent. The common carrier can only free itself from liability by proving that it
observed extraordinary diligence. It cannot discharge this liability by shifting the blame on its agents or
servants.52
On the other hand, the plaintiff in culpa aquiliana must clearly establish the defendant’s fault or negligence
because this is the very basis of the action.53 Moreover, if the injury to the plaintiff resulted from the act or
omission of the defendant’s employee or servant, the defendant may absolve himself by proving that he
observed the diligence of a good father of a family to prevent the damage. 54
In the present case, Mitsui’s action is solely premised on TMBI’s breach of contract. Mitsui did not even
sue BMT, much less prove any negligence on its part. If BMT has entered the picture at all, it is because
TMBI sued it for reimbursement for the liability that TMBI might incur from its contract of carriage with
Sony/Mitsui. Accordingly, there is no basis to directly hold BMT liable to Mitsui for quasi-delict.
BMT is liable to TMBI for breach of their
contract of carriage
We do not hereby say that TMBI must absorb the loss. By subcontracting the cargo delivery to BMT,
TMBI entered into its own contract of carriage with a fellow common carrier.
The cargo was lost after its transfer to BMT' s custody based on its contract of carriage with TMBI.
Following Article 1735, BMT is presumed to be at fault. Since BMT failed to prove that it
observed extraordinary diligence in the performance of its obligation to TMBI, it is liable to TMBI for
breach of their contract of carriage.

In these lights, TMBI is liable to Sony (subrogated by Mitsui) for breaching the contract of carriage. In
tum, TMBI is entitled to reimbursement from BMT due to the latter's own breach of its contract of carriage
with TMBI. The proverbial buck stops with BMT who may either: (a) absorb the loss, or (b) proceed after
its missing driver, the suspected culprit, pursuant to Article 2181. 55

WHEREFORE, the Court hereby ORDERS petitioner TorresMadrid Brokerage, Inc. to pay the
respondent FEB Mitsui Marine Insurance Co", Inc. the following:

a. Actual damages in the amount of PHP 7,293,386.23 plus legal interest from the time the complaint was
filed until it is fully paid;

b. Attorney's foes in the amount of PHP 200,000.00; and

c. Costs of suit.

Respondent Benjamin P. Manalastas is in turn ORDERED to REIMBURSE Torres-Madrid Brokerage,

Inc. of the above-mentioned amounts.

SO ORDERED.
G.R. No. L-28046 May 16, 1983
PHILIPPINE NATIONAL BANK, plaintiff-appellant,
vs.
INDEPENDENT PLANTERS ASSOCIATION, INC., ANTONIO DIMAYUGA, DELFIN
FAJARDO, CEFERINO VALENCIA, MOISES CARANDANG, LUCIANO CASTILLO,
AURELIO VALENCIA, LAURO LEVISTE, GAVINO GONZALES, LOPE GEVANA and
BONIFACIO LAUREANA, defendants-appellees.
Basa, Ilao, del Rosario Diaz for plaintiff-appellant.
Laurel Law Office for Dimayuga.
Tomas Yumol for Fajardo, defendant-appellee.
PLANA, J.:
Appeal by the Philippine National Bank (PNB) from the Order of the defunct Court of First Instance of
Manila (Branch XX) in its Civil Case No. 46741 dismissing PNB's complaint against several solidary
debtors for the collection of a sum of money on the ground that one of the defendants (Ceferino Valencia)
died during the pendency of the case (i.e., after the plaintiff had presented its evidence) and therefore the
complaint, being a money claim based on contract, should be prosecuted in the testate or intestate
proceeding for the settlement of the estate of the deceased defendant pursuant to Section 6 of Rule 86 of
the Rules of Court which reads:
SEC. 6. Solidary obligation of decedent.— the obligation of the decedent is solidary
with another debtor, the claim shall be filed against the decedent as if he were the
only debtor, without prejudice to the right of the estate to recover contribution from
the other debtor. In a joint obligation of the decedent, the claim shall be confined to
the portion belonging to him.
The appellant assails the order of dismissal, invoking its right of recourse against one, some or all of its
solidary debtors under Article 1216 of the Civil Code —
ART. 1216. The creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one of them shall not
be an obstacle to those which may subsequently be directed against the others, so
long as the debt has not been fully collected.
The sole issue thus raised is whether in an action for collection of a sum of money based on contract
against all the solidary debtors, the death of one defendant deprives the court of jurisdiction to proceed
with the case against the surviving defendants.
It is now settled that the quoted Article 1216 grants the creditor the substantive right to seek satisfaction of
his credit from one, some or all of his solidary debtors, as he deems fit or convenient for the protection of
his interests; and if, after instituting a collection suit based on contract against some or all of them and,
during its pendency, one of the defendants dies, the court retains jurisdiction to continue the proceedings
and decide the case in respect of the surviving defendants. Thus in Manila Surety & Fidelity Co., Inc. vs.
Villarama et al., 107 Phil. 891 at 897, this Court ruled:
Construing Section 698 of the Code of Civil Procedure from whence the aforequoted
provision (Sec. 6, Rule 86) was taken, this Court held that where two persons are
bound in solidum for the same debt and one of them dies, the whole indebtedness
can be proved against the estate of the latter, the decedent's liability being absolute
and primary; and if the claim is not presented within the time provided by the rules,
the same will be barred as against the estate. It is evident from the foregoing that
Section 6 of Rule 87 (now Rule 86) provides the procedure should the creditor
desire to go against the deceased debtor, but there is certainly nothing in the said
provision making compliance with such procedure a condition precedent before an
ordinary action against the surviving solidary debtors, should the creditor choose to
demand payment from the latter, could be entertained to the extent that failure to
observe the same would deprive the court jurisdiction to take cognizance of the
action against the surviving debtors. Upon the other hand, the Civil Code expressly
allows the creditor to proceed against any one of the solidary debtors or some or all
of them simultaneously. There is, therefore, nothing improper in the creditor's filing
of an action against the surviving solidary debtors alone, instead of instituting a
proceeding for the settlement of the estate of the deceased debtor wherein his claim
could be filed.
Similarly, in PNB vs. Asuncion, 80 SCRA 321 at 323-324, this Court, speaking thru Mr. Justice Makasiar,
reiterated the doctrine.
A cursory perusal of Section 6, Rule 86 of the Revised Rules of Court reveals that nothing therein prevents
a creditor from proceeding against the surviving solidary debtors. Said provision merely sets up the
procedure in enforcing collection in case a creditor chooses to pursue his claim against the estate of the
deceased solidary, debtor.
It is crystal clear that Article 1216 of the New Civil Code is the applicable provision in this matter. Said
provision gives the creditor the right to 'proceed against anyone of the solidary debtors or some or all of
them simultaneously.' The choice is undoubtedly left to the solidary, creditor to determine against whom
he will enforce collection. In case of the death of one of the solidary debtors, he (the creditor) may, if he so
chooses, proceed against the surviving solidary debtors without necessity of filing a claim in the estate of
the deceased debtors. It is not mandatory for him to have the case dismissed against the surviving debtors
and file its claim in the estate of the deceased solidary debtor . . .
As correctly argued by petitioner, if Section 6, Rule 86 of the Revised Rules of Court were applied
literally, Article 1216 of the New Civil Code would, in effect, be repealed since under the Rules of Court,
petitioner has no choice but to proceed against the estate of Manuel Barredo only. Obviously, this
provision diminishes the Bank's right under the New Civil, Code to proceed against any one, some or all of
the solidary debtors. Such a construction is not sanctioned by the principle, which is too well settled to
require citation, that a substantive law cannot be amended by a procedural rule. Otherwise stared, Section
6, Rule 86 of the Revised Rules of Court cannot be made to prevail over Article 1216 of the New Civil
Code, the former being merely procedural, while the latter, substantive.
WHEREFORE the appealed order of dismissal of the court a quo in its Civil Case No. 46741 is hereby set
aside in respect of the surviving defendants; and the case is remanded to the corresponding Regional Trial
Court for proceedings. proceedings. No costs. SO ORDERED.
G.R. No. 167615
SPOUSES ALEXANDER AND JULIE LAM, Doing Business Under the Name and Style
"COLORKWIK LABORATORIES" AND "COLORKWIK PHOTO SUPPLY", Petitioners,
vs.
KODAK PHILIPPINES, LTD., Respondent.
DECISION
LEONEN, J.:
This is a Petition for Review on Certiorari filed on April 20, 2005 assailing the March 30, 2005
Decision1 and September 9, 2005 Amended Decision2 of the Court of Appeals, which modified the
February 26, 1999 Decision3 of the Regional Trial Court by reducing the amount of damages awarded to
petitioners Spouses Alexander and Julie Lam (Lam Spouses).4 The Lam Spouses argue that respondent
Kodak Philippines, Ltd.’s breach of their contract of sale entitles them to damages more than the amount
awarded by the Court of Appeals.5
I
On January 8, 1992, the Lam Spouses and Kodak Philippines, Ltd. entered into an agreement (Letter
Agreement) for the sale of three (3) units of the Kodak Minilab System 22XL6 (Minilab Equipment) in the
amount of ₱1,796,000.00 per unit,7 with the following terms:
This confirms our verbal agreement for Kodak Phils., Ltd. To provide Colorkwik Laboratories, Inc. with
three (3) units Kodak Minilab System 22XL . . . for your proposed outlets in Rizal Avenue (Manila),
Tagum (Davao del Norte), and your existing Multicolor photo counter in Cotabato City under the
following terms and conditions:
1. Said Minilab Equipment packages will avail a total of 19% multiple order discount based on
prevailing equipment price provided said equipment packages will be purchased not later than
June 30, 1992.
2. 19% Multiple Order Discount shall be applied in the form of merchandise and delivered in
advance immediately after signing of the contract.
* Also includes start-up packages worth P61,000.00.
3. NO DOWNPAYMENT.
4. Minilab Equipment Package shall be payable in 48 monthly installments at THIRTY FIVE
THOUSAND PESOS (P35,000.00) inclusive of 24% interest rate for the first 12 months; the
balance shall be re-amortized for the remaining 36 months and the prevailing interest shall be
applied.
5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at ONE MILLION
SEVEN HUNDRED NINETY SIX THOUSAND PESOS.
6. Price is subject to change without prior notice.
*Secured with PDCs; 1st monthly amortization due 45 days after installation[.] 8
On January 15, 1992, Kodak Philippines, Ltd. delivered one (1) unit of the Minilab Equipment in Tagum,
Davao Province.9 The delivered unit was installed by Noritsu representatives on March 9, 1992. 10 The Lam
Spouses issued postdated checks amounting to ₱35,000.00 each for 12 months as payment for the first
delivered unit, with the first check due on March 31, 1992. 11
The Lam Spouses requested that Kodak Philippines, Ltd. not negotiate the check dated March 31, 1992
allegedly due to insufficiency of funds.12 The same request was made for the check due on April 30, 1992.
However, both checks were negotiated by Kodak Philippines, Ltd. and were honored by the depository
bank.13 The 10 other checks were subsequently dishonored after the Lam Spouses ordered the depository
bank to stop payment.14
Kodak Philippines, Ltd. canceled the sale and demanded that the Lam Spouses return the unit it delivered
together with its accessories.15 The Lam Spouses ignored the demand but also rescinded the contract
through the letter dated November 18, 1992 on account of Kodak Philippines, Ltd.’s failure to deliver the
two (2) remaining Minilab Equipment units.16
On November 25, 1992, Kodak Philippines, Ltd. filed a Complaint for replevin and/or recovery of sum of
money. The case was raffled to Branch 61 of the Regional Trial Court, Makati City. 17 The Summons and a
copy of Kodak Philippines, Ltd.’s Complaint was personally served on the Lam Spouses.18
The Lam Spouses failed to appear during the pre-trial conference and submit their pre-trial brief despite
being given extensions.19 Thus, on July 30, 1993, they were declared in default. 20 Kodak Philippines, Ltd.
presented evidence ex-parte.21 The trial court issued the Decision in favor of Kodak Philippines, Ltd.
ordering the seizure of the Minilab Equipment, which included the lone delivered unit, its standard
accessories, and a separate generator set.22 Based on this Decision, Kodak Philippines, Ltd. was able to
obtain a writ of seizure on December 16, 1992 for the Minilab Equipment installed at the Lam Spouses’
outlet in Tagum, Davao Province.23 The writ was enforced on December 21, 1992, and Kodak Philippines,
Ltd. gained possession of the Minilab Equipment unit, accessories, and the generator set. 24
The Lam Spouses then filed before the Court of Appeals a Petition to Set Aside the Orders issued by the
trial court dated July 30, 1993 and August 13, 1993. These Orders were subsequently set aside by the Court
of Appeals Ninth Division, and the case was remanded to the trial court for pre-trial.25
On September 12, 1995, an Urgent Motion for Inhibition was filed against Judge Fernando V. Gorospe,
Jr.,26 who had issued the writ of seizure.27 The ground for the motion for inhibition was not provided.
Nevertheless, Judge Fernando V. Gorospe Jr. inhibited himself, and the case was reassigned to Branch 65
of the Regional Trial Court, Makati City on October 3, 1995. 28
In the Decision dated February 26, 1999, the Regional Trial Court found that Kodak Philippines, Ltd.
defaulted in the performance of its obligation under its Letter Agreement with the Lam Spouses. 29 It held
that Kodak Philippines, Ltd.’s failure to deliver two (2) out of the three (3) units of the Minilab Equipment
caused the Lam Spouses to stop paying for the rest of the installments. 30 The trial court noted that while the
Letter Agreement did not specify a period within which the delivery of all units was to be made, the Civil
Code provides "reasonable time" as the standard period for compliance:
The second paragraph of Article 1521 of the Civil Code provides:
Where by a contract of sale the seller is bound to send the goods to the buyer, but no time for sending them
is fixed, the seller is bound to send them within a reasonable time.
What constitutes reasonable time is dependent on the circumstances availing both on the part of the seller
and the buyer. In this case, delivery of the first unit was made five (5) days after the date of the agreement.
Delivery of the other two (2) units, however, was never made despite the lapse of at least three (3) Ltd.37 Thus, the generator set that Kodak Philippines, Ltd. wrongfully took from the Lam Spouses should
months.31 be replaced.38

Kodak Philippines, Ltd. failed to give a sufficient explanation for its failure to deliver all three (3) The dispositive portion of the Regional Trial Court Decision reads:
purchased units within a reasonable time.32
PREMISES CONSIDERED, the case is hereby dismissed. Plaintiff is ordered to pay the following:
The trial court found:
1) PHP 130,000.00 representing the amount of the generator set, plus legal interest at 12% per
Kodak would have the court believe that it did not deliver the other two (2) units due to the failure of annum from December 1992 until fully paid; and
defendants to make good the installments subsequent to the second. The court is not convinced. First of all,
there should have been simultaneous delivery on account of the circumstances surrounding the transaction.
2) PHP 1,300,000.00 as actual expenses in the renovation of the Tagum, Davao and Rizal Ave.,
. . . Even after the first delivery . . . no delivery was made despite repeated demands from the defendants
Manila outlets.
and despite the fact no installments were due. Then in March and in April (three and four months
respectively from the date of the agreement and the first delivery) when the installments due were both
honored, still no delivery was made. SO ORDERED.39

Second, although it might be said that Kodak was testing the waters with just one delivery - determining
first defendants’ capacity to pay - it was not at liberty to do so. It is implicit in the letter agreement that
delivery within a reasonable time was of the essence and failure to so deliver within a reasonable time and
despite demand would render the vendor in default.
....
Third, at least two (2) checks were honored. If indeed Kodak refused delivery on account of defendants’
inability to pay, non-delivery during the two (2) months that payments were honored is unjustified. 33
On March 31, 1999, the Lam Spouses filed their Notice of Partial Appeal, raising as an issue the Regional
Trial Court’s failure to order Kodak Philippines, Ltd. to pay: (1) ₱2,040,000 in actual damages; (2)
₱50,000,000 in moral damages; (3) ₱20,000,000 in exemplary damages; (4) ₱353,000 in attorney’s fees;
and (5) ₱300,000 as litigation expenses.40 The Lam Spouses did not appeal the Regional Trial Court’s
award for the generator set and the renovation expenses. 41
Kodak Philippines, Ltd. also filed an appeal. However, the Court of Appeals 42 dismissed it on December
16, 2002 for Kodak Philippines, Ltd.’s failure to file its appellant’s brief, without prejudice to the
continuation of the Lam Spouses’ appeal.43 The Court of Appeals’ December 16, 2002 Resolution denying
Kodak Philippines, Ltd.’s appeal became final and executory on January 4, 2003. 44

Nevertheless, the trial court also ruled that when the Lam Spouses accepted delivery of the first unit, they
In the Decision45 dated March 30, 2005, the Court of Appeals Special Fourteenth Division modified the
became liable for the fair value of the goods received:
February 26, 1999 Decision of the Regional Trial Court:

On the other hand, defendants accepted delivery of one (1) unit. Under Article 1522 of the Civil Code, in
WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26 February 1999 of the
the event the buyer accepts incomplete delivery and uses the goods so delivered, not then knowing that
Regional Trial Court, Branch 65 in Civil Case No. 92-3442 is hereby MODIFIED. Plaintiff-appellant is
there would not be any further delivery by the seller, the buyer shall be liable only for the fair value to him
ordered to pay the following:
of the goods received. In other words, the buyer is still liable for the value of the property received.
Defendants were under obligation to pay the amount of the unit. Failure of delivery of the other units did
not thereby give unto them the right to suspend payment on the unit delivered. Indeed, in incomplete 1. P130,000.00 representing the amount of the generator set, plus legal interest at 12% per
deliveries, the buyer has the remedy of refusing payment unless delivery is first made. In this case though, annum from December 1992 until fully paid; and
payment for the two undelivered units have not even commenced; the installments made were for only one
(1) unit.
2. P440,000.00 as actual damages;
34
Hence, Kodak is right to retrieve the unit delivered.
3. P25,000.00 as moral damages; and

The Lam Spouses were under obligation to pay for the amount of one unit, and the failure to deliver the
4. P50,000.00 as exemplary damages.
remaining units did not give them the right to suspend payment for the unit already delivered. 35 However,
the trial court held that since Kodak Philippines, Ltd. had elected to cancel the sale and retrieve the
delivered unit, it could no longer seek payment for any deterioration that the unit may have suffered while SO ORDERED.46 (Emphasis supplied)
under the custody of the Lam Spouses.36
The Court of Appeals agreed with the trial court’s Decision, but extensively discussed the basis for the
As to the generator set, the trial court ruled that Kodak Philippines, Ltd. attempted to mislead the court by modification of the dispositive portion.
claiming that it had delivered the generator set with its accessories to the Lam Spouses, when the evidence
showed that the Lam Spouses had purchased it from Davao Ken Trading, not from Kodak Philippines,
The Court of Appeals ruled that the Letter Agreement executed by the parties showed that their obligations
were susceptible of partial performance. Under Article 1225 of the New Civil Code, their obligations are
divisible:
In determining the divisibility of an obligation, the following factors may be considered, to wit: (1) the will
or intention of the parties, which may be expressed or presumed; (2) the objective or purpose of the
stipulated prestation; (3) the nature of the thing; and (4) provisions of law affecting the prestation.
Applying the foregoing factors to this case, We found that the intention of the parties is to be bound
separately for each Minilab Equipment to be delivered as shown by the separate purchase price for each of
the item, by the acceptance of Sps. Lam of separate deliveries for the first Minilab Equipment and for those
of the remaining two and the separate payment arrangements for each of the equipment. Under this
premise, Sps. Lam shall be liable for the entire amount of the purchase price of the Minilab
Equipment delivered considering that Kodak had already completely fulfilled its obligation to deliver the
same. . . .
Third, it is also evident that the contract is one that is severable in character as demonstrated by the
separate purchase price for each of the minilab equipment. "If the part to be performed by one party
consists in several distinct and separate items and the price is apportioned to each of them, the contract will
generally be held to be severable. In such case, each distinct stipulation relating to a separate subject matter
will be treated as a separate contract." Considering this, Kodak's breach of its obligation to deliver the
other two (2) equipment cannot bar its recovery for the full payment of the equipment already delivered. As
far as Kodak is concerned, it had already fully complied with its separable obligation to deliver the first
unit of Minilab Equipment.47 (Emphasis supplied)
The Court of Appeals held that the issuance of a writ of replevin is proper insofar as the delivered Minilab
Equipment unit and its standard accessories are concerned, since Kodak Philippines, Ltd. had the right to
possess it:48
The purchase price of said equipment is P1,796,000.00 which, under the agreement is payable with forty
eight (48) monthly amortization. It is undisputed that Sps. Lam made payments which amounted to Two
Hundred Seventy Thousand Pesos (P270,000.00) through the following checks: Metrobank Check Nos.
00892620 and 00892621 dated 31 March 1992 and 30 April 1992 respectively in the amount of Thirty Five
Thousand Pesos (P35,000.00) each, and BPI Family Check dated 31 July 1992 amounting to Two Hundred
Thousand Pesos (P200,000.00). This being the case, Sps. Lam are still liable to Kodak in the amount of
One Million Five Hundred Twenty Six Thousand Pesos (P1,526,000.00), which is payable in several
monthly amortization, pursuant to the Letter Agreement. However, Sps. Lam admitted that sometime in
May 1992, they had already ordered their drawee bank to stop the payment on all the other checks they
had issued to Kodak as payment for the Minilab Equipment delivered to them. Clearly then, Kodak ha[d]
the right to repossess the said equipment, through this replevin suit. Sps. Lam cannot excuse themselves
from paying in full the purchase price of the equipment delivered to them on account of Kodak’s breach of
the contract to deliver the other two (2) Minilab Equipment, as contemplated in the Letter
Agreement.49(Emphasis supplied)
Echoing the ruling of the trial court, the Court of Appeals held that the liability of the Lam Spouses to pay
the remaining balance for the first delivered unit is based on the second sentence of Article 1592 of the
New Civil Code.50 The Lam Spouses’ receipt and use of the Minilab Equipment before they knew that
Kodak Philippines, Ltd. would not deliver the two (2) remaining units has made them liable for the unpaid
portion of the purchase price.51
The Court of Appeals noted that Kodak Philippines, Ltd. sought the rescission of its contract with the Lam
Spouses in the letter dated October 14, 1992.52 The rescission was based on Article 1191 of the New Civil
Code, which provides: "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."53 In its letter, Kodak Philippines, Ltd.
demanded that the Lam Spouses surrender the lone delivered unit of Minilab Equipment along with its
standard accessories.54
The Court of Appeals likewise noted that the Lam Spouses rescinded the contract through its letter dated
November 18, 1992 on account of Kodak Philippines, Inc.’s breach of the parties’ agreement to deliver the
two (2) remaining units.55
As a result of this rescission under Article 1191, the Court of Appeals ruled that "both parties must be
restored to their original situation, as far as practicable, as if the contract was never entered into."56 The
Court of Appeals ratiocinated that Article 1191 had the effect of extinguishing the obligatory relation as if
one was never created:57
To rescind is to declare a contract void in its inception and to put an end to it as though it never were. It is
not merely to terminate it and to release parties from further obligations to each other but abrogate it from
the beginning and restore parties to relative positions which they would have occupied had no contract
been made.58
The Lam Spouses were ordered to relinquish possession of the Minilab Equipment unit and its standard
accessories, while Kodak Philippines, Ltd. was ordered to return the amount of ₱270,000.00, tendered by
the Lam Spouses as partial payment.59
As to the actual damages sought by the parties, the Court of Appeals found that the Lam Spouses were able
to substantiate the following:
Incentive fee paid to Mr. Ruales in the amount of P100,000.00; the rider to the contract of lease which
made the Sps. Lam liable, by way of advance payment, in the amount of P40,000.00, the same being
intended for the repair of the flooring of the leased premises; and lastly, the payment of P300,000.00, as
compromise agreement for the pre-termination of the contract of lease with Ruales.60
The total amount is ₱440,000.00. The Court of Appeals found that all other claims made by the Lam
Spouses were not supported by evidence, either through official receipts or check payments. 61
As regards the generator set improperly seized from Kodak Philippines, Ltd. on the basis of the writ of
replevin, the Court of Appeals found that there was no basis for the Lam Spouses’ claim for reasonable
rental of ₱5,000.00. It held that the trial court’s award of 12% interest, in addition to the cost of the
generator set in the amount of ₱130,000.00, is sufficient compensation for whatever damage the Lam
Spouses suffered on account of its improper seizure.62
The Court of Appeals also ruled on the Lam Spouses’ entitlement to moral and exemplary damages, as
well as attorney’s fees and litigation expenses:
In seeking recovery of the Minilab Equipment, Kodak cannot be considered to have manifested bad faith
and malevolence because as earlier ruled upon, it was well within its right to do the same. However, with
respect to the seizure of the generator set, where Kodak misrepresented to the court a quo its alleged right
over the said item, Kodak’s bad faith and abuse of judicial processes become self-evident. Considering the
off-setting circumstances attendant, the amount of P25,000.00 by way of moral damages is considered
sufficient.
In addition, so as to serve as an example to the public that an application for replevin should not be Upon the other hand, defendants-appellants are hereby ordered to return to plaintiff-appellant the Minilab
accompanied by any false claims and misrepresentation, the amount of P50,000.00 by way of exemplary equipment and the standard accessories delivered by plaintiff-appellant.
damages should be pegged against Kodak.
SO ORDERED."
With respect to the attorney’s fees and litigation expenses, We find that there is no basis to award Sps. Lam
the amount sought for.63
SO ORDERED.68 (Emphasis in the original)

Kodak Philippines, Ltd. moved for reconsideration of the Court of Appeals Decision, but it was denied for
Upon receiving the Amended Decision of the Court of Appeals, Kodak Philippines, Ltd. filed a Motion for
lack of merit.64 However, the Court of Appeals noted that the Lam Spouses’ Opposition correctly pointed
Extension of Time to File an Appeal by Certiorari under Rule 45 of the 1997 Rules of Civil Procedure
out that the additional award of ₱270,000.00 made by the trial court was not mentioned in the decretal
before this court.69
portion of the March 30, 2005 Decision:

This was docketed as G.R. No. 169639. In the Motion for Consolidation dated November 2, 2005, the Lam
Going over the Decision, specifically page 12 thereof, the Court noted that, in addition to the amount of
Spouses moved that G.R. No. 167615 and G.R. No. 169639 be consolidated since both involved the same
Two Hundred Seventy Thousand (P270,000.00) which plaintiff-appellant should return to the
parties, issues, transactions, and essential facts and circumstances.70
defendantsappellants, the Court also ruled that defendants-appellants should, in turn, relinquish possession
of the Minilab Equipment and the standard accessories to plaintiff-appellant. Inadvertently, these material
items were not mentioned in the decretal portion of the Decision. Hence, the proper correction should In the Resolution dated November 16, 2005, this court noted the Lam Spouses’ September 23 and
herein be made.65 September 30, 2005 Manifestations praying that the Court of Appeals’ September 9, 2005 Amended
Decision be considered in the resolution of the Petition for Review on Certiorari.71 It also granted the Lam
Spouses’ Motion for Consolidation.72
The Lam Spouses filed this Petition for Review on April 14, 2005. On the other hand, Kodak Philippines,
Ltd. filed its Motion for Reconsideration66 before the Court of Appeals on April 22, 2005.
In the Resolution73 dated September 20, 2006, this court deconsolidated G.R No. 167615 from G.R. No.
169639 and declared G.R. No. 169639 closed and terminated since Kodak Philippines, Ltd. failed to file its
While the Petition for Review on Certiorari filed by the Lam Spouses was pending before this court, the
Petition for Review.
Court of Appeals Special Fourteenth Division, acting on Kodak Philippines, Ltd.’s Motion for
Reconsideration, issued the Amended Decision67 dated September 9, 2005. The dispositive portion of the
Decision reads: II

WHEREFORE, premises considered, this Court resolved that: We resolve the following issues:

A. Plaintiff-appellant’s Motion for Reconsideration is hereby DENIED for lack of merit. First, whether the contract between petitioners Spouses Alexander and Julie Lam and respondent Kodak
Philippines, Ltd. pertained to obligations that are severable, divisible, and susceptible of partial
performance under Article 1225 of the New Civil Code; and
B. The decretal portion of the 30 March 2005 Decision should now read as follows:

Second, upon rescission of the contract, what the parties are entitled to under Article 1190 and Article 1522
"WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26 February 1999 of the
of the New Civil Code.
Regional Trial Court, Branch 65 in Civil Cases No. 92-3442 is hereby MODIFIED. Plaintiff-appellant is
ordered to pay the following:
Petitioners argue that the Letter Agreement it executed with respondent for three (3) Minilab Equipment
units was not severable, divisible, and susceptible of partial performance. Respondent’s recovery of the
a. P270,000.00 representing the partial payment made on the Minilab equipment.
delivered unit was unjustified.74

b. P130,000.00 representing the amount of the generator set, plus legal interest at 12% per
Petitioners assert that the obligations of the parties were not susceptible of partial performance since the
annum from December 1992 until fully paid;
Letter Agreement was for a package deal consisting of three (3) units.75 For the delivery of these units,
petitioners were obliged to pay 48 monthly payments, the total of which constituted one debt. 76 Having
c. P440,000.00 as actual damages; relied on respondent’s assurance that the three units would be delivered at the same time, petitioners
simultaneously rented and renovated three stores in anticipation of simultaneous operations.77 Petitioners
argue that the divisibility of the object does not necessarily determine the divisibility of the obligation
d. P25,000.00 as moral damages; and
since the latter is tested against its susceptibility to a partial performance.78 They argue that even if the
object is susceptible of separate deliveries, the transaction is indivisible if the parties intended the
e. P50,000.00 as exemplary damages. realization of all parts of the agreed obligation.79
Petitioners support the claim that it was the parties’ intention to have an indivisible agreement by asserting
that the payments they made to respondent were intended to be applied to the whole package of three
units.80 The postdated checks were also intended as initial payment for the whole package. 81 The separate
purchase price for each item was merely intended to particularize the unit prices, not to negate the
indivisible nature of their transaction.82 As to the issue of delivery, petitioners claim that their acceptance
of separate deliveries of the units was solely due to the constraints faced by respondent, who had sole
control over delivery matters.83
With the obligation being indivisible, petitioners argue that respondent’s failure to comply with its
obligation to deliver the two (2) remaining Minilab Equipment units amounted to a breach. Petitioners
claim that the breach entitled them to the remedy of rescission and damages under Article 1191 of the New
Civil Code.84
Petitioners also argue that they are entitled to moral damages more than the ₱50,000.00 awarded by the
Court of Appeals since respondent’s wrongful act of accusing them of non-payment of their obligations
caused them sleepless nights, mental anguish, and wounded feelings. 85 They further claim that, to serve as
an example for the public good, they are entitled to exemplary damages as respondent, in making false
allegations, acted in evident bad faith and in a wanton, oppressive, capricious, and malevolent manner. 86
Petitioners also assert that they are entitled to attorney’s fees and litigation expenses under Article 2208 of
the New Civil Code since respondent’s act of bringing a suit against them was baseless and malicious. This
prompted them to engage the services of a lawyer.87
Respondent argues that the parties’ Letter Agreement contained divisible obligations susceptible of partial
performance as defined by Article 1225 of the New Civil Code. 88 In respondent’s view, it was the intention
of the parties to be bound separately for each individually priced Minilab Equipment unit to be delivered to
different outlets:89
The three (3) Minilab Equipment are intended by petitioners LAM for install[a]tion at their Tagum, Davao
del Norte, Sta. Cruz, Manila and Cotabato City outlets. Each of these units [is] independent from one
another, as many of them may perform its own job without the other. Clearly the objective or purpose of
the prestation, the obligation is divisible.
The nature of each unit of the three (3) Minilab Equipment is such that one can perform its own functions,
without awaiting for the other units to perform and complete its job. So much so, the nature of the object of
the Letter Agreement is susceptible of partial performance, thus the obligation is divisible.90
With the contract being severable in character, respondent argues that it performed its obligation when it
delivered one unit of the Minilab Equipment.91 Since each unit could perform on its own, there was no
need to await the delivery of the other units to complete its job.92 Respondent then is of the view that when
petitioners ordered the depository bank to stop payment of the issued checks covering the first delivered
unit, they violated their obligations under the Letter Agreement since respondent was already entitled to
full payment.93
Respondent also argues that petitioners benefited from the use of the Minilab Equipment for 10 months—
from March to December 1992— despite having paid only two (2) monthly installments.94 Respondent
avers that the two monthly installments amounting to ₱70,000.00 should be the subject of an offset against
the amount the Court of Appeals awarded to petitioners.95
Respondent further avers that petitioners have no basis for claiming damages since the seizure and
recovery of the Minilab Equipment was not in bad faith and respondent was well within its right. 96
III
The Letter Agreement contained an indivisible obligation.
Both parties rely on the Letter Agreement97 as basis of their respective obligations. Written by respondent’s
Jeffrey T. Go and Antonio V. Mines and addressed to petitioner Alexander Lam, the Letter Agreement
contemplated a "package deal" involving three (3) units of the Kodak Minilab System 22XL, with the
following terms and conditions:
This confirms our verbal agreement for Kodak Phils., Ltd. to provide Colorkwik Laboratories, Inc. with
three (3) units Kodak Minilab System 22XL . . . for your proposed outlets in Rizal Avenue (Manila),
Tagum (Davao del Norte), and your existing Multicolor photo counter in Cotabato City under the
following terms and conditions:
1. Said Minilab Equipment packages will avail a total of 19% multiple order discount based on
prevailing equipment price provided said equipment packages will be purchased not later than
June 30, 1992.
2. 19% Multiple Order Discount shall be applied in the form of merchandise and delivered in
advance immediately after signing of the contract.
* Also includes start-up packages worth P61,000.00.
3. NO DOWNPAYMENT.
4. Minilab Equipment Package shall be payable in 48 monthly installments at THIRTY FIVE
THOUSAND PESOS (P35,000.00) inclusive of 24% interest rate for the first 12 months; the
balance shall be re-amortized for the remaining 36 months and the prevailing interest shall be
applied.
5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at ONE MILLION
SEVEN HUNDRED NINETY SIX THOUSAND PESOS.
6. Price is subject to change without prior notice.
*Secured with PDCs; 1st monthly amortization due 45 days after installation[.]98
Based on the foregoing, the intention of the parties is for there to be a single transaction covering all three
(3) units of the Minilab Equipment. Respondent’s obligation was to deliver all products purchased under a
"package," and, in turn, petitioners’ obligation was to pay for the total purchase price, payable in
installments.
The intention of the parties to bind themselves to an indivisible obligation can be further discerned through
their direct acts in relation to the package deal. There was only one agreement covering all three (3) units
of the Minilab Equipment and their accessories. The Letter Agreement specified only one purpose for the
buyer, which was to obtain these units for three different outlets. If the intention of the parties were to have
a divisible contract, then separate agreements could have been made for each Minilab Equipment unit
instead of covering all three in one package deal. Furthermore, the 19% multiple order discount as
contained in the Letter Agreement was applied to all three acquired units. 99 The "no downpayment" term
contained in the Letter Agreement was also applicable to all the Minilab Equipment units. Lastly, the
fourth clause of the Letter Agreement clearly referred to the object of the contract as "Minilab Equipment
Package."
In ruling that the contract between the parties intended to cover divisible obligations, the Court of Appeals
highlighted: (a) the separate purchase price of each item; (b) petitioners’ acceptance of separate deliveries
of the units; and (c) the separate payment arrangements for each unit.100 However, through the specified
terms and conditions, the tenor of the Letter Agreement indicated an intention for a single transaction. This
intent must prevail even though the articles involved are physically separable and capable of being paid for
and delivered individually, consistent with the New Civil Code:
Article 1225. For the purposes of the preceding articles, obligations to give definite things and those which
are not susceptible of partial performance shall be deemed to be indivisible.
When the obligation has for its object the execution of a certain number of days of work, the
accomplishment of work by metrical units, or analogous things which by their nature are susceptible of
partial performance, it shall be divisible.
However, even though the object or service may be physically divisible, an obligation is indivisible if so
provided by law or intended by the parties. (Emphasis supplied)
In Nazareno v. Court of Appeals,101 the indivisibility of an obligation is tested against whether it can be the
subject of partial performance:
An obligation is indivisible when it cannot be validly performed in parts, whatever may be the nature of the
thing which is the object thereof. The indivisibility refers to the prestation and not to the object thereof. In
the present case, the Deed of Sale of January 29, 1970 supposedly conveyed the six lots to Natividad. The
obligation is clearly indivisible because the performance of the contract cannot be done in parts, otherwise
the value of what is transferred is diminished. Petitioners are therefore mistaken in basing the indivisibility
of a contract on the number of obligors.102 (Emphasis supplied, citation omitted)
There is no indication in the Letter Agreement that the units petitioners ordered were covered by three (3)
separate transactions. The factors considered by the Court of Appeals are mere incidents of the execution
of the obligation, which is to deliver three units of the Minilab Equipment on the part of respondent and
payment for all three on the part of petitioners. The intention to create an indivisible contract is apparent
from the benefits that the Letter Agreement afforded to both parties. Petitioners were given the 19%
discount on account of a multiple order, with the discount being equally applicable to all units that they
sought to acquire. The provision on "no downpayment" was also applicable to all units. Respondent, in
turn, was entitled to payment of all three Minilab Equipment units, payable by installments.
IV
With both parties opting for rescission of the contract under Article 1191, the Court of Appeals correctly
ordered for restitution.
The contract between the parties is one of sale, where one party obligates himself or herself to transfer the
ownership and deliver a determinate thing, while the other pays a certain price in money or its
equivalent.103 A contract of sale is perfected upon the meeting of minds as to the object and the price, and
the parties may reciprocally demand the performance of their respective obligations from that point on. 104
The Court of Appeals correctly noted that respondent had rescinded the parties’ Letter Agreement through
the letter dated October 14, 1992.105 It likewise noted petitioners’ rescission through the letter dated
November 18, 1992.106This rescission from both parties is founded on Article 1191 of the New Civil Code:
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfilment and the rescission of the obligation, with the payment
of damages in either case. He may also seek rescission, even after he has chosen fulfilment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
Rescission under Article 1191 has the effect of mutual restitution.107 In Velarde v. Court of Appeals:108
Rescission abrogates the contract from its inception and requires a mutual restitution of benefits received.
....
Rescission creates the obligation to return the object of the contract. It can be carried out only when the
one who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a
contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it
and release the parties from further obligations to each other, but to abrogate it from the beginning and
restore the parties to their relative positions as if no contract has been made.109 (Emphasis supplied,
citations omitted)
The Court of Appeals correctly ruled that both parties must be restored to their original situation as far as
practicable, as if the contract was never entered into. Petitioners must relinquish possession of the
delivered Minilab Equipment unit and accessories, while respondent must return the amount tendered by
petitioners as partial payment for the unit received. Further, respondent cannot claim that the two (2)
monthly installments should be offset against the amount awarded by the Court of Appeals to petitioners
because the effect of rescission under Article 1191 is to bring the parties back to their original positions
before the contract was entered into. Also in Velarde:
As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal
obligation, not a violation of the terms and conditions of the mortgage contract. Therefore, the automatic
rescission and forfeiture of payment clauses stipulated in the contract does not apply. Instead, Civil Code
provisions shall govern and regulate the resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual
restitution is required to bring back the parties to their original situation prior to the inception of the
contract. Accordingly, the initial payment of ₱800,000 and the corresponding mortgage payments in the
amounts of ₱27,225, ₱23,000 and ₱23,925 (totaling ₱874,150.00) advanced by petitioners should be
returned by private respondents, lest the latter unjustly enrich themselves at the expense of the
former.110 (Emphasis supplied)
When rescission is sought under Article 1191 of the Civil Code, it need not be judicially invoked because
the power to resolve is implied in reciprocal obligations.111 The right to resolve allows an injured party to
minimize the damages he or she may suffer on account of the other party’s failure to perform what is
incumbent upon him or her.112 When a party fails to comply with his or her obligation, the other party’s
right to resolve the contract is triggered.113 The resolution immediately produces legal effects if the non-
performing party does not question the resolution.114 Court intervention only becomes necessary when the
party who allegedly failed to comply with his or her obligation disputes the resolution of the
contract.115 Since both parties in this case have exercised their right to resolve under Article 1191, there is
no need for a judicial decree before the resolution produces effects.
V
that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the
liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his
overdue ₱17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his ₱17,000.00 debt shall
not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some
benefit for his use of the ₱17,000.00, it is just that he should account for the interest thereon. 126 (Emphasis
supplied)

The award for moral and exemplary damages also appears to be sufficient. Moral damages are granted to
The issue of damages is a factual one. A petition for review on certiorari under Rule 45 shall only pertain
alleviate the moral suffering suffered by a party due to an act of another, but it is not intended to enrich the
to questions of law.116 It is not the duty of this court to re-evaluate the evidence adduced before the lower
victim at the defendant’s expense.127 It is not meant to punish the culpable party and, therefore, must
courts.117Furthermore, unless the petition clearly shows that there is grave abuse of discretion, the findings
always be reasonable vis-a-vis the injury caused.128 Exemplary damages, on the other hand, are awarded
of fact of the trial court as affirmed by the Court of Appeals are conclusive upon this court. 118 In Lorzano v.
when the injurious act is attended by bad faith.129 In this case, respondent was found to have
Tabayag, Jr.:119
misrepresented its right over the generator set that was seized. As such, it is properly liable for exemplary
damages as an example to the public.130
For a question to be one of law, the same must not involve an examination of the probative value of the
evidence presented by the litigants or any of them. The resolution of the issue must rest solely on what the
However, the dispositive portion of the Court of Appeals Amended Decision dated September 9, 2005
law provides on the given set of circumstances. Once it is clear that the issue invites a review of the
must be modified to include the recovery of attorney’s fees and costs of suit in favor of petitioners.
evidence presented, the question posed is one of fact.
In Sunbanun v. Go:131

....
Furthermore, we affirm the award of exemplary damages and attorney’s fees. Exemplary damages may be
awarded when a wrongful act is accompanied by bad faith or when the defendant acted in a wanton,
For the same reason, we would ordinarily disregard the petitioner’s allegation as to the propriety of the fraudulent, reckless, oppressive, or malevolent manner which would justify an award of exemplary
award of moral damages and attorney’s fees in favor of the respondent as it is a question of fact. Thus, damages under Article 2232 of the Civil Code. Since the award of exemplary damages is proper in this
questions on whether or not there was a preponderance of evidence to justify the award of damages or case, attorney’s fees and cost of the suit may also be recovered as provided under Article 2208 of the Civil
whether or not there was a causal connection between the given set of facts and the damage suffered by the Code.132 (Emphasis supplied, citation omitted)
private complainant or whether or not the act from which civil liability might arise exists are questions of
fact.
Based on the amount awarded for moral and exemplary damages, it is reasonable to award petitioners
₱20,000.00 as attorney’s fees.
Essentially, the petitioner is questioning the award of moral damages and attorney’s fees in favor of the
respondent as the same is supposedly not fully supported by evidence. However, in the final analysis, the
WHEREFORE, the Petition is DENIED. The Amended Decision dated September 9, 2005
question of whether the said award is fully supported by evidence is a factual question as it would
is AFFIRMED with MODIFICATION. Respondent Kodak Philippines, Ltd. is ordered to pay petitioners
necessitate whether the evidence adduced in support of the same has any probative value. For a question
Alexander and Julie Lam:
to be one of law, it must involve no examination of the probative value of the evidence presented by the
litigants or any of them.120 (Emphasis supplied, citations omitted)
(a) P270,000.00, representing the partial payment made on the Minilab Equipment;
The damages awarded by the Court of Appeals were supported by documentary evidence. 121 Petitioners
failed to show any reason why the factual determination of the Court of Appeals must be reviewed, (b) P130,000.00, representing the amount of the generator set, plus legal interest at 12% .per
especially in light of their failure to produce receipts or check payments to support their other claim for annum from December 1992 until fully paid;
actual damages.122
(c) P440,000.00 as actual damages;
Furthermore, the actual damages amounting to ₱2,040,000.00 being sought by petitioners 123 must be
tempered on account of their own failure to pay the rest of the installments for the delivered unit. This
(d) P25,000.00 as moral damages;
failure on their part is a breach of their obligation, for which the liability of respondent, for its failure to
deliver the remaining units, shall be equitably tempered on account of Article 1192 of the New Civil
Code.124 In Central Bank of the Philippines v. Court of Appeals:125 (e) P50,000.00 as exemplary damages; and

Since both parties were in default in the performance of their respective reciprocal obligations, that is, (f) P20,000.00 as attorney's fees.
Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his ₱17,000.00 debt within 3 years as stipulated, they
Petitioners are ordered to return the Kodak Minilab System 22XL unit and its standard accessories to
are both liable for damages.
respondent.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule SO ORDERED.
G.R. No. L-28497 November 6, 1928
THE BACHRACH MOTOR CO., INC., plaintiff-appellee,
vs.
FAUSTINO ESPIRITU, defendant-appellant.
------------------------------
G.R. No. L-28498 November 6, 1928
THE BACHRACH MOTOR CO., INC., plaintiff-appellee,
vs.
FAUSTINO ESPIRITU, defendant-appellant, and
ROSARIO ESPIRITU, intervenor-appellant.
AVANCEÑA, C. J.:
These two cases, Nos. 28497 and 28948, were tried together.
It appears, in connection with case 28497; that on July 28, 1925 the defendant Faustino Espiritu purchased
of the plaintiff corporation a two-ton White truck for P11,983.50, paying P1,000 down to apply on account
of this price, and obligating himself to pay the remaining P10,983.50 within the periods agreed upon. To
secure the payment of this sum, the defendants mortgaged the said truck purchased and, besides, three
others, two of which are numbered 77197 and 92744 respectively, and all of the White make (Exhibit A).
These two trucks had been purchased from the same plaintiff and were fully paid for by the defendant and
his brother Rosario Espiritu. The defendant failed to pay P10,477.82 of the price secured by this mortgage.
In connection with case 28498, it appears that on February 18, 1925 the defendant bought a one-
ton White truck of the plaintiff corporation for the sum of P7,136.50, and after having deducted the P500
cash payment and the 12 per cent annual interest on the unpaid principal, obligated himself to make
payment of this sum within the periods agreed upon. To secure this payment the defendant mortgaged to
the plaintiff corporation the said truck purchased and two others, numbered 77197 and 92744, respectively,
the same that were mortgaged in the purchase of the other truck referred to in the other case. The defendant
failed to pay P4,208.28 of this sum.
In both sales it was agreed that 12 per cent interest would be paid upon the unpaid portion of the price at
the executon of the contracts, and in case of non-payment of the total debt upon its maturity, 25 per cent
thereon, as penalty.
In addition to the mortagage deeds referred to, which the defendant executed in favor of the plaintiff, the
defendant at the same time also signed a promissory note solidarily with his brother Rosario Espiritu for
the several sums secured by the two mortgages (Exhibits B and D).
Rosario Espiritu appeared in these two cases as intervenor, alleging to be the exclusive owner of the two
White trucks Nos. 77197 and 92744, which appear to have been mortgaged by the defendants to the
plaintiff. lawphi1.net
While these two cases were pending in the lower court the mortgaged trucks were sold by virtue of the
mortgage, all of them together bringing in, after deducting the sheriff's fees and transportation charges to
Manila, the net sum of P3,269.58.
The judgment appealed from ordered the defendants and the intervenor to pay plaintiff in case 28497 the
sum of P7,732.09 with interest at the rate of 12 per cent per annum from May 1, 1926 until fully paid, and
25 per cent thereof in addition as penalty. In case 28498, the trial court ordered the defendant and the
intervenor to pay plaintiff the sum of P4,208.28 with interest at 12 per cent per annum from December 1,
1925 until fully paid, and 25 per cent thereon as penalty.
The appellants contend that trucks 77197 and 92744 were not mortgaged, because, when the defendant
signed the mortgage deeds these trucks were not included in those documents, and were only put in later,
without defendant's knowledge. But there is positive proof that they were included at the time the
defendant signed these documents. Besides, there were presented two of defendant's letters to Hidalgo, an
employee of the plaintiff's written a few days before the transaction, acquiescing in the inclusion of all
his White trucks already paid for, in the mortgage (Exhibit H-I).
Appellants also alleged that on February 4, 1925, the defendant sold his rights in said trucks Nos. 77197
and 92744 to the intervenor, and that as the latter did not sign the mortgage deeds, such trucks cannot be
considered as mortgaged. But the evidence shows that while the intervenor Rosario Espiritu did not sign
the two mortgage deeds (Exhibits A and C), yet, together with the defendants Faustino Espiritu, he signed
the two promissory notes (Exhibits B and D) secured by these two mortgages. All these instruments were
executed at the same time, and when the trucks 77197 and 92744 were included in the mortgages, the
intervenor Rosario Espiritu was aware of it and consented to such inclusion. These facts are supported by
the testimony of Bachrach, manager of the plaintiff corporation, of Agustin Ramirez, who witnessed the
execution of all these documents, and of Angel Hidalgo, who witnessed the execution of Exhibits B and D.
We do not find the statement of the intervenor Rosario Espiritu that he did not sign promissory notes
Exhibits B and C to be sufficient to overthrow this evidence. A comparison of his genuine signature on
Exhibit AA with those appearing on promissory notes B and C, convinces us that the latter are his
signatures. And such is our conclusion, notwithstanding the evidence presented to establish that on the date
when Exhibits B appears to have been signed, that is July 25, 1925, the intervenor was in Batac, Ilocos
Norte, many miles away from Manila. And the fact that on the 24th of said month of July, the plaintiff sent
some truck accessory parts by rail to Ilocos for the intervenor does not necessarily prove that the latter
could not have been in Manila on the 25th of that month.
In view of his conclusion that the intervenor signed the promissory notes secured by trucks 77197 and
92744 and consented to the mortgage of the same, it is immaterial whether he was or was not the exclusive
owner thereof.
It is finally contended that the 25 per cent penalty upon the debt, in addition to the interest of 12 per cent
per annum, makes the contract usurious. Such a contention is not well founded. Article 1152 of the Civil
Code permits the agreement upon a penalty apart from the interest. Should there be such an agreemnet, the
penalty, as was held in the case of Lopez vs. Hernaez (32 Phil., 631), does not include the interest, and
which may be demamded separetely. According to this, the penalty is not to be added to the interest for the
determination of whether the interest exceeds the rate fixed by the law, since said rate was fixed only for
the interest. But considering that the obligation was partly performed, and making use of the power given
to the court by article 1154 of the Civil Code, this penalty is reduced to 10 per cent of the unpaid debt.
With the sole modification that instead of 25 per cent upon the sum owed, the defendants need pay only 10
per cent thereon as penalty, the judgment appealed from is affired in all other respects without special
pronouncement as to costs. So ordered.
G.R. No. L-41093 October 30, 1978
ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF FIRST INSTANCE OF RIZAL (BRANCH XXXIV), and LOLITA
MILLAN, respondents.
Purugganan & Bersamin for petitioner.
Salvador N. Beltran for respondent.
MUÑOZ PALMA, J.:
This is a direct appeal on questions of law from a decision of the Court of First Instance of Rizal, Branch
XXXIV, presided by the Honorable Bernardo P. Pardo, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered commanding the defendant to register
the deed of absolute sale it had executed in favor of plaintiff with the Register of
Deeds of Caloocan City and secure the corresponding title in the name of plaintiff
within ten (10) days after finality of this decision; if, for any reason, this not
possible, defendant is hereby sentenced to pay plaintiff the sum of P5,193.63 with
interest at 4% per annum from June 22, 1972 until fully paid.
In either case, defendant is sentenced to pay plaintiff nominal damages in the
amount of P20,000.00 plus attorney's fee in the amount of P5,000.00 and costs.
SO ORDERED.
Caloocan City, February 11, 1975. (rollo, p. 21)
Petitioner corporation questions the award for nominal damages of P20,000.00 and attorney's fee of
P5,000.00 which are allegedly excessive and unjustified.
In the Court's resolution of October 20, 1975, We gave due course to the Petition only as regards the
portion of the decision awarding nominal damages. 1
The following incidents are not in dispute:
In May 1962 Robes-Francisco Realty & Development Corporation, now petitioner, agreed to sell to private
respondent Lolita Millan for and in consideration of the sum of P3,864.00, payable in installments, a parcel
of land containing an area of approximately 276 square meters, situated in Barrio Camarin, Caloocan City,
known as Lot No. 20, Block No. 11 of its Franville Subdivision. 2
Millan complied with her obligation under the contract and paid the installments stipulated therein, the
final payment having been made on December 22, 1971. The vendee made a total payment of P5,193.63
including interests and expenses for registration of title.3
Thereafter, Lolita Millan made repeated demands upon the corporation for the execution of the final deed
of sale and the issuance to her of the transfer certificate of title over the lot. On March 2, 1973, the parties
executed a deed of absolute sale of the aforementioned parcel of land. The deed of absolute sale contained,
among others, this particular provision:
That the VENDOR further warrants that the transfer certificate of title of the above-
described parcel of land shall be transferred in the name of the VENDEE within the
period of six (6) months from the date of full payment and in case the VENDOR
fails to issue said transfer certificate of title, it shall bear the obligation to refund to
the VENDEE the total amount already paid for, plus an interest at the rate of 4% per
annum. (record on appeal, p. 9)
Notwithstanding the lapse of the above-mentioned stipulated period of six (6) months, the corporation
failed to cause the issuance of the corresponding transfer certificate of title over the lot sold to Millan,
hence, the latter filed on August 14, 1974 a complaint for specific performance and damages against
Robes-Francisco Realty & Development Corporation in the Court of First Instance of Rizal, Branch
XXXIV, Caloocan City, docketed therein as Civil Case No. C-3268. 4
The complaint prayed for judgment (1) ordering the reformation of the deed of absolute sale; (2) ordering
the defendant to deliver to plaintiff the certificate of title over the lot free from any lien or encumbrance;
or, should this be not possible, to pay plaintiff the value of the lot which should not be less than P27,600.00
(allegedly the present estimated value of the lot); and (3) ordering the defendant to pay plaintiff damages,
corrective and actual in the sum of P15 000.00. 5
The corporation in its answer prayed that the complaint be dismissed alleging that the deed of absolute sale
was voluntarily executed between the parties and the interest of the plaintiff was amply protected by the
provision in said contract for payment of interest at 4% per annum of the total amount paid, for the delay in
the issuance of the title. 6
At the pretrial conference the parties agreed to submit the case for decision on the pleadings after
defendant further made certain admissions of facts not contained in its answer. 7
Finding that the realty corporation failed to cause the issuance of the corresponding transfer certificate of
title because the parcel of land conveyed to Millan was included among other properties of the corporation
mortgaged to the GSIS to secure an obligation of P10 million and that the owner's duplicate certificate of
title of the subdivision was in the possession of the Government Service Insurance System (GSIS), the trial
court, on February 11, 1975, rendered judgment the dispositive portion of which is quoted in pages 1 and 2
of this Decision. We hold that the trial court did not err in awarding nominal damages; however, the
circumstances of the case warrant a reduction of the amount of P20,000.00 granted to private respondent
Millan.
There can be no dispute in this case under the pleadings and the admitted facts that petitioner corporation
was guilty of delay, amounting to nonperformance of its obligation, in issuing the transfer certificate of
title to vendee Millan who had fully paid up her installments on the lot bought by her. Article 170 of the
Civil Code expressly provides that those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages.
Petitioner contends that the deed of absolute sale executed between the parties stipulates that should the
vendor fail to issue the transfer certificate of title within six months from the date of full payment, it shall
refund to the vendee the total amount paid for with interest at the rate of 4% per annum, hence, the vendee
is bound by the terms of the provision and cannot recover more than what is agreed upon. Presumably,
petitioner in invoking Article 1226 of the Civil Code which provides that in obligations with a penal
clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of
noncompliance, if there is no stipulation to the contrary.
The foregoing argument of petitioner is totally devoid of merit. We would agree with petitioner if the
clause in question were to be considered as a penal clause. Nevertheless, for very obvious reasons, said
clause does not convey any penalty, for even without it, pursuant to Article 2209 of the Civil Code, the
vendee would be entitled to recover the amount paid by her with legal rate of interest which is even more
than the 4% provided for in the clause. 7-A
It is therefore inconceivable that the aforecited provision in the deed of sale is a penal clause which will
preclude an award of damages to the vendee Millan. In fact the clause is so worded as to work to the
advantage of petitioner corporation.
Actually, as explained in the Court's decision in Northwest Airlines, there is no conflict between that case
and Medina, for in the latter, the P10,000.00 award for nominal damages was eliminated principally
because the aggrieved party had already been awarded P6,000.00 as compensatory damages, P30,000.00 as
moral damages and P10,000.00 as exemplary damages, and "nominal damages cannot coexist with
compensatory damages," while in the case of Commissioner Cuenca, no such compensatory, moral, or
exemplary damages were granted to the latter. 12

At any rate, the circumstances of a particular case will determine whether or not the amount assessed as
Unfortunately, the vendee, now private respondent, submitted her case below without presenting evidence
nominal damages is within the scope or intent of the law, more particularly, Article 2221 of the Civil Code.
on the actual damages suffered by her as a result of the nonperformance of petitioner's obligation under the
deed of sale. Nonetheless, the facts show that the right of the vendee to acquire title to the lot bought by her
was violated by petitioner and this entitles her at the very least to nominal damages. In the situation now before Us, We are of the view that the amount of P20,000.00 is excessive. The
admitted fact that petitioner corporation failed to convey a transfer certificate of title to respondent Millan
because the subdivision property was mortgaged to the GSIS does not in itself show that there was bad
The pertinent provisions of our Civil Code follow:
faith or fraud. Bad faith is not to be presumed. Moreover, there was the expectation of the vendor that
arrangements were possible for the GSIS to make partial releases of the subdivision lots from the overall
Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, real estate mortgage. It was simply unfortunate that petitioner did not succeed in that regard.
which has been violated or invaded by the defendant, may be vindicated or
recognized, and not for the purpose of indemnifying the plaintiff for any loss
For that reason We cannot agree with respondent Millan Chat the P20,000.00 award may be considered in
suffered by him.
the nature of exemplary damages.

Art. 2222. The court may award nominal damages in every obligation arising from
In case of breach of contract, exemplary damages may be awarded if the guilty party acted in wanton,
any source enumerated in article 1157, or in every case where any property right has
fraudulent, reckless, oppressive or malevolent manner. 13 Furthermore, exemplary or corrective damages
been invaded.
are to be imposed by way of example or correction for the public good, only if the injured party has shown
that he is entitled to recover moral, temperate or compensatory damages."
Under the foregoing provisions nominal damages are not intended for indemnification of loss suffered but
for the vindication or recognition of a right violated or invaded. They are recoverable where some injury
Here, respondent Millan did not submit below any evidence to prove that she suffered actual or
has been done the amount of which the evidence fails to show, the assessment of damages being left to the
compensatory damages. 14
discretion of the court according to the circumstances of the case. 8

To conclude, We hold that the sum of Ten Thousand Pesos (P10,000.00) by way of nominal damages is
It is true as petitioner claims that under American jurisprudence nominal damages by their very nature are
fair and just under the following circumstances, viz: respondent Millan bought the lot from petitioner in
small sums fixed by the court without regard to the extent of the harm done to the injured party.
May, 1962, and paid in full her installments on December 22, 1971, but it was only on March 2, 1973, that
a deed of absolute sale was executed in her favor, and notwithstanding the lapse of almost three years since
It is generally held that a nominal damage is a substantial claim, if based upon the she made her last payment, petitioner still failed to convey the corresponding transfer certificate of title to
violation of a legal right; in such case, the law presumes a damage, although actual Millan who accordingly was compelled to file the instant complaint in August of 1974.
or compensatory damages are not proven; in truth nominal damages are damages in
name only and not in fact, and are allowed, not as an equivalent of a wrong inflicted,
PREMISES CONSIDERED, We modify the decision of the trial court and reduce the nominal damages to
but simply in recogniton of the existence of a technical injury. (Fouraker v. Kidd
Ten Thousand Pesos (P10,000.00). In all other respects the aforesaid decision stands.
Springs Boating and Fishing Club, 65 S. W. 2d 796-797, citing 17 C.J. 720, and a
number of authorities).9
Without pronouncement as to costs.
In this jurisdiction, in Vda. de Medina, et al. v. Cresencia, et al. 1956, which was an action for damages
arising out of a vehicular accident, this Court had occasion to eliminate an award of P10,000.00 imposed SO ORDERED.
by way of nominal damages, the Court stating inter alia that the amount cannot, in common sense, be
demeed "nominal".10

In a subsequent case, viz: Northwest Airlines, Inc. v. Nicolas L. Cuenca, 1965, this Court, however,
G.R. No. L-26339 December 14, 1979
through then Justice Roberto Concepcion who later became Chief Justice of this Court, sustained an award
of P20,000.00 as nominal damages in favor of respnodent Cuenca. The Court there found special
reasons for considering P20,000.00 as "nominal". Cuenca who was the holder of a first class ticket from MARIANO C. PAMINTUAN, petitioner-appellant,
Manila to Tokyo was rudely compelled by an agent of petitioner Airlines to move to the tourist class vs.
notwithstanding its knowledge that Cuenca as Commissioner of Public Highways of the Republic of the COURT OF APPEALS and YU PING KUN CO., INC., respondent-appellees.
Philippines was travelling in his official capacity as a delegate of the country to a conference in Tokyo." 11
AQUINO, J.: arriving in Manila, Pamintuan informed the president of Yu Ping Kun Co., Inc. that he was in dire need of
cash with which to pay his obligations to the Philippine National Bank. Inasmuch as the computation of the
prices of each delivery would allegedly be a long process, Pamintuan requested that he be paid
This case is about the recovery compensatory, damages for breach of a contract of sale in addition to
immediately.
liquidated damages.

Consequently, Pamintuan and the president of the company, Benito Y.C. Espiritu, agreed to fix the price of
Mariano C. Pamintuan appealed from the judgment of the Court of Appeals wherein he was ordered to
the plastic sheetings at P0.782 a yard, regardless of the kind, quality or actual invoice value thereof. The
deliver to Yu Ping Kun Co., Inc. certain plastic sheetings and, if he could not do so, to pay the latter
parties arrived at that figure by dividing the total price of P265,550 by 339,440 yards, the aggregate
P100,559.28 as damages with six percent interest from the date of the filing of the complaint. The facts and
quantity of the shipments.
the findings of the Court of Appeals are as follows:

After Pamintuan had delivered 224,150 yards of sheetings of interior quality valued at P163,.047.87, he
In 1960, Pamintuan was the holder of a barter license wherein he was authorized to export to Japan one
refused to deliver the remainder of the shipments with a total value of P102,502.13 which were covered by
thousand metric tons of white flint corn valued at forty-seven thousand United States dollars in exchange
(i) Firm Offer No. 330, containing 26,000 yards valued at P29,380; (2) Firm Offer No. 343, containing
for a collateral importation of plastic sheetings of an equivalent value.
18,440 yards valued at P13,023.25; (3) Firm Offer No. 217, containing 30,000 yards valued at P30,510 and
(4) Firm Offer No. 329 containing 40,850 yards valued at P29,588.88 (See pp. 243-2, Record on Appeal).
By virtue of that license, he entered into an agreement to ship his corn to Tokyo Menka Kaisha, Ltd. of
Osaka, Japan in exchange for plastic sheetings. He contracted to sell the plastic sheetings to Yu Ping Kun
As justification for his refusal, Pamintuan said that the company failed to comply with the conditions of the
Co., Inc. for two hundred sixty-five thousand five hundred fifty pesos. The company undertook to open an
contract and that it was novated with respect to the price.
irrevocable domestic letter of credit for that amount in favor of Pamintuan.

On December 2, 1960, the company filed its amended complaint for damages against Pamintuan. After
It was further agreed that Pamintuan would deliver the plastic sheetings to the company at its bodegas in
trial, the lower court rendered the judgment mentioned above but including moral damages.
Manila or suburbs directly from the piers "within one month upon arrival of" the carrying vessels. Any
violation of the contract of sale would entitle the aggreived party to collect from the offending party
liquidated damages in the sum of ten thousand pesos (Exh. A). The unrealized profits awarded as damages in the trial court's decision were computed as follows (pp. 248-
9, Record on Appeal):
On July 28, 1960, the company received a copy of the letter from the Manila branch of Toyo Menka
Kaisha, Ltd. confirming the acceptance by Japanese suppliers of firm offers for the consignment to (1) 26,000 yards with a contract price of Pl.13 per yard and a selling price at the time
Pamintuan of plastic sheetings valued at forty-seven thousand dollars. Acting on that information, the of delivery of Pl.75 a yard........................................................... P16,120.00
company lost no time in securing in favor of Pamintuan an irrevocable letter of credit for two hundred
sixty-five thousand five hundred fifty pesos.
(2) 18,000 yards with a contract price of P0.7062 per yard and selling price of Pl.20
per yard at the time of delivery......................................... 9,105.67
Pamintuan was apprised by the bank on August 1, 1960 of that letter of credit which made reference to the
delivery to Yu Ping Kun Co., Inc. on or before October 31, 1960 of 336, 360 yards of plastic sheetings (p.
(3) 30,000 yards with a contract price of Pl.017 per yard and a selling price of Pl.70
21, Record on Appeal).
per yard. 20,490.00

On September 27 and 30 and October 4, 1960, the Japanese suppliers shipped to Pamintuan, through Toyo
(4) 40,850 yards with a contract price of P0.7247 per yard and a selling price of
Menka Kaisha, Ltd., the plastic sheetings in four shipments to wit: (1) Firm Offer No. 327 for 50,000 yards
P1.25 a yard at the time of delivery.............................................. 21,458.50 Total
valued at $9,000; (2) Firm Offer No. 328 for 70,000 yards valued at $8,050; (3) Firm Offers Nos. 329 and
unrealized profits....................... P67,174.17
343 for 175,000 and 18,440 yards valued at $22,445 and $2,305, respectively, and (4) Firm Offer No. 330
for 26,000 yards valued at $5,200, or a total of 339,440 yards with an aggregate value of $47,000 (pp. 4-5
and 239-40, Record on Appeal). The overpayment of P12,282.26 made to Pamintuan by Yu Ping Kun Co., Inc. for the 224,150 yards,
which the trial court regarded as an item of damages suffered by the company, was computed as follows
(p. 71, Record on Appeal):
The plastic sheetings arrived in Manila and were received by Pamintuan. Out of the shipments, Pamintuan
delivered to the company's warehouse only the following quantities of plastic sheetings:
Liquidation value of 224,150 yards at P0.7822 a yard
.............................................................................. P175,330.13
November 11, 1960 — 140 cases, size 48 inches by 50 yards. November 14, 1960 — 258 cases out of 352
cases. November 15, 1960 — 11 cases out of 352 cases. November 15, 1960 — 10 cases out of 100 cases.
November 15, 1960 — 30 cases out of 100 cases. Actual peso value of 224,150 yards as per firm offers or as per
contract............................................163,047.87
Pamintuan withheld delivery of (1) 50 cases of plastic sheetings containing 26,000 yards valued at $5,200;
(2) 37 cases containing 18,440 yards valued at $2,305; (3) 60 cases containing 30,000 yards valued at Overpayment................................................................ P 12,282.26
$5,400 and (4) 83 cases containing 40,850 yards valued at $5,236.97. While the plastic sheetings were
To these two items of damages (P67,174.17 as unrealized profits and P12,282.26 as overpayment), the trial
court added (a) P10,000 as stipulated liquidated damages, (b) P10,000 as moral damages, (c) Pl,102.85 as
premium paid by the company on the bond of P102,502.13 for the issuance of the writ of preliminary
attachment and (d) P10,000 as attorney's fees, or total damages of P110,559.28) p. 250, Record on Appeal).
The Court of Appeals affirmed that judgment with the modification that the moral damages were
disallowed (Resolution of June 29, 1966).
Pamintuan appealed. The Court of Appeals in its decision of March 18, 1966 found that the contract of sale
between Pamintuan and the company was partly consummated. The company fulfilled its obligation to
obtain the Japanese suppliers' confirmation of their acceptance of firm offers totalling $47,000. Pamintuan
reaped certain benefits from the contract. Hence, he is estopped to repudiate it; otherwise, he would
unjustly enrich himself at the expense of the company.
The Court of Appeals found that the writ of attachment was properly issued. It also found that Pamintuan
was guilty of fraud because (1) he was able to make the company agree to change the manner of paying the
price by falsely alleging that there was a delay in obtaining confirmation of the suppliers' acceptance of the
offer to buy; (2) he caused the plastic sheetings to be deposited in the bonded warehouse of his brother and
then required his brother to make him Pamintuan), his attorney-in-fact so that he could control the disposal
of the goods; (3) Pamintuan, as attorney-in-fact of the warehouseman, endorsed to the customs broker the
warehouse receipts covering the plastic sheetings withheld by him and (4) he overpriced the plastic
sheetings which he delivered to the company.
The Court of Appeals described Pamintuan as a man "who, after having succeeded in getting another to
accommodate him by agreeing to liquidate his deliveries on the basis of P0.7822 per yard, irrespective of
invoice value, on the pretense that he would deliver what in the first place he ought to deliver anyway,
when he knew all the while that he had no such intention, and in the process delivered only the poorer or
cheaper kind or those which he had predetermined to deliver and did not conceal in his brother's name and
thus deceived the unwary party into overpaying him the sum of P 1 2,282.26 for the said deliveries, and
would thereafter refuse to make any further delivery in flagrant violation of his plighted word, would now
ask us to sanction his actuation" (pp. 61-62, Rollo).
The main contention of appellant Pamintuan is that the buyer, Yu Ping Kun Co., Inc., is entitled to recover
only liquidated damages. That contention is based on the stipulation "that any violation of the provisions of
this contract (of sale) shall entitle the aggrieved party to collect from the offending party liquidated
damages in the sum of P10,000 ".
Pamintuan relies on the rule that a penalty and liquidated damages are the same (Lambert vs. Fox 26 Phil.
588); that "in obligations with a penal clause, the penalty shall substitute the indemnity for damages and
the payment of interests in case of non-compliance, if there is no stipulation to the contrary " (1st sentence
of Art. 1226, Civil Code) and, it is argued, there is no such stipulation to the contrary in this case and that
"liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof"
(Art. 2226, Civil Code).
We hold that appellant's contention cannot be sustained because the second sentence of article 1226 itself
provides that I nevertheless, damages shall be paid if the obligor ... is guilty of fraud in the fulfillment of
the obligation". "Responsibility arising from fraud is demandable in all obligations" (Art. 1171, Civil
Code). "In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for an
damages which may be reasonably attributed to the non-performance of the obligation" (Ibid, art. 2201).
The trial court and the Court of Appeals found that Pamintuan was guilty of fraud because he did not make
a complete delivery of the plastic sheetings and he overpriced the same. That factual finding is conclusive
upon this Court.
There is no justification for the Civil Code to make an apparent distinction between penalty and liquidated
damages because the settled rule is that there is no difference between penalty and liquidated damages
insofar as legal results are concerned and that either may be recovered without the necessity of proving
actual damages and both may be reduced when proper (Arts. 1229, 2216 and 2227, Civil Code. See
observations of Justice J.B.L. Reyes, cited in 4 Tolentino's Civil Code, p. 251).
Castan Tobeñas notes that the penal clause in an obligation has three functions: "1. Una funcion coercitiva
o de garantia, consistente en estimular al deudor al complimiento de la obligacion principal, ante la
amenaza de tener que pagar la pena. 2. Una funcion liquidadora del daño, o sea la de evaluar por
anticipado los perjuicios que habria de ocasionar al acreedor el incumplimiento o cumplimiento
inadecuado de la obligacion. 3. Una funcion estrictamente penal, consistente en sancionar o castigar dicho
incumplimiento o cumplimiento inadecuado, atribuyendole consecuencias mas onerosas para el deudor que
las que normalmente lleva aparejadas la infraccion contractual. " (3 Derecho Civil Espanol, 9th Ed., p.
128).
The penalty clause is strictly penal or cumulative in character and does not partake of the nature of
liquidated damages (pena sustitutiva) when the parties agree "que el acreedor podra pedir, en el supuesto
incumplimiento o mero retardo de la obligacion principal, ademas de la pena, los danos y perjuicios. Se
habla en este caso de pena cumulativa, a differencia de aquellos otros ordinarios, en que la pena es
sustitutiva de la reparacion ordinaria." (Ibid, Castan Tobenas, p. 130).
After a conscientious consideration of the facts of the case, as found by Court of Appeals and the trial
court, and after reflecting on the/tenor of the stipulation for liquidated damages herein, the true nature of
which is not easy to categorize, we further hold that justice would be adequately done in this case by
allowing Yu Ping Kun Co., Inc. to recover only the actual damages proven and not to award to it the
stipulated liquidated damages of ten thousand pesos for any breach of the contract. The proven damages
supersede the stipulated liquidated damages.
This view finds support in the opinion of Manresa (whose comments were the bases of the new matter
found in article 1226, not found in article 1152 of the old Civil Code) that in case of fraud the difference
between the proven damages and the stipulated penalty may be recovered (Vol. 8, part. 1, Codigo Civil,
5th Ed., 1950, p. 483).
Hence, the damages recoverable by the firm would amount to ninety thousand five hundred fifty-nine
pesos and twenty-eight centavos (P90,559.28), with six percent interest a year from the filing of the
complaint.
With that modification the judgment of the Court of Appeals is affirmed in all respects. No costs in this
instance.
SO ORDERED.
G.R. No. 196118 July 30, 2014
LEONARDO C. CASTILLO, represented by LENNARD V. CASTILLO, Petitioner,
vs.
SECURITY BANK CORPORATION, JRC POULTRY FARMS or SPOUSES LEON C.
CASTILLO, JR., and TERESITA FLORESCASTILLO, Respondents.
DECISION
PERALTA, J.:
This is a Petition for Review questioning the Decision1 of the Court of Appeals (CA) dated November 26,
2010, as well as its Resolution2 dated March 17, 2011 in CA-G.R. CV No. 88914. The CA reversed and set
aside the Decision3 of the Regional Trial Court (RTC) of San Pablo City, Laguna, Branch 32, dated
October 16, 2006 in Civil Case No. SP-5882 (02), and consequently, upheld the validity of the real estate
mortgage entered into by respondents spouses Leon C. Castillo, Jr. and Teresita Flores-Castillo, and
Security Bank Corporation (SBC).
The facts, as culled from the records, are as follows:
Petitioner Leonardo C. Castillo and respondent Leon C. Castillo, Jr. are siblings. Leon and Teresita Flores-
Castillo (the Spouses Castillo) were doing business under the name of JRC Poultry Farms. Sometime in
1994, the Spouses Castillo obtained a loan from respondent SBC in the amount of ₱45,000,000.00. To
secure said loan, they executed a real estate mortgage on August 5, 1994 over eleven (11) parcels of land
belonging to different members of the Castillo family and which are all located in San Pablo City. 4 They
also procured a second loan5 amounting to ₱2,500,000.00, which was covered by a mortgage on a land in
Pasay City. Subsequently, the Spouses Castillo failed to settle the loan, prompting SBC to proceed with the
foreclosure of the properties. SBC was then adjudged as the winning bidder in the foreclosure sale held on
July 29, 1999. Thereafter, they were able to redeem the foreclosed properties, withthe exception of the lots
covered by Torrens Certificate of Title(TCT) Nos. 28302 and 28297.
On January 30, 2002, Leonardo filed a complaint for the partial annulment of the real estate mortgage. He
alleged that he owns the property covered by TCT No. 28297 and that the Spouses Castillo used it as one
of the collaterals for a loan without his consent. He contested his supposed Special Power of Attorney
(SPA) in Leon’s favor, claiming that it is falsified. According to him, the date of issuance of his
Community Tax Certificate (CTC) as indicated on the notarization of said SPA is January 11, 1993, when
he only secured the same on May 17, 1993. He also assailed the foreclosure of the lots under TCT
Nos.20030 and 10073 which were still registered in the name of their deceased father. Lastly, Leonardo
attacked SBC’s imposition of penalty and interest on the loans as being arbitrary and unconscionable.
On the other hand, the Spouses Castillo insisted on the validity of Leonardo’s SPA. They alleged that they
incurred the loan not only for themselves, but also for the other members of the Castillo family who needed
money at that time. Upon receipt of the proceeds of the loan, they distributed the same to their family
members, as agreed upon. However, when the loan became due, their relatives failed to pay their
respective shares such that Leon was forced to use his own money until SBC had to finally foreclose the
mortgage over the lots.6
In a Decision dated October 16, 2006, the RTC of San Pablo City ruled in Leonardo’s favor, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff Leonardo C. Castillo and against the
defendants SECURITY BANK CORPORATION, and JRC POULTRY FARMS or SPS. LEON C.
CASTILLO, JR. and TERESITA FLORES-CASTILLO declaring as null and void the Real Estate
Mortgage dated August 5, 1994, the Memorandum of Agreement dated October 28, 1997 and the
Certificate of Sale dated August 27, 1999 insofar as plaintiff’s property with Transfer Certificate of Title
No. T-28297 is concerned. The Security Bank Corporation is likewise ordered to return the ownership of
the Transfer Certificate of Title No. T-28297 to plaintiff Leonardo Castillo. Likewise, defendants spouses
Leon C. Castillo, Jr. and Teresita Flores-Castillo are hereby ordered to pay plaintiff moral damages in the
total amount of ₱500,000.00 and exemplary damages of ₱20,000.00. All other claims for damages and
attorney’s fees are DENIED for insufficiency of evidence.
SO ORDERED.7
Both parties elevated the case to the CA. On November 26, 2010, the CA denied Leonardo’s appeal and
granted that of the Spouses Castillo and SBC. It reversed and set aside the RTC Decision, essentially ruling
that the August 5, 1994 real estate mortgage isvalid. Leonardo filed a Motion for Reconsideration, but the
same was denied for lack of merit.
Hence, Leonardo brought the case to the Court and filed the instant Petition for Review.1âwphi1 The main
issue soughtto be resolved here is whether or not the real estate mortgage constituted over the property
under TCT No. T-28297 is valid and binding.
The Court finds the petition to be without merit.
As a rule, the jurisdiction of the Court over appealed cases from the CA is limited to the review and
revision of errors of law it allegedly committed, as its findings of fact are deemed conclusive. Thus, the
Court is not duty-bound to evaluate and weigh the evidence all over again which were already considered
in the proceedings below, except when, as in this case, the findings of fact of the CAare contrary to the
findings and conclusions of the trial court.8
The following are the legal requisites for a mortgage to be valid:
(1) It must be constituted to secure the fulfillment of a principal obligation;
(2) The mortgagor must be the absolute owner of the thing mortgaged;
(3) The persons constituting the mortgage must have the free disposal of their property, and in
the absence thereof, they should be legally authorized for the purpose. 9
Leonardo asserts that his signature inthe SPA authorizing his brother, Leon, to mortgage his property
covered by TCT No. T-28297 was falsified. He claims that he was in America at the time of its execution.
As proof of the forgery, he focuses on his alleged CTC used for the notarization10 of the SPA on May 5,
1993 and points out that it appears to have been issued on January 11, 1993 when, in fact, he only obtained
it on May 17, 1993. But it is a settled rule that allegations of forgery, like all other allegations, must be
proved by clear, positive, and convincing evidence by the party alleging it. It should not be presumed, but
must beestablished by comparing the alleged forged signature with the genuine signatures. 11 Here,
Leonardo simply relied on his self-serving declarations and refused to present further corroborative
evidence, saying that the falsified document itself is the best evidence. 12 He did not even bother comparing
the alleged forged signature on the SPA with samples of his real and actual signature. What he consistently
utilized as lone support for his allegation was the supposed discrepancy on the date of issuance of his CTC
as reflectedon the subject SPA’s notarial acknowledgment. On the contrary, in view of the great ease with
which CTCs are obtained these days,13 there is reasonable ground to believe that, as the CA correctly
observed, the CTC could have been issued with the space for the date left blank and Leonardo merelyfilled
it up to accommodate his assertions. Also, upon careful examination, the handwriting appearing on the
space for the date of issuance is different from that on the computation of fees, which in turn was
consistent with the rest of the writings on the document. 14 He did not likewise attempt to show any
evidence that would back up his claim that at the time of the execution of the SPA on May 5, 1993, he was
actually in America and therefore could not have possibly appeared and signed the document before the
notary.
And even if the Court were to assume, simply for the sake of argument, that Leonardo indeed secured his
CTC only on May 17, 1993, this does not automatically render the SPA invalid. The appellate court aptly
held that defective notarization will simply strip the document of its public character and reduce it to a
private instrument, but nonetheless, binding, provided its validity is established by preponderance of
evidence.15 Article 1358 of the Civil Code requires that the form of a contract that transmits or extinguishes
real rights over immovable property should be in a public document, yet the failure to observethe proper
form does not render the transaction invalid.16 The necessity of a public document for said contracts is only
for convenience; it is not essential for validity or enforceability.17 Even a sale of real property, though
notcontained in a public instrument or formal writing, is nevertheless valid and binding, for even a verbal
contract of sale or real estate produceslegal effects between the parties. 18 Consequently, when there is a
defect in the notarization of a document, the clear and convincing evidentiary standard originally attached
to a dulynotarized document is dispensed with, and the measure to test the validity of such document is
preponderance of evidence.19
Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial
foreclosure, shall have the right to redeem the property in accordance with this provision until, but not
after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in
no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that
has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights
until their expiration.28 Verily, the redemption price comprises not only the total amount due under the
mortgage deed, but also with interest at the rate specified in the mortgage, and all the foreclosure expenses
incurred by the mortgagee bank.

Here, the preponderance ofevidence indubitably tilts in favor of the respondents, still making the SPA To sustain Leonardo's claim that their payment of ₱45,000,000.00 had already extinguished their entire
binding between the parties even with the aforementioned assumed irregularity.1âwphi1 There are several obligation with SBC would mean that no interest ever accrued from 1994, when the loan was availed, up to
telling circumstances that would clearly demonstrate that Leonardo was aware of the mortgage and he the time the payment of ₱45,000,000.00 was made in 2000-2001.
indeed executed the SPA to entrust Leon with the mortgage of his property. Leon had inhis possession all
the titles covering the eleven (11) properties mortgaged, including that of Leonardo. 20 Leonardo and the
SBC's 16% rate of interest is not computed per month, but rather per annum or only 1.33% per month. In
rest of their relatives could not have just blindly ceded their respective TCTs to Leon. 21 It is likewise
Spouses Bacolor v. Banco Filipino Savings and Mortgage Bank, Dagupan City Branch,29 the Court held
ridiculous how Leonardo seemed to have been totally oblivious to the status of his property for eight (8)
that the interest rate of 24% per annum on a loan of ₱244,000.00 is not considered as unconscionable and
long years, and would only find outabout the mortgage and foreclosure from a nephew who himself had
excessive. As such, the Court ruled that the debtors cannot renege on their obligation to comply with what
consented to the mortgage of his own lot.22 Considering the lapse of time from the alleged forgery on May
is incumbent upon them under the contract of loan as they are bound by its stipulations. Also, the 24o/o per
5, 1993 and the mortgage on August 5, 1994, to the foreclosure on July 29, 1999, and to the supposed
annum rate or 2% per month for the penalty charges imposed on account of default, cannot be considered
discovery in 2001, it appears that the suit is a mere afterthought or a last-ditch effort on Leonardo’s part to
as skyrocketing. The enforcement of penalty can be demanded by the creditor in case of non-performance
extend his hold over his property and to prevent SBC from consolidating ownership over the same. More
due to the debtor's fault or fraud. The nonperformance gives rise to the presumption of fault and in order to
importantly, Leonardo himself admitted on cross-examination that he granted Leon authority to mortgage,
avoid the penalty, the debtor has the burden of proving that the failure of the performance was due to either
only that, according to him, he thought it was going to be with China Bank, and not SBC. 23 But as the CA
force majeure or the creditor's own acts.30 In the instant case, petitioner failed to discharge said burden and
noted, there is no mention of a certainbank in the subject SPA with which Leon must specifically deal.
thus cannot avoid the payment of the penalty charge agreed upon.
Leon, therefore, was simply acting within the bounds of the SPA’s authority when hemortgaged the lot to
SBC.
WHEREFORE, premises considered, the petition is DENIED. The Decision of the Court of Appeals, dated
November 26, 2010, as well as its Resolution dated March 17, 2011 in CA-G.R. CV No. 88914, are hereby
True, banks and other financing institutions, in entering into mortgage contracts, are expected to exercise
AFFIRMED.
due diligence.24 The ascertainment of the status or condition of a property offered to it as security for a loan
must be a standard and indispensable part of its operations.25 In this case, however, no evidence was
presented to show that SBC was remiss in the exercise of the standard care and prudence required of it or SO ORDERED.
that it was negligent in accepting the mortgage.26 SBC could not likewise befaulted for relying on the
presumption of regularity of the notarized SPA when it entered into the subject mortgage agreement.

Finally, the Court finds that the interest and penalty charges imposed by SBC are just, and not excessive or
unconscionable.

Section 47 of The General Banking Law of 200027 thus provides:

Section 47. Foreclosure of Real Estate Mortgage.- In the event of foreclosure, whether judicially or extra-
judicially, of any mortgage on real estate which is security for any loan or other credit accommodation
granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his
obligation shall have the right within one year after the sale of the real estate, to redeem the property by
paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage,
and all the costs and expenses incurred by the bank or institutionfrom the sale and custody of said property
less the income derived therefrom. However,the purchaser at the auction sale concerned whether in a
judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property
immediately after the date of the confirmation of the auction sale and administer the same in accordance
with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted
pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an
amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the
enjoining or the restraint of the foreclosure proceeding.
[ GR No. 183794, Jun 13, 2016 ]
SPOUSES JAIME & MATILDE POON v. PRIME SAVINGS BANK
DECISION
SERENO, C.J.:
[1]
Before this Court is a Petition for Review on Certiorari assailing the Court of Appeals (CA)
Decision[2] which affirmed the Decision[3] issued by Branch 21, Regional Trial Court (RTC) of Naga City.
The RTC ordered the partial rescission of the penal clause in the lease contract over the commercial
building of Spouses Jaime and Matilde Poon (petitioners). It directed petitioners to return to Prime Savings
Bank (respondent) the sum of P1,740,000, representing one-half of the unused portion of its advance
rentals, in view of the closure of respondent's business upon order by the Bangko Sentral ng
Pilipinas (BSP).
Antecedent Facts
The facts are undisputed.
Petitioners owned a commercial building in Naga City, which they used for their bakery business. On 3
November 2006, Matilde Poon and respondent executed a 10-year Contract of Lease[4] (Contract) over the
building for the latter's use as its branch office in Naga City. They agreed to a fixed monthly rental of
P60,000, with an advance payment of the rentals for the first 100 months in the amount of P6,000,000. As
agreed, the advance payment was to be applied immediately, while the rentals for the remaining period of
the Contract were to be paid on a monthly basis.[5]
In addition, paragraph 24 of the Contract provides:
24. Should the lease[d] premises be closed, deserted or vacated by the LESSEE, the LESSOR shall have
the right to terminate the lease without the necessity of serving a court order and to immediately repossess
the leased premises. Thereafter the LESSOR shall open and enter the leased premises in the presence of a
representative of the LESSEE (or of the proper authorities) for the purpose of taking a complete inventory
of all furniture, fixtures, equipment and/or other materials or property found within the leased premises.
The LESSOR shall thereupon have the right to enter into a new contract with another party. All advanced
rentals shall be forfeited in favor of the LESSOR.[6]
Barely three years later, however, the BSP placed respondent under the receivership of the Philippine
Deposit Insurance Corporation (PDIC) by virtue of BSP Monetary Board Resolution No. 22, [7] which
reads:
On the basis of the report of Mr. Candon B. Guerrero, Director of Thrift Banks and Non-Bank Financial
Institutions (DTBNBF1), in his memorandum dated January 3, 2000, which report showed that the Prime
Savings Bank, Inc. (a) is unable to pay its liabilities as they became due in the ordinary course of business;
(b) has insufficient realizable assets as determined by the Bangko Sentral ng Pilipinas to meet its liabilities;
(c) cannot continue in business without involving probable losses to its depositors and creditors; and (d)
has wilfully violated cease and desist orders under Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation of the assets of the institution; x x x.[8] (Emphasis
supplied)
The BSP eventually ordered respondent's liquidation under Monetary Board Resolution No. 664. [9]
On 12 May 2000, respondent vacated the leased premises and surrendered them to
petitioners.[10] Subsequently, the PDIC issued petitioners a demand letter[11] asking for the return of the
unused advance rental amounting to P3,480,000 on the ground that paragraph 24 of the lease agreement
had become inoperative, because respondent's closure constituted force majeure. The PDIC likewise
invoked the principle of rebus sic stantibus under Article 1267 of Republic Act No. 386 (Civil Code) as
alternative legal basis for demanding the refund.
Petitioners, however, refused the PDIC's demand.[12] They maintained that they were entitled to retain the
remainder of the advance rentals following paragraph 24 of their Contract.
Consequently, respondent sued petitioners before the RTC of Naga City for a partial rescission of contract
and/or recovery of a sum of money.
The RTC Ruling
After trial, the RTC ordered the partial rescission of the lease agreement, disposing as follows:
WHEREFORE, judgment is hereby entered ordering the partial rescission of the Contract of Lease dated
November 3, 1996 particularly the second paragraph of Par. 24 thereof and directing the defendant-spouses
Jaime and Matilde Poon to return or refund to the Plaintiff the sum of One Million Seven Hundred Forty
Thousand Pesos (P1,740,000) representing one-half of the unused portion of the advance rentals.
Parties' respective claims for damages and attorney's fees are dismissed.
No costs.[13]
The trial court ruled that the second clause in paragraph 24 of the Contract was penal in nature, and that the
clause was a valid contractual agreement.[14] Citing Provident Savings Bank v. CA[15] as legal precedent, it
ruled that the premature termination of the lease due to the BSP's closure of respondent's business was
actually involuntary. Consequently, it would be iniquitous for petitioners to forfeit the entire amount of P
3,480,000.[16] Invoking its equity jurisdiction under Article 1229 of the Civil Code, [17]the trial court limited
the forfeiture to only one-half of that amount to answer for respondent's unpaid utility bills and E-VAT, as
well as petitioner's lost business opportunity from its former bakery business. [18]
The CA Ruling
On appeal, the CA affirmed the RTC Decision,[19] but had a different rationale for applying Article 1229.
The appellate court ruled that the closure of respondent's business was not a fortuitous event.
Unlike Provident Savings Bank,[20] the instant case was one in which respondent was found to have
committed fraudulent acts and transactions. Lacking, therefore, was the first requisite of a fortuitous event,
i.e, that the cause of the breach of obligation must be independent of the will of the debtor. [21]
Still, the CA sustained the trial court's interpretation of the proviso on the forfeiture of advance rentals as a
penal clause and the consequent application of Article 1229. The appellate court found that the forfeiture
clause in the Contract was intended to prevent respondent from defaulting on the latter's obligation to
finish the term of the lease. It further found that respondent had partially performed that obligation and,
therefore, the reduction of the penalty was only proper. Similarly, it ruled that the RTC had properly
denied petitioners' claims for actual and moral damages for lack of basis. [22]
On 10 July 2008,[23] the CA denied petitioners' Motion for Reconsideration. Hence, this Petition.
Issues
The issues to be resolved are whether (1) respondent may be released from its contractual obligations to
petitioners on grounds of fortuitous event under Article 1174 of the Civil Code and unforeseen event under
Article 1267 of the Civil Code; (2) the proviso in the parties' Contract allowing the forfeiture of advance
rentals was a penal clause; and (3) the penalty agreed upon by the parties may be equitably reduced under
Article 1229 of the Civil Code.
COURT RULING
We DENY the Petition.
Preliminarily, we address petitioners' claim that respondent had no cause of action for rescission, because
this case does not fall under any of the circumstances enumerated in Articles 1381 [24] and 1382[25] of the
Civil Code.
The legal remedy of rescission, however, is by no means limited to the situations covered by the above
provisions. The Civil Code uses rescission in two different contexts, namely: (1) rescission on account of
breach of contract under Article 1191; and (2) rescission by reason of lesion or economic prejudice under
Article 1381.[26] While the term "rescission" is used in Article 1191, "resolution" was the original term used
in the old Civil Code, on which the article was based. Resolution is a principal action based on a breach by
a party, while rescission under Article 1383 is a subsidiary action limited to cases of rescission for lesion
under Article 1381 of the New Civil Code.[27]
It is clear from the allegations in paragraphs 12 and 13 of the Complaint[28] that respondent's right of action
rested on the alleged abuse by petitioners of their right under paragraph 24 of the Contract. Respondent's
theory before the trial court was that the tenacious enforcement by petitioners of their right to forfeit the
advance rentals was tainted with bad faith, because they knew that respondent was already insolvent. In
other words, the action instituted by respondent was for the rescission of reciprocal obligations under
Article 1191. The lower courts, therefore, correctly ruled that Articles 1381 and 1382 were inapposite.
We now resolve the main issues.
The closure of respondent's business was neither a fortuitous nor an unforeseen event that rendered the
lease agreement functus officio.
Respondent posits that it should be released from its contract with petitioners, because the closure of its
business upon the BSP's order constituted a fortuitous event as the Court held in Provident Savings
Bank.[29]
The cited case, however, must always be read in the context of the earlier Decision in Central Bank v.
Court of Appeals.[30] The Court ruled in that case that the Monetary Board had acted arbitrarily and in bad
faith in ordering the closure of Provident Savings Bank. Accordingly, in the subsequent case of Provident
Savings Bank it was held that fuerza mayor had interrupted the prescriptive period to file an action for the
foreclosure of the subject mortgage.[31]
In contrast, there is no indication or allegation that the BSP's action in this case was tainted with
arbitrariness or bad faith. Instead, its decision to place respondent under receivership and liquidation
proceedings was pursuant to Section 30 of Republic Act No. 7653. [32] Moreover, respondent was partly
accountable for the closure of its banking business. It cannot be said, then, that the closure of its business
was independent of its will as in the case of Provident Savings Bank. The legal effect is analogous to that
created by contributory negligence in quasi-delict actions.
The period during which the bank cannot do business due to insolvency is not a fortuitous event, [33] unless
it is shown that the government's action to place a bank under receivership or liquidation proceedings is
tainted with arbitrariness, or that the regulatory body has acted without jurisdiction.[34]
As an alternative justification for its premature termination of the Contract, respondent lessee invokes the
doctrine of unforeseen event under Article 1267 of the Civil Code, which provides:
Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in whole or in part.
The theory of rebus sic stantibus in public international law is often cited as the basis of the above article.
Under this theory, the parties stipulate in light of certain prevailing conditions, and the theory can be made
to apply when these conditions cease to exist.[35] The Court, however, has once cautioned that Article 1267
is not an absolute application of the principle of rebus sic stantibus, otherwise, it would endanger the
security of contractual relations. After all, parties to a contract are presumed to have assumed the risks of
unfavorable developments. It is only in absolutely exceptional changes of circumstance, therefore, that
equity demands assistance for the debtor.[36]
Tagaytay Realty Co., Inc. v. Gacutan[37] lays down the requisites for the application of Article 1267, as
follows:
1. The event or change in circumstance could not have been foreseen at the time of the execution of the
contract.
2. It makes the performance of the contract extremely difficult but not impossible.
3. It must not be due to the act of any of the parties.
4. The contract is for a future prestation.[38]
The difficulty of performance should be such that the party seeking to be released from a contractual
obligation would be placed at a disadvantage by the unforeseen event. Mere inconvenience, unexpected
impediments, increased expenses,[39] or even pecuniary inability to fulfil an engagement,[40] will not relieve
the obligor from an undertaking that it has knowingly and freely contracted.
The law speaks of "service." This term should be understood as referring to the performance of an
obligation or a prestation.[41] A prestation is the object of the contract; i.e., it is the conduct (to give, to do
or not to do) required of the parties.[42] In a reciprocal contract such as the lease in this case, one obligation
of respondent as the lessee was to pay the agreed rents for the whole contract period.[43] It would be hard-
pressed to complete the lease term since it was already out of business only three and a half years into the
10-year contract period. Without a doubt, the second and the fourth requisites mentioned above are present
in this case.
The first and the third requisites, however, are lacking. It must be noted that the lease agreement was for 10
years. As shown by the unrebutted testimony of Jaime Poon during trial, the parties had actually
considered the possibility of a deterioration or loss of respondent's business within that period:
ATTY. SALES
Now to the offer of that real estate broker for possible lease of your property at No. 38 General Luna
Q.
Street, Naga City which was then the Madam Poon Bakery, what did you tell your real estate broker?
WITNESS (JAIME POON)
When Mrs. Lauang approached me, she told me that she has a client who wants to lease a property in
A.
Naga City.
Q. Did she disclose to you the identity of her client?
A. Yes, Sir.
Q. What was the name of her client?
A. That is the Prime Savings Bank.
After you have known that it was the Prime Savings Bank that [wanted] to lease your property
Q.
located at No. 38 General Luna St., Naga City, what did you tell Mrs. Lauang[?]
I told her that if the price is good, I am willing to give up the place where this bakery of mine is
A.
situated.
Q. So, did Mrs. Lauang give you the quotation as to the price?
A. Yes, Sir.
Q. What was the amount?
A. She asked first if how much I demand for the price.
Q. What did you tell her?
A. I told her, if they can give me P100,000.00 for the rental, I will give up the place.
Q. What do you mean P100,000.00 rental?
A. That is only for the establishment [concerned].
Q. What was the period to be covered by the P100,000.00 rental?
A. That is monthly basis.
So after telling Mrs. Lauang that you can be amenable to lease the place for P100,000.00 monthly,
Q.
what if any, did Mrs. Lauang tell you?
A. She told me it is very high. And then she asked me if it is still negotiable, I answered, yes.
Q. So, what happened after your clarified to her that [it is] still negotiable?
She asked me if there is other condition, and I answered her, yes, if your client can give me advances
A.
I can lease my property.
xxxx
Q. So what is your answer when you were asked for the amount of the advances?
A. I told her I need 7 million pesos because I need to pay my debts.
xxx
x even presented any proof of that intent. It was, therefore, a reversible error on the part of the CA to
Q. Who was with her when she came over?
A. A certain guy name Ricci and said that he is the assistant manager of the Prime Savings Bank.
Q. What did you and Mr. Ricci talk about?
A. I told him the same story as I talked with Mrs. Lauang.
Q. Was the agreement finally reached between you and Mr. Ricci?
A. Not yet, Sir.
Q. What happened after that?
He said that he [will discuss] the matter with his higher officer, the branch manager in the person of
A.
Henry Lee.
Q. Were you able to meet this Henry Lee?
A. After a week later.
Q. Who was with Henry Lee?
A. Mrs. Lauang.
Q. Was there a final agreement on the day when you and Henry Lee met?
Not yet, he offered to reduce the rental and also the advances. Finally I gave way after 2 or 3
A.
negotiations.
Q. What happened after 2 or 3 negotiations?
A. We arrived at P60,000.00 for monthly rentals and P6,000,000.00 advances for 100 months.
Was the agreement between you and the representative of the Prime Savings Bank reduced into
Q.
writing?
A. Yes Sir.
xxx
x provide for liquidated damages and (2) to strengthen the coercive force of the obligation by the threat of
Now, Mr. Poon, I would like to direct your attention to paragraphs 4 and 5 of the contract of lease
which I read: Inasmuch as the leased property is presently mortgaged with the PCI Bank, the Lessor
and the Lessee hereby agree that another property with a clean title shall serve as security for herein
Lessee; Provided that the mortgaged property with PCI Bank is cancelled, the Lessee agrees that the
Q.
above-mentioned property shall be released to herein Lessor; paragraph 5 says: It is hereby stipulated
that should the leased property be foreclosed by the PCI Bank or any other banking or financial
institution, all unused rentals shall be returned by the Lessor to the Lessee. Now, my question is: Who
asked or requested that paragraphs 4 and 5 be incorporated in the contract of lease?
A. Mr. Lee himself.
Q. The representative of the plaintiff?
A. Yes, Sir.
Q. Q. For what purpose did Mr. Lee ask these matters to be incorporated?
Because they are worried that my building might be foreclosed because it is under [mortgage]
A. with the PCI Bank, that is why I gave them protection of a clean title. But I also asked them,
what will happen to me, in case your bank will be closed?
Q. When you asked that question, what did Mr. Lee tell you?
A. He told me that I don't have to worry I will have P6,000,000 advances.
Q. What was your protection as to the 6 million payment made by the plaintiff?
A. That is the protection for me because during that time I have my bakery and I myself [spent] 2 million
for the improvement of that bakery and I have sacrificed that for the sake of the offer of lease.
Q. In what manner that you are being protected for that 6 million pesos?
They said that if in case the bank will be closed that advance of 6 million pesos will be forfeited
A.
in my favor.
Q. And that is what is found in paragraph 24 of the Contract of Lease which I asked you to read?
A. That is true.[44]
Clearly, the closure of respondent's business was not an unforeseen event. As the lease was long-term, it
was not lost on the parties that such an eventuality might occur, as it was in fact covered by the terms of
their Contract. Besides, as We have previously discussed, the event was not independent of respondent's
will.
The forfeiture clause in the Contract is penal in nature.
Petitioners claim that paragraph 24 was not intended as a penal clause. They add that respondent has not
construe its forfeiture provision of the Contract as penal in nature.
It is settled that a provision is a penal clause if it calls for the forfeiture of any remaining deposit still in the
possession of the lessor, without prejudice to any other obligation still owing, in the event of the
termination or cancellation of the agreement by reason of the lessee's violation of any of the terms and
conditions thereof. This kind of agreement may be validly entered into by the parties. The clause is an
accessory obligation meant to ensure the performance of the principal obligation by imposing on the debtor
a special prestation in case of nonperformance or inadequate performance of the principal obligation. [45]
It is evident from the above-quoted testimony of Jaime Poon that the stipulation on the forfeiture of
advance rentals under paragraph 24 is a penal clause in the sense that it provides for liquidated damages.
Notably, paragraph 5 of the Contract also provides:
5. It is hereby stipulated that should the leased property be foreclosed by PCI Bank or any other banking or
financial institution, all unused rentals shall be returned by the LESSOR to the LESSEE; x x x. [46]
In effect, the penalty for the premature termination of the Contract works both ways. As the CA correctly
found, the penalty was to compel respondent to complete the 10-year term of the lease. Petitioners, too,
were similarly obliged to ensure the peaceful use of their building by respondent for the entire duration of
the lease under pain of losing the remaining advance rentals paid by the latter.
The forfeiture clauses of the Contract, therefore, served the two functions of a penal clause, i.e., (1) to
greater responsibility in case of breach.[47] As the CA correctly found, the prestation secured by those
clauses was the parties' mutual obligation to observe the fixed term of the lease. For this reason, We sustain
the lower courts' finding that the forfeiture clause in paragraph 24 is a penal clause, even if it is not
expressly labelled as such.
A reduction of the penalty agreed upon by the parties is warranted under Article 1129 of the Civil Code.
We have no reason to doubt that the forfeiture provisions of the Contract were deliberately and
intelligently crafted. Under Article 1196 of the Civil Code,[48] the period of the lease contract is deemed to
have been set for the benefit of both parties. Its continuance, effectivity or fulfillment cannot be made to
depend exclusively upon the free and uncontrolled choice of just one party.[49] Petitioners and respondent
freely and knowingly committed themselves to respecting the lease period, such that a breach by either
party would result in the forfeiture of the remaining advance rentals in favor of the aggrieved party.
If this were an ordinary contest of rights of private contracting parties, respondent lessee would be
obligated to abide by its commitment to petitioners. The general rule is that courts have no power to ease
the burden of obligations voluntarily assumed by parties, just because things did not turn out as expected at
the inception of the contract.[50]
It must be noted, however, that this case was initiated by the PDIC in furtherance of its statutory role as the
fiduciary of Prime Savings Bank.[51] As the state-appointed receiver and liquidator, the PDIC is mandated
to recover and conserve the assets of the foreclosed bank on behalf of the latter's depositors and
creditors.[52] In other words, at stake in this case are not just the rights of petitioners and the correlative
liabilities of respondent lessee. Over and above those rights and liabilities is the interest of innocent debtors
and creditors of a delinquent bank establishment. These overriding considerations justify the 50%
reduction of the penalty agreed upon by petitioners and respondent lessee in keeping with Article 1229 of
the Civil Code, which provides:

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable.
The reasonableness of a penalty depends on the circumstances in each case, because what is iniquitous and
unconscionable in one may be totally just and equitable in another.[53] In resolving this issue, courts may
consider factors including but not limited to the type, extent and purpose of the penalty; the nature of the
obligation; the mode of the breach and its consequences; the supervening realities; and the standing and
relationship of the parties.[54]

Under the circumstances, it is neither fair nor reasonable to deprive depositors and creditors of what could
be their last chance to recoup whatever bank assets or receivables the PDIC can still legally recover.
Besides, nothing has prevented petitioners from putting their building to other profitable uses, since
respondent surrendered the premises immediately after the closure of its business. Strict adherence to the
doctrine of freedom of contracts, at the expense of the rights of innocent creditors and investors, will only
work injustice rather than promote justice in this case.[55] Such adherence may even be misconstrued as
condoning profligate bank operations. We cannot allow this to happen. We are a Court of both law and
equity; We cannot sanction grossly unfair results without doing violence to Our solemn obligation to
administer justice fairly and equally to all who might be affected by our decisions. [56]

Neither do We find any error in the trial court's denial of the damages and attorney's fees claimed by
petitioners. No proof of the supposed expenses they have incurred for the improvement of the leased
premises and the payment of respondent's unpaid utility bills can be found in the records. Actual and
compensatory damages must be duly proven with a reasonable degree of certainty. [57]

To recover moral and exemplary damages where there is a breach of contract, the breach must be palpably
wanton, reckless, malicious, in bad faith, oppressive, or abusive. Attorney's fees are not awarded even if a
claimant is compelled to litigate or to incur expenses where no sufficient showing of bad faith
exists.[58] None of these circumstances have been shown in this case.

Finally, in line with prevailing jurisprudence,[59] legal interest at the rate of 6% per annum is imposed on
the monetary award computed from the finality of this Decision until full payment.

WHEREFORE, premises considered, the Petition for Review on Certiorari is DENIED. The Court of
Appeals Decision dated 29 November 2007 and its Resolution dated 10 July 2008 in CA-G.R. CV No.
75349 are hereby MODIFIED in that legal interest at the rate of 6% per annum is imposed on the
monetary award computed from the finality of this Decision until full payment.

No costs.

SO ORDERED.