G.R. No.

L-10134 June 29, 1957
SABINA EXCONDE, plaintiff-appellant,
vs.
DELFIN CAPUNO and DANTE CAPUNO, defendants-appellees.
Magno T. Bueser for appellant.
Alver Law Offices and Edon B. Brion and Vencedor A. Alimario for appellees.
BAUTISTA ANGELO, J.:
Dante Capuno, son of Delfin Capuno, was accused of double homicide through reckless imprudence for
the death of Isidoro Caperina and Amado Ticzon on March 31, 1949 in the Court of First Instance of
Laguna (Criminal Case No. 15001). During the trial, Sabina Exconde, as mother of the deceased Isidoro
Caperina, reserved her right to bring a separate civil action for damages against the accused. After trial,
Dante Capuno was found guilty of the crime charged and, on appeal, the Court Appeals affirmed the
decision. Dante Capuno was only (15) years old when he committed the crime.
In line with her reservation, Sabina Exconde filed the present action against Delfin Capuno and his son
Dante Capuno asking for damages in the aggregate amount of P2,959.00 for the death of her son Isidoro
Caperiña. Defendants set up the defense that if any one should be held liable for the death of Isidoro
Caperina, he is Dante Capuno and not his father Delfin because at the time of the accident, the former
was not under the control, supervision and custody, of the latter. This defense was sustained by the
lower court and, as a consequence it only convicted Dante Capuno to pay the damages claimed in the
complaint. From decision, plaintiff appealed to the Court of Appeals but the case was certified to us on
the ground that the appeal only involves questions of law.
It appears that Dante Capuno was a member of the Boy Scouts Organization and a student of the
Bilintawak Elementary School situated in a barrio in the City of San Pablo and on March 31, 1949 he
attended a parade in honor of Dr. Jose Rizal in said city upon instruction of the city school's supervisor.
From the school Dante, with other students, boarded a jeep and when the same started to run, he took
hold of the wheel and drove it while the driver sat on his left side. They have not gone far when the jeep
turned turtle and two of its passengers, Amado Ticzon and Isidore Caperiña, died as a consequence. It
further appears that Delfin Capuno, father of Dante, was not with his son at the time of the accident, nor
did he know that his son was going to attend a parade. He only came to know it when his son told him
after the accident that he attended the parade upon instruction of his teacher.
The only issue involved in this appeal is whether defendant Delfin Capuno can be held civilly liable,
jointly and severally with his son Dante, for damages resulting from the death of Isidoro Caperiña caused
by the negligent act of minor Dante Capuno.
The father, and, in case of his death or incapacity, the mother, are liable for any damages
caused by the minor children who live with them.
xxx xxx xxx
Finally, teachers or directors of arts and trades are liable for any damages caused by their
pupils or apprentices while they are under their custody.
Plaintiff contends that defendant Delfin Capuno is liable for the damages in question jointly and severally
with his son Dante because at the time the latter committed the negligent act which resulted in the death
of the victim, he was a minor and was then living with his father, and inasmuch as these facts are not
disputed, the civil liability of the father is evident. And so, plaintiff contends, the lower court erred in
relieving the father from liability.
We find merit in this claim. It is true that under the law above quoted, "teachers or directors of arts and
trades are liable for any damages caused by their pupils or apprentices while they are under their
custody", but this provision only applies to an institution of arts and trades and not to any academic
educational institution (Padilla, Civil Law, 1953, Ed., Vol. IV, p. 841; See 12 Manresa, 4th Ed., p. 557).
Here Dante capuno was then a student of the Balintawak Elementary School and as part of his extra-
curricular activity, he attended the parade in honor of Dr. Jose Rizal upon instruction of the city school's
supervisor. And it was in connection with that parade that Dante boarded a jeep with some companions
and while driving it, the accident occurred. In the circumstances, it is clear that neither the head of that
school, nor the city school's supervisor, could be held liable for the negligent act of Dante because he was
not then a student of an institute of arts and trades as provided by law.
The civil liability which the law impose upon the father, and, in case of his death or incapacity, the
mother, for any damages that may be caused by the minor children who live with them, is obvious. This
is necessary consequence of the parental authority they exercise over them which imposes upon the
parents the "duty of supporting them, keeping them in their company, educating them and instructing
them in proportion to their means", while, on the other hand, gives them the "right to correct and punish
them in moderation" (Articles 154 and 155, Spanish Civil Code). The only way by which they can relieve
themselves of this liability is if they prove that they exercised all the diligence of a good father of a family
to prevent the damage(Article 1903, last paragraph, Spanish Civil Code). This defendants failed to prove.
WHEREFORE, the decision appealed from is modified in the sense that defendants Delfin Capuno and
Dante Capuno shall pay to plaintiff, jointly and severally, the sum of P2,959.00 as damages, and the
costs of action.
Bengzon, Montemayor, Labrador and Endencia, JJ., concur.
Paras, C.J., concurs in the result.

The case comes under Article 1903 of the Spanish Civil Code, paragraph 1 and 5, which provides:

ART. 1903. The obligation impossed by the next preceding articles is enforceable not only for
personal acts and omissions, but also for those of persons for whom another is responsible.
G.R. No. L-14342 May 30, 1960
CIRIACO L. MERCADO, petitioner,
vs.
THE COURT OF APPEALS, MANUEL QUISUMBING, JR., ET AL., respondents.
Abad Santos and Pablo for petitioner.
Sycip, Quisumbing, Salazar and Associates for respondents.
LABRADOR, J.:
This is a petition to review a decision of the Court of Appeals, which condemned petitioner to pay P2,000
as moral damages and P50 for medical expenses, for a physical injury caused by the son of petitioner,
Augusto Mercado, on a classmate, Manuel Quisumbing, Jr., both pupils of the Lourdes Catholic School,
Kanlaon, Quezon City. The case had originated in the Court of First Instance of Manila, Hon. Bienvenido
A. Tan, presiding, which dismissed the complaint filed by Manuel Quisumbing, Jr. and his father against
petitioner, father of the above-mentioned Mercado. The facts found by the Court of Appeals are as
follows:
Plaintiff-appellant Manuel Quisumbing, Jr. is the son of his co-plaintiff-appellants Ana Pineda
and Manuel L. Quisumbing, while Augusto Mercado is the son of defendant-appellee Ciriaco L.
Mercado, Manuel Quisumbing, Jr. and Augusto Mercado were classmates in the Lourdes
Catholic School on Kanlaon, Quezon City. A "pitogo", which figures prominently in this case,
may be described as an empty nutshell used by children as a piggy bank. On February 22,
1956, Augusto Mercado and Manuel Quisumbing, Jr. quarrelled over a "pitogo". As a result,
Augusto wounded Manuel, Jr. on the right cheek with a piece of razor.
xxx xxx xxx
The facts of record clearly show that it was Augusto Mercado who started the aggression.
Undeniably, the "pitogo" belonged to Augusto Mercado but he lent it to Benedicto P. Lim and in
turn Benedicto lent it to Renato Legaspi. Renato was not aware that the "pitogo" belonged to
Augusto, because right after Benedicto gave it to him, Benedicto ran away to get a basket ball
with which they could play. Manuel Quisumbing, Jr. was likewise unaware that the "pitogo"
belonged to Augusto. He thought it was the "pitogo" of Benedicto P. Lim, so that when Augusto
attempted to get the "pitogo" from Renato, Manuel, Jr. told him not to do so because Renato was
better at putting the chain into the holes of the "pitogo". However, Augusto resented Manuel,
Jr.'s remark and he aggresively pushed the latter. The fight started then. After Augusto gave
successive blows to Manuel, Jr., and the latter was clutching his stomach which bore the brunt
of Augusto's anger, Augusto seeing that Manuel, Jr. was in a helpless position, cut him on the
right check with a piece of razor.
xxx xxx xxx
Although the doctor who treated Manuel Quisumbing, Jr., Antonio B. Past, testified for
plaintiffs-appellants, he did not declare as to the amount of fees he collected from plaintiff-
appellants for the treatment of Manuel, Jr. the child was not even hospitalized for the wound.
We believe that the sum of P50.00 is a fair approximation of the medical expenses incurred by
plaintiffs-appellants.
xxx xxx xxx
The damages specified in paragraphs C and D of the aforequoted portion of plaintiffs-appellant's
complaint come under the class of moral damages. The evidence of record shows that the child
suffered moral damages by reason of the wound inflicted by Augusto Mercado. Though such
kind of damages cannot be fully appreciated in terms of money, we believe that the sum of
P2,000.00 would fully compensate the child.
As second cause of action, plaintiffs-appellants pray for P5,000.00 covering the moral damages
they allegedly suffered due to their son's being wounded; and the sum of P3,000.00 as
attorney's fees. The facts of record do not warrant the granting of moral damages to plaintiffs-
appellants Manuel Quisumbing and Ana Pineda. "In law mental anguish is restricted, as a rule,
to such mental pain or suffering as arises from an injury or wrong to the person himself, as
distinguished from that form of mental suffering which is the accompaniment of sympathy or
sorrow for another's suffering of which arises from a contemplation of wrong committed on the
person of another. Pursuant to the rule stated, a husband or wife cannot recover for mental
suffering caused by his or her sympathy for the other's suffering. Nor can a parent recover for
mental distress and anxiety on account of physical injury sustained by a child or for anxiety for
the safety of his child placed in peril by the negligence of another." (15 Am. Jur. 597). Plaintiffs-
appellants are not entitled to attorney's fees, it not appearing that defendant-appellee had
wantonly disregarded their claim for damages.
In the first, second and third assignments of error, counsel for petitioner argues that since the incident of
the inflicting of the wound on respondent occurred in a Catholic School (during recess time), through no
fault of the father, petitioner herein, the teacher or head of the school should be held responsible instead
of the latter. This precise question was brought before this Court in Exconde vs. Capuno and Capuno, 101
Phil., 843, but we held, through Mr. Justice Bautista:
We find merit in this claim. It is true that under the law above-quoted, "teachers or directors of
arts and trades are liable for any damage caused by their pupils or apprentices while they are
under their custody", but this provision only applies to an institution of arts and trades and not
to any academic educational institution (Padilla, Civil Law, 1953 Ed., Vol. IV, p. 841; See 12
Manresa, 4th Ed., p. 557)
The last paragraph of Article 2180 of the Civil Code, upon which petitioner rests his claim that the school
where his son was studying should be made liable, is as follows:
ART. 2180. . . .
 Lastly, teachers or heads of establishments of arts and trades shall be liable for damages After considering all the facts as found by the Court of Appeals, we find that none of the cases mentioned
caused by their pupils and students or apprentices, so long as they remain in their custody. in Article 2219 of the Civil Code, which authorizes the grant of moral damages, was shown to have
existed. Consequently, the grant of moral damages is not justified.
It would be seem that the clause "so long as they remain in their custody," contemplates a situation
where the pupil lives and boards with the teacher, such that the control, direction and influence on the For the foregoing considerations, the decision appealed from is hereby reversed and the petitioner is
pupil supersedes those of the parents. In these circumstances the control or influence over the conduct declared exempt or free from the payment of moral damages. The award of P50 for medical expenses,
and actions of the pupil would pass from the father and mother to the teacher; and so would the however, is hereby affirmed. Without costs.
responsibility for the torts of the pupil. Such a situation does not appear in the case at bar; the pupils
appear to go to school during school hours and go back to their homes with their parents after school is
Paras, C.J., Bengzon, Montemayor, Barrera, and Gutierrez David, JJ., concur.
over. The situation contemplated in the last paragraph of Article 2180 does not apply, nor does
Bautista Angelo and Concepcion, JJ., concur in the result.
paragraph 2 of said article, which makes father or mother responsible for the damages caused by their
minor children. The claim of petitioner that responsibility should pass to the school must, therefore, be
held to be without merit.

We next come to the claim of petitioner that the moral damages fixed at P2,000 are excessive. We note
that the wound caused to respondent was inflicted in the course of an ordinary or common fight between
boys in a grade school. The Court of Appeals fixed the medical expenses incurred in treating and curing
the wound at P50. Said court stated that the wound did not even require hospitalization. Neither was
Mercado found guilty of any offense nor the scar in Quisumbing's face pronounced to have caused a
deformity, unlike the case of Araneta, et al. vs. Arreglado, et al., 104 Phil., 529; 55 Off. Gaz. (9) 1561.
Petitioner's counsel argues that if death call for P3,000 to P6,000, certainly the incised wound could
cause mental pain and suffering to the tune of P2,000.

In the decision of the Court of Appeals, said court pronounces that the child Quisumbing suffered moral
damages "by reason of the wound inflicted by Augusto Mercado." While moral damages included physical
suffering, which must have been caused to the wounded boy Quisumbing (Art. 2217, Civil Code), the
decision of the court below does not declare that any of the cases specified in Article 2219 of the Civil
Code in which moral damages may be recovered, has attended or occasioned the physical injury. The
only possible circumstance in the case at bar in which moral damages are recoverable would be if a
criminal offense or a quasi-delict has been committed.

It does not appear that a criminal action for physical injuries was ever presented. The offender, Augusto
Mercado, was nine years old and it does not appear that he had acted with discernment when he inflicted
the physical injuries on Manuel Quisumbing, Jr.

It is possible that the Court of Appeals may have considered Augusto Mercado responsible for or guilty, of
a quasi-delict causing physical injuries, within the meaning of paragraph 2 of Article 2219. Even if we
assume that said court considered Mercado guilty of a quasi-delict when it imposed the moral damages,
yet the facts found by said court indicate that Augusto's resentment, which motivated the assault, was
occasioned by the fact that Manuel, Jr. had tried to intervene in or interfere with the attempt of Mercado
to get "his pitogo from Renato." This is, according to the decision appealed from, the reason why Mercado
was incensed and pushed Quisumbing who, in turn, also pushed Mercado. It is, therefore, apparent that
the proximate cause of the injury caused to Quisumbing was Quisumbing's own fault or negligence for
having interfered with Mercado while trying to get the pitogo from another boy. (Art. 2179, Civil Code.)
G.R. No. L-29025 October 4, 1971
Spouses MOISES P. PALISOC and BRIGIDA P. PALISOC, plaintiffs-appellants,
vs.
ANTONIO C. BRILLANTES and TEODOSIO V. VALENTON, owner and President, respectively, of a
school of arts and trades, known under the name and style of "Manila Technical Institute" (M.I.T.),
VIRGILIO L. DAFFON and SANTIAGO M. QUIBULUE, defendants-appellees.
Leovillo C. Agustin for plaintiffs-appellants. .
Honorato S. Reyes for appellee Brillantes, et al. .
Villareal, Almacen Navarra & Amores for appellee Daffon. .
TEEHANKEE, J.:
An appeal in forma pauperis on pure questions of law from a decision of the Court of First Instance of
Manila. .
Plaintiffs-appellants as parents of their sixteen-year old son, Dominador Palisoc, and a student in
automotive mechanics at the Manila Technical Institute, Quezon Boulevard, Manila, had filed on May 19,
1966, the action below for damages arising from the death on March 10, 1966 of their son at the hands
of a fellow student, defendant Virgilio L. Daffon, at the laboratory room of the said Institute. .
Defendants, per the trial court's decision, are: "(T)he defendant Antonio C. Brillantes, at the time when
the incident which gave rise to his action occurred was a member of the Board of Directors of the
institute;1 the defendant Teodosio Valenton, the president thereof; the defendant Santiago M. Quibulue,
instructor of the class to which the deceased belonged; and the defendant Virgilio L. Daffon, a fellow
student of the deceased. At the beginning the Manila Technical Institute was a single proprietorship, but
lately on August 2, 1962, it was duly incorporated."
The facts that led to the tragic death of plaintiffs' son were thus narrated by the trial court: "(T)he
deceased Dominador Palisoc and the defendant Virgilio L. Daffon were classmates, and on the afternoon
of March 10, 1966, between two and three o'clock, they, together with another classmate Desiderio Cruz
were in the laboratory room located on the ground floor. At that time the classes were in recess. Desiderio
Cruz and Virgilio L. Daffon were working on a machine while Dominador Palisoc was merely looking on at
them. Daffon made a remark to the effect that Palisoc was acting like a foreman. Because of this remark
Palisoc slapped slightly Daffon on the face. Daffon, in retaliation, gave Palisoc a strong flat blow on the
face, which was followed by other fist blows on the stomach. Palisoc retreated apparently to avoid the fist
blows, but Daffon followed him and both exchanged blows until Palisoc stumbled on an engine block
which caused him to fall face downward. Palisoc became pale and fainted. First aid was administered to
him but he was not revived, so he was immediately taken to a hospital. He never regained consciousness;
finally he died. The foregoing is the substance of the testimony of Desiderio Cruz, the lone witness to the
incident."
The trial court expressly gave credence to this version of the incident, as testified to by the lone
eyewitness, Desiderio Cruz, a classmate of the protagonists, as that of a disinterested witness who "has
no motive or reason to testify one way or another in favor of any party" and rejected the self-exculpatory
version of defendant Daffon denying that he had inflicted any fist blows on the deceased. .
With the postmortem findings of Dr. Angelo Singian of the Manila Police Department who performed the
autopsy re "Cause of death: shock due to traumatic fracture of theribs (6th and 7th, left, contusion of the
pancreas and stomach with intra-gastric hemorrhage and slight subarachnoid hemorrhage on the brain,"
and his testimony that these internal injuries of the deceased were caused "probably by strong fist
blows," the trial court found defendant Daffon liable for the quasi delict under Article 2176 of the Civil
Code.3 It held that "(T)he act, therefore, of the accused Daffon in giving the deceased strong fistblows in
the stomach which ruptured his internal organs and caused his death falls within the purview of this
article of the Code."4
The trial court, however, absolved from liability the three other defendants-officials of the Manila
Technical Institute, in this wise:
... Their liabilities are based on the provisions of Article 2180 of the New Civil Code
which reads:
Art. 2180. ... .
Lastly, teachers or heads of establishments of arts and trades shall
be liable for damages caused by their pupils and students and
apprentices, so long as they remain in their custody.
In the opinion of the Court, this article of the Code is not applicable to the case at bar,
since this contemplates the situation where the control or influence of the teachers
and heads of school establishments over the conduct and actions by the pupil
supersedes those of the parents.
CIVIL LAW: DAMAGES ART 2180. NEW CIVIL CODE CONSTRUED:
— The clause "so long as they remain in their custody" contained in
Article 2180 of the new civil code contemplated a situation where the
pupil lives and boards with the teacher, such that the control or
influence on the pupil supersedes those of the parents. In those
circumstances the control or influence over the conduct and actions
of the pupil as well as the responsibilities for their sort would pass
from the father and mother to the teachers. (Ciriaco L. Mercado,
Petitioner vs. the Court of Appeals, Manuel Quisumbing, Jr., et al.,
respondents, G.R. No. L-14862, May 30, 1960).5
 There is no evidence that the accused Daffon lived and boarded with his teacher or the
other defendant officials of the school. These defendants cannot therefore be made
responsible for the tort of the defendant Daffon.
Judgment was therefore rendered by the trial court as follows:
1. Sentencing the defendant Virgilio L. Daffon to pay the plaintiffs as heirs of the
deceased Dominador Palisoc (a) P6,000.00 for the death of Dominador Palisoc; (b)
P3,375.00 for actual and compensatory expenses; (c) P5,000.00 for moral damages; (d)
P10,000.00 for loss of earning power, considering that the deceased was only between
sixteen and seventeen years, and in good health when he died, and (e) P2,000.00 for
attorney's fee, plus the costs of this action. .
2. Absolving the other defendants. .
3. Dismissing the defendants' counterclaim for lack of merit.
Plaintiffs' appeal raises the principal legal question that under the factual findings of the trial court,
which are now beyond review, the trial court erred in absolving the defendants-school officials instead of
holding them jointly and severally liable as tortfeasors, with defendant Daffon, for the damages awarded
them as a result of their son's death. The Court finds the appeal, in the main, to be meritorious. .
1. The lower court absolved defendants-school officials on the ground that the provisions of Article 2180,
Civil Code, which expressly hold "teachers or heads of establishments of arts and trades ... liable for
damages caused by their pupils and students and apprentices, so long as they remain in their custody,"
are not applicable to to the case at bar, since "there is no evidence that the accused Daffon [who inflicted
the fatal fistblows]6 lived and boarded with his teacher or the other defendants-officials of the school.
These defendants cannot therefore be made responsible for the tort of the defendant Daffon."
The lower court based its legal conclusion expressly on the Court's dictum in Mercado vs. Court of
Appeals,7 that "(I)t would seem that the clause "so long as they remain in their custody," contemplates a
situation where the pupil lives and boards with the teacher, such that the control, direction and
influence on the pupil supersedes those of the parents. In these circumstances the control or influence
over the conduct and actions of the pupil would pass from the father and mother to the teacher; and so
would the responsibility for the torts of the pupil. Such a situation does not appear in the case at bar; the
pupils appear to go to school during school hours and go back to their homes with their parents after
school is over." This dictum had been made in rejecting therein petitioner father's contention that his
minor son's school, Lourdes Catholic School at Kanlaon, Quezon City [which was not a party to the case]
should be held responsible, rather than him as father, for the moral damages of P2,000.00 adjudged
against him for the physical injury inflicted by his son on a classmate. [A cut on the right cheek with a
piece of razor which costs only P50.00 by way of medical expenses to treat and cure, since the wound left
no scar.] The moral damages award was after all set aside by the Court on the ground that none of the
specific cases provided in Article 2219, Civil Code, for awarding moral damages had been established,
petitioner's son being only nine years old and not having been shown to have "acted with discernment" in
inflicting the injuries on his classmate. .
The dictum in Mercado was based in turn on another dictum in the earlier case of Exconde vs.
Capuno,8 where the only issue involved as expressly stated in the decision, was whether the therein
defendant-father could be civilly liable for damages resulting from a death caused in a motor vehicle
accident driven unauthorizedly and negligently by his minor son, (which issue was resolved adversely
against the father). Nevertheless, the dictum in such earlier case that "It is true that under the law
abovequoted, teachers or directors of arts and trades are liable for any damage caused by their pupils or
apprentices while they are under their custody, but this provision only applies to an institution of arts
and trades and not to any academic educational institution" was expressly cited and quoted in Mercado. .
2. The case at bar was instituted directly against the school officials and squarely raises the issue of
liability of teachers and heads of schools under Article 2180, Civil Code, for damages caused by their
pupils and students against fellow students on the school premises. Here, the parents of the student at
fault, defendant Daffon, are not involved, since Daffon was already of age at the time of the tragic
incident. There is no question, either, that the school involved is a non-academic school,9 the Manila
Technical Institute being admittedly a technical vocational and industrial school. .
The Court holds that under the cited codal article, defendants head and teacher of the Manila Technical
Institute (defendants Valenton and Quibulue, respectively) are liable jointly and severally for damages to
plaintiffs-appellants for the death of the latter's minor son at the hands of defendant Daffon at the
school's laboratory room. No liability attaches to defendant Brillantes as a mere member of the school's
board of directors. The school itself cannot be held similarly liable, since it has not been properly
impleaded as party defendant. While plaintiffs sought to so implead it, by impleading improperly
defendant Brillantes, its former single proprietor, the lower court found that it had been incorporated
since August 2, 1962, and therefore the school itself, as thus incorporated, should have been brought in
as party defendant. Plaintiffs failed to do so, notwithstanding that Brillantes and his co-defendants in
their reply to plaintiffs' request for admission had expressly manifested and made of record that
"defendant Antonio C. Brillantes is not the registered owner/head of the "Manila Technical Institute"
which is now a corporation and is not owned by any individual person."10
3. The rationale of such liability of school heads and teachers for the tortious acts of their pupils and
students, so long as they remain in their custody, is that they stand, to a certain extent, as to their
pupils and students, in loco parentis and are called upon to "exercise reasonable supervision over the
conduct of the child."11 This is expressly provided for in Articles 349, 350 and 352 of the Civil Code.12 In
the law of torts, the governing principle is that the protective custody of the school heads and teachers is
mandatorily substituted for that of the parents, and hence, it becomes their obligation as well as that of
the school itself to provide proper supervision of the students' activities during the whole time that they
are at attendance in the school, including recess time, as well as to take the necessary precautions to
protect the students in their custody from dangers and hazards that would reasonably be anticipated,
including injuries that some student themselves may inflict willfully or through negligence on their fellow
students. .
4. As tersely summarized by Mr. Justice J.B.L. Reyes in his dissenting opinion in Exconde, "the basis of
the presumption of negligence of Art. 1903 [now 2180] is some culpa in vigilando that the parents,
teachers, etc. are supposed to have incurred in the exercise of their authority" 13 and "where the parent
places the child under the effective authority of the teacher, the latter, and not the parent, should be the
one answerable for the torts committed while under his custody, for the very reason that the parent is
not supposed to interfere with the discipline of the school nor with the authority and supervision of the
teacher while the child is under instruction." The school itself, likewise, has to respond for the fault or 1. Sentencing the defendants Virgilio L. Daffon, TeodosioV. Valenton and Santiago M. Quibulue jointly and
negligence of its school head and teachers under the same cited article.14 severallyto pay plaintiffs as heirs of the deceased Dominador Palisoc (a) P12,000.00 for the death of
Dominador Palisoc; (b) P3,375.00 for actual and compensatory expenses; (c) P5,000.00 for moral,
damages; (d) P10,000.00 for loss of earning power and (e) P2,000.00 for attorney's fee, plus the costs of
5. The lower court therefore erred in law in absolving defendants-school officials on the ground that they
this action in both instances; 2. absolving defendant Antonio C. Brillantes from the complaint; and 3.
could be held liable under Article 2180, Civil Code, only if the student who inflicted the fatal fistblows on
dismissing defendants' counterclaims. .
his classmate and victim "lived and boarded with his teacher or the other defendants officials of the
school." As stated above, the phrase used in the cited article — "so long as (the students) remain in their
custody" means the protective and supervisory custody that the school and its heads and teachers Concepcion, C.J., Villamor and Makasiar, JJ., concur. .
exercise over the pupils and students for as long as they are at attendance in the school, including recess
time. There is nothing in the law that requires that for such liability to attach the pupil or student who
Dizon, J., took no part. .
commits the tortious act must live and board in the school, as erroneously held by the lower court, and
the dicta in Mercado (as well as in Exconde) on which it relied, must now be deemed to have been set
aside by the present decision. . REYES, J.B.L., J., concurring: .

6. Defendants Valenton and Quibulue as president and teacher-in-charge of the school must therefore be I concur with the opinion of Mr. Justice Teehankee but would like to clarify that the argument of the
held jointly and severally liable for the quasi-delict of their co-defendant Daffon in the latter's having dissenting opinion of the effect that the responsibility of teachers and school officers under Articles 2180
caused the death of his classmate, the deceased Dominador Palisoc. The unfortunate death resulting should be limited to pupils who are minors (below the age of majority) is not in accord with the plain text
from the fight between the protagonists-students could have been avoided, had said defendants but of the law. Article 2180 of the Civil Code of the Philippines is to the following effect: .
complied with their duty of providing adequate supervision over the activities of the students in the
school premises to protect their students from harm, whether at the hands of fellow students or other
The obligation imposed by article 2176 is demandable not only for one's own acts or
parties. At any rate, the law holds them liable unless they relieve themselves of such liability, in
omissions, but also for those of persons for whom one is responsible. .
compliance with the last paragraph of Article 2180, Civil Code, by "(proving) that they observed all the
diligence of a good father of a family to prevent damage." In the light of the factual findings of the lower
court's decision, said defendants failed to prove such exemption from liability. . The father and, in case of his death or incapacity, the mother, are responsible for the
damages caused by the minor children who live in their company. .
7. Plaintiffs-appellees' contention that the award of P6,000.00 as indemnity for the death of their son
should be increased to P12,000.00 as set by the Court in People vs. Pantoja,15 and observed in all death Guardians are liable for damages caused by the minors or incapacitated persons who
indemnity cases thereafter is well taken. The Court, in Pantoja, after noting the decline in the purchasing are under their authority and live in their company. .
power of the Philippine peso, had expressed its "considered opinion that the amount of award of
compensatory damages for death caused by a crime or quasi-delict should now be P12,000.00." The
The owners and managers of an establishment or enterprise are likewise responsible
Court thereby adjusted the minimum amount of "compensatory damages for death caused by a crime
for damages caused by their employees in the service of the branches in which the
or quasi-delict" as per Article 2206, Civil Code, from the old stated minimum of P3,000.00 to P12,000.00,
latter are employed or on the occasion of their functions. .
which amount is to be awarded "even though there may have been mitigating circumstances" pursuant to
the express provisions of said codal article. .
Employers shall be liable for the damages caused by their employees and household
helpers acting within the scope of their assigned tasks, even though the former are not
8. Plaintiffs-appellees' other claims on appeal that the lower court should have awarded exemplary
engaged in any business or industry. .
damages and imposed legal interest on the total damages awarded, besides increasing the award of
attorney's fees all concern matters that are left by law to the discretion of the trial court and the Court
has not been shown any error or abuse in the exercise of such discretion on the part of the trial The State is responsible in like manner when it acts through a special agent; but not
court.16 Decisive here is the touchstone provision of Article 2231, Civil Code, that "In quasi-delicts, when the damage has been caused by the official to whom the task done properly
exemplary damages may be granted if the defendant acted with gross negligence." No gross negligence on pertains, in which case what is provided in article 2176 shall be applicable. .
the part of defendants was found by the trial court to warrant the imposition of exemplary damages, as
well as of interest and increased attorney's fees, and the Court has not been shown in this appeal any
Lastly, teachers or heads of establishments of arts and trades shall be liable for
compelling reason to disturb such finding. .
damages caused by their pupils and students or apprentices, so long as they remain in
their custody.
ACCORDINGLY, the judgment appealed from is modified so as to provide as follows: .
 The responsibility treated of in this article shall cease when the persons herein and attending a school, places himself under the custodial supervision and disciplinary authority of the
mentioned prove that they observe all the diligence of a good father of a family to school authorities, which is the basis of the latter's correlative responsibility for his torts, committed
prevent damages. while under such authority. Of course, the teachers' control is not as plenary as when the student is a
minor; but that circumstance can only affect the decree of the responsibility but cannot negate the
existence thereof. It is only a factor to be appreciated in determining whether or not the defendant has
Examination of the article shows that where the responsibility prescribed therein is limited to illegal acts
exercised due diligence in endeavoring to prevent the injury, as prescribed in the last paragraph of Article
during minority, the article expressly so provides, as in the case of the parents and of the guardians. It is
2180. .
natural to expect that if the law had intended to similarly restrict the civil responsibility of the other
categories of persons enumerated in the article, it would have expressly so stated. The fact that it has not
done so indicates an intent that the liability be not restricted to the case of persons under age. Further, it Barredo, J., concurs.
is not without significance that the teachers and heads of scholarly establishments are not grouped with
parents and guardians but ranged with owners and managers of enterprises, employers and the state, as
to whom no reason is discernible to imply that they should answer only for minors. .

Giorgi, in his well-known "Teoria de las Obligaciones en el Derecho Moderno", Volume 5, page 404, No.
272 (Sp. Ed.), after noting the split among commentators on the point it issue, observes with
considerable cogency that —

272. Ante esta variedad de opiniones, ninguna de las cuales se funds en argumentos
merecedores de seria ponderacion, no es facil tomar un partido. Esto no obstante,
debiendo manisfestar nuestra opinion, nos acercamos a la de los que no estiman
necesaria la menor edad del discipulo o del aprendiz; porque si el aforismo ubi voluit
dixit, ubi noluit tacuit, no es siempre argumento seguro para interpreter la ley, es
infalible cuanto se refiere a una misma disposicion relative a varios casos. Y tal es el
art. 1.153. Lo que haya establecido important poco si, elevandones a los principios de
razon, puede dudarse de la oportunidad de semajante diferencia; porque la voluntad
cierta del legislador prevalece in iure condito a cualquier otra consideracion. Por otra
parte, si bien se considera, no puede parecer extrano o absurdo el suponer que un
discipulo y un aprendiz, aunque mayores de edad, acepten voluntariamente la entera
vigilancia de su preceptor mientras dura la educacion. Ni parece dudoso desde el
momento que los artesanos y los preceptores deben, al par de los padres, responder
civilmente de los daños comitidos por sus discipulos, aun cuando estos esten faltos de
discernimiento.

Similarly, Planiol-Ripert, in their "Droit Civil Pratique," Volume VI, No. 635 (Spanish version), say that —

635. Personas de quien responde. — Si bien la responsibilidad del maestro es

originalmente una estension de la de los padres (1), el art. 1384 no especifica que los
alumnos y aprendices han de ser menores de edad, por lo que la presuncion de culpa
funcionara aun cuando sean mayores (2); pero, la vigilancia no tendra que ser ejercida
en iguales terminos. Aun respecto a los menores variara segun la edad, extremo que
tendra que ternese en ceunta a los fines de apreciar si el maestro ha podido impedir el
acto nocivo o no. .

I submit, finally, that while in the case of parents and guardians, their authority and supervision over the
children and wards end by law upon the latter reaching majority age, the authority and custodial
supervision over pupils exist regardless of the age of the latter. A student over twenty-one, by enrolling
G.R. No. L-47745 April 15, 1988
JOSE S. AMADORA, LORETA A. AMADORA, JOSE A. AMADORA JR., NORMA A. YLAYA PANTALEON
A. AMADORA, JOSE A. AMADORA III, LUCY A. AMADORA, ROSALINDA A. AMADORA, PERFECTO
A. AMADORA, SERREC A. AMADORA, VICENTE A. AMADORA and MARIA TISCALINA A.
AMADORA, petitioners
vs.
HONORABLE COURT OF APPEALS, COLEGIO DE SAN JOSE-RECOLETOS, VICTOR LLUCH SERGIO
P. DLMASO JR., CELESTINO DICON, ANIANO ABELLANA, PABLITO DAFFON thru his parents and
natural guardians, MR. and MRS. NICANOR GUMBAN, and ROLANDO VALENCIA, thru his guardian,
A. FRANCISCO ALONSO, respondents.
Jose S. Amadora & Associates for petitioners.
Padilla Law Office for respondents.
CRUZ, J.:
Like any prospective graduate, Alfredo Amadora was looking forward to the commencement exercises
where he would ascend the stage and in the presence of his relatives and friends receive his high school
diploma. These ceremonies were scheduled on April 16, 1972. As it turned out, though, fate would
intervene and deny him that awaited experience. On April 13, 1972, while they were in the auditorium of
their school, the Colegio de San Jose-Recoletos, a classmate, Pablito Damon, fired a gun that mortally hit
Alfredo, ending all his expectations and his life as well. The victim was only seventeen years old. 1
Daffon was convicted of homicide thru reckless imprudence . 2 Additionally, the herein petitioners, as the
victim's parents, filed a civil action for damages under Article 2180 of the Civil Code against the Colegio
de San Jose-Recoletos, its rector the high school principal, the dean of boys, and the physics teacher,
together with Daffon and two other students, through their respective parents. The complaint against the
students was later dropped. After trial, the Court of First Instance of Cebu held the remaining defendants
liable to the plaintiffs in the sum of P294,984.00, representing death compensation, loss of earning
capacity, costs of litigation, funeral expenses, moral damages, exemplary damages, and attorney's fees
.3 On appeal to the respondent court, however, the decision was reversed and all the defendants were
completely absolved .4
In its decision, which is now the subject of this petition for certiorari under Rule 45 of the Rules of Court,
the respondent court found that Article 2180 was not applicable as the Colegio de San Jose-Recoletos
was not a school of arts and trades but an academic institution of learning. It also held that the students
were not in the custody of the school at the time of the incident as the semester had already ended, that
there was no clear identification of the fatal gun and that in any event the defendant, had exercised the
necessary diligence in preventing the injury. 5
The basic undisputed facts are that Alfredo Amadora went to the San Jose-Recoletos on April 13, 1972,
and while in its auditorium was shot to death by Pablito Daffon, a classmate. On the implications and
consequences of these facts, the parties sharply disagree.
The petitioners contend that their son was in the school to show his physics experiment as a prerequisite
to his graduation; hence, he was then under the custody of the private respondents. The private
respondents submit that Alfredo Amadora had gone to the school only for the purpose of submitting his
physics report and that he was no longer in their custody because the semester had already ended.
There is also the question of the identity of the gun used which the petitioners consider important
because of an earlier incident which they claim underscores the negligence of the school and at least one
of the private respondents. It is not denied by the respondents that on April 7, 1972, Sergio Damaso, Jr.,
the dean of boys, confiscated from Jose Gumban an unlicensed pistol but later returned it to him without
making a report to the principal or taking any further action .6 As Gumban was one of the companions of
Daffon when the latter fired the gun that killed Alfredo, the petitioners contend that this was the same
pistol that had been confiscated from Gumban and that their son would not have been killed if it had not
been returned by Damaso. The respondents say, however, that there is no proof that the gun was the
same firearm that killed Alfredo.
Resolution of all these disagreements will depend on the interpretation of Article 2180 which, as it
happens, is invoked by both parties in support of their conflicting positions. The pertinent part of this
article reads as follows:
Lastly, teachers or heads of establishments of arts and trades shall be liable for
damages caused by their pupils and students or apprentices so long as they remain in
their custody.
Three cases have so far been decided by the Court in connection with the above-quoted provision, to wit:
Exconde v. Capuno 7 Mercado v. Court of Appeals, 8 and Palisoc v. Brillantes. 9 These will be briefly
reviewed in this opinion for a better resolution of the case at bar.
In the Exconde Case, Dante Capuno, a student of the Balintawak Elementary School and a Boy Scout,
attended a Rizal Day parade on instructions of the city school supervisor. After the parade, the boy
boarded a jeep, took over its wheel and drove it so recklessly that it turned turtle, resulting in the death
of two of its passengers. Dante was found guilty of double homicide with reckless imprudence. In the
separate civil action flied against them, his father was held solidarily liable with him in damages under
Article 1903 (now Article 2180) of the Civil Code for the tort committed by the 15-year old boy.
This decision, which was penned by Justice Bautista Angelo on June 29,1957, exculpated the school in
an obiter dictum (as it was not a party to the case) on the ground that it was riot a school of arts and
trades. Justice J.B.L. Reyes, with whom Justices Sabino Padilla and Alex Reyes concurred, dissented,
arguing that it was the school authorities who should be held liable Liability under this rule, he said, was
imposed on (1) teachers in general; and (2) heads of schools of arts and trades in particular. The
modifying clause "of establishments of arts and trades" should apply only to "heads" and not "teachers."
Exconde was reiterated in the Mercado Case, and with an elaboration. A student cut a classmate with a
razor blade during recess time at the Lourdes Catholic School in Quezon City, and the parents of the
victim sued the culprits parents for damages. Through Justice Labrador, the Court declared in another
obiter (as the school itself had also not been sued that the school was not liable because it was not an
establishment of arts and trades. Moreover, the custody requirement had not been proved as this
"contemplates a situation where the student lives and boards with the teacher, such that the control,
direction and influences on the pupil supersede those of the parents." Justice J.B.L. Reyes did not take
part but the other members of the court concurred in this decision promulgated on May 30, 1960.
In Palisoc vs. Brillantes, decided on October 4, 1971, a 16-year old student was killed by a classmate with
fist blows in the laboratory of the Manila Technical Institute. Although the wrongdoer — who was already
of age — was not boarding in the school, the head thereof and the teacher in charge were held solidarily
liable with him. The Court declared through Justice Teehankee:
The phrase used in the cited article — "so long as (the students) remain in their
custody" — means the protective and supervisory custody that the school and its
heads and teachers exercise over the pupils and students for as long as they are at
attendance in the school, including recess time. There is nothing in the law that
requires that for such liability to attach, the pupil or student who commits the tortious
act must live and board in the school, as erroneously held by the lower court, and
the dicta in Mercado (as well as in Exconde) on which it relied, must now be deemed to
have been set aside by the present decision.
This decision was concurred in by five other members, 10 including Justice J.B.L. Reyes, who stressed, in
answer to the dissenting opinion, that even students already of age were covered by the provision since
they were equally in the custody of the school and subject to its discipline. Dissenting with three
others,11 Justice Makalintal was for retaining the custody interpretation in Mercado and submitted that
the rule should apply only to torts committed by students not yet of age as the school would be acting
only in loco parentis.
In a footnote, Justice Teehankee said he agreed with Justice Reyes' dissent in the Exconde Case but
added that "since the school involved at bar is a non-academic school, the question as to the applicability
of the cited codal provision to academic institutions will have to await another case wherein it may
properly be raised."
This is the case.
Unlike in Exconde and Mercado, the Colegio de San Jose-Recoletos has been directly impleaded and is
sought to be held liable under Article 2180; and unlike in Palisoc, it is not a school of arts and trades but
an academic institution of learning. The parties herein have also directly raised the question of whether
or not Article 2180 covers even establishments which are technically not schools of arts and trades, and,
if so, when the offending student is supposed to be "in its custody."
After an exhaustive examination of the problem, the Court has come to the conclusion that the provision
in question should apply to all schools, academic as well as non-academic. Where the school is academic
rather than technical or vocational in nature, responsibility for the tort committed by the student will
attach to the teacher in charge of such student, following the first part of the provision. This is the
general rule. In the case of establishments of arts and trades, it is the head thereof, and only he, who
shall be held liable as an exception to the general rule. In other words, teachers in general shall be liable
for the acts of their students except where the school is technical in nature, in which case it is the head
thereof who shall be answerable. Following the canon of reddendo singula singulis"teachers" should apply
to the words "pupils and students" and "heads of establishments of arts and trades" to the word
"apprentices."
The Court thus conforms to the dissenting opinion expressed by Justice J.B.L. Reyes in Exconde where
he said in part:
I can see no sound reason for limiting Art. 1903 of the Old Civil Code to teachers of
arts and trades and not to academic ones. What substantial difference is there between
them insofar as concerns the proper supervision and vice over their pupils? It cannot
be seriously contended that an academic teacher is exempt from the duty of watching
that his pupils do not commit a tort to the detriment of third Persons, so long as they
are in a position to exercise authority and Supervision over the pupil. In my opinion, in
the phrase "teachers or heads of establishments of arts and trades" used in Art. 1903
of the old Civil Code, the words "arts and trades" does not qualify "teachers" but only
"heads of establishments." The phrase is only an updated version of the equivalent
terms "preceptores y artesanos" used in the Italian and French Civil Codes.
If, as conceded by all commentators, the basis of the presumption of negligence of Art.
1903 in some culpa in vigilando that the parents, teachers, etc. are supposed to have
incurred in the exercise of their authority, it would seem clear that where the parent
places the child under the effective authority of the teacher, the latter, and not the
parent, should be the one answerable for the torts committed while under his custody,
for the very reason/that the parent is not supposed to interfere with the discipline of
the school nor with the authority and supervision of the teacher while the child is
under instruction. And if there is no authority, there can be no responsibility.
There is really no substantial distinction between the academic and the non-academic schools insofar as
torts committed by their students are concerned. The same vigilance is expected from the teacher over
the students under his control and supervision, whatever the nature of the school where he is teaching.
The suggestion in the Exconde and Mercado Cases is that the provision would make the teacher or even
the head of the school of arts and trades liable for an injury caused by any student in its custody but if
that same tort were committed in an academic school, no liability would attach to the teacher or the
school head. All other circumstances being the same, the teacher or the head of the academic school
would be absolved whereas the teacher and the head of the non-academic school would be held liable,
and simply because the latter is a school of arts and trades.
The Court cannot see why different degrees of vigilance should be exercised by the school authorities on
the basis only of the nature of their respective schools. There does not seem to be any plausible reason
for relaxing that vigilance simply because the school is academic in nature and for increasing such
vigilance where the school is non-academic. Notably, the injury subject of liability is caused by the
student and not by the school itself nor is it a result of the operations of the school or its equipment. The
injury contemplated may be caused by any student regardless of the school where he is registered. The
teacher certainly should not be able to excuse himself by simply showing that he is teaching in an
academic school where, on the other hand, the head would be held liable if the school were non-
academic.
These questions, though, may be asked: If the teacher of the academic school is to be held answerable for
the torts committed by his students, why is it the head of the school only who is held liable where the
injury is caused in a school of arts and trades? And in the case of the academic or non- technical school,
why not apply the rule also to the head thereof instead of imposing the liability only on the teacher?
The reason for the disparity can be traced to the fact that historically the head of the school of arts and
trades exercised a closer tutelage over his pupils than the head of the academic school. The old schools of
arts and trades were engaged in the training of artisans apprenticed to their master who personally and
directly instructed them on the technique and secrets of their craft. The head of the school of arts and
trades was such a master and so was personally involved in the task of teaching his students, who
usually even boarded with him and so came under his constant control, supervision and influence. By
contrast, the head of the academic school was not as involved with his students and exercised only
administrative duties over the teachers who were the persons directly dealing with the students. The
head of the academic school had then (as now) only a vicarious relationship with the students.
Consequently, while he could not be directly faulted for the acts of the students, the head of the school of
arts and trades, because of his closer ties with them, could be so blamed.
It is conceded that the distinction no longer obtains at present in view of the expansion of the schools of
arts and trades, the consequent increase in their enrollment, and the corresponding diminution of the
direct and personal contract of their heads with the students. Article 2180, however, remains unchanged.
In its present state, the provision must be interpreted by the Court according to its clear and original
mandate until the legislature, taking into account the charges in the situation subject to be regulated,
sees fit to enact the necessary amendment.
The other matter to be resolved is the duration of the responsibility of the teacher or the head of the
school of arts and trades over the students. Is such responsibility co-extensive with the period when the
student is actually undergoing studies during the school term, as contended by the respondents and
impliedly admitted by the petitioners themselves?
From a reading of the provision under examination, it is clear that while the custody requirement, to
repeat Palisoc v. Brillantes, does not mean that the student must be boarding with the school authorities,
it does signify that the student should be within the control and under the influence of the school
authorities at the time of the occurrence of the injury. This does not necessarily mean that such, custody
be co-terminous with the semester, beginning with the start of classes and ending upon the close thereof,
and excluding the time before or after such period, such as the period of registration, and in the case of
graduating students, the period before the commencement exercises. In the view of the Court, the
student is in the custody of the school authorities as long as he is under the control and influence of the
school and within its premises, whether the semester has not yet begun or has already ended.
It is too tenuous to argue that the student comes under the discipline of the school only upon the start of
classes notwithstanding that before that day he has already registered and thus placed himself under its
rules. Neither should such discipline be deemed ended upon the last day of classes notwithstanding that
there may still be certain requisites to be satisfied for completion of the course, such as submission of
reports, term papers, clearances and the like. During such periods, the student is still subject to the
disciplinary authority of the school and cannot consider himself released altogether from observance of
its rules.
As long as it can be shown that the student is in the school premises in pursuance of a legitimate
student objective, in the exercise of a legitimate student right, and even in the enjoyment of a legitimate
student right, and even in the enjoyment of a legitimate student privilege, the responsibility of the school
authorities over the student continues. Indeed, even if the student should be doing nothing more than
relaxing in the campus in the company of his classmates and friends and enjoying the ambience and
atmosphere of the school, he is still within the custody and subject to the discipline of the school
authorities under the provisions of Article 2180.
During all these occasions, it is obviously the teacher-in-charge who must answer for his students' torts,
in practically the same way that the parents are responsible for the child when he is in their custody. The
teacher-in-charge is the one designated by the dean, principal, or other administrative superior to
exercise supervision over the pupils in the specific classes or sections to which they are assigned. It is
not necessary that at the time of the injury, the teacher be physically present and in a position to prevent
it. Custody does not connote immediate and actual physical control but refers more to the influence
exerted on the child and the discipline instilled in him as a result of such influence. Thus, for the injuries
caused by the student, the teacher and not the parent shag be held responsible if the tort was committed
within the premises of the school at any time when its authority could be validly exercised over him.
In any event, it should be noted that the liability imposed by this article is supposed to fall directly on the
teacher or the head of the school of arts and trades and not on the school itself. If at all, the school,
whatever its nature, may be held to answer for the acts of its teachers or even of the head thereof under
the general principle of respondeat superior, but then it may exculpate itself from liability by proof that it
had exercised the diligence of a bonus paterfamilias.
Such defense is, of course, also available to the teacher or the head of the school of arts and trades
directly held to answer for the tort committed by the student. As long as the defendant can show that he
had taken the necessary precautions to prevent the injury complained of, he can exonerate himself from
the liability imposed by Article 2180, which also states that:
The responsibility treated of in this article shall cease when the Persons herein
mentioned prove that they observed all the diligence of a good father of a family to
prevent damages.
In this connection, it should be observed that the teacher will be held liable not only when he is acting
in loco parentis for the law does not require that the offending student be of minority age. Unlike the
parent, who wig be liable only if his child is still a minor, the teacher is held answerable by the law for
the act of the student under him regardless of the student's age. Thus, in the Palisoc Case, liability
attached to the teacher and the head of the technical school although the wrongdoer was already of age.
In this sense, Article 2180 treats the parent more favorably than the teacher.
The Court is not unmindful of the apprehensions expressed by Justice Makalintal in his dissenting
opinion in Palisoc that the school may be unduly exposed to liability under this article in view of the
increasing activism among the students that is likely to cause violence and resulting injuries in the
school premises. That is a valid fear, to be sure. Nevertheless, it should be repeated that, under the
present ruling, it is not the school that will be held directly liable. Moreover, the defense of due diligence
is available to it in case it is sought to be held answerable as principal for the acts or omission of its head
or the teacher in its employ.
The school can show that it exercised proper measures in selecting the head or its teachers and the
appropriate supervision over them in the custody and instruction of the pupils pursuant to its rules and
regulations for the maintenance of discipline among them. In almost all cases now, in fact, these
measures are effected through the assistance of an adequate security force to help the teacher physically
enforce those rules upon the students. Ms should bolster the claim of the school that it has taken
adequate steps to prevent any injury that may be committed by its students.
A fortiori, the teacher himself may invoke this defense as it would otherwise be unfair to hold him directly
answerable for the damage caused by his students as long as they are in the school premises and
presumably under his influence. In this respect, the Court is disposed not to expect from the teacher the
same measure of responsibility imposed on the parent for their influence over the child is not equal in
degree. Obviously, the parent can expect more obedience from the child because the latter's dependence
on him is greater than on the teacher. It need not be stressed that such dependence includes the child's
support and sustenance whereas submission to the teacher's influence, besides being coterminous with
the period of custody is usually enforced only because of the students' desire to pass the course. The
parent can instill more las discipline on the child than the teacher and so should be held to a greater
accountability than the teacher for the tort committed by the child.
And if it is also considered that under the article in question, the teacher or the head of the school of arts
and trades is responsible for the damage caused by the student or apprentice even if he is already of age
— and therefore less tractable than the minor — then there should all the more be justification to require
from the school authorities less accountability as long as they can prove reasonable diligence in
preventing the injury. After all, if the parent himself is no longer liable for the student's acts because he
has reached majority age and so is no longer under the former's control, there is then all the more reason
for leniency in assessing the teacher's responsibility for the acts of the student.
Applying the foregoing considerations, the Court has arrived at the following conclusions:
1. At the time Alfredo Amadora was fatally shot, he was still in the custody of the authorities of Colegio
de San Jose-Recoletos notwithstanding that the fourth year classes had formally ended. It was
immaterial if he was in the school auditorium to finish his physics experiment or merely to submit his
physics report for what is important is that he was there for a legitimate purpose. As previously observed,
even the mere savoring of the company of his friends in the premises of the school is a legitimate purpose
that would have also brought him in the custody of the school authorities.
2. The rector, the high school principal and the dean of boys cannot be held liable because none of them
was the teacher-in-charge as previously defined. Each of them was exercising only a general authority
over the student body and not the direct control and influence exerted by the teacher placed in charge of
particular classes or sections and thus immediately involved in its discipline. The evidence of the parties
does not disclose who the teacher-in-charge of the offending student was. The mere fact that Alfredo
Amadora had gone to school that day in connection with his physics report did not necessarily make the
physics teacher, respondent Celestino Dicon, the teacher-in-charge of Alfredo's killer.
3. At any rate, assuming that he was the teacher-in-charge, there is no showing that Dicon was negligent
in enforcing discipline upon Daffon or that he had waived observance of the rules and regulations of the
school or condoned their non-observance. His absence when the tragedy happened cannot be considered
against him because he was not supposed or required to report to school on that day. And while it is true
that the offending student was still in the custody of the teacher-in-charge even if the latter was
physically absent when the tort was committed, it has not been established that it was caused by his
laxness in enforcing discipline upon the student. On the contrary, the private respondents have proved
that they had exercised due diligence, through the enforcement of the school regulations, in maintaining
that discipline.
4. In the absence of a teacher-in-charge, it is probably the dean of boys who should be held liable
especially in view of the unrefuted evidence that he had earlier confiscated an unlicensed gun from one of
the students and returned the same later to him without taking disciplinary action or reporting the
matter to higher authorities. While this was clearly negligence on his part, for which he deserves
sanctions from the school, it does not necessarily link him to the shooting of Amador as it has not been
shown that he confiscated and returned pistol was the gun that killed the petitioners' son.
5. Finally, as previously observed, the Colegio de San Jose-Recoletos cannot be held directly liable under
the article because only the teacher or the head of the school of arts and trades is made responsible for
the damage caused by the student or apprentice. Neither can it be held to answer for the tort committed
by any of the other private respondents for none of them has been found to have been charged with the
custody of the offending student or has been remiss in the discharge of his duties in connection with
such custody.
In sum, the Court finds under the facts as disclosed by the record and in the light of the principles herein
announced that none of the respondents is liable for the injury inflicted by Pablito Damon on Alfredo
Amadora that resulted in the latter's death at the auditorium of the Colegio de San Jose-Recoletos on
April 13, 1972. While we deeply sympathize with the petitioners over the loss of their son under the tragic
circumstances here related, we nevertheless are unable to extend them the material relief they seek, as a
balm to their grief, under the law they have invoked.
WHEREFORE, the petition is DENIED, without any pronouncement as to costs. It is so ordered.
Yap, Narvasa, Paras, Feliciano, Gancayco, Bidin, Sarmiento, Cortes and Griño-Aquino, JJ., concur.
Fernan, Padilla and Teehankee, C.J., JJ, took no part.
G.R. No. L-29025 October 4, 1971
Spouses MOISES P. PALISOC and BRIGIDA P. PALISOC, plaintiffs-appellants,
vs.
ANTONIO C. BRILLANTES and TEODOSIO V. VALENTON, owner and President, respectively, of a
school of arts and trades, known under the name and style of "Manila Technical Institute" (M.I.T.),
VIRGILIO L. DAFFON and SANTIAGO M. QUIBULUE, defendants-appellees.
Leovillo C. Agustin for plaintiffs-appellants. .
Honorato S. Reyes for appellee Brillantes, et al. .
Villareal, Almacen Navarra & Amores for appellee Daffon. .
TEEHANKEE, J.:
An appeal in forma pauperis on pure questions of law from a decision of the Court of First Instance of
Manila. .
Plaintiffs-appellants as parents of their sixteen-year old son, Dominador Palisoc, and a student in
automotive mechanics at the Manila Technical Institute, Quezon Boulevard, Manila, had filed on May 19,
1966, the action below for damages arising from the death on March 10, 1966 of their son at the hands
of a fellow student, defendant Virgilio L. Daffon, at the laboratory room of the said Institute. .
Defendants, per the trial court's decision, are: "(T)he defendant Antonio C. Brillantes, at the time when
the incident which gave rise to his action occurred was a member of the Board of Directors of the
institute;1 the defendant Teodosio Valenton, the president thereof; the defendant Santiago M. Quibulue,
instructor of the class to which the deceased belonged; and the defendant Virgilio L. Daffon, a fellow
student of the deceased. At the beginning the Manila Technical Institute was a single proprietorship, but
lately on August 2, 1962, it was duly incorporated."
The facts that led to the tragic death of plaintiffs' son were thus narrated by the trial court: "(T)he
deceased Dominador Palisoc and the defendant Virgilio L. Daffon were classmates, and on the afternoon
of March 10, 1966, between two and three o'clock, they, together with another classmate Desiderio Cruz
were in the laboratory room located on the ground floor. At that time the classes were in recess. Desiderio
Cruz and Virgilio L. Daffon were working on a machine while Dominador Palisoc was merely looking on at
them. Daffon made a remark to the effect that Palisoc was acting like a foreman. Because of this remark
Palisoc slapped slightly Daffon on the face. Daffon, in retaliation, gave Palisoc a strong flat blow on the
face, which was followed by other fist blows on the stomach. Palisoc retreated apparently to avoid the fist
blows, but Daffon followed him and both exchanged blows until Palisoc stumbled on an engine block
which caused him to fall face downward. Palisoc became pale and fainted. First aid was administered to
him but he was not revived, so he was immediately taken to a hospital. He never regained consciousness;
finally he died. The foregoing is the substance of the testimony of Desiderio Cruz, the lone witness to the
incident."
The trial court expressly gave credence to this version of the incident, as testified to by the lone
eyewitness, Desiderio Cruz, a classmate of the protagonists, as that of a disinterested witness who "has
no motive or reason to testify one way or another in favor of any party" and rejected the self-exculpatory
version of defendant Daffon denying that he had inflicted any fist blows on the deceased. .
With the postmortem findings of Dr. Angelo Singian of the Manila Police Department who performed the
autopsy re "Cause of death: shock due to traumatic fracture of theribs (6th and 7th, left, contusion of the
pancreas and stomach with intra-gastric hemorrhage and slight subarachnoid hemorrhage on the brain,"
and his testimony that these internal injuries of the deceased were caused "probably by strong fist
blows," the trial court found defendant Daffon liable for the quasi delict under Article 2176 of the Civil
Code.3 It held that "(T)he act, therefore, of the accused Daffon in giving the deceased strong fistblows in
the stomach which ruptured his internal organs and caused his death falls within the purview of this
article of the Code."4
The trial court, however, absolved from liability the three other defendants-officials of the Manila
Technical Institute, in this wise:
... Their liabilities are based on the provisions of Article 2180 of the New Civil Code
which reads:
Art. 2180. ... .
Lastly, teachers or heads of establishments of arts and trades shall
be liable for damages caused by their pupils and students and
apprentices, so long as they remain in their custody.
In the opinion of the Court, this article of the Code is not applicable to the case at bar,
since this contemplates the situation where the control or influence of the teachers
and heads of school establishments over the conduct and actions by the pupil
supersedes those of the parents.
CIVIL LAW: DAMAGES ART 2180. NEW CIVIL CODE CONSTRUED:
— The clause "so long as they remain in their custody" contained in
Article 2180 of the new civil code contemplated a situation where the
pupil lives and boards with the teacher, such that the control or
influence on the pupil supersedes those of the parents. In those
circumstances the control or influence over the conduct and actions
of the pupil as well as the responsibilities for their sort would pass
from the father and mother to the teachers. (Ciriaco L. Mercado,
Petitioner vs. the Court of Appeals, Manuel Quisumbing, Jr., et al.,
respondents, G.R. No. L-14862, May 30, 1960).5
 There is no evidence that the accused Daffon lived and boarded with his teacher or the
other defendant officials of the school. These defendants cannot therefore be made
responsible for the tort of the defendant Daffon.
Judgment was therefore rendered by the trial court as follows:
1. Sentencing the defendant Virgilio L. Daffon to pay the plaintiffs as heirs of the
deceased Dominador Palisoc (a) P6,000.00 for the death of Dominador Palisoc; (b)
P3,375.00 for actual and compensatory expenses; (c) P5,000.00 for moral damages; (d)
P10,000.00 for loss of earning power, considering that the deceased was only between
sixteen and seventeen years, and in good health when he died, and (e) P2,000.00 for
attorney's fee, plus the costs of this action. .
2. Absolving the other defendants. .
3. Dismissing the defendants' counterclaim for lack of merit.
Plaintiffs' appeal raises the principal legal question that under the factual findings of the trial court,
which are now beyond review, the trial court erred in absolving the defendants-school officials instead of
holding them jointly and severally liable as tortfeasors, with defendant Daffon, for the damages awarded
them as a result of their son's death. The Court finds the appeal, in the main, to be meritorious. .
1. The lower court absolved defendants-school officials on the ground that the provisions of Article 2180,
Civil Code, which expressly hold "teachers or heads of establishments of arts and trades ... liable for
damages caused by their pupils and students and apprentices, so long as they remain in their custody,"
are not applicable to to the case at bar, since "there is no evidence that the accused Daffon [who inflicted
the fatal fistblows]6 lived and boarded with his teacher or the other defendants-officials of the school.
These defendants cannot therefore be made responsible for the tort of the defendant Daffon."
The lower court based its legal conclusion expressly on the Court's dictum in Mercado vs. Court of
Appeals,7 that "(I)t would seem that the clause "so long as they remain in their custody," contemplates a
situation where the pupil lives and boards with the teacher, such that the control, direction and
influence on the pupil supersedes those of the parents. In these circumstances the control or influence
over the conduct and actions of the pupil would pass from the father and mother to the teacher; and so
would the responsibility for the torts of the pupil. Such a situation does not appear in the case at bar; the
pupils appear to go to school during school hours and go back to their homes with their parents after
school is over." This dictum had been made in rejecting therein petitioner father's contention that his
minor son's school, Lourdes Catholic School at Kanlaon, Quezon City [which was not a party to the case]
should be held responsible, rather than him as father, for the moral damages of P2,000.00 adjudged
against him for the physical injury inflicted by his son on a classmate. [A cut on the right cheek with a
piece of razor which costs only P50.00 by way of medical expenses to treat and cure, since the wound left
no scar.] The moral damages award was after all set aside by the Court on the ground that none of the
specific cases provided in Article 2219, Civil Code, for awarding moral damages had been established,
petitioner's son being only nine years old and not having been shown to have "acted with discernment" in
inflicting the injuries on his classmate. .
The dictum in Mercado was based in turn on another dictum in the earlier case of Exconde vs.
Capuno,8 where the only issue involved as expressly stated in the decision, was whether the therein
defendant-father could be civilly liable for damages resulting from a death caused in a motor vehicle
accident driven unauthorizedly and negligently by his minor son, (which issue was resolved adversely
against the father). Nevertheless, the dictum in such earlier case that "It is true that under the law
abovequoted, teachers or directors of arts and trades are liable for any damage caused by their pupils or
apprentices while they are under their custody, but this provision only applies to an institution of arts
and trades and not to any academic educational institution" was expressly cited and quoted in Mercado. .
2. The case at bar was instituted directly against the school officials and squarely raises the issue of
liability of teachers and heads of schools under Article 2180, Civil Code, for damages caused by their
pupils and students against fellow students on the school premises. Here, the parents of the student at
fault, defendant Daffon, are not involved, since Daffon was already of age at the time of the tragic
incident. There is no question, either, that the school involved is a non-academic school,9 the Manila
Technical Institute being admittedly a technical vocational and industrial school. .
The Court holds that under the cited codal article, defendants head and teacher of the Manila Technical
Institute (defendants Valenton and Quibulue, respectively) are liable jointly and severally for damages to
plaintiffs-appellants for the death of the latter's minor son at the hands of defendant Daffon at the
school's laboratory room. No liability attaches to defendant Brillantes as a mere member of the school's
board of directors. The school itself cannot be held similarly liable, since it has not been properly
impleaded as party defendant. While plaintiffs sought to so implead it, by impleading improperly
defendant Brillantes, its former single proprietor, the lower court found that it had been incorporated
since August 2, 1962, and therefore the school itself, as thus incorporated, should have been brought in
as party defendant. Plaintiffs failed to do so, notwithstanding that Brillantes and his co-defendants in
their reply to plaintiffs' request for admission had expressly manifested and made of record that
"defendant Antonio C. Brillantes is not the registered owner/head of the "Manila Technical Institute"
which is now a corporation and is not owned by any individual person."10
3. The rationale of such liability of school heads and teachers for the tortious acts of their pupils and
students, so long as they remain in their custody, is that they stand, to a certain extent, as to their
pupils and students, in loco parentis and are called upon to "exercise reasonable supervision over the
conduct of the child."11 This is expressly provided for in Articles 349, 350 and 352 of the Civil Code.12 In
the law of torts, the governing principle is that the protective custody of the school heads and teachers is
mandatorily substituted for that of the parents, and hence, it becomes their obligation as well as that of
the school itself to provide proper supervision of the students' activities during the whole time that they
are at attendance in the school, including recess time, as well as to take the necessary precautions to
protect the students in their custody from dangers and hazards that would reasonably be anticipated,
including injuries that some student themselves may inflict willfully or through negligence on their fellow
students. .
4. As tersely summarized by Mr. Justice J.B.L. Reyes in his dissenting opinion in Exconde, "the basis of
the presumption of negligence of Art. 1903 [now 2180] is some culpa in vigilando that the parents,
teachers, etc. are supposed to have incurred in the exercise of their authority" 13 and "where the parent
places the child under the effective authority of the teacher, the latter, and not the parent, should be the
one answerable for the torts committed while under his custody, for the very reason that the parent is
not supposed to interfere with the discipline of the school nor with the authority and supervision of the
teacher while the child is under instruction." The school itself, likewise, has to respond for the fault or 1. Sentencing the defendants Virgilio L. Daffon, TeodosioV. Valenton and Santiago M. Quibulue jointly and
negligence of its school head and teachers under the same cited article.14 severallyto pay plaintiffs as heirs of the deceased Dominador Palisoc (a) P12,000.00 for the death of
Dominador Palisoc; (b) P3,375.00 for actual and compensatory expenses; (c) P5,000.00 for moral,
damages; (d) P10,000.00 for loss of earning power and (e) P2,000.00 for attorney's fee, plus the costs of
5. The lower court therefore erred in law in absolving defendants-school officials on the ground that they
this action in both instances; 2. absolving defendant Antonio C. Brillantes from the complaint; and 3.
could be held liable under Article 2180, Civil Code, only if the student who inflicted the fatal fistblows on
dismissing defendants' counterclaims. .
his classmate and victim "lived and boarded with his teacher or the other defendants officials of the
school." As stated above, the phrase used in the cited article — "so long as (the students) remain in their
custody" means the protective and supervisory custody that the school and its heads and teachers Concepcion, C.J., Villamor and Makasiar, JJ., concur. .
exercise over the pupils and students for as long as they are at attendance in the school, including recess
time. There is nothing in the law that requires that for such liability to attach the pupil or student who
Dizon, J., took no part. .
commits the tortious act must live and board in the school, as erroneously held by the lower court, and
the dicta in Mercado (as well as in Exconde) on which it relied, must now be deemed to have been set
aside by the present decision. .

6. Defendants Valenton and Quibulue as president and teacher-in-charge of the school must therefore be
held jointly and severally liable for the quasi-delict of their co-defendant Daffon in the latter's having
caused the death of his classmate, the deceased Dominador Palisoc. The unfortunate death resulting
from the fight between the protagonists-students could have been avoided, had said defendants but
complied with their duty of providing adequate supervision over the activities of the students in the
school premises to protect their students from harm, whether at the hands of fellow students or other
parties. At any rate, the law holds them liable unless they relieve themselves of such liability, in
compliance with the last paragraph of Article 2180, Civil Code, by "(proving) that they observed all the
diligence of a good father of a family to prevent damage." In the light of the factual findings of the lower
court's decision, said defendants failed to prove such exemption from liability. .

7. Plaintiffs-appellees' contention that the award of P6,000.00 as indemnity for the death of their son
should be increased to P12,000.00 as set by the Court in People vs. Pantoja,15 and observed in all death
indemnity cases thereafter is well taken. The Court, in Pantoja, after noting the decline in the purchasing
power of the Philippine peso, had expressed its "considered opinion that the amount of award of
compensatory damages for death caused by a crime or quasi-delict should now be P12,000.00." The
Court thereby adjusted the minimum amount of "compensatory damages for death caused by a crime
or quasi-delict" as per Article 2206, Civil Code, from the old stated minimum of P3,000.00 to P12,000.00,
which amount is to be awarded "even though there may have been mitigating circumstances" pursuant to
the express provisions of said codal article. .

8. Plaintiffs-appellees' other claims on appeal that the lower court should have awarded exemplary
damages and imposed legal interest on the total damages awarded, besides increasing the award of
attorney's fees all concern matters that are left by law to the discretion of the trial court and the Court
has not been shown any error or abuse in the exercise of such discretion on the part of the trial
court.16 Decisive here is the touchstone provision of Article 2231, Civil Code, that "In quasi-delicts,
exemplary damages may be granted if the defendant acted with gross negligence." No gross negligence on
the part of defendants was found by the trial court to warrant the imposition of exemplary damages, as
well as of interest and increased attorney's fees, and the Court has not been shown in this appeal any
compelling reason to disturb such finding. .

ACCORDINGLY, the judgment appealed from is modified so as to provide as follows: .

 THIRD DIVISION
[G.R. No. 156109. November 18, 2004]
KHRISTINE REA M. REGINO, Assisted and Represented by ARMANDO REGINO, petitioner,
vs. PANGASINAN COLLEGES OF SCIENCE AND TECHNOLOGY, RACHELLE A. GAMUROT
and ELISSA BALADAD, respondents.
DECISION
PANGANIBAN, J.:
Upon enrolment, students and their school enter upon a reciprocal contract. The students agree to
abide by the standards of academic performance and codes of conduct, issued usually in the form of
manuals that are distributed to the enrollees at the start of the school term. Further, the school informs
them of the itemized fees they are expected to pay. Consequently, it cannot, after the enrolment of a
student, vary the terms of the contract. It cannot require fees other than those it specified upon
enrolment.
The Case
Before the Court is a Petition for Review under Rule 45,[1] seeking to nullify the July 12, 2002[2] and
the November 22, 2002[3] Orders of the Regional Trial Court (RTC) of Urdaneta City, Pangasinan (Branch
48) in Civil Case No. U-7541. The decretal portion of the first assailed Order reads:
WHEREFORE, the Court GRANTS the instant motion to dismiss for lack of
cause of action.[4]
The second challenged Order denied petitioners Motion for Reconsideration.
The Facts
Petitioner Khristine Rea M. Regino was a first year computer science student at Respondent
Pangasinan Colleges of Science and Technology (PCST). Reared in a poor family, Regino went to college
mainly through the financial support of her relatives. During the second semester of school year 2001-
2002, she enrolled in logic and statistics subjects under Respondents Rachelle A. Gamurot and Elissa
Baladad, respectively, as teachers.
In February 2002, PCST held a fund raising campaign dubbed the Rave Party and Dance
Revolution, the proceeds of which were to go to the construction of the schools tennis and volleyball
courts. Each student was required to pay for two tickets at the price of P100 each. The project was
allegedly implemented by recompensing students who purchased tickets with additional points in their
test scores; those who refused to pay were denied the opportunity to take the final examinations.
Financially strapped and prohibited by her religion from attending dance parties and celebrations,
Regino refused to pay for the tickets. On March 14 and March 15, 2002, the scheduled dates of the final
examinations in logic and statistics, her teachers -- Respondents Rachelle A. Gamurot and Elissa
Baladad -- allegedly disallowed her from taking the tests. According to petitioner, Gamurot made her sit
out her logic class while her classmates were taking their examinations. The next day, Baladad, after
announcing to the entire class that she was not permitting petitioner and another student to take their
statistics examinations for failing to pay for their tickets, allegedly ejected them from the classroom.
Petitioners pleas ostensibly went unheeded by Gamurot and Baladad, who unrelentingly defended their
positions as compliance with PCSTs policy.
On April 25, 2002, petitioner filed, as a pauper litigant, a Complaint[5] for damages against PCST,
Gamurot and Baladad. In her Complaint, she prayed for P500,000 as nominal damages; P500,000 as
moral damages; at least P1,000,000 as exemplary damages; P250,000 as actual damages; plus the costs
of litigation and attorneys fees.
On May 30, 2002, respondents filed a Motion to Dismiss[6] on the ground of petitioners failure to
exhaust administrative remedies. According to respondents, the question raised involved the
determination of the wisdom of an administrative policy of the PCST; hence, the case should have been
initiated before the proper administrative body, the Commission of Higher Education (CHED).
In her Comment to respondents Motion, petitioner argued that prior exhaustion of administrative
remedies was unnecessary, because her action was not administrative in nature, but one purely for
damages arising from respondents breach of the laws on human relations. As such, jurisdiction lay with
the courts.
On July 12, 2002, the RTC dismissed the Complaint for lack of cause of action.
Ruling of the Regional Trial Court
In granting respondents Motion to Dismiss, the trial court noted that the instant controversy
involved a higher institution of learning, two of its faculty members and one of its students. It added that
Section 54 of the Education Act of 1982 vested in the Commission on Higher Education (CHED) the
supervision and regulation of tertiary schools. Thus, it ruled that the CHED, not the courts, had
jurisdiction over the controversy.[7]
In its dispositive portion, the assailed Order dismissed the Complaint for lack of cause of action
without, however, explaining this ground.
Aggrieved, petitioner filed the present Petition on pure questions of law.[8]
 Issues
In her Memorandum, petitioner raises the following issues for our consideration:
Whether or not the principle of exhaustion of administrative remedies applies in a civil action exclusively
for damages based on violation of the human relation provisions of the Civil Code, filed by a student
against her former school.
Whether or not there is a need for prior declaration of invalidity of a certain school administrative policy
by the Commission on Higher Education (CHED) before a former student can successfully maintain an
action exclusively for damages in regular courts.
Whether or not the Commission on Higher Education (CHED) has exclusive original jurisdiction over
actions for damages based upon violation of the Civil Code provisions on human relations filed by a
student against the school.[9]
All of the foregoing point to one issue -- whether the doctrine of exhaustion of administrative
remedies is applicable. The Court, however, sees a second issue which, though not expressly raised by
petitioner, was impliedly contained in her Petition: whether the Complaint stated sufficient cause(s) of
action.
The Courts Ruling
The Petition is meritorious.
First Issue:
Exhaustion of Administrative Remedies
Respondents anchored their Motion to Dismiss on petitioners alleged failure to exhaust
administrative remedies before resorting to the RTC. According to them, the determination of the
controversy hinge on the validity, the wisdom and the propriety of PCSTs academic policy. Thus, the
Complaint should have been lodged in the CHED, the administrative body tasked under Republic Act No.
7722 to implement the state policy to protect, foster and promote the right of all citizens to affordable
quality education at all levels and to take appropriate steps to ensure that education is accessible to
all.[10]
Petitioner counters that the doctrine finds no relevance to the present case since she is praying for
damages, a remedy beyond the domain of the CHED and well within the jurisdiction of the courts.[11]
Petitioner is correct. First, the doctrine of exhaustion of administrative remedies has no bearing on
the present case. In Factoran Jr. v. CA,[12] the Court had occasion to elucidate on the rationale behind this
doctrine:
The doctrine of exhaustion of administrative remedies is basic. Courts, for
reasons of law, comity, and convenience, should not entertain suits unless the
available administrative remedies have first been resorted to and the proper authorities
have been given the appropriate opportunity to act and correct their alleged errors, if
any, committed in the administrative forum. x x x.[13]
Petitioner is not asking for the reversal of the policies of PCST. Neither is she demanding it to allow
her to take her final examinations; she was already enrolled in another educational institution. A reversal
of the acts complained of would not adequately redress her grievances; under the circumstances, the
consequences of respondents acts could no longer be undone or rectified.
Second, exhaustion of administrative remedies is applicable when there is competence on the part
of the administrative body to act upon the matter complained of.[14] Administrative agencies are not
courts; they are neither part of the judicial system, nor are they deemed judicial tribunals. [15] Specifically,
the CHED does not have the power to award damages.[16] Hence, petitioner could not have commenced
her case before the Commission.
Third, the exhaustion doctrine admits of exceptions, one of which arises when the issue is purely
legal and well within the jurisdiction of the trial court.[17] Petitioners action for damages inevitably calls
for the application and the interpretation of the Civil Code, a function that falls within the jurisdiction of
the courts.[18]
Second Issue:
Cause of Action
Sufficient Causes of Action Stated
in the Allegations in the Complaint
As a rule, every complaint must sufficiently allege a cause of action; failure to do so warrants its
dismissal.[19] A complaint is said to assert a sufficient cause of action if, admitting what appears solely on
its face to be correct, the plaintiff would be entitled to the relief prayed for. Assuming the facts that are
alleged to be true, the court should be able to render a valid judgment in accordance with the prayer in
the complaint.[20]
A motion to dismiss based on lack of cause of action hypothetically admits the truth of the alleged
facts. In their Motion to Dismiss, respondents did not dispute any of petitioners allegations, and they
admitted that x x x the crux of plaintiffs cause of action is the determination of whether or not the
assessment of P100 per ticket is excessive or oppressive.[21] They thereby premised their prayer for
dismissal on the Complaints alleged failure to state a cause of action. Thus, a reexamination of the
Complaint is in order.
 The Complaint contains the following factual allegations:
10. In the second week of February 2002, defendant Rachelle A. Gamurot, in connivance with
PCST, forced plaintiff and her classmates to buy or take two tickets each, x x x;
11. Plaintiff and many of her classmates objected to the forced distribution and selling of
tickets to them but the said defendant warned them that if they refused [to] take
or pay the price of the two tickets they would not be allowed at all to take the
final examinations;
12. As if to add insult to injury, defendant Rachelle A. Gamurot bribed students with
additional fifty points or so in their test score in her subject just to unjustly
influence and compel them into taking the tickets;
13. Despite the students refusal, they were forced to take the tickets because [of] defendant
Rachelle A. Gamurots coercion and act of intimidation, but still many of them
including the plaintiff did not attend the dance party imposed upon them by
defendants PCST and Rachelle A. Gamurot;
14. Plaintiff was not able to pay the price of her own two tickets because aside form the fact
that she could not afford to pay them it is also against her religious practice as a
member of a certain religious congregation to be attending dance parties and
celebrations;
15. On March 14, 2002, before defendant Rachelle A. Gamurot gave her class its final
examination in the subject Logic she warned that students who had not paid the
tickets would not be allowed to participate in the examination, for which threat
and intimidation many students were eventually forced to make payments:
16. Because plaintiff could not afford to pay, defendant Rachelle A. Gamurot inhumanly made
plaintiff sit out the class but the defendant did not allow her to take her final
examination in Logic;
17. On March 15, 2002 just before the giving of the final examination in the subject Statistics,
defendant Elissa Baladad, in connivance with defendants Rachelle A. Gamurot
and PCST, announced in the classroom that she was not allowing plaintiff and
another student to take the examination for their failure and refusal to pay the
price of the tickets, and thenceforth she ejected plaintiff and the other student
from the classroom;
18. Plaintiff pleaded for a chance to take the examination but all defendants could say was
that the prohibition to give the examinations to non-paying students was an
administrative decision;
19. Plaintiff has already paid her tuition fees and other obligations in the school;
20. That the above-cited incident was not a first since PCST also did another forced
distribution of tickets to its students in the first semester of school year 2001-
2002; x x x [22]
The foregoing allegations show two causes of action; first, breach of contract; and second, liability
for tort.
Reciprocity of the
School-Student Contract
In Alcuaz v. PSBA,[23] the Court characterized the relationship between the school and the student
as a contract, in which a student, once admitted by the school is considered enrolled for one
semester.[24]Two years later, in Non v. Dames II,[25] the Court modified the termination of contract theory
in Alcuaz by holding that the contractual relationship between the school and the student is not only
semestral in duration, but for the entire period the latter are expected to complete it.[26] Except for
the variance in the period during which the contractual relationship is considered to subsist, both Alcuaz
and Non were unanimous in characterizing the school-student relationship as contractual in nature.
The school-student relationship is also reciprocal. Thus, it has consequences appurtenant to and
inherent in all contracts of such kind -- it gives rise to bilateral or reciprocal rights and obligations. The
school undertakes to provide students with education sufficient to enable them to pursue higher
education or a profession. On the other hand, the students agree to abide by the academic requirements
of the school and to observe its rules and regulations.[27]
The terms of the school-student contract are defined at the moment of its inception -- upon
enrolment of the student. Standards of academic performance and the code of behavior and discipline are
usually set forth in manuals distributed to new students at the start of every school year. Further,
schools inform prospective enrollees the amount of fees and the terms of payment.
In practice, students are normally required to make a down payment upon enrollment, with the
balance to be paid before every preliminary, midterm and final examination. Their failure to pay their
financial obligation is regarded as a valid ground for the school to deny them the opportunity to take
these examinations.
The foregoing practice does not merely ensure compliance with financial obligations; it also
underlines the importance of major examinations. Failure to take a major examination is usually fatal to
the students promotion to the next grade or to graduation. Examination results form a significant basis
for their final grades. These tests are usually a primary and an indispensable requisite to their elevation
to the next educational level and, ultimately, to their completion of a course.
Education is not a measurable commodity. It is not possible to determine who is better educated
than another. Nevertheless, a students grades are an accepted approximation of what would otherwise be
an intangible product of countless hours of study. The importance of grades cannot be discounted in a
setting where education is generally the gate pass to employment opportunities and better life; such
grades are often the means by which a prospective employer measures whether a job applicant has
acquired the necessary tools or skills for a particular profession or trade.
Thus, students expect that upon their payment of tuition fees, satisfaction of the set academic
standards, completion of academic requirements and observance of school rules and regulations, the
school would reward them by recognizing their completion of the course enrolled in.
The obligation on the part of the school has been established in Magtibay v. Garcia,[28] Licup v.
University of San Carlos[29] and Ateneo de Manila University v. Garcia,[30] in which the Court held that,
barring any violation of the rules on the part of the students, an institution of higher learning has
a contractual obligation to afford its students a fair opportunity to complete the course they seek
to pursue.
 We recognize the need of a school to fund its facilities and to meet astronomical operating costs;
this is a reality in running it. Crystal v. Cebu International School[31] upheld the imposition by respondent
school of a land purchase deposit in the amount of P50,000 per student to be used for the purchase of a
piece of land and for the construction of new buildings and other facilities x x x which the school would
transfer [to] and occupy after the expiration of its lease contract over its present site.
The amount was refundable after the student graduated or left the school. After noting that the
imposition of the fee was made only after prior consultation and approval by the parents of the students,
the Court held that the school committed no actionable wrong in refusing to admit the children of the
petitioners therein for their failure to pay the land purchase deposit and the 2.5 percent monthly
surcharge thereon.
In the present case, PCST imposed the assailed revenue-raising measure belatedly, in the middle of
the semester. It exacted the dance party fee as a condition for the students taking the final examinations,
and ultimately for its recognition of their ability to finish a course. The fee, however, was not part of the
school-student contract entered into at the start of the school year. Hence, it could not be unilaterally
imposed to the prejudice of the enrollees.
Such contract is by no means an ordinary one. In Non, we stressed that the school-student contract
is imbued with public interest, considering the high priority given by the Constitution to education and
the grant to the State of supervisory and regulatory powers over all educational institutions.[32] Sections 5
(1) and (3) of Article XIV of the 1987 Constitution provide:
The State shall protect and promote the right of all citizens to quality
education at all levels and shall take appropriate steps to make such declaration
accessible to all.
Every student has a right to select a profession or course of study, subject
to fair, reasonable and equitable admission and academic requirements.
The same state policy resonates in Section 9(2) of BP 232, otherwise known as the Education Act of
1982:
Section 9. Rights of Students in School. In addition to other rights, and
subject to the limitations prescribed by law and regulations, students and pupils in
all schools shall enjoy the following rights:
xxxxxxxxx
(2) The right to freely choose their field of study subject
to existing curricula and to continue their course therein up to
graduation, except in cases of academic deficiency, or violation
of disciplinary regulations.
Liability for Tort
In her Complaint, petitioner also charged that private respondents inhumanly punish students x x
x by reason only of their poverty, religious practice or lowly station in life, which inculcated upon
[petitioner] the feelings of guilt, disgrace and unworthiness;[33] as a result of such punishment, she was
allegedly unable to finish any of her subjects for the second semester of that school year and had to lag
behind in her studies by a full year. The acts of respondents supposedly caused her extreme humiliation,
mental agony and demoralization of unimaginable proportions in violation of Articles 19, 21 and 26 of the
Civil Code. These provisions of the law state thus:
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.
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.
Article 26. Every person shall respect the dignity, personality, privacy and peace of mind of his neighbors
and other persons. The following and similar acts, though they may not constitute a criminal offense,
shall produce a cause of action for damages, prevention and other relief:
(1) Prying into the privacy of anothers residence;
(2) Meddling with or disturbing the private life or family relations of another;
(3) Intriguing to cause another to be alienated from his friends;
(4) Vexing or humiliating another on account of his beliefs, lowly station in life,
place of birth, physical defect, or other personal condition.
Generally, liability for tort arises only between parties not otherwise bound by a contract. An
academic institution, however, may be held liable for tort even if it has an existing contract with its
students, since the act that violated the contract may also be a tort. We ruled thus in PSBA vs.
CA,[34] from which we quote:
x x x A perusal of Article 2176 [of the Civil Code] shows that obligations arising from quasi-
delicts or tort, also known as extra-contractual obligations, arise only between parties not
otherwise bound by contract, whether express or implied. However, this impression has not
prevented this Court from determining the existence of a tort even when there obtains a
contract. In Air France v. Carrascoso (124 Phil. 722), the private respondent was awarded
damages for his unwarranted expulsion from a first-class seat aboard the petitioner airline. It is
noted, however, that the Court referred to the petitioner-airlines liability as one arising from
tort, not one arising form a contract of carriage. In effect, Air France is authority for the view
that liability from tort may exist even if there is a contract, for the act that breaks the contract
may be also a tort. x x x This view was not all that revolutionary, for even as early as 1918, this
Court was already of a similar mind. In Cangco v. Manila Railroad (38 Phil. 780), Mr. Justice
Fisher elucidated thus: x x x. When such a contractual relation exists the obligor may break the
contract under such conditions that the same act which constitutes a breach of the contract
would have constituted the source of an extra-contractual obligation had no contract existed
between the parties.
Immediately what comes to mind is the chapter of the Civil Code on Human Relations,
particularly Article 21 x x x.[35]
Academic Freedom SECOND DIVISION

FLORDELIZA MENDOZA, G.R. No. 164012

In their Memorandum, respondents harp on their right to academic freedom. We are not impressed. Petitioner,
According to present jurisprudence, academic freedom encompasses the independence of an academic Present:
institution to determine for itself (1) who may teach, (2) what may be taught, (3) how it shall teach, and
(4) who may be admitted to study.[36] In Garcia v. the Faculty Admission Committee, Loyola School of QUISUMBING, J.,* Chairperson,
Theology,[37] the Court upheld the respondent therein when it denied a female students admission to - versus - CARPIO,
theological studies in a seminary for prospective priests. The Court defined the freedom of an academic CARPIO MORALES,**
institution thus: to decide for itself aims and objectives and how best to attain them x x x free from TINGA, and
outside coercion or interference save possibly when overriding public welfare calls for some restraint. [38] VELASCO, JR., JJ.
MUTYA SORIANO and Minor JULIE ANN SORIANO
In Tangonan v. Pao,[39] the Court upheld, in the name of academic freedom, the right of the school to duly represented by her natural mother
refuse readmission of a nursing student who had been enrolled on probation, and who had failed her and guardian ad litem MUTYA SORIANO, Promulgated:
nursing subjects. These instances notwithstanding, the Court has emphasized that once a school has, in Respondents.
the name of academic freedom, set its standards, these should be meticulously observed and should not June 8, 2007
be used to discriminate against certain students.[40] After accepting them upon enrollment, the school
cannot renege on its contractual obligation on grounds other than those made known to, and accepted
by, students at the start of the school year.

In sum, the Court holds that the Complaint alleges sufficient causes of action against respondents,
and that it should not have been summarily dismissed. Needless to say, the Court is not holding
respondents liable for the acts complained of. That will have to be ruled upon in due course by the
court a quo.

WHEREFORE, the Petition is hereby GRANTED, and the assailed Orders REVERSED. The trial
court is DIRECTED to reinstate the Complaint and, with all deliberate speed, to continue the proceedings
in Civil Case No. U-7541. No costs.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
SO ORDERED.
DECISION
Sandoval-Gutierrez, Carpio-Morales, and Garcia, JJ., concur.
Corona, J., on leave.
QUISUMBING, J.:

In this petition for review under Rule 45 of the Rules of Court, petitioner asks this Court to
reverse and set aside the Decision[1] dated November 17, 2003 and the Resolution[2] dated May 24,
2004 of the Court of Appeals in CA-G.R. CV No. 69037. The appellate court found petitioner, as employer
of Lomer Macasasa, liable for damages.

The facts are as follows:

At around 1:00 a.m., July 14, 1997, Sonny Soriano, while crossing Commonwealth
Avenue near Luzon Avenue in Quezon City, was hit by a speeding Tamaraw FX driven by Lomer
Macasasa. Soriano was thrown five meters away, while the vehicle only stopped some 25 meters from the
point of impact. Gerard Villaspin, one of Sorianos companions, asked Macasasa to bring Soriano to the
hospital, but after checking out the scene of the incident, Macasasa returned to the FX, only to flee. A
school bus brought Soriano to East Avenue Medical Center where he later died. Subsequently, the
Quezon City Prosecutor recommended the filing of a criminal case for reckless imprudence resulting to
homicide against Macasasa.[3]
On August 20, 1997, respondents Mutya Soriano and Julie Ann Soriano, Sorianos wife and
daughter, respectively, filed a complaint for damages against Macasasa and petitioner Flordeliza Mendoza, the
registered owner of the vehicle. The complaint was docketed as Civil Case No. C-18038 in
the Regional Trial Court of Caloocan City, Branch 121. Respondents prayed that Macasasa and petitioner be
ordered to pay them: P200,000 moral damages; P500,000 for lost income; P22,250 for funeral
services; P45,000 for burial lot; P15,150 for interment and lapida; P8,066 for hospitalization, other medical
and transportation expenses; P28,540 for food and drinks during the wake; P50,000 exemplary
damages; P60,000 indemnity for Sorianos death; and P25,000 for attorneys fees plus P500 per court
appearance.[4]
In her answer, petitioner Mendoza maintained that she was not liable since as owner of the
vehicle, she had exercised the diligence of a good father of a family over her employee, Macasasa.
Upon respondents motion, the complaint for damages against Macasasa was dismissed.
After trial, the trial court also dismissed the complaint against petitioner.[5] It found Soriano
negligent for crossing Commonwealth Avenue by using a small gap in the islands fencing rather than the
pedestrian overpass. The lower court also ruled that petitioner was not negligent in the selection and
supervision of Macasasa since complainants presented no evidence to support their allegation of
petitioners negligence.[6]
Respondents appealed. The Court of Appeals reversed the trial court. The dispositive portion of
the appellate courts decision reads:
WHEREFORE, the judgment appealed from is REVERSED, and another one is
hereby rendered ordering [petitioner] Flordeliza Mendoza to pay [respondents] Mutya Soriano
and Julie Ann Soriano the following amounts:
1. Hospital and Burial Expenses P80,926.25
2. Loss of earning capacity P77,000.00
3. Moral Damages P20,000.00
4. Indemnity for the death of Sonny Soriano P50,000.00
Actual payment of the aforementioned amounts should, however, be reduced by twenty
(20%) per cent due to the presence of contributory negligence by the victim as provided
for in Article 2179 of the Civil Code.
SO ORDERED.[7]
While the appellate court agreed that Soriano was negligent, it also found Macasasa negligent for
speeding, such that he was unable to avoid hitting the victim. It observed that Sorianos own negligence did
not preclude recovery of damages from Macasasas negligence. It further held that since petitioner failed to
present evidence to the contrary, and conformably with Article 2180[8] of the Civil Code, the presumption of
negligence of the employer in the selection and supervision of employees stood.
Petitioners motion for reconsideration was denied by the appellate court in a
Resolution[9] dated May 24, 2004.
Hence, this appeal where petitioner alleges that:
I.
THE TOTAL AMOUNT PRAYED FOR IN THE COMPLAINT IS NOT WITHIN THE
JURISDICTION OF THE REGIONAL TRIAL COURT.
II.
[COROLLARILY], THE AWARD OF DAMAGES IN FAVOR OF THE RESPONDENTS
[HAS] NO BASIS IN LAW.[10]
The issues are simple: (1) Did the Regional Trial Court have jurisdiction to try the case? and (2) Was
there sufficient legal basis to award damages?
Petitioner argues that the amount claimed by respondents is within the jurisdiction of the
Metropolitan Trial Court. She posits that to determine the jurisdictional amount, what should only be
considered are the following: P22,250 for funeral services; P45,000 for burial lot; P15,150 for interment
and lapida; P8,066 for hospitalization and transportation; P28,540 for food and drinks during the wake;
and P60,000 indemnity for Sorianos death. She maintains that the sum of these amounts, P179,006, is
below the jurisdictional amount of the Regional Trial Court. She states that under Section 19(8) of the
Judiciary Reorganization Act of 1980, the following claims of respondents must be excluded: P200,000
moral damages, P500,000 for lost income; P50,000 exemplary damages; P25,000 attorneys fees
plus P500 per court appearance. Petitioner thus prays that the decision of the Court of Appeals be
reversed, and the dismissal of the case by the trial court be affirmed on the ground of lack of jurisdiction.
Section 19(8) of Batas Pambansa Blg. 129,[11] as amended by Republic Act No. 7691, states the
pertinent law.
SEC. 19. Jurisdiction in civil cases.Regional Trial Courts shall exercise
exclusive original jurisdiction:
xxxx
(8) In all other cases in which the demand, exclusive of interest, damages of
whatever kind, attorney's fees, litigation expenses, and costs or the value of the
property in controversy exceeds One hundred thousand pesos (P100,000.00) or, in
such other cases in Metro Manila, where the demand, exclusive of the abovementioned
items exceeds Two hundred thousand pesos (P200,000.00).
But relatedly, Administrative Circular No. 09-94[12] expressly states: suit is for the quasi-delict of petitioner, as owner and employer, and not for the delict of Macasasa, as
driver and employee.
xxxx

2. The exclusion of the term damages of whatever kind in determining the
jurisdictional amount under Section 19(8) and Section 33(1) of BP Blg. 129, as
amended by RA No. 7691, applies to cases where the damages are merely incidental to
or a consequence of the main cause of action. However, in cases where the claim for
damages is the main cause of action, or one of the causes of action, the amount of
such claim shall be considered in determining the jurisdiction of the
court. (Underscoring supplied.)
Actions for damages based on quasi-delicts, as in this case, are primarily and effectively actions for
the recovery of a sum of money for the damages for tortious acts.[13] In this case, respondents claim
of P929,006 in damages and P25,000 attorneys fees plus P500 per court appearance represents the monetary
equivalent for compensation of the alleged injury. These money claims are the principal reliefs sought by
respondents in their complaint for damages.[14] Consequently then, we hold
the Regional Trial Court of Caloocan City possessed and properly exercised jurisdiction over the case.[15]
Petitioner further argues that since respondents caused the dismissal of the complaint against
Macasasa, there is no longer any basis to find her liable. She claims that no iota of evidence was presented
in this case to prove Macasasas negligence, and besides, respondents can recover damages in the criminal
case against him.
Respondents counter that as Macasasas employer, petitioner was presumed negligent in
selecting and supervising Macasasa after he was found negligent by the Court of Appeals.
Under Article 2180 of the Civil Code, employers are liable for the damages caused by their employees
acting within the scope of their assigned tasks. The liability arises due to the presumed negligence of the
employers in supervising their employees unless they prove that they observed all the diligence of a good
father of a family to prevent the damage.
In this case, we hold petitioner primarily and solidarily liable for the damages caused
by Macasasa.[23] Respondents could recover directly from petitioner[24] since petitioner failed to prove that
she exercised the diligence of a good father of a family in supervising Macasasa.[25] Indeed, it is unfortunate
that petitioner harbored the notion that the Regional Trial Court did not have jurisdiction over the case and
opted not to present her evidence on this point.
Lastly, we agree that the Court of Appeals did not err in ruling that Soriano was guilty of
that contributory negligence for not using the pedestrian overpass while crossing Commonwealth Avenue. We
even note that the respondents now admit this point, and concede that the appellate court had properly
reduced by 20% the amount of damages it awarded. Hence, we affirm the reduction[26] of the amount earlier
awarded, based on Article 2179 of the Civil Code which reads:
When the plaintiff's own negligence was the immediate and proximate cause
of his injury, he cannot recover damages. But if his negligence was only contributory,
the immediate and proximate cause of the injury being the defendant's lack of due
care, the plaintiff may recover damages, but the courts shall mitigate the damages to
be awarded.

The records show that Macasasa violated two traffic rules under the Land Transportation and Traffic WHEREFORE, we DENY the petition for lack of merit and hereby AFFIRM the Decision
Code. First, he failed to maintain a safe speed to avoid endangering lives. [16] Both the trial and the dated November 17, 2003 and the Resolution dated May 24, 2004 of the Court of Appeals in CA-G.R. CV
appellate courts found Macasasa overspeeding.[17] The records show also that Soriano was thrown five No. 69037.
meters away after he was hit.[18] Moreover, the vehicle stopped only some 25 meters from the point of
impact.[19]
Costs against petitioner.
Both circumstances support the conclusion that the FX vehicle driven
by Macasasa was overspeeding. Second, Macasasa, the vehicle driver, did not aid Soriano, the accident
SO ORDERED.
victim, in violation of Section 55,[20] Article V of the Land Transportation and Traffic
Code. While Macasasa at first agreed to bring Soriano to the hospital, he fled the scene in a hurry. Contrary
to petitioners claim, there is no showing of any factual basis that Macasasa fled for fear of the peoples
wrath. What remains undisputed is that he did not report the accident to a police officer, nor did he
summon a doctor. Under Article 2185[21]of the Civil Code, a person driving a motor vehicle is presumed
negligent if at the time of the mishap, he was violating traffic regulations.

While respondents could recover damages from Macasasa in a criminal case and petitioner could
become subsidiarily liable, still petitioner, as owner and employer, is directly and separately civilly liable
for her failure to exercise due diligence in supervising Macasasa.[22] We must emphasize that this damage
G.R. No. 126297 January 31, 2007 examinations, Dr. Miguel Ampil, petitioner in G.R. No. 127590, diagnosed her to be suffering from
"cancer of the sigmoid."
PROFESSIONAL SERVICES, INC., Petitioner,
vs. On April 11, 1984, Dr. Ampil, assisted by the medical staff4 of the Medical City Hospital, performed an
NATIVIDAD and ENRIQUE AGANA, Respondents. anterior resection surgery on Natividad. He found that the malignancy in her sigmoid area had spread on
her left ovary, necessitating the removal of certain portions of it. Thus, Dr. Ampil obtained the consent of
Natividad’s husband, Enrique Agana, to permit Dr. Juan Fuentes, respondent in G.R. No. 126467, to
x-----------------------x
perform hysterectomy on her.

G.R. No. 126467 January 31, 2007

After Dr. Fuentes had completed the hysterectomy, Dr. Ampil took over, completed the operation and
closed the incision.
NATIVIDAD (Substituted by her children MARCELINO AGANA III, ENRIQUE AGANA, JR., EMMA
AGANA ANDAYA, JESUS AGANA, and RAYMUND AGANA) and ENRIQUE AGANA, Petitioners,
However, the operation appeared to be flawed. In the corresponding Record of Operation dated April 11,
vs.
1984, the attending nurses entered these remarks:
JUAN FUENTES, Respondent.

"sponge count lacking 2

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

"announced to surgeon searched (sic) done but to no avail continue for closure."
G.R. No. 127590 January 31, 2007

On April 24, 1984, Natividad was released from the hospital. Her hospital and medical bills, including the
MIGUEL AMPIL, Petitioner,
doctors’ fees, amounted to P60,000.00.
vs.
NATIVIDAD AGANA and ENRIQUE AGANA, Respondents.
After a couple of days, Natividad complained of excruciating pain in her anal region. She consulted both
Dr. Ampil and Dr. Fuentes about it. They told her that the pain was the natural consequence of the
DECISION
surgery. Dr. Ampil then recommended that she consult an oncologist to examine the cancerous nodes
which were not removed during the operation.
SANDOVAL-GUTIERREZ, J.:
On May 9, 1984, Natividad, accompanied by her husband, went to the United States to seek further
Hospitals, having undertaken one of mankind’s most important and delicate endeavors, must assume the treatment. After four months of consultations and laboratory examinations, Natividad was told she was
grave responsibility of pursuing it with appropriate care. The care and service dispensed through this free of cancer. Hence, she was advised to return to the Philippines.
high trust, however technical, complex and esoteric its character may be, must meet standards of
responsibility commensurate with the undertaking to preserve and protect the health, and indeed, the
On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains. Two weeks
very lives of those placed in the hospital’s keeping.1
thereafter, her daughter found a piece of gauze protruding from her vagina. Upon being informed about
it, Dr. Ampil proceeded to her house where he managed to extract by hand a piece of gauze measuring
Assailed in these three consolidated petitions for review on certiorari is the Court of Appeals’ 1.5 inches in width. He then assured her that the pains would soon vanish.
Decision2 dated September 6, 1996 in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198 affirming with
modification the Decision3dated March 17, 1993 of the Regional Trial Court (RTC), Branch 96, Quezon
Dr. Ampil’s assurance did not come true. Instead, the pains intensified, prompting Natividad to seek
City in Civil Case No. Q-43322 and nullifying its Order dated September 21, 1993.
treatment at the Polymedic General Hospital. While confined there, Dr. Ramon Gutierrez detected the
presence of another foreign object in her vagina -- a foul-smelling gauze measuring 1.5 inches in width
The facts, as culled from the records, are: which badly infected her vaginal vault. A recto-vaginal fistula had formed in her reproductive organs
which forced stool to excrete through the vagina. Another surgical operation was needed to remedy the
damage. Thus, in October 1984, Natividad underwent another surgery.
On April 4, 1984, Natividad Agana was rushed to the Medical City General Hospital (Medical City
Hospital) because of difficulty of bowel movement and bloody anal discharge. After a series of medical
On November 12, 1984, Natividad and her husband filed with the RTC, Branch 96, Quezon City a
complaint for damages against the Professional Services, Inc. (PSI), owner of the Medical City Hospital,
Dr. Ampil, and Dr. Fuentes, docketed as Civil Case No. Q-43322. They alleged that the latter are liable for
negligence for leaving two pieces of gauze inside Natividad’s body and malpractice for concealing their
acts of negligence.
Meanwhile, Enrique Agana also filed with the Professional Regulation Commission (PRC) an
administrative complaint for gross negligence and malpractice against Dr. Ampil and Dr. Fuentes,
docketed as Administrative Case No. 1690. The PRC Board of Medicine heard the case only with respect
to Dr. Fuentes because it failed to acquire jurisdiction over Dr. Ampil who was then in the United States.
On February 16, 1986, pending the outcome of the above cases, Natividad died and was duly substituted
by her above-named children (the Aganas).
On March 17, 1993, the RTC rendered its Decision in favor of the Aganas, finding PSI, Dr. Ampil and Dr.
Fuentes liable for negligence and malpractice, the decretal part of which reads:
WHEREFORE, judgment is hereby rendered for the plaintiffs ordering the defendants PROFESSIONAL
SERVICES, INC., DR. MIGUEL AMPIL and DR. JUAN FUENTES to pay to the plaintiffs, jointly and
severally, except in respect of the award for exemplary damages and the interest thereon which are the
liabilities of defendants Dr. Ampil and Dr. Fuentes only, as follows:
1. As actual damages, the following amounts:
a. The equivalent in Philippine Currency of the total of US$19,900.00 at the rate of
P21.60-US$1.00, as reimbursement of actual expenses incurred in the United States of
America;
b. The sum of P4,800.00 as travel taxes of plaintiffs and their physician daughter;
c. The total sum of P45,802.50, representing the cost of hospitalization at Polymedic
Hospital, medical fees, and cost of the saline solution;
2. As moral damages, the sum of P2,000,000.00;
3. As exemplary damages, the sum of P300,000.00;
4. As attorney’s fees, the sum of P250,000.00;
5. Legal interest on items 1 (a), (b), and (c); 2; and 3 hereinabove, from date of filing of the
complaint until full payment; and
6. Costs of suit.
SO ORDERED.
Aggrieved, PSI, Dr. Fuentes and Dr. Ampil interposed an appeal to the Court of Appeals, docketed as CA-
G.R. CV No. 42062.
Incidentally, on April 3, 1993, the Aganas filed with the RTC a motion for a partial execution of its
Decision, which was granted in an Order dated May 11, 1993. Thereafter, the sheriff levied upon certain
properties of Dr. Ampil and sold them for P451,275.00 and delivered the amount to the Aganas.
Following their receipt of the money, the Aganas entered into an agreement with PSI and Dr. Fuentes to
indefinitely suspend any further execution of the RTC Decision. However, not long thereafter, the Aganas
again filed a motion for an alias writ of execution against the properties of PSI and Dr. Fuentes. On
September 21, 1993, the RTC granted the motion and issued the corresponding writ, prompting Dr.
Fuentes to file with the Court of Appeals a petition for certiorari and prohibition, with prayer for
preliminary injunction, docketed as CA-G.R. SP No. 32198. During its pendency, the Court of Appeals
issued a Resolution5 dated October 29, 1993 granting Dr. Fuentes’ prayer for injunctive relief.
On January 24, 1994, CA-G.R. SP No. 32198 was consolidated with CA-G.R. CV No. 42062.
Meanwhile, on January 23, 1995, the PRC Board of Medicine rendered its Decision 6 in Administrative
Case No. 1690 dismissing the case against Dr. Fuentes. The Board held that the prosecution failed to
show that Dr. Fuentes was the one who left the two pieces of gauze inside Natividad’s body; and that he
concealed such fact from Natividad.
On September 6, 1996, the Court of Appeals rendered its Decision jointly disposing of CA-G.R. CV No.
42062 and CA-G.R. SP No. 32198, thus:
WHEREFORE, except for the modification that the case against defendant-appellant Dr. Juan Fuentes is
hereby DISMISSED, and with the pronouncement that defendant-appellant Dr. Miguel Ampil is liable to
reimburse defendant-appellant Professional Services, Inc., whatever amount the latter will pay or had
paid to the plaintiffs-appellees, the decision appealed from is hereby AFFIRMED and the instant appeal
DISMISSED.
Concomitant with the above, the petition for certiorari and prohibition filed by herein defendant-appellant
Dr. Juan Fuentes in CA-G.R. SP No. 32198 is hereby GRANTED and the challenged order of the
respondent judge dated September 21, 1993, as well as the alias writ of execution issued pursuant
thereto are hereby NULLIFIED and SET ASIDE. The bond posted by the petitioner in connection with the
writ of preliminary injunction issued by this Court on November 29, 1993 is hereby cancelled.
Costs against defendants-appellants Dr. Miguel Ampil and Professional Services, Inc.
SO ORDERED.
Only Dr. Ampil filed a motion for reconsideration, but it was denied in a Resolution 7 dated December 19,
1996.
Hence, the instant consolidated petitions.
In G.R. No. 126297, PSI alleged in its petition that the Court of Appeals erred in holding that: (1) it is
estopped from raising the defense that Dr. Ampil is not its employee; (2) it is solidarily liable with Dr.
Ampil; and (3) it is not entitled to its counterclaim against the Aganas. PSI contends that Dr. Ampil is not
its employee, but a mere consultant or independent contractor. As such, he alone should answer for his
negligence.
In G.R. No. 126467, the Aganas maintain that the Court of Appeals erred in finding that Dr. Fuentes is
not guilty of negligence or medical malpractice, invoking the doctrine of res ipsa loquitur. They contend
that the pieces of gauze are prima facie proofs that the operating surgeons have been negligent.
Finally, in G.R. No. 127590, Dr. Ampil asserts that the Court of Appeals erred in finding him liable for
negligence and malpractice sans evidence that he left the two pieces of gauze in Natividad’s vagina. He
pointed to other probable causes, such as: (1) it was Dr. Fuentes who used gauzes in performing the
hysterectomy; (2) the attending nurses’ failure to properly count the gauzes used during surgery; and (3)
the medical intervention of the American doctors who examined Natividad in the United States of
America.
For our resolution are these three vital issues: first, whether the Court of Appeals erred in holding Dr.
Ampil liable for negligence and malpractice; second, whether the Court of Appeals erred in absolving Dr.
Fuentes of any liability; and third, whether PSI may be held solidarily liable for the negligence of Dr.
Ampil.
I - G.R. No. 127590
Whether the Court of Appeals Erred in Holding Dr. Ampil
Liable for Negligence and Malpractice.
Dr. Ampil, in an attempt to absolve himself, gears the Court’s attention to other possible causes of
Natividad’s detriment. He argues that the Court should not discount either of the following possibilities:
first, Dr. Fuentes left the gauzes in Natividad’s body after performing hysterectomy; second, the attending
nurses erred in counting the gauzes; and third, the American doctors were the ones who placed the
gauzes in Natividad’s body.
Dr. Ampil’s arguments are purely conjectural and without basis. Records show that he did not present
any evidence to prove that the American doctors were the ones who put or left the gauzes in Natividad’s
body. Neither did he submit evidence to rebut the correctness of the record of operation, particularly the
number of gauzes used. As to the alleged negligence of Dr. Fuentes, we are mindful that Dr. Ampil
examined his (Dr. Fuentes’) work and found it in order.
The glaring truth is that all the major circumstances, taken together, as specified by the Court of
Appeals, directly point to Dr. Ampil as the negligent party, thus:
First, it is not disputed that the surgeons used gauzes as sponges to control the bleeding of the
patient during the surgical operation.
Second, immediately after the operation, the nurses who assisted in the surgery noted in their
report that the ‘sponge count (was) lacking 2’; that such anomaly was ‘announced to surgeon’
and that a ‘search was done but to no avail’ prompting Dr. Ampil to ‘continue for closure’ x x x.
Third, after the operation, two (2) gauzes were extracted from the same spot of the body of Mrs.
Agana where the surgery was performed.
An operation requiring the placing of sponges in the incision is not complete until the sponges are
properly removed, and it is settled that the leaving of sponges or other foreign substances in the wound
after the incision has been closed is at least prima facie negligence by the operating surgeon. 8 To put it
simply, such act is considered so inconsistent with due care as to raise an inference of negligence. There
are even legions of authorities to the effect that such act is negligence per se.9
Of course, the Court is not blind to the reality that there are times when danger to a patient’s life
precludes a surgeon from further searching missing sponges or foreign objects left in the body. But this
does not leave him free from any obligation. Even if it has been shown that a surgeon was required by the
urgent necessities of the case to leave a sponge in his patient’s abdomen, because of the dangers
attendant upon delay, still, it is his legal duty to so inform his patient within a reasonable time thereafter
by advising her of what he had been compelled to do. This is in order that she might seek relief from the
effects of the foreign object left in her body as her condition might permit. The ruling in Smith v.
Zeagler10 is explicit, thus:
The removal of all sponges used is part of a surgical operation, and when a physician or surgeon fails to
remove a sponge he has placed in his patient’s body that should be removed as part of the operation, he
thereby leaves his operation uncompleted and creates a new condition which imposes upon him the legal
duty of calling the new condition to his patient’s attention, and endeavoring with the means he has at
hand to minimize and avoid untoward results likely to ensue therefrom.
Here, Dr. Ampil did not inform Natividad about the missing two pieces of gauze. Worse, he even misled
her that the pain she was experiencing was the ordinary consequence of her operation. Had he been
more candid, Natividad could have taken the immediate and appropriate medical remedy to remove the
gauzes from her body. To our mind, what was initially an act of negligence by Dr. Ampil has ripened into
a deliberate wrongful act of deceiving his patient.
This is a clear case of medical malpractice or more appropriately, medical negligence. To successfully
pursue this kind of case, a patient must only prove that a health care provider either failed to do
something which a reasonably prudent health care provider would have done, or that he did something
that a reasonably prudent provider would not have done; and that failure or action caused injury to the
patient.11 Simply put, the elements are duty, breach, injury and proximate causation. Dr, Ampil, as the
lead surgeon, had the duty to remove all foreign objects, such as gauzes, from Natividad’s body before
closure of the incision. When he failed to do so, it was his duty to inform Natividad about it. Dr. Ampil
breached both duties. Such breach caused injury to Natividad, necessitating her further examination by
American doctors and another surgery. That Dr. Ampil’s negligence is the proximate cause 12 of
Natividad’s injury could be traced from his act of closing the incision despite the information given by the
attending nurses that two pieces of gauze were still missing. That they were later on extracted from
Natividad’s vagina established the causal link between Dr. Ampil’s negligence and the injury. And what
further aggravated such injury was his deliberate concealment of the missing gauzes from the knowledge
of Natividad and her family.
II - G.R. No. 126467
Whether the Court of Appeals Erred in Absolving
Dr. Fuentes of any Liability
The Aganas assailed the dismissal by the trial court of the case against Dr. Fuentes on the ground that it
is contrary to the doctrine of res ipsa loquitur. According to them, the fact that the two pieces of gauze
were left inside Natividad’s body is a prima facie evidence of Dr. Fuentes’ negligence.
We are not convinced.
Literally, res ipsa loquitur means "the thing speaks for itself." It is the rule that the fact of the occurrence
of an injury, taken with the surrounding circumstances, may permit an inference or raise a presumption
of negligence, or make out a plaintiff’s prima facie case, and present a question of fact for defendant to
meet with an explanation.13 Stated differently, where the thing which caused the injury, without the fault
of the injured, is under the exclusive control of the defendant and the injury is such that it should not
have occurred if he, having such control used proper care, it affords reasonable evidence, in the absence
of explanation that the injury arose from the defendant’s want of care, and the burden of proof is shifted
to him to establish that he has observed due care and diligence.14
From the foregoing statements of the rule, the requisites for the applicability of the doctrine of res ipsa
loquitur are: (1) the occurrence of an injury; (2) the thing which caused the injury was under the control
and management of the defendant; (3) the occurrence was such that in the ordinary course of things,
would not have happened if those who had control or management used proper care; and (4) the absence
of explanation by the defendant. Of the foregoing requisites, the most instrumental is the "control and
management of the thing which caused the injury."15
in order, allowed Dr. Fuentes to leave the operating room. Dr. Ampil then resumed operating on
Natividad. He was about to finish the procedure when the attending nurses informed him that two pieces
of gauze were missing. A "diligent search" was conducted, but the misplaced gauzes were not found. Dr.
Ampil then directed that the incision be closed. During this entire period, Dr. Fuentes was no longer in
the operating room and had, in fact, left the hospital.
Under the "Captain of the Ship" rule, the operating surgeon is the person in complete charge of the
surgery room and all personnel connected with the operation. Their duty is to obey his orders.16 As stated
before, Dr. Ampil was the lead surgeon. In other words, he was the "Captain of the Ship." That he
discharged such role is evident from his following conduct: (1) calling Dr. Fuentes to perform a
hysterectomy; (2) examining the work of Dr. Fuentes and finding it in order; (3) granting Dr. Fuentes’
permission to leave; and (4) ordering the closure of the incision. To our mind, it was this act of ordering
the closure of the incision notwithstanding that two pieces of gauze remained unaccounted for, that
caused injury to Natividad’s body. Clearly, the control and management of the thing which caused the
injury was in the hands of Dr. Ampil, not Dr. Fuentes.
In this jurisdiction, res ipsa loquitur is not a rule of substantive law, hence, does not per se create or
constitute an independent or separate ground of liability, being a mere evidentiary rule.17 In other words,
mere invocation and application of the doctrine does not dispense with the requirement of proof of
negligence. Here, the negligence was proven to have been committed by Dr. Ampil and not by Dr.
Fuentes.
III - G.R. No. 126297
Whether PSI Is Liable for the Negligence of Dr. Ampil
The third issue necessitates a glimpse at the historical development of hospitals and the resulting
theories concerning their liability for the negligence of physicians.
Until the mid-nineteenth century, hospitals were generally charitable institutions, providing medical
services to the lowest classes of society, without regard for a patient’s ability to pay.18 Those who could
afford medical treatment were usually treated at home by their doctors.19 However, the days of house
calls and philanthropic health care are over. The modern health care industry continues to distance itself
from its charitable past and has experienced a significant conversion from a not-for-profit health care to
for-profit hospital businesses. Consequently, significant changes in health law have accompanied the
business-related changes in the hospital industry. One important legal change is an increase in hospital
liability for medical malpractice. Many courts now allow claims for hospital vicarious liability under the
theories of respondeat superior, apparent authority, ostensible authority, or agency by estoppel. 20

We find the element of "control and management of the thing which caused the injury" to be wanting.
In this jurisdiction, the statute governing liability for negligent acts is Article 2176 of the Civil Code,
Hence, the doctrine of res ipsa loquitur will not lie.
which reads:

It was duly established that Dr. Ampil was the lead surgeon during the operation of Natividad. He
Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is
requested the assistance of Dr. Fuentes only to perform hysterectomy when he (Dr. Ampil) found that the
obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual
malignancy in her sigmoid area had spread to her left ovary. Dr. Fuentes performed the surgery and
relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter.
thereafter reported and showed his work to Dr. Ampil. The latter examined it and finding everything to be
A derivative of this provision is Article 2180, the rule governing vicarious liability under the doctrine of
respondeat superior, thus:
ART. 2180. The obligation imposed by Article 2176 is demandable not only for one’s own acts or
omissions, but also for those of persons for whom one is responsible.
x x x x x x
The owners and managers of an establishment or enterprise are likewise responsible for damages caused
by their employees in the service of the branches in which the latter are employed or on the occasion of
their functions.
Employers shall be liable for the damages caused by their employees and household helpers acting
within the scope of their assigned tasks even though the former are not engaged in any business or
industry.
x x x x x x
The responsibility treated of in this article shall cease when the persons herein mentioned prove that they
observed all the diligence of a good father of a family to prevent damage.
A prominent civilist commented that professionals engaged by an employer, such as physicians, dentists,
and pharmacists, are not "employees" under this article because the manner in which they perform their
work is not within the control of the latter (employer). In other words, professionals are considered
personally liable for the fault or negligence they commit in the discharge of their duties, and their
employer cannot be held liable for such fault or negligence. In the context of the present case, "a hospital
cannot be held liable for the fault or negligence of a physician or surgeon in the treatment or operation of
patients."21
The foregoing view is grounded on the traditional notion that the professional status and the very nature
of the physician’s calling preclude him from being classed as an agent or employee of a hospital,
whenever he acts in a professional capacity.22 It has been said that medical practice strictly involves
highly developed and specialized knowledge,23 such that physicians are generally free to exercise their
own skill and judgment in rendering medical services sans interference. 24 Hence, when a doctor practices
medicine in a hospital setting, the hospital and its employees are deemed to subserve him in his
ministrations to the patient and his actions are of his own responsibility.25
The case of Schloendorff v. Society of New York Hospital26 was then considered an authority for this view.
The "Schloendorff doctrine" regards a physician, even if employed by a hospital, as an independent
contractor because of the skill he exercises and the lack of control exerted over his work. Under this
doctrine, hospitals are exempt from the application of the respondeat superior principle for fault or
negligence committed by physicians in the discharge of their profession.
However, the efficacy of the foregoing doctrine has weakened with the significant developments in
medical care. Courts came to realize that modern hospitals are increasingly taking active role in
supplying and regulating medical care to patients. No longer were a hospital’s functions limited to
furnishing room, food, facilities for treatment and operation, and attendants for its patients. Thus, in
Bing v. Thunig,27 the New York Court of Appeals deviated from the Schloendorff doctrine, noting that
modern hospitals actually do far more than provide facilities for treatment. Rather, they regularly employ,
on a salaried basis, a large staff of physicians, interns, nurses, administrative and manual workers. They
charge patients for medical care and treatment, even collecting for such services through legal action, if
necessary. The court then concluded that there is no reason to exempt hospitals from the universal rule
of respondeat superior.
In our shores, the nature of the relationship between the hospital and the physicians is rendered
inconsequential in view of our categorical pronouncement in Ramos v. Court of Appeals 28 that for
purposes of apportioning responsibility in medical negligence cases, an employer-employee relationship
in effect exists between hospitals and their attending and visiting physicians. This Court held:
"We now discuss the responsibility of the hospital in this particular incident. The unique practice (among
private hospitals) of filling up specialist staff with attending and visiting "consultants," who are allegedly
not hospital employees, presents problems in apportioning responsibility for negligence in medical
malpractice cases. However, the difficulty is more apparent than real.
In the first place, hospitals exercise significant control in the hiring and firing of consultants and in the
conduct of their work within the hospital premises. Doctors who apply for ‘consultant’ slots, visiting or
attending, are required to submit proof of completion of residency, their educational qualifications,
generally, evidence of accreditation by the appropriate board (diplomate), evidence of fellowship in most
cases, and references. These requirements are carefully scrutinized by members of the hospital
administration or by a review committee set up by the hospital who either accept or reject the
application. x x x.
After a physician is accepted, either as a visiting or attending consultant, he is normally required to
attend clinico-pathological conferences, conduct bedside rounds for clerks, interns and residents,
moderate grand rounds and patient audits and perform other tasks and responsibilities, for the privilege
of being able to maintain a clinic in the hospital, and/or for the privilege of admitting patients into the
hospital. In addition to these, the physician’s performance as a specialist is generally evaluated by a peer
review committee on the basis of mortality and morbidity statistics, and feedback from patients, nurses,
interns and residents. A consultant remiss in his duties, or a consultant who regularly falls short of the
minimum standards acceptable to the hospital or its peer review committee, is normally politely
terminated.
In other words, private hospitals, hire, fire and exercise real control over their attending and visiting
‘consultant’ staff. While ‘consultants’ are not, technically employees, x x x, the control exercised, the
hiring, and the right to terminate consultants all fulfill the important hallmarks of an employer-employee
relationship, with the exception of the payment of wages. In assessing whether such a relationship in fact
exists, the control test is determining. Accordingly, on the basis of the foregoing, we rule that for the
purpose of allocating responsibility in medical negligence cases, an employer-employee relationship in
effect exists between hospitals and their attending and visiting physicians. "
But the Ramos pronouncement is not our only basis in sustaining PSI’s liability. Its liability is also
anchored upon the agency principle of apparent authority or agency by estoppel and the doctrine of
corporate negligence which have gained acceptance in the determination of a hospital’s liability for
negligent acts of health professionals. The present case serves as a perfect platform to test the
applicability of these doctrines, thus, enriching our jurisprudence.
Apparent authority, or what is sometimes referred to as the "holding
x x x regardless of the education and status in life of the patient, he ought not be burdened with the
defense of absence of employer-employee relationship between the hospital and the independent
physician whose name and competence are certainly certified to the general public by the hospital’s act of
listing him and his specialty in its lobby directory, as in the case herein. The high costs of today’s
medical and health care should at least exact on the hospital greater, if not broader, legal responsibility
for the conduct of treatment and surgery within its facility by its accredited physician or surgeon,
regardless of whether he is independent or employed."33

The wisdom of the foregoing ratiocination is easy to discern. Corporate entities, like PSI, are capable of
out" theory, or doctrine of ostensible agency or agency by estoppel,29 has its origin from the law of
acting only through other individuals, such as physicians. If these accredited physicians do their job well,
agency. It imposes liability, not as the result of the reality of a contractual relationship, but rather
the hospital succeeds in its mission of offering quality medical services and thus profits financially.
because of the actions of a principal or an employer in somehow misleading the public into believing that
Logically, where negligence mars the quality of its services, the hospital should not be allowed to escape
the relationship or the authority exists.30 The concept is essentially one of estoppel and has been
liability for the acts of its ostensible agents.
explained in this manner:

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

"The principal is bound by the acts of his agent with the apparent authority which he knowingly permits
the agent to assume, or which he holds the agent out to the public as possessing. The question in every
case is whether the principal has by his voluntary act placed the agent in such a situation that a person One allegation in the complaint in Civil Case No. Q-43332 for negligence and malpractice is that PSI as
of ordinary prudence, conversant with business usages and the nature of the particular business, is owner, operator and manager of Medical City Hospital, "did not perform the necessary supervision nor
justified in presuming that such agent has authority to perform the particular act in question.31 exercise diligent efforts in the supervision of Drs. Ampil and Fuentes and its nursing staff, resident
doctors, and medical interns who assisted Drs. Ampil and Fuentes in the performance of their duties as
surgeons."34 Premised on the doctrine of corporate negligence, the trial court held that PSI is directly
The applicability of apparent authority in the field of hospital liability was upheld long time ago in Irving
liable for such breach of duty.
v. Doctor Hospital of Lake Worth, Inc.32 There, it was explicitly stated that "there does not appear to be
any rational basis for excluding the concept of apparent authority from the field of hospital liability."
Thus, in cases where it can be shown that a hospital, by its actions, has held out a particular physician We agree with the trial court.
as its agent and/or employee and that a patient has accepted treatment from that physician in the
reasonable belief that it is being rendered in behalf of the hospital, then the hospital will be liable for the
Recent years have seen the doctrine of corporate negligence as the judicial answer to the problem of
physician’s negligence.
allocating hospital’s liability for the negligent acts of health practitioners, absent facts to support the
application of respondeat superior or apparent authority. Its formulation proceeds from the judiciary’s
Our jurisdiction recognizes the concept of an agency by implication or estoppel. Article 1869 of the Civil acknowledgment that in these modern times, the duty of providing quality medical service is no longer
Code reads: the sole prerogative and responsibility of the physician. The modern hospitals have changed structure.
Hospitals now tend to organize a highly professional medical staff whose competence and performance
need to be monitored by the hospitals commensurate with their inherent responsibility to provide quality
ART. 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of
medical care.35
action, or his failure to repudiate the agency, knowing that another person is acting on his behalf without
authority.
The doctrine has its genesis in Darling v. Charleston Community Hospital.36 There, the Supreme Court of
Illinois held that "the jury could have found a hospital negligent, inter alia, in failing to have a sufficient
In this case, PSI publicly displays in the lobby of the Medical City Hospital the names and specializations
number of trained nurses attending the patient; failing to require a consultation with or examination by
of the physicians associated or accredited by it, including those of Dr. Ampil and Dr. Fuentes. We concur
members of the hospital staff; and failing to review the treatment rendered to the patient." On the basis of
with the Court of Appeals’ conclusion that it "is now estopped from passing all the blame to the
Darling, other jurisdictions held that a hospital’s corporate negligence extends to permitting a physician
physicians whose names it proudly paraded in the public directory leading the public to believe that it
known to be incompetent to practice at the hospital.37 With the passage of time, more duties were
vouched for their skill and competence." Indeed, PSI’s act is tantamount to holding out to the public that
expected from hospitals, among them: (1) the use of reasonable care in the maintenance of safe and
Medical City Hospital, through its accredited physicians, offers quality health care services. By
adequate facilities and equipment; (2) the selection and retention of competent physicians; (3) the
accrediting Dr. Ampil and Dr. Fuentes and publicly advertising their qualifications, the hospital created
overseeing or supervision of all persons who practice medicine within its walls; and (4) the formulation,
the impression that they were its agents, authorized to perform medical or surgical services for its
adoption and enforcement of adequate rules and policies that ensure quality care for its patients.38 Thus,
patients. As expected, these patients, Natividad being one of them, accepted the services on the
in Tucson Medical Center, Inc. v. Misevich,39 it was held that a hospital, following the doctrine of
reasonable belief that such were being rendered by the hospital or its employees, agents, or servants. The
corporate responsibility, has the duty to see that it meets the standards of responsibilities for the care of
trial court correctly pointed out:
patients. Such duty includes the proper supervision of the members of its medical staff. And in Bost v.
Riley,40 the court concluded that a patient who enters a hospital does so with the reasonable expectation
that it will attempt to cure him. The hospital accordingly has the duty to make a reasonable effort to
monitor and oversee the treatment prescribed and administered by the physicians practicing in its
premises.
Subsequent to the Purcell decision, the Arizona Court of Appeals held that a hospital has certain
inherent responsibilities regarding the quality of medical care furnished to patients within its walls and it
must meet the standards of responsibility commensurate with this undertaking. Beeck v. Tucson General
Hospital, 18 Ariz. App. 165, 500 P. 2d 1153 (1972). This court has confirmed the rulings of the Court of
Appeals that a hospital has the duty of supervising the competence of the doctors on its staff. x x x.

In the present case, it was duly established that PSI operates the Medical City Hospital for the purpose x x x x x x
and under the concept of providing comprehensive medical services to the public. Accordingly, it has the
duty to exercise reasonable care to protect from harm all patients admitted into its facility for medical
In the amended complaint, the plaintiffs did plead that the operation was performed at the hospital with
treatment. Unfortunately, PSI failed to perform such duty. The findings of the trial court are convincing,
its knowledge, aid, and assistance, and that the negligence of the defendants was the proximate cause of
thus:
the patient’s injuries. We find that such general allegations of negligence, along with the evidence
produced at the trial of this case, are sufficient to support the hospital’s liability based on the theory of
x x x PSI’s liability is traceable to its failure to conduct an investigation of the matter reported in the nota negligent supervision."
bene of the count nurse. Such failure established PSI’s part in the dark conspiracy of silence and
concealment about the gauzes. Ethical considerations, if not also legal, dictated the holding of an
Anent the corollary issue of whether PSI is solidarily liable with Dr. Ampil for damages, let it be
immediate inquiry into the events, if not for the benefit of the patient to whom the duty is primarily owed,
emphasized that PSI, apart from a general denial of its responsibility, failed to adduce evidence showing
then in the interest of arriving at the truth. The Court cannot accept that the medical and the healing
that it exercised the diligence of a good father of a family in the accreditation and supervision of the
professions, through their members like defendant surgeons, and their institutions like PSI’s hospital
latter. In neglecting to offer such proof, PSI failed to discharge its burden under the last paragraph of
facility, can callously turn their backs on and disregard even a mere probability of mistake or negligence
Article 2180 cited earlier, and, therefore, must be adjudged solidarily liable with Dr. Ampil. Moreover, as
by refusing or failing to investigate a report of such seriousness as the one in Natividad’s case.
we have discussed, PSI is also directly liable to the Aganas.

It is worthy to note that Dr. Ampil and Dr. Fuentes operated on Natividad with the assistance of the
One final word. Once a physician undertakes the treatment and care of a patient, the law imposes on
Medical City Hospital’s staff, composed of resident doctors, nurses, and interns. As such, it is reasonable
him certain obligations. In order to escape liability, he must possess that reasonable degree of learning,
to conclude that PSI, as the operator of the hospital, has actual or constructive knowledge of the
skill and experience required by his profession. At the same time, he must apply reasonable care and
procedures carried out, particularly the report of the attending nurses that the two pieces of gauze were
diligence in the exercise of his skill and the application of his knowledge, and exert his best judgment.
missing. In Fridena v. Evans,41 it was held that a corporation is bound by the knowledge acquired by or
notice given to its agents or officers within the scope of their authority and in reference to a matter to
which their authority extends. This means that the knowledge of any of the staff of Medical City Hospital WHEREFORE, we DENY all the petitions and AFFIRM the challenged Decision of the Court of Appeals in
constitutes knowledge of PSI. Now, the failure of PSI, despite the attending nurses’ report, to investigate CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198.
and inform Natividad regarding the missing gauzes amounts to callous negligence. Not only did PSI
breach its duties to oversee or supervise all persons who practice medicine within its walls, it also failed
Costs against petitioners PSI and Dr. Miguel Ampil.
to take an active step in fixing the negligence committed. This renders PSI, not only vicariously liable for
the negligence of Dr. Ampil under Article 2180 of the Civil Code, but also directly liable for its own
negligence under Article 2176. In Fridena, the Supreme Court of Arizona held: SO ORDERED.

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

Among the cases indicative of the ‘emerging trend’ is Purcell v. Zimbelman, 18 Ariz. App. 75,500 P. 2d
REYNATO S. PUNO
335 (1972). In Purcell, the hospital argued that it could not be held liable for the malpractice of a medical
Chief Justice
practitioner because he was an independent contractor within the hospital. The Court of Appeals pointed
Chairperson
out that the hospital had created a professional staff whose competence and performance was to be
monitored and reviewed by the governing body of the hospital, and the court held that a hospital would
be negligent where it had knowledge or reason to believe that a doctor using the facilities was employing
a method of treatment or care which fell below the recognized standard of care.
 [G.R. No. 150843. March 14, 2003]
CATHAY PACIFIC AIRWAYS, LTD., petitioner, vs. SPOUSES DANIEL VAZQUEZ and MARIA LUISA
MADRIGAL VAZQUEZ, respondents.
DECISION
DAVIDE, JR., C.J.:
Is an involuntary upgrading of an airline passengers accommodation from one class to a more
superior class at no extra cost a breach of contract of carriage that would entitle the passenger to an
award of damages? This is a novel question that has to be resolved in this case.
The facts in this case, as found by the Court of Appeals and adopted by petitioner Cathay Pacific
Airways, Ltd., (hereinafter Cathay) are as follows:
Cathay is a common carrier engaged in the business of transporting passengers and goods by
air. Among the many routes it services is the Manila-Hongkong-Manila course. As part of its marketing
strategy, Cathay accords its frequent flyers membership in its Marco Polo Club. The members enjoy
several privileges, such as priority for upgrading of booking without any extra charge whenever an
opportunity arises.Thus, a frequent flyer booked in the Business Class has priority for upgrading to First
Class if the Business Class Section is fully booked.
Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa Madrigal Vazquez are
frequent flyers of Cathay and are Gold Card members of its Marco Polo Club. On 24 September 1996, the
Vazquezes, together with their maid and two friends Pacita Cruz and Josefina Vergel de Dios, went to
Hongkong for pleasure and business.
For their return flight to Manila on 28 September 1996, they were booked on Cathays Flight CX-
905, with departure time at 9:20 p.m. Two hours before their time of departure, the Vazquezes and their
companions checked in their luggage at Cathays check-in counter at Kai Tak Airport and were given their
respective boarding passes, to wit, Business Class boarding passes for the Vazquezes and their two
friends, and Economy Class for their maid. They then proceeded to the Business Class passenger lounge.
When boarding time was announced, the Vazquezes and their two friends went to Departure Gate
No. 28, which was designated for Business Class passengers. Dr. Vazquez presented his boarding pass to
the ground stewardess, who in turn inserted it into an electronic machine reader or computer at the gate.
The ground stewardess was assisted by a ground attendant by the name of Clara Lai Han Chiu. When
Ms. Chiu glanced at the computer monitor, she saw a message that there was a seat change from
Business Class to First Class for the Vazquezes.
Ms. Chiu approached Dr. Vazquez and told him that the Vazquezes accommodations were upgraded
to First Class. Dr. Vazquez refused the upgrade, reasoning that it would not look nice for them as hosts
to travel in First Class and their guests, in the Business Class; and moreover, they were going to discuss
business matters during the flight. He also told Ms. Chiu that she could have other passengers instead
transferred to the First Class Section. Taken aback by the refusal for upgrading, Ms. Chiu consulted her
supervisor, who told her to handle the situation and convince the Vazquezes to accept the upgrading. Ms.
Chiu informed the latter that the Business Class was fully booked, and that since they were Marco Polo
Club members they had the priority to be upgraded to the First Class. Dr. Vazquez continued to refuse,
so Ms. Chiu told them that if they would not avail themselves of the privilege, they would not be allowed
to take the flight. Eventually, after talking to his two friends, Dr. Vazquez gave in. He and Mrs. Vazquez
then proceeded to the First Class Cabin.
Upon their return to Manila, the Vazquezes, in a letter of 2 October 1996 addressed to Cathays
Country Manager, demanded that they be indemnified in the amount of P1million for the humiliation and
embarrassment caused by its employees. They also demanded a written apology from the management of
Cathay, preferably a responsible person with a rank of no less than the Country Manager, as well as the
apology from Ms. Chiu within fifteen days from receipt of the letter.
In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to Cathays Country Manager Argus
Guy Robson, informed the Vazquezes that Cathay would investigate the incident and get back to them
within a weeks time.
On 8 November 1996, after Cathays failure to give them any feedback within its self-imposed
deadline, the Vazquezes instituted before the Regional Trial Court of Makati City an action for damages
against Cathay, praying for the payment to each of them the amounts of P250,000 as temperate
damages; P500,000 as moral damages; P500,000 as exemplary or corrective damages; and P250,000 as
attorneys fees.
In their complaint, the Vazquezes alleged that when they informed Ms. Chiu that they preferred to
stay in Business Class, Ms. Chiu obstinately, uncompromisingly and in a loud, discourteous and harsh
voice threatened that they could not board and leave with the flight unless they go to First Class, since
the Business Class was overbooked. Ms. Chius loud and stringent shouting annoyed, embarrassed, and
humiliated them because the incident was witnessed by all the other passengers waiting for
boarding. They also claimed that they were unjustifiably delayed to board the plane, and when they were
finally permitted to get into the aircraft, the forward storage compartment was already full. A flight
stewardess instructed Dr. Vazquez to put his roll-on luggage in the overhead storage
compartment. Because he was not assisted by any of the crew in putting up his luggage, his bilateral
carpal tunnel syndrome was aggravated, causing him extreme pain on his arm and wrist. The Vazquezes
also averred that they belong to the uppermost and absolutely top elite of both Philippine Society and the
Philippine financial community, [and that] they were among the wealthiest persons in the Philippine[s].
In its answer, Cathay alleged that it is a practice among commercial airlines to upgrade passengers
to the next better class of accommodation, whenever an opportunity arises, such as when a certain
section is fully booked. Priority in upgrading is given to its frequent flyers, who are considered favored
passengers like the Vazquezes. Thus, when the Business Class Section of Flight CX-905 was fully
booked, Cathays computer sorted out the names of favored passengers for involuntary upgrading to First
Class. When Ms. Chiu informed the Vazquezes that they were upgraded to First Class, Dr. Vazquez
refused. He then stood at the entrance of the boarding apron, blocking the queue of passengers from
boarding the plane, which inconvenienced other passengers. He shouted that it was impossible for him
and his wife to be upgraded without his two friends who were traveling with them. Because of Dr.
Vazquezs outburst, Ms. Chiu thought of upgrading the traveling companions of the Vazquezes. But when
she checked the computer, she learned that the Vazquezes companions did not have priority for
upgrading. She then tried to book the Vazquezes again to their original seats. However, since the
Business Class Section was already fully booked, she politely informed Dr. Vazquez of such fact and
explained that the upgrading was in recognition of their status as Cathays valued passengers. Finally,
after talking to their guests, the Vazquezes eventually decided to take the First Class accommodation.
 Cathay also asserted that its employees at the Hong Kong airport acted in good faith in dealing with
the Vazquezes; none of them shouted, humiliated, embarrassed, or committed any act of disrespect
against them (the Vazquezes). Assuming that there was indeed a breach of contractual obligation, Cathay
acted in good faith, which negates any basis for their claim for temperate, moral, and exemplary damages
and attorneys fees. Hence, it prayed for the dismissal of the complaint and for payment of P100,000 for
exemplary damages and P300,000 as attorneys fees and litigation expenses.
During the trial, Dr. Vazquez testified to support the allegations in the complaint. His testimony
was corroborated by his two friends who were with him at the time of the incident, namely, Pacita G.
Cruz and Josefina Vergel de Dios.
For its part, Cathay presented documentary evidence and the testimonies of Mr. Yuen; Ms. Chiu;
Norma Barrientos, Comptroller of its retained counsel; and Mr. Robson. Yuen and Robson testified on
Cathays policy of upgrading the seat accommodation of its Marco Polo Club members when an
opportunity arises. The upgrading of the Vazquezes to First Class was done in good faith; in fact, the
First Class Section is definitely much better than the Business Class in terms of comfort, quality of food,
and service from the cabin crew. They also testified that overbooking is a widely accepted practice in the
airline industry and is in accordance with the International Air Transport Association (IATA)
regulations. Airlines overbook because a lot of passengers do not show up for their flight. With respect to
Flight CX-905, there was no overall overbooking to a degree that a passenger was bumped off or
downgraded. Yuen and Robson also stated that the demand letter of the Vazquezes was immediately
acted upon. Reports were gathered from their office in Hong Kong and immediately forwarded to their
counsel Atty. Remollo for legal advice. However, Atty. Remollo begged off because his services were
likewise retained by the Vazquezes; nonetheless, he undertook to solve the problem in behalf of Cathay.
But nothing happened until Cathay received a copy of the complaint in this case. For her part, Ms. Chiu
denied that she shouted or used foul or impolite language against the Vazquezes. Ms. Barrientos testified
on the amount of attorneys fees and other litigation expenses, such as those for the taking of the
depositions of Yuen and Chiu.
In its decision[1] of 19 October 1998, the trial court found for the Vazquezes and decreed as follows:
WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby
rendered in favor of plaintiffs Vazquez spouses and against defendant Cathay Pacific Airways, Ltd.,
ordering the latter to pay each plaintiff the following:
a) Nominal damages in the amount of P100,000.00 for each plaintiff;
b) Moral damages in the amount of P2,000,000.00 for each plaintiff;
c) Exemplary damages in the amount of P5,000,000.00 for each plaintiff;
d) Attorneys fees and expenses of litigation in the amount of P1,000,000.00 for each
plaintiff; and
e) Costs of suit.
SO ORDERED.
According to the trial court, Cathay offers various classes of seats from which passengers are
allowed to choose regardless of their reasons or motives, whether it be due to budgetary constraints or
whim. The choice imposes a clear obligation on Cathay to transport the passengers in the class chosen
by them. The carrier cannot, without exposing itself to liability, force a passenger to involuntarily change
his choice. The upgrading of the Vazquezes accommodation over and above their vehement objections
was due to the overbooking of the Business Class. It was a pretext to pack as many passengers as
possible into the plane to maximize Cathays revenues. Cathays actuations in this case displayed deceit,
gross negligence, and bad faith, which entitled the Vazquezes to awards for damages.
On appeal by the petitioners, the Court of Appeals, in its decision of 24 July 2001, [2] deleted the
award for exemplary damages; and it reduced the awards for moral and nominal damages for each of the
Vazquezes to P250,000 and P50,000, respectively, and the attorneys fees and litigation expenses
to P50,000 for both of them.
The Court of Appeals ratiocinated that by upgrading the Vazquezes to First Class, Cathay novated
the contract of carriage without the formers consent. There was a breach of contract not because Cathay
overbooked the Business Class Section of Flight CX-905 but because the latter pushed through with the
upgrading despite the objections of the Vazquezes.
However, the Court of Appeals was not convinced that Ms. Chiu shouted at, or meant to be
discourteous to, Dr. Vazquez, although it might seemed that way to the latter, who was a member of the
elite in Philippine society and was not therefore used to being harangued by anybody. Ms. Chiu was a
Hong Kong Chinese whose fractured Chinese was difficult to understand and whose manner of speaking
might sound harsh or shrill to Filipinos because of cultural differences. But the Court of Appeals did not
find her to have acted with deliberate malice, deceit, gross negligence, or bad faith. If at all, she was
negligent in not offering the First Class accommodations to other passengers. Neither can the flight
stewardess in the First Class Cabin be said to have been in bad faith when she failed to assist Dr.
Vazquez in lifting his baggage into the overhead storage bin. There is no proof that he asked for help and
was refused even after saying that he was suffering from bilateral carpal tunnel syndrome. Anent the
delay of Yuen in responding to the demand letter of the Vazquezes, the Court of Appeals found it to have
been sufficiently explained.
The Vazquezes and Cathay separately filed motions for a reconsideration of the decision, both of
which were denied by the Court of Appeals.
Cathay seasonably filed with us this petition in this case. Cathay maintains that the award for
moral damages has no basis, since the Court of Appeals found that there was no wanton, fraudulent,
reckless and oppressive display of manners on the part of its personnel; and that the breach of contract
was not attended by fraud, malice, or bad faith. If any damage had been suffered by the Vazquezes, it
was damnum absque injuria, which is damage without injury, damage or injury inflicted without
injustice, loss or damage without violation of a legal right, or a wrong done to a man for which the law
provides no remedy. Cathay also invokes our decision in United Airlines, Inc. v. Court of Appeals[3] where
we recognized that, in accordance with the Civil Aeronautics Boards Economic Regulation No. 7, as
amended, an overbooking that does not exceed ten percent cannot be considered deliberate and done in
bad faith. We thus deleted in that case the awards for moral and exemplary damages, as well as
attorneys fees, for lack of proof of overbooking exceeding ten percent or of bad faith on the part of the
airline carrier.
On the other hand, the Vazquezes assert that the Court of Appeals was correct in granting awards
for moral and nominal damages and attorneys fees in view of the breach of contract committed by Cathay
for transferring them from the Business Class to First Class Section without prior notice or consent and
over their vigorous objection. They likewise argue that the issuance of passenger tickets more than the
seating capacity of each section of the plane is in itself fraudulent, malicious and tainted with bad faith.
The key issues for our consideration are whether (1) by upgrading the seat accommodation of the
Vazquezes from Business Class to First Class Cathay breached its contract of carriage with the
Vazquezes; (2) the upgrading was tainted with fraud or bad faith; and (3) the Vazquezes are entitled to
damages.
We resolve the first issue in the affirmative.
A contract is a meeting of minds between two persons whereby one agrees to give something or
render some service to another for a consideration. There is no contract unless the following requisites
concur: (1) consent of the contracting parties; (2) an object certain which is the subject of the contract;
and (3) the cause of the obligation which is established.[4] Undoubtedly, a contract of carriage existed
between Cathay and the Vazquezes. They voluntarily and freely gave their consent to an agreement
whose object was the transportation of the Vazquezes from Manila to Hong Kong and back to Manila,
with seats in the Business Class Section of the aircraft, and whose cause or consideration was the fare
paid by the Vazquezes to Cathay.
The only problem is the legal effect of the upgrading of the seat accommodation of the
Vazquezes. Did it constitute a breach of contract?
Breach of contract is defined as the failure without legal reason to comply with the terms of a
contract.[5] It is also defined as the [f]ailure, without legal excuse, to perform any promise which forms the
whole or part of the contract.[6]
In previous cases, the breach of contract of carriage consisted in either the bumping off of a
passenger with confirmed reservation or the downgrading of a passengers seat accommodation from one
class to a lower class. In this case, what happened was the reverse. The contract between the parties was
for Cathay to transport the Vazquezes to Manila on a Business Class accommodation in Flight CX-
905. After checking-in their luggage at the Kai Tak Airport in Hong Kong, the Vazquezes were given
boarding cards indicating their seat assignments in the Business Class Section. However, during the
boarding time, when the Vazquezes presented their boarding passes, they were informed that they had a
seat change from Business Class to First Class. It turned out that the Business Class was overbooked in
that there were more passengers than the number of seats. Thus, the seat assignments of the Vazquezes
were given to waitlisted passengers, and the Vazquezes, being members of the Marco Polo Club, were
upgraded from Business Class to First Class.
We note that in all their pleadings, the Vazquezes never denied that they were members of Cathays
Marco Polo Club. They knew that as members of the Club, they had priority for upgrading of their seat
accommodation at no extra cost when an opportunity arises. But, just like other privileges, such priority
could be waived. The Vazquezes should have been consulted first whether they wanted to avail
themselves of the privilege or would consent to a change of seat accommodation before their seat
assignments were given to other passengers. Normally, one would appreciate and accept an upgrading,
for it would mean a better accommodation. But, whatever their reason was and however odd it might be,
the Vazquezes had every right to decline the upgrade and insist on the Business Class accommodation
they had booked for and which was designated in their boarding passes. They clearly waived their priority
or preference when they asked that other passengers be given the upgrade. It should not have been
imposed on them over their vehement objection. By insisting on the upgrade, Cathay breached its
contract of carriage with the Vazquezes.
We are not, however, convinced that the upgrading or the breach of contract was attended by fraud
or bad faith. Thus, we resolve the second issue in the negative.
Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are serious
accusations that can be so conveniently and casually invoked, and that is why they are never presumed.
They amount to mere slogans or mudslinging unless convincingly substantiated by whoever is alleging
them.
Fraud has been defined to include an inducement through insidious machination. Insidious
machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists where the
party, with intent to deceive, conceals or omits to state material facts and, by reason of such omission or
concealment, the other party was induced to give consent that would not otherwise have been given.[7]
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 a known duty through some motive or
interest or ill will that partakes of the nature of fraud.[8]
We find no persuasive proof of fraud or bad faith in this case. The Vazquezes were not induced to
agree to the upgrading through insidious words or deceitful machination or through willful concealment
of material facts. Upon boarding, Ms. Chiu told the Vazquezes that their accommodations were upgraded
to First Class in view of their being Gold Card members of Cathays Marco Polo Club. She was honest in
telling them that their seats were already given to other passengers and the Business Class Section was
fully booked. Ms. Chiu might have failed to consider the remedy of offering the First Class seats to other
passengers. But, we find no bad faith in her failure to do so, even if that amounted to an exercise of poor
judgment.
Neither was the transfer of the Vazquezes effected for some evil or devious purpose. As testified to
by Mr. Robson, the First Class Section is better than the Business Class Section in terms of comfort,
quality of food, and service from the cabin crew; thus, the difference in fare between the First Class and
Business Class at that time was $250.[9] Needless to state, an upgrading is for the better condition and,
definitely, for the benefit of the passenger.
We are not persuaded by the Vazquezes argument that the overbooking of the Business Class
Section constituted bad faith on the part of Cathay. Section 3 of the Economic Regulation No. 7 of the
Civil Aeronautics Board, as amended, provides:
Sec 3. Scope. This regulation shall apply to every Philippine and foreign air carrier with respect to its
operation of flights or portions of flights originating from or terminating at, or serving a point within the
territory of the Republic of the Philippines insofar as it denies boarding to a passenger on a flight, or
portion of a flight inside or outside the Philippines, for which he holds confirmed reserved
space. Furthermore, this Regulation is designed to cover only honest mistakes on the part of the carriers
and excludes deliberate and willful acts of non-accommodation. Provided, however, that overbooking not
exceeding 10% of the seating capacity of the aircraft shall not be considered as a deliberate and willful
act of non-accommodation.
It is clear from this section that an overbooking that does not exceed ten percent is not considered
deliberate and therefore does not amount to bad faith.[10] Here, while there was admittedly an
overbooking of the Business Class, there was no evidence of overbooking of the plane beyond ten percent,
and no passenger was ever bumped off or was refused to board the aircraft.
 Now we come to the third issue on damages.
The Court of Appeals awarded each of the Vazquezes moral damages in the amount of P250,000.
Article 2220 of the Civil Code provides:
Article 2220. Willful 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.
Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury. Although incapable of
pecuniary computation, moral damages may be recovered if they are the proximate result of the
defendants wrongful act or omission.[11] Thus, case law establishes the following requisites for the award
of moral damages: (1) there must be an injury clearly sustained by the claimant, whether physical,
mental or psychological; (2) there must be a culpable act or omission factually established; (3) the
wrongful act or omission of the defendant is the proximate cause of the injury sustained by the claimant;
and (4) the award for damages is predicated on any of the cases stated in Article 2219 of the Civil
Code.[12]
Moral damages predicated upon a breach of contract of carriage may only be recoverable in
instances where the carrier is guilty of fraud or bad faith or where the mishap resulted in the death of a
passenger.[13] Where in breaching the contract of carriage the airline is not shown to have acted
fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences of
the breach of the obligation which the parties had foreseen or could have reasonably foreseen. In such a
case the liability does not include moral and exemplary damages.[14]
In this case, we have ruled that the breach of contract of carriage, which consisted in the
involuntary upgrading of the Vazquezes seat accommodation, was not attended by fraud or bad faith. The
Court of Appeals award of moral damages has, therefore, no leg to stand on.
The deletion of the award for exemplary damages by the Court of Appeals is correct. It is a requisite
in the grant of exemplary damages that the act of the offender must be accompanied by bad faith or done
in wanton, fraudulent or malevolent manner.[15] Such requisite is absent in this case. Moreover, to be
entitled thereto the claimant must first establish his right to moral, temperate, or compensatory
damages.[16] Since the Vazquezes are not entitled to any of these damages, the award for exemplary
damages has no legal basis. And where the awards for moral and exemplary damages are eliminated, so
must the award for attorneys fees.[17]
The most that can be adjudged in favor of the Vazquezes for Cathays breach of contract is an award
for nominal damages under Article 2221 of the Civil Code, which reads as follows:
Article 2221 of the Civil Code provides:
Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff, 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 suffered by him.
Worth noting is the fact that in Cathays Memorandum filed with this Court, it prayed only for the
deletion of the award for moral damages. It deferred to the Court of Appeals discretion in awarding
nominal damages; thus:
As far as the award of nominal damages is concerned, petitioner respectfully defers to the Honorable
Court of Appeals discretion. Aware as it is that somehow, due to the resistance of respondents-spouses to
the normally-appreciated gesture of petitioner to upgrade their accommodations, petitioner may have
disturbed the respondents-spouses wish to be with their companions (who traveled to Hong Kong with
them) at the Business Class on their flight to Manila.Petitioner regrets that in its desire to provide the
respondents-spouses with additional amenities for the one and one-half (1 1/2) hour flight to Manila,
unintended tension ensued.[18]
Nonetheless, considering that the breach was intended to give more benefit and advantage to the
Vazquezes by upgrading their Business Class accommodation to First Class because of their valued
status as Marco Polo members, we reduce the award for nominal damages to P5,000.
Before writing finis to this decision, we find it well-worth to quote the apt observation of the Court of
Appeals regarding the awards adjudged by the trial court:
We are not amused but alarmed at the lower courts unbelievable alacrity, bordering on the scandalous,
to award excessive amounts as damages. In their complaint, appellees asked for P1 million as moral
damages but the lower court awarded P4 million; they asked for P500,000.00 as exemplary damages but
the lower court cavalierly awarded a whooping P10 million; they asked for P250,000.00 as attorneys fees
but were awarded P2 million; they did not ask for nominal damages but were awarded P200,000.00. It is
as if the lower court went on a rampage, and why it acted that way is beyond all tests of reason. In fact
the excessiveness of the total award invites the suspicion that it was the result of prejudice or corruption
on the part of the trial court.
The presiding judge of the lower court is enjoined to hearken to the Supreme Courts admonition
in Singson vs. CA (282 SCRA 149 [1997]), where it said:
The well-entrenched principle is that the grant of moral damages depends upon the discretion of the
court based on the circumstances of each case. This discretion is limited by the principle that the
amount awarded should not be palpably and scandalously excessive as to indicate that it was the result
of prejudice or corruption on the part of the trial court.
and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was held:
Nonetheless, we agree with the injunction expressed by the Court of Appeals that passengers must not
prey on international airlines for damage awards, like trophies in a safari. After all neither the social
standing nor prestige of the passenger should determine the extent to which he would suffer because of a
wrong done, since the dignity affronted in the individual is a quality inherent in him and not conferred by
these social indicators. [19]
We adopt as our own this observation of the Court of Appeals.
 WHEREFORE, the instant petition is hereby partly GRANTED. The Decision of the Court of Appeals [G.R. No. 142305. December 10, 2003]
of 24 July 2001 in CA-G.R. CV No. 63339 is hereby MODIFIED, and as modified, the awards for moral
damages and attorneys fees are set aside and deleted, and the award for nominal damages is reduced
to P5,000.

No pronouncement on costs. SINGAPORE AIRLINES LIMITED, petitioner, vs. ANDION FERNANDEZ, respondent.
SO ORDERED.
DECISION
Vitug, Carpio, and Azcuna, JJ., concur.
Ynares-Santiago, J., on leave. CALLEJO, SR., J.:

This is a petition for review on certiorari assailing the Decision[1] of the Court of Appeals which
affirmed in toto the decision[2] of the Regional Trial Court of Pasig City, Branch 164 in Civil Case No.
60985 filed by the respondent for damages.

The Case for the Respondent

Respondent Andion Fernandez is an acclaimed soprano here in the Philippines and abroad. At the
time of the incident, she was availing an educational grant from the Federal Republic of Germany,
pursuing a Masters Degree in Music majoring in Voice.[3]

She was invited to sing before the King and Queen of Malaysia on February 3 and 4, 1991. For this
singing engagement, an airline passage ticket was purchased from petitioner Singapore Airlines which
would transport her to Manila from Frankfurt, Germany on January 28, 1991. From Manila, she would
proceed to Malaysia on the next day.[4] It was necessary for the respondent to pass by Manila in order to
gather her wardrobe; and to rehearse and coordinate with her pianist her repertoire for the aforesaid
performance.

The petitioner issued the respondent a Singapore Airlines ticket for Flight No. SQ 27,
leaving Frankfurt, Germany on January 27, 1991 bound for Singapore with onward connections
from Singapore to Manila.Flight No. SQ 27 was scheduled to leave Frankfurt at 1:45 in the afternoon
of January 27, 1991, arriving at Singapore at 8:50 in the morning of January 28, 1991. The connecting
flight from Singapore to Manila, Flight No. SQ 72, was leaving Singapore at 11:00 in the morning
of January 28, 1991, arriving in Manila at 2:20 in the afternoon of the same day.[5]

On January 27, 1991, Flight No. SQ 27 left Frankfurt but arrived in Singapore two hours late or at
about 11:00 in the morning of January 28, 1991. By then, the aircraft bound for Manila had left as
scheduled, leaving the respondent and about 25 other passengers stranded in
the Changi Airport in Singapore.[6]

Upon disembarkation at Singapore, the respondent approached the transit counter who referred
her to the nightstop counter and told the lady employee thereat that it was important for her to
reach Manila on that day, January 28, 1991. The lady employee told her that there were no more flights
to Manila for that day and that respondent had no choice but to stay in Singapore. Upon respondents
persistence, she was told that she can actually fly to Hong Kong going to Manila but since her ticket was
non-transferable, she would have to pay for the ticket. The respondent could not accept the offer because
she had no money to pay for it.[7] Her pleas for the respondent to make arrangements to transport her
to Manila were unheeded.[8]
The respondent then requested the lady employee to use their phone to make a call to Manila. Over
the employees reluctance, the respondent telephoned her mother to inform the latter that she missed the
connecting flight. The respondent was able to contact a family friend who picked her up from the airport
for her overnight stay in Singapore.[9]
The next day, after being brought back to the airport, the respondent proceeded to petitioners
counter which says: Immediate Attention To Passengers with Immediate Booking. There were four or five
passengers in line. The respondent approached petitioners male employee at the counter to make
arrangements for immediate booking only to be told: Cant you see I am doing something. She explained
her predicament but the male employee uncaringly retorted: Its your problem, not ours.[10]
The respondent never made it to Manila and was forced to take a direct flight
from Singapore to Malaysia on January 29, 1991, through the efforts of her mother and travel agency
in Manila. Her mother also had to travel to Malaysia bringing with her respondents wardrobe and
personal things needed for the performance that caused them to incur an expense of about P50,000. [11]
As a result of this incident, the respondents performance before the Royal Family of Malaysia was
below par. Because of the rude and unkind treatment she received from the petitioners personnel
in Singapore, the respondent was engulfed with fear, anxiety, humiliation and embarrassment causing
her to suffer mental fatigue and skin rashes. She was thereby compelled to seek immediate medical
attention upon her return to Manila for acute urticaria.[12]
On June 15, 1993, the RTC rendered a decision with the following dispositive portion:
ACCORDINGLY and as prayed for, defendant Singapore Airlines is ordered to pay herein plaintiff Andion
H. Fernandez the sum of:
1. FIFTY THOUSAND (P50,000.00) PESOS as compensatory or actual damages;
2. TWO HUNDRED and FIFTY THOUSAND (P250,000.00) PESOS as moral damages
considering plaintiffs professional standing in the field of culture at home and
abroad;
3. ONE HUNDRED THOUSAND (P100,000.00) PESOS as exemplary damages;
4. SEVENTY-FIVE THOUSAND (P75,000.00) PESOS as attorneys fees; and
5. To pay the costs of suit.
SO ORDERED.[13]
The petitioner appealed the decision to the Court of Appeals.
On June 10, 1998, the CA promulgated the assailed decision finding no reversible error in the
appealed decision of the trial court.[14]
Forthwith, the petitioner filed the instant petition for review, raising the following errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE DECISION OF THE TRIAL
COURT THAT AWARDED DAMAGES TO RESPONDENT FOR THE ALLEGED FAILURE OF THE
PETITIONER TO EXERCISE EXTRAORDINARY DILIGENCE.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER ACTED IN BAD
FAITH.
III
THE HONORABLE COURT OF APPEALS ERRED IN DISMISSING THE PETITIONERS
COUNTERCLAIMS.[15]
The petitioner assails the award of damages contending that it exercised the extraordinary diligence
required by law under the given circumstances. The delay of Flight No. SQ 27
from Frankfurt to Singaporeon January 28, 1991 for more than two hours was due to a fortuitous
event and beyond petitioners control. Inclement weather prevented the petitioners plane coming
from Copenhagen, Denmark to arrive in Frankfurt on time on January 27, 1991. The plane could not
take off from the airport as the place was shrouded with fog. This delay caused a snowball effect whereby
the other flights were consequently delayed.The plane carrying the respondent arrived in Singapore two
(2) hours behind schedule.[16] The delay was even compounded when the plane could not travel the
normal route which was through the Middle Eastdue to the raging Gulf War at that time. It had to pass
through the restricted Russian airspace which was more congested.[17]
Under these circumstances, petitioner therefore alleged that it cannot be faulted for the delay in
arriving in Singapore on January 28, 1991 and causing the respondent to miss her connecting flight
to Manila.
The petitioner further contends that it could not also be held in bad faith because its personnel did
their best to look after the needs and interests of the passengers including the respondent. Because the
respondent and the other 25 passengers missed their connecting flight to Manila, the petitioner
automatically booked them to the flight the next day and gave them free hotel accommodations for the
night. It was respondent who did not take petitioners offer and opted to stay with a family friend
in Singapore.
The petitioner also alleges that the action of the respondent was baseless and it tarnished its good
name and image earned through the years for which, it was entitled to damages in the amount
of P1,000,000; exemplary damages of P500,000; and attorneys fees also in the amount of P500,000.[18]
The petition is barren of merit.
 When an airline issues a ticket to a passenger, confirmed for a particular flight on a certain date, a
contract of carriage arises. The passenger then has every right to expect that he be transported on that
flight and on that date. If he does not, then the carrier opens itself to a suit for a breach of contract of
carriage.[19]
The contract of air carriage is a peculiar one. Imbued with public interest, the law requires common
carriers to carry the passengers safely as far as human care and foresight can provide, using the utmost
diligence of very cautious persons with due regard for all the circumstances.[20] In an action for breach of
contract of carriage, the aggrieved party does not have to prove that the common carrier was at fault or
was negligent. All that is necessary to prove is the existence of the contract and the fact of its non-
performance by the carrier.[21]
In the case at bar, it is undisputed that the respondent carried a confirmed ticket for the two-legged
trip from Frankfurt to Manila: 1) Frankfurt-Singapore; and 2) Singapore-Manila. In her contract of
carriage with the petitioner, the respondent certainly expected that she would fly to Manila on Flight No.
SQ 72 on January 28, 1991. Since the petitioner did not transport the respondent as covenanted by it on
said terms, the petitioner clearly breached its contract of carriage with the respondent. The respondent
had every right to sue the petitioner for this breach. The defense that the delay was due to fortuitous
events and beyond petitioners control is unavailing. In PAL vs. CA,[22] we held that:
.... Undisputably, PALs diversion of its flight due to inclement weather was a fortuitous
event. Nonetheless, such occurrence did not terminate PALs contract with its passengers. Being in the
business of air carriage and the sole one to operate in the country, PAL is deemed to be equipped to deal
with situations as in the case at bar. What we said in one case once again must be stressed, i.e., the
relation of carrier and passenger continues until the latter has been landed at the port of destination and
has left the carriers premises. Hence, PAL necessarily would still have to exercise extraordinary diligence
in safeguarding the comfort, convenience and safety of its stranded passengers until they have reached
their final destination...
...
...If the cause of non-fulfillment of the contract is due to a fortuitous event, it has to be the sole and only
cause (Art. 1755 C.C., Art. 1733 C.C.). Since part of the failure to comply with the obligation of common
carrier to deliver its passengers safely to their destination lay in the defendants failure to provide comfort
and convenience to its stranded passengers using extraordinary diligence, the cause of non-fulfillment is
not solely and exclusively due to fortuitous event, but due to something which defendant airline could
have prevented, defendant becomes liable to plaintiff.
Indeed, in the instant case, petitioner was not without recourse to enable it to fulfill its obligation to
transport the respondent safely as scheduled as far as human care and foresight can provide to her
destination. Tagged as a premiere airline as it claims to be and with the complexities of air travel, it was
certainly well-equipped to be able to foresee and deal with such situation. The petitioners indifference
and negligence by its absence and insensitivity was exposed by the trial court, thus:
(a) Under Section 9.1 of its Traffic Manual (Exhibit 4) flights can be delayed to await the uplift
of connecting cargo and passengers arriving on a late in-bound flight As adverted to by
the trial court,Flight SQ-27/28 maybe delayed for about half an hour to transfer
plaintiff to her connecting flight. As pointed out above, delay is normal in commercial
air transportation (RTC Decision, p. 22); or
(b) Petitioner airlines could have carried her on one of its flights bound for Hongkong and
arranged for a connecting flight from Hongkong to Manila all on the same date. But
then the airline personnel who informed her of such possibility told her that she has to
pay for that flight. Regrettably, respondent did not have sufficient funds to pay for
it. (TSN, 30 March 1992, pp.8-9; RTC Decision, pp. 22-23) Knowing the predicament of
the respondent, petitioner did not offer to shoulder the cost of the ticket for that flight;
or
(c) As noted by the trial court from the account of petitioners witness, Bob Khkimyong, that a
passenger such as the plaintiff could have been accommodated in another
international airline such as Lufthansa to bring the plaintiff to Singapore early enough
from Frankfurt provided that there was prior communication from that station to
enable her to catch the connecting flight to Manila because of the urgency of her
business in Manila(RTC Decision, p. 23)
The petitioners diligence in communicating to its passengers the consequences of the delay in their
flights was wanting. As elucidated by the trial court:
It maybe that delay in the take off and arrival of commercial aircraft could not be avoided and may be
caused by diverse factors such as those testified to by defendants pilot. However, knowing fully well that
even before the plaintiff boarded defendants Jumbo aircraft in Frankfurt bound for Singapore, it has
already incurred a delay of two hours. Nevertheless, defendant did not take the trouble of informing
plaintiff, among its other passengers of such a delay and that in such a case, the usual practice of
defendant airline will be that they have to stay overnight at their connecting airport; and much less did it
inquire from the plaintiff and the other 25 passengers bound for Manila whether they are amenable to
stay overnight in Singapore and to take the connecting flight to Manila the next day. Such information
should have been given and inquiries made in Frankfurt because even the defendant airlines manual
provides that in case of urgency to reach his or her destination on the same date, the head office of
defendant in Singapore must be informed by telephone or telefax so as the latter may make certain
arrangements with other airlines in Frankfurt to bring such a passenger with urgent business to
Singapore in such a manner that the latter can catch up with her connecting flight such as S-27/28
without spending the night in Singapore[23]
The respondent was not remiss in conveying her apprehension about the delay of the flight when
she was still in Frankfurt. Upon the assurance of petitioners personnel in Frankfurt that she will be
transported to Manila on the same date, she had every right to expect that obligation fulfilled. She
testified, to wit:
Q: Now, since you were late, when the plane that arrived from Frankfurt was late, did you not
make arrangements so that your flight from Singapore to Manila would be adjusted?
A: I asked the lady at the ticket counter, the one who gave the boarding pass in Frankfurt and
I asked her, Since my flight going to Singapore would be late, what would happen to my
Singapore-Manila flight? and then she said, Dont worry, Singapore Airlines would be
responsible to bring you to Manila on the same date. And then they have informed the
name of the officer, or whatever, that our flight is going to be late.[24]
 When a passenger contracts for a specific flight, he has a purpose in making that choice which FIRST DIVISION
must be respected. This choice, once exercised, must not be impaired by a breach on the part of the
airline without the latter incurring any liability.[25] For petitioners failure to bring the respondent to her EQUITABLE PCI BANK,* G.R. No. 171545
destination, as scheduled, we find the petitioner clearly liable for the breach of its contract of carriage AIMEE YU and BEJAN
with the respondent. LIONEL APAS,
Petitioners, Present:
We are convinced that the petitioner acted in bad faith. Bad faith means a breach of known duty PUNO, C.J., Chairperson,
through some motive of interest or ill will. Self-enrichment or fraternal interest, and not personal ill will, - v e r s u s - SANDOVAL-GUTIERREZ,
may well have been the motive; but it is malice nevertheless.[26] Bad faith was imputed by the trial court CORONA,
when it found that the petitioners employees at the Singapore airport did not accord the respondent the AZCUNA and
attention and treatment allegedly warranted under the circumstances. The lady employee at the counter LEONARDO-DE CASTRO, JJ.
was unkind and of no help to her. The respondent further alleged that without her threats of suing the NG SHEUNG NGOR** doing
company, she was not allowed to use the companys phone to make long distance calls to her mother business under the name
in Manila. The male employee at the counter where it says: Immediate Attention to Passengers with and style KEN MARKETING, Promulgated:
Immediate Booking was rude to her when he curtly retorted that he was busy attending to other KEN APPLIANCE DIVISION,
passengers in line. The trial court concluded that this inattentiveness and rudeness of petitioners INC. and BENJAMIN E. GO,
personnel to respondents plight was gross enough amounting to bad faith. This is a finding that is Respondents. December 19, 2007
generally binding upon the Court which we find no reason to disturb.

Article 2232 of the Civil Code provides that in a contractual or quasi-contractual relationship,
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - x
exemplary damages may be awarded only if the defendant had acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. In this case, petitioners employees acted in a wanton, oppressive or
DECISION
malevolent manner. The award of exemplary damages is, therefore, warranted in this case.

WHEREFORE, the Petition is DENIED. The Decision of the Court of Appeals is AFFIRMED. CORONA, J.:

SO ORDERED. This petition for review on certiorari[1] seeks to set aside the decision[2] of the Court of Appeals (CA) in CA-
G.R. SP No. 83112 and its resolution[3] denying reconsideration.
Puno, (Chairman), Quisumbing, Austria-Martinez, and Tinga, JJ., concur. On October 7, 2001, respondents Ng Sheung Ngor,[4] Ken Appliance Division, Inc. and Benjamin
E. Go filed an action for annulment and/or reformation of documents and contracts [5] against petitioner
Equitable PCI Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel Apas, in the Regional Trial
Court (RTC), Branch 16 of Cebu City.[6] They claimed that Equitable induced them to avail of its peso and
dollar credit facilities by offering low interest rates[7] so they accepted Equitable's proposal and signed the
bank's pre-printed promissory notes on various dates beginning 1996. They, however, were unaware that
the documents contained identical escalation clauses granting Equitable authority to increase interest
rates without their consent.[8]

Equitable, in its answer, asserted that respondents knowingly accepted all the terms and conditions
contained in the promissory notes.[9] In fact, they continuously availed of and benefited from Equitable's
credit facilities for five years.[10]

After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone, Equitable
restructured respondents' loans amounting to US$228,200 and P1,000,000.[11] The trial court, however,
invalidated the escalation clause contained therein because it violated the principle of mutuality of
contracts.[12] Nevertheless, it took judicial notice of the steep depreciation of the peso during the
intervening period[13] and declared the existence of extraordinary deflation.[14] Consequently, the RTC
ordered the use of the 1996 dollar exchange rate in computing respondents' dollar-denominated
loans.[15] Lastly, because the business reputation of respondents was (allegedly) severely damaged when
Equitable froze their accounts,[16] the trial court awarded moral and exemplary damages to them.[17]
The dispositive portion of the February 5, 2004 RTC decision[18] provided:
WHEREFORE, premises considered, judgment is hereby rendered:
A) Ordering [Equitable] to reinstate and return the amount of [respondents']
deposit placed on hold status;
Equitable moved for the reconsideration of the March 1, 2004 order of the RTC [23] on the ground that it
did in fact pay the appeal fees. Respondents, on the other hand, prayed for the issuance of a writ of
execution.[24]

B) Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion [p]esos as On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for reconsideration for
moral damages; lack of merit[25] and ordered the issuance of a writ of execution in favor of respondents. [26]According to the
RTC, because respondents did not move for the reconsideration of the previous order (denying due course
C) Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion [p]esos as to the parties notices of appeal),[27] the February 5, 2004 decision became final and executory as to both
exemplary damages; parties and a writ of execution against Equitable was in order.[28]

D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay [respondents],
jointly and severally, the sum of [t]wo [m]illion [p]esos as moral and
exemplary damages;
E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and severally,
to pay [respondents'] attorney's fees in the sum of P300,000; litigation
expenses in the sum of P50,000 and the cost of suit;
F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable] the
unpaid principal obligation for the peso loan as well as the unpaid obligation
for the dollar denominated loan;
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable]
interest as follows:
A writ of execution was thereafter issued[29] and three real properties of Equitable were levied upon.[30]
On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004 order. [31] It,
however, withdrew that petition on March 30, 2004[32] and instead filed a petition for certiorari with an
application for an injunction in the CA to enjoin the implementation and execution of the March 24, 2004
omnibus order.[33]
On June 16, 2004, the CA granted Equitable's application for injunction. A writ of preliminary injunction
was correspondingly issued.[34]
Notwithstanding the writ of injunction, the properties of Equitable previously levied upon were sold in a
public auction on July 1, 2004. Respondents were the highest bidders and certificates of sale were issued
to them.[35]

1) 12% per annum for the peso loans; On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to cite the sheriffs who
conducted the sale in contempt for proceeding with the auction despite the injunction order of the CA.[36]
2) 8% per annum for the dollar loans. The basis for the payment of the
dollar obligation is the conversion rate of P26.50 per dollar availed of at On October 28, 2005, the CA dismissed the petition for certiorari.[37] It found Equitable guilty of forum
the time of incurring of the obligation in accordance with Article 1250 of shopping because the bank filed its petition for certiorari in the CA several hours before withdrawing its
the Civil Code of the Philippines; petition for relief in the RTC.[38] Moreover, Equitable failed to disclose, both in the statement of material
dates and certificate of non-forum shopping (attached to its petition for certiorari in the CA), that it had a
H) Dismissing [Equitable's] counterclaim except the payment of the aforestated pending petition for relief in the RTC.[39]
unpaid principal loan obligations and interest. Equitable moved for reconsideration[40] but it was denied.[41] Thus, this petition.

SO ORDERED.[19]
Equitable and respondents filed their respective notices of appeal.[20]
In the March 1, 2004 order of the RTC, both notices were denied due course because Equitable and
respondents failed to submit proof that they paid their respective appeal fees.[21]
Equitable asserts that it was not guilty of forum shopping because the petition for relief was withdrawn
on the same day the petition for certiorari was filed.[42] It likewise avers that its petition for certiorari was
meritorious because the RTC committed grave abuse of discretion in issuing the March 24, 2004
omnibus order which was based on an erroneous assumption. The March 1, 2004 order denying its
notice of appeal for non payment of appeal fees was erroneous because it had in fact paid the required
fees.[43] Thus, the RTC, by issuing its March 24, 2004 omnibus order, effectively prevented Equitable from
appealing the patently wrong February 5, 2004 decision.[44]

WHEREFORE, premises considered, the appeal interposed by defendants This petition is meritorious.
from the Decision in the above-entitled case is DENIED due course. As of February
27, 2004, the Decision dated February 5, 2004, is considered final and executory
in so far as [Equitable, Aimee Yu and Bejan Lionel Apas] are
concerned.[22] (emphasis supplied)
EQUITABLE WAS NOT GUILTY OF
FORUM SHOPPING
Forum shopping exists when two or more actions involving the same transactions, essential facts and
circumstances are filed and those actions raise identical issues, subject matter and causes of
action.[45] The test is whether, in two or more pending cases, there is identity of parties, rights or causes
of actions and reliefs.[46]
Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not have identical
causes of action. The petition for relief from the denial of its notice of appeal was based on the RTCs
judgment or final order preventing it from taking an appeal by fraud, accident, mistake or excusable
negligence.[47] On the other hand, its petition for certiorari in the CA, a special civil action, sought to
correct the grave abuse of discretion amounting to lack of jurisdiction committed by the RTC.[48]
In a petition for relief, the judgment or final order is rendered by a court with competent
jurisdiction. In a petition for certiorari, the order is rendered by a court without or in excess of its
jurisdiction.
Moreover, Equitable substantially complied with the rule on non-forum shopping when it moved to
withdraw its petition for relief in the RTC on the same day (in fact just four hours and forty minutes after)
it filed the petition for certiorari in the CA. Even if Equitable failed to disclose that it had a pending
petition for relief in the RTC, it rectified what was doubtlessly a careless oversight by withdrawing the
petition for relief just a few hours after it filed its petition for certiorari in the CA ― a clear indication that
it had no intention of maintaining the two actions at the same time.
THE TRIAL COURT COMMITTED
GRAVE ABUSE OF DISCRETION IN
ISSUING ITS MARCH 1, 2004 AND
MARCH 24, 2004 ORDERS
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any tribunal, board or officer exercising
judicial or quasi-judicial function has acted without or in excess of its or his
jurisdiction, or with grave abuse of discretion amounting to lack or excess of
jurisdiction, and there is no appeal, nor any plain, speedy or adequate remedy in
the ordinary course of law, a person aggrieved thereby may file a verified petition in
the proper court, alleging the facts with certainty and praying that judgment be
rendered annulling or modifying the proceedings of such tribunal, board or officer, and
granting such incidental reliefs as law and justice may require.
The petition shall be accompanied by a certified true copy of the judgment, order or
resolution subject thereof, copies of all pleadings and documents relevant and
pertinent thereto, and a sworn certificate of non-forum shopping as provided in the
third paragraph of Section 3, Rule 46.
There are two substantial requirements in a petition for certiorari. These are:
1. that the tribunal, board or officer exercising judicial or quasi-judicial
functions acted without or in excess of his or its jurisdiction or with grave
abuse of discretion amounting to lack or excess of jurisdiction; and
2. that there is no appeal or any plain, speedy and adequate remedy in the
ordinary course of law.
For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner must show that
the public respondent patently and grossly abused his discretion and that abuse amounted to an evasion
of positive duty or a virtual refusal to perform a duty enjoined by law or to act at all in contemplation of
law, as where the power was exercised in an arbitrary and despotic manner by reason of passion or
hostility.[49]
The March 1, 2004 order denied due course to the notices of appeal of both Equitable and respondents.
However, it declared that the February 5, 2004 decision was final and executory only with respect to
Equitable.[50] As expected, the March 24, 2004 omnibus order denied Equitable's motion for
reconsideration and granted respondents' motion for the issuance of a writ of execution.[51]
The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to prevent
Equitable, et al. from appealing the February 5, 2004 decision. Not only that. The execution of the
decision was undertaken with indecent haste, effectively obviating or defeating Equitable's right to avail
of possible legal remedies. No matter how we look at it, the RTC committed grave abuse of discretion in
rendering those orders.
With regard to whether Equitable had a plain, speedy and adequate remedy in the ordinary course of law,
we hold that there was none. The RTC denied due course to its notice of appeal in the March 1, 2004
order. It affirmed that denial in the March 24, 2004 omnibus order. Hence, there was no way Equitable
could have possibly appealed the February 5, 2004 decision.[52]
Although Equitable filed a petition for relief from the March 24, 2004 order, that petition was not a plain,
speedy and adequate remedy in the ordinary course of law.[53] A petition for relief under Rule 38 is an
equitable remedy allowed only in exceptional circumstances or where there is no other available or
adequate remedy.[54]
Thus, we grant Equitable's petition for certiorari and consequently give due course to its appeal.
EQUITABLE RAISED PURE
QUESTIONS OF LAW IN ITS
PETITION FOR REVIEW
The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.[55] There is a question of
law when the doubt or controversy concerns the correct application of law or jurisprudence to a certain
set of facts; or when the issue does not call for the probative value of the evidence presented, the truth or
falsehood of facts being admitted.[56]
Equitable does not assail the factual findings of the trial court. Its arguments essentially focus on the
nullity of the RTCs February 5, 2004 decision. Equitable points out that that decision was patently
erroneous, specially the exorbitant award of damages, as it was inconsistent with existing law and
jurisprudence.[57]
THE PROMISSORY NOTES
WERE VALID
The RTC upheld the validity of the promissory notes despite respondents assertion that those
documents were contracts of adhesion.
A contract of adhesion is a contract whereby almost all of its provisions are drafted by one party. [58] The
participation of the other party is limited to affixing his signature or his adhesion to the contract. [59] For
this reason, contracts of adhesion are strictly construed against the party who drafted it.[60]
It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are, on the
contrary, as binding as ordinary contracts. A party is in reality free to accept or reject it. A contract of
adhesion becomes void only when the dominant party takes advantage of the weakness of the other
party, completely depriving the latter of the opportunity to bargain on equal footing.[61]
That was not the case here. As the trial court noted, if the terms and conditions offered by Equitable had
been truly prejudicial to respondents, they would have walked out and negotiated with another bank at
the first available instance. But they did not. Instead, they continuously availed of Equitable's credit
facilities for five long years.
While the RTC categorically found that respondents had outstanding dollar- and peso-denominated loans
with Equitable, it, however, failed to ascertain the total amount due (principal, interest and penalties, if
any) as of July 9, 2001. The trial court did not explain how it arrived at the amounts of US$228,200
and P1,000,000.[62] In Metro Manila Transit Corporation v. D.M. Consunji,[63] we reiterated that this Court
is not a trier of facts and it shall pass upon them only for compelling reasons which unfortunately are not
present in this case.[64] Hence, we ordered the partial remand of the case for the sole purpose of
determining the amount of actual damages.[65]
ESCALATION CLAUSE VIOLATED
THE PRINCIPLE OF
MUTUALITY OF CONTRACTS
Escalation clauses are not void per se. However, one which grants the creditor an unbridled right to
adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to
an important modification in the agreement is void. Clauses of that nature violate the principle of
mutuality of contracts.[66] Article 1308[67] of the Civil Code holds that a contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of them.[68]
For this reason, we have consistently held that a valid escalation clause provides:
1. that the rate of interest will only be increased if the applicable maximum
rate of interest is increased by law or by the Monetary Board; and
2. that the stipulated rate of interest will be reduced if the applicable
maximum rate of interest is reduced by law or by the Monetary Board (de-
escalation clause).[69]
The RTC found that Equitable's promissory notes uniformly stated:
If subject promissory note is extended, the interest for subsequent extensions shall be
at such rate as shall be determined by the bank.[70]
Equitable dictated the interest rates if the term (or period for repayment) of the loan was
extended. Respondents had no choice but to accept them. This was a violation of Article 1308 of the Civil
Code. Furthermore, the assailed escalation clause did not contain the necessary provisions for validity,
that is, it neither provided that the rate of interest would be increased only if allowed by law or the
Monetary Board, nor allowed de-escalation. For these reasons, the escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National Bank[71] we
held that, because the escalation clause was annulled, the principal amount of the loan was subject to
the original or stipulated rate of interest. Upon maturity, the amount due was subject to legal interest at
the rate of 12% per annum.[72]
Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their dollar-
denominated loans and 20% p.a. for their peso-denominated loans from January 10, 2001 to July 9,
2001. Thereafter, Equitable was entitled to legal interest of 12% p.a. on all amounts due.
THERE WAS NO
EXTRAORDINARY DEFLATION
Extraordinary inflation exists when there is an unusual decrease in the purchasing power of currency
(that is, beyond the common fluctuation in the value of currency) and such decrease could not be
reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the
obligation. Extraordinary deflation, on the other hand, involves an inverse situation.[73]
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the currency stipulated
should intervene, the value of the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there is an agreement to the
contrary.
For extraordinary inflation (or deflation) to affect an obligation, the following requisites must be
proven:
 1. that there was an official declaration of extraordinary inflation or deflation
from the Bangko Sentral ng Pilipinas (BSP);[74]
2. that the obligation was contractual in nature;[75] and
3. that the parties expressly agreed to consider the effects of the extraordinary
inflation or deflation.[76]
Despite the devaluation of the peso, the BSP never declared a situation of extraordinary
inflation. Moreover, although the obligation in this instance arose out of a contract, the parties did not
agree to recognize the effects of extraordinary inflation (or deflation).[77] The RTC never mentioned that
there was a such stipulation either in the promissory note or loan agreement. Therefore, respondents
should pay their dollar-denominated loans at the exchange rate fixed by the BSP on the date of
maturity.[78]
THE AWARD OF MORAL AND
EXEMPLARY DAMAGES
LACKED BASIS
Moral damages are in the category of an award designed to compensate the claimant for actual injury
suffered, not to impose a penalty to the wrongdoer.[79] To be entitled to moral damages, a claimant must
prove:
1. That he or she suffered besmirched reputation, or physical, mental or
psychological suffering sustained by the claimant;
2. That the defendant committed a wrongful act or omission;
3. That the wrongful act or omission was the proximate cause of the damages
the claimant sustained;
4. The case is predicated on any of the instances expressed or envisioned by
Article 2219[80] and 2220[81]. [82]
In culpa contractual or breach of contract, moral damages are recoverable only if the defendant
acted fraudulently or in bad faith or in wanton disregard of his contractual obligations.[83] The breach
must be wanton, reckless, malicious or in bad faith, and oppressive or abusive.[84]
The RTC found that respondents did not pay Equitable the interest due on February 9, 2001 (or any
month thereafter prior to the maturity of the loan)[85] or the amount due (principal plus interest) due on
July 9, 2001.[86] Consequently, Equitable applied respondents' deposits to their loans upon maturity.
The relationship between a bank and its depositor is that of creditor and debtor.[87] For this reason, a
bank has the right to set-off the deposits in its hands for the payment of a depositor's indebtedness.[88]
Respondents indeed defaulted on their obligation. For this reason, Equitable had the option to exercise
its legal right to set-off or compensation. However, the RTC mistakenly (or, as it now appears,
deliberately) concluded that Equitable acted fraudulently or in bad faith or in wanton disregard of its
contractual obligations despite the absence of proof. The undeniable fact was that, whatever damage
respondents sustained was purely the consequence of their failure to pay their loans. There was
therefore absolutely no basis for the award of moral damages to them.
Neither was there reason to award exemplary damages. Since respondents were not entitled to moral
damages, neither should they be awarded exemplary damages.[89] And if respondents were not entitled to
moral and exemplary damages, neither could they be awarded attorney's fees and litigation expenses.[90]
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the Court of Appeals in CA-G.R. SP
No. 83112 are hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in Civil Case No.
CEB-26983 is hereby ANNULLED for being rendered with grave abuse of discretion amounting to lack or
excess of jurisdiction. All proceedings undertaken pursuant thereto are likewise declared null and void.
The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No. CEB-
26983 is hereby SET ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee Yu and Bejan Lionel
Apas is therefore given due course.
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No. CEB-
26983 is accordingly SET ASIDE. New judgment is hereby entered:
1. ordering respondents Ng Sheung Ngor, doing business under the name and style of
Ken Marketing, Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner
Equitable PCI Bank the principal amount of their dollar- and peso-denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under the name and style of
Ken Marketing, Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner
Equitable PCI Bank interest at:
a) 12.66% p.a. with respect to their dollar-denominated loans from January
10, 2001 to July 9, 2001;
b) 20% p.a. with respect to their peso-denominated loans from January 10,
2001 to July 9, 2001;[91]
c) pursuant to our ruling in Eastern Shipping Lines v. Court of Appeals,[92] the
total amount due on July 9, 2001 shall earn legal interest at 12% p.a. from
the time petitioner Equitable PCI Bank demanded payment, whether
judicially or extra-judicially; and
d) after this Decision becomes final and executory, the applicable rate shall
be 12% p.a. until full satisfaction;
3. all other claims and counterclaims are dismissed.
As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute the exact amounts
due on the respective dollar-denominated and peso-denominated loans, as of July 9, 2001, of
respondents Ng Sheung Ngor, doing business under the name and style of Ken Marketing, Ken Appliance
Division and Benjamin E. Go.
 Republic of the Philippines
SUPREME COURT
Manila The Case

THIRD DIVISION Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to
reverse and set aside the June 30, 2006 Decision[1] of the Court of Appeals (CA) and its November 21,
2006 Resolution[2] denying petitioners motion for reconsideration.

ILEANA DR. MACALINAO, G.R. No. 175490

The Facts
Petitioner,

Present: Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of the credit
card facilities of respondent Bank of the Philippine Islands (BPI). [3] Petitioner Macalinao made some
- versus - purchases through the use of the said credit card and defaulted in paying for said purchases. She
YNARES-SANTIAGO, J., subsequently received a letter dated January 5, 2004 from respondent BPI, demanding payment of the
amount of one hundred forty-one thousand five hundred eighteen pesos and thirty-four centavos (PhP
Chairperson, 141,518.34), as follows:

CHICO-NAZARIO,
BANK OF THE PHILIPPINE ISLANDS,
VELASCO, JR., Statement Previous Purchases Penalty Finance Balance Due
Respondent. Date Balance (Payments) Interest Charges
NACHURA, and 10/27/2002 94,843.70 559.72 3,061.99 98,456.41
11/27/2002 98,465.41 (15,000) 0 2,885.61 86,351.02
PERALTA, JJ.
. 12/31/2002 86,351.02 30,308.80 259.05 2,806.41 119,752.28
1/27/2003 119,752.28 618.23 3,891.07 124,234.58
2/27/2003 124,234.58 990.93 4,037.62 129,263.13
Promulgated: 3/27/2003 129,263.13 (18,000.00) 298.72 3,616.05 115,177.90
4/27/2003 115,177.90 644.26 3,743.28 119,565.44
September 17, 2009 5/27/2003 119,565.44 (10,000.00) 402.95 3,571.71 113,540.10
x-----------------------------------------------------------------------------------------x 6/29/2003 113,540.10 8,362.50 323.57 3,607.32 118,833.49
(7,000.00)
7/27/2003 118,833.49 608.07 3,862.09 123,375.65
8/27/2003 123,375.65 1,050.20 4,009.71 128,435.56
9/28/2003 128,435.56 1,435.51 4,174.16 134,045.23
10/28/2003
DECISION
11/28/2003
12/28/2003
1/27/2004 141,518.34 8,491.10 4,599.34 154,608.78

VELASCO, JR., J.:

Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI
Mastercard, the charges or balance thereof remaining unpaid after the payment due date indicated on
the monthly Statement of Accounts shall bear interest at the rate of 3% per month and an additional
penalty fee equivalent to another 3% per month. Particularly: For failure of petitioner Macalinao to settle her obligations, respondent BPI filed with the
Metropolitan Trial Court (MeTC) of Makati City a complaint for a sum of money against her and her
husband, Danilo SJ. Macalinao. This was raffled to Branch 66 of the MeTC and was docketed as Civil
Case No. 84462 entitled Bank of the Philippine Islands vs. Spouses Ileana Dr. Macalinao and Danilo SJ.
8. PAYMENT OF CHARGES BCC shall furnish the Cardholder a monthly Macalinao.[5]
Statement of Account (SOA) and the Cardholder agrees that all charges made through
the use of the CARD shall be paid by the Cardholder as stated in the SOA on or before
the last day for payment, which is twenty (20) days from the date of the said SOA, and
such payment due date may be changed to an earlier date if the Cardholders account In said complaint, respondent BPI prayed for the payment of the amount of one hundred fifty-
is considered overdue and/or with balances in excess of the approved credit limit, or to four thousand six hundred eight pesos and seventy-eight centavos (PhP 154,608.78) plus 3.25% finance
such other date as may be deemed proper by the CARD issuer with notice to the charges and late payment charges equivalent to 6% of the amount due from February 29, 2004 and an
Cardholder on the same monthly SOA. If the last day fall on a Saturday, Sunday or a amount equivalent to 25% of the total amount due as attorneys fees, and of the cost of suit.[6]
holiday, the last day for the payment automatically becomes the last working day prior
to said payment date. However, notwithstanding the absence or lack of proof of service
of the SOA of the Cardholder, the latter shall pay any and all charges made through
After the summons and a copy of the complaint were served upon petitioner Macalinao and her
the use of the CARD within thirty (30) days from date or dates thereof. Failure of the
husband, they failed to file their Answer.[7] Thus, respondent BPI moved that judgment be rendered in
Cardholder to pay the charges made through the CARD within the payment period as
accordance with Section 6 of the Rule on Summary Procedure.[8] This was granted in an Order dated
stated in the SOA or within thirty (30) days from actual date or dates of purchase
June 16, 2004.[9] Thereafter, respondent BPI submitted its documentary evidence.[10]
whichever occur earlier, shall render him in default without the necessity of demand
from BCC, which the Cardholder expressly waives. The charges or balance thereof
remaining unpaid after the payment due date indicated on the monthly
Statement of Accounts shall bear interest at the rate of 3% per month for BPI In its Decision dated August 2, 2004, the MeTC ruled in favor of respondent BPI and ordered
Express Credit, BPI Gold Mastercard and an additional penalty fee equivalent to petitioner Macalinao and her husband to pay the amount of PhP 141,518.34 plus interest and penalty
another 3% of the amount due for every month or a fraction of a months charges of 2% per month, to wit:
delay. PROVIDED that if there occurs any change on the prevailing market rates, BCC
shall have the option to adjust the rate of interest and/or penalty fee due on the
outstanding obligation with prior notice to the cardholder. The Cardholder hereby
authorizes BCC to correspondingly increase the rate of such interest [in] the event of WHEREFORE, finding merit in the allegations of the complaint supported by
changes in the prevailing market rates, and to charge additional service fees as may be documentary evidence, judgment is hereby rendered in favor of the plaintiff, Bank of
deemed necessary in order to maintain its service to the Cardholder. A CARD with the Philippine Islands and against defendant-spouses Ileana DR Macalinao and
outstanding balance unpaid after thirty (30) days from original billing statement date Danilo SJ Macalinao by ordering the latter to pay the former jointly and severally the
shall automatically be suspended, and those with accounts unpaid after ninety (90) following:
days from said original billing/statement date shall automatically be cancel (sic),
without prejudice to BCCs right to suspend or cancel any card anytime and for
whatever reason. In case of default in his obligation as provided herein, Cardholder 1. The amount of PESOS: ONE HUNDRED FORTY ONE THOUSAND FIVE
shall surrender his/her card to BCC and in addition to the interest and penalty HUNDRED EIGHTEEN AND 34/100 (P141,518.34) plus interest and
charges aforementioned , pay the following liquidated damages and/or fees (a) a penalty charges of 2% per month from January 05, 2004 until fully paid;
collection fee of 25% of the amount due if the account is referred to a collection agency 2. P10,000.00 as and by way of attorneys fees; and
or attorney; (b) service fee for every dishonored check issued by the cardholder in 3. Cost of suit.
payment of his account without prejudice, however, to BCCs right of considering
Cardholders account, and (c) a final fee equivalent to 25% of the unpaid balance, SO ORDERED.[11]
exclusive of litigation expenses and judicial cost, if the payment of the account is
enforced though court action. Venue of all civil suits to enforce this Agreement or any
other suit directly or indirectly arising from the relationship between the parties as
established herein, whether arising from crimes, negligence or breach thereof, shall be
in the process of courts of the City of Makati or in other courts at the option of Only petitioner Macalinao and her husband appealed to the Regional Trial Court (RTC)
BCC.[4] (Emphasis supplied.) of Makati City, their recourse docketed as Civil Case No. 04-1153. In its Decision dated October 14,
2004, the RTC affirmed in toto the decision of the MeTC and held:
 In any event, the sum of P141,518.34 adjudged by the trial court appeared to Petitioner Macalinaos motion for reconsideration was denied by the CA in its Resolution dated
be the result of a recomputation at the reduced rate of 2% per month. Note that the November 21, 2006. Hence, petitioner Macalinao is now before this Court with the following assigned
total amount sought by the plaintiff-appellee was P154,608.75 exclusive of finance errors:
charge of 3.25% per month and late payment charge of 6% per month.

WHEREFORE, the appealed decision is hereby affirmed in toto.

I.
No pronouncement as to costs.

SO ORDERED.[12] THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%, SHOULD BE UPHELD
SINCE THE STIPULATED RATE OF INTEREST WAS UNCONSCIONABLE AND
INIQUITOUS, AND THUS ILLEGAL.
Unconvinced, petitioner Macalinao filed a petition for review with the CA, which was docketed as
CA-G.R. SP No. 92031. The CA affirmed with modification the Decision of the RTC:
II.

WHEREFORE, the appealed decision is AFFIRMED but MODIFIED with

respect to the total amount due and interest rate. Accordingly, petitioners are jointly
and severally ordered to pay respondent Bank of the Philippine Islands the following: THE COURT OF APPEALS ARBITRARILY MODIFIED THE REDUCED RATE OF
INTEREST FROM 2% TO 3%, CONTRARY TO THE TENOR OF ITS OWN DECISION.

1. The amount of One Hundred Twenty Six Thousand Seven

Hundred Six Pesos and Seventy Centavos plus interest and
penalty charges of 3% per month from January 5, 2004 until
fully paid;
2. P10,000.00 as and by way of attorneys fees; and III.
3. Cost of Suit.

SO ORDERED.[13]
Although sued jointly with her husband, petitioner Macalinao was the only one who filed the
petition before the CA since her husband already passed away on October 18, 2005.[14]
THE COURT A QUO, INSTEAD OF PROCEEDING WITH A RECOMPUTATION, SHOULD
HAVE DISMISSED THE CASE FOR FAILURE OF RESPONDENT BPI TO PROVE THE
CORRECT AMOUNT OF PETITIONERS OBLIGATION, OR IN THE ALTERNATIVE,
REMANDED THE CASE TO THE LOWER COURT FOR RESPONDENT BPI TO
PRESENT PROOF OF THE CORRECT AMOUNT THEREOF.

In its assailed decision, the CA held that the amount of PhP 141,518.34 (the amount sought to
be satisfied in the demand letter of respondent BPI) is clearly not the result of the re-computation at the
reduced interest rate as previous higher interest rates were already incorporated in the said amount. Our Ruling
Thus, the said amount should not be made as basis in computing the total obligation of petitioner
Macalinao. Further, the CA also emphasized that respondent BPI should not compound the interest in
the instant case absent a stipulation to that effect. The CA also held, however, that the MeTC erred in The petition is partly meritorious.
modifying the amount of interest rate from 3% monthly to only 2% considering that petitioner Macalinao
freely availed herself of the credit card facility offered by respondent BPI to the general public. It
explained that contracts of adhesion are not invalid per se and are not entirely prohibited.
The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be Reduced to
2% Per Month or 24% Per Annum
 In its Complaint, respondent BPI originally imposed the interest and penalty charges at the rate
of 9.25% per month or 111% per annum. This was declared as unconscionable by the lower courts for
being clearly excessive, and was thus reduced to 2% per month or 24% per annum. On appeal, the CA
modified the rate of interest and penalty charge and increased them to 3% per month or 36% per annum
based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, which
governs the transaction between petitioner Macalinao and respondent BPI.
In the instant petition, Macalinao claims that the interest rate and penalty charge of 3% per
month imposed by the CA is iniquitous as the same translates to 36% per annum or thrice the legal rate
of interest.[15] On the other hand, respondent BPI asserts that said interest rate and penalty charge are
reasonable as the same are based on the Terms and Conditions Governing the Issuance and Use of the
BPI Credit Card.[16]
We find for petitioner. We are of the opinion that the interest rate and penalty charge of 3% per
month should be equitably reduced to 2% per month or 24% per annum.
Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card,
there was a stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first
time that this Court has considered the interest rate of 36% per annum as excessive and unconscionable.
We held in Chua vs. Timan:[17]
The stipulated interest rates of 7% and 5% per month imposed on
respondents loans must be equitably reduced to 1% per month or 12% per annum. We
need not unsettle the principle we had affirmed in a plethora of cases that
stipulated interest rates of 3% per month and higher are excessive, iniquitous,
unconscionable and exorbitant. Such stipulations are void for being contrary to
morals, if not against the law. While C.B. Circular No. 905-82, which took effect on
January 1, 1983, effectively removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity, nothing in the said circular could possibly be
read as granting carte blanche authority to lenders to raise interest rates to levels
which would either enslave their borrowers or lead to a hemorrhaging of their assets.
(Emphasis supplied.)
Since the stipulation on the interest rate is void, it is as if there was no express contract
thereon. Hence, courts may reduce the interest rate as reason and equity demand.[18]
The same is true with respect to the penalty charge. Notably, under the Terms and Conditions
Governing the Issuance and Use of the BPI Credit Card, it was also stated therein that respondent BPI
shall impose an additional penalty charge of 3% per month. Pertinently, Article 1229 of the Civil Code
states:
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.
In exercising this power to determine what is iniquitous and unconscionable, courts must
consider the circumstances of each case since what may be iniquitous and unconscionable in one may be
totally just and equitable in another.[19]
In the instant case, the records would reveal that petitioner Macalinao made partial payments to
respondent BPI, as indicated in her Billing Statements.[20] Further, the stipulated penalty charge of 3%
per month or 36% per annum, in addition to regular interests, is indeed iniquitous and unconscionable.
Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged
by the CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to 1%
monthly or a total of 2% per month or 24% per annum in line with the prevailing jurisprudence and in
accordance with Art. 1229 of the Civil Code.
There Is No Basis for the Dismissal of the Case,
Much Less a Remand of the Same for Further Reception of Evidence
Petitioner Macalinao claims that the basis of the re-computation of the CA, that is, the amount
of PhP 94,843.70 stated on the October 27, 2002 Statement of Account, was not the amount of the
principal obligation. Thus, this allegedly necessitates a re-examination of the evidence presented by the
parties. For this reason, petitioner Macalinao further contends that the dismissal of the case or its
remand to the lower court would be a more appropriate disposition of the case.
Such contention is untenable. Based on the records, the summons and a copy of the complaint
were served upon petitioner Macalinao and her husband on May 4, 2004. Nevertheless, they failed to file
their Answer despite such service. Thus, respondent BPI moved that judgment be rendered
accordingly.[21] Consequently, a decision was rendered by the MeTC on the basis of the evidence
submitted by respondent BPI. This is in consonance with Sec. 6 of the Revised Rule on Summary 70
Procedure, which states: 11/27/2002 94,843. (15,000) 79,843.70 798.44 798.44 81,440.58
70
12/31/2002 79,843. 30,308.80 110,152.50 1,101.53 1,101.53 112,355.56
Sec. 6. Effect of failure to answer. Should the defendant fail to answer the 70
complaint within the period above provided, the court, motu proprio, or on 1/27/2003 110,152 110,152.50 1,101.53 1,101.53 112,355.56
motion of the plaintiff, shall render judgment as may be warranted by the facts .50
alleged in the complaint and limited to what is prayed for therein: Provided, 2/27/2003 110,152 110,152.50 1,101.53 1,101.53 112,355.56
however, that the court may in its discretion reduce the amount of damages and .50
attorneys fees claimed for being excessive or otherwise unconscionable. This is without 3/27/2003 110,152 (18,000.00) 92,152.50 921.53 921.53 93,995.56
prejudice to the applicability of Section 3(c), Rule 10 of the Rules of Court, if there are .50
two or more defendants. (As amended by the 1997 Rules of Civil Procedure; emphasis 4/27/2003 92,152. 92,152.50 921.53 921.53 93,995.56
supplied.) 50
5/27/2003 92,152. (10,000.00) 82,152.50 821.53 821.53 83,795.56
50
6/29/2003 82,152. 8,362.50 83,515.00 835.15 835.15 85,185.30
50 (7,000.00)
Considering the foregoing rule, respondent BPI should not be made to suffer for petitioner 7/27/2003 83,515. 83,515.00 835.15 835.15 85,185.30
Macalinaos failure to file an answer and concomitantly, to allow the latter to submit additional evidence 00
by dismissing or remanding the case for further reception of evidence. Significantly, petitioner Macalinao 8/27/2003 83,515. 83,515.00 835.15 835.15 85,185.30
herself admitted the existence of her obligation to respondent BPI, albeit with reservation as to the 00
principal amount. Thus, a dismissal of the case would cause great injustice to respondent BPI. Similarly, 9/28/2003 83,515. 83,515.00 835.15 835.15 85,185.30
a remand of the case for further reception of evidence would unduly prolong the proceedings of the 00
instant case and render inutile the proceedings conducted before the lower courts. 10/28/2003 83,515. 83,515.00 835.15 835.15 85,185.30
00
11/28/2003 83,515. 83,515.00 835.15 835.15 85,185.30
Significantly, the CA correctly used the beginning balance of PhP 94,843.70 as basis for the re- 00
computation of the interest considering that this was the first amount which appeared on the Statement 12/28/2003 83,515. 83,515.00 835.15 835.15 85,185.30
of Account of petitioner Macalinao. There is no other amount on which the re-computation could be 00
based, as can be gathered from the evidence on record. Furthermore, barring a showing that the factual 1/27/2004 83,515. 83,515.00 835.15 835.15 85,185.30
findings complained of are totally devoid of support in the record or that they are so glaringly erroneous 00
as to constitute serious abuse of discretion, such findings must stand, for this Court is not expected or TOTAL 83,515.00 14,397.26 14,397.26 112,309.52
required to examine or contrast the evidence submitted by the parties.[22]

In view of the ruling that only 1% monthly interest and 1% penalty charge can be applied to the
beginning balance of PhP 94,843.70, this Court finds the following computation more appropriate:

Statement Previous Purchases Balance Interest (1%) Penalty Total

Date Balance (Payments) Charge Amount
(1%) Due for the
Month
10/27/2002 94,843. 94,843.70 948.44 948.44 96,740.58
 WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated June 30, 2006 in CA- FIRST DIVISION
G.R. SP No. 92031 is hereby MODIFIED with respect to the total amount due, interest rate, and penalty
charge. Accordingly, petitioner Macalinao is ordered to pay respondent BPI the following:

[G.R. No. 128690. January 21, 1999]

(1) The amount of one hundred twelve thousand three hundred nine pesos and fifty-two
centavos (PhP 112,309.52) plus interest and penalty charges of 2% per month from January 5, 2004
until fully paid;

ABS-CBN BROADCASTING CORPORATION, petitioners, vs. HONORABLE COURT OF APPEALS,

REPUBLIC BROADCASTING CORP., VIVA PRODUCTIONS, INC., and VICENTE DEL
(2) PhP 10,000 as and by way of attorneys fees; and ROSARIO, respondents.

DECISION
(3) Cost of suit.
DAVIDE, JR., C.J.:

SO ORDERED. In this petition for review on certiorari, petitioners ABS-CBN Broadcasting Corp. (hereinafter ABS-
CBN) seeks to reverse and set aside the decision[1] of 31 October 1996 and the resolution[2] of 10 March
1997 of the Court of Appeals in CA-G.R. CV No. 44125. The former affirmed with modification the
PRESBITERO J. VELASCO, JR. decision[3] of 28 April 1993 of the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case No.
Q-12309. The latter denied the motion to reconsider the decision of 31 October 1996.
Associate Justice
The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:

In 1990, ABS-CBN and VIVA executed a Film Exhibition Agreement (Exh. A) whereby Viva gave ABS-CBN
an exclusive right to exhibit some Viva films. Sometime in December 1991, in accordance with paragraph
2.4 [sic] of said agreement stating that-

1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva films for TV telecast
under such terms as may be agreed upon by the parties hereto, provided, however, that such right shall
be exercised by ABS-CBN from the actual offer in writing.

Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president Charo Santos-Concio,
a list of three (3) film packages (36 title) from which ABS-CBN may exercise its right of first refusal under
the afore-said agreement (Exhs. 1 par. 2, 2, 2-A and 2-B Viva). ABS-CBN, however through Mrs. Concio,
can tick off only ten (10) titles (from the list) we can purchase (Exh. 3 Viva) and therefore did not accept
said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs. Concio are not the subject of the case
at bar except the film Maging Sino Ka Man.

For further enlightenment, this rejection letter dated January 06, 1992 (Exh 3 Viva) is hereby quoted:

6 January 1992

Dear Vic,
This is not a very formal business letter I am writing to you as I would like to express my difficulty in On April 2, 1992, defendant Del Rosario and ABS-CBNs general manager, Eugenio Lopez III, met at the
recommending the purchase of the three film packages you are offering ABS-CBN. Tamarind Grill Restaurant in Quezon City to discuss the package proposal of VIVA. What transpired in
that lunch meeting is the subject of conflicting versions. Mr. Lopez testified that he and Mr. Del Rosario
allegedly agreed that ABS-CBN was granted exclusive film rights to fourteen (14) films for a total
From among the three packages I can only tick off 10 titles we can purchase. Please see attached. I hope
consideration of P36 million; that he allegedly put this agreement as to the price and number of films in a
you will understand my position. Most of the action pictures in the list do not have big action stars in the
napkin and signed it and gave it to Mr. Del Rosario (Exh. D; TSN, pp. 24-26, 77-78, June 8, 1992). On
cast. They are not for primetime. In line with this I wish to mention that I have not scheduled for telecast
the other hand. Del Rosario denied having made any agreement with Lopez regarding the 14 Viva films;
several action pictures in our very first contract because of the cheap production value of these movies as
denied the existence of a napkin in which Lopez wrote something; and insisted that what he and Lopez
well as the lack of big action stars. As a film producer, I am sure you understand what I am trying to say
discussed at the lunch meeting was Vivas film package offer of 104 films (52 originals and 52 re-runs) for
as Viva produces only big action pictures.
a total price of P60 million. Mr. Lopez promising [sic]to make a counter proposal which came in the form
of a proposal contract Annex C of the complaint (Exh. 1 Viva; Exh C ABS-CBN).
In fact, I would like to request two (2) additional runs for these movies as I can only schedule them in out
non-primetime slots. We have to cover the amount that was paid for these movies because as you very
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president for Finance
well know that non-primetime advertising rates are very low. These are the unaired titles in the first
discussed the terms and conditions of Vivas offer to sell the 104 films, after the rejection of the same
contract.
package by ABS-CBN.

1. Kontra Persa [sic]

On April 07, 1992, defendant Del Rosario received through his secretary , a handwritten note from Ms.
2. Raider Platoon
Concio, (Exh. 5 Viva), which reads: Heres the draft of the contract. I hope you find everything in order, to
3. Underground guerillas
which was attached a draft exhibition agreement (Exh. C ABS-CBN; Exh. 9 Viva p. 3) a counter-proposal
4. Tiger Command
covering 53 films, 52 of which came from the list sent by defendant Del Rosario and one film was added
5. Boy de Sabog
by Ms. Concio, for a consideration of P35 million. Exhibit C provides that ABS-CBN is granted film rights
6. lady Commando
to 53 films and contains a right of first refusal to 1992 Viva Films. The said counter proposal was
7. Batang Matadero
however rejected by Vivas Board of Directors [in the] evening of the same day, April 7, 1992, as Viva
8. Rebelyon
would not sell anything less than the package of 104 films for P60 million pesos (Exh. 9 Viva), and such
rejection was relayed to Ms. Concio.
I hope you will consider this request of mine.
On April 29, 1992, after the rejection of ABS-CBN and following several negotiations and meetings
The other dramatic films have been offered to us before and have been rejected because of the ruling of defendant Del Rosario and Vivas President Teresita Cruz, in consideration of P60 million, signed a letter
MTRCB to have them aired at 9:00 p.m. due to their very adult themes. of agreement dated April 24, 1992, granting RBS the exclusive right to air 104 Viva-produced and/or
acquired films (Exh. 7-A - RBS; Exh. 4 RBS) including the fourteen (14) films subject of the present
case.[4]
As for the 10 titles I have choosen [sic] from the 3 packages please consider including all the other Viva
movies produced last year, I have quite an attractive offer to make.
On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a prayer
for a writ of preliminary injunction and/or temporary restraining order against private respondents
Thanking you and with my warmest regards.
Republic Broadcasting Corporation[5] (hereafter RBS), Viva Production (hereafter VIVA), and Vicente del
Rosario. The complaint was docketed as Civil Case No. Q-92-12309.
(Signed)
Charo Santos-Concio On 28 May 1992, the RTC issued a temporary restraining order[6] enjoining private respondents
from proceeding with the airing, broadcasting, and televising of the fourteen VIVA films subject of the
controversy, starting with the film Maging Sino Ka Man, which was scheduled to be shown on private
On February 27, 1992, defendant Del Rosario approached ABS-CBNs Ms. Concio, with a list consisting of respondent RBS channel 7 at seven oclock in the evening of said date.
52 original movie titles (i.e., not yet aired on television) including the 14 titles subject of the present case,
as well as 104 re-runs (previously aired on television) from which ABS-CBN may choose another 52 titles, On 17 June 1992, after appropriate proceedings, the RTC issued an order[7] directing the issuance
as a total of 156 titles, proposing to sell to ABS-CBN airing rights over this package of 52 originals and 52 of a writ of preliminary injunction upon ABS-CBNs posting of a P35 million bond. ABS-CBN moved for
re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash and P30,000,000.00 worth of the reduction of the bond,[8] while private respondents moved for reconsideration of the order and offered
television spots (Exh. 4 to 4-C Viva; 9 Viva). to put up a counterbond.[9]
 In the meantime, private respondents filed separate answer with counterclaim.[10] RBS also set up a
cross-claim against VIVA.
On 3 August 1992, the RTC issued an order[11] dissolving the writ of preliminary injunction upon
the posting by RBS of a P30 million counterbond to answer for whatever damages ABS-CBN might suffer
by virtue of such dissolution. However, it reduced petitioners injunction bond to P15 million as a
condition precedent for the reinstatement of the writ of preliminary injunction should private
respondents be unable to post a counterbond.
At the pre-trial[12] on 6 August 1992, the parties upon suggestion of the court, agreed to explore the
possibility of an amicable settlement. In the meantime, RBS prayed for and was granted reasonable time
within which to put up a P30 million counterbond in the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement, RBS posted on 1 October 1992 a
counterbond, which the RTC approved in its Order of 15 October 1992.[13]
On 19 October 1992, ABS-CBN filed a motion for reconsideration[14] of the 3 August and 15 October
1992 Orders, which RBS opposed.[15]
On 29 October, the RTC conducted a pre-trial.[16]
Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals a
petition[17] challenging the RTCs Order of 3 August and 15 October 1992 and praying for the issuance of
a writ of preliminary injunction to enjoin the RTC from enforcing said orders. The case was docketed as
CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary restraining order[18] to enjoin the
airing, broadcasting, and televising of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a decision[19] dismissing the petition in
CA-G.R. SP No. 29300 for being premature. ABS-CBN challenged the dismissal in a petition for review
filed with this Court on 19 January 1993, which was docketed s G.R. No. 108363.
In the meantime the RTC received the evidence for the parties in Civil Case No. Q-92-
12309. Thereafter, on 28 April 1993, it rendered a decision[20] in favor of RBS and VIVA and against ABS-
CBN disposing as follows:
WHEREFORE, under cool reflection and prescinding from the foregoing, judgment is rendered in favor of
defendants and against the plaintiff.
(1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:
a) P107,727.00 the amount of premium paid by RBS to the surety which issued
defendants RBSs bond to lift the injunction;
b) P191,843.00 for the amount of print advertisement for Maging Sino Ka Man in
various newspapers;
c) Attorneys fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
(3) For the defendant VIVA, plaintiff ABS-CBN is ordered to pay P212,000.00 by way of
reasonable attorneys fees.
(4) The cross-claim of defendant RBS against defendant VIVA is dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price and terms of the offer. The
alleged agreement between Lopez III and Del Rosario was subject to the approval of the VIVA Board of
Directors, and said agreement was disapproved during the meeting of the Board on 7 April 1992. Hence,
there was no basis for ABS-CBNs demand that VIVA signed the 1992 Film Exhibition
Agreement. Furthermore, the right of first refusal under the 1990 Film Exhibition Agreement had
previously been exercised per Ms. Concios letter to Del Rosario ticking off ten titles acceptable to them,
which would have made the 1992 agreement an entirely new contract.
On 21 June 1993, this Court denied[21] ABS-CBNs petition for review in G.R. No. 108363, as no
reversible error was committed by the Court of Appeals in its challenged decision and the case had
become moot and academic in view of the dismissal of the main action by the court a quo in its decision
of 28 April 1993.
Aggrieved by the RTCs decision, ABS-CBN appealed to the Court of Appeals claiming that there was
a perfected contract between ABS-CBN and VIVA granting ABS-CBN the exclusive right to exhibit the
subject films. Private respondents VIVA and Del Rosario also appealed seeking moral and exemplary
damages and additional attorneys fees.
In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract
between ABS-CBN and VIVA had not been perfected, absent the approval by the VIVA Board of Directors
of whatever Del Rosario, its agent, might have agreed with Lopez III. The appellate court did not even
believe ABS-CBNs evidence that Lopez III actually wrote down such an agreement on a napkin, as the
same was never produced in court. It likewise rejected ABS-CBNs insistence on its right of first refusal
and ratiocinated as follows:
As regards the matter of right of first refusal, it may be true that a Film Exhibition Agreement was
entered into between Appellant ABS-CBN and appellant VIVA under Exhibit A in 1990 and that parag.
1.4 thereof provides:
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) VIVA films for TV telecast
under such terms as may be agreed upon by the parties hereto, provided, however, that such right shall
be exercised by ABS-CBN within a period of fifteen (15) days from the actual offer in writing (Records, p.
14).
[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still be subjected to
such terms as may be agreed upon by the parties thereto, and that the said right shall be exercised by
ABS-CBN within fifteen (15) days from the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit A on the right of first refusal did not fix the price of the film
right to the twenty-four (24) films, nor did it specify the terms thereof. The same are still left to be agreed
upon by the parties.
In the instant case, ABS-CBNs letter of rejection Exhibit 3 (Records, p. 89) stated that it can only tick off
ten (10) films, and the draft contract Exhibit C accepted only fourteen (14) films, while parag. 1.4 of
Exhibit A speaks of the next twenty-four (24) films.
The offer of VIVA was sometime in December 1991, (Exhibits 2, 2-A, 2-B; Records, pp. 86-88; Decision, p.
11, Records, p. 1150), when the first list of VIVA films was sent by Mr. Del Rosario to ABS-CBN. The Vice
President of ABS-CBN, Mrs. Charo Santos-Concio, sent a letter dated January 6, 1992 (Exhibit 3,
Records, p. 89) where ABS-CBN exercised its right of refusal by rejecting the offer of VIVA. As aptly
observed by the trial court, with the said letter of Mrs. Concio of January 6, 1992, ABS-CBN had lost its
right of first refusal. And even if We reckon the fifteen (15) day period from February 27, 1992 (Exhibit 4
to 4-C) when another list was sent to ABS-CBN after the letter of Mrs. Concio, still the fifteen (15) day
period within which ABS-CBN shall exercise its right of first refusal has already expired.[22]
Accordingly, respondent court sustained the award factual damages consisting in the cost of print
advertisements and the premium payments for the counterbond, there being adequate proof of the
pecuniary loss which RBS has suffered as a result of the filing of the complaint by ABS-CBN. As to the
award of moral damages, the Court of Appeals found reasonable basis therefor, holding that RBSs
reputation was debased by the filing of the complaint in Civil Case No. Q-92-12309 and by the non-
showing of the film Maging Sino Ka Man. Respondent court also held that exemplary damages were
correctly imposed by way of example or correction for the public good in view of the filing of the complaint
despite petitioners knowledge that the contract with VIVA had not been perfected. It also upheld the
award of attorneys fees, reasoning that with ABS-CBNs act of instituting Civil Case No. Q-92-12309, RBS
was unnecessarily forced to litigate. The appellate court, however, reduced the awards of moral damages
to P 2 million, exemplary damages to P2 million, and attorneys fees to P500,000.00.
On the other hand, respondent Court of Appeals denied VIVA and Del Rosarios appeal because it
was RBS and not VIVA which was actually prejudiced when the complaint was filed by ABS-CBN.
Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case,
contending that the Court of Appeals gravely erred in
I legal technicalities, or a different interpretation of the laws on the matter, the case would lose
RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN PETITIONER AND
PRIVATE RESPONDENT VIVA NOTWITHSTANDING PREPONFERANCE OF EVIDENCE
ADDUCED BY PETITIONER TO THE CONTRARY.
II
IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF PRIVATE
RESPONDENT RBS.
III
IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE
RESPONDENT RBS.
IV
IN AWARDING ATORNEYS FEES OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles under
the 1990 Film Exhibition Agreement, as it had chosen only ten titles from the first list. It insists that we
give credence to Lopezs testimony that he and Del Rosario met at the Tamarind Grill Restaurant,
discussed the terms and conditions of the second list (the 1992 Film Exhibition Agreement) and upon
agreement thereon, wrote the same on a paper napkin. It also asserts that the contract has already been
effective, as the elements thereof, namely, consent, object, and consideration were established. It then
concludes that the Court of Appeals pronouncements were not supported by law and jurisprudence, as
per our decision of 1 December 1995 in Limketkai Sons Milling, Inc. v. Court of Appeals, [23] which
cited Toyota Shaw, Inc. v. Court of Appeals;[24] Ang Yu Asuncion v. Court of Appeals,[25] and Villonco
Realty Company v. Bormaheco, Inc.[26]
Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent for the
premium on the counterbond of its own volition in order to negate the injunction issued by the trial court
after the parties had ventilated their respective positions during the hearings for the purpose. The filing
of the counterbond was an option available to RBS, but it can hardly be argued that ABS-CBN compelled
RBS to incur such expense. Besides, RBS had another available option, i.e., move for the dissolution of
the injunction; or if it was determined to put up a counterbond, it could have presented a cash
bond. Furthermore under Article 2203 of the Civil Code, the party suffering loss injury is also required to
exercise the diligence of a good father of a family to minimize the damages resulting from the act or
omission. As regards the cost of print advertisements, RBS had not convincingly established that this
was a loss attributable to the non-showing of Maging Sino Ka Man; on the contrary, it was brought out
during trial that with or without the case or injunction, RBS would have spent such an amount to
generate interest in the film.
ABS-CBN further contends that there was no other clear basis for the awards of moral and
exemplary damages. The controversy involving ABS-CBN and RBS did not in any way originate from
business transaction between them.The claims for such damages did not arise from any contractual
dealings or from specific acts committed by ABS-CBN against RBS that may be characterized as wanton,
fraudulent, or reckless; they arose by virtue only of the filing of the complaint. An award of moral and
exemplary damages is not warranted where the record is bereft of any proof that a party acted
maliciously or in bad faith in filing an action.[27] In any case, free resort to courts for redress of wrongs is
a matter of public policy. The law recognizes the right of every one to sue for that which he honestly
believes to be his right without fear of standing trial for damages where by lack of sufficient evidence,
ground.[28] One who, makes use of his own legal right does no injury.[29] If damage results from filing of
the complaint, it is damnum absque injuria.[30]Besides, moral damages are generally not awarded in favor
of a juridical person, unless it enjoys a good reputation that was debased by the offending party resulting
in social humiliation.[31]
As regards the award of attorneys fees, ABS-CBN maintains that the same had no factual, legal, or
equitable justification. In sustaining the trial courts award, the Court of Appeals acted in clear disregard
of the doctrine laid down in Buan v. Camaganacan[32] that the text of the decision should state the reason
why attorneys fees are being awarded; otherwise, the award should be disallowed. Besides, no bad faith
has been imputed on, much less proved as having been committed by, ABS-CBN. It has been held that
where no sufficient showing of bad faith would be reflected in a partys persistence in a case other than
an erroneous conviction of the righteousness of his cause, attorneys fees shall not be recovered as
cost.[33]
On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and VIVA
absent meeting of minds between them regarding the object and consideration of the alleged contract. It
affirms that ABS-CBNs claim of a right of first refusal was correctly rejected by the trial court. RBS
insists the premium it had paid for the counterbond constituted a pecuniary loss upon which it may
recover. It was obliged to put up the counterbond due to the injunction procured by ABS-CBN. Since the
trial court found that ABS-CBN had no cause of action or valid claim against RBS and, therefore not
entitled to the writ of injunction, RBS could recover from ABS-CBN the premium paid on the
counterbond. Contrary to the claim of ABS-CBN, the cash bond would prove to be more expensive, as the
loss would be equivalent to the cost of money RBS would forego in case the P30 million came from its
funds or was borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled showing of
the film Maging Sino Ka Man because the print advertisements were out to announce the showing on a
particular day and hour on Channel 7, i.e., in its entirety at one time, not as series to be shown on a
periodic basis. Hence, the print advertisements were good and relevant for the particular date of showing,
and since the film could not be shown on that particular date and hour because of the injunction, the
expenses for the advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and secured
injunctions purely for the purpose of harassing and prejudicing RBS. Pursuant then to Articles 19 and
21 of the Civil Code, ABS-CBN must be held liable for such damages. Citing Tolentino,[34] damages may be
awarded in cases of abuse of rights even if the done is not illicit, and there is abuse of rights where a
plaintiff institutes an action purely for the purpose of harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and exemplary damages, private
respondent RBS cited People v. Manero,[35] where it was stated that such entity may recover moral and
exemplary damages if it has a good reputation that is debased resulting in social humiliation. It then
ratiocinates; thus:
There can be no doubt that RBS reputation has been debased by ABS-CBNs acts in this case. When RBS
was not able to fulfill its commitment to the viewing public to show the film Maging Sino Ka Man on the
scheduled dates and times (and on two occasions that RBS advertised), it suffered serious
embarrassment and social humiliation. When the showing was cancelled, irate viewers called up RBS
offices and subjected RBS to verbal abuse (Announce kayo ng announce, hindi ninyo naman ilalabas,
nanloloko yata kayo) (Exh. 3-RBS, par.3). This alone was not something RBS brought upon itself. It was
exactly what ABS-CBN had planted to happen.
The amount of moral and exemplary damages cannot be said to be excessive. Two reasons justify the
amount of the award.
The first is that the humiliation suffered by RBS, is national in extent. RBS operations as a broadcasting
company is [sic] nationwide. Its clientele, like that of ABS-CBN, consists of those who own and watch
television. It is not an exaggeration to state, and it is a matter of judicial notice that almost every other
person in the country watches television. The humiliation suffered by RBS is multiplied by the number of
televiewers who had anticipated the showing of the film, Maging Sino Ka Man on May 28 and November
3, 1992 but did not see it owing to the cancellation. Added to this are the advertisers who had placed
commercial spots for the telecast and to whom RBS had a commitment in consideration of the placement
to show the film in the dates and times specified.
The second is that it is a competitor that caused RBS suffer the humiliation. The humiliation and injury
are far greater in degree when caused by an entity whose ultimate business objective is to lure customers
(viewers in this case) away from the competition.[36]
For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court and
the Court of Appeals do not support ABS-CBNs claim that there was a perfected contract. Such factual
findings can no longer be disturbed in this petition for review under Rule 45, as only questions of law can
be raised, not questions of fact. On the issue of damages and attorneys fees, they adopted the arguments
of RBS.
The key issues for our consideration are (1) whether there was a perfected contract between VIVA
and ABS-CBN, and (2) whether RBS is entitled to damages and attorneys fees. It may be noted that that
award of attorneys fees of P212,000 in favor of VIVA is not assigned as another error.
I
The first issue should be resolved against ABS-CBN. A contract is a meeting of minds between two
persons whereby one binds himself to give something or render some service to another [37] for a
consideration. There is no contract unless the following requisites concur: (1) consent of the contracting
parties; (2) object certain which is the subject of the contract; and (3) cause of the obligation, which is
established.[38] A contract undergoes three stages:
(a) preparation, conception, or generation, which is the period of negotiation and bargaining,
ending at the moment of agreement of the parties;
(b) perfection or birth of the contract, which is the moment when the parties come to agree on
the terms of the contract; and
(c) consummation or death, which is the fulfillment or performance of the terms agreed upon
in the contract.[39]
Contracts that are consensual in nature are perfected upon mere meeting of the minds. Once there
is concurrence between the offer and the acceptance upon the subject matter, consideration, and terms
of payment a contract is produced. The offer must be certain. To convert the offer into a contract, the
acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal,
unconditional, and without variance of any sort from the proposal. A qualified acceptance, or one that
involves a new proposal, constitutes a counter-offer and is a rejection of the original offer. Consequently,
when something is desired which is not exactly what is proposed in the offer, such acceptance is not
sufficient to generate consent because any modification or variation from the terms of the offer annuls
the offer.[40]
When Mr. Del Rosario of Viva met Mr. Lopez of ABS-CBN at the Tamarind Grill on 2 April 1992 to
discuss the package of films, said package of 104 VIVA films was VIVAs offer to ABS-CBN to enter into a
new Film Exhibition Agreement. But ABS-CBN, sent through Ms. Concio, counter-proposal in the form a
draft contract proposing exhibition of 53 films for a consideration of P35 million. This counter-proposal
could be nothing less than the counter-offer of Mr. Lopez during his conference with Del Rosario at
Tamarind Grill Restaurant. Clearly, there was no acceptance of VIVAs offer, for it was met by a counter-
offer which substantially varied the terms of the offer.
ABS-CBNs reliance in Limketkai Sons Milling, Inc. v. Court of Appeals[41] and Villonco Realty
Company v. Bormaheco, Inc.,[42] is misplaced. In these cases, it was held that an acceptance may contain
a request for certain changes in the terms of the offer and yet be a binding acceptance as long as it is
clear that the meaning of the acceptance is positively and unequivocally to accept the offer, whether such
request is granted or not. This ruling was, however, reversed in the resolution of 29 March 1996,[43] which
ruled that the acceptance of an offer must be unqualified and absolute, i.e., it must be identical in all
respects with that of the offer so as to produce consent or meetings of the minds.
On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-offer
were not material but merely clarificatory of what had previously been agreed upon. It cited the
statement in Stuart v. Franklin Life Insurance Co.[44] that a vendors change in a phrase of the offer to
purchase, which change does not essentially change the terms of the offer, does not amount to a
rejection of the offer and the tender of a counter-offer.[45] However, when any of the elements of the
contract is modified upon acceptance, such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of VIVAs offer hence, they underwent
period of bargaining. ABS-CBN then formalized its counter-proposals or counter-offer in a draft
contract. VIVA through its Board of Directors, rejected such counter-offer. Even if it be
conceded arguendo that Del Rosario had accepted the counter-offer, the acceptance did not bind VIVA, as
there was no proof whatsoever that Del Rosario had the specific authority to do so.
Under the Corporation Code,[46] unless otherwise provided by said Code, corporate powers, such as
the power to enter into contracts, are exercised by the Board of Directors. However, the Board may
delegate such powers to either an executive committee or officials or contracted managers. The
delegation, except for the executive committee, must be for specific purposes.[47] Delegation to officers
makes the latter agents of the corporation; accordingly, the general rules of agency as to the binding
effects of their acts would apply.[48] For such officers to be deemed fully clothed by the corporation to
exercise a power of the Board, the latter must specially authorize them to do so. that Del Rosario did not
have the authority to accept ABS-CBNs counter-offer was best evidenced by his submission of the draft
contract to VIVAs Board of Directors for the latters approval. In any event, there was between Del Rosario
and Lopez III no meeting of minds. The following findings of the trial court are instructive:
A number of considerations militate against ABS-CBNs claim that a contract was perfected at that lunch
meeting on April 02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred to the price and the
number of films, which he wrote on a napkin. However, Exhibit C contains numerous provisions which
were not discussed at the Tamarind Grill, if Lopez testimony was to be believed nor could they have been
physically written on a napkin. There was even doubt as to whether it was a paper napkin or cloth
napkin. In short what were written in Exhibit C were not discussed, and therefore could not have been
agreed upon, by the parties. How then could this court compel the parties to sign Exhibit C when the
provisions thereof were not previously agreed upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the contract was 14
films. The complaint in fact prays for delivery of 14 films. But Exhibit C mentions 53 films as its subject
matter. Which is which? If Exhibit C reflected the true intent of the parties, then ABS-CBNs claim for 14
films in its complaint is false or if what it alleged in the complaint is true, then Exhibit C did not reflect
what was agreed upon by the parties. This underscores the fact that there was no meeting of the minds
as to the subject matter of the contract, so as to preclude perfection thereof. For settled is the rule that
there can be no contract where there is no object certain which is its subject matter (Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. D) States:
We were able to reach an agreement. VIVA gave us the exclusive license to show these fourteen (14) films,
and we agreed to pay Viva the amount of P16,050,000.00 as well as grant Viva commercial slots
worth P19,950,000.00. We had already earmarked this P16,050,000.00.
which gives a total consideration of P36 million (P19,951,000.00 plus P16,050,000.00
equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q What was written in this napkin?
A The total price, the breakdown the known Viva movies, the 7 blockbuster movies and the other 7
Viva movies because the price was broken down accordingly. The none [sic] Viva and the seven
other Viva movies and the sharing between the cash portion and the concerned spot portion in
the total amount of P35 million pesos.
Now, which is which? P36 million or P35 million? This weakens ABS-CBNs claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit C to Mr. Del Rosario
with a handwritten note, describing said Exhibit C as a draft. (Exh. 5 Viva; tsn pp. 23-24, June 08,
1992). The said draft has a well defined meaning.
Since Exhibit C is only a draft, or a tentative, provisional or preparatory writing prepared for discussion,
the terms and conditions thereof could not have been previously agreed upon by ABS-CBN and
Viva. Exhibit C could not therefore legally bind Viva, not having agreed thereto. In fact, Ms. Concio
admitted that the terms and conditions embodied in Exhibit C were prepared by ABS-CBNs lawyers and
there was no discussion on said terms and conditions.
As the parties had not yet discussed the proposed terms and conditions in Exhibit C, and there was no
evidence whatsoever that Viva agreed to the terms and conditions thereof, said document cannot be a
binding contract. The fact that Viva refused to sign Exhibit C reveals only two [sic] well that it did not
agree on its terms and conditions, and this court has no authority to compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at the Tamarind Grill
was only provisional, in the sense that it was subject to approval by the Board of Directors of Viva. He
testified:
 Q Now, Mr. Witness, and after that Tamarinf meeting the second meeting wherein you claimed that
you have the meeting of the minds between you and Mr. Vic del Rosario, what happened?
A Vic Del Rosario was supposed to call us up and tell us specifically the result of the discussion with
the Board of Directors.
Q And you are referring to the so-called agreement which you wrote in [sic] a piece of paper?
A Yes, sir.
Q So, he was going to forward that to the board of Directors for approval?
A Yes, sir (Tsn, pp. 42-43, June 8, 1992)
Q Did Mr. Del Rosario tell you that he will submit it to his Board for approval?
A Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del Rosario had no authority to
bind Viva to a contract with ABS-CBN until and unless its Board of Directors approved it. The complaint,
in fact, alleges that Mr. Del Rosario is the Executive Producer of defendant Viva which is a corporation.
(par. 2, complaint). As a mere agent of Viva, Del Rosario could not bind Viva unless what he did is ratified
by its Directors. (Vicente vs.Geraldez, 52 SCRA 210; Arnold vs. Willets and Paterson, 44 Phil. 634). As a
mere agent, recognized as such by plaintiff, Del Rosario could not be held liable jointly and severally with
Viva and his inclusion as party defendant has no legal basis.(Salonga vs. Warner Barnes [sic],COLTA, 88
Phil. 125; Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations in the complaint are clear admissions that what was
supposed to have been agreed upon at the Tamarind Grill between Mr. Lopez and Del Rosario was not a
binding agreement. It is as it should be because corporate power to enter into a contract is lodged in the
Board of Directors. (Sec. 23, Corporation Code). Without such board approval by the Viva board,
whatever agreement Lopez and Del Rosario arrived at could not ripen into a valid binding upon Viva (Yao
Ka Sin Trading vs. Court of Appeals, 209 SCRA 763). The evidence adduced shows that the Board of
Directors of Viva rejected Exhibit C and insisted that the film package for 104 films be maintained (Exh.
7-1 Cica).[49]
The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four films
under the 1990 Film Exhibition Agreement and that the meeting between Lopez and Del Rosario was a
continuation of said previous contract is untenable. As observed by the trial court, ABS-CBNs right of
first refusal had already been exercised when Ms. Concio wrote to Viva ticking off ten films. Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent, was for an
entirely different package. Ms. Concio herself admitted on cross-examination to having used or
exercised the right of first refusal.She stated that the list was not acceptable and was indeed not
accepted by ABS-CBN, (Tsn, June 8, 1992, pp. 8-10). Even Mr. Lopez himself admitted that the
right of first refusal may have been already exercised by Ms. Concio (as she had). (TSN, June 8,
1992, pp. 71-75). Del Rosario himself knew and understand [sic] that ABS-CBN has lost its right of
first refusal when his list of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-11).[50]
II
However, we find for ABS-CBN on the issue of damages. We shall first take up actual
damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or compensatory
damages. Except as provided by law or by stipulation, one is entitled to compensation for actual damages
only for such pecuniary loss suffered by him as he has duly proved.[51] The indemnification shall
comprehend not only the value of the loss suffered, but also that of the profits that the obligee failed to
obtain.[52] In contracts and quasi-contracts the damages which may be awarded are dependent on
whether the obligor acted with good faith or otherwise. In case of good faith, the damages recoverable are
those which are the natural and probable consequences of the breach of the obligation and which the
parties have foreseen or could have reasonably foreseen at the time of the constitution of the obligation. If
the obligor acted with fraud, bad faith, malice, or wanton attitude, he shall be responsible for all damages
which may be reasonably attributed to the non-performance of the obligation.[53] In crimes and quasi-
delicts, the defendants shall be liable for all damages which are the natural and probable consequences
of the act or omission complained of, whether or not such damages have been foreseen or could have
reasonably been foreseen by the defendant.[54]
Actual damages may likewise be recovered for loss or impairment of earning capacity in cases of
temporary or permanent personal injury, or for injury to the plaintiffs business standing or commercial
credit.[55]
The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or quasi-
delict. It arose from the fact of filing of the complaint despite ABS-CBNs alleged knowledge of lack of
cause of action. Thus paragraph 12 of RBSs Answer with Counterclaim and Cross-claim under the
heading COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has no cause of action against
RBS. As a result thereof, RBS suffered actual damages in the amount of P6,621,195.32.[56]
Needless to state the award of actual damages cannot be comprehended under the above law on actual
damages. RBS could only probably take refuge under Articles 19, 20, and 21 of the Civil Code, which
read as follows:
ART. 19. Every person must, in the exercise of hid rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.
ART. 20. Every person who, contrary to law, wilfully or negligently causes damage to another shall
indemnify the latter for the same.
ART. 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.
It may further be observed that in cases where a writ of preliminary injunction is issued, the
damages which the defendant may suffer by reason of the writ are recoverable from the injunctive
bond.[57] In this case, ABS-CBN had not yet filed the required bond; as a matter of fact, it asked for
reduction of the bond and even went to the Court of Appeals to challenge the order on the matter. Clearly
then, it was not necessary for RBS to file a counterbond. Hence, ABS-CBN cannot be held responsible for
the premium RBS paid for the counterbond.
 Neither could ABS-CBN be liable for the print advertisements for Maging Sino Ka Man for lack of
sufficient legal basis. The RTC issued a temporary restraining order and later, a writ of preliminary
injunction on the basis of its determination that there existed sufficient ground for the issuance
thereof. Notably, the RTC did not dissolve the injunction on the ground of lack of legal and factual basis,
but because of the plea of RBS that it be allowed to put up a counterbond.
As regards attorneys fees, the law is clear that in the absence of stipulation, attorneys fees may be
recovered as actual or compensatory damages under any of the circumstances provided for in Article
2208 of the Civil Code.[58]
The general rule is that attorneys fees cannot be recovered as part of damages because of the policy
that no premium should be placed on the right to litigate.[59] They are not to be awarded every time a
party wins a suit. The power of the court t award attorneys fees under Article 2208 demands factual,
legal, and equitable justification.[60] Even when a claimant is compelled to litigate with third persons or to
incur expenses to protect his rights, still attorneys fees may not be awarded where no sufficient showing
of bad faith could be reflected in a partys persistence in a case other than an erroneous conviction of the
righteousness of his cause.[61]
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code. Article
2217 thereof defines what are included in moral damages, while Article 2219 enumerates the cases
where they may be recovered. Article 2220 provides that moral damages may be recovered in breaches of
contract where the defendant acted fraudulently or in bad faith. RBSs claim for moral damages could
possibly fall only under item (10) of Article 2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34 and 35.
Moral damages are in the category of an award designed to compensate the claimant for actual
injury suffered and not to impose a penalty on the wrongdoer.[62] The award is not meant to enrich the
complainant at the expense of the defendant, but to enable the injured party to obtain means, diversion,
or amusements that will serve to obviate the moral suffering he has undergone. It is aimed at the
restoration, within the limits of the possible, of the spiritual status quo ante, and should be proportionate
to the suffering inflicted.[63] Trial courts must then guard against the award of exorbitant damages; they
should exercise balanced restrained and measured objectivity to avoid suspicion that it was due to
passion, prejudice, or corruption or the part of the trial court.[64]
It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-
contract, delict, or quasi-delict. Hence, the claims for moral and exemplary damages can only be based
on Articles 19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the following: (1) the existence of a legal right or
duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or injuring
another. Article 20 speaks of the general sanction for all provisions of law which do not especially provide
for their own sanction; while Article 21 deals with acts contra bonus mores, and has the following
elements: (1) there is an act which is legal, (2) but which is contrary to morals, good custom, public
order, or public policy, and (3) and it is done with intent to injure.[72]
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith implies a
conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity. [73] Such
must be substantiated by evidence.[74]
There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly
convinced of the merits of its cause after it had undergone serious negotiations culminating in its formal
submission of a draft contract.Settled is the rule that the adverse result of an action does not per
se make the action wrongful and subject the actor to damages, for the law could not have meant impose
a penalty on the right to litigate. If damages result from a persons exercise of a right, it is damnum
absque injuria.[75]
WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of Appeals in
CA-G.R. CV No. 44125 is hereby REVERSED except as to unappealed award of attorneys fees in favor of
VIVA Productions, Inc.
No pronouncement as to costs.
SO ORDERED.
Melo, Kapunan, Martinez, and Pardo, JJ., concur.

The award of moral damages cannot be granted in favor of a corporation because, being an artificial
person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. It
cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by
one having a nervous system.[65] The statement in People v. Manero[66] and Mambulao Lumber Co. v.
PNB[67] that a corporation may recover moral damages if it has a good reputation that is debased,
resulting in social humiliation is an obiter dictum. On this score alone the award for damages must be set
aside, since RBS is a corporation.

The basic law on exemplary damages is Section 5 Chapter 3, Title XVIII, Book IV of the Civil
Code. These are imposed by way of example or correction for the public good, in addition to moral,
temperate, liquidated, or compensatory damages.[68] They are recoverable in criminal cases as part of the
civil liability when the crime was committed with one or more aggravating circumstances;[69] in quasi-
delicts, if the defendant acted with gross negligence;[70] and in contracts and quasi-contracts, if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.[71]
 Republic of the Philippines On November 19, 1985, Servando and Leticia obtained from Veronica another
Supreme Court loan in the amount of P90,000.00, payable in two months, at 6% interest per month.
Manila They executed a promissory note to evidence the loan, maturing on January 19, 1986.
FIRST DIVISION They received only P84,000.00, out of the proceeds of the loan.

HEIRS OF SERVANDO FRANCO, G.R. No. 159709 On maturity of the two promissory notes, the borrowers failed to pay the
Petitioners, indebtedness.
Present:
On June 11, 1986, Servando and Leticia secured from Veronica still another
LEONARDO-DE CASTRO, loan in the amount of P300,000.00, maturing in one month, secured by a real estate
- versus - Acting Chairperson, mortgage over a property belonging to Leticia Makalintal Yaptinchay, who issued a
BERSAMIN, special power of attorney in favor of Leticia Medel, authorizing her to execute the
DEL CASTILLO, mortgage. Servando and Leticia executed a promissory note in favor of Veronica to pay
VILLARAMA, JR, and the sum of P300,000.00, after a month, or on July 11, 1986. However, only the sum
PERLAS-BERNABE, JJ. of P275,000.00, was given to them out of the proceeds of the loan.
SPOUSES VERONICA AND DANILO Promulgated:
GONZALES, Like the previous loans, Servando and Medel failed to pay the third loan on
Respondents. June 27, 2012 maturity.
x-----------------------------------------------------------------------------------------x On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael
Medel, consolidated all their previous unpaid loans totaling P440,000.00, and sought
DECISION from Veronica another loan in the amount of P60,000.00, bringing their indebtedness
to a total of P500,000.00, payable on August 23, 1986. They executed a promissory
BERSAMIN, J.: note, reading as follows:
There is novation when there is an irreconcilable incompatibility between the old and the new obligations.
There is no novation in case of only slight modifications; hence, the old obligation prevails. Baliwag, Bulacan July 23, 1986

The petitioners challenge the decision promulgated on March 19, 2003,[1] whereby the Court of Appeals Maturity Date August 23, 1986
(CA) upheld the issuance of a writ of execution by the Regional Trial Court (RTC), Branch 16, in Malolos,
P500,000.00
Bulacan.
FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to
the order of VERONICA R. GONZALES doing business in the business style
of GONZALES CREDIT ENTERPRISES, Filipino, of legal age, married to
Danilo G. Gonzales, Jr., of Baliwag Bulacan, the sum of PESOS ........ FIVE
HUNDRED THOUSAND ..... (P500,000.00) Philippine
Antecedents
Currency with interest thereon at the rate of 5.5 PERCENT per month plus
The Court adopts the following summary of the antecedents rendered by the Court in Medel v. 2% service charge per annum from date hereof until fully paid according to
Court of Appeals,[2] the case from which this case originated, to wit: the amortization schedule contained herein. (Underscoring supplied)

On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando Payment will be made in full at the maturity date.
and Leticia) obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was
engaged in the money lending business under the name Gonzales Credit Enterprises, Should I/WE fail to pay any amortization or portion hereof when due,
in the amount of P50,000.00, payable in two months. Veronica gave only the amount all the other installments together with all interest accrued shall
of P47,000.00, to the borrowers, as she retained P3,000.00, as advance interest for one immediately be due and payable and I/WE hereby agree to pay
month at 6% per month. Servado and Leticia executed a promissory note an additional amount equivalent to one per cent (1%) per month of the amo
for P50,000.00, to evidence the loan, payable on January 7, 1986. unt due and demandable as penalty charges in the form of liquidated dama
ges until fully paid; and the
further sum of TWENTY FIVEPER CENT (25%) thereof in full, without
 deductions as Attorney's Fee whether actually incurred or not, of the total
amount due and demandable, exclusive of costs and judicial or extra
judicial expenses. (Underscoring supplied)
I, WE further agree that in the event the present rate of interest on
loan is increased by law or the Central Bank of the Philippines, the holder
shall have the option to apply and collect the increased interest charges
without notice although the original interest have already been collected
wholly or partially unless the contrary is required by law.
It is also a special condition of this contract that the parties herein
agree that the amount of peso-obligation under this agreement is based on
the present value of peso, and if there be any change in the value thereof,
due to extraordinary inflation or deflation, or any other cause or reason,
then the peso-obligation herein contracted shall be adjusted in accordance
with the value of the peso then prevailing at the time of the complete
fulfillment of obligation.
Demand and notice of dishonor waived. Holder may accept partial
payments and grant renewals of this note or extension of payments,
reserving rights against each and all indorsers and all parties to this note.
IN CASE OF JUDICIAL Execution of this obligation, or any part of it,
the debtors waive all his/their rights under the provisions of Section 12,
Rule 39, of the Revised Rules of Court.
On maturity of the loan, the borrowers failed to pay the indebtedness
of P500,000.00, plus interests and penalties, evidenced by the above-quoted
promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G.
Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos,
Bulacan, a complaint for collection of the full amount of the loan including interests
and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990,
defendant Servando alleged that he did not obtain any loan from the plaintiffs; that it
was defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the sum
of P500,000.00, and actually received the amount and benefited therefrom; that the
loan was secured by a real estate mortgage executed in favor of the plaintiffs, and that
he (Servando Franco) signed the promissory note only as a witness.
In their separate answer filed on April 10,1990, defendants Leticia and Rafael
Medel alleged that the loan was the transaction of Leticia Yaptinchay, who executed a
mortgage in favor of the plaintiffs over a parcel of real estate situated in San Juan,
Batangas; that the interest rate is excessive at 5.5% per month with additional service
charge of 2% per annum, and penalty charge of 1% per month; that the stipulation for
attorney's fees of 25% of the amount due is unconscionable, illegal and excessive, and
that substantial payments made were applied to interest, penalties and other charges.
After due trial, the lower court declared that the due execution and genuineness
of the four promissory notes had been duly proved, and ruled that although the Usury
Law had been repealed, the interest charged by the plaintiffs on the loans was
unconscionable and "revolting to the conscience". Hence, the trial court applied "the
provision of the New [Civil] Code" that the "legal rate of interest for loan or forbearance
of money, goods or credit is 12% per annum."
Accordingly, on December 9, 1991, the trial court rendered judgment, the
dispositive portion of which reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered, as
follows:
1. Ordering the defendants Servando Franco and Leticia Medel, jointly
and severally, to pay plaintiffs the amount of P47,000.00 plus 12% interest
per annum from November 7, 1985 and 1% per month as penalty, until the
entire amount is paid in full.
2. Ordering the defendants Servando Franco and Leticia Y. Medel to
plaintiffs, jointly and severally the amount of P84,000.00 with 12% interest
per annum and 1% per cent per month as penalty from November 19,1985
until the whole amount is fully paid;
3. Ordering the defendants to pay the plaintiffs, jointly and severally,
the amount of P285,000.00 plus 12% interest per annum and 1% per
month as penalty from July 11, 1986, until the whole amount is fully paid;
4. Ordering the defendants to pay plaintiffs, jointly and severally, the
amount of P50,000.00 as attorney's fees;
5. All counterclaims are hereby dismissed.
With costs against the defendants.
In due time, both plaintiffs and defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which
consolidated all the unpaid loans of the defendants, is the law that governs the
parties. They further argued that Circular No. 416 of the Central Bank prescribing the
rate of interest for loans or forbearance of money, goods or credit at 12% per annum,
applies only in the absence of a stipulation on interest rate, but not when the parties
agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled
that the Usury Law having become legally inexistent with the promulgation by the
Central Bank in 1982 of Circular No. 905, the lender and borrower could agree on any
interest that may be charged on the loan. The Court of Appeals further held that "the
imposition of an additional amount equivalent to 1% per month of the amount due and
 demandable as penalty charges in the form of liquidated damages until fully paid was
allowed by law.
Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision
reversing that of the Regional Trial Court, disposing as follows:
WHEREFORE, the appealed judgment is hereby MODIFIED such that
defendants are hereby ordered to pay the plaintiffs the sum
of P500,000.00, plus 5.5% per month interest and 2% service charge per
annum effective July 23, 1986, plus 1% per month of the total amount due
and demandable as penalty charges effective August 24, 1986, until the
entire amount is fully paid.
The award to the plaintiffs of P50,000.00 as attorney's fees is
affirmed. And so is the imposition of costs against the defendants.
SO ORDERED.
On April 15, 1997, defendants-appellants filed a motion for reconsideration of
the said decision. By resolution dated November 25, 1997, the Court of Appeals
denied the motion.[3]
On review, the Court in Medel v. Court of Appeals struck down as void the stipulation on the
interest for being iniquitous or unconscionable, and revived the judgment of the RTC rendered on
December 9, 1991, viz:
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of
the Court of Appeals promulgated on March 21, 1997, and its resolution dated
November 25, 1997. Instead, we render judgment REVIVING and AFFIRMING the
decision dated December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16,
Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same parties.
No pronouncement as to costs in this instance.
SO ORDERED.[4]
Upon the finality of the decision in Medel v. Court of Appeals, the respondents moved for
execution.[5] Servando Franco opposed,[6] claiming that he and the respondents had agreed to fix the
entire obligation at P775,000.00.[7] According to Servando, their agreement, which was allegedly
embodied in a receipt dated February 5, 1992,[8] whereby he made an initial payment of P400,000.00 and
promised to pay the balance of P375,000.00 on February 29, 1992, superseded the July 23, 1986
promissory note.
The RTC granted the motion for execution over Servandos opposition, thus:
There is no doubt that the decision dated December 9, 1991 had already been
affirmed and had already become final and executory. Thus, in accordance with Sec. 1
of Rule 39 of the 1997 Rules of Civil Procedure, execution shall issue as a matter of
right. It has likewise been ruled that a judgment which has acquired finality becomes
immutable and unalterable and hence may no longer be modified at any respect except
only to correct clerical errors or mistakes (Korean Airlines Co. Ltd. vs. C.A., 247 SCRA
599). In this respect, the decision deserves to be respected.
The argument about the modification of the contract or non-participation of
defendant Servando Franco in the proceedings on appeal on the alleged belief that the
payment he made had already absolved him from liability is of no moment. Primarily,
the decision was for him and Leticia Medel to pay the plaintiffs jointly and severally the
amounts stated in the Decision. In other words, the liability of the defendants
thereunder is solidary. Based on this aspect alone, the new defense raised by
defendant Franco is unavailing.
WHEREFORE, in the light of all the foregoing, the Court hereby grants the
Motion for Execution of Judgment.
Accordingly, let a writ of execution be issued for implementation by the Deputy
Sheriff of this Court.
SO ORDERED.[9]
On March 8, 2001, the RTC issued the writ of execution.[10]
Servando moved for reconsideration,[11] but the RTC denied his motion.[12]
On March 19, 2003, the CA affirmed the RTC through its assailed decision, ruling that the execution was
proper because of Servandos failure to comply with the terms of the compromise agreement, stating:[13]
Petitioner cannot deny the fact that there was no full compliance with the tenor
of the compromise agreement. Private respondents on their part did not disregard the
payments made by the petitioner. They even offered that whatever payments made by
petitioner, it can be deducted from the principal obligation including interest. However,
private respondents posit that the payments made cannot alter, modify or revoke the
decision of the Supreme Court in the instant case.
In the case of Prudence Realty and Development Corporation vs. Court of
Appeals, the Supreme Court ruled that:
When the terms of the compromise judgment is violated, the aggrieved
party must move for its execution, not its invalidation.
It is clear from the aforementioned jurisprudence that even if there is a
compromise agreement and the terms have been violated, the aggrieved party, such as
the private respondents, has the right to move for the issuance of a writ of execution of
the final judgment subject of the compromise agreement.

Moreover, under the circumstances of this case, petitioner does not stand to
suffer any harm or prejudice for the simple reason that what has been asked by private
respondents to be the subject of a writ of execution is only the balance of petitioners
obligation after deducting the payments made on the basis of the compromise
agreement.
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE
COURSE and consequently DISMISSED for lack of merit.
SO ORDERED.
His motion for reconsideration having been denied,[14] Servando appealed. He was eventually substituted
by his heirs, now the petitioners herein, on account of his intervening death. The substitution was
pursuant to the resolution dated June 15, 2005.[15]
Issue
The petitioners submit that the CA erred in ruling that:
I contract; (c) an extinguishment of the old contract; and (d) a valid new contract.[17] In short, the new
THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL
COURT OF MALOLOS, BULACAN WAS NOT NOVATED BY THE COMPROMISE
AGREEMENT BETWEEN THE PARTIES ON 5 FEBRUARY 1992.
II
THE LIABILITY OF THE PETITIONER TO RESPONDENTS SHOULD BE BASED ON
THE DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURT
OF MALOLOS, BULACAN AND NOT ON THE COMPROMISE AGREEMENT EXECUTED
IN 1992.
The petitioners insist that the RTC could not validly enforce a judgment based on a promissory note that
had been already novated; that the promissory note had been impliedly novated when the principal
obligation of P500,000.00 had been fixed at P750,000.00, and the maturity date had been extended from
August 23, 1986 to February 29, 1992.
In contrast, the respondents aver that the petitioners seek to alter, modify or revoke the final and
executory decision of the Court; that novation did not take place because there was no complete
incompatibility between the promissory note and the memorandum receipt; that Servandos previous
payment would be deducted from the total liability of the debtors based on the RTCs decision.
Issue
Was there a novation of the August 23, 1986 promissory note when respondent Veronica
Gonzales issued the February 5, 1992 receipt?
Ruling
The petition lacks merits.
I
Novation did not transpire because no
irreconcilable incompatibility existed
between the promissory note and the receipt
To buttress their claim of novation, the petitioners rely on the receipt issued on February 5, 1992 by
respondent Veronica whereby Servandos obligation was fixed at P750,000.00. They insist that even the
maturity date was extended until February 29, 1992. Such changes, they assert, were incompatible with
those of the original agreement under the promissory note.
The petitioners assertion is wrong.
A novation arises when there is a substitution of an obligation by a subsequent one that extinguishes the
first, either by changing the object or the principal conditions, or by substituting the person of the
debtor, or by subrogating a third person in the rights of the creditor.[16] For a valid novation to take place,
there must be, therefore: (a) a previous valid obligation; (b) an agreement of the parties to make a new
obligation extinguishes the prior agreement only when the substitution is unequivocally declared, or the
old and the new obligations are incompatible on every point. A compromise of a final judgment operates
as a novation of the judgment obligation upon compliance with either of these two conditions.[18]
The receipt dated February 5, 1992, excerpted below, did not create a new obligation incompatible with
the old one under the promissory note, viz:
February 5, 1992
Received from SERVANDO FRANCO BPI Managers Check No. 001700 in the
amount of P400,00.00 as partial payment of loan. Balance of P375,000.00 to be paid
on or before FEBRUARY 29, 1992. In case of default an interest will be charged as
stipulated in the promissory note subject of this case.
(Sgd)
V. Gonzalez[19]
To be clear, novation is not presumed. This means that the parties to a contract should expressly agree
to abrogate the old contract in favor of a new one. In the absence of the express agreement, the old and
the new obligations must be incompatible on every point.[20] According to California Bus Lines, Inc. v.
State Investment House, Inc.:[21]
The extinguishment of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. The term expressly
 means that the contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. Upon the other hand, no
specific form is required for an implied novation, and all that is prescribed by law
would be an incompatibility between the two contracts. While there is really no hard
and fast rule to determine what might constitute to be a sufficient change that can
bring about novation, the touchstone for contrariety, however, would be an
irreconcilable incompatibility between the old and the new obligations.
There is incompatibility when the two obligations cannot stand together, each one having its independent
existence. If the two obligations cannot stand together, the latter obligation novates the first. [22]Changes
that breed incompatibility must be essential in nature and not merely accidental. The incompatibility
must affect any of the essential elements of the obligation, such as its object, cause or principal
conditions thereof; otherwise, the change is merely modificatory in nature and insufficient to extinguish
the original obligation.[23]
In light of the foregoing, the issuance of the receipt created no new obligation. Instead, the respondents
only thereby recognized the original obligation by stating in the receipt that the P400,000.00 was partial
payment of loan and by referring to the promissory note subject of the case in imposing the interest.
The loan mentioned in the receipt was still the same loan involving the P500,000.00 extended to
Servando. Advertence to the interest stipulated in the promissory note indicated that the contract still
subsisted, not replaced and extinguished, as the petitioners claim.
Total liability to be reduced by P400,000.00
The petitioners argue that Servandos remaining liability amounted to only P375,000.00, the balance
indicated in the February 5, 1992 receipt. Accordingly, the balance was not yet due because the
respondents did not yet make a demand for payment.
The petitioners cannot be upheld.
The balance of P375,000.00 was premised on the taking place of a novation. However, as found now,
novation did not take place. Accordingly, Servandos obligation, being solidary, remained to be that
decreed in the December 9, 1991 decision of the RTC, inclusive of interests, less the amount
of P400,000.00 that was meanwhile paid by him.
WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on March
19, 2003; ORDERS the Regional Trial Court, Branch 16, in Malolos, Bulacan to proceed with the
execution based on its decision rendered on December 9, 1991, deducting the amount of P400,000.00
already paid by the late Servando Franco; and DIRECTS the petitioners to pay the costs of suit.
SO ORDERED.

The receipt dated February 5, 1992 was only the proof of Servandos payment of his obligation as
confirmed by the decision of the RTC. It did not establish the novation of his agreement with the
respondents. Indeed, the Court has ruled that an obligation to pay a sum of money is not novated by an
instrument that expressly recognizes the old, or changes only the terms of payment, or adds other
obligations not incompatible with the old ones, or the new contract merely supplements the old one. [24] A
new contract that is a mere reiteration, acknowledgment or ratification of the old contract with slight
modifications or alterations as to the cause or object or principal conditions can stand together with the
former one, and there can be no incompatibility between them.[25] Moreover, a creditors acceptance of
payment after demand does not operate as a modification of the original contract.[26]

Worth noting is that Servandos liability was joint and solidary with his co-debtors. In a solidary
obligation, the creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously.[27] The choice to determine against whom the collection is enforced belongs to the
creditor until the obligation is fully satisfied.[28] Thus, the obligation was being enforced against Servando,
who, in order to escape liability, should have presented evidence to prove that his obligation had already
been cancelled by the new obligation or that another debtor had assumed his place. In case of change in
the person of the debtor, the substitution must be clear and express,[29] and made with the consent of the
creditor.[30] Yet, these circumstances did not obtain herein, proving precisely that Servando remained a
solidary debtor against whom the entire or part of the obligation might be enforced.

Lastly, the extension of the maturity date did not constitute a novation of the previous agreement. It is
settled that an extension of the term or period of the maturity date does not result in novation.[31]
II
 Republic of the Philippines On June 11, 1996, the children of Enrique filed a complaint for annulment of saleof the said homestead
SUPREME COURT properties against spouses Uy (later substituted by their heirs)before the RTC, docketed as Civil Case
Manila No.96-28, assailing the validity of the sale for having been sold within the prohibited period.
Thecomplaint was later amended to include Eutropia and Victoriaas additional plaintiffs for having been
excluded and deprived of their legitimes as childrenof Anunciacion from her first marriage.
SECOND DIVISION

In their amended answer with counterclaim, the heirs of Uy countered that the sale took place beyond
G.R. No. 194366 October 10, 2012
the 5-year prohibitory period from the issuance of the homestead patents. They also denied knowledge of
Eutropia and Victoria’s exclusionfrom the extrajudicial settlement and sale of the subject properties, and
NAPOLEON D. NERI, ALICIA D. NERI-MONDEJAR, VISMINDA D. NERI-CHAMBERS, ROSA D. NERI- interposed further the defenses of prescription and laches.
MILLAN, DOUGLAS D. NERI, EUTROPIA D. ILLUT-COCKINOS AND VICTORIA D. ILLUT-
PIALA, Petitioners,
The RTC Ruling
vs.
HEIRS OF HADJI YUSOP UY AND JULPHA* IBRAHIM UY, Respondents.
On October 25, 2004, the RTC rendered a decision ordering, among others, the annulment of the Extra-
Judicial Settlement of the Estate with Absolute Deed of Sale. It ruled that while the sale occurred beyond
DECISION
the 5-year prohibitory period, the sale is still void because Eutropia and Victoria were deprived of their
hereditary rights and that Enrique had no judicial authority to sell the shares of his minor children, Rosa
PERLAS-BERNABE, J.: and Douglas.

In this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, petitioners Napoleon D. Neri Consequently, it rejected the defenses of laches and prescription raised by spouses Uy, who claimed
(Napoleon), Alicia D. Neri-Mondejar (Alicia), Visminda D. Neri-Chambers (Visminda), Rosa D. Neri-Millan possession of the subject properties for 17 years, holding that co-ownership rights are imprescriptible.
(Rosa), Douglas D. Neri (Douglas), Eutropia D. Illut-Cockinos (Eutropia), and Victoria D. Illut-Piala
(Victoria) seek to reverse and set aside the April 27, 2010 Decision 2 and October 18, 2010 Resolution3 of
The CA Ruling
the Court of Appeals (CA) in CA-G.R. CV No. 01031-MIN which annulled the October 25, 2004
Decision4 of the Regional Trial Court (RTC) of Panabo City, Davao del Norte and instead, entered a new
one dismissing petitioners’ complaint for annulment of sale, damages and attorney’s feesagainst herein On appeal, the CAreversed and set aside the ruling of the RTC in its April 27, 2010 Decision and
respondents heirs of spouses Hadji Yusop Uy and Julpha Ibrahim Uy (heirs of Uy). dismissed the complaint of the petitioners. It held that, while Eutropia and Victoria had no knowledge of
the extrajudicial settlement and sale of the subject properties and as such, were not bound by it, the CA
found it unconscionable to permit the annulment of the sale considering spouses Uy’s possession thereof
The Facts
for 17 years, and thatEutropia and Victoriabelatedlyfiled their actionin 1997, ormore than two years
fromknowledge of their exclusion as heirs in 1994 when their stepfather died. It, however, did not
During her lifetime, Anunciacion Neri (Anunciacion) had seven children, two (2) from her first marriage preclude the excluded heirs from recovering their legitimes from their co-heirs.
with Gonzalo Illut (Gonzalo), namely: Eutropia and Victoria, and five (5) from her second marriage with
Enrique Neri (Enrique), namely: Napoleon, Alicia, Visminda, Douglas and Rosa. Throughout the marriage
Similarly, the CA declared the extrajudicial settlement and the subsequent saleas valid and binding with
of spouses Enrique and Anunciacion, they acquired several homestead properties with a total area of
respect to Enrique and hischildren, holding that as co-owners, they have the right to dispose of their
296,555 square meters located in Samal, Davao del Norte, embraced by Original Certificate of Title (OCT)
respective shares as they consider necessary or fit.While recognizing Rosa and Douglas to be minors at
Nos. (P-7998) P-21285 , (P-14608) P-51536and P-20551 (P-8348)7 issued on February 15, 1957, August
that time, they were deemed to have ratified the sale whenthey failed to question it upon reaching the age
27, 1962 and July 7, 1967, respectively.
of majority.Italso found laches to have set in because of their inaction for a long period of time.

On September 21, 1977, Anunciacion died intestate. Her husband, Enrique, in his personal capacity and
The Issues
as natural guardian of his minor children Rosa and Douglas, together with Napoleon, Alicia, and
Vismindaexecuted an Extra-Judicial Settlement of the Estate with Absolute Deed of Sale 8 on July 7,
1979, adjudicating among themselves the said homestead properties, and thereafter, conveying themto In this petition, petitioners imputeto the CA the following errors:
the late spouses Hadji Yusop Uy and Julpha Ibrahim Uy (spouses Uy)for a consideration of ₱ 80,000.00.
I. WHEN IT UPHELDTHE VALIDITY OF THE "EXTRA JUDICIAL SETTLEMENT OF THE ESTATE WITH
ABSOLUTE DEED OF SALE" AS FAR AS THE SHARES OF EUTROPIA AND VICTORIA WERE
CONCERNED, THEREBY DEPRIVING THEM OF THEIR INHERITANCE;
II. WHEN IT DID NOT NULLIFY OR ANNUL THE "EXTRA JUDICIAL SETTLEMENT OF THE ESTATE WITH
ABSOLUTE DEED OF SALE" WITH RESPECT TO THE SHARESOF ROSA AND DOUGLAS, THEREBY
DEPRIVING THEM OF THEIR INHERITANCE; and
III. WHEN IT FOUND THAT LACHES OR PRESCRIPTION HAS SET IN.
The Ruling of the Court
The petitionis meritorious.
Hence, in the execution of the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale in favor
of spouses Uy, all the heirs of Anunciacionshould have participated. Considering that Eutropia and
Victoria were admittedly excluded and that then minors Rosa and Douglas were not properly represented
therein, the settlement was not valid and binding uponthem and consequently, a total nullity.
Section 1, Rule 74 of the Rules of Court provides:
SECTION 1. Extrajudicial settlement by agreement between heirs. – x x x
The fact of the extrajudicial settlement or administration shall be published in a newspaper of general
circulation in the manner provided in the next succeeding section; but no extrajudicial settlement shall
be binding upon any person who has not participated therein or had no notice thereof. (Underscoring
added)

It bears to stress that all the petitioners herein are indisputably legitimate children of Anunciacion from
her first and second marriages with Gonzalo and Enrique, respectively, and consequently, are entitled to
inherit from her in equal shares, pursuant to Articles 979 and 980 of the Civil Code which read:
ART. 979. Legitimate children and their descendants succeed the parents and other ascendants, without
distinction as to sex or age, and even if they should come from different marriages.
xxx
ART. 980. The children of the deceased shall always inherit from him in their own right, dividing the
inheritance in equal shares.
As such, upon the death of Anunciacion on September 21, 1977, her children and Enrique acquired their
respective inheritances,9 entitling them to their pro indiviso shares in her whole estate, as follows:
The effect of excluding the heirs in the settlement of estate was further elucidated in Segura v.
Segura,10 thus:
It is clear that Section 1 of Rule 74 does not apply to the partition in question which was null and void as
far as the plaintiffs were concerned. The rule covers only valid partitions. The partition in the present
case was invalid because it excluded six of the nine heirs who were entitled to equal shares in the
partitioned property. Under the rule "no extrajudicial settlement shall be binding upon any person who
has not participated therein or had no notice thereof." As the partition was a total nullity and did not
affect the excluded heirs, it was not correct for the trial court to hold that their right to challenge the
partition had prescribed after two years from its execution…
However, while the settlement of the estate is null and void, the subsequent sale of the subject
propertiesmade by Enrique and his children, Napoleon, Alicia and Visminda, in favor of the respondents
isvalid but only with respect to their proportionate shares therein.It cannot be denied that these heirs
have acquired their respective shares in the properties of Anunciacion from the moment of her
death11 and that, as owners thereof, they can very well sell their undivided share in the estate.12

Enrique 9/16 (1/2 of the conjugal assets + 1/16) With respect to Rosa and Douglas who were minors at the time of the execution of the settlement and
Eutropia 1/16 sale, their natural guardian and father, Enrique, represented them in the transaction. However, on the
basis of the laws prevailing at that time, Enrique was merely clothed with powers of administration and
Victoria 1/16 bereft of any authority to dispose of their 2/16 shares in the estate of their mother, Anunciacion.
Napoleon 1/16
Articles 320 and 326 of the Civil Code, the laws in force at the time of the execution of the settlement and
Alicia 1/16
sale, provide:
Visminda 1/16
Rosa 1/16 ART. 320. The father, or in his absence the mother, is the legal administrator of the property pertaining
to the child under parental authority. If the property is worth more than two thousand pesos, the father
Douglas 1/16 or mother shall give a bond subject to the approval of the Court of First Instance.
ART. 326. When the property of the child is worth more than two thousand pesos, the father or mother
shall be considered a guardian of the child’s property, subject to the duties and obligations of guardians
under the Rules of Court.
Corollarily, Section 7, Rule 93 of the Rules of Court also provides:
SEC. 7. Parents as Guardians. – When the property of the child under parental authority is worth two
thousand pesos or less, the father or the mother, without the necessity of court appointment, shall be his
legal guardian. When the property of the child is worth more than two thousand pesos, the father or the
mother shall be considered guardian of the child’s property, with the duties and obligations of guardians
under these Rules, and shall file the petition required by Section 2 hereof. For good reasons, the court
may, however, appoint another suitable persons.
Administration includes all acts for the preservation of the property and the receipt of fruits according to
the natural purpose of the thing. Any act of disposition or alienation, or any reduction in the substance
of the patrimony of child, exceeds the limits of administration.13 Thus, a father or mother, as the natural
guardian of the minor under parental authority, does not have the power to dispose or encumber the
property of the latter. Such power is granted by law only to a judicial guardian of the ward’s property and
even then only with courts’ prior approval secured in accordance with the proceedings set forth by the
Rules of Court.14
Consequently, the disputed sale entered into by Enrique in behalf of his minor children without the
proper judicial authority, unless ratified by them upon reaching the age of majority,15 is unenforceable in
accordance with Articles 1317 and 1403(1) of the Civil Code which provide:
ART. 1317. No one may contract in the name of another without being authorized by the latter or unless
he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or legal representation, or
who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by
the person on whose behalf it has been executed, before it is revoked by the other contracting party.
ART. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers;
xxx
Ratification means that one under no disability voluntarily adopts and gives sanction to some
unauthorized act or defective proceeding, which without his sanction would not be binding on him. It is
this voluntary choice, knowingly made, which amounts to a ratification of what was theretofore
unauthorized, and becomes the authorized act of the party so making the ratification.16 Once ratified,
expressly or impliedly such as when the person knowingly received benefits from it, the contract is
cleansed from all its defects from the moment it was constituted,17 as it has a retroactive effect.
Records, however, show that Rosa had ratified the extrajudicial settlement of the estate with absolute
deed of sale. In Napoleon and Rosa’s Manifestation18 before the RTC dated July 11, 1997,they stated:
"Concerning the sale of our parcel of land executed by our father, Enrique Neri concurred in and
conformed to by us and our other two sisters and brother (the other plaintiffs), in favor of Hadji Yusop Uy
and his spouse Hadja Julpa Uy on July 7, 1979, we both confirmed that the same was voluntary and
freely made by all of us and therefore the sale was absolutely valid and enforceable as far as we all
plaintiffs in this case are concerned;" (Underscoring supplied)
In their June 30, 1997 Joint-Affidavit,19 Napoleon and Rosa also alleged:
"That we are surprised that our names are included in this case since we do not have any intention to file
a case against Hadji Yusop Uy and Julpha Ibrahim Uy and their family and we respect and acknowledge
the validity of the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale dated July 7, 1979;"
(Underscoring supplied)
Clearly, the foregoing statements constitutedratification of the settlement of the estate and the
subsequent sale, thus, purging all the defects existing at the time of its execution and legitimizing the
conveyance of Rosa’s 1/16 share in the estate of Anunciacion to spouses Uy. The same, however, is not
true with respect to Douglas for lack of evidence showing ratification.
Considering, thus, that the extrajudicial settlement with sale is invalid and therefore, not binding on
Eutropia, Victoria and Douglas, only the shares ofEnrique, Napoleon, Alicia, Visminda and Rosa in the
homestead properties have effectivelybeen disposed in favor of spouses Uy. "A person can only sell what
he owns, or is authorized to sell and the buyer can as a consequence acquire no more than what the
sellercan legally transfer."20 On this score, Article 493 of the Civil Codeis relevant, which provides:
Each co-owner shall have the full ownership of his part and of the fruits and benefits pertaining thereto,
and he may therefore alienate, assign or mortgage it, and even substitute another person in its
enjoyment, except when personal rights are involved. But the effect of the alienation or the mortgage,
with respect to the co-owners, shall be limited to the portion which may be allotted to him in the division
upon the termination of the co-ownership.
Consequently, spouses Uy or their substituted heirs became pro indiviso co-owners of the homestead
properties with Eutropia, Victoria and Douglas, who retained title to their respective 1/16 shares. They
were deemed to be holding the 3/16 shares of Eutropia, Victoria and Douglas under an implied
constructive trust for the latter’s benefit, conformably with Article 1456 of the Civil Code which states:"if
property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a
trustee of an implied trust for the benefit of the person from whom the property comes." As such, it is
only fair, just and equitable that the amount paid for their shares equivalent to ₱ 5,000.0021 each or a
total of ₱ 15,000.00 be returned to spouses Uy with legal interest.
On the issue of prescription, the Court agrees with petitioners that the present action has not prescribed
in so far as it seeks to annul the extrajudicial settlement of the estate. Contrary to the ruling of the CA,
the prescriptive period of 2 years provided in Section 1 Rule 74 of the Rules of

Court reckoned from the execution of the extrajudicial settlement finds no application to petitioners
Eutropia, Victoria and Douglas, who were deprived of their lawful participation in the subject estate.
Besides, an "action or defense for the declaration of the inexistence of a contract does not prescribe" in
accordance with Article 1410 of the Civil Code.

However, the action to recover property held in trust prescribes after 10 years from the time the cause of
action accrues,22 which is from the time of actual notice in case of unregistered deed.23 In this case,
Eutropia, Victoria and Douglas claimed to have knowledge of the extrajudicial settlement with sale after
the death of their father, Enrique, in 1994 which spouses Uy failed to refute. Hence, the complaint filed
in 1997 was well within the prescriptive period of 10 years.

WHEREFORE, the instant petition is GRANTED. The April 27, 2010 Decision and October 18, 2010
Resolution of the Court of Appeals are REVERSED and SET ASIDE and a new judgment is entered:

1. Declaring the Extra-Judicial Settlement of the Estate of Anunciacion Neri NULL and VOID;

2. Declaring the Absolute Deed of Sale in favor of the late spouses Hadji Yusop Uy and Julpha
Ibrahim Uy as regards the 13/16 total shares of the late Enrique Neri, Napoleon Neri, Alicia D.
Neri-Mondejar, Visminda D. Neri-Chambers and Rosa D. Neri-Millan VALID;

3. Declaring Eutropia D. Illut-Cockinos, Victoria D. Illut-Piala and Douglas D. Neri as

the LAWFUL OWNERSof the 3/16 portions of the subject homestead properties, covered by
Original Certificate of Title Nos. (P-7998) P-2128, (P-14608) P-5153 and P-20551 (P-8348); and

4. Ordering the estate of the late Enrique Neri, as well as Napoleon Neri, Alicia D. Neri-
Mondejar, Visminda D. Neri-Chambers and Rosa D. Neri-Millan to return to the respondents
jointly and solidarily the amount paid corresponding to the 3/16 shares of Eutropia, Victoria
and Douglas in the total amount of ₱ 15,000.00, with legal interest at 6% per annum computed
from the time of payment until finality of this decision and 12% per annum thereafter until fully
paid.

No pronouncement as to costs.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice
 EN BANC
[G.R. No. 155001. May 5, 2003]
DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO
B. BOE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G.
DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR
WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES
EMPLOYEES ASSOCIATION (PALEA), petitioners, vs. PHILIPPINE INTERNATIONAL AIR
TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF
TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in
his capacity as Head of the Department of Transportation and
Communications, respondents,
MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION,
MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES
CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT
MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-in-
intervention,
[G.R. No. 155547. May 5, 2003]
SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and CONSTANTINO G. JARAULA, petitioners,
vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL
AIRPORT AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS,
DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS, SECRETARY LEANDRO M. MENDOZA,
in his capacity as Head of the Department of Transportation and Communications, and
SECRETARY SIMEON A. DATUMANONG, in his capacity as Head of the Department of
Public Works and Highways, respondents,
JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C. ZIALCITA, WILLY BUYSON VILLARAMA,
PROSPERO C. NOGRALES, PROSPERO A. PICHAY, JR., HARLIN CAST ABAYON, and
BENASING O. MACARANBON, respondents-intervenors,
[G.R. No. 155661. May 5, 2003]
CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B. VALENCIA, MA. TERESA V. GAERLAN,
LEONARDO DE LA ROSA, DINA C. DE LEON, VIRGIE CATAMIN RONALD SCHLOBOM,
ANGELITO SANTOS, MA. LUISA M. PALCON and SAMAHANG MANGGAGAWA SA
PALIPARAN NG PILIPINAS (SMPP), petitioners, vs. PHILIPPINE INTERNATIONAL AIR
TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF
TRANSPORTATION AND COMMUNICATIONS, SECRETARY LEANDRO M. MENDOZA, in his
capacity as Head of the Department of Transportation and Communications, respondents.
DECISION
PUNO, J.:
Petitioners and petitioners-in-intervention filed the instant petitions for prohibition under Rule 65
of the Revised Rules of Court seeking to prohibit the Manila International Airport Authority (MIAA) and
the Department of Transportation and Communications (DOTC) and its Secretary from implementing the
following agreements executed by the Philippine Government through the DOTC and the MIAA and the
Philippine International Air Terminals Co., Inc. (PIATCO): (1) the Concession Agreement signed on July
12, 1997, (2) the Amended and Restated Concession Agreement dated November 26, 1999, (3) the First
Supplement to the Amended and Restated Concession Agreement dated August 27, 1999, (4) the Second
Supplement to the Amended and Restated Concession Agreement dated September 4, 2000, and (5) the
Third Supplement to the Amended and Restated Concession Agreement dated June 22, 2001 (collectively,
the PIATCO Contracts).
The facts are as follows:
In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP) to conduct a
comprehensive study of the Ninoy Aquino International Airport (NAIA) and determine whether the present
airport can cope with the traffic development up to the year 2010. The study consisted of two parts: first,
traffic forecasts, capacity of existing facilities, NAIA future requirements, proposed master plans and
development plans; and second, presentation of the preliminary design of the passenger terminal
building. The ADP submitted a Draft Final Report to the DOTC in December 1989.
Some time in 1993, six business leaders consisting of John Gokongwei, Andrew Gotianun, Henry
Sy, Sr., Lucio Tan, George Ty and Alfonso Yuchengco met with then President Fidel V. Ramos to explore
the possibility of investing in the construction and operation of a new international airport terminal. To
signify their commitment to pursue the project, they formed the Asias Emerging Dragon Corp. (AEDC)
which was registered with the Securities and Exchange Commission (SEC) on September 15, 1993.
On October 5, 1994, AEDC submitted an unsolicited proposal to the Government through the
DOTC/MIAA for the development of NAIA International Passenger Terminal III (NAIA IPT III) under a
build-operate-and-transfer arrangement pursuant to RA 6957 as amended by RA 7718 (BOT Law).[1]
On December 2, 1994, the DOTC issued Dept. Order No. 94-832 constituting the Prequalification
Bids and Awards Committee (PBAC) for the implementation of the NAIA IPT III project.
On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal of AEDC to the
National Economic and Development Authority (NEDA). A revised proposal, however, was forwarded by
the DOTC to NEDA on December 13, 1995. On January 5, 1996, the NEDA Investment Coordinating
Council (NEDA ICC) Technical Board favorably endorsed the project to the ICC Cabinet Committee which
approved the same, subject to certain conditions, on January 19, 1996. On February 13, 1996, the
NEDA passed Board Resolution No. 2 which approved the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily newspapers of an
invitation for competitive or comparative proposals on AEDCs unsolicited proposal, in accordance with
Sec. 4-A of RA 6957, as amended. The alternative bidders were required to submit three (3) sealed
envelopes on or before 5:00 p.m. of September 20, 1996. The first envelope should contain the
Prequalification Documents, the second envelope the Technical Proposal, and the third envelope the
Financial Proposal of the proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the availment of the Bid
Documents and the submission of the comparative bid proposals. Interested firms were permitted to
obtain the Request for Proposal Documents beginning June 28, 1996, upon submission of a written
application and payment of a non-refundable fee of P50,000.00 (US$2,000).
The Bid Documents issued by the PBAC provided among others that the proponent must have
adequate capability to sustain the financing requirement for the detailed engineering, design,
construction, operation, and maintenance phases of the project. The proponent would be evaluated
based on its ability to provide a minimum amount of equity to the project, and its capacity to secure
external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders to a pre-bid conference
on July 29, 1996.
On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the Bid Documents. The
following amendments were made on the Bid Documents:
a. Aside from the fixed Annual Guaranteed Payment, the proponent shall include in its financial proposal
an additional percentage of gross revenue share of the Government, as follows:
i. First 5 years 5.0%
ii. Next 10 years 7.5%
iii. Next 10 years 10.0%
b. The amount of the fixed Annual Guaranteed Payment shall be subject of the price
challenge. Proponent may offer an Annual Guaranteed Payment which need not be of equal amount, but
payment of which shall start upon site possession.
c. The project proponent must have adequate capability to sustain the financing requirement for the
detailed engineering, design, construction, and/or operation and maintenance phases of the project as
the case may be. For purposes of pre-qualification, this capability shall be measured in terms of:
i. Proof of the availability of the project proponent and/or the consortium to provide the minimum
amount of equity for the project; and
ii. a letter testimonial from reputable banks attesting that the project proponent and/or the members of
the consortium are banking with them, that the project proponent and/or the members are of good
financial standing, and have adequate resources.
d. The basis for the prequalification shall be the proponents compliance with the minimum technical and
financial requirements provided in the Bid Documents and the IRR of the BOT Law. The minimum
amount of equity shall be 30% of the Project Cost.
e. Amendments to the draft Concession Agreement shall be issued from time to time. Said amendments
shall only cover items that would not materially affect the preparation of the proponents proposal.
On August 29, 1996, the Second Pre-Bid Conference was held where certain clarifications were
made. Upon the request of prospective bidder Peoples Air Cargo & Warehousing Co., Inc (Paircargo), the
PBAC warranted that based on Sec. 11.6, Rule 11 of the Implementing Rules and Regulations of the BOT
Law, only the proposed Annual Guaranteed Payment submitted by the challengers would be revealed to
AEDC, and that the challengers technical and financial proposals would remain confidential. The PBAC
also clarified that the list of revenue sources contained in Annex 4.2a of the Bid Documents was merely
indicative and that other revenue sources may be included by the proponent, subject to approval by
DOTC/MIAA. Furthermore, the PBAC clarified that only those fees and charges denominated as Public
Utility Fees would be subject to regulation, and those charges which would be actually deemed Public
Utility Fees could still be revised, depending on the outcome of PBACs query on the matter with the
Department of Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled Answers to the Queries of
PAIRCARGO as Per Letter Dated September 3 and 10, 1996. Paircargos queries and the PBACs responses
were as follows:
1. It is difficult for Paircargo and Associates to meet the required minimum equity requirement as prescribed
in Section 8.3.4 of the Bid Documents considering that the capitalization of each member company is so
structured to meet the requirements and needs of their current respective business
undertaking/activities. In order to comply with this equity requirement, Paircargo is requesting PBAC to just
allow each member of (sic) corporation of the Joint Venture to just execute an agreement that embodies a
commitment to infuse the required capital in case the project is awarded to the Joint Venture instead of
increasing each corporations current authorized capital stock just for prequalification purposes.
In prequalification, the agency is interested in ones financial capability at the time of prequalification, not
future or potential capability.
A commitment to put up equity once awarded the project is not enough to establish that present
financial capability. However, total financial capability of all member companies of the Consortium, to be
established by submitting the respective companies audited financial statements, shall be acceptable.
2. At present, Paircargo is negotiating with banks and other institutions for the extension of a Performance
Security to the joint venture in the event that the Concessions Agreement (sic) is awarded to them. However,
Paircargo is being required to submit a copy of the draft concession as one of the documentary
requirements. Therefore, Paircargo is requesting that theyd (sic) be furnished copy of the approved
negotiated agreement between the PBAC and the AEDC at the soonest possible time.
A copy of the draft Concession Agreement is included in the Bid Documents. Any material changes would
be made known to prospective challengers through bid bulletins. However, a final version will be issued
before the award of contract.
The PBAC also stated that it would require AEDC to sign Supplement C of the Bid Documents
(Acceptance of Criteria and Waiver of Rights to Enjoin Project) and to submit the same with the required
Bid Security.
On September 20, 1996, the consortium composed of Peoples Air Cargo and Warehousing Co., Inc.
(Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security Bank)
(collectively, Paircargo Consortium) submitted their competitive proposal to the PBAC. On September 23,
1996, the PBAC opened the first envelope containing the prequalification documents of the Paircargo
Consortium. On the following day, September 24, 1996, the PBAC prequalified the Paircargo Consortium.
On September 26, 1996, AEDC informed the PBAC in writing of its reservations as regards the
Paircargo Consortium, which include:
a. The lack of corporate approvals and financial capability of PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;
c. The prohibition imposed by RA 337, as amended (the General Banking Act) on the amount that
Security Bank could legally invest in the project;
d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for prequalification
purposes; and
e. The appointment of Lufthansa as the facility operator, in view of the Philippine requirement in the
operation of a public utility.
The PBAC gave its reply on October 2, 1996, informing AEDC that it had considered the issues
raised by the latter, and that based on the documents submitted by Paircargo and the established
prequalification criteria, the PBAC had found that the challenger, Paircargo, had prequalified to
undertake the project. The Secretary of the DOTC approved the finding of the PBAC.
The PBAC then proceeded with the opening of the second envelope of the Paircargo Consortium
which contained its Technical Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly with respect to Paircargos financial
capability, in view of the restrictions imposed by Section 21-B of the General Banking Act and Sections
1380 and 1381 of the Manual Regulations for Banks and Other Financial Intermediaries. On October 7,
1996, AEDC again manifested its objections and requested that it be furnished with excerpts of the PBAC
meeting and the accompanying technical evaluation report where each of the issues they raised were
addressed.
On October 16, 1996, the PBAC opened the third envelope submitted by AEDC and the Paircargo
Consortium containing their respective financial proposals. Both proponents offered to build the NAIA
Passenger Terminal III for at least $350 million at no cost to the government and to pay the
government: 5% share in gross revenues for the first five years of operation, 7.5% share in gross revenues
for the next ten years of operation, and 10% share in gross revenues for the last ten years of operation, in
accordance with the Bid Documents. However, in addition to the foregoing, AEDC offered to pay the
government a total of P135 million as guaranteed payment for 27 years while Paircargo Consortium
offered to pay the government a total of P17.75 billion for the same period.
Thus, the PBAC formally informed AEDC that it had accepted the price proposal submitted by the
Paircargo Consortium, and gave AEDC 30 working days or until November 28, 1996 within which to
match the said bid, otherwise, the project would be awarded to Paircargo.
As AEDC failed to match the proposal within the 30-day period, then DOTC Secretary Amado
Lagdameo, on December 11, 1996, issued a notice to Paircargo Consortium regarding AEDCs failure to
match the proposal.
On February 27, 1997, Paircargo Consortium incorporated into Philippine International Airport
Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged undue preference given to PIATCO and reiterated its
objections as regards the prequalification of PIATCO.
On April 11, 1997, the DOTC submitted the concession agreement for the second-pass approval of
the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a Petition for Declaration of
Nullity of the Proceedings, Mandamus and Injunction against the Secretary of the DOTC, the Chairman
of the PBAC, the voting members of the PBAC and Pantaleon D. Alvarez, in his capacity as Chairman of
the PBAC Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate the approval, on a no-
objection basis, of the BOT agreement between the DOTC and PIATCO. As the ad referendum gathered
only four (4) of the required six (6) signatures, the NEDA merely noted the agreement.
On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO.
On July 12, 1997, the Government, through then DOTC Secretary Arturo T. Enrile, and PIATCO,
through its President, Henry T. Go, signed the Concession Agreement for the Build-Operate-and-Transfer
Arrangement of the Ninoy Aquino International Airport Passenger Terminal III (1997 Concession
Agreement). The Government granted PIATCO the franchise to operate and maintain the said terminal
during the concession period and to collect the fees, rentals and other charges in accordance with the
rates or schedules stipulated in the 1997 Concession Agreement. The Agreement provided that the
concession period shall be for twenty-five (25) years commencing from the in-service date, and may be
renewed at the option of the Government for a period not exceeding twenty-five (25) years. At the end of
the concession period, PIATCO shall transfer the development facility to MIAA.
On November 26, 1998, the Government and PIATCO signed an Amended and Restated Concession
Agreement (ARCA). Among the provisions of the 1997 Concession Agreement that were amended by the
ARCA were: Sec. 1.11 pertaining to the definition of certificate of completion; Sec. 2.05 pertaining to the
Special Obligations of GRP; Sec. 3.02 (a) dealing with the exclusivity of the franchise given to the
Concessionaire; Sec. 4.04 concerning the assignment by Concessionaire of its interest in the
Development Facility; Sec. 5.08 (c) dealing with the proceeds of Concessionaires insurance; Sec. 5.10
with respect to the temporary take-over of operations by GRP; Sec. 5.16 pertaining to the taxes, duties
and other imposts that may be levied on the Concessionaire; Sec. 6.03 as regards the periodic
adjustment of public utility fees and charges; the entire Article VIII concerning the provisions on the
termination of the contract; and Sec. 10.02 providing for the venue of the arbitration proceedings in case
a dispute or controversy arises between the parties to the agreement.
Subsequently, the Government and PIATCO signed three Supplements to the ARCA. The First
Supplement was signed on August 27, 1999; the Second Supplement on September 4, 2000; and the
Third Supplement on June 22, 2001 (collectively, Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the ARCA defining Revenues or Gross
Revenues; Sec. 2.05 (d) of the ARCA referring to the obligation of MIAA to provide sufficient funds for the
upkeep, maintenance, repair and/or replacement of all airport facilities and equipment which are owned
or operated by MIAA; and further providing additional special obligations on the part of GRP aside from
those already enumerated in Sec. 2.05 of the ARCA. The First Supplement also provided a stipulation as
regards the construction of a surface road to connect NAIA Terminal II and Terminal III in lieu of the
proposed access tunnel crossing Runway 13/31; the swapping of obligations between GRP and PIATCO
regarding the improvement of Sales Road; and the changes in the timetable. It also amended Sec. 6.01 (c)
of the ARCA pertaining to the Disposition of Terminal Fees; Sec. 6.02 of the ARCA by inserting an
introductory paragraph; and Sec. 6.02 (a) (iii) of the ARCA referring to the Payments of Percentage Share
in Gross Revenues.
The Second Supplement to the ARCA contained provisions concerning the clearing, removal,
demolition or disposal of subterranean structures uncovered or discovered at the site of the construction
of the terminal by the Concessionaire. It defined the scope of works; it provided for the procedure for the
demolition of the said structures and the consideration for the same which the GRP shall pay PIATCO; it
provided for time extensions, incremental and consequential costs and losses consequent to the existence
of such structures; and it provided for some additional obligations on the part of PIATCO as regards the
said structures.
Finally, the Third Supplement provided for the obligations of the Concessionaire as regards the
construction of the surface road connecting Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance and operation of the NAIA Terminals I
and II, had existing concession contracts with various service providers to offer international airline
airport services, such as in-flight catering, passenger handling, ramp and ground support, aircraft
maintenance and provisions, cargo handling and warehousing, and other services, to several
international airlines at the NAIA. Some of these service providers are the Miascor Group, DNATA-Wings
Aviation Systems Corp., and the MacroAsia Group. Miascor, DNATA and MacroAsia, together with
Philippine Airlines (PAL), are the dominant players in the industry with an aggregate market share of
70%.
On September 17, 2002, the workers of the international airline service providers, claiming that
they stand to lose their employment upon the implementation of the questioned agreements, filed before
this Court a petition for prohibition to enjoin the enforcement of said agreements.[2]
On October 15, 2002, the service providers, joining the cause of the petitioning workers, filed a
motion for intervention and a petition-in-intervention.
On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and Constantino Jaraula
filed a similar petition with this Court.[3]
On November 6, 2002, several employees of the MIAA likewise filed a petition assailing the legality
of the various agreements.[4]
On December 11, 2002. another group of Congressmen, Hon. Jacinto V. Paras, Rafael P. Nantes,
Eduardo C. Zialcita, Willie B. Villarama, Prospero C. Nograles, Prospero A. Pichay, Jr., Harlin Cast
Abayon and Benasing O. Macaranbon, moved to intervene in the case as Respondents-Intervenors. They
filed their Comment-In-Intervention defending the validity of the assailed agreements and praying for the
dismissal of the petitions.
During the pendency of the case before this Court, President Gloria Macapagal Arroyo, on
November 29, 2002, in her speech at the 2002 Golden Shell Export Awards at Malacaang Palace, stated
that she will not honor (PIATCO) contracts which the Executive Branchs legal offices have concluded (as)
null and void.[5]
Respondent PIATCO filed its Comments to the present petitions on November 7 and 27, 2002. The
Office of the Solicitor General and the Office of the Government Corporate Counsel filed their respective
Comments in behalf of the public respondents.
On December 10, 2002, the Court heard the case on oral argument. After the oral argument, the
Court then resolved in open court to require the parties to file simultaneously their respective
Memoranda in amplification of the issues heard in the oral arguments within 30 days and to explore the
possibility of arbitration or mediation as provided in the challenged contracts.
In their consolidated Memorandum, the Office of the Solicitor General and the Office of the
Government Corporate Counsel prayed that the present petitions be given due course and that judgment
be rendered declaring the 1997 Concession Agreement, the ARCA and the Supplements thereto void for
being contrary to the Constitution, the BOT Law and its Implementing Rules and Regulations.
On March 6, 2003, respondent PIATCO informed the Court that on March 4, 2003 PIATCO
commenced arbitration proceedings before the International Chamber of Commerce, International Court
of Arbitration (ICC) by filing a Request for Arbitration with the Secretariat of the ICC against the
Government of the Republic of the Philippines acting through the DOTC and MIAA.
In the present cases, the Court is again faced with the task of resolving complicated issues made
difficult by their intersecting legal and economic implications. The Court is aware of the far reaching fall
out effects of the ruling which it makes today. For more than a century and whenever the exigencies of
the times demand it, this Court has never shirked from its solemn duty to dispense justice and resolve
actual controversies involving rights which are legally demandable and enforceable, and to determine
whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction. [6] To
be sure, this Court will not begin to do otherwise today.
We shall first dispose of the procedural issues raised by respondent PIATCO which they allege will
bar the resolution of the instant controversy.
Petitioners Legal Standing to File
the present Petitions
 a. G.R. Nos. 155001 and 155661
In G.R. No. 155001 individual petitioners are employees of various service providers [7] having
separate concession contracts with MIAA and continuing service agreements with various international
airlines to provide in-flight catering, passenger handling, ramp and ground support, aircraft maintenance
and provisions, cargo handling and warehousing and other services. Also included as petitioners are
labor unions MIASCOR Workers Union-National Labor Union and Philippine Airlines Employees
Association. These petitioners filed the instant action for prohibition as taxpayers and as parties whose
rights and interests stand to be violated by the implementation of the PIATCO Contracts.
Petitioners-Intervenors in the same case are all corporations organized and existing under
Philippine laws engaged in the business of providing in-flight catering, passenger handling, ramp and
ground support, aircraft maintenance and provisions, cargo handling and warehousing and other
services to several international airlines at the Ninoy Aquino International Airport. Petitioners-Intervenors
allege that as tax-paying international airline and airport-related service operators, each one of them
stands to be irreparably injured by the implementation of the PIATCO Contracts. Each of the petitioners-
intervenors have separate and subsisting concession agreements with MIAA and with various
international airlines which they allege are being interfered with and violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA and Samahang Manggagawa sa
Paliparan ng Pilipinas - a legitimate labor union and accredited as the sole and exclusive bargaining
agent of all the employees in MIAA. Petitioners anchor their petition for prohibition on the nullity of the
contracts entered into by the Government and PIATCO regarding the build-operate-and-transfer of the
NAIA IPT III. They filed the petition as taxpayers and persons who have a legitimate interest to protect in
the implementation of the PIATCO Contracts.
Petitioners in both cases raise the argument that the PIATCO Contracts contain stipulations which
directly contravene numerous provisions of the Constitution, specific provisions of the BOT Law and its
Implementing Rules and Regulations, and public policy. Petitioners contend that the DOTC and the
MIAA, by entering into said contracts, have committed grave abuse of discretion amounting to lack or
excess of jurisdiction which can be remedied only by a writ of prohibition, there being no plain, speedy or
adequate remedy in the ordinary course of law.
In particular, petitioners assail the provisions in the 1997 Concession Agreement and the ARCA
which grant PIATCO the exclusive right to operate a commercial international passenger terminal within
the Island of Luzon, except those international airports already existing at the time of the execution of the
agreement. The contracts further provide that upon the commencement of operations at the NAIA IPT III,
the Government shall cause the closure of Ninoy Aquino International Airport Passenger Terminals I and
II as international passenger terminals. With respect to existing concession agreements between MIAA
and international airport service providers regarding certain services or operations, the 1997 Concession
Agreement and the ARCA uniformly provide that such services or operations will not be carried over to
the NAIA IPT III and PIATCO is under no obligation to permit such carry over except through a separate
agreement duly entered into with PIATCO.[8]
With respect to the petitioning service providers and their employees, upon the commencement of
operations of the NAIA IPT III, they allege that they will be effectively barred from providing international
airline airport services at the NAIA Terminals I and II as all international airlines and passengers will be
diverted to the NAIA IPT III. The petitioning service providers will thus be compelled to contract with
PIATCO alone for such services, with no assurance that subsisting contracts with MIAA and other
international airlines will be respected. Petitioning service providers stress that despite the very
competitive market, the substantial capital investments required and the high rate of fees, they entered
into their respective contracts with the MIAA with the understanding that the said contracts will be in
force for the stipulated period, and thereafter, renewed so as to allow each of the petitioning service
providers to recoup their investments and obtain a reasonable return thereon.
Petitioning employees of various service providers at the NAIA Terminals I and II and of MIAA on the
other hand allege that with the closure of the NAIA Terminals I and II as international passenger
terminals under the PIATCO Contracts, they stand to lose employment.
The question on legal standing is whether such parties have alleged such a personal stake in the
outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of
issues upon which the court so largely depends for illumination of difficult constitutional
questions.[9] Accordingly, it has been held that the interest of a person assailing the constitutionality of a
statute must be direct and personal. He must be able to show, not only that the law or any government
act is invalid, but also that he sustained or is in imminent danger of sustaining some direct injury as a
result of its enforcement, and not merely that he suffers thereby in some indefinite way. It must appear
that the person complaining has been or is about to be denied some right or privilege to which he is
lawfully entitled or that he is about to be subjected to some burdens or penalties by reason of the statute
or act complained of.[10]
We hold that petitioners have the requisite standing. In the above-mentioned cases, petitioners have
a direct and substantial interest to protect by reason of the implementation of the PIATCO Contracts.
They stand to lose their source of livelihood, a property right which is zealously protected by the
Constitution. Moreover, subsisting concession agreements between MIAA and petitioners-intervenors and
service contracts between international airlines and petitioners-intervenors stand to be nullified or
terminated by the operation of the NAIA IPT III under the PIATCO Contracts. The financial prejudice
brought about by the PIATCO Contracts on petitioners and petitioners-intervenors in these cases are
legitimate interests sufficient to confer on them the requisite standing to file the instant petitions.
b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition as members of the House of
Representatives, citizens and taxpayers. They allege that as members of the House of Representatives,
they are especially interested in the PIATCO Contracts, because the contracts compel the Government
and/or the House of Representatives to appropriate funds necessary to comply with the provisions
therein.[11] They cite provisions of the PIATCO Contracts which require disbursement of unappropriated
amounts in compliance with the contractual obligations of the Government. They allege that the
Government obligations in the PIATCO Contracts which compel government expenditure without
appropriation is a curtailment of their prerogatives as legislators, contrary to the mandate of the
Constitution that [n]o money shall be paid out of the treasury except in pursuance of an appropriation
made by law.[12]
Standing is a peculiar concept in constitutional law because in some cases, suits are not brought
by parties who have been personally injured by the operation of a law or any other government act but by
concerned citizens, taxpayers or voters who actually sue in the public interest. Although we are not
unmindful of the cases of Imus Electric Co. v. Municipality of Imus[13] and Gonzales v.
Raquiza[14] whereinthis Court held that appropriation must be made only on amounts immediately
demandable, public interest demands that we take a more liberal view in determining whether the
petitioners suing as legislators, taxpayers and citizens have locus standi to file the instant
petition. In Kilosbayan, Inc. v. Guingona,[15] this Court held [i]n line with the liberal policy of this Court
on locus standi, ordinary taxpayers, members of Congress, and even association of planters, and non-
profit civic organizations were allowed to initiate and prosecute actions before this Court to question the
constitutionality or validity of laws, acts, decisions, rulings, or orders of various government agencies or
instrumentalities.[16] Further, insofar as taxpayers' suits are concerned . . . (this Court) is not devoid of
discretion as to whether or not it should be entertained.[17] As such . . . even if, strictly speaking, they
[the petitioners] are not covered by the definition, it is still within the wide discretion of the Court to
waive the requirement and so remove the impediment to its addressing and resolving the serious
constitutional questions raised.[18] In view of the serious legal questions involved and their impact on
public interest, we resolve to grant standing to the petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this Court is without jurisdiction to review the instant
cases as factual issues are involved which this Court is ill-equipped to resolve. Moreover, PIATCO alleges
that submission of this controversy to this Court at the first instance is a violation of the rule on
hierarchy of courts. They contend that trial courts have concurrent jurisdiction with this Court with
respect to a special civil action for prohibition and hence, following the rule on hierarchy of courts, resort
must first be had before the trial courts.
After a thorough study and careful evaluation of the issues involved, this Court is of the view that
the crux of the instant controversy involves significant legal questions. The facts necessary to resolve
these legal questions are well established and, hence, need not be determined by a trial court.
The rule on hierarchy of courts will not also prevent this Court from assuming jurisdiction over the
cases at bar. The said rule may be relaxed when the redress desired cannot be obtained in the
appropriate courts or where exceptional and compelling circumstances justify availment of a
remedy within and calling for the exercise of this Courts primary jurisdiction.[19]
It is easy to discern that exceptional circumstances exist in the cases at bar that call for the
relaxation of the rule. Both petitioners and respondents agree that these cases are of transcendental
importance as they involve the construction and operation of the countrys premier international airport.
Moreover, the crucial issues submitted for resolution are of first impression and they entail the proper
legal interpretation of key provisions of the Constitution, the BOT Law and its Implementing Rules and
Regulations. Thus, considering the nature of the controversy before the Court, procedural bars may be
lowered to give way for the speedy disposition of the instant cases.
Legal Effect of the Commencement
of Arbitration Proceedings by
PIATCO
There is one more procedural obstacle which must be overcome. The Court is aware that arbitration
proceedings pursuant to Section 10.02 of the ARCA have been filed at the instance of respondent
PIATCO. Again, we hold that the arbitration step taken by PIATCO will not oust this Court of its
jurisdiction over the cases at bar.
In Del Monte Corporation-USA v. Court of Appeals,[20] even after finding that the arbitration
clause in the Distributorship Agreement in question is valid and the dispute between the parties is
arbitrable, this Court affirmed the trial courts decision denying petitioners Motion to Suspend
Proceedings pursuant to the arbitration clause under the contract. In so ruling, this Court held that as
contracts produce legal effect between the parties, their assigns and heirs, only the parties to the
Distributorship Agreement are bound by its terms, including the arbitration clause stipulated therein.
This Court ruled that arbitration proceedings could be called for but only with respect to the parties to
the contract in question. Considering that there are parties to the case who are neither parties to the
Distributorship Agreement nor heirs or assigns of the parties thereto, this Court, citing its previous
ruling in Salas, Jr. v. Laperal Realty Corporation,[21] held that to tolerate the splitting of
proceedings by allowing arbitration as to some of the parties on the one hand and trial for the others on
the other hand would, in effect, result in multiplicity of suits, duplicitous procedure and unnecessary
delay.[22] Thus, we ruled that the interest of justice would best be served if the trial court hears and
adjudicates the case in a single and complete proceeding.
It is established that petitioners in the present cases who have presented legitimate interests in
the resolution of the controversy are not parties to the PIATCO Contracts. Accordingly, they cannot be
bound by the arbitration clause provided for in the ARCA and hence, cannot be compelled to submit to
arbitration proceedings. A speedy and decisive resolution of all the critical issues in the present
controversy, including those raised by petitioners, cannot be made before an arbitral tribunal. The
object of arbitration is precisely to allow an expeditious determination of a dispute. This objective would
not be met if this Court were to allow the parties to settle the cases by arbitration as there are certain
issues involving non-parties to the PIATCO Contracts which the arbitral tribunal will not be equipped to
resolve.
Now, to the merits of the instant controversy.
I
Is PIATCO a qualified bidder?
Public respondents argue that the Paircargo Consortium, PIATCOs predecessor, was not a duly pre-
qualified bidder on the unsolicited proposal submitted by AEDC as the Paircargo Consortium failed to
meet the financial capability required under the BOT Law and the Bid Documents. They allege that in
computing the ability of the Paircargo Consortium to meet the minimum equity requirements for the
project, the entire net worth of Security Bank, a member of the consortium, should not be
considered.
PIATCO relies, on the other hand, on the strength of the Memorandum dated October 14, 1996
issued by the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo Consortium is found to
have a combined net worth of P3,900,000,000.00, sufficient to meet the equity requirements of the
project. The said Memorandum was in response to a letter from Mr. Antonio Henson of AEDC to
President Fidel V. Ramos questioning the financial capability of the Paircargo Consortium on the ground
that it does not have the financial resources to put up the required minimum equity
of P2,700,000,000.00. This contention is based on the restriction under R.A. No. 337, as amended or the
General Banking Act that a commercial bank cannot invest in any single enterprise in an amount more
than 15% of its net worth. In the said Memorandum, Undersecretary Cal opined:
The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require that financial capability will
be evaluated based on total financial capability of all the member companies of the [Paircargo]
Consortium. In this connection, the Challenger was found to have a combined net worth
of P3,926,421,242.00 that could support a project costing approximately P13 Billion.
It is not a requirement that the net worth must be unrestricted. To impose that as a requirement now will
be nothing less than unfair.
The financial statement or the net worth is not the sole basis in establishing financial capability. As
stated in Bid Bulletin No. 3, financial capability may also be established by testimonial letters issued by
reputable banks. The Challenger has complied with this requirement.
To recap, net worth reflected in the Financial Statement should not be taken as the amount of the money
to be used to answer the required thirty percent (30%) equity of the challenger but rather to be used in
establishing if there is enough basis to believe that the challenger can comply with the required 30%
equity. In fact, proof of sufficient equity is required as one of the conditions for award of contract (Section
12.1 IRR of the BOT Law) but not for pre-qualification (Section 5.4 of the same document).[23]
Under the BOT Law, in case of a build-operate-and-transfer arrangement, the contract shall be
awarded to the bidder who, having satisfied the minimum financial, technical, organizational and
legal standards required by the law, has submitted the lowest bid and most favorable terms of the
project.[24] Further, the 1994 Implementing Rules and Regulations of the BOT Law provide:
Section 5.4 Pre-qualification Requirements.
. accordance with the provisions of R.A. No. 337, as amended or the General Banking Act:
c. Financial Capability: The project proponent must have adequate capability to sustain the financing
requirements for the detailed engineering design, construction and/or operation and maintenance phases
of the project, as the case may be. For purposes of pre-qualification, this capability shall be measured in
terms of (i) proof of the ability of the project proponent and/or the consortium to provide a
minimum amount of equity to the project, and (ii) a letter testimonial from reputable banks
attesting that the project proponent and/or members of the consortium are banking with them,
that they are in good financial standing, and that they have adequate resources. The government
agency/LGU concerned shall determine on a project-to-project basis and before pre-qualification, the
minimum amount of equity needed. (emphasis supplied)
Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated August 16, 1996 amending
the financial capability requirements for pre-qualification of the project proponent as follows:
6. Basis of Pre-qualification
The basis for the pre-qualification shall be on the compliance of the proponent to the minimum technical
and financial requirements provided in the Bid Documents and in the IRR of the BOT Law, R.A. No.
6957, as amended by R.A. 7718.
The minimum amount of equity to which the proponents financial capability will be based shall be thirty
percent (30%) of the project cost instead of the twenty percent (20%) specified in Section 3.6.4 of
the Bid Documents.This is to correlate with the required debt-to-equity ratio of 70:30 in Section 2.01a of
the draft concession agreement. The debt portion of the project financing should not exceed 70% of the
actual project cost.
Accordingly, based on the above provisions of law, the Paircargo Consortium or any challenger to
the unsolicited proposal of AEDC has to show that it possesses the requisite financial capability to
undertake the project in the minimum amount of 30% of the project cost through (i) proof of the
ability to provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable
banks attesting that the project proponent or members of the consortium are banking with them, that
they are in good financial standing, and that they have adequate resources.
As the minimum project cost was estimated to be US$350,000,000.00 or
roughly P9,183,650,000.00,[25] the Paircargo Consortium had to show to the satisfaction of the PBAC that
it had the ability to provide the minimum equity for the project in the amount of at
least P2,755,095,000.00.
Paircargos Audited Financial Statements as of 1993 and 1994 indicated that it had a net worth
of P2,783,592.00 and P3,123,515.00 respectively.[26] PAGS Audited Financial Statements as of 1995
indicate that it has approximately P26,735,700.00 to invest as its equity for the project.[27] Security
Banks Audited Financial Statements as of 1995 show that it has a net worth equivalent to its capital
funds in the amount of P3,523,504,377.00.[28]
We agree with public respondents that with respect to Security Bank, the entire amount of its net
worth could not be invested in a single undertaking or enterprise, whether allied or non-allied in
Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding, the Monetary
Board, whenever it shall deem appropriate and necessary to further national development objectives or
support national priority projects, may authorize a commercial bank, a bank authorized to provide
commercial banking services, as well as a government-owned and controlled bank, to operate
under an expanded commercial banking authority and by virtue thereof exercise, in addition
to powers authorized for commercial banks, the powers of an Investment House as provided in
Presidential Decree No. 129, invest in the equity of a non-allied undertaking, or own a majority or
all of the equity in a financial intermediary other than a commercial bank or a bank authorized to
provide commercial banking services: Provided, That (a) the total investment in equities shall not exceed
fifty percent (50%) of the net worth of the bank; (b) the equity investment in any one enterprise
whether allied or non-allied shall not exceed fifteen percent (15%) of the net worth of the
bank; (c) the equity investment of the bank, or of its wholly or majority-owned subsidiary, in a single
non-allied undertaking shall not exceed thirty-five percent (35%) of the total equity in the enterprise nor
shall it exceed thirty-five percent (35%) of the voting stock in thatenterprise; and (d) the equity
investment in other banks shall be deducted from the investing bank's net worth for purposes of
computing the prescribed ratio of net worth to risk assets.
.
Further, the 1993 Manual of Regulations for Banks provides:
SECTION X383. Other Limitations and Restrictions. The following limitations and restrictions shall also
apply regarding equity investments of banks.
a. In any single enterprise. The equity investments of banks in any single enterprise shall not exceed at
any time fifteen percent (15%) of the net worth of the investing bank as defined in Sec. X106 and Subsec.
X121.5.
Thus, the maximum amount that Security Bank could validly invest in the Paircargo Consortium is
only P528,525,656.55, representing 15% of its entire net worth. The total net worth therefore of the
Paircargo Consortium, after considering the maximum amounts that may be validly invested by each of
its members is P558,384,871.55 or only 6.08% of the project cost,[29] an amount substantially less
than the prescribed minimum equity investment required for the project in the amount
of P2,755,095,000.00 or 30% of the project cost.
The purpose of pre-qualification in any public bidding is to determine, at the earliest opportunity,
the ability of the bidder to undertake the project. Thus, with respect to the bidders financial capacity at
the pre-qualification stage, the law requires the government agency to examine and determine the ability
of the bidder to fund the entire cost of the project by considering the maximum amounts that each
bidder may invest in the project at the time of pre-qualification.
The PBAC has determined that any prospective bidder for the construction, operation and
maintenance of the NAIA IPT III project should prove that it has the ability to provide equity in the
minimum amount of 30% of the project cost, in accordance with the 70:30 debt-to-equity ratio prescribed
in the Bid Documents. Thus, in the case of Paircargo Consortium, the PBAC should determine
the maximum amounts that each member of the consortium may commit for the construction,
operation and maintenance of the NAIA IPT III project at the time of pre-qualification. With respect to
Security Bank, the maximum amountwhich may be invested by it would only be 15% of its net worth in
view of the restrictions imposed by the General Banking Act. Disregarding the investment ceilings
provided by applicable law would not result in a proper evaluation of whether or not a bidder is pre-
qualified to undertake the project as for all intents and purposes, such ceiling or legal restriction
determines the true maximum amount which a bidder may invest in the project.
Further, the determination of whether or not a bidder is pre-qualified to undertake the project
requires an evaluation of the financial capacity of the said bidder at the time the bid is
submitted based on the required documents presented by the bidder. The PBAC should not be allowed
to speculate on the future financial ability of the bidder to undertake the project on the basis of
documents submitted. This would open doors to abuse and defeat the very purpose of a public bidding.
This is especially true in the case at bar which involves the investment of billions of pesos by the project
proponent. The relevant government authority is duty-bound to ensure that the awardee of the contract
possesses the minimum required financial capability to complete the project. To allow the PBAC to
estimate the bidders future financial capability would not secure the viability and integrity of the
project. A restrictive and conservative application of the rules and procedures of public bidding is
necessary not only to protect the impartiality and regularity of the proceedings but also to ensure the
financial and technical reliability of the project. It has been held that:
The basic rule in public bidding is that bids should be evaluated based on the required documents
submitted before and not after the opening of bids. Otherwise, the foundation of a fair and competitive
public bidding would be defeated. Strict observance of the rules, regulations, and guidelines of the
bidding process is the only safeguard to a fair, honest and competitive public bidding.[30]
Thus, if the maximum amount of equity that a bidder may invest in the project at the time the
bids are submitted falls short of the minimum amounts required to be put up by the bidder, said bidder
should be properly disqualified. Considering that at the pre-qualification stage, the maximum amounts
which the Paircargo Consortium may invest in the project fell short of the minimum amounts prescribed
by the PBAC, we hold that Paircargo Consortium was not a qualified bidder. Thus the award of the
contract by the PBAC to the Paircargo Consortium, a disqualified bidder, is null and void.
While it would be proper at this juncture to end the resolution of the instant controversy, as the
legal effects of the disqualification of respondent PIATCOs predecessor would come into play and
necessarily result in the nullity of all the subsequent contracts entered by it in pursuance of the project,
the Court feels that it is necessary to discuss in full the pressing issues of the present controversy for a
complete resolution thereof.
II
Is the 1997 Concession Agreement valid?
Petitioners and public respondents contend that the 1997 Concession Agreement is invalid as it
contains provisions that substantially depart from the draft Concession Agreement included in the Bid
Documents. They maintain that a substantial departure from the draft Concession Agreement is a
violation of public policy and renders the 1997 Concession Agreement null and void.
PIATCO maintains, however, that the Concession Agreement attached to the Bid Documents is
intended to be a draft, i.e., subject to change, alteration or modification, and that this intention was clear
to all participants, including AEDC, and DOTC/MIAA. It argued further that said intention is expressed
in Part C (6) of Bid Bulletin No. 3 issued by the PBAC which states:
6. Amendments to the Draft Concessions Agreement
Amendments to the Draft Concessions Agreement shall be issued from time to time. Said amendments
shall only cover items that would not materially affect the preparation of the proponents proposal.
By its very nature, public bidding aims to protect the public interest by giving the public the best
possible advantages through open competition. Thus:
Competition must be legitimate, fair and honest. In the field of government contract law, competition
requires, not only `bidding upon a common standard, a common basis, upon the same thing, the same
subject matter, the same undertaking,' but also that it be legitimate, fair and honest; and not designed to
injure or defraud the government.[31]
An essential element of a publicly bidded contract is that all bidders must be on equal footing. Not
simply in terms of application of the procedural rules and regulations imposed by the relevant
government agency, but more importantly, on the contract bidded upon. Each bidder must be able
to bid on the same thing. The rationale is obvious. If the winning bidder is allowed to later include or
modify certain provisions in the contract awarded such that the contract is altered in any material
respect, then the essence of fair competition in the public bidding is destroyed. A public bidding would
indeed be a farce if after the contract is awarded, the winning bidder may modify the contract and
include provisions which are favorable to it that were not previously made available to the other
bidders. Thus:
It is inherent in public biddings that there shall be a fair competition among the bidders. The Utility Revenues and Non-Public
specifications in such biddings provide the common ground or basis for the bidders. The specifications Utility Revenues that may be
should, accordingly, operate equally or indiscriminately upon all bidders.[32] collected by PIATCO

The fees that may be imposed and collected by PIATCO under the draft Concession Agreement and
The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota: the 1997 Concession Agreement may be classified into three distinct categories: (1) fees which are subject
to periodic adjustment of once every two years in accordance with a prescribed parametric formula and
The law is well settled that where, as in this case, municipal authorities can only let a contract for public adjustments are made effective only upon written approval by MIAA; (2) fees other than those included in
work to the lowest responsible bidder, the proposals and specifications therefore must be so framed as to the first category which maybe adjusted by PIATCO whenever it deems necessary without need for
permit free and full competition. Nor can they enter into a contract with the best bidder containing consent of DOTC/MIAA; and (3) new fees and charges that may be imposed by PIATCO which have not
substantial provisions beneficial to him, not included or contemplated in the terms and been previously imposed or collected at the Ninoy Aquino International Airport Passenger Terminal I,
specifications upon which the bids were invited.[33] pursuant to Administrative Order No. 1, Series of 1993, as amended. The glaring distinctions between
the draft Concession Agreement and the 1997 Concession Agreement lie in the types of fees included in
each category and the extent of the supervision and regulation which MIAA is allowed to exercise in
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its argument that the draft relation thereto.
concession agreement is subject to amendment, the pertinent portion of which was quoted above, the
PBAC also clarified that [s]aid amendments shall only cover items that would not materially affect For fees under the first category, i.e., those which are subject to periodic adjustment in
the preparation of the proponents proposal. accordance with a prescribed parametric formula and effective only upon written approval by MIAA, the
draft Concession Agreement includes the following:[36]
While we concede that a winning bidder is not precluded from modifying or amending certain
provisions of the contract bidded upon, such changes must not constitute substantial or material
amendments that would alter the basic parameters of the contract and would constitute a denial (1) aircraft parking fees;
to the other bidders of the opportunity to bid on the same terms. Hence, the determination of
whether or not a modification or amendment of a contract bidded out constitutes a substantial (2) aircraft tacking fees;
amendment rests on whether the contract, when taken as a whole, would contain substantially different
terms and conditions that would have the effect of altering the technical and/or financial proposals
previously submitted by other bidders. The alterations and modifications in the contract executed (3) groundhandling fees;
between the government and the winning bidder must be such as to render such executed contract to
be an entirely different contract from the one that was bidded upon. (4) rentals and airline offices;
In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc.,[34]
this Court quoted with
approval the ruling of the trial court that an amendment to a contract awarded through public bidding, (5) check-in counter rentals; and
when such subsequent amendment was made without a new public bidding, is null and void:
(6) porterage fees.
The Court agrees with the contention of counsel for the plaintiffs that the due execution of a contract
after public bidding is a limitation upon the right of the contracting parties to alter or amend it without
Under the 1997 Concession Agreement, fees which are subject to adjustment and effective upon
another public bidding, for otherwise what would a public bidding be good for if after the execution
MIAA approval are classified as Public Utility Revenues and include:[37]
of a contract after public bidding, the contracting parties may alter or amend the contract, or
even cancel it, at their will? Public biddings are held for the protection of the public, and to give the
public the best possible advantages by means of open competition between the bidders. He who bids or (1) aircraft parking fees;
offers the best terms is awarded the contract subject of the bid, and it is obvious that such
protection and best possible advantages to the public will disappear if the parties to a contract
(2) aircraft tacking fees;
executed after public bidding may alter or amend it without another previous public bidding.[35]

(3) check-in counter fees; and

Hence, the question that comes to fore is this: is the 1997 Concession Agreement the same
agreement that was offered for public bidding, i.e., the draft Concession Agreement attached to the
Bid Documents? A close comparison of the draft Concession Agreement attached to the Bid Documents (4) Terminal Fees.
and the 1997 Concession Agreement reveals that the documents differ in at least two material respects:

a. Modification on the Public

 The implication of the reduced number of fees that are subject to MIAA approval is best appreciated
in relation to fees included in the second category identified above. Under the 1997 Concession
Agreement, fees which PIATCO may adjust whenever it deems necessary without need for consent of
DOTC/MIAA are Non-Public Utility Revenues and is defined as all other income not classified as Public
Utility Revenues derived from operations of the Terminal and the Terminal Complex.[38] Thus, under the
1997 Concession Agreement, groundhandling fees, rentals from airline offices and porterage fees are no
longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession Agreement, MIAA reserves the right to
regulate (1) lobby and vehicular parking fees and (2) other new fees and charges that may be imposed by
PIATCO. Such regulation may be made by periodic adjustment and is effective only upon written approval
of MIAA. The full text of said provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the aircraft parking fees, aircraft
tacking fees, groundhandling fees, rentals and airline offices, check-in-counter rentals and porterage fees
shall be allowed only once every two years and in accordance with the Parametric Formula attached
hereto as Annex F. Provided that adjustments shall be made effective only after the written express
approval of the MIAA. Provided, further, that such approval of the MIAA, shall be contingent only on the
conformity of the adjustments with the above said parametric formula. The first adjustment shall be
made prior to the In-Service Date of the Terminal.
The MIAA reserves the right to regulate under the foregoing terms and conditions the lobby and
vehicular parking fees and other new fees and charges as contemplated in paragraph 2 of Section
6.01 if in its judgment the users of the airport shall be deprived of a free option for the services
they cover.[39]
On the other hand, the equivalent provision under the 1997 Concession Agreement reads:
Section 6.03 Periodic Adjustment in Fees and Charges.
.
(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-Public Utility
Revenues in order to ensure that End Users are not unreasonably deprived of services. While the
vehicular parking fee, porterage fee and greeter/well wisher fee constitute Non-Public Utility
Revenues of Concessionaire, GRP may intervene and require Concessionaire to explain and justify
the fee it may set from time to time, if in the reasonable opinion of GRP the said fees have become
exorbitant resulting in the unreasonable deprivation of End Users of such services.[40]
Thus, under the 1997 Concession Agreement, with respect to (1) vehicular parking fee, (2)
porterage fee and (3) greeter/well wisher fee, all that MIAA can do is to require PIATCO to explain and
justify the fees set by PIATCO. In the draft Concession Agreement, vehicular parking fee is subject to
MIAA regulation and approval under the second paragraph of Section 6.03 thereof while porterage fee is
covered by the first paragraph of the same provision. There is an obvious relaxation of the extent of
control and regulation by MIAA with respect to the particular fees that may be charged by PIATCO.
Moreover, with respect to the third category of fees that may be imposed and collected by PIATCO,
i.e., new fees and charges that may be imposed by PIATCO which have not been previously imposed or
collected at the Ninoy Aquino International Airport Passenger Terminal I, under Section 6.03 of the draft
Concession Agreement MIAA has reserved the right to regulate the same under the same conditions
that MIAA may regulate fees under the first category, i.e., periodic adjustment of once every two years in
accordance with a prescribed parametric formula and effective only upon written approval by MIAA.
However, under the 1997 Concession Agreement, adjustment of fees under the third category is not
subject to MIAA regulation.
With respect to terminal fees that may be charged by PIATCO,[41] as shown earlier, this was
included within the category of Public Utility Revenues under the 1997 Concession Agreement. This
classification is significant because under the 1997 Concession Agreement, Public Utility Revenues are
subject to an Interim Adjustment of fees upon the occurrence of certain extraordinary events specified in
the agreement.[42] However, under the draft Concession Agreement, terminal fees are not included in
the types of fees that may be subject to Interim Adjustment.[43]
Finally, under the 1997 Concession Agreement, Public Utility Revenues, except terminal fees, are
denominated in US Dollars[44] while payments to the Government are in Philippine Pesos. In the draft
Concession Agreement, no such stipulation was included. By stipulating that Public Utility Revenues
will be paid to PIATCO in US Dollars while payments by PIATCO to the Government are in Philippine
currency under the 1997 Concession Agreement, PIATCO is able to enjoy the benefits of depreciations of
the Philippine Peso, while being effectively insulated from the detrimental effects of exchange rate
fluctuations.
When taken as a whole, the changes under the 1997 Concession Agreement with respect to
reduction in the types of fees that are subject to MIAA regulation and the relaxation of such regulation
with respect to other fees are significant amendments that substantially distinguish the draft Concession
Agreement from the 1997 Concession Agreement. The 1997 Concession Agreement, in this respect,
clearly gives PIATCO more favorable terms than what was available to other bidders at the time
the contract was bidded out. It is not very difficult to see that the changes in the 1997 Concession
Agreement translate to direct and concrete financial advantages for PIATCO which were not available
at the time the contract was offered for bidding. It cannot be denied that under the 1997 Concession
Agreement only Public Utility Revenues are subject to MIAA regulation. Adjustments of all other
fees imposed and collected by PIATCO are entirely within its control. Moreover, with respect to
terminal fees, under the 1997 Concession Agreement, the same is further subject to Interim Adjustments
not previously stipulated in the draft Concession Agreement. Finally, the change in the currency
stipulated for Public Utility Revenues under the 1997 Concession Agreement, except terminal fees, gives
PIATCO an added benefit which was not available at the time of bidding.
b. Assumption by the
Government of the liabilities of
PIATCO in the event of the latters
default thereof
Under the draft Concession Agreement, default by PIATCO of any of its obligations to creditors
who have provided, loaned or advanced funds for the NAIA IPT III project does not result in the
assumption by the Government of these liabilities. In fact, nowhere in the said contract does default of
PIATCOs loans figure in the agreement. Such default does not directly result in any concomitant right or
obligation in favor of the Government.
However, the 1997 Concession Agreement provides:
Section 4.04 Assignment.
 . bidding process. This financial advantage is a significant modification that translates to better terms
(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the default
has resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated date
of maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of such
default. GRP shall, within one hundred eighty (180) Days from receipt of the joint written notice of the
Unpaid Creditors and Concessionaire, either (i) take over the Development Facility and assume the
Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified, to be substituted as concessionaire
and operator of the Development Facility in accordance with the terms and conditions hereof, or
designate a qualified operator acceptable to GRP to operate the Development Facility, likewise under the
terms and conditions of this Agreement; Provided that if at the end of the 180-day period GRP shall not
have served the Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to
have elected to take over the Development Facility with the concomitant assumption of Attendant
Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the
latter shall form and organize a concession company qualified to take over the operation of the
Development Facility. If the concession company should elect to designate an operator for the
Development Facility, the concession company shall in good faith identify and designate a qualified
operator acceptable to GRP within one hundred eighty (180) days from receipt of GRPs written notice. If
the concession company, acting in good faith and with due diligence, is unable to designate a qualified
operator within the aforesaid period, then GRP shall at the end of the 180-day period take over the
Development Facility and assume Attendant Liabilities.
The term Attendant Liabilities under the 1997 Concession Agreement is defined as:
Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of the
Concessionaire as owing to Unpaid Creditors who have provided, loaned or advanced funds actually
used for the Project, including all interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses, and further including amounts owed by Concessionaire to
its suppliers, contractors and sub-contractors.
Under the above quoted portions of Section 4.04 in relation to the definition of Attendant
Liabilities, default by PIATCO of its loans used to finance the NAIA IPT III project triggers the
occurrence of certain events that leads to the assumption by the Government of the liability for
the loans. Only in one instance may the Government escape the assumption of PIATCOs liabilities, i.e.,
when the Government so elects and allows a qualified operator to take over as Concessionaire. However,
this circumstance is dependent on the existence and availability of a qualified operator who is
willing to take over the rights and obligations of PIATCO under the contract, a circumstance that
is not entirely within the control of the Government.
Without going into the validity of this provision at this juncture, suffice it to state that Section 4.04
of the 1997 Concession Agreement may be considered a form of security for the loans PIATCO has
obtained to finance the project, an option that was not made available in the draft Concession
Agreement. Section 4.04 is an important amendment to the 1997 Concession Agreement because it
grants PIATCO a financial advantage or benefit which was not previously made available during the
and conditions for PIATCO.
PIATCO, however, argues that the parties to the bidding procedure acknowledge that the draft
Concession Agreement is subject to amendment because the Bid Documents permit financing or
borrowing. They claim that it was the lenders who proposed the amendments to the draft Concession
Agreement which resulted in the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and purpose of the BOT Law to allow the
project proponent or the winning bidder to obtain financing for the project, especially in this case which
involves the construction, operation and maintenance of the NAIA IPT III. Expectedly, compliance by the
project proponent of its undertakings therein would involve a substantial amount of investment. It is
therefore inevitable for the awardee of the contract to seek alternate sources of funds to support the
project. Be that as it may, this Court maintains that amendments to the contract bidded upon should
always conform to the general policy on public bidding if such procedure is to be faithful to its real
nature and purpose. By its very nature and characteristic, competitive public bidding aims to protect the
public interest by giving the public the best possible advantages through open competition.[45] It has been
held that the three principles in public bidding are (1) the offer to the public; (2) opportunity for
competition; and (3) a basis for the exact comparison of bids. A regulation of the matter which excludes
any of these factors destroys the distinctive character of the system and thwarts the purpose of its
adoption.[46] These are the basic parameters which every awardee of a contract bidded out must conform
to, requirements of financing and borrowing notwithstanding. Thus, upon a concrete showing that, as in
this case, the contract signed by the government and the contract-awardee is an entirely different
contract from the contract bidded, courts should not hesitate to strike down said contract in its entirety
for violation of public policy on public bidding. A strict adherence on the principles, rules and regulations
on public bidding must be sustained if only to preserve the integrity and the faith of the general public on
the procedure.
Public bidding is a standard practice for procuring government contracts for public service and for
furnishing supplies and other materials. It aims to secure for the government the lowest possible price
under the most favorable terms and conditions, to curtail favoritism in the award of government
contracts and avoid suspicion of anomalies and it places all bidders in equal footing.[47] Any government
action which permits any substantial variance between the conditions under which the bids are
invited and the contract executed after the award thereof is a grave abuse of discretion amounting
to lack or excess of jurisdiction which warrants proper judicial action.
In view of the above discussion, the fact that the foregoing substantial amendments were made on
the 1997 Concession Agreement renders the same null and void for being contrary to public policy.
These amendments convert the 1997 Concession Agreement to an entirely different agreement from
the contract bidded out or the draft Concession Agreement. It is not difficult to see that the amendments
on (1) the types of fees or charges that are subject to MIAA regulation or control and the extent thereof
and (2) the assumption by the Government, under certain conditions, of the liabilities of PIATCO directly
translates concrete financial advantages to PIATCO that were previously not available during the
bidding process. These amendments cannot be taken as merely supplements to or implementing
provisions of those already existing in the draft Concession Agreement. The amendments discussed above
present new terms and conditions which provide financial benefit to PIATCO which may have altered the
technical and financial parameters of other bidders had they known that such terms were available.
III
Direct Government Guarantee
 Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997 Concession Agreement
provides:
Section 4.04 Assignment
.
(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the
default resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated
date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of
such default. GRP shall within one hundred eighty (180) days from receipt of the joint written notice of
the Unpaid Creditors and Concessionaire, either (i) take over the Development Facility and assume the
Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified to be substituted as concessionaire
and operator of the Development facility in accordance with the terms and conditions hereof, or designate
a qualified operator acceptable to GRP to operate the Development Facility, likewise under the terms and
conditions of this Agreement; Provided, that if at the end of the 180-day period GRP shall not have served
the Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have
elected to take over the Development Facility with the concomitant assumption of Attendant
Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the latter
shall form and organize a concession company qualified to takeover the operation of the Development
Facility. If the concession company should elect to designate an operator for the Development Facility,
the concession company shall in good faith identify and designate a qualified operator acceptable to GRP
within one hundred eighty (180) days from receipt of GRPs written notice. If the concession company,
acting in good faith and with due diligence, is unable to designate a qualified operator within the
aforesaid period, then GRP shall at the end of the 180-day period take over the Development Facility
and assume Attendant Liabilities.
. the relevant sections are subsumed under the title of assignment. The provisions providing for direct
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of
the Concessionaire as owing to Unpaid Creditors who have provided, loaned or advanced funds
actually used for the Project, including all interests, penalties, associated fees, charges, surcharges,
indemnities, reimbursements and other related expenses, and further including amounts owed by
Concessionaire to its suppliers, contractors and sub-contractors.[48]
It is clear from the above-quoted provisions that Government, in the event that PIATCO defaults
in its loan obligations, is obligated to pay all amounts recorded and from time to time outstanding
from the books of PIATCO which the latter owes to its creditors. [49] These amounts include all interests,
penalties, associated fees, charges, surcharges, indemnities, reimbursements and other related
expenses.[50] This obligation of the Government to pay PIATCOs creditors upon PIATCOs default would
arise if the Government opts to take over NAIA IPT III. It should be noted, however, that even if the
Government chooses the second option, which is to allow PIATCOs unpaid creditors operate NAIA IPT III,
the Government is still at a risk of being liable to PIATCOs creditors should the latter be unable to
designate a qualified operator within the prescribed period.[51] In effect, whatever option the
Government chooses to take in the event of PIATCOs failure to fulfill its loan obligations, the
Government is still at a risk of assuming PIATCOs outstanding loans. This is due to the fact that the
Government would only be free from assuming PIATCOs debts if the unpaid creditors would be able to
designate a qualified operator within the period provided for in the contract. Thus, the Governments
assumption of liability is virtually out of its control. The Government under the circumstances
provided for in the 1997 Concession Agreement is at the mercy of the existence, availability and
willingness of a qualified operator. The above contractual provisions constitute a direct government
guarantee which is prohibited by law.
One of the main impetus for the enactment of the BOT Law is the lack of government funds to
construct the infrastructure and development projects necessary for economic growth and
development. This is why private sector resources are being tapped in order to finance these projects. The
BOT law allows the private sector to participate, and is in fact encouraged to do so by way of incentives,
such as minimizing the unstable flow of returns,[52] provided that the government would not have to
unnecessarily expend scarcely available funds for the project itself. As such, direct guarantee, subsidy
and equity by the government in these projects are strictly prohibited.[53] This is but logical for if the
government would in the end still be at a risk of paying the debts incurred by the private entity in
the BOT projects, then the purpose of the law is subverted.
Section 2(n) of the BOT Law defines direct guarantee as follows:
(n) Direct government guarantee An agreement whereby the government or any of its agencies or local
government units assume responsibility for the repayment of debt directly incurred by the project
proponent in implementing the project in case of a loan default.
Clearly by providing that the Government assumes the attendant liabilities, which consists of
PIATCOs unpaid debts, the 1997 Concession Agreement provided for a direct government guarantee for
the debts incurred by PIATCO in the implementation of the NAIA IPT III project. It is of no moment that
government guarantee which is prohibited by law is clear from the terms thereof.
The fact that the ARCA superseded the 1997 Concession Agreement did not cure this fatal
defect. Article IV, Section 4.04(c), in relation to Article I, Section 1.06, of the ARCA provides:
Section 4.04 Security
.
(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith and enter into
direct agreement with the Senior Lenders, or with an agent of such Senior Lenders (which agreement
shall be subject to the approval of the Bangko Sentral ng Pilipinas), in such form as may be reasonably
acceptable to both GRP and Senior Lenders, with regard, inter alia, to the following parameters:
.
(iv) If the Concessionaire [PIATCO] is in default under a payment obligation owed to the Senior
Lenders, and as a result thereof the Senior Lenders have become entitled to accelerate the Senior Loans,
the Senior Lenders shall have the right to notify GRP of the same, and without prejudice to any other
rights of the Senior Lenders or any Senior Lenders agent may have (including without limitation under
security interests granted in favor of the Senior Lenders), to either in good faith identify and designate a
nominee which is qualified under sub-clause (viii)(y) below to operate the Development Facility [NAIA
Terminal 3] or transfer the Concessionaires [PIATCO] rights and obligations under this Agreement to a
transferee which is qualified under sub-clause (viii) below;
. government to pay PIATCOs loans not only to its Senior Lenders but all other entities who
(vi) if the Senior Lenders, acting in good faith and using reasonable efforts, are unable to designate a
nominee or effect a transfer in terms and conditions satisfactory to the Senior Lenders within one
hundred eighty (180) days after giving GRP notice as referred to respectively in (iv) or (v) above, then GRP
and the Senior Lenders shall endeavor in good faith to enter into any other arrangement relating to the
Development Facility [NAIA Terminal 3] (other than a turnover of the Development Facility [NAIA
Terminal 3] to GRP) within the following one hundred eighty (180) days. If no agreement relating to the
Development Facility [NAIA Terminal 3] is arrived at by GRP and the Senior Lenders within the said 180-
day period, then at the end thereof the Development Facility [NAIA Terminal 3] shall be transferred
by the Concessionaire [PIATCO] to GRP or its designee and GRP shall make a termination payment
to Concessionaire [PIATCO] equal to the Appraised Value (as hereinafter defined) of the
Development Facility [NAIA Terminal 3] or the sum of the Attendant Liabilities, if
greater. Notwithstanding Section 8.01(c) hereof, this Agreement shall be deemed terminated upon the
transfer of the Development Facility [NAIA Terminal 3] to GRP pursuant hereto;
. willingness of a qualified nominee or transferee is totally out of the governments control. As such the
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from time to
time owed or which may become owing by Concessionaire [PIATCO] to Senior Lenders or any other
persons or entities who have provided, loaned, or advanced funds or provided financial facilities to
Concessionaire [PIATCO] for the Project [NAIA Terminal 3], including, without limitation, all
principal, interest, associated fees, charges, reimbursements, and other related expenses (including
the fees, charges and expenses of any agents or trustees of such persons or entities), whether payable at
maturity, by acceleration or otherwise, and further including amounts owed by Concessionaire [PIATCO]
to its professional consultants and advisers, suppliers, contractors and sub-contractors.[54]
It is clear from the foregoing contractual provisions that in the event that PIATCO fails to fulfill its
loan obligations to its Senior Lenders, the Government is obligated to directly negotiate and enter into an
agreement relating to NAIA IPT III with the Senior Lenders, should the latter fail to appoint a qualified
nominee or transferee who will take the place of PIATCO. If the Senior Lenders and the Government are
unable to enter into an agreement after the prescribed period, the Government must then pay PIATCO,
upon transfer of NAIA IPT III to the Government, termination payment equal to the appraised value of the
project or the value of the attendant liabilities whichever is greater. Attendant liabilities as defined in
the ARCA includes all amounts owed or thereafter may be owed by PIATCO not only to the Senior
Lenders with whom PIATCO has defaulted in its loan obligations but to all other persons who may have
loaned, advanced funds or provided any other type of financial facilities to PIATCO for NAIA IPT III. The
amount of PIATCOs debt that the Government would have to pay as a result of PIATCOs default in its
loan obligations -- in case no qualified nominee or transferee is appointed by the Senior Lenders and no
other agreement relating to NAIA IPT III has been reached between the Government and the Senior
Lenders -- includes, but is not limited to, all principal, interest, associated fees, charges,
reimbursements, and other related expenses . . . whether payable at maturity, by acceleration or
otherwise.[55]
It is clear from the foregoing that the ARCA provides for a direct guarantee by the
provided PIATCO funds or services upon PIATCOs default in its loan obligation with its Senior
Lenders. The fact that the Governments obligation to pay PIATCOs lenders for the latters obligation
would only arise after the Senior Lenders fail to appoint a qualified nominee or transferee does not
detract from the fact that, should the conditions as stated in the contract occur, the ARCA still obligates
the Government to pay any and all amounts owed by PIATCO to its lenders in connection with NAIA IPT
III. Worse, the conditions that would make the Government liable for PIATCOs debts is triggered by
PIATCOs own default of its loan obligations to its Senior Lenders to which loan contracts the Government
was never a party to. The Government was not even given an option as to what course of action it should
take in case PIATCO defaulted in the payment of its senior loans. The Government, upon PIATCOs
default, would be merely notified by the Senior Lenders of the same and it is the Senior Lenders who are
authorized to appoint a qualified nominee or transferee. Should the Senior Lenders fail to make such an
appointment, the Government is then automatically obligated to directly deal and negotiate with the
Senior Lenders regarding NAIA IPT III. The only way the Government would not be liable for PIATCOs
debt is for a qualified nominee or transferee to be appointed in place of PIATCO to continue the
construction, operation and maintenance of NAIA IPT III. This pre-condition, however, will not take the
contract out of the ambit of a direct guarantee by the government as the existence, availability and
Government is virtually at the mercy of PIATCO (that it would not default on its loan obligations to its
Senior Lenders), the Senior Lenders (that they would appoint a qualified nominee or transferee or agree
to some other arrangement with the Government) and the existence of a qualified nominee or transferee
who is able and willing to take the place of PIATCO in NAIA IPT III.
The proscription against government guarantee in any form is one of the policy
considerations behind the BOT Law. Clearly, in the present case, the ARCA obligates the Government
to pay for all loans, advances and obligations arising out of financial facilities extended to PIATCO for the
implementation of the NAIA IPT III project should PIATCO default in its loan obligations to its Senior
Lenders and the latter fails to appoint a qualified nominee or transferee. This in effect would make the
Government liable for PIATCOs loans should the conditions as set forth in the ARCA arise. This is a form
of direct government guarantee.
The BOT Law and its implementing rules provide that in order for an unsolicited proposal for a BOT
project may be accepted, the following conditions must first be met: (1) the project involves a new concept
in technology and/or is not part of the list of priority projects, (2) no direct government guarantee,
subsidy or equity is required, and (3) the government agency or local government unit has invited by
publication other interested parties to a public bidding and conducted the same.[56] The failure to meet
any of the above conditions will result in the denial of the proposal. It is further provided that the
presence of direct government guarantee, subsidy or equity will necessarily disqualify a proposal from
being treated and accepted as an unsolicited proposal.[57] The BOT Law clearly and strictly prohibits
direct government guarantee, subsidy and equity in unsolicited proposals that the mere inclusion of a
provision to that effect is fatal and is sufficient to deny the proposal. It stands to reason therefore that if a
proposal can be denied by reason of the existence of direct government guarantee, then its inclusion in
the contract executed after the said proposal has been accepted is likewise sufficient to invalidate the
contract itself. A prohibited provision, the inclusion of which would result in the denial of a proposal
cannot, and should not, be allowed to later on be inserted in the contract resulting from the said
proposal. The basic rules of justice and fair play alone militate against such an occurrence and must not,
therefore, be countenanced particularly in this instance where the government is exposed to the risk of
shouldering hundreds of million of dollars in debt.
This Court has long and consistently adhered to the legal maxim that those that cannot be done
directly cannot be done indirectly.[58] To declare the PIATCO contracts valid despite the clear
statutory prohibition against a direct government guarantee would not only make a mockery of
what the BOT Law seeks to prevent -- which is to expose the government to the risk of incurring a
monetary obligation resulting from a contract of loan between the project proponent and its
lenders and to which the Government is not a party to -- but would also render the BOT Law
useless for what it seeks to achieve - to make use of the resources of the private sector in the
financing, operation and maintenance of infrastructure and development projects[59] which are
necessary for national growth and development but which the government, unfortunately, could
ill-afford to finance at this point in time.
IV
Temporary takeover of business affected with public interest
Article XII, Section 17 of the 1987 Constitution provides:
Section 17. In times of national emergency, when the public interest so requires, the State may, during
the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation
of any privately owned public utility or business affected with public interest.
The above provision pertains to the right of the State in times of national emergency, and in the
exercise of its police power, to temporarily take over the operation of any business affected with public
interest.In the 1986 Constitutional Commission, the term national emergency was defined to include
threat from external aggression, calamities or national disasters, but not strikes unless it is of such
proportion that would paralyze government service.[60] The duration of the emergency itself is the
determining factor as to how long the temporary takeover by the government would last.[61] The
temporary takeover by the government extends only to the operation of the business and not to the
ownership thereof. As such the government is not required to compensate the private entity-owner
of the said business as there is no transfer of ownership, whether permanent or temporary. The
private entity-owner affected by the temporary takeover cannot, likewise, claim just compensation for the
use of the said business and its properties as the temporary takeover by the government is in exercise of
its police power and not of its power of eminent domain.
Article V, Section 5.10 (c) of the 1997 Concession Agreement provides:
Section 5.10 Temporary Take-over of operations by GRP.
. whether public interest requires a monopoly. As monopolies are subject to abuses that can inflict severe
(c) In the event the development Facility or any part thereof and/or the operations of Concessionaire or
any part thereof, become the subject matter of or be included in any notice, notification, or declaration
concerning or relating to acquisition, seizure or appropriation by GRP in times of war or national
emergency, GRP shall, by written notice to Concessionaire, immediately take over the operations of the
Terminal and/or the Terminal Complex. During such take over by GRP, the Concession Period shall be
suspended; provided, that upon termination of war, hostilities or national emergency, the operations
shall be returned to Concessionaire, at which time, the Concession period shall commence to run
again. Concessionaire shall be entitled to reasonable compensation for the duration of the
temporary take over by GRP, which compensation shall take into account the reasonable cost for
the use of the Terminal and/or Terminal Complex, (which is in the amount at least equal to the
debt service requirements of Concessionaire, if the temporary take over should occur at the time when
Concessionaire is still servicing debts owed to project lenders), any loss or damage to the Development
Facility, and other consequential damages. If the parties cannot agree on the reasonable compensation of
Concessionaire, or on the liability of GRP as aforesaid, the matter shall be resolved in accordance with
Section 10.01 [Arbitration]. Any amount determined to be payable by GRP to Concessionaire shall be
offset from the amount next payable by Concessionaire to GRP.[62]
PIATCO cannot, by mere contractual stipulation, contravene the Constitutional provision on
temporary government takeover and obligate the government to pay reasonable cost for the use of
the Terminal and/or Terminal Complex.[63] Article XII, section 17 of the 1987 Constitution envisions a
situation wherein the exigencies of the times necessitate the government to temporarily take over or
direct the operation of any privately owned public utility or business affected with public interest. It is the
welfare and interest of the public which is the paramount consideration in determining whether or not to
temporarily take over a particular business. Clearly, the State in effecting the temporary takeover is
exercising its police power. Police power is the most essential, insistent, and illimitable of powers.[64] Its
exercise therefore must not be unreasonably hampered nor its exercise be a source of obligation by the
government in the absence of damage due to arbitrariness of its exercise. [65] Thus, requiring the
government to pay reasonable compensation for the reasonable use of the property pursuant to the
operation of the business contravenes the Constitution.
V
Regulation of Monopolies
A monopoly is a privilege or peculiar advantage vested in one or more persons or companies,
consisting in the exclusive right (or power) to carry on a particular business or trade, manufacture a
particular article, or control the sale of a particular commodity.[66] The 1987 Constitution strictly
regulates monopolies, whether private or public, and even provides for their prohibition if public
interest so requires. Article XII, Section 19 of the 1987 Constitution states:
Sec. 19. The state shall regulate or prohibit monopolies when the public interest so requires. No
combinations in restraint of trade or unfair competition shall be allowed.
Clearly, monopolies are not per se prohibited by the Constitution but may be permitted to exist to
aid the government in carrying on an enterprise or to aid in the performance of various services and
functions in the interest of the public.[67] Nonetheless, a determination must first be made as to
prejudice to the public, they are subject to a higher level of State regulation than an ordinary business
undertaking.
 In the cases at bar, PIATCO, under the 1997 Concession Agreement and the ARCA, is granted
the exclusive right to operate a commercial international passenger terminal within the Island of Luzon
at the NAIA IPT III.[68] This is with the exception of already existing international airports in Luzon such
as those located in the Subic Bay Freeport Special Economic Zone (SBFSEZ), Clark Special Economic
Zone (CSEZ) and in Laoag City.[69] As such, upon commencement of PIATCOs operation of NAIA IPT III,
Terminals 1 and 2 of NAIA would cease to function as international passenger terminals. This, however,
does not prevent MIAA to use Terminals 1 and 2 as domestic passenger terminals or in any other manner
as it may deem appropriate except those activities that would compete with NAIA IPT III in the latters
operation as an international passenger terminal.[70] The right granted to PIATCO to exclusively operate
NAIA IPT III would be for a period of twenty-five (25) years from the In-Service Date[71] and renewable for
another twenty-five (25) years at the option of the government.[72] Both the 1997 Concession
Agreement and the ARCA further provide that, in view of the exclusive right granted to PIATCO,
the concession contracts of the service providers currently servicing Terminals 1 and 2 would no
longer be renewed and those concession contracts whose expiration are subsequent to the In-
Service Date would cease to be effective on the said date.[73]
The operation of an international passenger airport terminal is no doubt an undertaking imbued
with public interest. In entering into a BuildOperate-and-Transfer contract for the construction,
operation and maintenance of NAIA IPT III, the government has determined that public interest would be
served better if private sector resources were used in its construction and an exclusive right to operate be
granted to the private entity undertaking the said project, in this case PIATCO. Nonetheless, the privilege
given to PIATCO is subject to reasonable regulation and supervision by the Government through the
MIAA, which is the government agency authorized to operate the NAIA complex, as well as DOTC, the
department to which MIAA is attached.[74]
This is in accord with the Constitutional mandate that a monopoly which is not prohibited must be
regulated.[75] While it is the declared policy of the BOT Law to encourage private sector participation by
providing a climate of minimum government regulations,[76] the same does not mean that Government
must completely surrender its sovereign power to protect public interest in the operation of a public
utility as a monopoly. The operation of said public utility can not be done in an arbitrary manner to the
detriment of the public which it seeks to serve. The right granted to the public utility may be exclusive
but the exercise of the right cannot run riot. Thus, while PIATCO may be authorized to exclusively
operate NAIA IPT III as an international passenger terminal, the Government, through the MIAA, has the
right and the duty to ensure that it is done in accord with public interest. PIATCOs right to operate NAIA
IPT III cannot also violate the rights of third parties.
Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:
3.01 Concession Period
. direct government guarantee expressly prohibited by, among others, the BOT Law and its Implementing
(e) GRP confirms that certain concession agreements relative to certain services and operations
currently being undertaken at the Ninoy Aquino International Airport passenger Terminal I have a
validity period extending beyond the In-Service Date. GRP through DOTC/MIAA, confirms that these
services and operations shall not be carried over to the Terminal and the Concessionaire is under no
legal obligation to permit such carry-over except through a separate agreement duly entered into with
Concessionaire. In the event Concessionaire becomes involved in any litigation initiated by any such
concessionaire or operator, GRP undertakes and hereby holds Concessionaire free and harmless on full
indemnity basis from and against any loss and/or any liability resulting from any such litigation,
including the cost of litigation and the reasonable fees paid or payable to Concessionaires counsel of
choice, all such amounts shall be fully deductible by way of an offset from any amount which the
Concessionaire is bound to pay GRP under this Agreement.
During the oral arguments on December 10, 2002, the counsel for the petitioners-in-intervention
for G.R. No. 155001 stated that there are two service providers whose contracts are still existing and
whose validity extends beyond the In-Service Date. One contract remains valid until 2008 and the other
until 2010.[77]
We hold that while the service providers presently operating at NAIA Terminal 1 do not have an
absolute right for the renewal or the extension of their respective contracts, those contracts whose
duration extends beyond NAIA IPT IIIs In-Service-Date should not be unduly prejudiced. These contracts
must be respected not just by the parties thereto but also by third parties. PIATCO cannot, by law and
certainly not by contract, render a valid and binding contract nugatory. PIATCO, by the mere expedient of
claiming an exclusive right to operate, cannot require the Government to break its contractual obligations
to the service providers. In contrast to the arrastre and stevedoring service providers in the case of Anglo-
Fil Trading Corporation v. Lazaro[78] whose contracts consist of temporary hold-over permits, the
affected service providers in the cases at bar, have a valid and binding contract with the Government,
through MIAA, whose period of effectivity, as well as the other terms and conditions thereof, cannot be
violated.
In fine, the efficient functioning of NAIA IPT III is imbued with public interest. The provisions of the
1997 Concession Agreement and the ARCA did not strip government, thru the MIAA, of its right to
supervise the operation of the whole NAIA complex, including NAIA IPT III. As the primary government
agency tasked with the job,[79] it is MIAAs responsibility to ensure that whoever by contract is given the
right to operate NAIA IPT III will do so within the bounds of the law and with due regard to the rights
of third parties and above all, the interest of the public.
VI
CONCLUSION
In sum, this Court rules that in view of the absence of the requisite financial capacity of the
Paircargo Consortium, predecessor of respondent PIATCO, the award by the PBAC of the contract for the
construction, operation and maintenance of the NAIA IPT III is null and void. Further, considering that
the 1997 Concession Agreement contains material and substantial amendments, which amendments had
the effect of converting the 1997 Concession Agreement into an entirely different agreement from the
contract bidded upon, the 1997 Concession Agreement is similarly null and void for being contrary to
public policy.The provisions under Sections 4.04(b) and (c) in relation to Section 1.06 of the 1997
Concession Agreement and Section 4.04(c) in relation to Section 1.06 of the ARCA, which constitute a
Rules and Regulations are also null and void. The Supplements, being accessory contracts to the ARCA,
are likewise null and void.
WHEREFORE, the 1997 Concession Agreement, the Amended and Restated Concession Agreement
and the Supplements thereto are set aside for being null and void.
SO ORDERED.
 [G.R. No. 146364. June 3, 2004]
COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review[1] of the 21 June 2000 Decision[2] and 14 December 2000
Resolution of the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the 11
November 1996 decision[3] of the Regional Trial Court of Quezon City, Branch 81,[4] affirming the 15
December 1995 decision[5] of the Metropolitan Trial Court of Quezon City, Branch 31.[6]
The Antecedents
In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a certain Pedro Perez for the rights
over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a house made of
light materials on the lot. Pajuyo and his family lived in the house from 1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra (Guevarra) executed
a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house for free
provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra promised that
he would voluntarily vacate the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that
Guevarra vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon City,
Branch 31 (MTC).
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot
where the house stands because the lot is within the 150 hectares set aside by Proclamation No. 137 for
socialized housing. Guevarra pointed out that from December 1985 to September 1994, Pajuyo did not
show up or communicate with him. Guevarra insisted that neither he nor Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive portion of
the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against defendant,
ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other person or persons
claiming any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00) monthly as reasonable
compensation for the use of the premises starting from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and
D) pay the cost of suit.
SO ORDERED.[7]
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 (RTC).
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC
decision reads:
WHEREFORE, premises considered, the Court finds no reversible error in the decision appealed from,
being in accord with the law and evidence presented, and the same is hereby affirmed en toto.
SO ORDERED.[8]
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14 December
1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with the Court of Appeals,
Guevarra filed with the Supreme Court a Motion for Extension of Time to File Appeal by Certiorari Based
on Rule 42 (motion for extension). Guevarra theorized that his appeal raised pure questions of law. The
Receiving Clerk of the Supreme Court received the motion for extension on 13 December 1996 or one day
before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution[9] referring the
motion for extension to the Court of Appeals which has concurrent jurisdiction over the case. The case
presented no special and important matter for the Supreme Court to take cognizance of at the first
instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a
Resolution[10] granting the motion for extension conditioned on the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevaras petition for
review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The
dispositive portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case No. Q-96-
26943 is REVERSED and SET ASIDE; and it is hereby declared that the ejectment case filed against
defendant-appellant is without factual and legal basis.
SO ORDERED.[11]
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of
Appeals should have dismissed outright Guevarras petition for review because it was filed out of
time. Moreover, it was Guevarras counsel and not Guevarra who signed the certification against forum-
shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos motion for
reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.
SO ORDERED.[12]
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house and
not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house only by
tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos demand made Guevarras continued
possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant relationship between
Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return possession of the house on
demand.
The RTC rejected Guevarras claim of a better right under Proclamation No. 137, the Revised
National Government Center Housing Project Code of Policies and other pertinent laws. In an ejectment
suit, the RTC has no power to decide Guevarras rights under these laws. The RTC declared that in an
ejectment case, the only issue for resolution is material or physical possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra
illegally occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right or
title over the lot because it is public land. The assignment of rights between Perez and Pajuyo, and
the Kasunduan between Pajuyo and Guevarra, did not have any legal effect. Pajuyo and Guevarra are
in pari delicto or in equal fault. The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan between
Pajuyo and Guevarra created a legal tie akin to that of a landlord and tenant relationship. The Court of
Appeals ruled that the Kasunduan is not a lease contract but a commodatum because the agreement is
not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court
held that Guevarra has a better right over the property under Proclamation No. 137. President Corazon
C. Aquino (President Aquino) issued Proclamation No. 137 on 7 September 1987. At that time, Guevarra
was in physical possession of the property. Under Article VI of the Code of Policies Beneficiary Selection
and Disposition of Homelots and Structures in the National Housing Project (the Code), the actual
occupant or caretaker of the lot shall have first priority as beneficiary of the project. The Court of Appeals
concluded that Guevarra is first in the hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate court debunked Pajuyos claim that
Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for extension filed before the Supreme
Court was stamped 13 December 1996 at 4:09 PM by the Supreme Courts Receiving Clerk. The Court of
Appeals concluded that the motion for extension bore a date, contrary to Pajuyos claim that the motion
for extension was undated. Guevarra filed the motion for extension on time on 13 December 1996 since
he filed the motion one day before the expiration of the reglementary period on 14 December 1996. Thus,
the motion for extension properly complied with the condition imposed by the Court of Appeals in its 28
January 1997 Resolution. The Court of Appeals explained that the thirty-day extension to file the petition
for review was deemed granted because of such compliance.
The Court of Appeals rejected Pajuyos argument that the appellate court should have dismissed the
petition for review because it was Guevarras counsel and not Guevarra who signed the certification
against forum-shopping. The Court of Appeals pointed out that Pajuyo did not raise this issue in his
Comment. The Court of Appeals held that Pajuyo could not now seek the dismissal of the case after he
had extensively argued on the merits of the case. This technicality, the appellate court opined, was
clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND DISCRETION
TANTAMOUNT TO LACK OF JURISDICTION:
 1) in GRANTING, instead of denying, Private Respondents Motion for an Extension
of thirty days to file petition for review at the time when there was no more
period to extend as the decision of the Regional Trial Court had already become
final and executory.
2) in giving due course, instead of dismissing, private respondents Petition for
Review even though the certification against forum-shopping was signed only
by counsel instead of by petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact
a commodatum, instead of a Contract of Lease as found by the Metropolitan
Trial Court and in holding that the ejectment case filed against defendant-
appellant is without legal and factual basis.
4) in reversing and setting aside the Decision of the Regional Trial Court in Civil
Case No. Q-96-26943 and in holding that the parties are in pari delicto being
both squatters, therefore, illegal occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code of Policies of
the National Government Center Housing Project instead of deciding the same
under the Kasunduan voluntarily executed by the parties, the terms and
conditions of which are the laws between themselves.[13]
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive
issues Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarras petition for
review because the RTC decision had already become final and executory when the appellate court acted
on Guevarras motion for extension to file the petition. Pajuyo points out that Guevarra had only one day
before the expiry of his period to appeal the RTC decision. Instead of filing the petition for review with the
Court of Appeals, Guevarra filed with this Court an undated motion for extension of 30 days to file a
petition for review. This Court merely referred the motion to the Court of Appeals. Pajuyo believes that
the filing of the motion for extension with this Court did not toll the running of the period to perfect the
appeal. Hence, when the Court of Appeals received the motion, the period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable to
the Court of Appeals by petition for review in cases involving questions of fact or mixed questions of fact
and law.[14] Decisions of the regional trial courts involving pure questions of law are appealable directly to
this Court by petition for review.[15] These modes of appeal are now embodied in Section 2, Rule 41 of the
1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra thus
filed his motion for extension to file petition for review before this Court on 14 December 1996. On 3
January 1997, Guevarra then filed his petition for review with this Court. A perusal of Guevarras petition
for review gives the impression that the issues he raised were pure questions of law. There is a question
of law when the doubt or difference is on what the law is on a certain state of facts. [16] There is a question
of fact when the doubt or difference is on the truth or falsity of the facts alleged.[17]
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarras
petition for review raised these questions: (1) Do ejectment cases pertain only to possession of a
structure, and not the lot on which the structure stands? (2) Does a suit by a squatter against a fellow
squatter constitute a valid case for ejectment? (3) Should a Presidential Proclamation governing the lot on
which a squatters structure stands be considered in an ejectment suit filed by the owner of the
structure?
These questions call for the evaluation of the rights of the parties under the law on ejectment and
the Presidential Proclamation. At first glance, the questions Guevarra raised appeared purely
legal. However, some factual questions still have to be resolved because they have a bearing on the legal
questions raised in the petition for review. These factual matters refer to the metes and bounds of the
disputed property and the application of Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for
review. In Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court,[18] we
declared that the Court of Appeals could grant extension of time in appeals by petition for review.
In Liboro v. Court of Appeals,[19] we clarified that the prohibition against granting an extension of time
applies only in a case where ordinary appeal is perfected by a mere notice of appeal. The prohibition does
not apply in a petition for review where the pleading needs verification. A petition for review, unlike an
ordinary appeal, requires preparation and research to present a persuasive position.[20] The drafting of
the petition for review entails more time and effort than filing a notice of appeal. [21] Hence, the Court of
Appeals may allow an extension of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,[22] we held
that Liboros clarification of Lacsamana is consistent with the Revised Internal Rules of the Court of
Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for filing petitions for
review with the Court of Appeals. The extension, however, should be limited to only fifteen days save in
exceptionally meritorious cases where the Court of Appeals may grant a longer period.
A judgment becomes final and executory by operation of law. Finality of judgment becomes a fact on
the lapse of the reglementary period to appeal if no appeal is perfected.[23] The RTC decision could not
have gained finality because the Court of Appeals granted the 30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarras motion
for extension. The Court of Appeals gave due course to the motion for extension because it complied with
the condition set by the appellate court in its resolution dated 28 January 1997. The resolution stated
that the Court of Appeals would only give due course to the motion for extension if filed on time. The
motion for extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for extension
are (1) the date of receipt of the judgment or final order or resolution subject of the petition, and (2) the
date of filing of the motion for extension.[24] It is the date of the filing of the motion or pleading, and not
the date of execution, that determines the timeliness of the filing of that motion or pleading. Thus, even if
the motion for extension bears no date, the date of filing stamped on it is the reckoning point for
determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed his
motion for extension before this Court on 13 December 1996, the date stamped by this Courts Receiving
Clerk on the motion for extension. Clearly, Guevarra filed the motion for extension exactly one day before
the lapse of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarras appeal on technical grounds,
Pajuyo did not ask the appellate court to deny the motion for extension and dismiss the petition for
review at the earliest opportunity. Instead, Pajuyo vigorously discussed the merits of the case. It was only
when the Court of Appeals ruled in Guevarras favor that Pajuyo raised the procedural issues against
Guevarras petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision on
the merits, is estopped from attacking the jurisdiction of the court.[25] Estoppel sets in not because the
judgment of the court is a valid and conclusive adjudication, but because the practice of attacking the
courts jurisdiction after voluntarily submitting to it is against public policy.[26]
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarras failure to sign
the certification against forum shopping. Instead, Pajuyo harped on Guevarras counsel signing the
verification, claiming that the counsels verification is insufficient since it is based only on mere
information.
A partys failure to sign the certification against forum shopping is different from the partys failure
to sign personally the verification. The certificate of non-forum shopping must be signed by the party,
and not by counsel.[27] The certification of counsel renders the petition defective.[28]
On the other hand, the requirement on verification of a pleading is a formal and not a jurisdictional
requisite.[29] It is intended simply to secure an assurance that what are alleged in the pleading are true
and correct and not the product of the imagination or a matter of speculation, and that the pleading is
filed in good faith.[30] The party need not sign the verification. A partys representative, lawyer or any
person who personally knows the truth of the facts alleged in the pleading may sign the verification.[31]
We agree with the Court of Appeals that the issue on the certificate against forum shopping was
merely an afterthought. Pajuyo did not call the Court of Appeals attention to this defect at the early stage
of the proceedings. Pajuyo raised this procedural issue too late in the proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to Resolve
the Issue of Possession
Settled is the rule that the defendants claim of ownership of the disputed property will not divest
the inferior court of its jurisdiction over the ejectment case.[32] Even if the pleadings raise the issue of
ownership, the court may pass on such issue to determine only the question of possession, especially if
the ownership is inseparably linked with the possession.[33] The adjudication on the issue of ownership is
only provisional and will not bar an action between the same parties involving title to the land. [34] This
doctrine is a necessary consequence of the nature of the two summary actions of ejectment, forcible entry
and unlawful detainer, where the only issue for adjudication is the physical or material possession over
the real property.[35]
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners of
the contested property and that they are mere squatters. Will the defense that the parties to the
ejectment case are not the owners of the disputed lot allow the courts to renounce their jurisdiction over
the case? The Court of Appeals believed so and held that it would just leave the parties where they are
since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for recovery of
possession. The parties cannot present evidence to prove ownership or right to legal possession except to
prove the nature of the possession when necessary to resolve the issue of physical possession.[36] The
same is true when the defendant asserts the absence of title over the property. The absence of title over
the contested lot is not a ground for the courts to withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is entitled to the
physical possession of the premises, that is, to the possession de facto and not to the possession de
jure.[37] It does not even matter if a partys title to the property is questionable,[38] or when both parties
intruded into public land and their applications to own the land have yet to be approved by the proper
government agency.[39] Regardless of the actual condition of the title to the property, the party in
peaceable quiet possession shall not be thrown out by a strong hand, violence or terror. [40] Neither is the
unlawful withholding of property allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against the owner
himself.[41] Whatever may be the character of his possession, if he has in his favor prior possession in
time, he has the security that entitles him to remain on the property until a person with a better right
lawfully ejects him.[42] To repeat, the only issue that the court has to settle in an ejectment suit is the
right to physical possession.
In Pitargue v. Sorilla,[43] the government owned the land in dispute. The government did not
authorize either the plaintiff or the defendant in the case of forcible entry case to occupy the land. The
plaintiff had prior possession and had already introduced improvements on the public land. The plaintiff
had a pending application for the land with the Bureau of Lands when the defendant ousted him from
possession. The plaintiff filed the action of forcible entry against the defendant. The government was not
a party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of possession because
while the application of the plaintiff was still pending, title remained with the government, and the
Bureau of Public Lands had jurisdiction over the case. We disagreed with the defendant. We ruled that
courts have jurisdiction to entertain ejectment suits even before the resolution of the application. The
plaintiff, by priority of his application and of his entry, acquired prior physical possession over the public
land applied for as against other private claimants. That prior physical possession enjoys legal protection
against other private claimants because only a court can take away such physical possession in an
ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue[44] as squatters, strictly
speaking, their entry into the disputed land was illegal. Both the plaintiff and defendant entered the
public land without the owners permission. Title to the land remained with the government because it
had not awarded to anyone ownership of the contested public land. Both the plaintiff and the defendant
were in effect squatting on government property. Yet, we upheld the courts jurisdiction to resolve the
issue of possession even if the plaintiff and the defendant in the ejectment case did not have any title
over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession because of
the public need to preserve the basic policy behind the summary actions of forcible entry and unlawful
detainer.The underlying philosophy behind ejectment suits is to prevent breach of the peace and criminal
disorder and to compel the party out of possession to respect and resort to the law alone to obtain what
he claims is his.[45] The party deprived of possession must not take the law into his own
hands.[46] Ejectment proceedings are summary in nature so the authorities can settle speedily actions to
recover possession because of the overriding need to quell social disturbances.[47]
has another ultimate purpose, i.e., the protection of actual possessors and occupants with a
view to the prevention of breaches of the peace. The power to dispose and alienate could not
have been intended to include the power to prevent or settle disorders or breaches of the peace
among rival settlers or claimants prior to the final award. As to this, therefore, the corresponding
branches of the Government must continue to exercise power and jurisdiction within the limits of their
respective functions. The vesting of the Lands Department with authority to administer, dispose,
and alienate public lands, therefore, must not be understood as depriving the other branches of
the Government of the exercise of the respective functions or powers thereon, such as the
authority to stop disorders and quell breaches of the peace by the police, the authority on the
part of the courts to take jurisdiction over possessory actions arising therefrom not involving,
directly or indirectly, alienation and disposition.

We further explained in Pitargue the greater interest that is at stake in actions for recovery of Our attention has been called to a principle enunciated in American courts to the effect that courts have
possession. We made the following pronouncements in Pitargue: no jurisdiction to determine the rights of claimants to public lands, and that until the disposition of the
land has passed from the control of the Federal Government, the courts will not interfere with the
administration of matters concerning the same. (50 C. J. 1093-1094.) We have no quarrel with this
The question that is before this Court is: Are courts without jurisdiction to take cognizance of possessory
principle. The determination of the respective rights of rival claimants to public lands is different from the
actions involving these public lands before final award is made by the Lands Department, and before title
determination of who has the actual physical possession or occupation with a view to protecting the same
is given any of the conflicting claimants? It is one of utmost importance, as there are public lands
and preventing disorder and breaches of the peace. A judgment of the court ordering restitution of the
everywhere and there are thousands of settlers, especially in newly opened regions. It also involves a
possession of a parcel of land to the actual occupant, who has been deprived thereof by another through
matter of policy, as it requires the determination of the respective authorities and functions of two
the use of force or in any other illegal manner, can never be prejudicial interference with the disposition
coordinate branches of the Government in connection with public land conflicts.
or alienation of public lands. On the other hand, if courts were deprived of jurisdiction of cases
involving conflicts of possession, that threat of judicial action against breaches of the peace
Our problem is made simple by the fact that under the Civil Code, either in the old, which was in force in committed on public lands would be eliminated, and a state of lawlessness would probably be
this country before the American occupation, or in the new, we have a possessory action, the aim and produced between applicants, occupants or squatters, where force or might, not right or justice,
purpose of which is the recovery of the physical possession of real property, irrespective of the question would rule.
as to who has the title thereto. Under the Spanish Civil Code we had the accion interdictal, a summary
proceeding which could be brought within one year from dispossession (Roman Catholic Bishop of Cebu
It must be borne in mind that the action that would be used to solve conflicts of possession between
vs. Mangaron, 6 Phil. 286, 291); and as early as October 1, 1901, upon the enactment of the Code of Civil
rivals or conflicting applicants or claimants would be no other than that of forcible entry. This action,
Procedure (Act No. 190 of the Philippine Commission) we implanted the common law action of forcible
both in England and the United States and in our jurisdiction, is a summary and expeditious remedy
entry (section 80 of Act No. 190), the object of which has been stated by this Court to be to prevent
whereby one in peaceful and quiet possession may recover the possession of which he has been deprived
breaches of the peace and criminal disorder which would ensue from the withdrawal of the
by a stronger hand, by violence or terror; its ultimate object being to prevent breach of the peace and
remedy, and the reasonable hope such withdrawal would create that some advantage must
criminal disorder. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy
accrue to those persons who, believing themselves entitled to the possession of property, resort
is mere possession as a fact, of physical possession, not a legal possession. (Mediran vs. Villanueva, 37
to force to gain possession rather than to some appropriate action in the court to assert their
Phil. 752.) The title or right to possession is never in issue in an action of forcible entry; as a matter of
claims. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So before the enactment of the
fact, evidence thereof is expressly banned, except to prove the nature of the possession. (Second 4, Rule
first Public Land Act (Act No. 926) the action of forcible entry was already available in the courts of the
72, Rules of Court.) With this nature of the action in mind, by no stretch of the imagination can
country. So the question to be resolved is, Did the Legislature intend, when it vested the power and
conclusion be arrived at that the use of the remedy in the courts of justice would constitute an
authority to alienate and dispose of the public lands in the Lands Department, to exclude the courts from
interference with the alienation, disposition, and control of public lands. To limit ourselves to the case at
entertaining the possessory action of forcible entry between rival claimants or occupants of any land
bar can it be pretended at all that its result would in any way interfere with the manner of the alienation
before award thereof to any of the parties? Did Congress intend that the lands applied for, or all public
or disposition of the land contested? On the contrary, it would facilitate adjudication, for the question of
lands for that matter, be removed from the jurisdiction of the judicial Branch of the Government, so that
priority of possession having been decided in a final manner by the courts, said question need no longer
any troubles arising therefrom, or any breaches of the peace or disorders caused by rival claimants,
waste the time of the land officers making the adjudication or award. (Emphasis ours)
could be inquired into only by the Lands Department to the exclusion of the courts? The answer to this
question seems to us evident. The Lands Department does not have the means to police public lands;
neither does it have the means to prevent disorders arising therefrom, or contain breaches of the peace
among settlers; or to pass promptly upon conflicts of possession. Then its power is clearly limited to
The Principle of Pari Delicto is not Applicable to Ejectment Cases
disposition and alienation, and while it may decide conflicts of possession in order to make
proper award, the settlement of conflicts of possession which is recognized in the court herein
 The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code[48] embody the principle of pari delicto. We explained the
principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio and in pari delicto potior
est conditio defedentis. The law will not aid either party to an illegal agreement. It leaves the parties
where it finds them.[49]
The application of the pari delicto principle is not absolute, as there are exceptions to its
application. One of these exceptions is where the application of the pari delicto rule would violate well-
established public policy.[50]
In Drilon v. Gaurana,[51] we reiterated the basic policy behind the summary actions of forcible
entry and unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that, regardless of the
actual condition of the title to the property, the party in peaceable quiet possession shall not be turned
out by strong hand, violence or terror. In affording this remedy of restitution the object of the statute is to
prevent breaches of the peace and criminal disorder which would ensue from the withdrawal of the
remedy, and the reasonable hope such withdrawal would create that some advantage must accrue to
those persons who, believing themselves entitled to the possession of property, resort to force to gain
possession rather than to some appropriate action in the courts to assert their claims. This is the
philosophy at the foundation of all these actions of forcible entry and detainer which are designed to
compel the party out of possession to respect and resort to the law alone to obtain what he claims is
his.[52]
Clearly, the application of the principle of pari delicto to a case of ejectment between squatters is
fraught with danger. To shut out relief to squatters on the ground of pari delicto would openly invite
mayhem and lawlessness. A squatter would oust another squatter from possession of the lot that the
latter had illegally occupied, emboldened by the knowledge that the courts would leave them where they
are. Nothing would then stand in the way of the ousted squatter from re-claiming his prior possession at
all cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for recovery
of possession seek to prevent.[53] Even the owner who has title over the disputed property cannot take the
law into his own hands to regain possession of his property. The owner must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are
squatters. The determination of priority and superiority of possession is a serious and urgent matter that
cannot be left to the squatters to decide. To do so would make squatters receive better treatment under
the law. The law restrains property owners from taking the law into their own hands. However, the
principle of pari delictoas applied by the Court of Appeals would give squatters free rein to dispossess
fellow squatters or violently retake possession of properties usurped from them. Courts should not leave
squatters to their own devices in cases involving recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment. The Court of
Appeals refused to rule on the issue of physical possession. Nevertheless, the appellate court held that
the pivotal issue in this case is who between Pajuyo and Guevarra has the priority right as beneficiary of
the contested land under Proclamation No. 137.[54] According to the Court of Appeals, Guevarra enjoys
preferential right under Proclamation No. 137 because Article VI of the Code declares that the actual
occupant or caretaker is the one qualified to apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a relocation site
under Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the land that it
declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation No. 137.
Guevarra had the burden to prove that the disputed lot is within the coverage of Proclamation No.
137. He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarras unsubstantiated claim
that he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the survey the project
administrator conducted, he and not Pajuyo appeared as the actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo
allowed Guevarra to occupy the disputed property in 1985. President Aquino signed Proclamation No.
137 into law on 11 March 1986. Pajuyo made his earliest demand for Guevarra to vacate the property in
September 1994.
During the time that Guevarra temporarily held the property up to the time that Proclamation No.
137 allegedly segregated the disputed lot, Guevarra never applied as beneficiary of Proclamation No. 137.
Even when Guevarra already knew that Pajuyo was reclaiming possession of the property, Guevarra did
not take any step to comply with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and
Guevarra has a pending application over the lot, courts should still assume jurisdiction and resolve the
issue of possession. However, the jurisdiction of the courts would be limited to the issue of physical
possession only.
In Pitargue,[55] we ruled that courts have jurisdiction over possessory actions involving public land
to determine the issue of physical possession. The determination of the respective rights of rival
claimants to public land is, however, distinct from the determination of who has the actual physical
possession or who has a better right of physical possession.[56] The administrative disposition and
alienation of public lands should be threshed out in the proper government agency.[57]
The Court of Appeals determination of Pajuyo and Guevarras rights under Proclamation No. 137
was premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law. Courts
should not preempt the decision of the administrative agency mandated by law to determine the
qualifications of applicants for the acquisition of public lands. Instead, courts should expeditiously
resolve the issue of physical possession in ejectment cases to prevent disorder and breaches of peace. [58]
 Pajuyo is Entitled to Physical Possession of the Disputed Property maintain the property in good condition. The imposition of this obligation makes the Kasunduan a
contract different from a commodatum. The effects of the Kasunduan are also different from that of
a commodatum. Case law on ejectment has treated relationship based on tolerance as one that is akin to
Guevarra does not dispute Pajuyos prior possession of the lot and ownership of the house built on a landlord-tenant relationship where the withdrawal of permission would result in the termination of the
it. Guevarra expressly admitted the existence and due execution of lease.[69] The tenants withholding of the property would then be unlawful. This is settled jurisprudence.
the Kasunduan. The Kasunduan reads:
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum,
Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo, the
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay bailor. The obligation to deliver or to return the thing received attaches to contracts for safekeeping, or
pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing bahay at lote ng walang contracts of commission, administration and commodatum.[70] These contracts certainly involve the
bayad. Kaugnay nito, kailangang panatilihin nila ang kalinisan at kaayusan ng bahay at lote. obligation to deliver or return the thing received.[71]

Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng walang reklamo. squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land they illegally
occupy. Guevarra insists that the contract is void.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of rent, but
Guevarra should know that there must be honor even between squatters. Guevarra freely entered
Guevarra was under obligation to maintain the premises in good condition. Guevarra promised to vacate
into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from
the premises on Pajuyos demand but Guevarra broke his promise and refused to heed Pajuyos demand
it. The Kasunduan binds Guevarra.
to vacate.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a
These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding by a
right to physical possession of the contested property. The Kasunduan is the undeniable evidence of
person from another of the possession of real property to which the latter is entitled after the expiration
Guevarras recognition of Pajuyos better right of physical possession. Guevarra is clearly a possessor in
or termination of the formers right to hold possession under a contract, express or implied.[59]
bad faith. The absence of a contract would not yield a different result, as there would still be an implied
Where the plaintiff allows the defendant to use his property by tolerance without any contract, the promise to vacate.
defendant is necessarily bound by an implied promise that he will vacate on demand, failing which, an
Guevarra contends that there is a pernicious evil that is sought to be avoided, and that is allowing
action for unlawful detainer will lie.[60] The defendants refusal to comply with the demand makes his
an absentee squatter who (sic) makes (sic) a profit out of his illegal act.[72] Guevarra bases his argument
continued possession of the property unlawful.[61] The status of the defendant in such a case is similar to
on the preferential right given to the actual occupant or caretaker under Proclamation No. 137 on
that of a lessee or tenant whose term of lease has expired but whose occupancy continues by tolerance of
socialized housing.
the owner.[62]
We are not convinced.
This principle should apply with greater force in cases where a contract embodies the permission or
tolerance to use the property. The Kasunduan expressly articulated Pajuyos forbearance. Pajuyo did not Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the property
require Guevarra to pay any rent but only to maintain the house and lot in good condition. Guevarra without paying any rent. There is also no proof that Pajuyo is a professional squatter who rents out
expressly vowed in the Kasunduan that he would vacate the property on demand. Guevarras refusal to usurped properties to other squatters. Moreover, it is for the proper government agency to decide who
comply with Pajuyos demand to vacate made Guevarras continued possession of the property unlawful. between Pajuyo and Guevarra qualifies for socialized housing. The only issue that we are addressing is
physical possession.
We do not subscribe to the Court of Appeals theory that the Kasunduan is one of commodatum.
Prior possession is not always a condition sine qua non in ejectment.[73] This is one of the
In a contract of commodatum, one of the parties delivers to another something not consumable so
distinctions between forcible entry and unlawful detainer.[74] In forcible entry, the plaintiff is deprived of
that the latter may use the same for a certain time and return it.[63] An essential feature
physical possession of his land or building by means of force, intimidation, threat, strategy or
of commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing
stealth. Thus, he must allege and prove prior possession.[75] But in unlawful detainer, the defendant
belonging to another is for a certain period.[64] Thus, the bailor cannot demand the return of the thing
unlawfully withholds possession after the expiration or termination of his right to possess under any
loaned until after expiration of the period stipulated, or after accomplishment of the use for which
contract, express or implied. In such a case, prior physical possession is not required.[76]
the commodatum is constituted.[65] If the bailor should have urgent need of the thing, he may demand its
return for temporary use.[66] If the use of the thing is merely tolerated by the bailor, he can demand the Pajuyos withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarras transient
return of the thing at will, in which case the contractual relation is called a precarium.[67] Under the Civil right to possess the property ended as well. Moreover, it was Pajuyo who was in actual possession of the
Code, precarium is a kind of commodatum.[68] property because Guevarra had to seek Pajuyos permission to temporarily hold the property and
Guevarra had to follow the conditions set by Pajuyo in the Kasunduan. Control over the property still
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
rested with Pajuyo and this is evidence of actual possession.
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to
 Pajuyos absence did not affect his actual possession of the disputed property. Possession in the
eyes of the law does not mean that a man has to have his feet on every square meter of the ground before
he is deemed in possession.[77] One may acquire possession not only by physical occupation, but also by
the fact that a thing is subject to the action of ones will.[78] Actual or physical occupation is not always
necessary.[79]
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that squatters and intruders who
clandestinely enter into titled government property cannot, by such act, acquire any legal right to said
property.[80] We made this declaration because the person who had title or who had the right to legal
possession over the disputed property was a party in the ejectment suit and that party instituted the case
against squatters or usurpers.
the award of attorneys fees is the exception rather than the rule.[84] Attorneys fees are not awarded every
time a party prevails in a suit because of the policy that no premium should be placed on the right to
litigate.[85]We therefore delete the attorneys fees awarded to Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra did
not dispute this factual finding of the two courts. We find the amount reasonable compensation to
Pajuyo.The P300 monthly rental is counted from the last demand to vacate, which was on 16 February
1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated 14
December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The Decision dated 11
November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil Case No. Q-96-26943,
affirming the Decision dated 15 December 1995 of the Metropolitan Trial Court of Quezon City, Branch
31 in Civil Case No. 12432, is REINSTATED with MODIFICATION. The award of attorneys fees is deleted.
No costs.
SO ORDERED.

In this case, the owner of the land, which is the government, is not a party to the ejectment Davide, Jr., C.J., (Chairman), Panganiban, Ynares-Santiago, and Azcuna, JJ., concur.
case. This case is between squatters. Had the government participated in this case, the courts could have
evicted the contending squatters, Pajuyo and Guevarra.

Since the party that has title or a better right over the property is not impleaded in this case, we
cannot evict on our own the parties. Such a ruling would discourage squatters from seeking the aid of
the courts in settling the issue of physical possession. Stripping both the plaintiff and the defendant of
possession just because they are squatters would have the same dangerous implications as the
application of the principle of pari delicto. Squatters would then rather settle the issue of physical
possession among themselves than seek relief from the courts if the plaintiff and defendant in the
ejectment case would both stand to lose possession of the disputed property. This would subvert the
policy underlying actions for recovery of possession.

Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on the
property until a person who has title or a better right lawfully ejects him. Guevarra is certainly not that
person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from introducing
evidence and presenting arguments before the proper administrative agency to establish any right to
which they may be entitled under the law.[81]

In no way should our ruling in this case be interpreted to condone squatting. The ruling on the
issue of physical possession does not affect title to the property nor constitute a binding and conclusive
adjudication on the merits on the issue of ownership.[82] The owner can still go to court to recover lawfully
the property from the person who holds the property without legal title. Our ruling here does not
diminish the power of government agencies, including local governments, to condemn, abate, remove or
demolish illegal or unauthorized structures in accordance with existing laws.

Attorneys Fees and Rentals

The MTC and RTC failed to justify the award of P3,000 attorneys fees to Pajuyo. Attorneys fees as
part of damages are awarded only in the instances enumerated in Article 2208 of the Civil Code.[83] Thus,