G.R. No. L-25071 July 29, 1972 reconsideration following People v.

reconsideration following People v. Que Po Lay,9 that a Central Bank circular may have the
force and effect of law, especially when issued in pursuance of its quasi-legislative power. That
of itself, however, is no justification to conclude that it has thereby assumed an obligation. To be
GEORGE W. BATCHELDER, doing business under the name and style of Batchelder
impressed with such a character, however, it must be categorically demonstrated that the very
Equipment, plaintiff-appellant,
administrative agency, which is the source of such regulation, would place such a burden on
vs.
itself.
THE CENTRAL BANK OF THE PHILIPPINES, defendant-appellant.

RESOLUTION
FERNANDO, J.:p
An ably-written motion for the reconsideration of our decision of March 29, 1972 was submitted
by plaintiff-appellant through its counsel, Delegate Mauro Baradi. It is based primarily on this
contention: "Said decision failed to consider that if there was no contract obligating the
defendant to resell US$154,094.56 to plaintiff at the exchange rate of P2.00375 to US$1.00, the
judgment of the lower court can and should nevertheless be sustained on the basis of there
being such an obligation araising from law."1 It is clear therefore that there is a retreat from the
untenable position taken by it, both in the lower court and here on appeal, that there was a
contract between it and defendant Central Bank of the Philippines that gave rise to such a duty
on the part of the latter. This time, it would predicate its alleged right to the exchange rate of
P2.00375 to US$1.00 to an obligation of defendant Central Bank arising from law. This point,
while strongly pressed in a pleading that is not without its plausibility, loses sight of the ratio
decidendi of our decision of March 29, 1972 that the Central Bank acted not as a juridical person
with power to enter into contracts but as a regulatory agency entrusted with the delicate function
of managing the currency. It is far-fetched to assume that such an administrative body by the
issuance of the circulars in question did transform itself into just another party to a juridical
relation, called upon to satisfy a credit. As will be more fully explained, the motion for
reconsideration cannot suffice to call for a reversal of our judgment. Our decision of March 29,
1972 therefore stands.
Here certainly, it cannot be so plausibly maintained. As was noted in the decision sought to be
reconsidered after recital of the statutory objectives of defendant Central Bank to maintain
monetary stability as well as to preserve international value of the peso: "It would be then to set
at naught fundamental concepts in administrative law that accord due recognition to the vesting
of quasi-legislative and quasi-judicial power in administrative law for the purpose of attaining
statutory objectives, especially now that government is saddled with greater responsibilities due
to complex situation of the modern era if the lower court is to be upheld. For if such be the case
then, by the judiciary failing to exercise due care in its oversight of an administrative agency,
substituting its own discretion for what usually is the more expert appraisal of such an
instrumentality, there may even be a frustration if not a nullification of the objective of the
law." 10 The assertion that there is such a self-imposed obligation on the part of defendant
Central Bank is thus lacking in persuasiveness.11
With the above disposition of the principal contention, the two other points of the motion for
reconsideration that there was in fact such compliance with the rules and regulations of
defendant Central Bank and that he has acquired a vested right, likewise fall to the ground. It is
not to be lost sight of that all the while defendant Central Bank precisely had denied that there
was such a compliance, indicating in order what respect such deficiency was incurred. No
reliance could be placed on the lower court decision reversed by us based on the assumption
that there was a contract between plaintiff and defendant. Commendably, plaintiff-appellant in
this motion for reconsideration appears to be of the same mind. Necessarily any claim that a
vested right has accrued is likewise untenable. It cannot be said then that our decision of March
29, 1972 should be overturned.

Plaintiff-appellant would sustain its principal contention thus: " 'Laws', as used in the Civil Code, WHEREFORE, the motion for reconsideration is denied.
include Administrative orders and regulations 'not contrary to the laws or the Constitution.' Thus,
in his Outlines on Civil Law, a distinguished member of this Court, Hon. Jose B. L. Reyes (with
Judge Ricardo Puno as co-author), in outlining the 'sources from which the rule of law applicable
to a given controversy is to be found', states: '... 'B. Statute (laws) applicable to the point in
controversy. The word includes enactments by the legislative authority, original or delegated
(executive or administrative orders or regulations). But the latter shall be valid only when they
are not contrary to the laws or the Constitution.' In People v. Que Po Lay, this Honorable Court
held: '... It is true that Circular No. 20 of the Central Bank is not a statute or law but being issued
for the implementation of the law authorizing its issuance, it has the force and effect of
law according to settled jurisprudence. ( See U.S. v. Tupasi Molina, 29 Phil. 119 and authorities
cited therein). [Emphasis supplied].' The various resolutions and memoranda issued by the
defendant, having 'the force and effect of law,' if not themselves laws, therefore can be the
sources of obligations."2

It is, of course, true that obligations arise from 1) law; 2) contracts; 3) quasi-contracts; 4) acts or
omissions punished by law and 5) quasi-delicts.3 One of the sources an obligation then is a law.
A legal norm could so require that a particular party be chargeable with a prestation or
undertaking to give or to deliver or to do or to render some service. It is an indispensable
requisite though that such a provision, thus in fact exists. There must be a showing to that effect.
As early as 1909 in Pelayo v. Lauron,4 Court through Justice Torres, categorically declared:
"Obligation arising from law are not presumed."5 For in the language of Justice Street in Leung
Ben v. O'Brien,6 a 1918 decision, such an obligation is "a creation of the positive law." 7 They are
ordinarily traceable to code or statute.8 It is true though, as noted in the motion for
 G.R. No. L-18841 January 27, 1969
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, defendant-appellant.
REYES, J.B.L., J.:
Direct appeals, upon a joint record on appeal, by both the plaintiff and the defendant from the
dismissal, after hearing, by the Court of First Instance of Manila, in its Civil Case No. 35805, of
their respective complaint and counterclaims, but making permanent a preliminary mandatory
injunction theretofore issued against the defendant on the interconnection of telephone facilities
owned and operated by said parties.
The plaintiff, Republic of the Philippines, is a political entity exercising governmental powers
through its branches and instrumentalities, one of which is the Bureau of Telecommunications.
That office was created on 1 July 1947, under Executive Order No. 94, with the following powers
and duties, in addition to certain powers and duties formerly vested in the Director of
Posts: 1awphil.ñêt
SEC. 79. The Bureau of Telecommunications shall exercise the following powers and duties:
(a) To operate and maintain existing wire-telegraph and radio-telegraph offices,
stations, and facilities, and those to be established to restore the pre-war
telecommunication service under the Bureau of Posts, as well as such additional
offices or stations as may hereafter be established to provide telecommunication
service in places requiring such service;
(b) To investigate, consolidate, negotiate for, operate and maintain wire-telephone or
radio telephone communication service throughout the Philippines by utilizing such
existing facilities in cities, towns, and provinces as may be found feasible and under
such terms and conditions or arrangements with the present owners or operators
thereof as may be agreed upon to the satisfaction of all concerned;
(c) To prescribe, subject to approval by the Department Head, equitable rates of
charges for messages handled by the system and/or for time calls and other services
that may be rendered by said system;
(d) To establish and maintain coastal stations to serve ships at sea or aircrafts and,
when public interest so requires, to engage in the international telecommunication
service in agreement with other countries desiring to establish such service with the
Republic of the Philippines; and
(e) To abide by all existing rules and regulations prescribed by the International
Telecommunication Convention relative to the accounting, disposition and exchange
of messages handled in the international service, and those that may hereafter be
promulgated by said convention and adhered to by the Government of the Republic of
the Philippines. 1
The defendant, Philippine Long Distance Telephone Company (PLDT for short), is a public
service corporation holding a legislative franchise, Act 3426, as amended by Commonwealth Act
407, to install, operate and maintain a telephone system throughout the Philippines and to carry
on the business of electrical transmission of messages within the Philippines and between the
Philippines and the telephone systems of other countries. 2 The RCA Communications, Inc.,
(which is not a party to the present case but has contractual relations with the parties) is an
American corporation authorized to transact business in the Philippines and is the grantee, by
assignment, of a legislative franchise to operate a domestic station for the reception and
transmission of long distance wireless messages (Act 2178) and to operate broadcasting and
radio-telephone and radio-telegraphic communications services (Act 3180). 3
Sometime in 1933, the defendant, PLDT, and the RCA Communications, Inc., entered into an
agreement whereby telephone messages, coming from the United States and received by
RCA's domestic station, could automatically be transferred to the lines of PLDT; and vice-versa,
for calls collected by the PLDT for transmission from the Philippines to the United States. The
contracting parties agreed to divide the tolls, as follows: 25% to PLDT and 75% to RCA. The
sharing was amended in 1941 to 30% for PLDT and 70% for RCA, and again amended in 1947
to a 50-50 basis. The arrangement was later extended to radio-telephone messages to and from
European and Asiatic countries. Their contract contained a stipulation that either party could
terminate it on a 24-month notice to the other. 4 On 2 February 1956, PLDT gave notice to RCA
to terminate their contract on 2 February 1958. 5
Soon after its creation in 1947, the Bureau of Telecommunications set up its own Government
Telephone System by utilizing its own appropriation and equipment and by renting trunk lines of
the PLDT to enable government offices to call private parties. 6 Its application for the use of these
trunk lines was in the usual form of applications for telephone service, containing a statement,
above the signature of the applicant, that the latter will abide by the rules and regulations of the
PLDT which are on file with the Public Service Commission. 7 One of the many rules prohibits the
public use of the service furnished the telephone subscriber for his private use. 8 The Bureau has
extended its services to the general public since 1948, 9 using the same trunk lines owned by,
and rented from, the PLDT, and prescribing its (the Bureau's) own schedule of rates. 10 Through
these trunk lines, a Government Telephone System (GTS) subscriber could make a call to a
PLDT subscriber in the same way that the latter could make a call to the former.
On 5 March 1958, the plaintiff, through the Director of Telecommunications, entered into an
agreement with RCA Communications, Inc., for a joint overseas telephone service whereby the
Bureau would convey radio-telephone overseas calls received by RCA's station to and from
local residents. 11 Actually, they inaugurated this joint operation on 2 February 1958, under a
"provisional" agreement. 12
On 7 April 1958, the defendant Philippine Long Distance Telephone Company, complained to
the Bureau of Telecommunications that said bureau was violating the conditions under which
their Private Branch Exchange (PBX) is inter-connected with the PLDT's facilities, referring to
the rented trunk lines, for the Bureau had used the trunk lines not only for the use of government
offices but even to serve private persons or the general public, in competition with the business
of the PLDT; and gave notice that if said violations were not stopped by midnight of 12 April
1958, the PLDT would sever the telephone connections. 13 When the PLDT received no reply, it
disconnected the trunk lines being rented by the Bureau at midnight on 12 April 1958. 14 The
result was the isolation of the Philippines, on telephone services, from the rest of the world,
except the United States. 15
At that time, the Bureau was maintaining 5,000 telephones and had 5,000 pending applications
for telephone connection. 16 The PLDT was also maintaining 60,000 telephones and had also
20,000 pending applications. 17 Through the years, neither of them has been able to fill up the
demand for telephone service.
 The Bureau of Telecommunications had proposed to the PLDT on 8 January 1958 that both
enter into an interconnecting agreement, with the government paying (on a call basis) for all calls
passing through the interconnecting facilities from the Government Telephone System to the
PLDT. 18 The PLDT replied that it was willing to enter into an agreement on overseas telephone
service to Europe and Asian countries provided that the Bureau would submit to the jurisdiction
and regulations of the Public Service Commission and in consideration of 37 1/2% of the gross
revenues. 19 In its memorandum in lieu of oral argument in this Court dated 9 February 1964, on
page 8, the defendant reduced its offer to 33 1/3 % (1/3) as its share in the overseas telephone
service. The proposals were not accepted by either party.
On 12 April 1958, plaintiff Republic commenced suit against the defendant, Philippine Long
Distance Telephone Company, in the Court of First Instance of Manila (Civil Case No. 35805),
praying in its complaint for judgment commanding the PLDT to execute a contract with plaintiff,
through the Bureau, for the use of the facilities of defendant's telephone system throughout the
Philippines under such terms and conditions as the court might consider reasonable, and for a
writ of preliminary injunction against the defendant company to restrain the severance of the
existing telephone connections and/or restore those severed.
Acting on the application of the plaintiff, and on the ground that the severance of telephone
connections by the defendant company would isolate the Philippines from other countries, the
court a quo, on 14 April 1958, issued an order for the defendant:
(1) to forthwith reconnect and restore the seventy-eight (78) trunk lines that it has
disconnected between the facilities of the Government Telephone System, including
its overseas telephone services, and the facilities of defendant; (2) to refrain from
carrying into effect its threat to sever the existing telephone communication between
the Bureau of Telecommunications and defendant, and not to make connection over
its telephone system of telephone calls coming to the Philippines from foreign
countries through the said Bureau's telephone facilities and the radio facilities of RCA
Communications, Inc.; and (3) to accept and connect through its telephone system all
such telephone calls coming to the Philippines from foreign countries — until further
order of this Court.
On 28 April 1958, the defendant company filed its answer, with counterclaims.
It denied any obligation on its part to execute a contrary of services with the Bureau of
Telecommunications; contested the jurisdiction of the Court of First Instance to compel it to enter
into interconnecting agreements, and averred that it was justified to disconnect the trunk lines
heretofore leased to the Bureau of Telecommunications under the existing agreement because
its facilities were being used in fraud of its rights. PLDT further claimed that the Bureau was
engaging in commercial telephone operations in excess of authority, in competition with, and to
the prejudice of, the PLDT, using defendants own telephone poles, without proper accounting of
revenues.
After trial, the lower court rendered judgment that it could not compel the PLDT to enter into an
agreement with the Bureau because the parties were not in agreement; that under Executive
Order 94, establishing the Bureau of Telecommunications, said Bureau was not limited to
servicing government offices alone, nor was there any in the contract of lease of the trunk lines,
since the PLDT knew, or ought to have known, at the time that their use by the Bureau was to be
public throughout the Islands, hence the Bureau was neither guilty of fraud, abuse, or misuse of
the poles of the PLDT; and, in view of serious public prejudice that would result from the
disconnection of the trunk lines, declared the preliminary injunction permanent, although it
dismissed both the complaint and the counterclaims.
Both parties appealed.
Taking up first the appeal of the Republic, the latter complains of the action of the trial court in
dismissing the part of its complaint seeking to compel the defendant to enter into an
interconnecting contract with it, because the parties could not agree on the terms and conditions
of the interconnection, and of its refusal to fix the terms and conditions therefor.
We agree with the court below that parties can not be coerced to enter into a contract where no
agreement is had between them as to the principal terms and conditions of the contract.
Freedom to stipulate such terms and conditions is of the essence of our contractual system, and
by express provision of the statute, a contract may be annulled if tainted by violence,
intimidation, or undue influence (Articles 1306, 1336, 1337, Civil Code of the Philippines). But
the court a quo has apparently overlooked that while the Republic may not compel the PLDT to
celebrate a contract with it, the Republic may, in the exercise of the sovereign power of eminent
domain, require the telephone company to permit interconnection of the government telephone
system and that of the PLDT, as the needs of the government service may require, subject to
the payment of just compensation to be determined by the court. Nominally, of course, the
power of eminent domain results in the taking or appropriation of title to, and possession of, the
expropriated property; but no cogent reason appears why the said power may not be availed of
to impose only a burden upon the owner of condemned property, without loss of title and
possession. It is unquestionable that real property may, through expropriation, be subjected to
an easement of right of way. The use of the PLDT's lines and services to allow inter-service
connection between both telephone systems is not much different. In either case private
property is subjected to a burden for public use and benefit. If, under section 6, Article XIII, of the
Constitution, the State may, in the interest of national welfare, transfer utilities to public
ownership upon payment of just compensation, there is no reason why the State may not require
a public utility to render services in the general interest, provided just compensation is paid
therefor. Ultimately, the beneficiary of the interconnecting service would be the users of both
telephone systems, so that the condemnation would be for public use.
The Bureau of Telecommunications, under section 78 (b) of Executive Order No. 94, may
operate and maintain wire telephone or radio telephone communications throughout the
Philippines by utilizing existing facilities in cities, towns, and provinces under such terms and
conditions or arrangement with present owners or operators as may be agreed upon to the
satisfaction of all concerned; but there is nothing in this section that would exclude resort to
condemnation proceedings where unreasonable or unjust terms and conditions are exacted, to
the extent of crippling or seriously hampering the operations of said Bureau.
A perusal of the complaint shows that the Republic's cause of action is predicated upon the
radio telephonic isolation of the Bureau's facilities from the outside world if the severance of
interconnection were to be carried out by the PLDT, thereby preventing the Bureau of
Telecommunications from properly discharging its functions, to the prejudice of the general
public. Save for the prayer to compel the PLDT to enter into a contract (and the prayer is no
essential part of the pleading), the averments make out a case for compulsory rendering of inter-
connecting services by the telephone company upon such terms and conditions as the court
may determine to be just. And since the lower court found that both parties "are practically at
one that defendant (PLDT) is entitled to reasonable compensation from plaintiff for the
reasonable use of the former's telephone facilities" (Decision, Record on Appeal, page 224), the
lower court should have proceeded to treat the case as one of condemnation of such services
independently of contract and proceeded to determine the just and reasonable compensation for
the same, instead of dismissing the petition.
This view we have taken of the true nature of the Republic's petition necessarily results in
overruling the plea of defendant-appellant PLDT that the court of first instance had no jurisdiction
to entertain the petition and that the proper forum for the action was the Public Service
Commission. That body, under the law, has no authority to pass upon actions for the taking of
private property under the sovereign right of eminent domain. Furthermore, while the defendant
telephone company is a public utility corporation whose franchise, equipment and other
properties are under the jurisdiction, supervision and control of the Public Service Commission
(Sec. 13, Public Service Act), yet the plaintiff's telecommunications network is a public service
owned by the Republic and operated by an instrumentality of the National Government, hence
exempt, under Section 14 of the Public Service Act, from such jurisdiction, supervision and
control. The Bureau of Telecommunications was created in pursuance of a state policy
reorganizing the government offices —
to meet the exigencies attendant upon the establishment of the free and independent
Government of the Republic of the Philippines, and for the purpose of promoting
simplicity, economy and efficiency in its operation (Section 1, Republic Act No. 51) —
and the determination of state policy is not vested in the Commission (Utilities Com. vs.
Bartonville Bus Line, 290 Ill. 574; 124 N.E. 373).
Defendant PLDT, as appellant, contends that the court below was in error in not holding that
the Bureau of Telecommunications was not empowered to engage in commercial telephone
business, and in ruling that said defendant was not justified in disconnecting the telephone trunk
lines it had previously leased to the Bureau. We find that the court a quo ruled correctly in
rejecting both assertions.
Executive Order No. 94, Series of 1947, reorganizing the Bureau of Telecommunications,
expressly empowered the latter in its Section 79, subsection (b), to "negotiate for, operate and
maintain wire telephone or radio telephone communication service throughout the Philippines",
and, in subsection (c), "to prescribe, subject to approval by the Department Head, equitable
rates of charges for messages handled by the system and/or for time calls and other services
that may be rendered by the system". Nothing in these provisions limits the Bureau to non-
commercial activities or prevents it from serving the general public. It may be that in its original
prospectuses the Bureau officials had stated that the service would be limited to government
offices: but such limitations could not block future expansion of the system, as authorized by the
terms of the Executive Order, nor could the officials of the Bureau bind the Government not to
engage in services that are authorized by law. It is a well-known rule that erroneous application
and enforcement of the law by public officers do not block subsequent correct application of the
statute (PLDT vs. Collector of Internal Revenue, 90 Phil. 676), and that the Government is never
estopped by mistake or error on the part of its agents (Pineda vs. Court of First Instance of
Tayabas, 52 Phil. 803, 807; Benguet Consolidated Mining Co. vs. Pineda, 98 Phil. 711, 724).
The theses that the Bureau's commercial services constituted unfair competition, and that the
Bureau was guilty of fraud and abuse under its contract, are, likewise, untenable.
First, the competition is merely hypothetical, the demand for telephone service being very much
more than the supposed competitors can supply. As previously noted, the PLDT had 20,000
pending applications at the time, and the Bureau had another 5,000. The telephone company's
inability to meet the demands for service are notorious even now. Second, the charter of the
defendant expressly provides:
SEC. 14. The rights herein granted shall not be exclusive, and the rights and power
to grant to any corporation, association or person other than the grantee franchise for
the telephone or electrical transmission of message or signals shall not be impaired or
affected by the granting of this franchise: — (Act 3436)
And third, as the trial court correctly stated, "when the Bureau of Telecommunications
subscribed to the trunk lines, defendant knew or should have known that their use by the
subscriber was more or less public and all embracing in nature, that is, throughout the
Philippines, if not abroad" (Decision, Record on Appeal, page 216).
The acceptance by the defendant of the payment of rentals, despite its knowledge that the
plaintiff had extended the use of the trunk lines to commercial purposes, continuously since
1948, implies assent by the defendant to such extended use. Since this relationship has been
maintained for a long time and the public has patronized both telephone systems, and their
interconnection is to the public convenience, it is too late for the defendant to claim misuse of its
facilities, and it is not now at liberty to unilaterally sever the physical connection of the trunk
lines.
..., but there is high authority for the position that, when such physical connection has
been voluntarily made, under a fair and workable arrangement and guaranteed by
contract and the continuous line has come to be patronized and established as a great
public convenience, such connection shall not in breach of the agreement be severed
by one of the parties. In that case, the public is held to have such an interest in the
arrangement that its rights must receive due consideration. This position finds
approval in State ex rel. vs. Cadwaller, 172 Ind. 619, 636, 87 N.E. 650, and is stated in
the elaborate and learned opinion of Chief Justice Myers as follows: "Such physical
connection cannot be required as of right, but if such connection is voluntarily made by
contract, as is here alleged to be the case, so that the public acquires an interest in its
continuance, the act of the parties in making such connection is equivalent to a
declaration of a purpose to waive the primary right of independence, and it imposes
upon the property such a public status that it may not be disregarded" — citing Mahan
v. Mich. Tel. Co., 132 Mich. 242, 93 N.W. 629, and the reasons upon which it is in part
made to rest are referred to in the same opinion, as follows: "Where private property is
by the consent of the owner invested with a public interest or privilege for the benefit
of the public, the owner can no longer deal with it as private property only, but must
hold it subject to the right of the public in the exercise of that public interest or privilege
conferred for their benefit." Allnut v. Inglis (1810) 12 East, 527. The doctrine of this
early case is the acknowledged law. (Clinton-Dunn Tel. Co. v. Carolina Tel. & Tel. Co.,
74 S.E. 636, 638).
It is clear that the main reason for the objection of the PLDT lies in the fact that said appellant
did not expect that the Bureau's telephone system would expand with such rapidity as it has
done; but this expansion is no ground for the discontinuance of the service agreed upon.
The last issue urged by the PLDT as appellant is its right to compensation for the use of its
poles for bearing telephone wires of the Bureau of Telecommunications. Admitting that section
19 of the PLDT charter reserves to the Government —
the privilege without compensation of using the poles of the grantee to attach one
ten-pin cross-arm, and to install, maintain and operate wires of its telegraph system
thereon; Provided, however, That the Bureau of Posts shall have the right to place
additional cross-arms and wires on the poles of the grantee by paying a
compensation, the rate of which is to be agreed upon by the Director of Posts and the
grantee; —
the defendant counterclaimed for P8,772.00 for the use of its poles by the plaintiff, contending
that what was allowed free use, under the aforequoted provision, was one ten-pin cross-arm
attachment and only for plaintiff's telegraph system, not for its telephone system; that said
section could not refer to the plaintiff's telephone system, because it did not have such
telephone system when defendant acquired its franchise. The implication of the argument is that
plaintiff has to pay for the use of defendant's poles if such use is for plaintiff's telephone system
and has to pay also if it attaches more than one (1) ten-pin cross-arm for telegraphic purposes.

As there is no proof that the telephone wires strain the poles of the PLDT more than the
telegraph wires, nor that they cause more damage than the wires of the telegraph system, or
that the Government has attached to the poles more than one ten-pin cross-arm as permitted by
the PLDT charter, we see no point in this assignment of error. So long as the burden to be borne
by the PLDT poles is not increased, we see no reason why the reservation in favor of the
telegraph wires of the government should not be extended to its telephone lines, any time that
the government decided to engage also in this kind of communication.

In the ultimate analysis, the true objection of the PLDT to continue the link between its network
and that of the Government is that the latter competes "parasitically" (sic) with its own telephone
services. Considering, however, that the PLDT franchise is non-exclusive; that it is well-known
that defendant PLDT is unable to adequately cope with the current demands for telephone
service, as shown by the number of pending applications therefor; and that the PLDT's right to
just compensation for the services rendered to the Government telephone system and its users
is herein recognized and preserved, the objections of defendant-appellant are without merit. To
uphold the PLDT's contention is to subordinate the needs of the general public to the right of the
PLDT to derive profit from the future expansion of its services under its non-exclusive franchise.

WHEREFORE, the decision of the Court of First Instance, now under appeal, is affirmed,
except in so far as it dismisses the petition of the Republic of the Philippines to compel the
Philippine Long Distance Telephone Company to continue servicing the Government telephone
system upon such terms, and for a compensation, that the trial court may determine to be just,
including the period elapsed from the filing of the original complaint or petition. And for this
purpose, the records are ordered returned to the court of origin for further hearings and other
proceedings not inconsistent with this opinion. No costs.
 G.R. No. L-40424 June 30, 1980
R. MARINO CORPUS, petitioner,
vs.
COURT OF APPEALS and JUAN T. DAVID, respondents
MAKASIAR, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals promulgated on
February 14, 1975 in CA-G.R. No. 40583-R, affirming the decision of the court of Instance of
Manila, Branch V. dated september 4, 1967, in Civil Case no. 61802 entitled "Juan T.
David,plaintiff, versus R. Mariano Corpus, defendant', for the recovery of attorneys fees for
professional services rendered by the plaintiff, private respondent herein, to defendant, petitioner
herein.
A he and Atty. Alverez would collaborate in the case.
Having been close friends, aside from being membres Civil Liberties Union, petitioner Corpus
intimately calls respondent David by his nickname "Juaning" and the latter addresses the former
simply as "Marino".
The factual setting of this case is stated in the decision of the lower court, thus:
It appears that in March, 1958, the defendant was charged administratively
by several employee of the Central Bank Export Department of which the
defendant is the director. The defendant was represented by Atty. Rosauro
Alvarez. Pending the investigation and effective March 18, 1958, he
defendant was suspended from office. After the investigating committee
found the administrative charges to be without merit, and subsequently
recommended the immediate reinstatement of the defendant, the then
Governor of Central Bank, Miguel Cuaderno, Sr., recommended that the
defendant be considered resigned as on the ground that he had lost
confidence in him. The Monetary Board, by a resolution of July 20, 1959,
declared the defendant as resigned as of the date of suspension.
On August 18, 1959, the defendant, thru Atty. Alvarez, filed the Court of
First Instance of Manila a petition for certiorari, mandamus and quo
warranto with preliminary mandatory injuction and damages against Miguel
Cuaderno, Sr., the Central Bank and Mario Marcos who was appointed to
the position of the defendant, said case having been docketed as Civil Case
No. 41226 and assigned to Branch VII presided over by Judge Gregorio T.
Lantin. On September 7, 1959, the respondent filed a motion to dismiss the
petition, alleging among other grounds, the failure of the defendant to
exhaust, available administrative remedies (Exh. X). On September 25,
1959, the defendant, thru Atty. Alvarez, filed his opposition to the said
motion. On March 17, 1960, during the course of the presentation of the
evidence for the petition for a writ of preliminary mandatory injunction, Atty.
Alvarez manifested that the defendant was abandoning his prayer for a writ
of preliminary mandatory injunction and asked for a ruling on the motion to
dismiss. On June 14, 1960, Judge Lantin dismissed Civil Case No. 41226
for failure to exhaust she administrative remedies available to the herein
defendant.
On June 24, 1960, Atty. Alverez received a copy of the order of dismissal It
was at this state that the plaintiff entered into the case under circumstances
about which the parties herein have given divergent versions.
According to the plaintiff, six or seven days prior to the expiration of the
period for appeal from the order of dismissal, he chanced to meet the late
Rafael Corpus, father of the defendant, at the Taza de Oro coffee shop.
After they talked about the defendant's having lost his case before Judge
Lantin, and knowing that the plaintiff and the defendant were both members
of the Civil Liberties Union, Rafael Corpus requested the plaintiff to go over
the case and further said that he would send his son, the herein defendant,
to the plaintiff to find out what could be done about the case. The defendant
called up the plaintiff the following morning for an appointment, and the
plaintiff agreed to am him in the latter's office. At said conference, the
defendant requested the plaintiff to handle the case because Atty. Alvarez
had already been disenchanted and wanted to give up the case. Although at
first reluctant to handle the case, the plaintiff finally agreed on condition that
The defendant's version of how the plaintiff came into the case is as follows:
After the order of dismissal issued by Judge Lantin was published in the
newspapers, the plaintiff sought a conference with the defendant at Taza de
Oro, but the defendant told him that he would rather meet the plaintiff at the
Swiss Inn. Even before the case was dismissed the plaintiff had shown
interest in the same by being present during the hearings of said case in the
sala of Judge Lantin When the plaintiff and the defendant met at the Swiss
Inn, the plaintiff handed the defendant a memorandum prepared by him on
how he can secure the reversal of the order of dismissal by means of a
formula stated in said memorandum. During the said occasion the plaintiff
scribbled some notes on a paper napkin (Exhibit 19). On June 28, 1960, the
defendant wrote the plaintiff, sending with it a copy of the order of Judge
Lantin dated June 14, 1960 (Exhibit S Inasmuch as said letter, Exhibit S
already mentions the 'memorandum' of the plaintiff, the defendant contends
that it was not six or seven days prior to the expiration of the period of
appeal (which should be on or about July 2 or 3, 1960) but on a date even
earlier than June 28, 1960 that the plaintiff and the defendant met together
to discuss the latter's case.
Laying aside for the moment the true circumstances under which the plaintiff
started rendering professional services to the defendant, the undisputed
evidence shows that on July 7, 1960, the plaintiff filed a motion for
reconsideration of the order of dismissal under the joint signatures of the
plaintiff and Atty. Alverez (Exhibit B). The plaintiff argued the said motion
during the hearing thereof On August 8, 1960, he file a 13-page
'Memorandum of Authorities in support of said motion for reconsideration
(Exhibit C). A 3-page supplemental memorandum of authorities was filed by
the plaintiff on September 6, 1960 (Exhibit D)
On November 15, 1960, Judge Lantin denied the motion for reconsideration.
On November 19, 1960, the plaintiff perfected the appeal from the order of
dismissal dated June 14, 1960. For purposes of said appeal the plaintiff
prepared a 232-page brief and submitted the same before the Supreme
Court in Baguio City on April 20, 1961. The plaintiff was the one who orally
argued the case before the Supreme Court. In connection with the trip to
Baguio for the said oral argument, the plaintiff used his car hich broke down
and necessitated extensive repairs paid for by the plaintiff himself.
On March 30, 1962, the Supreme Court promulgated its decision reversing
the order of dismissal and remanding the case for further proceedings. On
April 18, 1962, after the promulgation of the decision of the Supreme Court
reversing the dismissal of the case the defendant wrote the plaintiff the
following letter, Exhibit 'Q'. .
xxxxxxxxx
Dear Juaning
Will you please accept the attached check in the amount of TWO
THOUSAND P2,000.00) PESOS for legal services in the handling of L-
17860 recently decided by the Court? I wish I could give more but as y•u
know we were banking on a SC decision reinstating me and reimburse my
backstage I had been wanting to offer some token of my appreciation of
your legal fight for and in my behalf, and it was only last week that I received
something on account of a pending claim.
Looking forward to a continuation of the case in the lower court, I remain
Sincerely yours, Illegible
xxxxxxxxx
In a reply letter dated April 25, 1962, the plaintiff returned the check,
explaining said act as follows:
April 25, 1962
My dear Marino:
Yesterday, I received your letter of April 18th with its enclosure. I wished
thank you for your kind thoughts, however, please don't take offense if I
have to return the check. I will explain.
When I decided to render professional services in your case, I was
motivated by the value to me of the very intimate relations which you and I
have enjoyed during the past many years. It was nor primarily, for a
professional fee.
Although we were not fortunate to have obtained a decision in your case
which should have put an end to it. I feel that we have reason to be jubilant
over the outcome, because, the final favorable outcome of the case seems
certain irrespective of the length of time required to terminate the same.
Your appreciation of the efforts I have invested in your case is enough
compensation therefor, however, when you shall have obtained a decision
which would have finally resolved the case in your favor, remembering me
then will make me happy. In the meantime, you will make me happier by just
keeping the check.
Sincerely yours,
JUANING
xxxxxxxxx
When the case was remanded for further proceedings before Judge Lantin,
the evidence for the defendant was presented by Atty. 'Alvarez with the
plaintiff cooperating in the same-'On June 24, 1963, Judge Lantin rendered
his decision in favor of the defendant declaring illegal the resolution of the
Monetary Board of July 20, 1959, and ordering the defendant's
reinstatement and the payment of his back salaries and allowances - The
respondents in said Civil Case No. 41226 filed a motion for reconsideration
which was opposed by the herein plaintiff. The said decision was appealed
by the respondents, as well as by the herein defendant with respect to the
award of P5, 000. 00 attorney's feed The plaintiff prepared two briefs for
submission to the Court of Appeals one as appellee (Exhibit H) and the
other as appellant (Exhibit H-1). The Court of Appeal however, certified the
case to the Supreme Court in 1964.
On March 31, 1965, the Supreme Court rendered a decision affirming the
judgment of the Court of first Instance of Manila.
On April 19, 1965 the plaintiffs law office made a formal de command upon
the defendant for collection of 50% of the amount recovered by the
defendant as back salaries and other emoluments from the Central Bank
(Exhibit N). This letter was written after the defendant failed to appear at an
appointment with the plaintiff so that they could go together to the Central
Bank to claim the possession of the office to which the defendant was
reinstated and after a confrontation in the office of the plaintiff wherein the
plaintiff was remanding 50% of the back salaries and other emoluments
amounting to P203,000.00 recoverable by the defendant. The defendant
demurred to this demand inasmuch as he had plenty of outstanding
obligations and that his tax liability for said back salaries was around
P90,000.00, and that he expected to net only around P10,000.00 after
deducting all expenses and taxes.
On the same date, April 19,1965 the plaintiff wrote the Governor for of
Central Bank requesting that the amount representing the sack salaries of
the defendant be made out in two one in favor of the defendant and the
other representing the professional fees equivalent to 50% of the said back
salaries being claimed by the plaintiff (Exhibit 8). F to obtain the relief from
the Governor of Central Bank, the plaintiff instituted this action before this
Court on July 20, 1965 (Emphasis supplied).
As therein defendant, herein petitioner Marino Corpus filed in August 5, 1965 an answer with
counter-claim. On August 30, 1965, private respondent Atty. Juan T. David, plaintiff therein, filed
a reply with answer to the counterclaim of petitioner.
After due trial, the lower court rendered judgment on September 4, 1967, the dispositive portion
of which reads:
WHEREFORE, judgment is hereby rendered, ordering the defendant to pay
plaintiff the sum of P30,000.00 in the concept of professional fees, and to
pay the costs (pp. 112-113, CA Record on Appeal p. 54, rec.)
After receipt on September 7, 1967 of a copy of the aforequoted judgment, petitioner Marino
Corpus, defendant therein, filed on October 7, 1967 a notice of appeal from said judgment to the
Court of Appeals. In his appeal, he alleged that the lower court erred:
1. In not holding that the plaintiff's professional services were offered and
rendered gratuitously;
2. Assuming that plaintiff is entitled to compensation — in holding that he
was entitled to attorney's fees in the amount of P30,000.00 when at most he
would be entitled to only P2,500.00;
3. In not dismissing plaintiff's complaint; and
4. In not awarding damages and attorney's fees to the defendant (p. 2, CA
Decision, p. 26, rec.)
Likewise, private respondent Atty. Juan T. David, plaintiff therein, appealed to the Court of
Appeals on October 9, 1967 assigning one error, to wit:
The lower court erred in ordering the defendant to pay the plaintiff only the
sum of P30,000.00 in the concept of attorney's fees (p. 1, CA Decision, p.
25, rec.).
On February 14, 1975, respondent Court of Appeals promulgated its decision affirming in
toto the decision of the lower court, with costs against petitioner Marino Corpus (Annex A,
Petition for Certiorari, p. 25, rec.)
Hence, the instant petition for review on certiorari, petitioner — contending that the respondent
Court of Appeals erred in finding that petitioner accepted private respondent's services "with the
understanding of both that he (private respondent) was to be compensated" in money; and that
the fee of private respondent was contingent (pp. 3 & 5, Petition for Certiorari, pp. 17 & 19, rec.).
On October 1, 1975, the case was deemed submitted for decision (p. 177, rec.), after the parties
filed their respective memoranda.
B why he should not be cited for contempt for issuing an order directing the issuance of a writ of
On January 31, 1978, private respondent Atty. Juan T. David filed a petition to remand the case
to the court a quo for execution of the latter's decision in Civil Case No. 61802, dated September
4, 1967, alleging that said decision is already deemed affirmed pursuant to Section 11(2), Article
X of the New Constitution by reason of the failure of this Tribunal to decide the case within 18
months. Then on July 7, 1978, another petition to remand the case to the lower court to
execution was filed by herein private respondent.
Subsequently, private respondent Atty. Juan T. David filed with The court a quo a motion dated
September 13, 1978 for the issuance of a writ of execution of the lower court's decision in the
aforesaid civil case, also invoking Section 11 (2), Article X of the 1973 Constitution. In an order
dated September 19, 1978, the lower court, through Judge Jose H. Tecson, directed the
issuance of a writ of execution. The writ of execution was issued on October 2, 1978 and a
notice of garnishment was also issued n October 13, 1978 to garnish the bank deposits of herein
petitioner Marino Corpus in the Commercial Bank and Trust Company, Makati Branch.
It appears that on October 13, 1978, herein petitioner filed a motion for reconsideration of the
September 19, 1978 order. Private respondent Atty. Juan T. David filed on October 19, 1978 an
opposition to said motion and herein petitioner filed a reply on October 30, 1978. The lower court
denied said motion for reconsideration in its over dated November 7, 1978.
It appears also that in a letter dated October 18, 1978, herein petitioner Marino Corpus
requested this Court to inquire into what appears to be an irregularity in the issuance of the
aforesaid garnishment notice to the Commercial Bank and Trust Company, by virtue of which his
bank deposits were garnished and he was prevented from making withdrawals from his bank
account.
In OUR resolution of November 3, 1978, WE required private respondent Atty. Juan T. David
and the Commercial Bank and Trust Company to comment on petitioner's letter, and for the
bank to explain why it did not honor petitioner's withdrawals from his bank deposits when no
garnishment order has been issued by the Supreme Court. This Court further inquired from the
lower court whether it has issued any garnishment order during the pendency of the present
case.
On November 27, 1978, the Commercial Bank and Trust Company filed its comment which was
noted in the Court's resolution of December 4, 1978. In said resolution, the Court also required
Judge Jose H. Tecson to comply with the resolution of November 3, 1978, inquiring as to
whether he had issued any garnishment order, and to explain why a writ of execution was issued
despite the pendency of the present case before the Supreme Court.
Further, WE required private respondent Atty. Juan T. David Lo explain his failure to file his
comment, and to file the same as directed by the resolution of the Court dated November 3,
1978. Private respondent's compliance came on December 13, 1978, requesting to be excused
from the filing of his comment because herein petitioner's letter was unverified. Judge Tecson's
compliance was filed on December 15, 1978, to which herein petitioner replied on January 11,
1979.
In OUR resolution dated January 3, 1979, WE set aside the order of Judge Jose H. Tecson
dated September 19, 1978, the writ of execution as well as the notice of garnishment, and
required private respondent Atty. Juan T. David to show cause why he should not be cited for
contempt for his failure to file his comment as directed by the resolution of the Court dated
December 4, 1978, and for filing a motion for execution knowing that the case is pending appeal
and review before this Court Likewise, the Court required Judge Jose H. Tecson to show cause
execution and for issuing such writ despite the pendency of the present case in the Supreme
Court.
On January 12, 1979, Judge Jose H. Tecson filed his compliance explanation as directed by the
aforesaid resolution of January 3, 1979, while private respondent Atty. Juan T. David filed on
January 30, 19 79 his compliance and motion for reconsideration after the Court has granted
him an extension of time to file his compliance.
Private respondent Atty. Juan T. David filed on February 28, 1979, a petition praying that the
merits of his compliance be resolved by the Court en banc. Subsequently, on March 26, 1979,
another petition was filed by herein private respondent asking the Chief
Justice and the members of the First Division to inhibit themselves from participating in the
determination of the merits of his compliance and for its merits to be resolved by the Court en
banc.
C
The main thrust of this petition for review is whether or not private respondent Atty. Juan T.
David is entitled to attorney's fees.
Petitioner Marino Corpus contends that respondent David is not entitled to attorney's fees
because there was no contract to that effect. On the other hand, respondent David contends that
the absence of a formal contract for the payment of the attorney's fees will not negate the
payment thereof because the contract may be express or implied, and there was an implied
understanding between the petitioner and private respondent that the former will pay the latter
attorney's fees when a final decision shall have been rendered in favor of the petitioner
reinstating him to -his former position in the Central Bank and paying his back salaries.
I further emphasize the fact that petitioner Corpus was aware all the time that he was liable to pay
WE find respondent David's position meritorious. While there was express agreement between
petitioner Corpus and respondent David as regards attorney's fees, the facts of the case support
the position of respondent David that there was at least an implied agreement for the payment of
attorney's fees.
Petitioner's act of giving the check for P2,000.00 through his aforestated April 18, 1962 letter to
respondent David indicates petitioner's commitment to pay the former attorney's fees, which is
stressed by expressing that "I wish I could give more but as you know we were banking on a SC
decision reinstating me and reimbursing my back salaries This last sentiment constitutes a
promise to pay more upon his reinstatement and payment of his back salaries. Petitioner ended
his letter that he was "looking forward to a continuation of the case in the lower court, ... to which
the certiorari-mandamus-quo warranto case was remanded by the Supreme Court for further
proceedings.
Moreover, respondent David's letter-reply of April 25, 1962 confirms the promise of petitioner
Corpus to pay attorney's fees upon his reinstatement and payment of back salaries. Said reply
states that respondent David decided to be his counsel in the case because of the value to him
of their intimate relationship over the years and "not, primarily, for a professional fee." It is patent
then, that respondent David agreed to render professional services to petitioner Corpus
secondarily for a professional fee. This is stressed by the last paragraph of said reply which
states that "however, when you shall have obtained a decision which would have finally resolved
the case in your favor, remembering me then will make me happy. In the meantime, you will
make me happier by just keeping the check." Thereafter, respondent David continued to render
legal services to petitioner Corpus, in collaboration with Atty. Alverez until he and Atty. Alvarez
secured the decision directing petitioner's reinstatement with back salaries, which legal services
were undisputedly accepted by, and benefited petitioner.
Moreover, there is no reason to doubt respondent David's assertion that Don Rafael Corpus, the
late father of petitioner Corpus, requested respondent to help his son, whose suit for
reinstatement was dismissed by the lower court; that pursuant to such request, respondent
conferred in his office with petitioner, who requested respondent to handle the case as his
lawyer, Atty. Alvarez, was already disenchanted and wanted to give up the case; and that
respondent agreed on the case. It would have been unethical for respondent to even offer his
services when petitioner had a competent counsel in the person of Atty. Alvarez, who has been
teaching political, constitutional and administrative law for over twenty years.
Likewise, it appears that after the Supreme Court affirmed on March 31, 1965 the order of the
lower court reinstating petitioner Corpus with back salaries and awarding attorney's fees of
P5,000.00, respondent David made a written demand on April 19, 1965 upon petitioner Corpus
for the payment of his attorney's fees in an amount equivalent to 50% of what was paid as back
salaries (Exh. N p. 75, Folder of Exhibits, Civil Case No. 61802). Petitioner Corpus, in his reply
dated May 7, 1965 to the aforesaid written demand, while disagreeing as to the amount of
attorney's fees demanded, did not categorically deny the right of respondent David to attorney's
fees but on the contrary gave the latter the amount of P2,500.00, which is one-half (½) of the
court-awarded attorney's fees of P5,000.00, thus impliedly admitting the right of respondent
David to attorney's fees (Exh. K, p. 57, Folder of Exhibits, Civil Case No. 61802).
It is further shown by the records that in the motion filed on March 5, 1975 by petitioner Corpus
before the Court of Appeals for the reconsideration of its decision the order of the lower court
granting P30,000.00 attorney's fee's to respondent David, he admitted that he was the first to
acknowledge that respondent David was entitled to tion for legal services rendered when he sent
the chock for P2,000.00 in his letter of April 18, 1962, and he is still to compensate the
respondent but only to the extent of P10,000.00 (p. 44, rec.). This admission serves only to
attorney's fees to respondent David which is therefore inconsistent with his position that the
services of respondent David were gratuitous, which did not entitle said respondent to
compensation.
It may be advanced that respondent David may be faulted for not reducing the agreement for
attorney's fees with petitioner Corpus in writing. However, this should be viewed from their
special relationship. It appears that both have been friends for several years and were co-
members of the Civil Liberties Union. In addition, respondent David and petitioner's father, the
late Rafael Corpus, were also close friends. Thus, the absence of an express contract for
attorney's fees between respondent David and petitioner Corpus is no argument against the
payment of attorney's fees, considering their close relationship which signifies mutual trust and
confidence between them.
II
Moreover, the payment of attorney's fees to respondent David may also be justified by virtue of
the innominate contract of facio ut des (I do and you give which is based on the principle that "no
one shall unjustly enrich himself at the expense of another." innominate contracts have been
elevated to a codal provision in the New Civil Code by providing under Article 1307 that such
contracts shall be regulated by the stipulations of the parties, by the general provisions or
principles of obligations and contracts, by the rules governing the most analogous nominate
contracts, and by the customs of the people. The rationale of this article was stated in the 1903
case of Perez vs. Pomar (2 Phil. 982). In that case, the Court sustained the claim of plaintiff
Perez for payment of services rendered against defendant Pomar despite the absence of an
express contract to that effect, thus:
It does not appear that any written contract was entered into between the
parties for the employment of the plaintiff as interpreter, or that any other
innominate contract was entered into but
whethertheplaintiffsservicesweresolicitedorwhethertheywereoffered to the
 defendant for his assistance, inasmuch as these services were accepted
and made use of by the latter, we must consider that there was a tacit and
mutual consent as to the rendition of the services. This gives rise to the
obligation upon the person benefited by the services to make compensation
therefor, since the bilateral obligation to render service as interpreter, on the
one hand, and on the other to pay for the service rendered, is thereby
incurred. (Arts. 1088, 1089, and 1262 of the Civil Code).
xxxxxxxxx
... Whether the service was solicited or offered, the fact remains that Perez
rendered to Pomar services as interpreter. As it does not appear that he did
this gratuitously, the duty is imposed upon the defendant, he having
accepted the benefit of the service, to pay a just compensation therefor, by
virtue of the innominate contract of facio ut des implicitly established.
xxxxxxxxx
... because it is a well-known principle of law that no one should permitted to
enrich himself to the damage of another" (emphasis supplied; see also
Tolentino, Civil Code of the Philippines, p. 388, Vol. IV 119621, citing Estate
of Reguera vs. Tandra 81 Phil. 404 [1948]; Arroyo vs. Azur 76 Phil.
493119461; and Perez vs. Pomar. 2 Phil. 682 [1903]).
WE reiterated this rule in Pacific Merchandising Corp. vs. Consolacion Insurance & Surety Co.,
Inc. (73 SCRA 564 [1976]) citing the case of Perez v. Pomar, supra thus:
Where one has rendered services to another, and these services are
accepted by the latter, in the absence of proof that the service was rendered
gratuitously, it is but just that he should pay a reasonable remuneration
therefor because 'it is a well-known principle of law, that no one should be
permitted to enrich himself to the damage of another (emphasis supplied).
Likewise, under American law, the same rule obtains (7 CJS 1079; FL Still & Co. v. Powell, 114
So 375).
III
There was no contract for contingent fee between Corpus and respondent David. Contingent
fees depend on an express contract therefor. Thus, "an attorney is not entitled to a percentage
of the amount recovered by his client in the absence of an express contract to that effect" (7
C.J.S. 1063 citing Thurston v. Travelers Ins. Co., 258 N.W. 66, 128 Neb. 141).
Where services were rendered without any agreement whatever as to the
amount or terms of compensation, the attorney is not acting under a
contract for a contingent fee, and a letter by the attorney to the client stating
that a certain sum would be a reasonable amount to charge for his services
and adding that a rate of not less than five percent nor more than ten would
be reasonable and customary does not convert the original agreement into
a contract for a contingent fee (7 C.J.S. 1063 citing Fleming v. Phinizy 134
S.E. 814).
While there was no express contract between the parties for the payment of attorney's fees, the
fact remains that respondent David rendered legal services to petitioner Corpus and therefore as
aforestated, is entitled to compensation under the innominate contract of facio lit des And such
being the case, respondent David is entitled to a reasonable compensation.
IV
In determining a reasonable fee to be paid to respondent David as compensation for his
services, on a quantum meruit basis, it is proper to consider all the facts and circumstances
obtaining in this case particularly the following:
The extent of the services rendered by respondent David should be considered together with the
extent of the services of Petitioner's other counsel, Atty. Rosauro Alvarez, It is undisputed that
Atty. Rosauro Alvarez had rendered legal services as principal counsel for more shall six (6)
years while respondent David has rendered legal services as collaborating counsel for almost
four (4) years. It appears that Atty. Alvarez started to render legal services after the
administrative case was filed on March 7, 1958 against petitioner Corpus. He represented
petitioner Corpus in the hearing of said case which was conducted from May 5, 1958 to October
8, 1958, involving 56 sessions, and this resulted in the complete exoneration by the Investigating
Committee of all the charges against the petitioner. It appears further that after the Monetary
Board, in its resolution of July 20, 1959, declared petitioner Corpus as being considered
resigned from the service, Atty. Alvarez instituted on August 18, 1958 Civil Case No. 41126 in
the Court of First Instance of Manila for the setting aside of the aforestated resolution and for the
reinstatement of petitioner Corpus. Atty. Alvarez actively participated in the proceedings.
On the other hand, respondent David entered his appearance as counsel for petitioner Corpus
sometime after the dismissal on June 14, 1960 of the aforesaid civil case. From the time he
entered his appearance, both he and Atty. Alvarez rendered legal services to petitioner Corpus
in connection with the appeals of the aforementioned civil case to the Court of Appeals and to
the Supreme Court. The records disclose that in connection with the appeal from the June 14,
1960 order of dismissal, respondent David prepared and signed pleadings although the same
were made for and on behalf of Atty. Alvarez and himself And it is not far-fetched to conclude
that all appearances were made by both counsels considering that Atty. Alverez was the
principal counsel and respondent David was the collaborating counsel. Thus, when the case was
called for oral argument on April 20, 1961 before the Supreme Court, respondent David and
Atty. Alverez appeared for petitioner Corpus although it was David who orally argued the case.
When the Supreme Court, in its decision of March 30, 1962, remanded the case to the lower
court for further it was Atty. Alverez who conducted the presentation of evidence while
respondent David assisted him The records also review that respondent David prepared and
signed for Atty. Alverez and himself. certain pleadings, including a memorandum. Moreover,
after the lower court rendered judgment on June 2 4, 1963 ordering the reinstatement and
payment of back salaries to petitioner Corpus and awarding him P5,000.00 by way of attorney's
fees, both petitioner Corpus and the respondents in said case appealed the judgment. At that
stage, respondent David again prepared and signed for Atty. Alvarez and himself, the necessary
pleadings, including two appeal briefs. And in addition, he made oral arguments in the hearings
of motions filed in the lower court before the records of the case were forwarded to the appellate
court. Furthermore, while it appears that it was Atty. Alvarez who laid down the basic theory and
foundation of the case of petitioner Corpus in the administrative case and later in the civil case,
respondent David also advanced legal propositions. Petitioner Corpus contends that said legal
propositions were invariably rejected by the courts. This is, however, of no moment because the
fact remains that respondent David faithfully rendered legal services for the success of
petitioner's case.
The benefits secured for petitioner Corpus may also be considered in ascertaining what should
be the compensation of respondent David. It cannot be denied that both Atty. Alvarez and
respondent David were instrumental in obtaining substantial benefits for petitioner Corpus which
consisted primarily of his reinstatement, recovery of back salaries and the vindication of his
honor and reputation. But, note should also be taken of the fact that respondent David came at
the crucial stage when the case of petitioner Corpus was dismissed by the lower court.
Atty. Rosauro Alvarez admittedly was paid by petitioner Corpus the sum of P20,000.00 or at
most P22,500.00 (T.s.n., Jan. 11, 1967, pp. 34-35; T.s.n., Feb. 10, 1967, pp. 48-49). On the
other hand, petitioner Corpus, after WE suggested on August 15, 1975 that they settle the case
amicably has, in his September 15, 1975 pleading filed before this Court (p. 166, rec.),
manifested his willingness to pay P10,000.00 for the services of respondent David. However,
respondent David has not manifested his intention to accept the offer.
In his complaint in the instant case, he asked for P75,000.00 as his attorney's fees. The records
reveal that petitioner Corpus actually received only P150,158.50 as back salaries and
emoluments after deducting taxes as well as retirement and life insurance premiums due to the
GSIS. The amount thus claimed by respondent David represents 50% of the amount actually
received by petitioner Corpus. The lower court, however, awarded only P30,000.00 and it was
affirmed by the Court of Appeals.
Considering the aforestated circumstances, WE are of the opinion that the reasonable
compensation of respondent David should be P20,000.00.
V
WE find private respondent Juan T. David and Judge Jose H. Tecson, Presiding Judge of the
Court of First Instance of Manila, Branch V, guilty of contempt of court.
Respondent David filed on or about September 13, 1978 a motion with the court a quo for the
issuance of a writ of execution to enforce its decision in Civil Case No 61802, subject of the
present petition, knowing fully well that it was then still pending appeal before this Court. In
addition, no certification that the aforesaid decision is already deemed affirmed had as yet been
issued by the Chief Justice pursuant to Section 11, paragraph 2, Article X of the New
Constitution; because respondent David's petitions filed with the Supreme Court on January 31,
1978 and on July 7, 1978 to remand the case to the trial court for execution and for the issuance
of such certification had not yet been acted upon as the same were still pending consideration
by this Court. In fact, this Court has not as of this time made any pronouncement on the
aforesaid provision of the New Constitution.
This act of respondent David constitutes disrespect to, as well as disregard of, the authority of
this Court as the final arbiter of all cases duly appealed to it, especially constitutional questions.
It must be emphasized that as a member of the Philippine Bar he is required "to observe and
maintain the respect due to the court of justice and judicial officers" (Section 20 (b), 138 of the
Revised Rules of Court). Likewise, Canon 1 of. the Canons of Professional Ethic expressly
provide that: "It is the duty of the lawyer to maintain towards the Courts a respectful attitude, not
for the sake of the temporary incumbent of the judgement office, but for the maintenance of its
supreme importance." And this Court had stressed that "the duty of an attorney to the courts
'can only be maintained by rendering no service involving any disrespect to the judicial office
which he is bound to uphold'" (Rheem of the Philippines v. Ferrer, 20 SCRA 441, 444 [1967]
citing the case of Lualhati v. Albert, 67 Phil. 86, 92 [1932]).
Moreover, this Court takes judicial notice of the fact that herein respondent David, in the
previous case of Integrated Construction Services, Inc. and Engineering Construction, Inc. v.
Relova (65 SCRA 638 [1975]), had sent letters addressed to the then Chief Justice Querube C.
Makalintal and later to the late Chief Justice Fred Ruiz Castro, requesting for the issuance of
certification on the basis of the aforementioned provision of the New Constitution which were not
given due consideration. And knowing this, respondent David should have been more prudent
and cautious in g with the court a quo any motion for execution.
Furthermore, there was even a taint of arrogance and defiance on the part of respondent David
in not filing his comment to the letter- complaint dated October 18, 1978 of petitioner Corpus, as
required by this Court in its November 3, 1978 and December 4,1978 resolutions which were
duly received by him, and instead, he sent on December 13, 1978 a letter requesting to be
excused from the filing of his comment on the lame excuse that petitioner's letter-complaint was
not verified.
On the part of Judge Jose H. Tecson, his presumptuous and precipitate act of granting the
motion for execution of dent David likewise constitutes disrespect to, as well as of, the authority
of this Court because he know for a that the case was still pending apply as the had not yet been
remanded to it and that no certification has been issued by this Court. As a judicial officer, Judge
Tecson is charged with the knowledge of the fact that this Court has yet to make a definite
pronouncement on Section 11, paragraph 2, Article X of the New Constitution. Judge Tecson
should know that only the Supreme Court can authoritatively interpret Section 11 (2) of Article X
of the 1973 Constitution. Yet, Judge Tecson assumed the role of the Highest Court of the Land.
He should be reminded of what Justice Laurel speaking for the Court, has said in People v.
Vera (65 Phil 56, 82 [1937]):
A becoming modesty of inferior courts demands conscious realization of the
position that they occupy in the interrelation and operation of the integrated
judged system of the nation.
It may also be added that the improvident act of respondent David in firing the motion for
execution and the precipitate act of Judge Tecson in issuing the writ of execution are intriguing
as they invite suspicion that there was connivance between the two. Respondent David would
seem to imply that his claim for attorney's fees should be given preference over the other cams
now pending in this Court. Certainly, such should not be the case because there are cases
which by their nature require immediate or preferential attention by this Tribunal like habeas
corpus cases, labor cases and c cases involving death sentence, let alone cases involving
properties and property rights of poor litigants pending decision or resolution long before the
New Constitution of 1973. Nobility and exempt forbearance were expected of Atty. David, who is
old and experienced in the practice of the legal profession, from which he has derived a great
measure. of economic well-being and independence
Consequently, the filing of the motion for immediate tion and the issuance of the writ of
execution constitute a defiance and usurpation of the jurisdiction of the Supreme Court. As a
disciplinary measure for the preservation and vindication of the dignity of this Supreme Tribunal
respondent Atty. Juan T. David should be REPRIMANDED for his precipitate action of filing a
motion for execution as well as Judge Jose H. Tecson for his improvident issuance of a writ of
execution while the case is pending appeal before the Supreme Court, and a repetition of said
acts would be dealt with more severely.
WHEREFORE, PETITIONER R. MARINO CORPUS IS HEREBY DIRECTED TO PAY
RESPONDENT ATTY. JUAN T. DAVID THE SUM OF TWENTY THOUSAND (P20,000.00)
PESOS AS ATTORNEY'S FEES.
RESPONDENT ATTY. JUAN T. DAVID AND JUDGE JOSE H. TECSON OF THE COURT OF
FIRST INSTANCE OF MANILA, BRANCH V, ARE HEREBY DECLARED GUILTY OF
CONTEMPT AND ARE HEREBY REPRIMANDED, WITH A WARNING THAT REPETITION
TION OF THE SAME OR SIMILAR ACTS WILL BE DEALT WITH MORE SEVERELY.

COSTS AGAINST PETITIONER.

SO ORDERED.
 G.R. No. 192099 July 08, 2015
PAULINO M. EJERCITO, JESSIE M. EJERCITO AND JOHNNY D. CHANG, Petitioners,
vs.
ORIENTAL ASSURANCE CORPORATION, Respondent.
DECISION
SERENO, C.J.:
This is a Petition for Review on Certiorari[1] filed by Paulino M. Ejercito, Jessie M. Ejercito and
Johnny D. Chang (petitioners) under Rule 45 of the 1997 Rules of Civil Procedure assailing the
Court of Appeals (CA) Decision dated 2 October 2009[2] and Resolution dated 14 April 2010[3] in
CA-G.R. CV No. 90828. The Special Third Division of the CA reversed and set aside the
Regional Trial Court (RTC) Decision in Civil Case No. 01-101999:
WHEREFORE, premises considered, the present appeal is hereby GRANTED. The Decision
dated February 2, 2007 of the Regional Trial Court of Manila, Branch 36 in Civil Case No. 01-
101999 is hereby SET ASIDE.
A new judgment is hereby entered ordering the defendants-appellees Merissa C. Somes,
Paulino M. Ejercito, Jessie M. Ejercito and Johnny D. Chang jointly and severally liable to pay
plaintiff-appellant Oriental Assurance Corporation the following sums:
1. The principal amount of P3,000,000.00 with interest at the rate of 12% per annum from the
time of the filing of the complaint until the same shall have been fully paid;
2. Attorney's fees in the amount of P30,000.00; and
3. Costs of suit.
SO ORDERED.[4]
The Facts
The facts of the case, as found by the CA, are as follows:
On 10 May 1999, respondent Oriental Assurance Corporation, through its Executive Vice
President Luz N. Cotoco issued a Surety Bond in favor of FFV Travel & Tours, Inc. (Company).
The bond was intended to guarantee the Company's payment of airline tickets purchased on
credit from participating members of International Air Transport Association (IATA) to the extent
of P3 million.
On the same day, petitioners and Merissa C. Somes (Somes) executed a Deed of Indemnity in
favor of respondent. The Surety Bond was effective for one year from its issuance until 10 May
2000. It was renewed for another year, from 10 May 2000 to 10 May 2001, as shown in Bond
Endorsement No. OAC-2000/0145 dated 17 April 2000. The corresponding renewal premium
amounting to P15,024.54 was paid by the insured corporation under Official Receipt No.
100262.
FFV Travel & Tours, Inc. has been declared in default for failure to pay its obligations amounting
to P5,484,086.97 and USD 18,760.98 as of 31 July 2000. Consequently, IATA demanded
payment of the bond, and respondent heeded the demand on 28 November 2000 as evidenced
by China Bank Check No. 104949. IATA executed a Release of Claim on 29 November 2000
acknowledging payment of the surety bond.
Respondent sent demand letters to petitioners and Somes for reimbursement of the P3 million
pursuant to the indemnity agreement. For their failure to reimburse respondent, the latter filed a
collection suit.
The RTC Ruling
After trial, the RTC rendered a Decision dismissing the complaint against petitioners for lack of
merit and pronouncing Somes liable to pay the amount of P3 million and interest per annum at
the rate of 12% of the principal obligation from the date the complaint was filed up to the date the
obligation would have been fully paid.
The RTC found that there was no written agreement to show the intention of petitioners to renew
the Deed of Indemnity. The absence thereof was evidenced by the nonappearance of any
signature on the Renewal Notice, which was not signed by Somes. However, she was held liable
to pay the surety value of the cost of tickets as she had paid the premium for the renewal of the
Surety Bond and used the renewed bond by submitting it to IATA.
The CA Ruling
The CA reversed the finding of the RTC and ruled that petitioners could not escape liability, as
they had authorized respondent to grant any renewals or extensions pursuant to the indemnity
agreement. The Deed of Indemnity contained a stipulation that the signatories (petitioners) were
authorizing the Company (respondent) to grant or consent to the grant of any extension,
continuation, increase, modification, change or alteration, and/or renewal of the original bond.
Petitioners voluntarily signed the agreement and, are educated persons (Paulino, being a
lawyer), so they could not have misunderstood the legal effects of the undertaking they had
signed.
Issues
Petitioners raise the following issues:
Whether or not the Honorable Court of Appeals erred in ruling that petitioners are liable to
indemnify the respondent under the deed of indemnity considering that petitioners did not give
their consent to be bound thereby beyond the one (1) year effectivity period of the original surety
bond.
Whether or not the Honorable Court of Appeals erred in ruling that petitioners are liable to pay
the respondent attorney's fees considering that petitioners did not breach their obligation under
the deed of indemnity to indemnify the respondent during the one (1) year effectivity period of
the original surety bond.[5]
The Court's Ruling
We find no merit in the Petition.
The contract of indemnity is the law between the parties.[6] It is a cardinal rule in the
interpretation of a contract that if its terms are clear and leave no doubt on the intention of the
contracting parties, the literal meaning of its stipulation shall control.[7] The CA aptly found
provisions in the contract that could not exonerate petitioners from their liability.
The Deed of Indemnity contains the following stipulations:
INDEMNITY: - To indemnify the COMPANY for any damages, payments, advances, prejudices,
loss, costs and expenses of whatever kind and nature, including counsel or attorney's fees,
which the Company may at any time, sustain or incur, as a consequence of having executed the
above-mentioned Bond, its renewals, extensions, modifications or substitutions and said
attorney's fees shall not be less than fifteen (15%) per cent of the amount claimed by the
Company in each action, the same to be due and payable, irrespective of whether the case is
settled judicially or extrajudicially. contained a proviso that became the basis for the authority to renew the original bond.

xxxx
MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: - The said indemnities
will be paid to the COMPANY as soon as demand is received from the Creditor, or as soon
as it becomes liable to make payment of any sum under the terms of the above-mentioned
Bond, its renewals, extension, modifications or substitutions, whether the said sum or sums or
part thereof, have been actually paid or not. We authorize the COMPANY to accept in any case
and at its entire discretion, from any of us, payment on account of the pending obligation, and to
grant extensions to any of us, to liquidate said obligations, without necessity of previous
knowledge or consent from the obligors.
xxxx
INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY:
-- Any payment or disbursement made by the COMPANY on account of the above-mentioned
Bond, its renewals, extensions, modifications or substitutions either in the belief that the
Company was obligated to make such payment or in the belief that said payment was necessary
in order to avoid greater losses or obligation for which the company might be liable by virtue of
the terms of the above-mentioned Bond, its renewals, extensions, modifications or substitutions
shall be final and will not be disputed by the undersigned who jointly and severally bind
themselves to indemnify the COMPANY of any and all such payments as stated in the
preceding clauses.
xxx
With regard to the contention that the Deed of Indemnity is a contract of adhesion, the Court has
consistently held that contracts of adhesion are not invalid per se and that their binding effects
have been upheld on numerous occasions.[10] The pretension that petitioners did not consent to
the renewal of the bond is belied by the fact that the terms of the contract which they voluntarily
entered into contained a clause granting authority to the Company to grant or consent to the
renewal of the bond. Having entered into the contract with full knowledge of its terms and
conditions, petitioners are estopped from asserting that they did so under the ignorance of the
legal effect of the contract or the undertaking.
It is true that on some occasions, the Court has struck down such contract as void when the
weaker party is imposed upon in dealing with the dominant party and is reduced to the
alternative of accepting the contract or leaving it, completely deprived of the opportunity to
bargain on equal footing.[11] This reasoning cannot be used in the instant case. One of the
petitioners, Paulino M. Ejercito, is a lawyer who cannot feign ignorance of the legal effect of his
undertaking. Petitioners could have easily inserted a remark in the clause granting authority to
the Company to renew the original bond, if the renewal thereof was not their intention.
The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of
the one who signs it[12] may also be applied to this Indemnity Agreement. And the mistake of
petitioners as to the legal effect of their obligation is ordinarily no reason for relieving them of
liability.[13]
WHEREFORE, premises considered, the Petition is DENIED. The Court of Appeals Decision
dated 2 October 2009 and Resolution dated 14 April 2010 in CA-G.R. CV No. 90828
are AFFIRMED.

WAIVER: — The undersigned hereby waive all the rights, privileges, and benefits that they have SO ORDERED.
or may have under Articles 2077, 2078, 2079, 2080 and 2081 of the Civil Code.

xxx

RENEWALS, ALTERATIONS AND SUBSTITUTIONS: - The undersigned hereby empower and

authorize the Company to grant or consent to the granting of, any extension,
continuation, increase, modifications, change, alteration and/or renewal of the original
bond herein referred to, and to execute or consent to the execution of any substitution for said
bond with the same or different conditions and parties, and the undersigned hereby hold
themselves jointly and severally liable to the Company for the original bond hereinabove
mentioned or for any extension, continuation, increase, modification, change,
alteration, renewal or substitution thereof until the full amount including principal interests,
premiums, costs and other expenses due to the Company thereunder is fully paid
up.[8] (Emphasis on the original)
Clearly, as far as respondent is concerned, petitioners have expressly bound themselves to the
contract, which provides for the terms granting authority to the Company to renew the original
bond. The terms of the contract are clear, explicit and unequivocal. Therefore, the subsequent
acts of the Company, through Somes, that led to the renewal of the surety bond are binding on
petitioners as well.

The intention of Somes to renew the bond cannot be denied, as she paid the renewal premium
and even submitted the renewed bond to IATA.[9]

The claim of petitioners that they only consented to the one-year validity of the surety bond must
be directed against Somes in a separate action. She allegedly convinced them that the bond
was valid for one year only. The allegation of petitioners is an agreement outside of the contract.
In other words, respondent is not privy to the alleged agreement between Somes and
petitioners. For respondent, there was a valid indemnity agreement executed by the parties, and
 G.R. No. 163512 February 28, 2007 was recruited, she already possessed the knowledge and expertise required in the pre-need
industry and respondent benefited tremendously from it. Third, a strict application of the non-
involvement clause would amount to a deprivation of petitioner’s right to engage in the only work
DAISY B. TIU, Petitioner
she knew.
vs.
PLATINUM PLANS PHIL., INC., Respondent.
In upholding the validity of the non-involvement clause, the trial court ruled that a contract in
restraint of trade is valid provided that there is a limitation upon either time or place. In the case
DECISION
of the pre-need industry, the trial court found the two-year restriction to be valid and reasonable.
The dispositive portion of the decision reads:
QUISUMBING, J.:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant,
For review on certiorari are the Decision1 dated January 20, 2004 of the Court of Appeals in CA- ordering the latter to pay the following:
G.R. CV No. 74972, and its Resolution2 dated May 4, 2004 denying reconsideration. The Court
of Appeals had affirmed the decision3 dated February 28, 2002 of the Regional Trial Court (RTC)
1. the amount of One Hundred Thousand Pesos (P100,000.00) for and as damages,
of Pasig City, Branch 261, in an action for damages, ordering petitioner to pay respondent
for the breach of the non-involvement provision (Item No. 8) of the contract of
₱100,000 as liquidated damages.
employment;

The relevant facts are as follows:

2. costs of suit.

Respondent Platinum Plans Philippines, Inc. is a domestic corporation engaged in the pre-need
There being no sufficient evidence presented to sustain the grant of attorney’s fees, the Court
industry. From 1987 to 1989, petitioner Daisy B. Tiu was its Division Marketing Director.
deems it proper not to award any.

On January 1, 1993, respondent re-hired petitioner as Senior Assistant Vice-President and

SO ORDERED.6
Territorial Operations Head in charge of its Hongkong and Asean operations. The parties
executed a contract of employment valid for five years.4
On appeal, the Court of Appeals affirmed the trial court’s ruling. It reasoned that petitioner
entered into the contract on her own will and volition. Thus, she bound herself to fulfill not only
On September 16, 1995, petitioner stopped reporting for work. In November 1995, she became
what was expressly stipulated in the contract, but also all its consequences that were not against
the Vice-President for Sales of Professional Pension Plans, Inc., a corporation engaged also in
good faith, usage, and law. The appellate court also ruled that the stipulation prohibiting non-
the pre-need industry.
employment for two years was valid and enforceable considering the nature of respondent’s
business.
Consequently, respondent sued petitioner for damages before the RTC of Pasig City, Branch
261. Respondent alleged, among others, that petitioner’s employment with Professional Pension
Petitioner moved for reconsideration but was denied. Hence, this appeal by certiorari where
Plans, Inc. violated the non-involvement clause in her contract of employment, to wit:
petitioner alleges that the Court of Appeals erred when:

8. NON INVOLVEMENT PROVISION – The EMPLOYEE further undertakes that during his/her
A.
engagement with EMPLOYER and in case of separation from the Company, whether voluntary
or for cause, he/she shall not, for the next TWO (2) years thereafter, engage in or be involved
with any corporation, association or entity, whether directly or indirectly, engaged in the same … [IT SUSTAINED] THE VALIDITY OF THE NON-INVOLVEMENT CLAUSE IN PETITIONER’S
business or belonging to the same pre-need industry as the EMPLOYER. Any breach of the CONTRACT CONSIDERING THAT THE PERIOD FIXED THEREIN IS VOID FOR BEING
foregoing provision shall render the EMPLOYEE liable to the EMPLOYER in the amount of One OFFENSIVE TO PUBLIC POLICY
Hundred Thousand Pesos (P100,000.00) for and as liquidated damages. 5
B.
Respondent thus prayed for ₱100,000 as compensatory damages; ₱200,000 as moral
damages; ₱100,000 as exemplary damages; and 25% of the total amount due plus ₱1,000 per
… [IT SUSTAINED] THE AWARD OF LIQUIDATED DAMAGES CONSIDERING THAT IT
counsel’s court appearance, as attorney’s fees.
BEING IN THE NATURE OF A PENALTY THE SAME IS EXCESSIVE, INIQUITOUS OR
UNCONSCIONABLE7
Petitioner countered that the non-involvement clause was unenforceable for being against public
order or public policy: First, the restraint imposed was much greater than what was necessary to
Plainly stated, the core issue is whether the non-involvement clause is valid.
afford respondent a fair and reasonable protection. Petitioner contended that the transfer to a
rival company was an accepted practice in the pre-need industry. Since the products sold by the
companies were more or less the same, there was nothing peculiar or unique to protect. Petitioner avers that the non-involvement clause is offensive to public policy since the restraint
Second, respondent did not invest in petitioner’s training or improvement. At the time petitioner imposed is much greater than what is necessary to afford respondent a fair and reasonable
protection. She adds that since the products sold in the pre-need industry are more or less the In this case, the non-involvement clause has a time limit: two years from the time petitioner’s
same, the transfer to a rival company is acceptable. Petitioner also points out that respondent employment with respondent ends. It is also limited as to trade, since it only prohibits petitioner
did not invest in her training or improvement. At the time she joined respondent, she already had from engaging in any pre-need business akin to respondent’s.1awphi1.net
the knowledge and expertise required in the pre-need industry. Finally, petitioner argues that a
strict application of the non-involvement clause would deprive her of the right to engage in the
More significantly, since petitioner was the Senior Assistant Vice-President and Territorial
only work she knows.
Operations Head in charge of respondent’s Hongkong and Asean operations, she had been
privy to confidential and highly sensitive marketing strategies of respondent’s business. To allow
Respondent counters that the validity of a non-involvement clause has been sustained by the her to engage in a rival business soon after she leaves would make respondent’s trade secrets
Supreme Court in a long line of cases. It contends that the inclusion of the two-year non- vulnerable especially in a highly competitive marketing environment. In sum, we find the non-
involvement clause in petitioner’s contract of employment was reasonable and needed since her involvement clause not contrary to public welfare and not greater than is necessary to afford a
job gave her access to the company’s confidential marketing strategies. Respondent adds that fair and reasonable protection to respondent.13
the non-involvement clause merely enjoined her from engaging in pre-need business akin to
respondent’s within two years from petitioner’s separation from respondent. She had not been
In any event, Article 1306 of the Civil Code provides that parties to a contract may establish such
prohibited from marketing other service plans.
stipulations, clauses, terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy.
As early as 1916, we already had the occasion to discuss the validity of a non-involvement
clause. In Ferrazzini v. Gsell,8 we said that such clause was unreasonable restraint of trade and
Article 115914 of the same Code also provides that obligations arising from contracts have the
therefore against public policy. In Ferrazzini, the employee was prohibited from engaging in any
force of law between the contracting parties and should be complied with in good faith. Courts
business or occupation in the Philippines for a period of five years after the termination of his
cannot stipulate for the parties nor amend their agreement where the same does not contravene
employment contract and must first get the written permission of his employer if he were to do
law, morals, good customs, public order or public policy, for to do so would be to alter the real
so. The Court ruled that while the stipulation was indeed limited as to time and space, it was not
intent of the parties, and would run contrary to the function of the courts to give force and effect
limited as to trade. Such prohibition, in effect, forces an employee to leave the Philippines to
thereto.15 Not being contrary to public policy, the non-involvement clause, which petitioner and
work should his employer refuse to give a written permission.
respondent freely agreed upon, has the force of law between them, and thus, should be
complied with in good faith.16
In G. Martini, Ltd. v. Glaiserman,9 we also declared a similar stipulation as void for being an
unreasonable restraint of trade. There, the employee was prohibited from engaging in any
Thus, as held by the trial court and the Court of Appeals, petitioner is bound to pay respondent
business similar to that of his employer for a period of one year. Since the employee was
₱100,000 as liquidated damages. While we have equitably reduced liquidated damages in
employed only in connection with the purchase and export of abaca, among the many
certain cases,17 we cannot do so in this case, since it appears that even from the start, petitioner
businesses of the employer, the Court considered the restraint too broad since it effectively
had not shown the least intention to fulfill the non-involvement clause in good faith.
prevented the employee from working in any other business similar to his employer even if his
employment was limited only to one of its multifarious business activities.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 20, 2004,
10 and the Resolution dated May 4, 2004, of the Court of Appeals in CA-G.R. CV No. 74972, are
However, in Del Castillo v. Richmond, we upheld a similar stipulation as legal, reasonable, and
AFFIRMED. Costs against petitioner.
not contrary to public policy. In the said case, the employee was restricted from opening, owning
or having any connection with any other drugstore within a radius of four miles from the
employer’s place of business during the time the employer was operating his drugstore. We said SO ORDERED.
that a contract in restraint of trade is valid provided there is a limitation upon either time or place
and the restraint upon one party is not greater than the protection the other party requires.

Finally, in Consulta v. Court of Appeals,11 we considered a non-involvement clause in

accordance with Article 130612 of the Civil Code. While the complainant in that case was an
independent agent and not an employee, she was prohibited for one year from engaging directly
or indirectly in activities of other companies that compete with the business of her principal. We
noted therein that the restriction did not prohibit the agent from engaging in any other business,
or from being connected with any other company, for as long as the business or company did
not compete with the principal’s business. Further, the prohibition applied only for one year after
the termination of the agent’s contract and was therefore a reasonable restriction designed to
prevent acts prejudicial to the employer.

Conformably then with the aforementioned pronouncements, a non-involvement clause is not

necessarily void for being in restraint of trade as long as there are reasonable limitations as to
time, trade, and place.
 G.R. No. L-15127 May 30, 1961
EMETERIO CUI, plaintiff-appellant,
vs.
ARELLANO UNIVERSITY, defendant-appellee.
CONCEPCION, J.:
Appeal by plaintiff Emeterio Cui from a decision of the Court of First Instance of Manila,
absolving defendant Arellano University from plaintiff's complaint, with costs against the plaintiff,
and dismissing defendant's counter claim, for insufficiency of proof thereon.
In the language of the decision appealed from:
The essential facts of this case are short and undisputed. As established by the
agreement of facts Exhibits X and by the respective oral and documentary evidence
introduced by the parties, it appears conclusive that plaintiff, before the school year
1948-1949 took up preparatory law course in the defendant University. After finishing
his preparatory law course plaintiff enrolled in the College of Law of the defendant
from the school year 1948-1949. Plaintiff finished his law studies in the defendant
university up to and including the first semester of the fourth year. During all the
school years in which plaintiff was studying law in defendant law college, Francisco R.
Capistrano, brother of the mother of plaintiff, was the dean of the College of Law and
legal counsel of the defendant university. Plaintiff enrolled for the last semester of his
law studies in the defendant university but failed to pay his tuition fees because his
uncle Dean Francisco R. Capistrano having severed his connection with defendant
and having accepted the deanship and chancellorship of the College of Law of Abad
Santos University, plaintiff left the defendant's law college and enrolled for the last
semester of his fourth year law in the college of law of the Abad Santos University
graduating from the college of law of the latter university. Plaintiff, during all the time
he was studying law in defendant university was awarded scholarship grants, for
scholastic merit, so that his semestral tuition fees were returned to him after the ends
of semester and when his scholarship grants were awarded to him. The whole amount
of tuition fees paid by plaintiff to defendant and refunded to him by the latter from the
first semester up to and including the first semester of his last year in the college of
law or the fourth year, is in total P1,033.87. After graduating in law from Abad Santos
University he applied to take the bar examination. To secure permission to take the
bar he needed the transcripts of his records in defendant Arellano University. Plaintiff
petitioned the latter to issue to him the needed transcripts. The defendant refused until
after he had paid back the P1,033 87 which defendant refunded to him as above
stated. As he could not take the bar examination without those transcripts, plaintiff
paid to defendant the said sum under protest. This is the sum which plaintiff seeks to
recover from defendant in this case.
Before defendant awarded to plaintiff the scholarship grants as above stated, he was
made to sign the following contract covenant and agreement:
"In consideration of the scholarship granted to me by the University, I hereby waive
my right to transfer to another school without having refunded to the University
(defendant) the equivalent of my scholarship cash.
(Sgd.) Emeterio Cui".
It is admitted that, on August 16, 1949, the Director of Private Schools issued Memorandum No.
38, series of 1949, on the subject of "Scholarship," addressed to "All heads of private schools,
colleges and universities," reading:
1. School catalogs and prospectuses submitted to this, Bureau show that some
schools offer full or partial scholarships to deserving students — for excellence in
scholarship or for leadership in extra-curricular activities. Such inducements to poor
but gifted students should be encouraged. But to stipulate the condition that such
scholarships are good only if the students concerned continue in the same school
nullifies the principle of merit in the award of these scholarships.
2. When students are given full or partial scholarships, it is understood that such
scholarships are merited and earned. The amount in tuition and other fees
corresponding to these scholarships should not be subsequently charged to the
recipient students when they decide to quit school or to transfer to another institution.
Scholarships should not be offered merely to attract and keep students in a school.
3. Several complaints have actually been received from students who have enjoyed
scholarships, full or partial, to the effect that they could not transfer to other schools
since their credentials would not be released unless they would pay the fees
corresponding to the period of the scholarships. Where the Bureau believes that the
right of the student to transfer is being denied on this ground, it reserves the right to
authorize such transfer.
that defendant herein received a copy of this memorandum; that plaintiff asked the Bureau of
Private Schools to pass upon the issue on his right to secure the transcript of his record in
defendant University, without being required to refund the sum of P1,033.87; that the Bureau of
Private Schools upheld the position taken by the plaintiff and so advised the defendant; and that,
this notwithstanding, the latter refused to issue said transcript of records, unless said refund
were made, and even recommended to said Bureau that it issue a written order directing the
defendant to release said transcript of record, "so that the case may be presented to the court
for judicial action." As above stated, plaintiff was, accordingly, constrained to pay, and did pay
under protest, said sum of P1,033.87, in order that he could take the bar examination in 1953.
Subsequently, he brought this action for the recovery of said amount, aside from P2,000 as
moral damages, P500 as exemplary damages, P2,000 as attorney's fees, and P500 as
expenses of litigation.
In its answer, defendant reiterated the stand it took, vis-a-vis the Bureau of Private Schools,
namely, that the provisions of its contract with plaintiff are valid and binding and that the
memorandum above-referred to is null and void. It, likewise, set up a counterclaim for
P10,000.00 as damages, and P3,000 as attorney's fees.
The issue in this case is whether the above quoted provision of the contract between plaintiff
and the defendant, whereby the former waived his right to transfer to another school without
refunding to the latter the equivalent of his scholarships in cash, is valid or not. The lower court
resolved this question in the affirmative, upon the ground that the aforementioned memorandum
of the Director of Private Schools is not a law; that the provisions thereof are advisory, not
mandatory in nature; and that, although the contractual provision "may be unethical, yet it was
more unethical for plaintiff to quit studying with the defendant without good reasons and simply
because he wanted to follow the example of his uncle." Moreover, defendant maintains in its
brief that the aforementioned memorandum of the Director of Private Schools is null and void WHEREFORE, the decision appealed from is hereby reversed and another one shall be entered
because said officer had no authority to issue it, and because it had been neither approved by sentencing the defendant to pay to the plaintiff the sum of P1,033.87, with interest thereon at the
the corresponding department head nor published in the official gazette. legal rate from September 1, 1954, date of the institution of this case, as well as the costs, and
dismissing defendant's counterclaim. It is so ordered.
We do not deem it necessary or advisable to consider as the lower court did, the question
whether plaintiff had sufficient reasons or not to transfer from defendant University to the Abad
Santos University. The nature of the issue before us, and its far reaching effects, transcend
personal equations and demand a determination of the case from a high impersonal plane.
Neither do we deem it essential to pass upon the validity of said Memorandum No. 38, for,
regardless of the same, we are of the opinion that the stipulation in question is contrary to public
policy and, hence, null and void. The aforesaid memorandum merely incorporates a sound
principle of public policy. As the Director of Private Schools correctly pointed, out in his letter,
Exhibit B, to the defendant,

There is one more point that merits refutation and that is whether or not the contract
entered into between Cui and Arellano University on September 10, 1951 was void as
against public policy. In the case of Zeigel vs. Illinois Trust and Savings Bank, 245 Ill.
180, 19 Ann. Case 127, the court said: 'In determining a public policy of the state,
courts are limited to a consideration of the Constitution, the judicial decisions, the
statutes, and the practice of government officers.' It might take more than a
government bureau or office to lay down or establish a public policy, as alleged in your
communication, but courts consider the practices of government officials as one of the
four factors in determining a public policy of the state. It has been consistently held in
America that under the principles relating to the doctrine of public policy, as applied to
the law of contracts, courts of justice will not recognize or uphold a transaction which
its object, operation, or tendency is calculated to be prejudicial to the public welfare, to
sound morality or to civic honesty (Ritter vs. Mutual Life Ins. Co., 169 U.S. 139;
Heding vs. Gallaghere 64 L.R.A. 811; Veazy vs. Allen, 173 N.Y. 359). If Arellano
University understood clearly the real essence of scholarships and the motives which
prompted this office to issue Memorandum No. 38, s. 1949, it should have not entered
into a contract of waiver with Cui on September 10, 1951, which is a direct violation of
our Memorandum and an open challenge to the authority of the Director of Private
Schools because the contract was repugnant to sound morality and civic honesty. And
finally, in Gabriel vs. Monte de Piedad, Off. Gazette Supp. Dec. 6, 1941, p. 67 we
read: 'In order to declare a contract void as against public policy, a court must find that
the contract as to consideration or the thing to be done, contravenes some established
interest of society, or is inconsistent with sound policy and good morals or tends
clearly to undermine the security of individual rights. The policy enunciated in
Memorandum No. 38, s. 1949 is sound policy. Scholarship are awarded in recognition
of merit not to keep outstanding students in school to bolster its prestige. In the
understanding of that university scholarships award is a business scheme designed to
increase the business potential of an education institution. Thus conceived it is not
only inconsistent with sound policy but also good morals. But what is morals?
Manresa has this definition. It is good customs; those generally accepted principles of
morality which have received some kind of social and practical confirmation. The
practice of awarding scholarships to attract students and keep them in school is not
good customs nor has it received some kind of social and practical confirmation
except in some private institutions as in Arellano University. The University of the
Philippines which implements Section 5 of Article XIV of the Constitution with
reference to the giving of free scholarships to gifted children, does not require scholars
to reimburse the corresponding value of the scholarships if they transfer to other
schools. So also with the leading colleges and universities of the United States after
which our educational practices or policies are patterned. In these institutions
scholarships are granted not to attract and to keep brilliant students in school for their
propaganda mine but to reward merit or help gifted students in whom society has an
established interest or a first lien. (Emphasis supplied.)
 G.R. No. L-13403 March 23, 1960 State of New Mexico, 48 NM 226, 149 P (2d) 120, 153 A.L.R. 635, 637-638)
(Emphasis supplied)
RAMON E. SAURA, plaintiff-appellant,
vs. In common law, certain agreements in consideration of the withdrawal of candidates for office
ESTELA P. SINDICO, defendant-appellee. have invariably been condemned by the courts as being against public policy, be it a withdrawal
from the race for nomination or, after nomination, from the race for election. (See notes in 37 L.
R. A. (N.S.) 289 and cases cited therein; 18 Am. Jur. Sec. 352, pp. 399-400)
REYES, J. B. L., J.:

Appeal on issues of law from an order of the Court of First Instance of Pangasinan dismissing
plaintiff's complaint for damages.
From the records it appears that Ramon E. Saura and Estela P. Sindico were contesting for
nomination as the official candidate of the Nacionalista Party in the fourth district of Pangasinan
in the congressional elections of November 12, 1957. On August 23, 1957, the parties entered
into a written agreement bearing the same date, containing among other matters stated therein,
a pledge that —
Each aspirant shall respect the result of the aforesaid convention, i.e., no one of us
shall either run as a rebel or independent candidate after losing in said convention.
In the case at hand, plaintiff complains on account of defendant's alleged violation of the
"pledge" in question by filing her own certificate o candidacy for a seat in the Congress of the
Philippines and in openly and actively campaigning for her election. In the face of the preceding
considerations, we certainly cannot entertain plaintiff's action, which would result in limiting the
choice of the electors to only those persons selected by a small group or by party boses.
The case of Pendleton vs. Pace, 9 S.W. (2nd) 437, cited by the appellant, is clearly inapplicable.
The court there only sanctioned the validity of an agreement by the opposing candidates for
nomination setting aside and re-submitting the nomination for another primary election on
account of the protest or contest filed by the losing candidate in the first primary election. To
abandon the contest proceedings, the candidates for nomination agreed to submit again their
nomination to the electors in the subsequent primary.

In the provincial convention held by the Nacionalista Party on August 31, 1957, Saura was Appellant likewise cites and quotes a portion of our ruling in Monsale vs. Nico, 83 Phil., 758; 46
elected and proclaimed the Party's official congressional candidate for the aforesaid district of Off. Gaz., 210, to the effect that it is not incompetent or a candidate to withdraw or annul his
Pangasinan. Nonetheless, Sindico, in disregard of the covenant, filed, on September 6, 1957, certificate of candidacy. This is not in point, for while we stated there that he may do so, there
her certificate of candidacy for the same office with the Commission on Elections, and she being no legal prohibition against such a voluntary withdrawal, it does not follow, nor did we
openly and actively campaigned for her election. Wherefore, on October 5, 1957, plaintiff Saura imply anywhere in the decision, that in case there is any agreement or consideration for such a
commenced this suit for the recovery of damages. Upon motion of the defendant, the lower withdrawal, said agreement or consideration should be held valid or given effect.
court, in its order of November 19, 1957, dismissed the complaint on the basis that the
agreement sued upon is null and void, in tat (1) the subject matter of the contract, being a public
We find it unnecessary to discuss the other points raised by the parties.
office, is not within the commerce of man; and (2) the "pledge" was in curtailment of the free
exercise of elective franchise and therefore against public policy. Hence, this appeal.
Wherefore, the order of dismissal appealed from is hereby affirmed. No pronouncement as to
costs.
We agree with the lower court in adjudging the contract or agreement in question a nullity.
Among those that may not be the subject matter (object) of contracts are certain rights of
individuals, which the law and public policy have deemed wise to exclude from the commerce of
man. Among them are the political rights conferred upon citizens, including, but not limited to,
once's right to vote, the right to present one's candidacy to the people and to be voted to public
office, provided, however, that all the qualifications prescribed by law obtain. Such rights may
not, therefore, be bargained away curtailed with impunity, for they are conferred not for individual
or private benefit or advantage but for the public good and interest.

Constitutional and statutory provision fix the qualifications of persons who may be eligible for
certain elective public offices. Said requirements may neither be enlarged nor reduced by mere
agreements between private parties. A voter possessing all the qualifications required to fill an
office may, by himself or through a political party or group, present his candidacy without further
limitations than those provided by law.

Every voter has a right to be a candidate for public office if he possesses the
qualifications required to fill the office. It does not necessarily follow that he can be the
candidate of a particular political party. The statute provides when and how one may
be a candidate of a political party. If he cannot fill the requirement so as to be the
candidates of the political party of his choice, he may still be a candidate at the
general election by petition. The right of the voter to vote at the general election for
whom he pleases cannot be limited. (Roberts vs. Cleveland, Secretary of State of
 G.R. No. L-65425 November 5, 1987
IRENEO LEAL, JOSE LEAL, CATALINA LEAL, BERNABELA LEAL, VICENTE LEAL
EUIOGIA LEAL PATERNO RAMOS, MACARIO DEL ROSARIO, MARGARITA ALBERTO,
VICTORIA TORRES, JUSTINA MANUEL, JULIAN MANUEL, MELANIA SANTOS,
CLEMENTE SAMARIO, MARIKINA VALLEY, INC., MIGUELA MENDOZA, and REGISTER OF
DEEDS OF RIZAL, petitioners,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT (4th Civil Cases Division), and
VICENTE SANTIAGO (Substituted by SALUD M. SANTIAGO), respondents.
SARMIENTO, J.:
In its resolution dated September 27, 1983, the respondent Intermediate Appellate
Court, 1 speaking through Justice Porfirio V, Sison, ordered, in part, the petitioners to accept the
sum of P5,600.00 from the private respondent as repurchase price of the lots described in the
"Compraventa" and, thereafter, to execute a Deed of Repurchase to effect transfer over
ownership over the same properties to the private respondent.
This ruling was a complete reversal of the earlier decision, 2 dated June 28, 1.978, penned by
Justice Paras, of the Court of Appeals, in the same case, affirming the trial court's dismissal of
the private respondent's complaint.
The petitioners, feeling aggrieved and astonished by the complete turnaround of the respondent
court, come to Us with this petition for review by certiorari.
The antecedent facts are undisputed.
This case brings us back almost half a century ago, on March 21, 1941, when a document
entitled "Compraventa," written entirely in the Spanish language, involving three parcels of land,
was executed by the private respondent's predecessors-in-interest, Vicente Santiago and his
brother, Luis Santiago, in favor of Cirilio Leal the deceased father of some of the petitioners,
Pursuant to this "Compraventa," the title over the three parcels of land in the name of the
vendors was cancelled and a new one was issued in the name of Cirilo Leal who immediately
took possession and exercised ownership over the said lands. When Cirilo died on December
10, 1959, the subject lands were inherited by his six children, who are among the petitioners,
and who caused the consolidation and subdivision of the properties among themselves.
Between the years 1960 and 1965, the properties were either mortgaged or leased by the
petitioners-children of Cirilo Leal — to their co-petitioners.
Sometime before the agricultural year 1966-1967, Vicente Santiago approached the petitioners
and offered re- repurchase the subject properties. Petitioners, however, refused the offer.
Consequently, Vicente Santiago instituted a complaint for specific performance before the then
Court of First Instance of Quezon City on August 2, 1967.
All the trial, the court a quo rendered its decision,-dismissing the complaint on the ground that
the same was still premature considering that there was, as yet, no sale nor any alienation
equivalent to a sale. Not satisfied with this decision, the private respondent appealed to the
Court of Appeals and the latter, acting through the Fourth Division and with Justice Edgardo
Paras as ponente affirmed the decision of the court a quo.
The petitioners seasonably filed a motion to amend the dispositive portion of the decision so as
to include an order for the cancellation of the annotations at the back of the Transfer certificates
of Title issued in their favor. The private respondent,-on the other hand, filed a-timely motion for
reconsideration of the above decision and an opposition to petitioners' motion to amend. These
incidents were not resolved until then Court of Appeals was abolished and in lieu of which the
Intermideate Appellate Court was established In view of the said reorganization, case was
reassigned to the Fourth Civil in this cases Division.
Resolving the abovestated motion for reconsideration, the respondent court, in a resolution
penned by Justice Sison and promulgated on September 27, 1983, ruled, as follows:
WHEREFORE, Our decision of June 28, 1978 is hereby reversed and set
aside and another one is rendered ordering: (1) defendants-appellees
surnamed Leal to accept the sum of P5,600.00 from plaintiff-appellant
(substituted by Salud M. Santiago) as repurchase price of the lots described
in the "Compraventa" of March 21, 1941, and thereafter to execute a deed
of repurchase sufficient in law to transfer ownership of the properties to
appellant Salud M. Santiago, the same to be done within five (5) days from
payment; (2) ordering the same defendants Leals and defendant Clemente
Samario to indemnify appellant in the sum of P3,087.50 as rental for the
year 1967-1968 and the same amount every year thereafter; (3) ordering an
the defendants jointly and severally to pay the sum of Pl,500.00 as
attorney's fees and other expenses of litigation; and (4) ordering defendant
Register of Deeds of Rizal to cancel Transfer Certificate of Title No. 42535
in the names of Vicente Santiago and Luis Santiago upon presentation of
the deed of sale herein ordered to be executed by the appellees in favor of
Salud M. Santiago and to issue thereof another Transfer Certificate of Title
in the name alone of Salud M. Santiago. No costs here and in the courts
(sic) below.
SO ORDERED.
Verily, the well-spring whence the present controversy arose is the abovementioned
"Compraventa," more particularly paragraph (b) thereof, to wit:
xxx xxx xxx
(b) En caso de venta, no podran vender a otros dichos tres lotes de terreno
sino al aqui vendedor Vicente Santiago, o los herederos o sucesores de
este por el niismo precio de CINCO MIL SEISCIENTOS PESOS
(P5,600.00) siempre y cuando estos ultimos pueden hacer la compra. 3
xxx xxx xxx
which is now the subject of varying and conflicting interpretations.
xxx xxx xxx
It is admitted by both parties that the phrase "they shall not sell to others these three lots but
only to the seller Vicente Santiago or to his heirs or successors" is an express prohibition
against the sale of the lots described in the "Compraventa" to third persons or strangers to the
contract. However, while private respondent naturally lauds the resolution of Justice Sison,
which sustains the validity of this prohibition, the petitioners, on the other hand, endorse the
decision penned by Justice Paras, which states, in part:
xxx xxx xxx
Finally, there is grave doubt re the validity of the ostensible resolutory
condition here, namely, the prohibition to sell the lots to persons other than
the vendor (appellant); uncertainly, a prohibition to alienate should not
exceed at most a period of twenty years, otherwise there would be
subversion of public policy, which naturally frowns on unwarranted
restrictions on the right of ownership. 4
xxx xxx xxx
We agree with the Paras ponencia.
Contracts are generally binding between the parties, their assigns and heirs; however, under Art.
1255 of the Civil Code of Spain, which is applicable in this instance, pacts, clauses, and
conditions which are contrary to public order are null and void, thus, without any binding effect.
Parenthetically, the equivalent provision in the Civil Code of the Philippines is that of Art. 1306,
which states: "That contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy. Public order signifies the public weal — public
policy. 5 Essentially, therefore, public order and public policy mean one and the same thing.
Public policy is simply the English equivalent of "order publico" in Art. 1255 of the Civil Code of
Spain. 6
One such condition which is contrary to public policy is the present prohibition to self to third
parties, because the same virtually amounts to a perpetual restriction to the right of ownership,
specifically the owner's right to freely dispose of his properties. This, we hold that any such
prohibition, indefinite and stated as to time, so much so that it shall continue to be applicable
even beyond the lifetime of the original parties to the contract, is, without doubt, a nullity. In the
light of this pronouncement, we grant the petitioners' prayer for the cancellation of the
annotations of this prohibition at the back of their Transfer Certificates 'Title.
It will be noted, moreover, that the petitioners have never sold, or even attempted to sell, the
properties subject of the "Compraventa. "
We now come to what we believe is the very issue in this case which is, whether or not under
the aforequoted paragraph (b) of the "Compraventa" a right of repurchase in favor of the private
respondent exist.
The ruling of the Fourth Division (Justice Paras) is that the said stipulation does not grant a right
to repurchase. Contrarily, the resolution of the Fourth Civil Cases Division (Justice P. V. Sison)
interpreted the same provision as granting the right to repurchase subject to a condition
precedent.
Thus, the assailed Resolution, reversing the earlier decision of the same respondent court, ruled
xxx xxx xxx
The all-importartant phrase "en caso de venta," must of necessity refer to
the sale of the properties either by Cirilo or his heirs to the Santiago
brothers themselves or to their heirs, including appellants Vicente Santiago
including appellants Vicente Santiago and Salud M Santiago, for the same
sum of P5,600.00, "siempre y cuando estos ultimos pueden hacer la
compra" (when the latter shall be able to buy it).
xxx xxx xxx
... We repeat, The words envision the situation contemplated by the
contracting parties themselves, the resale of the lots to their owners, and
NOT to a sale of the lots to third parties or strangers to the contracts. ... 7
xxx xxx xxx
The law provides that for conventional redemption to take place, the vendor should reserve, in
no uncertain terms, the right to repurchase the thing sold.8 Thus, the right to redeem must be
expressly stipulated in the contract of sale in order that it may have legal existence.
In the case before us, we cannot and any express or implied grant of a right to repurchase, nor
can we infer, from any word or words in the questioned paragraph, the existence of any such
right. The interpretation in the resolution (Justice Sison) is rather strained. The phrase "in case
case" of should be construed to mean "should the buyers wish to sell which is the plain and
simple import of the words, and not "the buyers should sell," which is clearly a contorted
construction of the same phrase. The resort to Article 1373 of the Civil Code of the Philippines is
erroneous. The subject phrase is patent and unambiguous, hence, it must not be given another
interpretation
But even assuming that such a right of repurchase is granted under the "Compraventa," the
petitioner correctly asserts that the same has already prescribed. Under Art. 1508 of the Civil
Code of Spain (Art,. 1606 of the Civil Code of the Philippines), the right to redeem or
repurchase, in the absence of an express agreement as to time, shall last four years from the
date of the contract. In this case then, the right to repurchase, if it was at four guaranteed under
in the "Compraventa," should have been exercise within four years from March 21, 1941
(indubitably the date of execution of the contract), or at the latest in 1945.
In the respondent court's resolution, it is further ruled that the right to repurchase was given birth
by the condition precedent provided for in the phrase "siempre y cuando estos ultimos pueden
hacer la compra" (when the buyer has money to buy). In other words, it is the respondent court's
contention that the right may be exercised only when the buyer has money to buy. If this were
so, the second paragraph of Article 1508 would apply — there is agreement as to the time,
although it is indefinite, therefore, the right should be exercised within ten years, because the
law does not favor suspended ownership. Since the alleged right to repurchase was attempted
to be exercised by Vicente Santiago only in 1966, or 25 years from the date of the contract, the
said right has undoubtedly expired.
WHEREFORE, in view of the foregoing, the Resolution dated September 27, 1983, of the
respondent court is SET ASIDE and the Decision promulgated on June 28, 1978 is hereby
REINSTATED. The annotations of the prohibition to sell at the back of TCT Nos. 138837,
138838, 138839, 138840, 138841, and 138842 are hereby ordered CANCELLED. Costs against
the private respondent.
SO ORDERED.
 G.R. No. L-46591 July 28, 1987
BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner,
vs.
HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXI
and FLORANTE DEL VALLE, respondents.
MELENCIO-HERRERA, J.:
This is a Petition to review on certiorari the Decision of respondent Court, the dispositive portion
of which decrees:
WHEREFORE, the Court finds that the enforcement of the escalation clause
retroactively before the lapse of the 15-year period stated in the promissory note is
contrary to Sec. 3 of Presidential Decree No. 116 and Sec. 109 of Republic Act No.
265, and hereby declares null and void the said escalation clause. The respondent
Banco Filipino Savings and Mortgage Bank is hereby ordered to desist from enforcing
the increased rate of interest on petitioner's loan.
SO ORDERED.
The facts are not in dispute:
On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan secured by
a real estate mortgage (the LOAN, for short) from petitioner BANCO FILIPINO1 in the sum of
Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be amortized within
fifteen (15) years at twelve (12%) per cent interest annually. Hence, the LOAN still had more
than 730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was issued by the
Central Bank.
Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as
follows:
I/We hereby authorize Banco Filipino to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event law should be
enacted increasing the lawful rates of interest that may be charged on this particular
kind of loan.
The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2,
1976, the pertinent portion of which reads:
3. The maximum rate of interest, including commissions, premiums, fees and other
charges on loans with maturity of more than seven hundred thirty (730) days, by
banking institutions, including thrift banks and rural banks, or by financial
intermediaries authorized to engage in quasi-banking functions shall be nineteen
percent (19%) per annum.
xxx xxx xxx
7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof
shall continue to be governed by the Usury Law, as amended."
CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by
Presidential Decree No. 116 (Amending Further Certain Sections of the Usury Law) promulgated
on January 29, 1973, the applicable section of which provides:
Sec. 2. The same Act is hereby amended by adding the following section immediately
after section one thereof, which reads as follows:
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or
rates of interest for the loan or renewal thereof or the forbearance of any money,
goods or credits, and to change such rate or rates whenever warranted by prevailing
economic and social conditions: Provided, that such changes shall not be made
oftener than once every twelve months.
The same grant of authority appears in P.D. No. 858, promulgated on December 31, 1975,
except that the limitation on the frequency of changes was eliminated.
On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on
June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum
effective on March 1, 1976.
On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a letter to the
BORROWER as follows:
September 24, 1976
Mr. Florante del Valle
14 Palanca Street
B.F. Homes, Paranaque
Rizal
Dear Mr. del Valle:
This refers to your letter dated August 28, 1976 addressed to the Governor, Central Bank of the
Philippines, seeking clarification and our official stand on Banco Filipino's recent decision to
raise interest rates on lots bought on installment from 12% to 17% per annum.
A verification made by our Examiner of the copy of your Promissory Note on file with Banco
Filipino showed that the following escalation clause with your signature is stamped on the
Promissory Note:
I /We hereby authorize Banco Filipino to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event a law should be
enacted increasing the lawful rates of interest that may be charged on this particular
kind of loan.
In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 dated
June 11, 1976, adopted the following guidelines to govern interest rate adjustments by banks
and non-banks performing quasi-banking functions on loans already existing as of January 3,
1976, in the light of Central Bank Circulars Nos. 492-498:
 l. Only banks and non-bank financial intermediaries performing quasi-banking
functions may increase interest rates on loans already existings of January 2, 1976,
provided that:
a. The pertinent loan contracts/documents contain escalation clauses
expressly authorizing lending bank or non-bank performing quasi-banking
functions to increase the rate of interest stipulated in the contract, in the
event that any law or Central Bank regulation is promulgated increasing the
maximum interest rate for loans; and
b. Said loans were directly granted by them and the remaining maturities
thereof were more than 730 days as of January 2, 1976; and
2. The increase in the rate of interest can be effective only as of January 2, 1976 or on
a later date.
The foregoing guidelines, however, shall not be understood as precluding affected parties from
questioning before a competent court of justice the legality or validity of such escalation clauses.
We trust the above guidelines would help you resolve your problems regarding additional
interest charges of Banco Filipino.
Very truly yours,
(Sgd.) MERCEDES C. PAREDES
Director
Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the
promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief"
with respondent Court, praying that the Escalation Clause be declared null and void and that
BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest on the
BORROWER's real estate loan.
For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the
BORROWER authorized it to increase the interest rate once a law was passed increasing the
rate of interest and that its authority to increase was provided for by CIRCULAR No. 494.
In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO
to desist from enforcing the increased rate of interest on the BORROWER's loan. It reasoned
out that P.D. No. 116 does not expressly grant the Central Bank authority to maximize interest
rates with retroactive effect and that BANCO FILIPINO cannot legally impose a higher rate of
interest before the expiration of the 15-year period in which the loan is to be paid other than the
12% per annum in force at the time of the execution of the loan.
It is from that Decision in favor of the BORROWER that BANCO FILIPINO has come to this
instance on review by Certiorari. We gave due course to the Petition, the question being one of
law.
On February 24, 1983, the parties represented by their respective counsel, not only moved to
withdraw the appeal on the ground that it had become moot and academic "because of recent
developments in the rules and regulations of the Central Bank," but also prayed that "the
decision rendered in the Court of First Instance be therefore vacated and declared of no force
and effect as if the case was never filed," since the parties would like to end this matter once
and for all."
However, "considering the subject matter of the controversy in which many persons similarly
situated are interested and because of the need for a definite ruling on the question," the Court,
in its Resolution of February 24, 1983, impleaded the Central Bank and required it to submit its
Comment, and encouraged homeowners similarly situated as the BORROWER to intervene in
the proceedings.
At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage homeowner at B.F.
Resort Subdivision, was present and manifested that he was in a similar situation as the
BORROWER. Since then, he has written several letters to the Court, pleading for early
resolution of the case. The Court allowed the intervention of Lolita Perono2 and issued a
temporary restraining order enjoining the Regional Trial Court (Pasay City Branch) in the case
entitled "Banco Filipino Savings and Mortgage Bank vs. Lolita Perono" from issuing a writ of
possession over her mortgaged property. Also snowed to intervene were Enrique Tabalon, Jose
Llopis, et als., who had obtained loans with Identical escalation clauses from Apex Mortgage and
Loans Corporation, apparently an affiliate of BANCO FILIPINO, Upon motion of Jose Llopis, a
Temporary Restraining Order was likewise issued enjoining the foreclosure of his real estate
mortgage by BANCO FILIPINO.
The Court made it explicit, however, that intervention was allowed only for the purpose of
"joining in the discussion of the legal issue involved in this proceedings, to wit, the validity of the
so-called "escalation clause," or its applicability to existing contracts of loan."
The Central Bank has submitted its Comment and Supplemental Comment and like BANCO
FILIPINO, has taken the position that the issuance of its Circulars is a valid exercise of its
authority to scribe maximum rates of interest and that, based on general principles of contract,
the Escalation Clause is a valid provision in the loan agreement provided that "(1) the increased
rate imposed or charged by petitioner does not exceed the ceiling fixed by law or the Monetary
Board; (2) the increase is made effective not earlier than the effectivity of the law or regulation
authorizing such an increase; and (3) the remaining maturities of the loans are more than 730
days as of the effectivity of the law or regulation authorizing such an increase. However, with
respect to loan agreements entered into,on or after March 17, 1980, such agreement, in order to
be valid, must also include a de-escalation clause as required by Presidential Decree No.
1684."3
The substantial question in this case is not really whether the Escalation Clause is a valid or void
stipulation. There should be no question that the clause is valid.
Some contracts contain what is known as an "escalator clause," which is defined as
one in which the contract fixes a base price but contains a provision that in the event
of specified cost increases, the seller or contractor may raise the price up to a fixed
percentage of the base. Attacks on such a clause have usually been based on the
claim that, because of the open price-provision, the contract was too indefinite to be
enforceable and did not evidence an actual meeting of the minds of the parties, or that
the arrangement left the price to be determined arbitrarily by one party so that the
contract lacked mutuality. In most instances, however, these attacks have been
unsuccessful.4
The Court further finds as a matter of law that the cost of living index adjustment, or
escalator clause, is not substantively unconscionable.
 Cost of living index adjustment clauses are widely used in commercial contracts in an
effort to maintain fiscal stability and to retain "real dollar" value to the price terms of
long term contracts. The provision is a common one, and has been universally upheld
and enforced. Indeed, the Federal government has recognized the efficacy of
escalator clauses in tying Social Security benefits to the cost of living index, 42
U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the major
labor unions are other examples. That inflation, expected or otherwise, will cause a
particular bargain to be more costly in terms of total dollars than originally
contemplated can be of little solace to the plaintiffs.5
What should be resolved is whether BANCO FILIPINO can increase the interest rate on the
LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion
that it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino to correspondingly increase
the interest rate stipulated in this contract without advance notice to me/us in the event
a law
increasing
the lawful rates of interest that may be charged
on this particular
kind of loan. (Paragraphing and emphasis supplied)
It is clear from the stipulation between the parties that the interest rate may be increased "in the
event a law should be enacted increasing the lawful rate of interest that may be charged on this
particular kind of loan." " The Escalation Clause was dependent on an increase of rate made by
"law" alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly
issued is not strictly a statute or a law, it has, however, the force and effect of law."6 (Italics
supplied). "An administrative regulation adopted pursuant to law has the force and effect of
law."7 "That administrative rules and regulations have the force of law can no longer be
questioned. "8
The distinction between a law and an administrative regulation is recognized in the Monetary
Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976
(supra). According to the guidelines, for a loan's interest to be subject to the increases provided
in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event
that any law or Central Bank regulation is promulgated increasing the maximum interest rate for
loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any
law."
The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding
section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could
stipulate that the rate of interest agreed upon may be increased in the event that the applicable
maximum rate of interest is increased "by law or by the Monetary Board." To quote:
Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money, goods
or credits may stipulate that the rate of interest agreed upon may be increased in the
event that the applicable maximum rate of interest
is increased by law or by the Monetary Board:
Provided, That such stipulation shall be valid only if there is also a stipulation in the
agreement that the rate of interest agreed upon shall be reduced in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board;
Provided, further, That the adjustment in the rate of interest agreed upon shall take
effect on or after the effectivity of the increase or decrease in the maximum rate of
interest. (Paragraphing and emphasis supplied).
It is now clear that from March 17, 1980, escalation clauses to be valid should specifically
provide: (1) that there can be an increase in interest if increased by law or by the Monetary
Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of
the stipulated interest "in the event that the applicable maximum rate of interest is reduced by
law or by the Monetary Board."
While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation clause
in the Escalation Clause in question provides another reason why it should not be given effect
because of its one-sidedness in favor of the lender.
2. The Escalation Clause specifically stipulated that the increase in interest rate was to be "on
this particular kind of loan, " meaning one secured by registered real estate mortgage.
Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals continue to be
governed by the Usury Law, as amended." So do Circular No. 586 of the Central Bank, which
superseded Circular No. 494, and Circular No. 705, which superseded Circular No. 586. The
Usury Law, as amended by Acts Nos. 3291, 3998 and 4070, became effective on May 1, 1916.
It provided for the maximum yearly interest of 12% for loans secured by a mortgage upon
registered real estate (Section 2), and a maximum annual interest of 14% for loans covered by
security other than mortgage upon registered real estate (Section 3). Significant is the separate
treatment of registered real estate loans and other loans not secured by mortgage upon
registered real estate. It appears clear in the Usury Law that the policy is to make interest rates
for loans guaranteed by registered real estate lower than those for loans guaranteed by
properties other than registered realty.
On June 15, 1948, Congress approved Republic Act No. 265, creating the Central Bank, and
establishing the Monetary Board. That law provides that "the Monetary Board may, within the
limits prescribed in the Usury law,9 fix the maximum rates of interest which banks may charge for
different types of loans and for any other credit operations, ... " and that "any modification in the
maximum interest rates permitted for the borrowing or lending operations of the banks shall
apply only to future operations and not to those made prior to the date on which the modification
becomes effective" (Section 109).1avvphi1
On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The Decree
gave authority to the Monetary Board "to prescribe maximum rates of interest for the loan or
renewal thereof or the forbearance of any money goods or credits, and to change such rate or The Temporary Restraining Orders heretofore issued are hereby made permanent if the
rates whenever warranted by prevailing economic and social conditions. In one section,10 the escalation clauses are Identical to the one herein and the loans involved have applied the
Monetary Board could prescribe the maximum rate of interest for loans secured by mortgage increased rate of interest authorized by Central Bank Circular No. 494.
upon registered real estate or by any document conveying such real estate or an interest therein
and, in another separate section,11 the Monetary Board was also granted authority to fix the
SO ORDERED.
maximum interest rate for loans secured by types of security other than registered real property.
The two sections read:

SEC. 3. Section two of the same Act is hereby amended to read as follows:

SEC. 2. No person or corporation shall directly or indirectly take or receive

in money or other property, real or personal, or choses in action, a higher
rate of interest or greater sum or value, including commissions, premiums,
fines and penalties, for the loan or renewal thereof or forbearance of money,
goods, or credits, where such loan or renewal or forbearance is secured in
whole or in part by a mortgage upon real estate the title to which is duly
registered or by any document conveying such real estate or an interest
therein, than twelve per centum per annum or the maximum rate prescribed
by the Monetary Board and in force at the time the loan or renewal thereof
or forbearance is granted: Provided, That the rate of interest under this
section or the maximum rate of interest that may be prescribed by the
Monetary Board under this section may likewise apply to loans secured by
other types of security as may be specified by the Monetary Board.

SEC. 4. Section three of the same Act is hereby amended to read as follows:

SEC. 3. No person or corporation shall directly or indirectly demand, take,

receive, or agree to charge in money or other property, real or personal, a
higher rate or greater sum or value for the loan or forbearance of money,
goods, or credits, where such loan or forbearance is not secured as
provided in Section two hereof, than fourteen per centum per annum or the
maximum rate or rates prescribed by the Monetary Board and in force at the
time the loan or forbearance is granted.

Apparent then is that the separate treatment for the two classes of loans was maintained. Yet,
CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to unlike
Circular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1, 1979, which fix
the effective rate of interest on loan transactions with maturities of more than 730 days to not
exceeding 19% per annum (Circular No. 586) and not exceeding 21% per annum (Circular No.
705) "on both secured and unsecured loans as defined by the Usury Law, as amended."

In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan was
meant by the Monetary Board, the more equitable construction is to limit CIRCULAR No. 494 to
loans guaranteed by securities other than mortgage upon registered realty.

WHEREFORE, the Court rules that while an escalation clause like the one in question can
ordinarily be held valid, nevertheless, petitioner Banco Filipino cannot rely thereon to raise the
interest on the borrower's loan from 12% to 17% per annum because Circular No. 494 of the
Monetary Board was not the "law" contemplated by the parties, nor should said Circular be held
as applicable to loans secured by registered real estate in the absence of any such specific
indication and in contravention of the policy behind the Usury Law. The judgment appealed from
is, therefore, hereby affirmed in so far as it orders petitioner Banco Filipino to desist from
enforcing the increased rate of interest on petitioner's loan.
 G.R. No. 101771 December 17, 1996
SPOUSES MARIANO and GILDA FLORENDO, petitioners,
vs.
COURT OF APPEALS and LAND BANK OF THE PHILIPPINES, respondents.
PANGANIBAN, J.:p
May a bank unilaterally raise the interest rate on a housing loan granted an employee, by reason
of the voluntary resignation of the borrower?
Such is the query raised in the petition for review on certiorari now before us, which assails the
Decision promulgated on June 19, 1991 by respondent Court of Appeals 1 in CA-G.R. CV No.
24956, upholding the validity and enforceability of the escalation by private respondent Land
Bank of the Philippines of the applicable interest rate on the housing loan taken out by
petitioner-spouses.
The Antecedent Facts
Petitioners filed an action for Injunction with Damages docketed as Civil Case No. 86-38146
before the Regional Trial Court of Manila, Branch XXII against respondent bank. Both parties,
after entering into a joint stipulation of facts, submitted the case for decision on the basis of said
stipulation and memoranda. The stipulation reads in part: 2
1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent
Bank) from May 17, 1976 until August 16, 1984 when she voluntarily
resigned. However, before her resignation, she applied for a housing loan of
P148,000.00, payable within 25 years from (respondent bank's) Provident
Fund on July 20, 1983;
2. That (petitioners) and (respondent bank), through the latter's duly
authorized representative, executed the Housing Loan Agreement, . . .;
3. That, together with the Housing Loan Agreement, (petitioners) and
(respondent bank), through the latter's authorized representative, also
executed a Real Estate Mortgage and Promissory
Note, . . .;
4. That the loan . . . was actually given to (petitioner) Gilda Florendo, . . ., in
her capacity as employee of (respondent bank);
5. That on March 19, 1985, (respondent bank) increased the interest rate on
(petitioner's) loan from 9% per annum to 17%, the said increase to take
effect on March 19, 1985;
6. That the details of the increase are embodied in (Landbank's) ManCom
Resolution No. 85-08 dated March 19, 1985, . . . , and in a PF (Provident
Fund) Memorandum Circular (No. 85-08, Series of 1985), . . .;
7. That (respondent bank) first informed (petitioners) of the said increase in
a letter dated June 7, 1985, . . . . Enclosed with the letter are a copy of the
PF Memo Circular . . . and a Statement of Account as of May 31, 1985, . . .;
8. That (petitioners) protested the increase in a letter dated June 11, 1985 to
which (respondent bank) replied through a letter dated July 1, 1985, . . .
Enclosed with the letter is a Memorandum dated June 26, 1985 of
(respondent bank's) legal counsel, A.B. F. Gaviola, Jr., . . .;
9. That thereafter, (respondent bank) kept on demanding that (petitioner)
pay the increased interest or the new monthly installments based on the
increased interest rate, but Plaintiff just as vehemently maintained that the
said increase is unlawful and unjustifiable. Because of (respondent bank's)
repeated demands, (petitioners) were forced to file the instant suit for
Injunction and Damages;
10. That, just the same, despite (respondent bank's) demands that
(petitioners) pay the increased interest or increased monthly installments,
they (petitioners) have faithfully paid and discharged their loan obligations,
more particularly the monthly payment of the original stipulated installment
of P1,248.72. Disregarding (respondent bank's) repeated demand for
increased interest and monthly installment, (petitioners) are presently up-to-
date in the payments of their obligations under the original contracts
(Housing Loan Agreement, Promissory Note and Real Estate Mortgage)
with (respondent bank);
xxx xxx xxx
The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage
referred to above as the basis for the escalation are:
a. Section I-F of Article VI of the Housing Loan Agreement, 3 which provides
that, for as long as the loan or any portion thereof or any sum that may be
due and payable under the said loan agreement remains outstanding, the
borrower shall —
f) Comply with all the rules and regulations of the
program imposed by the LENDER and to comply with
all the rules and regulations that the Central Bank of the
Philippines has imposed or will impose in connection
with the financing programs for bank officers and
employees in the form of fringe benefits.
b. Paragraph (f) of the Real Estate Mortgage 4 which states:
The rate of interest charged on the obligation secured
by this mortgage. . ., shall be subject, during the life of
this contract, to such an increase/decrease in
accordance with prevailing rules, regulations and
circulars of the Central Bank of the Philippines as the
Provident Fund Board of Trustees of the Mortgagee
may prescribe for its debtors and subject to the
condition that the increase/decrease shall only take
 effect on the date of effectivity of said
increase/decrease and shall only apply to the remaining
balance of the loan.
c. and ManCom (Management Committee) Resolution No. 85-08, together
with PF (Provident Fund) Memorandum Circular No. 85-08, which escalated
the interest rates on outstanding housing loans of bank employees who
voluntarily "secede" (resign) from the Bank; the range of rates varied
depending upon the number of years service rendered by the employees
concerned. The rates were made applicable to those who had previously
resigned from the bank as well as those who would be resigning in the
future.
The trial court ruled in favor of respondent bank, and held that the bank was vested with
authority to increase the interest rate (and the corresponding monthly amortizations) pursuant to
said escalation provisions in the housing loan agreement and the mortgage contract. The
dispositive portion of the said decision reads: 5
WHEREFORE, judgment is hereby rendered denying the instant suit for
injunction and declaring that the rate of interest on the loan agreement in
question shall be 17% per annum and the monthly amortization on said loan
properly raised to P2,064.75 a month, upon the finality of this judgment.
xxx xxx xxx
Petitioners promptly appealed, arguing that, inter alia, the increased rate of interest is onerous
and was imposed unilaterally, without the consent of the borrower-spouses. Respondent bank
likewise appealed and contested the propriety of having the increased interest rate apply only
upon the finality of the judgment and not from March 19, 1985.
The respondent Court subsequently affirmed with modification the decision of the trial court,
holding that: 6
. . . Among the salient provisions of the mortgage is paragraph (f) which
provides that the interest rate shall be subject, during the term of the loan, to
such increases/decreases as may be allowed under the prevailing rules
and/or circulars of the Central Bank and as the Provident Fund of the Bank
may prescribe for its borrowers. In other words, the spouses agreed to the
escalation of the interest rate on their original loan. Such an agreement is a
contractual one and the spouses are bound by it. Escalation clauses have
been ruled to be valid stipulations in contracts in order to maintain fiscal
stability and to retain the value of money in long term contracts (Insular
Bank of Asia and America vs. Spouses Epifania Salazar and Ricardo
Salazar, 159 SCRA 133). One of the conditions for the validity of an
escalation clause such as the one which refers to an increase rate is that
the contract should also contain a proviso for a decrease when
circumstances so warrant it. Paragraph (f) referred to above contains such
provision.
A contract is binding on the parties no matter that a provision thereof later
proves onerous and which on hindsight, a party feels he should not have
agreed to in the first place.
and disposed as follows: 7
WHEREFORE, the dispositive part of the decision is MODIFIED in the
sense that the interest of 17% on the balance of the loan of the spouses
shall be computed starting July 1, 1985.
Dissatisfied, the petitioners had recourse to this Court.
The Issues
Petitioners ascribe to respondent Court "a grave and patent error" in not nullifying the
respondent bank's unilateral increase of the interest rate and monthly amortizations of the loan
—
1. . . . (simply because of) a bare and unqualified stipulation that the interest
rate may be increased;
2. . . . on the ground that the increase has no basis in the contracts between
the parties;
3. . . . on the ground that the increase violates Section 7-A of the Usury
Law;
4. . . . on the ground that the increase and the contractual provision that
(respondent bank) relies upon for the increase are contrary to morals, good
customs, public order and public policy. 8
The key issue may be simply presented as follows: Did the respondent bank have a valid and
legal basis to impose an increased interest rate on the petitioners' housing loan?
The Court's Ruling
Basis for Increased Interest Rate
Petitioners argue that the HLA provision covers only administrative and other matters, and does
not include interest rates per se, since Article VI of the agreement deals with insurance on and
upkeep of the mortgaged property. As for the stipulation in the mortgage deed, they claim that it
is vague because it does not state if the "prevailing" CB rules and regulations referred to therein
are those prevailing at the time of the execution of these contracts or at the time of the increase
or decrease of the interest rate. They insist that the bank's authority to escalate interest rates
has not been shown to be "crystal-clear as a matter of fact" and established beyond doubt. The
contracts being "contracts of adhesion," any vagueness in their provisions should be interpreted
in favor of petitioners.
We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it
does not make any reference to increases or decreases in the interest rate on loans. However,
paragraph (f) of the mortgage contract is clearly and indubitably an escalation provision, and
therefore, the parties were and are bound by the said stipulation that "(t)he rate of interest
charged on the obligation secured by this mortgage . . ., shall be subject, during the life of this
contract, to such an increase/decrease in accordance with prevailing rules, regulations and
circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the
Mortgagee (respondent bank) may prescribe for its debtors . . . ." 9 Contrary to petitioners'
allegation, there is no vagueness in the aforequoted proviso; even their own arguments (below)
indicate that this provision is quite clear to them.
In Banco Filipino Savings & Mortgage Bank vs. Navarro, 10 this Court in essence ruled that in
general there is nothing inherently wrong with escalation clauses. In IBAA vs. Spouses
Salazar, 11 the Court reiterated the rule that escalation clauses are valid stipulations in
commercial contracts to maintain fiscal stability and to retain the value of money in long term
contracts.
Application of the Escalation to Petitioners
Petitioners however insist that while ManCom Resolution No. 85-08 authorized a rate increase
for resigned employees, it could not apply as to petitioner-employee because nowhere in the
loan agreement or mortgage contract is it provided that petitioner-wife's resignation will be a
ground for the adjustment of interest rates, which is the very bedrock of and the raison
d'etre specified in said ManCom Resolution.
They additionally contend that the escalation is violative of Section 7-A of the Usury Law (Act
No. 2655, as amended) which requires a law or MB act fixing an increased maximum rate of
interest, and that escalation upon the will of the respondent bank is contrary to the principle of
mutuality of contracts, per Philippine National Bank vs. Court of Appeals. 12
What is actually central to the disposition of this case is not really the validity of the escalation
clause but the retroactive enforcement of the ManCom Resolution as against petitioner-
employee. In the case at bar, petitioners have put forth a telling argument that there is in fact no
Central Bank rule, regulation or other issuance which would have triggered an application of the
escalation clause as to her factual situation.
In Banco Filipino, 13 this Court, speaking through Mme. Justice Ameurfina M. Herrera, disallowed
the bank from increasing the interest rate on the subject loan from 12% to 17% despite an
escalation clause in the loan agreement authorizing the bank to "correspondingly increase the
interest rate stipulated in this contract without advance notice to me/us in the event a law should
be enacted increasing the lawful rates of interest that may be charged on this particular kind of
loan". In said case, the bank had relied upon a Central Bank circular as authority to up its rates.
The Court ruled that CB Circular No. 494, although it has the effect of law, is not a law, but an
administrative regulation.
In PNB vs. Court of Appeals, 14 this Court disallowed the increases in interest rate imposed by
the petitioner-bank therein, on the ground, among others, that said bank relied merely on its own
Board Resolution (No. 681), PNB Circular No. 40-79-84, and PNB Circular No. 40-129-84, which
were neither laws nor resolutions of the Monetary Board.
In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on
January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued
February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest
rate ceiling prescribed under or pursuant to the Usury Law, as amended, was promulgated in
1982. These and other relevant CB issuances had already come into existence prior to the
perfection of the housing loan agreement and mortgage contract, and thus it may be said that
these regulations had been taken into consideration by the contracting parties when they first
entered into their loan contract. In light of the CB issuances in force at that time, respondent
bank was fully aware that it could have imposed an interest rate higher than 9% per annum rate
for the housing loans of its employees, but it did not. In the subject loan, the respondent bank
knowingly agreed that the interest rate on petitioners' loan shall remain at 9% p.a. unless a CB
issuance is passed authorizing an increase (or decrease) in the rate on such employee loans
and the Provident Fund Board of Trustees acts accordingly. Thus, as far as the parties were
concerned, all other onerous factors, such as employee resignations, which could have been
used to trigger an application of the escalation clause were considered barred or waived. If the
intention were otherwise, they — especially respondent bank — should have included such
factors in their loan agreement.
ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board,
cannot be used as basis for the escalation in lieu of CB issuances, since paragraph (f) of the
mortgage contract very categorically specifies that any interest rate increase be in accordance
with "prevailing rules, regulations and circulars of the Central Bank . . . as the Provident Fund
Board . . . may prescribe." The Banco Filipino and PNB doctrines are applicable four-square in
this case. As a matter of fact, the said escalation clause further provides that the increased
interest rate "shall only take effect on the date of effectivity of (the) increase/decrease"
authorized by the CB rule, regulation or circular. Without such CB issuance, any proposed
increased rate will never become effective.
We have already mentioned (and now reiterate our holding in several
cases 15) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Thus,
petitioners' contention that the escalation clause is violative of the said law is bereft of any merit.
On the other hand, it will not be amiss to point out that the unilateral determination and
imposition of increased interest rates by the herein respondent bank is obviously violative of
the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. As this Court
held in PNB: 16
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the . . . loan agreement between the PNB and
the private respondent gave the PNB a license (although in fact there was
none) to increase the interest rate at will during the term of the loan, that
license would have been null and void for being violative of the principle of
mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not
bargain on equal footing, the weaker party's (the debtor) participation being
reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock
Insurance Co., 95 Phil 85). Such a contract is a veritable trap for the weaker
party whom the courts of justice must protect against abuse and imposition.
The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as
a former bank employee was very knowledgeable concerning respondent bank's lending rates
and procedures, and therefore, petitioners were "on an equal footing" with respondent bank as
far as the subject loan contract was concerned. That may have been true insofar as entering into
the original loan agreement and mortgage contract was concerned. However, that does not hold
true when it comes to the determination and imposition of escalated rates of interest as
unilaterally provided in the ManCom Resolution, where she had no voice at all in its preparation
and application.
To allay fears that respondent bank will inordinately be prejudiced by being stuck with this
"sweetheart loan" at patently concessionary interest rates, which according to respondent bank
is the "sweetest deal" anyone could obtain and is an act of generosity considering that in 1985
lending rates in the banking industry were peaking well over 30% p.a., 17 we need only point out
that the bank had the option to impose in its loan contracts the condition that resignation of an
employee-borrower would be a ground for escalation. The fact is it did not. Hence, it must live
with such omission. And it would be totally unfair to now impose said condition, not to mention
that it would violate the principle of mutuality of consent in contracts. It goes without saying that
such escalation ground can be included in future contracts — not to agreements already validly
entered into.

Let it be clear that this Court understands respondent bank's position that the concessional
interest rate was really intended as a means to remunerate its employees and thus an escalation
due to resignation would have been a valid stipulation. But no such stipulation was in fact made,
and thus the escalation provision could not be legally applied and enforced as against herein
petitioners.

WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS
ASIDE the challenged Decision of the Court of Appeals. The interest rate on the subject housing
loan remains at nine (9) percent per annum and the monthly amortization at P1,248.72.

SO ORDERED.
 G.R. No. 187930 February 23, 2015
NEW WORLD DEVELOPERS AND MANAGEMENT, INC., Petitioner,
vs.
AMA COMPUTER LEARNING CENTER, INC., Respondent.
x-----------------------x
G.R. No. 188250
AMA COMPUTER LEARNING CENTER, INC., Petitioner.
vs.
NEW WORLD DEVELOPERS AND MANAGEMENT, INC., Respondent,
DECISION
SERENO, CJ:
Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of
Court assailing the Court of Appeals (CA) Decision1 dated 22 January 2009 and
Resolution2 dated 18 May 2009 in CA-G.R. CV No. 89483.
The CA Decision ordered AMA Computer Learning Center, Inc. (AMA) to pay New World
Developers and Management, Inc. (New World) unpaid rentals for 2 months, as well asliquidated
damages equivalent to 4 months’ rent. The CA Resolution denied the separate motions for
reconsideration filed by the parties.
FACTS
New World is the owner of a commercial building located at No. 1104-1118 España corner
Paredes Streets, Sampaloc, Manila.3 In 1998, AMA agreed to lease the entire second floor of
the building for its computer learning center, and the parties entered into a Contract of
Lease4 covering the eight-year period from 15 June 1998 to 14 March 2006.
The monthly rental for the first year was set at ₱181,500, with an annual escalation rate
equivalent to 15% for the succeeding years.5 It was also provided that AMA may preterminate
the contract by sending notice in writing to New World at least six months before the intended
date.6 In case of pretermination, AMA shall be liable for liquidated damages in an amount
equivalent to six months of the prevailing rent.
In compliance with the contract, AMA paid New World the amount of ₱450,000 as advance
rental and another ₱450,000 as security deposit.7
For the first three years, AMA paid the monthly rent as stipulated in the contract, with the
required adjustment in accordance with the escalation rate for the second and the third years. 8
In a letter dated 18 March 2002, AMA requested the deferment of the annual increase in the
monthly rent by citing financial constraints brought about by a decrease in its enrollment. New
World agreed to reduce the escalation rate by 50% for the next six months. The following year,
AMA again requested the adjustment of the monthly rent and New World obliged by granting a
45% reduction of the monthly rent and a 5% reduction of the escalation rate for the remaining
term of the lease. For this purpose, the parties entered into an Addendum to the Contract of
Lease.9
On the evening of 6 July 2004, AMA removed all its office equipment and furniture from the
leased premises. The following day, New World received a letter from AMA dated 6 July
200410 stating that the former had decided to preterminate the contract effective immediately on
the ground of business losses due to a drastic decline in enrollment. AMA also demanded the
refund of its advance rental and security deposit.
New World replied in a letter dated 12 July 2004,11 to which was attached a Statement of
Account12 indicating the following amounts to be paid by AMA: 1) unpaid two months’ rent in the
amount of ₱466,620; 2) 3% monthly interest for the unpaid rent in the amount of ₱67,426.59; 3)
liquidated damages equivalent to six months of the prevailing rent in the amount of ₱1,399,860;
and 4) damage to the leased premises amounting to ₱15,580. The deduction of the advance
rental and security deposit paid by AMA still left an unpaid balance in the amount of
₱1,049,486.59.
Despite the meetings between the parties, they failed to arrive at a settlement regarding the
payment of the foregoing amounts.13
On 27 October 2004, New World filed a complaint for a sum of money and damages against
AMA before the Regional Trial Court of Marikina City, Branch 156 (RTC).14
RULING OF THE RTC
In a Decision15 dated 31 January 2007, the RTC ordered AMA to pay New World ₱466,620 as
unpaid rentals plus 3% monthly penalty interest until payment; ₱1,399,860 as liquidated
damages equivalent to six months’ rent, with the advance rental and security deposit paid by
AMA to be deducted therefrom; ₱15,580 for the damage to the leased premises; ₱100,000 as
attorney’s fees; and costs of the suit.
According to the RTC, AMA never denied that it had arrearages equivalent to two months’ rent.
Other than its allegation that it did not participate in the preparation of the Statement of Account,
AMA did not proffer any evidence disputing the unpaid rent. For its part, New World clearly
explained the existence of the arrears.
While sympathizing with AMA in view of its business losses, the RTC ruled that AMA could not
shirk from its contractual obligations, which provided that it had to pay liquidated damages
equivalent to six months’ rent in case of a pretermination of the lease.
The RTC provided no bases for awarding ₱15,580 for the damage to the leased premises and
₱100,000 for attorney’s fees, while denying the prayer for exemplary and moral damages.
Upon the denial of its motion for reconsideration, AMA filed an appeal before the CA. 16
RULING OF THE CA
In the assailed Decision dated 22 January 2009, the CA ordered AMA to pay New World
₱466,620 for unpaid rentals and ₱933,240 for liquidated damages equivalent to four months’
rent, with the advance rental and security deposit paid by AMA to be deducted therefrom. 17
The appellate court ruled that the RTC erred in imposing a 3% monthly penalty interest on the
unpaid rent, because there was no stipulation either in the Contract of Lease or in the
Addendum to the Contract of Lease concerning the imposition of interest in the event of a delay
in the payment of the rent.18 Thus, the CA ruled that the rent in arrears should earn interest at
the rate of 6% per annum only, reckoned from the date of the extrajudicial demand on 12 July
2004 until the finality of the Decision. Thereafter, interest at the rate of12% per annum shall be
imposed until full payment.
The CA also ruled that the RTC’s imposition of liquidated damages equivalent to six months’ rent
was iniquitous.19 While conceding that AMA was liable for liquidated damages for preterminating
the lease, the CA also recognized that stipulated penalties may be equitably reduced by the
courts based on its sound discretion. Considering that the unexpired portion of the term of lease
was already less than two years, and that AMA had suffered business losses rendering it
incapable of paying for its expenses, the CA deemed that liquidated damages equivalent to four
months’ rent was reasonable.20
The appellate court deleted the award for the damage to the leased premises, because no proof
other than the Statement of Account was presented by New World. 21 Furthermore, noting that
the latter was already entitled to liquidated damages, and that the trial court did not give any
justification for attorney’s fees, the CA disallowed the award thereof. 22
Both parties filed their respective motions for reconsideration, which were denied in the assailed
Resolution dated 10 May 2009.
Hence, the present petitions for review on certiorari. On 3 August 2009, the Court resolved to
consolidate the petitions, considering that they involve the same parties and assail the same CA
Decision and Resolution.23
PARTIES’ POSITIONS
According to New World, when parties freely stipulate on the manner by which one may
preterminate the lease, that stipulation has the force of law between them and should be
complied with in good faith.24 Since AMA preterminated the lease, it became liable to liquidated
damages equivalent to six months’ rent. Furthermore, its failure to give notice to New World six
months prior to the intended pretermination of the contract and its leaving the leased premises in
the middle of the night, with all its office equipment and furniture, smacked of gross bad faith that
renders it undeserving of sympathy from the courts.25 Thus, the CA erred in reducing the
liquidated damages from an amount equivalent to six months’ rent to only four months.
New World also challenges the CA Decision and Resolution for disallowing the imposition of the
3% monthly interest on the unpaid rentals. It is argued that AMA never disputed the imposition of
the 3% monthly interest; rather, it only requested that the interest rate be reduced. 26
On the other hand, AMA assails the CA ruling for not recognizing the fact that compensation
took place between the unpaid rentals and the advance rental paid by AMA. 27 Considering that
the obligation of AMA as to the arrears has been extinguished by operation of law, there would
be no occasion for the imposition of interest.28
AMA also prays for the further reduction of the liquidated damages to an amount equivalent to
one month’s rent up to one and a half months, arguing that four months’ worth of rent is still
iniquitous on account of the severe financial losses it suffered. 29
ISSUES
1. Whether AMA is liable to pay six months’ worth of rent as liquidated damages.
2. Whether AMA remained liable for the rental arrears.
OUR RULING
I.
AMA is liable for six months’ worth of rent as liquidated damages.
Item No. 14 of the Contract of Lease states:
That [AMA] may pre-terminate this Contract of Lease by notice in writing to [New World] at least
six (6) months before the intended date of pretermination, provided, however, that in such case,
[AMA] shall be liable to [New World] for an amount equivalent to six (6) months current rental as
liquidated damages;30
Quite notable is the fact that AMA never denied its liability for the payment of liquidated
damages in view of its pretermination of the lease contract with New World. What it claims,
however, is that it is entitled to the reduction of the amount due to the serious business losses it
suffered as a result of a drastic decrease in its enrollment.
This Court is, first and foremost, one of law. While we are also a court of equity, we do not
employ equitable principles when well-established doctrines and positive provisions of the law
clearly apply.31
The law does not relieve a party from the consequences of a contract it entered into with all the
required formalities.32 Courts have no power to ease the burden of obligations voluntarily
assumed by parties, just because things did not turn out as expected at the inception of the
contract.33 It must also be emphasized that AMA is an entity that has had significant business
experience, and is not a mere babe in the woods.
Articles 1159 and 1306 of the Civil Code state:
Art. 1159. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.
xxxx
Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions
as they may deem convenient, provided they are not contrary to law, morals, good customs,
public order, or public policy.
The fundamental rule is that a contract is the law between the parties. Unless it has been shown
that its provisions are wholly or in part contrary to law, morals, good customs, public order, or
public policy, the contract will be strictly enforced by the courts. 34
In rebuttal, AMA invokes Article 2227 of the Civil Code, to wit:
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable.
In Ligutan v. CA, we held that the resolution of the question of whether a penalty is reasonable,
or iniquitous or unconscionable would depend on factors including but not limited to the type,
extent and purpose of the penalty; the nature of the obligation; the mode of the breach and its
consequences; the supervening realities; and the standing and relationship of the parties.35 The
appreciation of these factors is essentially addressed to the sound discretion of the court. 36
It is quite easy to understand the reason why a lessor would impose liquidated damages in the
event of the pretermination of a lease contract. Pretermination is effectively the breach of a
contract, that was originally intended to cover an agreed upon period of time. A definite period
assures the lessor a steady income for the duration. A pretermination would suddenly cut short
what would otherwise have been a longer profitable relationship. Along the way, the lessor is
bound to incur losses until it is able to find a new lessee, and it is this loss of income that is
sought to be compensated by the payment of liquidated damages.
There might have been other ways to work around its difficult financial situation and lessen the
impact of the pretermination to both parties. However, AMA opted to do the following:
1. It preterminated the lease without notifying New World at least six months before
the intended date.
2. It removed all its office equipment and left the premises in the middle of the night.
3. Only after it had cleared the premises did it send New World a notice of
pretermination effective immediately.
4. It had the gall to demand a full refund of the advance rental and security deposit,
albeit without prejudice to their removal of the improvements introduced in the
premises.
We cannot understand the inability of AMA to be forthright with New World, considering that the
former had been transparent about its business losses in its previous requests for the reduction
of the monthly rental. The drastic decrease in AMA’s enrollment had been unfolding since 2002.
Thus, it cannot be said that the business losses had taken it by surprise. It is also highly unlikely
that the decision to preterminate the lease contract was made at the last minute. The
cancellation of classes, the transfer of students, and administrative preparations for the closure
of the computer learning center and the removal of office equipment therefrom should take at
least weeks, if not months, of logistic planning. Had AMA come clean about the impending
pretermination, measures beneficial to both parties could have been arrived at, and the instant
cases would not have reached this Court. Instead, AMA forced New World to share in the
former’s losses, causing the latter to scramble for new lessees while the premises remained
untenanted and unproductive.
In the sphere of personal and contractual relations governed by laws, rules and regulations
created to promote justice and fairness, equity is deserved, not demanded. The application of
equity necessitates a balancing of the equities involved in a case, 37 for "[h]e who seeks equity
must do equity, and he who comes into equity must come with clean hands." 38 Persons in dire
straits are never justified in trampling on other persons’ rights. Litigants shall be denied relief if
their conduct has been inequitable, unfair and dishonest as to the controversy in issue. 39 The
actions of AMA smack of bad faith.
We cannot abide by the prayer for the further reduction of the liquidated damages. We find that,
in view of the surrounding circumstances, the CA even erred in reducing the liquidated damages
to four month’s worth of rent. Under the terms of the contract, and in light of the failure of AMA to
show that it is deserving of this Court’s indulgence, the payment of liquidated damages in an
amount equivalent to six months’ rent is proper.
Also proper is an award of exemplary damages. Article 2234 of the Civil Code provides:
Art. 2234. While the amount of the exemplary damages need not be proved, the plaintiff must
show that he is entitled to moral, temperate or compensatory damages before the court may
consider the question of whether or not exemplary damages should be awarded. In case
liquidated damages have been agreed upon, although no proof of loss is necessary in order that
such liquidated damages may be recovered, nevertheless, before the court may consider the
question of granting exemplary in addition to the liquidated damages, the plaintiff must show that
he would be entitled to moral, temperate or compensatory damages were it not for the stipulation
for liquidated damages. (Emphasis supplied)
In this case, it is quite clear that New World sustained losses as a result of the unwarranted acts
of AMA. Further, were it not for the stipulation in the contract regarding the payment of liquidated
damages, we would be awarding compensatory damages to New World.
"Exemplary damages are designed by our civil law to permit the courts to reshape behaviour
that is socially deleterious in its consequence by creating negative incentives or deterrents
against such behaviour."40 As such, they may be awarded even when not pleaded or prayed
for.41 In order to prevent the commission of a similar act in the future, AMA shall pay New World
exemplary damages in the amount of ₱100,000.
II.
AMA’s liability for the rental arrears has already been extinguished.
AMA assails the CA ruling mainly for the imposition of legal interest on the rent in arrears. AMA
argues that the advance rental has extinguished its obligation as to the arrears. Thus, it says,
there is no more basis for the imposition of interest at the rate of 6% per annum from the date of
extrajudicial demand on 12 July 2004 until the finality of the Decision, plus interest at the rate of
12% per annum from finality until full payment.
At this juncture, it is necessary to look into the contract to determine the purpose of the advance
rental and security deposit.
Item Nos. 2, 3 and 4 of the Contract of Lease provide:
xxxx
2. That [AMA] shall pay to [New World] in advance within the first 5 days of each
calendar month a monthly rental in accordance with the following schedule for the
entire term of this Contract of Lease;
 We now delve into the actual application of the security deposit and the advance rental.
PERIOD MONTHLY RENTAL RATES

Year 1 June 15, 1998 – Mar 14, 1999
Year 2 Mar 15, 1999 – Mar 14, 2000
Year 3 Mar 15, 2000 – Mar 14, 2001
Year 4 Mar 15, 2001 – Mar 14, 2002
Year 5 Mar 15, 2002 – Mar 14, 2003
Year 6 Mar 15, 2003 – Mar 14, 2004
Year 7 Mar 15, 2004 – Mar 14, 2005
181,500.00 At the time of the pretermination of the contract of lease, the monthly rent stood at ₱233,310,
inclusive of taxes;43 hence, the two-month rental arrears in the amount of ₱466,620.
₱208,725.00
Applying the security deposit of ₱450,000 to the arrears will leave a balance of ₱16,620 in New
₱240,033.75
World’s favor.1âwphi1 Given that we have found AMA liable for liquidated damages equivalent
₱276,038.81 to six months’ rent in the amount of ₱1,399,860 (monthly rent of ₱233,310 multiplied by 6
months), its total liability to New World is ₱1,416,480.
₱317,444.63
We then apply the advance rental of ₱450,000 to this amount to arrive at a total extinguishment
₱365,061.33 of the liability for the unpaid rentals and a partial extinguishment of the liability for liquidated
damages. This shall leave AMA still liable to New World in the amount of ₱966,480 (₱1,416,480
₱419,820.53 total liability less ₱450,000 advance rental).

Year 8 Mar 15, 2005 – Mar 14, 2006 ₱482,793.61

(₱482,793.61 – 37,500 =
₱445,293.61)
The monthly rentals referred to above were computed at an escalation rate of Fifteen
Percent (15%) every year for the entire duration of this lease contract.
3. Upon signing of this Contract, [AMA] shall pay advance rental in the amount of
FOUR HUNDRED FIFTY THOUSAND PESOS (₱450,000.00); Said advance rental
shall be applied as part of the rental for the last year of the Contract with a remaining
balance of Four Hundred Forty Five Thousand Two Hundred Ninety Three and 61/100
Pesos (₱445,293.61) as monthly rental for the tenth [sic] and last year of the lease
term;
4. Upon signing of the Contract, [AMA] shall pay [New World] a Security Deposit in the
amount of FOUR HUNDRED FIFTY THOUSAND PESOS (₱450,000.00) which shall
be applied for any unpaid rental balance and damages on the leased premises, and
the balance of which shall be refunded by [New World] to [AMA] within sixty (60) days
after the termination of the Contract, it being understood that such balance is being
held by [New World] in trust for [AMA].42
Based on Item No. 4, the security deposit was paid precisely to answer for unpaid rentals that
may be incurred by AMA while the contract was in force. The security deposit was held in trust
by New World, and whatever may have been left of it after the termination of the lease shall be
refunded to AMA.
Not constituting a forbearance of money,44 this amount shall earn interest pursuant to Item
II(2)45 of our pronouncement in Eastern Shipping Lines v. CA.46 This item remained unchanged
by the modification made in Nacar v. Gallery Frames.47 Interest at the rate of 6% per annum is
hereby imposed on the amount of 966,480 from the time of extrajudicial demand on 12 July
2004 until the finality of this Decision.
Thereafter – this time pursuant to the modification in Nacar– the amount due shall earn interest
at the rate of 6% per annum until satisfaction, this interim period being deemed to be by then
equivalent to a forbearance of credit.48
Considering the foregoing, there was no occasion for the unpaid two months’ rental to earn
interest. Besides, we cannot sanction the imposition of 3% monthly penalty interest thereon. We
quote with approval the ruling of the CA on this issue:
If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon and in the absence of stipulation, the legal interest, which is six per cent
per annum.
In the instant case, the Contract of Lease and the Addendum to the Contract of Lease do not
specify any interest in the event of delay of payment of rentals. Accordingly, there being no
stipulation concerning interest, the trial court erred in imposing 3% interest per month on the
two-month unpaid rentals.
[New World] argues that the said3% interest per month on the unpaid rentals was agreed upon
by the parties as allegedly shown in Exhibits "A-4", "A-5", "A-6", "B-4", and "B-5".

Based on Item No. 3 in relation to Item No. 2, the parties divided the advance rental of ₱450,000
by 12 months. They came up with ₱37,500, which they intended to deduct from the monthly
rental to be paid by AMA for the last year of the lease term. Thus, unlike the security deposit, no
part of the advance rental was ever meant to be refunded to AMA. Instead, the parties intended
to apply the advance rental, on a staggered basis, to a portion of the monthly rental in the last
year of the lease term.
Considering the pretermination of the lease contract in the present case, this intent of the parties
as regards the advance rental failed to take effect. The advance rental, however, retains its
purpose of answering for the outstanding amounts that AMA may owe New World.
We are not persuaded.
[New World’s] letter dated 12 July 2004 to [AMA], Statement of Account dated 07 July 2004; and
another Statement of Account dated 27 October 2004 were all prepared by [New World], with no
participation or any indication of agreement on [AMA’s] part. The alleged proposal of [AMA] as
contained in the Schedule of Receivable/Payable is just a computer print-out and does not
contain any signature showing [AMA’s] conformity to the same. 49
Having relied on the Contract of Lease for its demand for payment of liquidated damages, New
World should have also referred to the contract to determine the proper application of the
advance rental and security deposit. Had it done so in the first instance, it would have known
that there is no occasion for the imposition of interest, 3% or otherwise, on the unpaid rentals.
WHEREFORE, the Court of Appeals Decision dated 22 January 2009 and Resolution dated 10
May 2009 in CA-G.R. CV No. 89483 is AFFIRMED with MODIFICATION.

AMA Computer Learning Center, Inc. is ordered to pay New World Developers and
Management, Inc. the amount of ₱966,480, with interest at the rate of 6% per annum from 12
July 2004 until full payment.

In addition, AMA shall pay New World exemplary damages in the amount of ₱100,000, which
shall earn interest at the rate of 6% per annum from the finality of this Decision until full payment.

SO ORDERED.
 G.R. No. 184041 October 13, 2010 On 7 March 2005, Booklight was declared in default. Consequently, SBC presented its evidence
ex-parte. The case against petitioner, however, proceeded and the latter was able to present
evidence on his behalf.
ANICETO G. SALUDO, JR., Petitioner,
vs.
SECURITY BANK CORPORATION, Respondent. After trial, the RTC ruled that petitioner is jointly and solidarily liable with Booklight under the
Continuing Suretyship Agreement. The dispositive portion reads:
DECISION
WHEREFORE, in view of the foregoing considerations, the Court hereby finds in favor of the
plaintiff against the defendants by ordering the defendants Booklight, Inc. and Aniceto G.
PEREZ, J.:
Saludo, Jr., jointly and severally liable (solidarily liable) to plaintiff [sic], the following sums of
Philippine Pesos:
Before this Court is a petition for review on certiorari seeking the reversal of the Decision 1 of the
Court of Appeals in CA-G.R. CV No. 88079 dated 24 January 2008 which affirmed the
Decision2 of Branch 149 of the Regional Trial Court (RTC) of Makati City, finding petitioner PN No. Amount Interest Rate Beginning—Until fully paid
Aniceto G. Saludo, Jr. and Booklight, Inc. (Booklight) jointly and severally liable to Security Bank (per annum)
Corporation (SBC).
74/787/98 P1,927,000.00 20.189% November 2, 1998

The basic facts follow— 74/788/98 913,545.00 20.189% November 2, 1998

74/789/98 1,927,090.00 20.189% November 2, 1998

On 30 May 1996, Booklight was extended an omnibus line credit facility3 by SBC in the amount
of ₱10,000,000.00. Said loan was covered by a Credit Agreement 4 and a Continuing 74/791/98 500,000.00 20.178% November 4, 1998
Suretyship5 with petitioner as surety, both documents dated 1 August 1996, to secure full
payment and performance of the obligations arising from the credit accommodation. 74/792/98 800,000.00 20.178% November 4, 1998

74/793/98 665,000.00 20.178% November 3, 1998

Booklight drew several availments of the approved credit facility from 1996 to 1997 and faithfully
complied with the terms of the loan. On 30 October 1997, SBC approved the renewal of credit 74/808/98 970,000.00 20.178% November 9, 1998
facility of Booklight in the amount of ₱10,000,000.00 under the prevailing security lending
rate.6 From August 3 to 14, 1998, Booklight executed nine (9) promissory notes 7 in favor of SBC 74/822/98 975,000.00 20.178% November 12, 1998
in the aggregate amount of ₱9,652,725.00. For failure to settle the loans upon maturity,
demands8 were made on Booklight and petitioner for the payment of the obligation but the duo 74/823/98 975,000.00 20.178% November 12, 1998
failed to pay. As of 15 May 2000, the obligation of Booklight stood at ₱10,487,875.41, inclusive
of interest past due and penalty.9
with attorney’s fee of ₱100,000.00 plus cost of suit.12

On 16 June 2000, SBC filed against Booklight and herein petitioner an action for collection of
sum of money with the RTC. Booklight initially filed a motion to dismiss, which was later on The Court of Appeals affirmed in toto the ruling of the RTC.13 Petitioner filed a motion for
denied for lack of merit. In his Answer, Booklight asserted that the amount demanded by SBC reconsideration but it was denied by the Court of Appeals on 7 August 2008. 14
was not based on the omnibus credit line facility of 30 May 1996, but rather on the amendment
of the credit facilities on 15 October 1996 increasing the loan line from ₱8,000,000.00 to Hence, the instant petition on the following arguments:
₱10,000,000.00. Booklight denied executing the promissory notes. It also claimed that it was not
in default as in fact, it paid the sum of ₱1,599,126.11 on 30 September 1999 as a prelude to
restructuring its loan for which it earnestly negotiated for a mutually acceptable agreement until 5 1. The first credit facility has a one-year term from 30 June 1996 to 30 June 1997
July 2000, without knowing that SBC had already filed the collection case. 10 while the second credit facility runs from 30 October 1997 to 30 October 1998.

In his Answer to the complaint, herein petitioner alleged that under the Continuing Suretyship, it
was the parties’ understanding that his undertaking and liability was merely as an
accommodation guarantor of Booklight. He countered that he came to know that Booklight
offered to pay SBC the partial payment of the loan and proposed the restructuring of the
obligation. Petitioner argued that said offer to pay constitutes a valid tender of payment which
discharged Booklight’s obligation to the extent of the offer. Petitioner also averred that the
imposition of the penalty on the supposed due and unpaid principal obligation based on the
penalty rate of 2% per month is clearly unconscionable.11
2. When the first credit facility expired, its accessory contract, the Continuing Surety
agreement likewise expired.
3. The second credit facility is not covered by the Continuing Suretyship, thus,
availments made in 1998 by Booklight are not covered by the Continuing Suretyship.
4. The approval of the second credit facility necessitates the consent of petitioner for
the latter’s Continuing Suretyship to be effective.1avvphi1
 5. The nine (9) promissory notes executed and drawn by Booklight in 1998 did not
specify that they were drawn against and subject to the Continuing Suretyship. Neither
was it mentioned in the Continuing Suretyship that it was executed to serve as
collateral to the nine (9) promissory notes.
6. The Continuing Suretyship is a contract of adhesion and petitioner’s participation to
it is his signing of his contract.
7. The approval of the second credit facility is considered a novation of the first
sufficient to extinguish the Continuing Suretyship and discharge petitioner.
8. The 20.178% interest rate imposed by the RTC is unconscionable.15
The main derivative of these averments is the issue of whether or not petitioner should be held
solidarily liable for the second credit facility extended to Booklight.
We rule in the affirmative.
There is no doubt that Booklight was extended two (2) credit facilities, each with a one-year
term, by SBC. Booklight availed of these two (2) credit lines. While Booklight was able to comply
with its obligation under the first credit line, it defaulted in the payment of the loan obligation
amounting to ₱9,652,725.00 under the second credit line. There is likewise no dispute that the
first credit line facility, with a term from 30 June 1996 to 30 June 1997, was covered by a
Continuing Suretyship with petitioner acting as the surety. The dispute is on the coverage by the
Continuing Suretyship of the loan contracted under the second credit facility.
Under the Continuing Suretyship, petitioner undertook to guarantee the following obligations:
a) "Guaranteed Obligations" – the obligations of the Debtor arising from all credit
accommodations extended by the Bank to the Debtor, including increases, renewals, roll-overs,
extensions, restructurings, amendments or novations thereof, as well as (i) all obligations of the
Debtor presently or hereafter owing to the Bank, as appears in the accounts, books and records
of the Bank, whether direct or indirect, and (ii) any and all expenses which the Bank may incur in
enforcing any of its rights, powers and remedies under the Credit Instruments as defined
hereinbelow; 16 (Emphasis supplied.)
Whether the second credit facility is considered a renewal of the first or a brand new credit
facility altogether was indirectly answered by the trial court when it invoked paragraph 10 of the
Continuing Suretyship which provides:
10. Continuity of Suretyship. – This Suretyship shall remain in full force and effect until full and
due payment and performance of the Guaranteed Obligations. This Suretyship shall not be
terminated by the partial payment to the Bank of Guaranteed Obligations by any other surety or
sureties of the Guaranteed Obligations, even if the particular surety or sureties are relieved of
further liabilities.17
and concluded that the liability of petitioner did not expire upon the termination of the first credit
facility.
It cannot be gainsaid that the second credit facility was renewed for another one-year term by
SBC. The terms of renewal read:
30 October 1997
BOOKLIGHT, INC.
xxxx
Gentlemen:
We are pleased to advise you that the Bank has approved the renewal of your credit facility
subject to the terms and conditions set forth below:
Facility : Loan Line
Amount : P10,000,000.00
Collateral : Existing JSS of Atty. Aniceto Saludo (marital consent waived)
Term : 180 day Promissory Notes
Interest Rate : Prevailing SBC lending rate; subject to monthly setting and payment
Expiry : October 31, 1998
x x x x.18
This very renewal is explicitly covered by the guaranteed obligations of the Continuing
Suretyship.
The essence of a continuing surety has been highlighted in the case of Totanes v. China
Banking Corporation19 in this wise:
Comprehensive or continuing surety agreements are, in fact, quite commonplace in present day
financial and commercial practice. A bank or financing company which anticipates entering into a
series of credit transactions with a particular company, normally requires the projected principal
debtor to execute a continuing surety agreement along with its sureties. By executing such an
agreement, the principal places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship agreement, there would be no need to
execute a separate surety contract or bond for each financing or credit accommodation
extended to the principal debtor.201awphil
In Gateway Electronics Corporation v. Asianbank Corporation,21 the Court emphasized that "[b]y
its nature, a continuing suretyship covers current and future loans, provided that, with respect to
future loan transactions, they are x x x ‘within the description or contemplation of the contract of
guaranty.’"
Petitioner argues that the approval of the second credit facility necessitates his consent
considering the onerous and solidary liability of a surety. This is contrary to the express waiver of
his consent to such renewal, contained in paragraph 12 of the Continuing Suretyship, which
provides in part:
12. Waivers by the Surety. – The Surety hereby waives: x x x (v) notice or consent to any WHEREFORE, the petition is DENIED. The Decision dated 24 January 2008 of the Court of
modification, amendment, renewal, extension or grace period granted by the Bank to the Debtor Appeals in CA-G.R. CV No. 88079 is AFFIRMED in toto.
with respect to the Credit Instruments.22
SO ORDERED.
Respondent, as last resort, harps on the novation of the first credit facility to exculpate itself from
liability from the second credit facility.

At the outset, it must be pointed out that the Credit Agreement is actually the principal contract
and it covers "all credit facilities now or hereafter extended by [SBC] to [Booklight];" 23 and that
the suretyship agreement was executed precisely to guarantee these obligations, i.e., the credit
facilities arising from the credit agreement. The principal contract is the credit agreement
covered by the Continuing Suretyship.

The two loan facilities availed by Booklight under the credit agreement are the Omnibus Line
amounting to ₱10,000,000.00 granted to Booklight in 1996 and the other one is the Loan Line of
the same amount in 1997. Petitioner however seeks to muddle the issue by insisting that these
two availments were two separate principal contracts, conveniently ignoring the fact that it is the
credit agreement which constitutes the principal contract signed by Booklight in order to avail of
SBC’s credit facilities. The two credit facilities are but loans made available to Booklight pursuant
to the credit agreement.

On these facts the novation argument advanced by petitioner must fail.

There is no novation to speak of. It is the first credit facility that expired and not the Credit
Agreement. There was a second loan pursuant to the same credit agreement. The terms and
conditions under the Credit Agreement continue to apply and the Continuing Suretyship
continues to guarantee the Credit Agreement.

The lameness of petitioner’s stand is pointed up by his attempt to escape from liability by
labelling the Continuing Suretyship as a contract of adhesion.

A contract of adhesion is defined as one in which one of the parties imposes a ready-made form
of contract, which the other party may accept or reject, but which the latter cannot modify. One
party prepares the stipulation in the contract, while the other party merely affixes his signature or
his ‘adhesion’ thereto, giving no room for negotiation and depriving the latter of the opportunity to
bargain on equal footing.24

A contract of adhesion presupposes that the party adhering to the contract is a weaker party.
That cannot be said of petitioner. He is a lawyer. He is deemed knowledgeable of the legal
implications of the contract that he is signing.

It must be borne in mind, however, that contracts of adhesion are not invalid per se. Contracts of
adhesion, where one party imposes a ready-made form of contract on the other, are not entirely
prohibited. The one who adheres to the contract is, in reality, free to reject it entirely; if he
adheres, he gives his consent.25

Finally, petitioner challenges the imposition of 20.189% interest rate as unconscionable. We rule
otherwise. In Development Bank of the Philippines v. Family Foods Manufacturing Co.
Ltd.,26 this Court upheld the validity of the imposition of 18% and 22% stipulated rates of interest
in the two (2) promissory notes. Likewise in Spouses Bacolor v. Banco Filipino Savings and
Mortgage Bank,27 the 24% interest rate agreed upon by parties was held as not violative of the
Usury Law, as amended by Presidential Decree No. 116.
 G.R. No. 164538 August 9, 2010 Following the requisite preliminary investigation, Assistant City Prosecutor Winnie M. Edad
(Prosecutor Edad) in her Resolution10 dated July 10, 1997 found petitioner’s evidence
insufficient to hold respondents liable for estafa. According to Prosecutor Edad:
METROPOLITAN BANK and TRUST COMPANY, Petitioner,
vs.
ROGELIO REYNADO and JOSE C. ADRANDEA,** Respondents. The execution of the Debt Settlement Agreement puts complainant bank in estoppel to argue
that the liability is criminal. Since the agreement was made even before the filing of this case,
the relations between the parties [have] change[d], novation has set in and prevented the
DECISION
incipience of any criminal liability on the part of respondents.11

DEL CASTILLO, J.:

Thus, Prosecutor Edad recommended the dismissal of the case:

"It is a hornbook doctrine in our criminal law that the criminal liability for estafa is not affected by
WHEREFORE, for insufficiency of evidence, it is respectfully recommended that the case be
a compromise, for it is a public offense which must be prosecuted and punished by the
dismissed.12
government on its own motion, even though complete reparation [has] been made of the
damage suffered by the private offended party. Since a criminal offense like estafa is committed
against the State, the private offended party may not waive or extinguish the criminal liability that On December 9, 1997, petitioner appealed the Resolution of Prosecutor Edad to the Department
the law imposes for the commission of the crime."1 of Justice (DOJ) by means of a Petition for Review.13

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks the reversal of Ruling of the Department of Justice
the Court of Appeals’ (CA’s) Decision2 dated October 21, 2002 in CA-G.R. SP No. 58548 and its
further Resolution3 dated July 12, 2004 denying petitioner’s Motion for Reconsideration. 4
On June 22, 1998, the DOJ dismissed the petition ratiocinating that:

Factual Antecedents
It is evident that your client based on the same transaction chose to file estafa only against its
employees and treat with kid gloves its big time client Universal who was the one who benefited
On January 31, 1997, petitioner Metropolitan Bank and Trust Company charged respondents from this transaction and instead, agreed that it should be paid on installment basis.
before the Office of the City Prosecutor of Manila with the crime of estafa under Article 315,
paragraph 1(b) of the Revised Penal Code. In the affidavit 5 of petitioner’s audit officer, Antonio
To allow your client to make the choice is to make an unwarranted classification under the law
Ivan S. Aguirre, it was alleged that the special audit conducted on the cash and lending
which will result in grave injustice against herein respondents. Thus, if your client agreed that no
operations of its Port Area branch uncovered anomalous/fraudulent transactions perpetrated by
estafa was committed in this transaction with Universal who was the principal player and
respondents in connivance with client Universal Converter Philippines, Inc. (Universal); that
beneficiary of this transaction[,] more so with herein respondents whose liabilities are based only
respondents were the only voting members of the branch’s credit committee authorized to
on conspiracy with Universal.
extend credit accommodation to clients up to ₱200,000.00; that through the so-called Bills
Purchase Transaction, Universal, which has a paid-up capital of only ₱125,000.00 and actual
maintaining balance of ₱5,000.00, was able to make withdrawals totaling Equivocally, there is no estafa in the instant case as it was not clearly shown how respondents
₱81,652,000.006 against uncleared regional checks deposited in its account at petitioner’s Port misappropriated the ₱53,873,500.00 which Universal owed your client after its checks deposited
Area branch; that, consequently, Universal was able to utilize petitioner’s funds even before the with Metrobank were dishonored. Moreover, fraud is not present considering that the Executive
seven-day clearing period for regional checks expired; that Universal’s withdrawals against Committee and the Credit Committee of Metrobank were duly notified of these transactions
uncleared regional check deposits were without prior approval of petitioner’s head office; that the which they approved. Further, no damage was caused to your client as it agreed [to] the
uncleared checks were later dishonored by the drawee bank for the reason "Account Closed"; settlement [with] Universal.14
and, that respondents acted with fraud, deceit, and abuse of confidence.
A Motion for Reconsideration15 was filed by petitioner, but the same was denied on March 1,
In their defense, respondents denied responsibility in the anomalous transactions with Universal 2000 by then Acting Secretary of Justice Artemio G. Tuquero.16
and claimed that they only intended to help the Port Area branch solicit and increase its deposit
accounts and daily transactions.
Aggrieved, petitioner went to the CA by filing a Petition for Certiorari & Mandamus.17

Meanwhile, on February 26, 1997, petitioner and Universal entered into a Debt Settlement
Agreement7 whereby the latter acknowledged its indebtedness to the former in the total amount
of ₱50,990,976.278 as of February 4, 1997 and undertook to pay the same in bi-monthly
amortizations in the sum of ₱300,000.00 starting January 15, 1997, covered by postdated
checks, "plus balloon payment of the remaining principal balance and interest and other
charges, if any, on December 31, 2001."9
Findings of the Prosecutor
Ruling of the Court of Appeals
By Decision18 of October 21, 2002, the CA affirmed the twin resolutions of the Secretary of
Justice. Citing jurisprudence19 wherein we ruled that while novation does not extinguish criminal
liability, it may prevent the rise of such liability as long as it occurs prior to the filing of the
criminal information in court.20 Hence, according to the CA, "[j]ust as Universal cannot be held
responsible under the bills purchase transactions on account of novation, private respondents,
who acted in complicity with the former, cannot be made liable [for] the same
transactions."21 The CA added that "[s]ince the dismissal of the complaint is founded on legal
ground, public respondents may not be compelled by mandamus to file an information in
court."22
Incidentally, the CA totally ignored the Comment23 of the Office of the Solicitor General (OSG)
where the latter, despite being the statutory counsel of public respondent DOJ, agreed with
petitioner that the DOJ erred in dismissing the complaint. It alleged that where novation does not
extinguish criminal liability for estafa neither does restitution negate the offense already
committed.24
Additionally, the OSG, in sharing the views of petitioner contended that failure to implead other
responsible individuals in the complaint does not warrant its dismissal, suggesting that the
proper remedy is to cause their inclusion in the information.25 This notwithstanding, however, the
CA disposed of the petition as follows:
WHEREFORE, the petition is DENIED due course and, accordingly, DISMISSED.
Consequently, the resolutions dated June 22, 1998 and March 1, 2000 of the Secretary of
Justice are AFFIRMED.
26
SO ORDERED.
Hence, this instant petition before the Court.
On November 8, 2004, we required27 respondents to file Comment, not a motion to dismiss, on
the petition within 10 days from notice. The OSG filed a Manifestation and Motion in Lieu of
Comment28 while respondent Jose C. Adraneda (Adraneda) submitted his Comment 29 on the
petition. The Secretary of Justice failed to file the required comment on the OSG’s Manifestation
and Motion in Lieu of Comment and respondent Rogelio Reynado (Reynado) did not submit any.
For which reason, we issued a show cause order30 on July 19, 2006. Their persistent non-
compliance with our directives constrained us to resolve that they had waived the filing of
comment and to impose a fine of ₱1,000.00 on Reynado. Upon submission of the required
memorandum by petitioner and Adraneda, the instant petition was submitted for resolution.
Issues
Petitioner presented the following main arguments for our consideration:
1. Novation and undertaking to pay the amount embezzled do not extinguish criminal
liability.
2. It is the duty of the public prosecutor to implead all persons who appear criminally
liable for the offense charged.
Petitioner persistently insists that the execution of the Debt Settlement Agreement with Universal
did not absolve private respondents from criminal liability for estafa. Petitioner submits that the
settlement affects only the civil obligation of Universal but did not extinguish the criminal liability
of the respondents. Petitioner thus faults the CA in sustaining the DOJ which in turn affirmed the
finding of Prosecutor Edad for committing apparent error in the appreciation and the application
of the law on novation. By petitioner’s claim, citing Metropolitan Bank and Trust Co. v.
Tonda,31 the "negotiations pertain [to] and affect only the civil aspect of the case but [do] not
preclude prosecution for the offense already committed."32
In his Comment, Adraneda denies being a privy to the anomalous transactions and passes on
the sole responsibility to his co-respondent Reynado as the latter was able to conceal the
pertinent documents being the head of petitioner’s Port Area branch. Nonetheless, he contends
that because of the Debt Settlement Agreement, they cannot be held liable for estafa.
The OSG, for its part, instead of contesting the arguments of petitioner, even prayed before the
CA to give due course to the petition contending that DOJ indeed erred in dismissing the
complaint for estafa.
Given the facts of the case, the basic issue presented before this Court is whether the execution
of the Debt Settlement Agreement precluded petitioner from holding respondents liable to stand
trial for estafa under Art. 315 (1)(b) of the Revised Penal Code.33
Our Ruling
We find the petition highly meritorious.
Novation not a mode of extinguishing
criminal liability for estafa; Criminal liability for estafa not affected by compromise or novation of
contract.
Initially, it is best to emphasize that "novation is not one of the grounds prescribed by the
Revised Penal Code for the extinguishment of criminal liability."34
In a catena of cases, it was ruled that criminal liability for estafa is not affected by a compromise
or novation of contract. In Firaza v. People35 and Recuerdo v. People,36 this Court ruled that in a
crime of estafa, reimbursement or belated payment to the offended party of the money swindled
by the accused does not extinguish the criminal liability of the latter. We also held in People v.
Moreno37 and in People v. Ladera38 that "criminal liability for estafa is not affected by
compromise or novation of contract, for it is a public offense which must be prosecuted and
punished by the Government on its own motion even though complete reparation should have
been made of the damage suffered by the offended party." Similarly in the case of Metropolitan
Bank and Trust Company v. Tonda39 cited by petitioner, we held that in a crime of estafa,
reimbursement of or compromise as to the amount misappropriated, after the commission of the
crime, affects only the civil liability of the offender, and not his criminal liability.
Thus, the doctrine that evolved from the aforecited cases is that a compromise or settlement
entered into after the commission of the crime does not extinguish accused’s liability for estafa.
Neither will the same bar the prosecution of said crime. Accordingly, in such a situation, as in
this case, the complaint for estafa against respondents should not be dismissed just because
petitioner entered into a Debt Settlement Agreement with Universal. Even the OSG arrived at the
same conclusion:
Contrary to the conclusion of public respondent, the Debt Settlement Agreement entered into
between petitioner and Universal Converter Philippines extinguishes merely the civil aspect of
the latter’s liability as a corporate entity but not the criminal liability of the persons who actually
committed the crime of estafa against petitioner Metrobank. x x x40
Unfortunately for petitioner, the above observation of the OSG was wittingly glossed over in the
body of the assailed Decision of the CA.
Execution of the Debt Settlement Agreement did not prevent the incipience of criminal liability.
Even if the instant case is viewed from the standpoint of the law on contracts, the disposition
absolving the respondents from criminal liability because of novation is still erroneous.
Under Article 1311 of the Civil Code, "contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and obligations arising from the contract are
not transmissible by their nature, or by stipulation or by provision of law." The civil law principle
of relativity of contracts provides that "contracts can only bind the parties who entered into it, and
it cannot favor or prejudice a third person, even if he is aware of such contract and has acted
with knowledge thereof."41
In the case at bar, it is beyond cavil that respondents are not parties to the agreement. The
intention of the parties thereto not to include them is evident either in the onerous or in the
beneficent provisions of said agreement. They are not assigns or heirs of either of the parties.
Not being parties to the agreement, respondents cannot take refuge therefrom to bar their
anticipated trial for the crime they committed. It may do well for respondents to remember that
the criminal action commenced by petitioner had its genesis from the alleged fraud,
unfaithfulness, and abuse of confidence perpetrated by them in relation to their positions as
responsible bank officers. It did not arise from a contractual dispute or matters strictly between
petitioner and Universal. This being so, respondents cannot rely on subject settlement
agreement to preclude prosecution of the offense already committed to the end of extinguishing
their criminal liability or prevent the incipience of any liability that may arise from the criminal
offense. This only demonstrates that the execution of the agreement between petitioner and
Universal has no bearing on the innocence or guilt of the respondents.
Determination of the probable cause, a function belonging to the public prosecutor; judicial
review allowed where it has been clearly established that the prosecutor committed grave abuse
of discretion.
In a preliminary investigation, a public prosecutor determines whether a crime has been
committed and whether there is probable cause that the accused is guilty thereof. 42 The
Secretary of Justice, however, may review or modify the resolution of the prosecutor.
"Probable cause is defined as such facts and circumstances that will engender a well-founded
belief that a crime has been committed and that the respondent is probably guilty thereof and
should be held for trial."43 Generally, a public prosecutor is afforded a wide latitude of discretion
in the conduct of a preliminary investigation. By way of exception, however, judicial review is
allowed where respondent has clearly established that the prosecutor committed grave abuse of
discretion that is, when he has exercised his discretion "in an arbitrary, capricious, whimsical or
despotic manner by reason of passion or personal hostility, patent and gross enough as to
amount to an evasion of a positive duty or virtual refusal to perform a duty enjoined by
law."44 Tested against these guidelines, we find that this case falls under the exception rather
than the general rule.
A close scrutiny of the substance of Prosecutor Edad’s Resolution dated July 10, 1997 readily
reveals that were it not for the Debt Settlement Agreement, there was indeed probable cause to
indict respondents for the crime charged. From her own assessment of the Complaint-Affidavit of
petitioner’s auditor, her preliminary finding is that "Ordinarily, the offense of estafa has been
sufficiently established."45 Interestingly, she suddenly changed tack and declared that the
agreement altered the relation of the parties and that novation had set in preventing the
incipience of any criminal liability on respondents. In light of the jurisprudence herein earlier
discussed, the prosecutor should not have gone that far and executed an apparent somersault.
Compounding further the error, the DOJ in dismissing petitioner’s petition, ruled out estafa
contrary to the findings of the prosecutor. Pertinent portion of the ruling reads:
Equivocally, there is no estafa in the instant case as it was not clearly shown how respondents
misappropriated the ₱53,873,500.00 which Universal owed your client after its checks deposited
with Metrobank were dishonored. Moreover, fraud is not present considering that the Executive
Committee and the Credit Committee of Metrobank were duly notified of these transactions
which they approved. Further, no damage was caused to your client as it agreed [to] the
settlement [with] Universal.46
The findings of the Secretary of Justice in sustaining the dismissal of the Complaint are matters
of defense best left to the trial court’s deliberation and contemplation after conducting the trial of
the criminal case. To emphasize, a preliminary investigation for the purpose of determining the
existence of probable cause is "not a part of the trial. A full and exhaustive presentation of the
parties’ evidence is not required, but only such as may engender a well-grounded belief that an
offense has been committed and that the accused is probably guilty thereof." 47 A "finding of
probable cause does not require an inquiry into whether there is sufficient evidence to procure a
conviction. It is enough that it is believed that the act or omission complained of constitutes the
offense charged."48 So we held in Balangauan v. Court of Appeals:49
Applying the foregoing disquisition to the present petition, the reasons of DOJ for affirming the
dismissal of the criminal complaints for estafa and/or qualified estafa are determinative of
whether or not it committed grave abuse of discretion amounting to lack or excess of jurisdiction.
In requiring "hard facts and solid evidence" as the basis for a finding of probable cause to hold
petitioners Bernyl and Katherene liable to stand trial for the crime complained of, the DOJ
disregards the definition of probable cause – that it is a reasonable ground of presumption that a
matter is, or may be, well-founded, such a state of facts in the mind of the prosecutor as would
lead a person of ordinary caution and prudence to believe, or entertain an honest or strong
suspicion, that a thing is so. The term does not mean "actual and positive cause" nor does it
import absolute certainty. It is merely based on opinion and reasonable belief; that is, the belief
that the act or omission complained of constitutes the offense charged. While probable cause
demands more than "bare suspicion," it requires "less than evidence which would justify
conviction." Herein, the DOJ reasoned as if no evidence was actually presented by respondent
HSBC when in fact the records of the case were teeming; or it discounted the value of such
substantiation when in fact the evidence presented was adequate to excite in a reasonable mind
the probability that petitioners Bernyl and Katherene committed the crime/s complained of. In so
doing, the DOJ whimsically and capriciously exercised its discretion, amounting to grave abuse
of discretion, which rendered its resolutions amenable to correction and annulment by the
extraordinary remedy of certiorari.
In the case at bar, as analyzed by the prosecutor, a prima facie case of estafa exists against
respondents. As perused by her, the facts as presented in the Complaint-Affidavit of the auditor
are reasonable enough to excite her belief that respondents are guilty of the crime complained
of. In Andres v. Justice Secretary Cuevas50 we had occasion to rule that the "presence or
absence of the elements of the crime is evidentiary in nature and is a matter of defense that may
be passed upon after a full-blown trial on the merits."51
Thus confronted with the issue on whether the public prosecutor and the Secretary of Justice
committed grave abuse of discretion in disposing of the case of petitioner, given the sufficiency
of evidence on hand, we do not hesitate to rule in the affirmative. We have previously ruled that
grave abuse of discretion may arise when a lower court or tribunal violates and contravenes the
Constitution, the law or existing jurisprudence.
Non-inclusion of officers of Universal not a ground for the dismissal of the complaint.
The DOJ in resolving to deny petitioner’s appeal from the resolution of the prosecutor gave exception. Given the facts of this case, petitioner has clearly established that the public
another ground – failure to implead the officers of Universal. It explained: prosecutor and the Secretary of Justice committed grave abuse of discretion.

To allow your client to make the choice is to make an unwarranted classification under the law
which will result in grave injustice against herein respondents. Thus, if your client agreed that no
estafa was committed in this transaction with Universal who was the principal player and
beneficiary of this transaction[,] more so with herein respondents whose liabilities are based only
on conspiracy with Universal.521avvphi1
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals in CA-
G.R. SP No. 58548 promulgated on October 21, 2002 affirming the Resolutions dated June 22,
1998 and March 1, 2000 of the Secretary of Justice, and its Resolution dated July 12, 2004
denying reconsideration thereon are hereby REVERSED and SET ASIDE. The public
prosecutor is ordered to file the necessary information for estafa against the respondents.

The ratiocination of the Secretary of Justice conveys the idea that if the charge against SO ORDERED.
respondents rests upon the same evidence used to charge co-accused (officers of Universal)
based on the latter’s conspiratorial participation, the non-inclusion of said co-accused in the
charge should benefit the respondents.

The reasoning of the DOJ is flawed.

Suffice it to say that it is indubitably within the discretion of the prosecutor to determine who
must be charged with what crime or for what offense. Public prosecutors, not the private
complainant, are the ones obliged to bring forth before the law those who have transgressed it.

Section 2, Rule 110 of the Rules of Court53 mandates that all criminal actions must be
commenced either by complaint or information in the name of the People of the Philippines
against all persons who appear to be responsible therefor. Thus the law makes it a legal duty for
prosecuting officers to file the charges against whomsoever the evidence may show to be
responsible for the offense. The proper remedy under the circumstances where persons who
ought to be charged were not included in the complaint of the private complainant is definitely
not to dismiss the complaint but to include them in the information. As the OSG correctly
suggested, the proper remedy should have been the inclusion of certain employees of Universal
who were found to have been in cahoots with respondents in defrauding petitioner. The DOJ,
therefore, cannot seriously argue that because the officers of Universal were not indicted,
respondents themselves should not likewise be charged. Their non-inclusion cannot be
perversely used to justify desistance by the public prosecutor from prosecution of the criminal
case just because not all of those who are probably guilty thereof were charged.

Mandamus a proper remedy when resolution of public respondent is tainted with grave abuse of
discretion.

Mandamus is a remedial measure for parties aggrieved. It shall issue when "any tribunal,
corporation, board, officer or person unlawfully neglects the performance of an act which the law
specifically enjoins as a duty resulting from an office, trust or station."54 The writ of mandamus is
not available to control discretion neither may it be issued to compel the exercise of discretion.
Truly, it is a matter of discretion on the part of the prosecutor to determine which persons appear
responsible for the commission of a crime. However, the moment he finds one to be so liable it
becomes his inescapable duty to charge him therewith and to prosecute him for the same. In
such a situation, the rule loses its discretionary character and becomes mandatory. Thus, where,
as in this case, despite the sufficiency of the evidence before the prosecutor, he refuses to file
the corresponding information against the person responsible, he abuses his discretion. His act
is tantamount to a deliberate refusal to perform a duty enjoined by law. The Secretary of Justice,
on the other hand, gravely abused his discretion when, despite the existence of sufficient
evidence for the crime of estafa as acknowledged by the investigating prosecutor, he completely
ignored the latter’s finding and proceeded with the questioned resolution anchored on purely
evidentiary matters in utter disregard of the concept of probable cause as pointed out
in Balangauan. To be sure, findings of the Secretary of Justice are not subject to review unless
shown to have been made with grave abuse.55 The present case calls for the application of the
 G.R. No. 186738 September 27, 2010
PRUDENTIAL BANK AND TRUST COMPANY (now BANK OF THE PHILIPPINE
ISLANDS,1) Petitioner,
vs.
LIWAYWAY ABASOLO, Respondent.
DECISION
CARPIO MORALES, J.:
Leonor Valenzuela-Rosales inherited two parcels of land situated in Palanan, Sta. Cruz, Laguna
(the properties), registered as Original Certificates of Title Nos. RO-527 and RO-528. After she
passed away, her heirs executed on June 14, 1993 a Special Power of Attorney (SPA) in favor
of Liwayway Abasolo (respondent) empowering her to sell the properties. 2
Sometime in 1995, Corazon Marasigan (Corazon) wanted to buy the properties which were
being sold for ₱2,448,960, but as she had no available cash, she broached the idea of first
mortgaging the properties to petitioner Prudential Bank and Trust Company (PBTC), the
proceeds of which would be paid directly to respondent. Respondent agreed to the proposal.
In view of Corazon’s failure to fully pay the purchase price, respondent filed a complaint for
collection of sum of money and annulment of sale and mortgage with damages, against Corazon
and PBTC (hereafter petitioner), before the Regional Trial Court (RTC) of Sta. Cruz, Laguna.4
In her Answer,5 Corazon denied that there was an agreement that the proceeds of the loan
would be paid directly to respondent. And she claimed that the vehicles represented full payment
of the properties, and had in fact overpaid ₱76,040.
Petitioner also denied that there was any arrangement between it and respondent that the
proceeds of the loan would be released to her.6 It claimed that it "may process a loan application
of the registered owner of the real property who requests that proceeds of the loan or part
thereof be payable directly to a third party [but] the applicant must submit a letter request to the
Bank."7
On pre-trial, the parties stipulated that petitioner was not a party to the contract of sale between
respondent and Corazon; that there was no written request that the proceeds of the loan should
be paid to respondent; and that respondent received five vehicles as partial payment of the
properties.8
Despite notice, Corazon failed to appear during the trial to substantiate her claims.

By Decision of March 12, 2004,9 Branch 91 of the Sta. Cruz, Laguna RTC rendered judgment in
On Corazon and respondent’s consultation with PBTC’s Head Office, its employee, Norberto
favor of respondent and against Corazon who was made directly liable to respondent, and
Mendiola (Mendiola), allegedly advised respondent to issue an authorization for Corazon to
against petitioner who was made subsidiarily liable in the event that Corazon fails to pay. Thus
mortgage the properties, and for her (respondent) to act as one of the co-makers so that the
the trial court disposed:
proceeds could be released to both of them.

WHEREFORE, premises considered, finding the plaintiff has established her claim against the
To guarantee the payment of the property, Corazon executed on August 25, 1995 a Promissory
defendants, Corazon Marasigan and Prudential Bank and Trust Company, judgment is hereby
Note for ₱2,448,960 in favor of respondent.
rendered in favor of the plaintiff ordering:

By respondent’s claim, in October 1995, Mendiola advised her to transfer the properties first to
Defendant Corazon Marasigan to pay the plaintiff the amount of P1,783,960.00 plus three
Corazon for the immediate processing of Corazon’s loan application with assurance that the
percent (3%) monthly interest per month from August 25, 1995 until fully paid. Further, to pay the
proceeds thereof would be paid directly to her (respondent), and the obligation would be
plaintiff the sum equivalent to twenty percent five [sic] (25%) of P1,783,960.00 as attorney’s
reflected in a bank guarantee.
fees.

Heeding Mendiola’s advice, respondent executed a Deed of Absolute Sale over the properties in
Defendant Prudential Bank and Trust Company to pay the plaintiff the amount of P1,783,960.00
favor of Corazon following which or on December 4, 1995, Transfer Certificates of Title Nos.
or a portion thereof plus the legal rate of interest per annum until fully paid in the event that
164159 and 164160 were issued in the name of Corazon.
Defendant Corazon Marasigan fails to pay the said amount or a portion thereof.

Corazon’s application for a loan with PBTC’s Tondo Branch was approved on December 1995.
Other damages claimed not duly proved are hereby dismissed.
She thereupon executed a real estate mortgage covering the properties to secure the payment
of the loan. In the absence of a written request for a bank guarantee, the PBTC released the
proceeds of the loan to Corazon. So Ordered.10 (emphasis in the original; underscoring partly in the original, partly supplied)

Respondent later got wind of the approval of Corazon’s loan application and the release of its
proceeds to Corazon who, despite repeated demands, failed to pay the purchase price of the
properties.
Respondent eventually accepted from Corazon partial payment in kind consisting of one owner
type jeepney and four passenger jeepneys,3 plus installment payments, which, by the trial
court’s computation, totaled ₱665,000.
In finding petitioner subsidiarily liable, the trial court held that petitioner breached its
understanding to release the proceeds of the loan to respondent:
Liwayway claims that the bank should also be held responsible for breach of its obligation to
directly release to her the proceeds of the loan or part thereof as payment for the subject lots.
The evidence shows that her claim is valid. The Bank had such an obligation as proven by
evidence. It failed to rebut the credible testimony of Liwayway which was given in a frank,
spontaneous, and straightforward manner and withstood the test of rigorous cross-examination
conducted by the counsel of the Bank. Her credibility is further strengthened by the corroborative promise to repay the liabilities of a debtor, in this case Corazon. It would be contrary to
testimony of Miguela delos Reyes who testified that she went with Liwayway to the bank for established banking practice if Mendiola issued a bank guarantee, even if no request to that
several times. In her presence, Norberto Mendiola, the head of the loan department, instructed effect was made.
Liwayway to transfer the title over the subject lots to Corazon to facilitate the release of the loan
with the guarantee that Liwayway will be paid upon the release of the proceeds.
The principle of relativity of contracts in Article 1311 of the Civil Code supports petitioner’s
cause:
Further, Liwayway would not have executed the deed of sale in favor of Corazon had Norberto
Mendiola did not promise and guarantee that the proceeds of the loan would be directly paid to
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case
her. Based on ordinary human experience, she would not have readily transferred the title over
where the rights and obligations arising from the contract are not transmissible by their nature, or
the subject lots had there been no strong and reliable guarantee. In this case, what caused her
by stipulation or by provision of law. The heir is not liable beyond the value of the property he
to transfer title is the promise and guarantee made by Norberto Mendiola that the proceeds of
received from the decedent.
the loan would be directly paid to her. 11 (emphasis underscoring supplied)

If a contract should contain some stipulation in favor of a third person, he may demand its
On appeal, the Court of Appeals¸ by Decision of January 14, 200812, affirmed the trial court’s
fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere
decision with modification on the amount of the balance of the purchase price which was
incidental benefit or interest of a person is not sufficient. The contracting parties must have
reduced from ₱1,783,960 to ₱1,753,960. It disposed:
clearly and deliberately conferred a favor upon a third person. (underscoring supplied)

WHEREFORE, premises considered, the assailed Decision dated March 12, 2004 of the
For Liwayway to prove her claim against petitioner, a clear and deliberate act of conferring a
Regional Trial Court of Sta. Cruz, Laguna, Branch 91, is AFFIRMED WITH MODIFICATION as
favor upon her must be present. A written request would have sufficed to prove this, given the
to the amount to be paid which is P1,753,960.00.
nature of a banking business, not to mention the amount involved.

SO ORDERED.13 (emphasis in the original; underscoring supplied)

Petitioner’s motion for reconsideration having been denied by the appellate court by Resolution
of February 23, 2009, the present petition for review was filed.
The only issue petitioner raises is whether it is subsidiarily liable.
The petition is meritorious.
Since it has not been established that petitioner had an obligation to Liwayway, there is no
breach to speak of. Liwayway’s claim should only be directed against Corazon. Petitioner cannot
thus be held subisidiarily liable.
To the Court, Liwayway did not rely on Mendiola’s representations, even if he indeed made
them. The contract for Liwayway to sell to Corazon was perfected from the moment there was a
meeting of minds upon the properties-object of the contract and upon the price. Only the source
of the funds to pay the purchase price was yet to be resolved at the time the two inquired from
Mendiola. Consider Liwayway’s testimony:

In the absence of a lender-borrower relationship between petitioner and Liwayway, there is no

Q: We are referring to the promissory note which you aforementioned a while ago, why did this
inherent obligation of petitioner to release the proceeds of the loan to her.
promissory note come about?

To a banking institution, well-defined lending policies and sound lending practices are essential
A: Because the negotiation was already completed, sir, and the deed of sale will have to be
to perform its lending function effectively and minimize the risk inherent in any extension of
executed, I asked the defendant (Corazon) to execute the promissory note first before I could
credit.
execute a deed of absolute sale, for assurance that she really pay me, sir. 14 (emphasis and
underscoring supplied)
Thus, Section X302 of the Manual of Regulations for Banks provides:
That it was on Corazon’s execution of a promissory note that prompted Liwayway to finally
X-302. To ensure that timely and adequate management action is taken to maintain the quality execute the Deed of Sale is thus clear.
of the loan portfolio and other risk assets and that adequate loss reserves are set up and
maintained at a level sufficient to absorb the loss inherent in the loan portfolio and other risk
The trial Court’s reliance on the doctrine of apparent authority – that the principal, in this case
assets, each bank shall establish a system of identifying and monitoring existing or potential
petitioner, is liable for the obligations contracted by its agent, in this case Mendiola, – does not
problem loans and other risk assets and of evaluating credit policies vis-à-vis prevailing
lie. Prudential Bank v. Court of Appeals15 instructs:
circumstances and emerging portfolio trends. Management must also recognize that loss
reserve is a stabilizing factor and that failure to account appropriately for losses or make
adequate provisions for estimated future losses may result in misrepresentation of the bank’s [A] banking corporation is liable to innocent third persons where the representation is made in
financial condition. the course of its business by an agent acting within the general scope of his authority even
though, in the particular case, the agent is secretly abusing his authority and attempting to
perpetuate fraud upon his principal or some person, for his own ultimate benefit.16 (underscoring
In order to identify and monitor loans that a bank has extended, a system of documentation is
supplied)
necessary. Under this fold falls the issuance by a bank of a guarantee which is essentially a
The onus probandi that attempt to commit fraud attended petitioner’s employee Mendiola’s acts
and that he abused his authority lies on Liwayway. She, however, failed to discharge the onus. It
bears noting that Mendiola was not privy to the approval or disallowance of Corazon’s
application for a loan nor that he would benefit by the approval thereof.

Aside from Liwayway’s bare allegations, evidence is wanting to show that there was collusion
between Corazon and Mendiola to defraud her. Even in Liwayway’s Complaint, the allegation of
fraud is specifically directed against Corazon.17

IN FINE, Liwayway’s cause of action lies against only Corazon.

WHEREFORE, the Decision of January 14, 2008 of the Court of Appeals, in so far as it holds
petitioner, Prudential Bank and Trust Company (now Bank of the Philippine Islands), subsidiary
liable in case its co-defendant Corazon Marasigan, who did not appeal the trial court’s decision,
fails to pay the judgment debt, is REVERSED and SET ASIDE. The complaint against petitioner
is accordingly DISMISSED.

SO ORDERED.
 G.R. No. 186550 July 5, 2010 On May 12, 2000, ACFLC filed its Answer, denying the material allegations in the complaint and
averring failure to state a cause of action and lack of cause of action, as defenses. ACFLC
claimed that it was merely exercising its right as mortgagor; hence, it prayed for the dismissal of
ASIAN CATHAY FINANCE AND LEASING CORPORATION, Petitioner,
the complaint.
vs.
SPOUSES CESARIO GRAVADOR and NORMA DE VERA and SPOUSES EMMA
CONCEPCION G. DUMIGPI and FEDERICO L. DUMIGPI, Respondents. After trial, the RTC rendered a decision, dismissing the complaint for lack of cause of action.
Sustaining the validity of the promissory note and the real estate mortgage, the RTC held that
respondents are well-educated individuals who could not feign naiveté in the execution of the
DECISION
loan documents. It, therefore, rejected respondents’ claim that ACFLC deceived them into
signing the promissory note, disclosure statement, and deed of real estate mortgage. The RTC
NACHURA, J.: further held that the alleged defects in the promissory note and in the deed of real estate
mortgage are too insubstantial to warrant the nullification of the mortgage. It added that a
promissory note is not one of the essential elements of a mortgage; thus, reference to a
On appeal is the June 10, 2008 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No.
promissory note is neither indispensable nor imperative for the validity of the mortgage. The
83197, setting aside the April 5, 2004 decision2 of the Regional Trial Court (RTC), Branch 9, RTC also upheld the interest rate and the penalty charge imposed by ACFLC, and the waiver of
Bulacan, as well as its subsequent Resolution3 dated February 11, 2009, denying petitioner’s respondents’ right of redemption provided in the deed of real estate mortgage.
motion for reconsideration.

The RTC disposed thus:

On October 22, 1999, petitioner Asian Cathay Finance and Leasing Corporation (ACFLC)
extended a loan of Eight Hundred Thousand Pesos (₱800,000.00)4 to respondent Cesario
Gravador, with respondents Norma de Vera and Emma Concepcion Dumigpi as co-makers. The WHEREFORE, on the basis of the evidence on record and the laws/jurisprudence applicable
loan was payable in sixty (60) monthly installments of ₱24,400.00 each. To secure the loan, thereto, judgment is hereby rendered DISMISSING the complaint in the above-entitled case for
respondent Cesario executed a real estate mortgage5 over his property in Sta. Maria, Bulacan, want of cause of action as well as the counterclaim of [petitioner] Asian Cathay Finance &
covered by Transfer Certificate of Title No. T-29234.6 Leasing Corporation for moral and exemplary damages and attorney’s fees for abject lack of
proof to justify the same.
Respondents paid the initial installment due in November 1999. However, they were unable to
pay the subsequent ones. Consequently, on February 1, 2000, respondents received a letter SO ORDERED.8
demanding payment of ₱1,871,480.00 within five (5) days from receipt thereof. Respondents
requested for an additional period to settle their account, but ACFLC denied the request.
Aggrieved, respondents appealed to the CA. On June 10, 2008, the CA rendered the assailed
Petitioner filed a petition for extrajudicial foreclosure of mortgage with the Office of the Deputy
Decision, reversing the RTC. It held that the amount of ₱1,871,480.00 demanded by ACFLC
Sheriff of Malolos, Bulacan.
from respondents is unconscionable and excessive. Thus, it declared respondents’ principal loan
to be ₱800,000.00, and fixed the interest rate at 12% per annum and reduced the penalty
On April 7, 2000, respondents filed a suit for annulment of real estate mortgage and promissory charge to 1% per month. It explained that ACFLC could not insist on the interest rate provided
note with damages and prayer for issuance of a temporary restraining order (TRO) and writ of on the note because it failed to provide respondents with the disclosure statement prior to the
preliminary injunction. Respondents claimed that the real estate mortgage is null and void. They consummation of the loan transaction. Finally, the CA invalidated the waiver of respondents’
pointed out that the mortgage does not make reference to the promissory note dated October right of redemption for reasons of public policy. Thus, the CA ordered:
22, 1999. The promissory note does not specify the maturity date of the loan, the interest rate,
and the mode of payment; and it illegally imposed liquidated damages. The real estate
WHEREFORE, premises considered, the appealed decision is REVERSED AND SET ASIDE.
mortgage, on the other hand, contains a provision on the waiver of the mortgagor’s right of
Judgment is hereby rendered as follows:
redemption, a provision that is contrary to law and public policy. Respondents added that
ACFLC violated Republic Act No. 3765, or the Truth in Lending Act, in the disclosure statement
that should be issued to the borrower. Respondents, thus, claimed that ACFLC’s petition for 1) Affirming the amount of the principal loan under the REM and Disclosure Statement
foreclosure lacked factual and legal basis, and prayed that the promissory note, real estate both dated October 22, 1999 to be ₱800,000.00, subject to:
mortgage, and any certificate of sale that might be issued in connection with ACFLC’s petition
for extrajudicial foreclosure be declared null and void. In the alternative, respondents prayed that
a. 1% interest per month (12% per annum) on the principal from November
the court fix their obligation at ₱800,000.00 if the mortgage could not be annulled, and declare
23, 1999 until the date of the foreclosure sale, less ₱24,000.00 paid by
as null and void the provisions on the waiver of mortgagor’s right of redemption and imposition of
[respondents] as first month amortization[;]
the liquidated damages. Respondents further prayed for moral and exemplary damages, as well
as attorney’s fees, and for the issuance of a TRO to enjoin ACFLC from foreclosing their
property. b. 1% penalty charge per month on the principal from December 23, 1999
until the date of the foreclosure sale.
On April 12, 2000, the RTC issued an Order,7 denying respondents’ application for TRO, as the
acts sought to be enjoined were already fait accompli. 2) Declaring par. 14 of the REM as null and void by reason of public policy, and
granting mortgagors a period of one year from the finality of this Decision within which
to redeem the subject property by paying the redemption price as computed under
 paragraph 1 hereof, plus one percent (1%) interest thereon from the time of
foreclosure up to the time of the actual redemption pursuant to Section 28, Rule 39 of
the 1997 Rules on Civil Procedure.
The claim of the [respondents] for moral and exemplary damages and attorney’s fees is
dismissed for lack of merit.
SO ORDERED.9
ACFLC filed a motion for reconsideration, but the CA denied it on February 11, 2009.
ACFLC is now before us, faulting the CA for reversing the dismissal of respondents’ complaint. It
points out that respondents are well-educated persons who are familiar with the execution of
loan documents. Thus, they cannot be deceived into signing a document containing provisions
that they are not amenable to. ACFLC ascribes error on the part of the CA for invalidating the
interest rates imposed on respondents’ loan, and the waiver of the right of redemption.
The appeal lacks merit.
It is true that parties to a loan agreement have a wide latitude to stipulate on any interest rate in
view of Central Bank Circular No. 905, series of 1982, which suspended the Usury Law ceiling
on interest rate effective January 1, 1983. However, interest rates, whenever unconscionable,
may be equitably reduced or even invalidated. In several cases,10 this Court had declared as null
and void stipulations on interest and charges that were found excessive, iniquitous and
unconscionable.
Records show that the amount of loan obtained by respondents on October 22, 1999 was
₱800,000.00. Respondents paid the installment for November 1999, but failed to pay the
subsequent ones. On February 1, 2000, ACFLC demanded payment of ₱1,871,480.00. In a
span of three months, respondents’ obligation ballooned by more than ₱1,000,000.00. ACFLC
failed to show any computation on how much interest was imposed and on the penalties
charged. Thus, we fully agree with the CA that the amount claimed by ACFLC is
unconscionable.
In Spouses Isagani and Diosdada Castro v. Angelina de Leon Tan, Sps. Concepcion T.
Clemente and Alexander C. Clemente, Sps. Elizabeth T. Carpio and Alvin Carpio, Sps. Marie
Rose T. Soliman and Arvin Soliman and Julius Amiel Tan,11 this Court held:
The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of man. It has no support in
law, in principles of justice, or in the human conscience nor is there any reason whatsoever
which may justify such imposition as righteous and as one that may be sustained within the
sphere of public or private morals.
Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to
morals, if not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent
and void from the beginning. They cannot be ratified nor the right to set up their illegality as a
defense be waived. The nullity of the stipulation on the usurious interest does not, however,
affect the lender’s right to recover the principal of the loan. Nor would it affect the terms of the
real estate mortgage. The right to foreclose the mortgage remains with the creditors, and said
right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be
considered without the stipulation of the excessive interest. A legal interest of 12% per annum
will be added in place of the excessive interest formerly imposed. 12 The nullification by the CA of
the interest rate and the penalty charge and the consequent imposition of an interest rate of 12%
and penalty charge of 1% per month cannot, therefore, be considered a reversible error.
ACFLC next faults the CA for invalidating paragraph 14 of the real estate mortgage which
provides for the waiver of the mortgagor’s right of redemption. It argues that the right of
redemption is a privilege; hence, respondents are at liberty to waive their right of redemption, as
they did in this case.
Settled is the rule that for a waiver to be valid and effective, it must, in the first place, be couched
in clear and unequivocal terms which will leave no doubt as to the intention of a party to give up
a right or benefit which legally pertains to him. Additionally, the intention to waive a right or an
advantage must be shown clearly and convincingly.13 Unfortunately, ACFLC failed to convince
us that respondents waived their right of redemption voluntarily.
As the CA had taken pains to demonstrate:
The supposed waiver by the mortgagors was contained in a statement made in fine print in the
REM. It was made in the form and language prepared by [petitioner]ACFLC while the
[respondents] merely affixed their signatures or adhesion thereto. It thus partakes of the nature
of a contract of adhesion. It is settled that doubts in the interpretation of stipulations in contracts
of adhesion should be resolved against the party that prepared them. This principle especially
holds true with regard to waivers, which are not presumed, but which must be clearly and
convincingly shown. [Petitioner] ACFLC presented no evidence hence it failed to show the
efficacy of this waiver.
Moreover, to say that the mortgagor’s right of redemption may be waived through a fine print in a
mortgage contract is, in the last analysis, tantamount to placing at the mortgagee’s absolute
disposal the property foreclosed. It would render practically nugatory this right that is provided by
law for the mortgagor for reasons of public policy. A contract of adhesion may be struck down as
void and unenforceable for being subversive to public policy, when the weaker party is
completely deprived of the opportunity to bargain on equal footing.14
In fine, when the redemptioner chooses to exercise his right of redemption, it is the policy of the
law to aid rather than to defeat his right.15 Thus, we affirm the CA in nullifying the waiver of the
right of redemption provided in the real estate mortgage.
Finally, ACFLC claims that respondents’ complaint for annulment of mortgage is a collateral
attack on its certificate of title. The argument is specious.
The instant complaint for annulment of mortgage was filed on April 7, 2000, long before the
consolidation of ACFLC’s title over the property. In fact, when respondents filed this suit at the
first instance, the title to the property was still in the name of respondent Cesario. The instant
case was pending with the RTC when ACFLC filed a petition for foreclosure of mortgage and
even when a writ of possession was issued. Clearly, ACFLC’s title is subject to the final outcome
of the present case.1avvphi1
WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 83197 are AFFIRMED. Costs against petitioner.
SO ORDERED.
 G.R. No. L-47544 January 28, 1980
PEPITO VELASCO, AMABLE LUMANLAN, RAMON GALANG, FELIPE LUMBANG and
APOLONIO DE LOS SANTOS, petitioners,
vs.
COURT OF APPEALS and GOVERNMENT SERVICE INSURANCE SYSTEM, respondents.
BARREDO, J.:
Petition for certiorari, erroneously citing Section I of Rule 65, for the review of the decision of the
Special Division of Five of the Court of Appeals dated December 6, 1977 in CA .G.R. No. 06152
declaring, by a vote of four to one, null and void the order of the Court of First Instance of
Pampanga in Civil Case No. 4260 dated December 2, 1976, which had declared the judgment of
said court in said case final and executory, directing in consequence, said trial court to approve
the record on appeal of herein respondent Government Service Insurance System (GSIS for
short) and to give due course to its appeal, setting aside correspondingly the restraining order it
had previously issued in the same case, the Court of Appeals holding that, contrary to the ruling
of the trial court, the motion for new trial of the GSIS admittedly filed on time is not pro-
forma and, therefore, the period to appeal the trial court's decision in question had been
suspended by said motion, hence, said decision was still appealable.
From the foregoing brief statement of the nature of the instant case, it would appear that Our
sole function in this proceeding should be to resolve the single issue of whether or not the Court
of Appeals erred in ruling that the motion for new trial of the GSIS in question should indeed be
deemed pro-forma. But going over the extended pleadings of both parties, the Court is
immediately impressed that substantial justice may not be timely achieved, if We should decide
this case upon such a technical ground alone. We have carefully read all the allegations and
arguments of the parties, very ably and comprehensively expounded by evidently
knowledgeable and unusually competent counsel, and We feel We can better serve the interests
of justice by broadening the scope of Our inquiry, for as the record before Us stands, We see
that there is enough basis for Us to end the basic controversy between the parties here and
now, dispensing, however, with procedural steps which would not anyway affect substantially the
merits of their respective claims.
As a matter of fact, after our first study of this case, We already announced Our intention in this
direction at the hearing held on February 21, 1979, where Attys. Celestino T. Ocampo, Vicente
Sicat and Victoriano David appeared and argued for the petitioners and Justice Manuel Lazaro
and Atty. Antonio F. Navarrete, for the GSIS. We reiterated said intention in Our resolution of
said date by requiring the parties "to INFORM the Court ... whether or not there are any issues
of fact that the purported appeal of private respondent would involve and whether or not
petitioners controvert the same, with the end in view of enabling this Court to take the necessary
steps to convert this proceeding into an appeal ... (under) Republic Act 5440". To be sure, in its
compliance dated April 10, 1979 with said resolution, GSIS does enumerate certain allegedly
"pivotal factual issues" its appeal "would involve." However, as will be explained anon even the
"pivotal factual issues" referred to may be justly resolved here without the need of returning this
case to the trial court. The exact position of the parties in respect to said issues and the
allegations of fact in their pleadings here and in the court below as well as the undisputed
evidence related thereto are so clearly stated and comprehensively discussed by the parties in
their said pleadings that to conduct further proceedings or to await any other briefs from them
would be superfluous and a waste of time and effort. Accordingly, We now deem this case as
submitted for Our decision as a duly made appeal under Republic Act 5440.
According to GSIS:
A Detailed Statement of Facts and of the Case
It is not without reason to state that the ambience of a particular case has
much to contribute to the resolution thereof. So it is with the instant case.
And for a better appreciation of the antecedents which led to the decision of
the Court of First Instance of Pampanga and subsequently the questioned
decision of the respondent Court of Appeals, the environmental facts which
spawned them should thus be laid bare before this Honorable Court, the
better to appreciate their factual significance and legal consequences.
1. Sometime on November 10, 1965, Alta Farms secured from the GSIS a
Three Million Two Hundred Fifty Five Thousand Pesos (P3,255,000.00) loan
and an additional loan of Five Million Sixty-Two Thousand Pesos
(P5,062,000.00) on October 5, 1967, to finance a piggery project. These
loans were secured by two mortgage (Exh. "B").
2. Alta Farms defaulted in the payment of its amortizations. it is presumably
because of this that Alta Farms executed a Deed of Sale With Assumption
of Mortgage with Asian Engineering Corporation on July 10, 1969 (Exh.
"C"), but without the previous consent or approval of the GSIS and in direct
violation of the provisions of the mortgage contracts.
3. Even without the approval of the Deed of Sale With Assumption of
Mortgage by the GSIS, Asian Engineering Corporation executed an
Exclusive Sales Agency, Management and Administration Contract in favor
of Laigo Realty Corporation, with the intention of converting the piggery farm
into a subdivision (Exh. "D"). And on October 20, 1969, Asian Engineering
executed another contract with Laigo, whereby Laigo was to undertake the
development of the property into a subdivision (Exh. "E"). Conformably with
the two contracts (Exh "D" and "E"), Laigo started the development of the lot
into a subdivision.
Contract of Petitioner
Lumanlan and his admission
4. After developing the area, on December 4, 1969, Laigo entered into a
contract (Exh. "GG") with Amable Lumanlan, one of the petitioners, to
construct for the home buyers, 20 houses on the subdivision. The contract
provided that Laigo shall secure the agreement and signature of the home
buyers (Paragraph 6 of Agreement, Exh. "GG") and that Laigo "shall pay for
the houses on a "turn-key" bases" (Paragraph 5 of Agreement, Exh. "GG").
The parties to the agreement are, stated by the agreement itself, as follows:
This Agreement, executed this 29th day of November,
1969, in the City of Manila, by and between
LAIGO REALTY CORPORATION, ...
represented by its President,
 RHODY E. LAIGO, ... hereinafter referred to as the I wish to inform you that I have received from Mrs.
FIRST PARTY Rhody E. Laigo several bank checks which were either
dishonored by the bank or were cancelled at the
request of Mrs. Rhody E. Laigo for reasons of
- and -
insufficient funds.

... AMABLE G. LUMANLAN ... hereinafter referred to as

The following are the checks:
the SECOND PARTY.

And the signatories are - DATE SER. NO. AMOUNT BANK

IN WITNESS WHEREOF, the parties hereunto affixed May 20,1970 646371 P36,000.00 Prudential
their signatures this 4th day of Dec. 1969 at Manila, Bank
Philippines.
June 10,1970 659907 9,000.00 "

(Sgd) Illegible June 30, 1970 646397 20,000.00 "

LAIGO REALTY ALEJANDRO Y. DE July 6, 1970 646398 19,800.00 "

CORPORATION JESUS
July 3, 1970 464399 11,250.00 "
BY: By:
Aug. 7,1970 659913 16,200.00 "
(Sgd) RHODY E. (Sgd) Illegible
LAIGO Aug. 14,1970 659914 12,605.00 "

(t) RHODY E. AMABLE G. Total P124,855.00

LAIGO LUMANLAN

- President - 8. In the same letter, Exh, "Y", Lumanlan admits that the checks of Laigo
that were dishonored were intended to pay 8 houses occupied by home
(Sgd) Illegible buyers, who caused the construction in accordance with the Agreement of
Laigo and Lumanlan (Exh. "GG"). The letter of Lumanlan also admits -
ANASTACIO F.
DANAN This amount was intended to pay for eight (8) houses
occupied by the following home buyers:

(See Exh. "GG")

1
. Liborio Yalung P18,000.00
5. Petitioner Lumanlan allegedly constructed 20 houses for the home buyers
and for which he claims a balance of P309,187.76 from the home buyers 2. Caridad Pascua 13,500.00
and Laigo. This is reflected in Exhibit "X" of petitioners. However, in the
letter of Lumanlan to the GSIS on January 7, 1972, he was collecting only 3. Antonio Candelaria 15,300.00
P216,500.00 (Exh. "W" evidence of Lumanlan). Thus, even the evidence of
Lumanlan on what is due him is conflicting. 4. Alberto Rarela 11,800.00

6. Out of his claim, petitioner Lumanlan admits that Mrs. Rhody Laigo paid 5. Felomena Gonzales 16,200.00
him in several checks totalling P124,855.00 but which checks were all
dishonored when presented for payment. This is Exhibit "X" of petitioners. 6. Estelita Manalang 16,200.00

7. Rogelio Zabala 16,200.00

7. Thus, on November 7, 1970, petitioner Lumanlan wrote a letter to Laigo
Realty Corporation (Exh. "Y", evidence of Lumanlan) which reads —
8. Wilhelmina Paras 16,200.00
 May I inform your good offices that the undersigned is
P123,400.00 one of the building contractors contracted by the Laigo
Realty Corporation to construct residential houses of lot
Refund for expenses in buyers therein For your further information the following
the execution of housing are the names of the lot owners for whom the
plans for the above undersigned have constructed houses for, including the
houses. respective balances payable to me as of this date.

1 ,455.00
Name of Buyer Cost of House Down Balances
P 124,855.00
1. Benjamin Cristobal P19,500.00 P1,950.00 17,550.00

It is significant to note that Exhibits "GG", "W" "X" and 2. Nehemiah Quipot 23,000.00 2,300.00 20,700.00
"Y" are part of the evidence of petitioners.
3. Alberto Villalon 18,000.00 1,800.00 16,200.00
9. On December 17, 1970, Laigo acknowledged its dishonored checks and
promised to make good the same. This is reflected in Exhibit "Y-l" of 4. Luis Jacob 20,000.00 2,000.00 18,000.00
petitioners. The dishonored checks were all presented by petitioners and
marked Exhibits "II-l" to "II-6". 5. Jose Salonga 20,000.00 2,000.00 18,000.00

Contract of Petitioner 6. Antonio Jontillano 12,500.00 1,200.00 11,300.00

P101,750.00
Velasco and his admissions

10. On December 29, 1969, Laigo entered into a contract with petitioner xxx xxx xxx
Pepito Velasco to construct houses for the home buyers who agreed with
Velasco on the prices and the downpayment. Exhibits "HH" and "HH-l" for
Very respectfully yours,
petitioners. The parties to the contract are -

(Sgd) Pepito Velasco

LAIGO REALTY CORPORATION, ... as the FIRST
PARTY
(t) PEPITO VELASCO Contractor'
- and -
This is the evidence of Velasco.
... PEPITO VELASCO, ... jointly known as the SECOND
PARTY; 12. Velasco admits that Laigo paid him in five (5) checks with the total
amount of P35,000.00 but which all bounched or were dishonored (Exh.
"BB" of petitioners). It is interesting to note that in the same letter of Velasco
11. Petitioner Velasco constructed houses for various home buyers, who
to his lawyer, Velasco also named the buyers of the houses for whom he
individually agreed with Velasco, as to the prices and the downpayment to
constructed the houses and the balance due from the home buyers (See
be paid by the individual home buyers.
Exh. "BB" of petitioners)

When neither Laigo nor the individual home buyers paid for the home
Con tract of Petitioner
constructed, Velasco wrote the GSIS to intercede for the unpaid accounts of
the home buyers (Exh. "AA" for petitioners). Exhibit "AA" admits that Pepito
Velasco is one of the building contractors contracted by Laigo to construct de los Santos and his
houses for home buyers. it states the names of the home buyers, the cost of
houses agreed upon, the downpayment made by the buyers and their
respective balance to Velasco. Since the letter of Velasco, Exh. "AA", is a admissions
written admission that is highly revealing and illuminating we feel it
important and material to quote therefrom as follows. 13. On March 4, 1970, Laigo entered into a contract with petitioner Apolonio
de los Santos whereby the latter agreed to construct houses for the home
buyers and Laigo agreed to pay the full purchase price of every house
 constructed ... based on a "turn- key arrangement". (Vide Exh. "A") The (Sgd.) Ramon R. Galang
parties to the contract are shown as follows:
(t) RAMON R. GALANG
If these conditions above are acceptable to your good
self, kindly signify your conformity below.
Contractor,

Truly yours,
(Vide Exh. "KK" for petitioners; emphasis supplied)

(Sgd) Rhody E. Laigo

Contract of Petitioner

(t) RHODY E. LAIGO

Lumbang

CONFORME
15. Petitioner Felipe Lumbang also claims to have constructed for the home
buyers upon the instance of Laigo, four (4) houses with the balance of
(Sgd) APOLONIO DE LOS SANTOS P82,705.00. Lumanlan admits that he constructed the four houses for the
home buyers who paid him a downpayment but who still have outstanding
balances Vide Exh. "LL" for the petitioners).
(Date) March 4, 1970

16. The Deed of Sale With Assumption of Mortgage between Alta Farms
(Vide Exhibit "A" of petitioners)
and Asian Engineering, for one reason or another, was not approved by the
GSIS. And when Alta Farms failed to liquidate its accounts, GSIS foreclosed
Contract of Petitioner the properties including all improvements (the house in 1970. In November
and December 1971, the Certificate of Sale in favor of the GSIS were
issued.
Galang and his admissions

14. Petitioner Ramon Galang also constructed a house for Victor Coquilla
for an agreed price of P14,000.00. Coquilla paid a downpayment of
P1,400.00, thereby leaving a balance of P12,600.00, which he wanted the
GSIS to pay. Thus, in his letter to the GSIS (Exh "CC" for Petitioners) he
admits -
17. While the properties were under foreclosure and even pending the
consolidation of titles, certain lots were sold on installment basis, for which
Laigo received P985,000.00, and 63 houses in various stages were
constructed, among which are the houses allegedly constructed by the
petitioners.

xxx xxx xxx

In connection with your Palos Verdes Estate
Subdivision located in Talipapa, Caloocan City and
which was era d Realty Corporation I wish to inform you 21. An along, from the time the contracts were entered into by Laigo Realty
that I have the Laigo Realty Corporation constructed in Corporation, the petitioners had always directed their claims against Laigo
the subdivision the following house, its owner and cost Realty Corporation as may be shown by Exhibits "Z", "X", "Y" and "I-1";
of construction Laigo would pay by checks to the contractors; and when the checks were
dishonored they would always file a protest with Laigo Realty Corporation.
Originally, an claims were addressed to Laigo Realty Corporation, being the
Name Of Owner Cost of House Amount Paid Balance party who executed the contracts

1. Victor Coquilla P14,000.00 P1,400.00 P12,600.00 22. When the petitioners could not collect from Laigo and the home buyers
and after the GSIS foreclosed the subdivision including the improvements
(the houses constructed), the petitioners sent a letter of demand on August
May I inform your good Offices further that the amount of P12,600.00 3, 1974 (Exhibit "EE") for GSIS to pay for the indebtedness of Laigo Realty
referred to above as the 'balance 'is payable to the undersigned, Payment of Corporation. It is enlightening and interesting to note that the annexes to the
which has been delayed for almost one and a half years now. letter specifies who are the home buyers who caused the construction the
agreed price of the construction between the home buyers and the
Trusting that you give this letter your usual Prompt attention, I beg to remain contractors, the downpayment made by the home buyers to the contractors,
and the balance of the home buyers due the contractors by reason of the
contracts (Exhibits "EE-l" and "EE-2"). It is crystal clear from the letter of the
Very respectfully yours, lawyer of the petitioners that the ones who caused the construction are
home buyers through Laigo Realty Corporation, that the home buyers made
downpayments to the contractors, and that the latter agreed to the price and
the balance that were not paid by the home buyers This is certainly
indubitable proof that the GSIS had nothing to do whatsoever in the
construction of the houses by the petitioners.
23. On August 12. 1974, the Assistant General Manager on A legal affairs -
he GSIS categorically and specifically denied the an the firm and clear legal
ground, among others, that the has no privity of contract with the petitioners
(Exhibit "FF"). This denial of the claim of the negates, rebukes and belies
any and all or on the other inter-office the GSIS.
24. On April 14, 1975, the petitioners filed a case against the GSIS for the
on of mm of money representing labor and materials used in the
construction of houses caused by home buyers the intercession of Laigo
Realty Corporation in the principal sum of P607,328.27. The complaint,
docketed as Civil Case No. 4260 of the Court of First Instance of
Pampanga, prayed for -
(1) The sum of SIX HUNDRED SEVEN THOUSAND
THREE HUNDRED TWENTY EIGHT & 271100
PESOS (P607,328.27) in its current value due to
inflation with legal interest from the date of extrajudicial
demand;
(2) the sum of FIFTY THOUSAND (P50,000.00)
PESOS as attorney's fees;
(3) such sum for exemplary damages as may be
assess by this Honorable Court against the defendant;
and
(4) the costs of this suit (Vide pp. 91-95 of the instant
Amended Petition)
25. On July 30, 1975, and within the extensions of time granted, the GSIS
filed its Answer traversing the claims and alleging, among others, that the
petitioners have no privity of contract with the GSIS; that the petitioners
have no cause of action; and that Laigo Realty Corporation which entered
into the contracts with the petitioners is a necessary and indispensable party
who should be included as a party to properly ventilate the issues and to
avoid multiplicity of suits (pp. 96-101 of the instant Amended Petition).
26. After pre-trial was terminated the petitioners presented their evidence,
and thereafter, under date of December 16, 1975, they filed their Plaintiffs'
Formal Offer of Evidence (pp. 103-113 of the instant Amended Petition).
27. On February 20, 1976, the petitioners and the GSIS filed their "Joint
Manifestation" which in substance is a stipulation of facts (pp. 114-116 of
the instant Amended Petition). The petitioners agreed that the witnesses of
the GSIS to be presented would testify on the following-
a. The execution of the Deed of Quitclaim dated May 7,
1970, executed in favor of defendant GSIS by Laigo
Realty notwithstanding the followed ownership." GSIS if
they were presented evidence." (Pp. 379-391, Record.
Corporation freeing said defendant from any and all
claims arising out of the suppliers, contractors and
house such as plaintiffs in the Palos Verdes Estate
which now constitutes the GSIS Hills Subdivision
b. At the time of the Extra-Judicial Foreclosure of the
Estate Mortgage on November, 1971, conducted by
defendant or Laigo properties, plaintiff's claims are not
registered;
c. Plaintiffs' services were contracted by Laigo
Corporation and not by the defendant GSIS;
d That defendant up to the present has not collected
the house owner of the 63 houses built by the plaintiffs
proceedings and consolidation of ownership
The petitioners thus did not choose to cross-examine or dispute what they
had agreed upon as the testimonies of the witnesses of the to testify;
hence, they stand as uncontroverted evidence. 1
Significantly, the trial court's conclusions of fact are substantially as alleged by the GSIS above,
except as to certain details which We deem immaterial in the light of the legal provisions and
principles upon which We believe the resolution of this controversy should be based. It may be
stated in this connection, however, that the trial court made the following findings and
conclusions as regards the amount petitioners are entitled to recover:
The next issue that would then necessarily follow is: - How much are the
plaintiffs entitled to be paid?
Again, an examination of the plaintiffs' uncontroverted evidence disclose
that as of the time they were ordered to 'cease and desist' from introducing
any further improvement on the property, they had already constructed
several houses valued (in common to them) in the total of P609,328.27 and
for which amount representing the actual cost of construction of the houses
(materials and labor already considered) as of those years of construction
(1969-1970), they had not yet been fully paid; that upon consolidation of
ownership of the entire Palos Verdes Estate Subdivision where said
plaintiffs had introduced the improvements aforesaid in the GSIS, they
made written request for payment of what was already then due them on the
defendant GSIS - new owner of the premises but that their said request had
fallen on deaf ears. Consequently, for having been compelled to litigate and
to incur unnecessary expenses instead of given the opportunity of making
use of the proceeds of their investment and labor in further investments and
work, said plaintiffs are here now further invoking justice and equity on their
side and praying that they be paid their afore-stated entitlement in the
amount of P607,328.27 in the equivalent or present value of our Pesos as
devaluated. Thus, through testimonial evidence now also standing on record
unrebutted, said plaintiffs proceeded to show to the Court the effect of such
 devaluation of the currency on the prices of materials, as well as on their the facts and circumstances as proven, in the honest opinion of this Court
rights and claims, as follow: as a court of law and equity, truly warrant that this said amount be awarded
to the plaintiffs. (pp. 193-195, Record.)

1969-1970 1975 Parenthetically, the following reprobation by the Court of Appeals of the foregoing posture of the
trial court reveals how much the same had evidently influenced said appellate court to rule in
MATERIAL Cost Cost favor of allowing respondent's appeal:

1. White Sand Porac P9.00 per cu. m. P30.00 per cu. m.

This Court finds no compelling reason to bar appellate review of the
unprecedented judgment, mentioned at the outset, which revalued upwards
2. Crashed Gravel-Baliwag 15.00 per cu. m. 30.00 per cu. m.
four-fold to repeat, four times — the amount of plaintiffs' claim (as alleged in
their complaint) representing actual costs of houses built by them for the
3. Cement 3.90 per bag 14.00 per bag former owner-mortgagor of the subdivision that, eventually, was acquired by
the GSIS as highest bidder at the foreclosure sale.
4. Lumber .36 to .42 per 1. 70 to 1.80 per board ft.
board foot
It bears emphasis that "unjust enrichment", which was invoked by plaintiffs
5. Nails . 75 per kilo 4.20 per kilo in suing the GSIS instead of the former owner and/or the developer (which
contracted with plaintiff in regard to the houses in question), is manifest in
the judgment sought to be elevated to this appellate court. For, under that
6. GI Sheets 1.00 per linear foot 4.20 to 4.50 per linear foot
judgment, plaintiffs stand to receive, from and at the expense of the GSIS,
as new owner, and to keep for themselves as additional increment more
7. Paint 10.50 to 1 1.00 per 38.00 to 40.00 per gallon than P 1.8 million OVER and ABOVE actual costs of materials and labor
gallon that went into the building of said houses, according to their own allegations
and evidence. Whether or not the trial court can, by the simple expedient of
8. Iron bars 2.7 5 to 3. 00 15.00 taking "judicial notice" of inflation, quadruple the plaintiffs' claim, in the light
of the Civil Code provision (Art. 1250) authorizing revaluation only upon
9. Toilet materials 110.00 to 120.00 410. 00 to 420. 00 proof of "extraordinary inflation or deflation of the currency" and of Republic
Act No. 524 providing that obligation shall be discharged in the currency that
Water closet, Phil. is legal tender at the time of payment, is an important and far-reaching legal
question that deserves further examination or review not only by this court
Standard with seat cover but also, if need be, by the Supreme Court." (Pp. 31-32, Record.)

And indeed, this Court can take judicial notice of the fact that a house
costing, say P10,000.00 in 1969-1970, would now cost no less than
P40,000.00. So that, considering that the generally accepted standard or
ratio in the determination of the costs of materials and labor supplied and
put in the construction by the builder-contractors that the latter (labor) is
30% of that of the former (cost of materials), a computation of plaintiffs dues
as is, or P607,328,27, would give this:
Truth to tell however, contrary to the contention of GSIS, the trial court's four-fold award may not
be said to be entirely baseless and arbitrary, much less based on no more than the judicial
notice taken by His Honor that "a house costing, say P10,000 in 1969-1970, would now cost no
less than P40,000." That the trial court did not award more than what petitioners had demanded
in their complaint is clearly evidenced by their allegation in Paragraph 5 of their complaint
regarding the effects of inflation as wen as by their prayer that they be paid "the sum of Six
Hundred Seven Thousand Three Hundred Twenty-Eight and 27/100 Pesos (P607,328.27) in its
current value due to inflation", as well as by the testimonial evidence referred to in detail in the
decision in question, as can be seen in the portions thereof We have quoted above.

a. —Cost of materials P 467,175.50

b. — Cost of labor 140,152 .50
Total 607,328.00
In effect, by considering the aforesaid four times increase in said materials
costing P467,175.50, the same materials would now cost P1,868,702.00. By
adding 30% of said amount of P1,868.702.00, or P560,610.60 for the cost of
labor, to the said cost of materials, the total amount to which plaintiffs would
therefore, be justly and equitably entitled is the sum of P2,429,312.60. And
Thus, We find and hold that the material facts in this case are beyond dispute and the only
issues We have to resolve are legal ones. It is clear to Us that petitioners did construct,
furnishing the materials and labor needed for the purpose the 63 houses that now belong to or
are owned by respondent GSIS. It is alleged in Paragraphs 5 and 8 of petitioners' complaint that:
5. That during the period of the joint venture agreement being negotiated by
the Government Service Insurance System and the Laigo Realty
Corporation, the plaintiffs herein constructed residential house and other
improvements at the said GSIS His Subdivision, furnishing materials,
supplies, labor and miscellaneous services at their own expense, which
costs of mass labor and miscellaneous services total the amount of
P607,328.27, and which is broken down or itemized as follows:

Amable C. Lumanlan ------------ P309,187.76
Pepito Velasco -------------------- 142,510.00
Apolonio de los Santos -------- 60,325.51
Felipe Lumbang ------------------ 82,705.00
Ramon Galang -------------------- 12,600.00
That the foregoing expenditures and- claims are computed on the basis of
actual costs of ma and labor as of the time of the construction;
That owing to the inflation which is a matter of judicial notice, such costs of
materials and labor is now reasonably assessed at very much more than the
above-mentioned amount
xxx xxx xxx
8. That the construction of houses and improvements has greatly increased
the value of the aforesaid defendant's property. (Pp. 71-72, Record.)
The answer of GSIS to the foregoing allegations is as follows:
5. It specifically denies the allegations in paragraph 5, the truth being
defendant is not liable for any of the materials, supplies and labor allegedly
furnished and supplied by plaintiffs to Palos Verdes Estate Subdivision as
the same pertain exclusively to Laigo Realty Corporation, since on 7 May
1970, Laigo Realty Corporation executed a Deed of Quitclaim and
Undertaking, xerox copy of which is hereto attached as Annex "1" and made
an integral part hereof, holding free and harmless defendant from claims of
materialmen, contractor or any other person arising out of or having
connection with the development of the said subdivision. Thus the "NOW,
THEREFORE" clause of said Deed of Quitclaim and Undertaking provides:
NO THEREFORE, for and in consideration of the above
premises; and in the event of disapproval by the GSIS
of its proposal to develop- the aforesaid property of
ALTA FARMS, INC. into a subdivision, REALTY
CORPORATION hereby forever quitclaims, releases
and waives in favor of the GSIS its rights and interests
in the aforesaid property of ALTA FARMS, INC. arising
out of the development of the aforesaid property into a
subdivision, and further shall answer and pay for any
claim of or liability to any contractor, material furnisher,
lot buyer, or any other person arising out of or having
connection with said subdivision development. If the
GSIS, for any reason, shall be held liable on any such
claims or liabilities or otherwise its mortgage hen be
diminished, LAIGO REALTY CORPORATION further
binds itself to indemnify the GSIS such sums
corresponding to such claims or diminution.
xxx xxx xxx
8. It admits the allegations in paragraph 8.(Pp. 76-77, Record.)
In other words, apart from- admitting expressly that "the constructions of houses and
improvements has greatly increased the value" of the subdivision it now owns, nowhere in its
statement of the material facts in Paragraph 5 of its answer relative to the allegations of the
petitioners regarding the construction by them of the houses in dispute and the cost thereof to
each of them does respondent deny said facts as not true. What GSIS limitedly alleged in its
answer is the legal proposition that it is not liable therefor because of lack of contractual privity
between it and petitioners. It may be safely said then that it does not now lie in the lips of GSIS
to maintain that petitioners did not build the houses in question and that the cost thereof is
different from what petitioners have stated in their complaint.
What is more, the reliance of GSIS on the Deed of Quitclaim of May 7, 1970 is to Our mind
misplaced. We have analyzed this document carefully, and We are of the considered view that it
is actually evidence against GSIS. Even if what is unnatural in ordinary business or industrial
experience were assumed, that is, that GSIS was unaware all along during the period of their
construction of the work then being done by petitioners - albeit it is possible there was no
express consent given to - by and thru the aforementioned deed of quitclaim, GSIS agreed to
receive and did actually receive the benefits of what petitioners had accomplished or would
accomplish under their contracts with Laigo., So much so, that the dispositive portion of the
quitclaim dead does not really relieve GSIS from liability to petitioners. Properly viewed, GSIS
virtually assumed under said deed, liability in regard to claims like those of petitioners who might
not be paid by Laigo albeit said liability has been made subject to the reservation that it could
seek indemnity from Laigo.
GSIS received Alta Farms' proposal about the conversion of their piggery project into a
subdivision (in which Laigo Realty's participation was mentioned) as early as February 5, 1970.
It was only in November, 1970 that it issued its "cease and desist" order. From all indications,
the jobs of petitioners were already practically finished then. Thus, in Paragraph 17 of its
Comment on the petition herein, GSIS states:
17. While the properties were under foreclosure and even pending the
consolidation of titles, certain lots were sold to installment basis, for which
Laigo received P985,000.00, and 63 houses in various stages were
constructed, among which are the houses allegedly constructed by the
petitioners. (P. 387, Record.)
And in the Joint Manifestation filed by the parties with the trial court as late as February 20,
1976, GSIS made it clear that "defendant (GSIS) up to the present has not collected from the
house owners of the 63 houses built by the plaintiffs notwithstanding the foreclosure
proceedings and consolidation 6f ownership." Again, it is thus obvious that GSIS assumed
ownership of the houses built by petitioners and was benefited by the same, and the fact that it
has not collected any payment from the "house owners" or the construction of the houses
respectively occupied by them is of no moment insofar as its liability to petitioners is concerned.
Surely, it is not pretended that those "house owners" would be allowed to enrich themselves at
the expense of petitioners. Indeed, the term "house owners" is inappropriate, if only because in
Paragraph 16 of its Comment on the petition herein, GSIS unequivocally state that "GSIS
foreclosed the properties including all improvements (the houses in 1970" and, thereby, became
the owner of said houses.
Upon the foregoing factual premises, the legal issue that arises is whether or not GSIS is liable
to the petitioners for the cost of the materials and labor furnished by them in construction of the
63 houses now owned by the GSIS and for the construction of which no payment has been
made on the balance due petitioners. Our considered view is and We so hold that even in equity
alone, GSIS should pay the petitioners. After all, it admits it has not collected from the ones who
appear to be the buyers thereof, albeit it must be collecting the installments on the lots. All it has
to do then is to pass on to them what it has to pay petitioners. In law, GSIS is, under the peculiar
circumstances of this case, the owner of said houses. Pursuant to Article 1729 of the Civil Code:
Those who put their labor upon or furnish materials for a piece of work
undertaken by the contractor have an action against the owner up to the
amount owing from the latter to the contractor at the time the claim is made.
However, the following shall not prejudice the laborers, employees and
furnishers of materials:
1) Payments made by the owner to the contractor before they are due;
2) Renunciation by the contractor of any amount due him from the owner.
This article is subject to the provisions of special laws. (1597a)
Laigo admittedly has not paid petitioners. The "bouncing" checks issued by it in their favor is
mentioned by GSIS itself in its statement of the facts. We hold that upon this premise it is a fair
construction of the Deed of Quitclaim aforementioned, that GSIS can be held liable to
petitioners, without prejudice to its securing corresponding indemnity from Laigo. It is obvious
from the terms of said deed that GSIS contemplated the possibility of its being liable for Laigo's
account, otherwise, there was no need for the reservation. This is one such liability. In this
connection while, indeed, Article 1729 refers to the laborers and materialmen themselves, under
the peculiar circumstances of this case, it is but fair and just that petitioners be deemed as suing
for the reimbursement of what they have already paid the laborers and materialmen, as
otherwise they (petitioners) would be unduly prejudiced while either Laigo, GSIS or the
occupants of the houses would enrich themselves at their expense. It is a bad law that would
allow such a result.
At this juncture, We need to add only that Article 1311 of the Civil Code which GSIS invokes is
not applicable where the situation contemplated in Article 1729 obtains. The intention of the
latter provision is to protect the laborers and the materialmen from being taken advantage of by
unscrupulous contractors and from possible connivance between owners and contractors. Thus,
a constructive vinculum or contractual privity is created by this provision, by way of exception to
the principle underlying Article 1311 between the owner, on the one hand, and those who furnish
labor and/or materials, on the other. As a matter of fact, insofar as the laborers are concerned,
by a special law, Act No. 3959, they are given added protection by requiring contractors to file
bonds guaranteeing payment to them. And under Article 2242 of the Civil Code, paragraphs (3)
and (4), claims of laborers and materialmen, respectively, enjoy preference among the creditors
of the owner in regard to specific immovable property.
As regards Article 525 of the Civil Code also invoked by GSIS, suffice it to say that this provision
refers particularly to instances where the bad faith or the good faith of the builder is the decisive
factor in determining liability. In the case at bar, there is no necessity to pass on the question of
whether petitioners acted in good faith or bad faith, for the simple reason that under the Deed of
Quitclaim, GSIS freely accepted the benefits of what they have accomplished.
GSIS contends that Laigo should have been joined as defendant in this case. While petitioners
could have done so, they were not under such obligation mandatorily. Under the circumstances
of this case, Laigo is only a necessary party, not an indispensable one. And to allay GSIS, its
right to secure reimbursement from Laigo is hereby reserved.
Coming now to the amount for which GSIS is liable, We reiterate that, to be sure, there is
evidence in the record, uncontradicted at that, regarding the lower value of money at the time
the demand upon GSIS was made compared to that when petitioners furnished the labor and
materials in question. We are not, however, inclined to go along with the trial court that the
amount demanded should be multiplied four times. We believe that it being a matter of judicial
notice that the prices of labor and material have substantially risen since 1970, it would be fair
enough to make respondent liable for interest on the amount of the demand, which is supported
by evidence and not effectively disputed by GSIS in its answer, at the rate of 12% per annum
from the time petitioners filed their complaint below on April 14,1975.
In addition, We hold that our award to petitioners of attorney's fees in the amount of Fifty
Thousand (P50,00.00) Pesos would only be just and proper. As We view the position taken by
GSIS in this case, petitioners were compelled to litigate over a matter that could have been justly
and equitably settled without having to go to court, particularly, when it is considered that under
the Deed of Quitclaim several times mentioned earlier, GSIS freely accepted from Laigo the
benefits of the expenses for labor and material incurred by petitioners in the houses in question,
hence, as We have said above, GSIS had no legal basis for insisting that Article 1729 of the Civil
Code does not apply to this case, it being indisputably the owner of said houses already.
Besides, it must be borne in mind that the claims of petitioners are in the nature of claims of the
laborers and materialmen themselves. Accordingly, Article 2208, paragraphs 2, 7 and 11, are
applicable hereto. Indeed, the "house owners " or occupants who have not paid either petitioners
or Laigo, or even the GSIS should not be allowed to enrich themselves at the expense of
petitioners, and the most feasible way of avoiding such a result is for GSIS to Pay Petitioners
and then pass on to said "house owners" what it would have to pay under this judgment.
IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered affirming the decision
appealed from, with the modification that respondent GSIS shall pay petitioners the total amount
of SIX HUNDRED SEVEN THOUSAND THREE HUNDRED TWENTY EIGHT AND 27/100
PESOS (P607,328.27), plus interest at 8% per annum from April 14, 1975 (which is less than
that allowed by Circular No. 416 of the Central Bank dated July 29, 1974) until fully paid, the said
sum to correspond separately to petitioners as follows:
Amable C. Lumanlan P309,187.76 plus
interest
Pepito Velasco 142,510.00
Apolonio de log 60,325.51
Santos
Felipe Lumbang 82,705.00 and
Ramon Galang 12,600.00
plus Fifty Thousand (P50,000) Pesos as attorney's fees for an of them and the costs.
 G.R. No. 16454 September 29, 1921
GEORGE A. KAUFFMAN, plaintiff-appellee,
vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
STREET, J.:
At the time of the transaction which gave rise to this litigation the plaintiff, George A. Kauffman,
was the president of a domestic corporation engaged chiefly in the exportation of hemp from the
Philippine Islands and known as the Philippine Fiber and Produce Company, of which company
the plaintiff apparently held in his own right nearly the entire issue of capital stock. On February
5, 1918, the board of directors of said company, declared a dividend of P100,000 from its
surplus earnings for the year 1917, of which the plaintiff was entitled to the sum of P98,000. This
amount was accordingly placed to his credit on the books of the company, and so remained until
in October of the same year when an unsuccessful effort was made to transmit the whole, or a
greater part thereof, to the plaintiff in New York City.
In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the
Philippine Fiber and Produce Company, presented himself in the exchange department of the
Philippine National Bank in Manila and requested that a telegraphic transfer of $45,000 should
be made to the plaintiff in New York City, upon account of the Philippine Fiber and Produce
Company. He was informed that the total cost of said transfer, including exchange and cost of
message, would be P90,355.50. Accordingly, Wicks, as treasurer of the Philippine Fiber and
Produce Company, thereupon drew and delivered a check for that amount on the Philippine
National Bank; and the same was accepted by the officer selling the exchange in payment of the
transfer in question. As evidence of this transaction a document was made out and delivered to
Wicks, which is referred to by the bank's assistant cashier as its official receipt. This
memorandum receipt is in the following language:
October 9th, 1918.
CABLE TRANSFER BOUGHT FROM
PHILIPPINE NATIONAL BANK,
Manila, P.I. Stamp P18
Foreign Amount Rate
$45,000. 3/8 % P90,337.50
Payable through Philippine National Bank, New York. To G. A. Kauffman, New York.
Total P90,355.50. Account of Philippine Fiber and Produce Company. Sold to Messrs.
Philippine Fiber and Produce Company, Manila.
(Sgd.) Y LERMA,
Manager, Foreign Department.
On the same day the Philippine National Bank dispatched to its New York agency a cablegram
to the following effect:
Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000.
(Sgd.) PHILIPPINE NATIONAL BANK, Manila.
Upon receiving this telegraphic message, the bank's representative in New York sent a cable
message in reply suggesting the advisability of withholding this money from Kauffman, in view of
his reluctance to accept certain bills of the Philippine Fiber and Produce Company. The
Philippine National Bank acquiesced in this and on October 11 dispatched to its New York
agency another message to withhold the Kauffman payment as suggested.
Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled to
Kauffman in New York, advising him that $45,000 had been placed to his credit in the New York
agency of the Philippine National Bank; and in response to this advice Kauffman presented
himself at the office of the Philippine National Bank in New York City on October 15, 1918, and
demanded the money. By this time, however, the message from the Philippine National Bank of
October 11, directing the withholding of payment had been received in New York, and payment
was therefore refused.
In view of these facts, the plaintiff Kauffman instituted the present action in the Court of First
Instance of the city of Manila to recover said sum, with interest and costs; and judgment having
been there entered favorably to the plaintiff, the defendant appealed.
Among additional facts pertinent to the case we note the circumstance that at the time of the
transaction above-mentioned, the Philippines Fiber and Produce Company did not have on
deposit in the Philippine National Bank money adequate to pay the check for P90,355.50, which
was delivered in payment of the telegraphic order; but the company did have credit to that
extent, or more, for overdraft in current account, and the check in question was charged as an
overdraft against the Philippine Fiber and Produce Company and has remained on the books of
the bank as an interest-bearing item in the account of said company.
It is furthermore noteworthy that no evidence has been introduced tending to show failure of
consideration with respect to the amount paid for said telegraphic order. It is true that in the
defendant's answer it is suggested that the failure of the bank to pay over the amount of this
remittance to the plaintiff in New York City, pursuant to its agreement, was due to a desire to
protect the bank in its relations with the Philippine Fiber and Produce Company, whose credit
was secured at the bank by warehouse receipts on Philippine products; and it is alleged that
after the exchange in question was sold the bank found that it did not have sufficient to warrant
payment of the remittance. In view, however, of the failure of the bank to substantiate these
allegations, or to offer any other proof showing failure of consideration, it must be assumed that
the obligation of the bank was supported by adequate consideration.
In this court the defense is mainly, if not exclusively, based upon the proposition that, inasmuch
as the plaintiff Kauffman was not a party to the contract with the bank for the transmission of this
credit, no right of action can be vested in him for the breach thereof. "In this situation," — we
here quote the words of the appellant's brief, — "if there exists a cause of action against the
defendant, it would not be in favor of the plaintiff who had taken no part at all in the transaction
nor had entered into any contract with the plaintiff, but in favor of the Philippine Fiber and
Produce Company, the party which contracted in its own name with the defendant."
The question thus placed before us is one purely of law; and at the very threshold of the
discussion it can be stated that the provisions of the Negotiable Instruments Law can come into
operation there must be a document in existence of the character described in section 1 of the
Law; and no rights properly speaking arise in respect to said instrument until it is delivered. In
the case before us there was an order, it is true, transmitted by the defendant bank to its New
York branch, for the payment of a specified sum of money to George A. Kauffman. But this order
was not made payable "to order or "to bearer," as required in subsection (d) of that Act; and
inasmuch as it never left the possession of the bank, or its representative in New York City,
there was no delivery in the sense intended in section 16 of the same Law. In this connection it
is unnecessary to point out that the official receipt delivered by the bank to the purchaser of the
telegraphic order, and already set out above, cannot itself be viewed in the light of a negotiable
instrument, although it affords complete proof of the obligation actually assumed by the bank.
Stated in bare simplicity the admitted facts show that the defendant bank for a valuable
consideration paid by the Philippine Fiber and Produce Company agreed on October 9, 1918, to
cause a sum of money to be paid to the plaintiff in New York City; and the question is whether
the plaintiff can maintain an action against the bank for the nonperformance of said undertaking.
In other words, is the lack of privity with the contract on the part of the plaintiff fatal to the
maintenance of an action by him?
The only express provision of law that has been cited as bearing directly on this question is the
second paragraph of article 1257 of the Civil Code; and unless the present action can be
maintained under the provision, the plaintiff admittedly has no case. This provision states an
exception to the more general rule expressed in the first paragraph of the same article to the
effect that contracts are productive of effects only between the parties who execute them; and in
harmony with this general rule are numerous decisions of this court (Wolfson vs. Estate of
Martinez, 20 Phil., 340; Ibañez de Aldecoa vs. Hongkong and Shanghai Banking Corporation, 22
Phil., 572, 584; Manila Railroad Co. vs. Compañia Trasatlantica and Atlantic, Gulf and Pacific
Co., 38 Phil., 873, 894.)
The paragraph introducing the exception which we are now to consider is in these words:
Should the contract contain any stipulation in favor of a third person, he may demand
its fulfillment, provided he has given notice of his acceptance to the person bound
before the stipulation has been revoked. (Art. 1257, par. 2, Civ. Code.)
In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate dissertation
upon the history and interpretation of the paragraph above quoted and so complete is the
discussion contained in that opinion that it would be idle for us here to go over the same matter.
Suffice it to say that Justice Trent, speaking for the court in that case, sums up its conclusions
upon the conditions governing the right of the person for whose benefit a contract is made to
maintain an action for the breach thereof in the following words:
So, we believe the fairest test, in this jurisdiction at least, whereby to determine
whether the interest of a third person in a contract is a stipulation pour autrui, or
merely an incidental interest, is to rely upon the intention of the parties as disclosed by
their contract.
assist in determining whether the parties intended to benefit a third person, whether they
stipulated for him." (Uy Tam and Uy Yet vs. Leonard, supra.)
In the light of the conclusion thus stated, the right of the plaintiff to maintain the present action is
clear enough; for it is undeniable that the bank's promise to cause a definite sum of money to be
paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the
paragraph above quoted; and the circumstances under which that promise was given disclose
an evident intention on the part of the contracting parties that the plaintiff should have the money
upon demand in New York City. The recognition of this unqualified right in the plaintiff to receive
the money implies in our opinion the right in him to maintain an action to recover it; and indeed if
the provision in question were not applicable to the facts now before us, it would be difficult to
conceive of a case arising under it.
It will be noted that under the paragraph cited a third person seeking to enforce compliance with
a stipulation in his favor must signify his acceptance before it has been revoked. In this case the
plaintiff clearly signified his acceptance to the bank by demanding payment; and although the
Philippine National Bank had already directed its New York agency to withhold payment when
this demand was made, the rights of the plaintiff cannot be considered to as there used, must be
understood to imply revocation by the mutual consent of the contracting parties, or at least by
direction of the party purchasing he exchange.
In the course of the argument attention was directed to the case of Legniti vs. Mechanics, etc.
Bank (130 N.E. Rep., 597), decided by the Court of Appeals of the State of New York on March
1, 1921, wherein it is held that, by selling a cable transfer of funds on a foreign country in
ordinary course, a bank incurs a simple contractual obligation, and cannot be considered as
holding the money which was paid for the transfer in the character of a specific trust. Thus, it
was said, "Cable transfers, therefore, mean a method of transmitting money by cable wherein
the seller engages that he has the balance at the point on which the payment is ordered and that
on receipt of the cable directing the transfer his correspondent at such point will make payment
to the beneficiary described in the cable. All these transaction are matters of purchase and sale
create no trust relationship."
As we view it there is nothing in the decision referred to decisive of the question now before us,
wish is merely that of the right of the beneficiary to maintain an action against the bank selling
the transfer.
Upon the considerations already stated, we are of the opinion that the right of action exists, and
the judgment must be affirmed. It is so ordered, with costs against the appellant. Interest will be
computed as prescribed in section 510 of the Code of Civil Procedure.

If a third person claims an enforcible interest in the contract, the question must be
settled by determining whether the contracting parties desired to tender him such an
interest. Did they deliberately insert terms in their agreement with the avowed purpose
of conferring a favor upon such third person? In resolving this question, of course, the
ordinary rules of construction and interpretation of writings must be observed. (Uy
Tam and Uy Yet vs. Leonard, supra.)

Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui, it
matters not whether the stipulation is in the nature of a gift or whether there is an obligation
owing from the promise to the third person. That no such obligation exists may in some degree
 G.R. No. L-20853 May 29, 1967
BONIFACIO BROS., INC., ET AL., plaintiffs-appellants,
vs.
ENRIQUE MORA, ET AL., defendants-appellees.
CASTRO, J.:
This is an appeal from the decision of the Court of First Instance of Manila, Branch XV, in civil
case 48823, affirming the decision of the Municipal Court of Manila, declaring the H.S. Reyes,
Inc. as having a better right than the Bonifacio Bros., Inc. and the Ayala Auto Parts Company,
appellants herein, to the proceeds of motor insurance policy A-0615, in the sum of P2,002.73,
issued by the State Bonding & Insurance Co. Inc., and directing payment of the said amount to
the H. Reyes, Inc.
Enrique Mora, owner of Oldsmobile sedan model 1956, bearing plate No. QC- mortgaged the
same to the H.S. Reyes, Inc., with the condition that the former would insure the automobile with
the latter as beneficiary. The automobile was thereafter insured on June 23, 1959 with the State
Bonding & Insurance Co., Inc., and motor car insurance policy A-0615 was issued to Enrique
Mora, the pertinent provisions of which read:
1. The Company (referring to the State Bonding & Insurance Co., Inc.) will, subject to
the Limits of Liability, indemnify the Insured against loss of or damages to the Motor
Vehicle and its accessories and spare parts whilst thereon; (a) by accidental collision
or overturning or collision or overturning consequent upon mechanical breakdown or
consequent upon wear and tear,
xxx xxx xxx
2. At its own option the Company may pay in cash the amount of the loss or damage
or may repair, reinstate, or replace the Motor Vehicle or any part thereof or its
accessories or spare parts. The liability of the Company shall not exceed the value of
the parts whichever is the less. The Insured's estimate of value stated in the schedule
will be the maximum amount payable by the Company in respect of any claim for loss
or damage.1äwphï1.ñët
xxx xxx xxx
4. The Insured may authorize the repair of the Motor Vehicle necessitated by damage
for which the Company may be liable under this Policy provided that: — (a) The
estimated cost of such repair does not exceed the Authorized Repair Limit, (b) A
detailed estimate of the cost is forwarded to the Company without delay, subject to the
condition that "Loss, if any is payable to H.S. Reyes, Inc.," by virtue of the fact that
said Oldsmobile sedan was mortgaged in favor of the said H.S. Reyes, Inc. and that
under a clause in said insurance policy, any loss was made payable to the H.S.
Reyes, Inc. as Mortgagee;
xxx xxx xxx
During the effectivity of the insurance contract, the car met with an accident. The insurance
company then assigned the accident to the Bayne Adjustment Co. for investigation and
appraisal of the damage. Enrique Mora, without the knowledge and consent of the H.S. Reyes,
Inc., authorized the Bonifacio Bros. Inc. to furnish the labor and materials, some of which were
supplied by the Ayala Auto Parts Co. For the cost of labor and materials, Enrique Mora was
billed at P2,102.73 through the H.H. Bayne Adjustment Co. The insurance company after
claiming a franchise in the amount of P100, drew a check in the amount of P2,002.73, as
proceeds of the insurance policy, payable to the order of Enrique Mora or H.S. Reyes,. Inc., and
entrusted the check to the H.H. Bayne Adjustment Co. for disposition and delivery to the proper
party. In the meantime, the car was delivered to Enrique Mora without the consent of the H.S.
Reyes, Inc., and without payment to the Bonifacio Bros. Inc. and the Ayala Auto Parts Co. of the
cost of repairs and materials.
Upon the theory that the insurance proceeds should be paid directly to them, the Bonifacio Bros.
Inc. and the Ayala Auto Parts Co. filed on May 8, 1961 a complaint with the Municipal Court of
Manila against Enrique Mora and the State Bonding & Insurance Co., Inc. for the collection of
the sum of P2,002.73 The insurance company filed its answer with a counterclaim for
interpleader, requiring the Bonifacio Bros. Inc. and the H.S. Reyes, Inc. to interplead in order to
determine who has better right to the insurance proceeds in question. Enrique Mora was
declared in default for failure to appear at the hearing, and evidence against him was
received ex parte. However, the counsel for the Bonifacio Bros. Inc., Ayala Auto Parts Co. and
State Bonding & Insurance Co. Inc. submitted a stipulation of facts, on the basis of which are
Municipal Court rendered a decision declaring the H.S. Reyes, Inc. as having a better right to the
disputed amount and ordering State Bonding & Insurance Co. Inc. to pay to the H. S. Reyes, Inc.
the said sum of P2,002.73. From this decision, the appellants elevated the case to the Court of
First Instance of Manila which the stipulation of facts was reproduced. On October 19, 1962 the
latter court rendered a decision, affirming the decision of the Municipal Court. The Bonifacio
Bros. Inc. and the Ayala Auto Parts Co. moved for reconsideration of the decision, but the trial
court denied the motion. Hence, this appeal.
The main issue raised is whether there is privity of contract between the Bonifacio Bros. Inc. and
the Ayala Auto Parts Co. on the one hand and the insurance company on the other. The
appellants argue that the insurance company and Enrique Mora are parties to the repair of the
car as well as the towage thereof performed. The authority for this assertion is to be found, it is
alleged, in paragraph 4 of the insurance contract which provides that "the insured may authorize
the repair of the Motor Vehicle necessitated by damage for which the company may be liable
under the policy provided that (a) the estimated cost of such repair does not exceed the
Authorized Repair Limit, and (b) a detailed estimate of the cost is forwarded to the company
without delay." It is stressed that the H.H. Bayne Adjustment Company's recommendation of
payment of the appellants' bill for materials and repairs for which the latter drew a check for
P2,002.73 indicates that Mora and the H.H. Bayne Adjustment Co. acted for and in
representation of the insurance company.
This argument is, in our view, beside the point, because from the undisputed facts and from the
pleadings it will be seen that the appellants' alleged cause of action rests exclusively upon the
terms of the insurance contract. The appellants seek to recover the insurance proceeds, and for
this purpose, they rely upon paragraph 4 of the insurance contract document executed by and
between the State Bonding & Insurance Company, Inc. and Enrique Mora. The appellants are
not mentioned in the contract as parties thereto nor is there any clause or provision thereof from
which we can infer that there is an obligation on the part of the insurance company to pay the
cost of repairs directly to them. It is fundamental that contracts take effect only between the
parties thereto, except in some specific instances provided by law where the contract contains
some stipulation in favor of a third person.1 Such stipulation is known as stipulation pour
autrui or a provision in favor of a third person not a pay to the contract. Under this doctrine, a
third person is allowed to avail himself of a benefit granted to him by the terms of the contract,
provided that the contracting parties have clearly and deliberately conferred a favor upon such
person.2 Consequently, a third person not a party to the contract has no action against the
parties thereto, and cannot generally demand the enforcement of the same. 3 The question of
whether a third person has an enforcible interest in a contract, must be settled by determining
whether the contracting parties intended to tender him such an interest by deliberately inserting insured. (1 Bouv. Ins. No. 1215; Black's Law Dictionary; Cyclopedic Law Dictionary,
terms in their agreement with the avowed purpose of conferring a favor upon such third person. cited in Martin's Phil. Commercial Laws, Vol. 1, 1961 ed. p. 608).
In this connection, this Court has laid down the rule that the fairest test to determine whether the
interest of a third person in a contract is a stipulation pour autrui or merely an incidental interest,
Indeed, according to sec. 120 of the Insurance Act, a loss may be either total or partial.
is to rely upon the intention of the parties as disclosed by their contract. 4 In the instant case the
insurance contract does not contain any words or clauses to disclose an intent to give any
benefit to any repairmen or materialmen in case of repair of the car in question. The parties to Accordingly, the judgment appealed from is hereby affirmed, at appellants' cost.
the insurance contract omitted such stipulation, which is a circumstance that supports the said
conclusion. On the other hand, the "loss payable" clause of the insurance policy stipulates that
"Loss, if any, is payable to H.S. Reyes, Inc." indicating that it was only the H.S. Reyes, Inc.
which they intended to benefit.

We likewise observe from the brief of the State Bonding & Insurance Company that it has
vehemently opposed the assertion or pretension of the appellants that they are privy to the
contract. If it were the intention of the insurance company to make itself liable to the repair shop
or materialmen, it could have easily inserted in the contract a stipulation to that effect. To hold
now that the original parties to the insurance contract intended to confer upon the appellants the
benefit claimed by them would require us to ignore the indespensable requisite that a
stipulation pour autrui must be clearly expressed by the parties, which we cannot do.

As regards paragraph 4 of the insurance contract, a perusal thereof would show that instead of
establishing privity between the appellants and the insurance company, such stipulation merely
establishes the procedure that the insured has to follow in order to be entitled to indemnity for
repair. This paragraph therefore should not be construed as bringing into existence in favor of
the appellants a right of action against the insurance company as such intention can never be
inferred therefrom.

Another cogent reason for not recognizing a right of action by the appellants against the
insurance company is that "a policy of insurance is a distinct and independent contract between
the insured and insurer, and third persons have no right either in a court of equity, or in a court of
law, to the proceeds of it, unless there be some contract of trust, expressed or implied between
the insured and third person."5 In this case, no contract of trust, expressed or implied exists. We,
therefore, agree with the trial court that no cause of action exists in favor of the appellants in so
far as the proceeds of insurance are concerned. The appellants' claim, if at all, is merely
equitable in nature and must be made effective through Enrique Mora who entered into a
contract with the Bonifacio Bros. Inc. This conclusion is deducible not only from the principle
governing the operation and effect of insurance contracts in general, but is clearly covered by
the express provisions of section 50 of the Insurance Act which read:

The insurance shall be applied exclusively to the proper interests of the person in
whose name it is made unless otherwise specified in the policy.

The policy in question has been so framed that "Loss, if any, is payable to H.S. Reyes, Inc.,"
which unmistakably shows the intention of the parties.

The final contention of the appellants is that the right of the H.S. Reyes, Inc. to the insurance
proceeds arises only if there was loss and not where there is mere damage as in the instant
case. Suffice it to say that any attempt to draw a distinction between "loss" and "damage" is
uncalled for, because the word "loss" in insurance law embraces injury or damage.

Loss in insurance, defined. — The injury or damage sustained by the insured in

consequence of the happening of one or more of the accidents or misfortune against
which the insurer, in consideration of the premium, has undertaken to indemnify the
 G.R. No. L-27696 September 30, 1977 In his testimony during the trial, applicant Miguel Florentino asked the court to include the said
stipulation (Exhibit O-1) as an encumbrance on the land sought to be registered, and cause the
entry of the same on the face of the title that will finally be issued. Opposing its entry on the title
MIGUEL FLORENTINO, ROSARIO ENCARNACION de FLORENTINO, MANUEL ARCE,
as an encumbrance, petitionersappellee Salvador Encamacion, Sr., Salvador Encarnaciori, Jr.
JOSE FLORENTINO, VICTORINO FLORENTINO, ANTONIO FLORENTINO, REMEDION
and Angel Encarriacion filed on October 3, 1966 a manifestation seeking to withdraw their
ENCARNACION and SEVERINA ENCARNACION, petitioners-appellants,
application on their respective shares of the land sought to be registered. The withdrawal was
vs.
opposed by the petitioners-appellants.
SALVADOR ENCARNACION, SR., SALVADOR ENCARNACION, JR., and ANGEL
ENCARNACION, oppositors to encumbrance-petitioners-appelles.
The Court after hearing the motion for withdrawal and the opposition thereto issued on
November 17, 1966 an order and for the purpose of ascertaining and implifying the issues
GUERRERO, J.:
therein stated that all the applicants admit the truth of the following;

Appeal from the decision of the Court of First Instance of Ilocos Sur, acting as a land registration
(1) That just after the death of Encarnacion FIorentino in 1941 up to last
court, in Land Registration case No. N-310.
year and as had always been the case since time immomorial the products
of the land made subiect matter of this land has been used in answering for
On May 22, 1964, the petitioners-appellants Miguel Florentino, Remedios Encarnacion de the payment for the religious functions specified in the Deed Extrajudicial
Florentino, Manuel Arce, Jose Florentino, Victorino Florentino, Antonio Florentino, Remedior, Partition belated August 24, 1947:
Encarnacion and Severina Encamacion, and the Petitiners-appellees Salvador Encamacion, Sr.,
Salvador Encamacion, Jr. and Angel Encarnacion filed with the Court of First Instance of ilocos
(2) That this arrangement about the products answering for the comment of
Sur an application for the registration under Act 496 of a parcel of agricultural land located at
experisence for religions functions as mentioned above was not registered
Barrio Lubong Dacquel Cabugao Ilocos Sur.
in the office of the Register of Deeds under Act No 3344, Act 496 or and,
other system of registration;
The application alleged among other things that the applicants are the common and pro-indiviso
owners in fee simple of the said land with the improvements existing thereon; that to the best of
(3) That all the herein applicants know of the existence of his arrangement
their knowledge and belief, there is no mortgage, lien or encumbrance of any kind whatever
as specified in the Deed of Extra judicial Partition of A adjust 24, 1947;
affecting said land, nor any other person having any estate or interest thereon, legal or
equitable, remainder, reservation or in expectancy; that said applicants had acquired the
aforesaid land thru and by inheritance from their predecessors in interest, lately from their aunt, (4) That the Deed of Extrajudicial Partition of August 24, 194-, not signed by
Doña Encarnacion Florentino who died in Vigan, Ilocos Sur in 1941, and for which the said land Angel Encarnacion or Salvador Encarnacion, Jr,.
was adjudicated to them by virtue of the deed of extrajudicial partition dated August 24, 1947;
that applicants Salvador Encarnacion, Jr. and Angel Encarnacion acquired their respective
The court denied the petitioners-appellee motion to withdraw for lack of
shares of the land thru purchase from the original heirs, Jesus, Caridad, Lourdes and Dolores
merit, and rendered a decision under date of November 29, 1966 confirming
surnamed Singson one hand and from Asuncion Florentino on the other.
the title of the property in favor of the f appoints with their respective shares
as follows:
After due notice and publication, the Court set the application for hearing. No Opposition
whatsoever was filed except that of the Director of Lands which was later withdrawn, thereby
Spouses Miguel Florentino and Rosario Encarnacion de Florentino, both of
leaving the option unopposed. Thereupon, an order of general default was withdrawn against
legal age, Filipinos, and residents of Vigan, Ilocos Sur, consisting of an
the whole world. Upon application of the asets the Clerk Of court was commission will and to
undivided 31/297 and 8.25/297 portions, respectively;
have the evidence of the agents and or to submit the for the Court's for resolution.

Manuel Arce, of legal age, Filipino, married to Remedios Pichay and

The crucial point in controversy in this registration case is centered in the stipulation marked
resident of Vigan, Ilocos Sur, consisting of an undivided 66/297 portion;
Exhibit O-1 embodied in the deed of extrajudicial partition (Exhibit O) dated August 24, 1947
which states:
Salvador Encarnacion, Jr., of legal age, Filipino, married to Angelita Nagar
and resident of Vigan, Ilocos Sur, consisting of an undivided 66/297; Jose
Los productos de esta parcela de terreno situada en el Barrio Lubong
Florentino, of legal age, Filipino, married to Salvacion Florendo and resident
Dacquel Cabugao Ilocos Sur, se destination para costear los tos de
of 16 South Ninth Diliman, Quezon City, consisting of an undivided 33/297
procesio de la Tercera Caida celebration y sermon de Siete Palbras Seis
portion;
Estaciones de Cuaresma, procesion del Nino Jesus, tilaracion y
conservacion de los mismos, construction le union camarin en conde se
depositan los carros mesas y otras cosas que seven para lot leiracion de Angel Encarnacion, of legal age, Filipino, single and resident of 1514
Siete Palabras y otras cosas mas Lo que sobra de lihos productos despues Milagros St., Sta. Cruz, Manila, consisting of an undivided 33/297 portion;
de descontados todos los gastos se repartira nosotros los herederos.
 Victorino Florentino, of legal age, Filipino, married to Mercedes L.
Encarnacion and resident of Vigan, Ilocos Sur, consisting of an undivided
17.5/297 portion;
Antonio Florentino, of legal age, Filipino, single and resident of Vigan, Ilocos
Sur, consisting of an undivided 17.5/297;
Salvador Encarnacion, Sr., of legal age, Filipino, married to Dolores
Singson, consisting of an undivided 8.25/297;
Remedios Encarnacion, of legal age, Filipino, single and resident of Vigan,
Ilocos Sur, consisting of an undivided 8.25/297 portion; and
Severina Encarnacion, of legal age, Filipino, single and resident of Vigan,
Ilocos Sur, consisting of 8.25/297 undivided portion.
The court, after ruling "that the contention of the proponents of encumbrance is without merit
bemuse, taking the self-imposed arrangement in favor of the Church as a pure and simple
donation, the same is void for the that the donee here has riot accepted the donation (Art. 745,
Civil Code) and for the further that, in the case of Salvador Encarnacion, Jr. and Angel
Encarnacion, they had made no oral or written grant at all (Art. 748) as in fact they are even
opposed to it," 1 held in the Positive portion, as follows:
In view of all these, therefore, and insofar as the question of encumbrance
is concerned, let the religious expenses as herein specified be made and
entered on the undivided shares, interests and participations of all the
applicants in this case, except that of Salvador Encarnacion, Sr., Salvador
Encarnacion, Jr. and Angel Encarnacion.
On January 3, 1967, petitioners-appellants filed their Reply to the Opposition reiterating their
previous arguments, and also attacking the junction of the registration court to pass upon the
validity or invalidity of the agreement Exhibit O-1, alleging that such is specified only in an
ordinary action and not proper in a land registration proceeding.
The Motion for Reconsideration and of New Trial was denied on January 14, 1967 for lack of
merit, but the court modified its earlier decision of November 29, 1966, to wit:
This Court believes, and so holds, that the contention of the movants
(proponents of the encumbrance) is without merit because the arrangement,
stipulation or grant as embodied in Exhibit O (Escritura de Particion
Extrajudicial), by whatever name it may be (called, whether donation,
usufruct or ellemosynary gift, can be revoked as in fact the oppositors
Salvador Encarnacion, Sr., who is the only one of the three oppositors who
is a party to said Exhibit O (the two others, Salvador Encarnacion, Jr. and
Angel Encarnacion no parties to it) did revoke it as shown by acts
accompanying his refusal to have the same appear as an encumbrance on
the title to be issued. In fact, legally, the same can also be ignored or
discararded by will the three oppositors. The reasons are: First, if the said
stipulation is pour bodies in Exhibit O-1 is to be viewed as a stipulation pour
autrui the same cannot now be enforced because the Church in whose
favor it was made has not communicated its acceptance to the oppositors
before the latter revoked it. Says the 2nd par. of Art. 1311 of the New Civil
Code:
"If a contract should contain some stipulation in favor of a third person he
may demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person." No evide nee has ever
been submitted by the Church to show its clear acceptance of the grant
before its revocation by the oppositor Salvador Encarnacion, Sr. (or of the
two other oppositors, Salvador Encarnacion, Jr. and Angel Encarnacion,
who didn't even make any giant, in the first place), and so not even the
movants who have officiously taken into themselves the right to enforce the
grant cannot now maintain any action to compel compliance with it. (Bank of
the P.I. v. Concepcion y Hijos, Inc., 53 Phil. 806). Second, the Church in
whose favor the stipulation or grant had apparently been made ought to be
the proper party to compel the herein three oppositors to abide with the
stipulation. But it has not made any appearance nor registered its opposition
to the application even before Oct. 18, 1965 when an order of general
default was issued. Third, the movants are not, in the contemplation of
Section 2, Rule 3 of the Rules of Court, the real party in interest to raise the
present issue; and Fourth, the movants having once alleged in their
application for registration that the land is without encumbrance (par. 3
thereof), cannot now be alloted by the rules of pleading to contradict said
allegation of theirs. (McDaniel v. Apacible, 44 Phil. 248)
SO ORDERED. 2
After Motions for Reconsideration were denied by the court, the petitioners- appellants appealed
directly to this Court pursuant to Rule 4 1, Rules of Court, raising the following assign of error:
I. The lower court erred in concluding that the stipulation embodied in
Exhibit O on religious expenses is just an arrangement stipulation, or grant
revocable at the unilateral option of the coowners.
II. The lower court erred in finding and concluding that the encumbrance or
religious expenses embodied in Exhibit O, the extrajudicial partition between
the co-heirs, is binding only on the appoints Miguel Florentino, Rosario
Encarnacion de Florentino, Manuel Arce, Jose Florentino, Antonio
Florentino, Victorino Florentino, Remedios Encarnacion and Severina
Encarnacion.
III. The lower court as a registration court erred in passing upon the merits
of the encumbrance (Exhibit O-1) as the sanie was never put to issue and
as the question involved is an adjudication of rights of the parties.
We find the first and second assignments of error impressed with merit and, therefore, tenable.
The stipulation embodied in Exhibit O-1 on religious expenses is not revocable at the unilateral
option of the co-owners and neither is it binding only on the petitioners-appellants Miguel
Florentino, Rosario Encarnacion de Florentino Manuel Arce, Jose Florentino, Victorino
Florentino Antonio Florentino, Remedios Encarnacion and Severina E It is also binding on the
oppositors-appellees Angel Encarnacion,
The stipulation (Exhibit 411) in pan of an extrajudicial partition (Exh. O) duly agreed and signed
by the parties, hence the sanie must bind the contracting parties thereto and its validity or
compliance cannot be left to the with of one of them (Art. 1308, N.C.C.). Under Art 1311 of the
New Civil Code, this stipulation takes effect between the parties, their assign and heirs. The
article provides:
Art. 1311. — Contracts take effect only between the parties, their assigns
and heirs, except in cases where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value of the property he
received from the decedent.
If a contract should contain a stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person.
The second paragraph of Article 1311 above-quoted states the law on stipulations pour
autrui. Consent the nature and purpose of the motion (Exh. O-1), We hold that said stipulation is
a station pour autrui. A stipulation pour autrui is a stipulation in favor of a third person conferring
a clear and deliberate favor upon him, and which stipulation is merely a part of a contract
entered into by the parties, neither of whom acted as agent of the third person, and such third
person and demand its fulfillment provoked that he communicates his to the obligor before it is
revoked. 3 The requisites are: (1) that the stipulation in favor of a third person should be a part,
not the whole, of the contract; (2) that the favorable stipulation should not be conditioned or
compensated by any kind of obligation whatever; and (3) neither of the contracting bears the
legal represented or authorization of third person.
To constitute a valid stipulation pour autrui it must be the purpose and intent of the stipulating
parties to benefit the third and it is not sufficient that the third person may be incidentally
benefited by the stipulation. The fairest test to determine whether the interest of third person in a
contract is a stipulation pour autrui or merely an incidental interest, is to rely upon the intention of
the parties as disclosed by their contract. In applying this test, it meters not whether the
stipulation is in the nature of a gift or whether there is an obligation owing from the promisee to
the third person. That no such obsorption exists may in some degree assist in determining
whether the parties intended to benefit a third person.4
In the case at bar, the determining point is whether the co-owners intended to benefit the Church
when in their extrajudicial partition of several parcels of land inherited by them from Doña
Encarnacion Florendo they agreed that with respect to the land situated in Barrio Lubong
Dacquel Cabugao Ilocos Sur, the fruits thereof shall serve to defray the religious expenses
specified in Exhibit O-1. The evidence on record shows that the true intent of the parties is to
confer a direct and material benefit upon the Church. The fruits of the aforesaid land were used
thenceforth to defray the expenses of the Church in the preparation and celebration of the Holy
Week, an annual Church function. Suffice it to say that were it not for Exhibit O-1, the Church
would have necessarily expended for this religious occasion, the annual relisgious procession
during the Holy Wock and also for the repair and preservation of all the statutes, for the
celebration of the Seven Last Word.
We find that the trial court erred in holding that the stipulation, arrangement or grant (Exhibit O-
1) is revocable at the option of the co-owners. While a stipulation in favor of a third person has
no binding effect in itself before its acceptance by the party favored, the law does not provide
when the third person must make his acceptance. As a rule, there is no time at such third person
has after the time until the stipulation is revoked. Here, We find that the Church accepted the
stipulation in its favor before it is sought to be revoked by some of the co-owners, namely the
petitioners-appellants herein. It is not disputed that from the time of the with of Doña
Encarnacion Florentino in 1941, as had always been the case since time immemorial up to a
year before the firing of their application in May 1964, the Church had been enjoying the benefits
of the stipulation. The enjoyment of benefits flowing therefrom for almost seventeen years
without question from any quarters can only be construed as an implied acceptance by the
Church of the stipulation pour autrui before its revocation.
The acceptance does not have to be in any particular form, even when the
stipulation is for the third person an act of liberality or generosity on the part
of the promisor or promise. 5
It need not be made expressly and formally. Notification of acceptance,
6
other than such as is involved in the making of demand, is unnecessary.
A trust constituted between two contracting parties for the benefit of a third
person is not subject to the rules governing donation of real property. The
beneficiary of a trust may demand performance of the obligation without
having formally accepted the benefit of the this in a public document, upon
mere acquiescence in the formation of the trust and acceptance under the
second paragraph of Art. 1257 of the Civil Code. 7
Hence, the stipulation (Exhibit O-1) cannot now be revoked by any of the stipulators at their own
option. This must be so because of Article 1257, Civil Code and the cardinal rule of contracts
that it has the force of law between the parties. 8 Thus, this Court ruled in Garcia v. Rita
Legarda, Inc., 9 "Article 1309 is a virtual reproduction of Article 1256 of the Civil Code, so
phrased to emphasize that the contract must bind both parties, based on the principles (1) that
obligation arising from contracts have the force of law between the contracting parties; and (2)
that there must be mutuality between the parties based on their principle equality, to which is
repugnant to have one party bound by the contract leaving the other free therefrom."
Consequently, Salvador Encarnacion, Sr. must bear with Exhibit O-1, being a signatory to the
Deed of Extrajudicial Partition embodying such beneficial stipualtion. Likewise, with regards to
Salvador, Jr. and Angel Encarnacion, they too are bound to the agreement. Being subsequent
purchasers, they are privies or successors in interest; it is axiomatic that contracts are
enforceable against the parties and their privies. 10 Furthermore, they are shown to have given
their conformity to such agreement when they kept their peace in 1962 and 1963, having already
bought their respective shares of the subject land but did not question the enforcement of the
agreement as against them. They are also shown to have knowledge of Exhibit O-1 as they had
admitted in a Deed of Real Mortgage executed by them on March 8, 1962 involving their shares
of the subject land that, "This parcel of land is encumbered as evidenced by the document No.
420, page 94, Book 1, series 1947, executed by the heirs of the late Encarnacion Florentino, on
August 26, 1947, before M. Francisco Ante, Notwy Public of Vigan, Ilocos Sur, in its page 10 of
the said document of partition, and also by other documents."
The annotation of Exhibit O-1 on the face of the title to be issued in this case is merely a
guarantee of the continued enforcement and fulfillment of the beneficial stipulation. It is error for
the lower court to rule that the petitioners-appellants are not the real parties in interest, but the
Church. That one of the parties to a contract pour autrui is entitled to bring an action for its
enforcement or to prevent its breach is too clear to need any extensive discussion. Upon the
other hand, that the contract involved contained a stipulation pour autrui amplifies this settled
rule only in the sense that the third person for whose benefit the contract was entered into may
also demand its fulfillment provoked he had communicated his acceptance thereof to the obligor
before the stipulation in his favor is revoked. 11
Petitioners-appellants' third assignment of error is not well-taken. Firstly, the otherwise rigid rule
that the jurisdiction of the Land Registration Court, being special and limited in character and
proceedings thereon summary in nature, does not extend to cases involving issues properly
litigable in other independent suits or ordinary civil actions, has time and again been relaxed in
special and exceptional circumstances. (See Government of the Phil. Islands v. Serafica, 61
Phil. 93 (1934); Caoibes v. Sison, 102 Phil. 19 (1957); Luna v. Santos, 102 Phil. 588 (1957);
Cruz v. Tan, 93 Phil. 348 (1953); Gurbax Singh Pabla & Co. v. Reyes, 92 Phil. 177 (1952). From
these cases, it may be gleaned and gathered that the peculiarity of the exceptions is based not
only on the fact that Land Registration Courts are likewise the same Courts of First Instance, but
also the following premises (1) Mutual consent of the parties or their acquired in submitting the
at aforesaid determination by the court in the registration; (2) Full opportunity given to the parties
in the presentation of their respective skies of the issues and of the evidence in support thereto;
(3) Consideration by the court that the evidence already of record is sufficient and adequate for
rendering a decision upon these issues. 12 In the case at bar, the records clearly show that the
second and third premism enumerated abow are fully mt. With regards to first premise, the
petioners-appellants cannot claim that the issues anent Exhibit O-1 were not put in issue
because this is contrary to their stand before the lower court where they took the initial step in
praying for the court's determination of the merits of Exhibit O-1 as an encumbrance to be
annotated on the title to be issued by such court. On the other hand, the petitioners-appellees
who had the right to invoke the limited jurisdiction of the registration court failed to do so but met
the issues head-on.

Secondly, for this very special reason, We win uphold the actuation of the lower court in
determining the conflicting interests of the parties in the registration proceedings before it. This
case has been languishing in our courts for thirteen tong years. To require that it be remanded to
the lower court for another proceeding under its general jurisdiction is not in consonance with
our avowed policy of speedy justice. It would not be amiss to note that if this case be remanded
to the lower court, and should appeal again be made, the name issues will once more be raised
before us hence, Our decision to resolve at once the issues in the instant petition.

IN VIEW OF THE FOREGOING, the decision of the Court of First Instance of Ilocos Sur in Land
Registration Case No. N-310 is affirmed but modified to allow the annotation of Exhibit O-1 as an
encumbrance on the face of the title to be finally issued in favor of all the applications (herein
appellants and herein appellees) in the registration proceedings below.

No pronouncement as to cost.

SO ORDERED.
 G.R. No. 74521 November 11, 1986 On February 18, 1982, ACTC filed suit for damages against BANKAMERICA and Minami before
the Trial Court in Pasig for the failure of BANKAMERICA to restitute. Minami was declared in
default. Thereafter, judgment was rendered with the following dispositive part:
BANK OF AMERICA NT & SA, petitioner,
vs.
THE HON. FIRST CIVIL CASES DIVISION, INTERMEDIATE APPELLATE COURT and AIR IN VIEW OF THE FOREGOING CONSIDERATIONS, the Court upon a
CARGO AND TRAVEL CORPORATION, respondents. judicious and fair assessment of the testimonial and documentary evidences
submitted by the parties is of the opinion and so holds that defendant Bank
and defendant Minami must pay plaintiff, jointly and severally the following.
MELENCIO-HERRERA, J.:

1. The sum of US$23,595.00 or in Philippine Currency at the current guiding

As the Petition and the Comment submitted by private respondent Air Cargo and Travel
rate of exchange which is P14.00 to the dollar, as and by way of actual
Corporation (ACTC) have sufficiently argued the legal question involved in this case, the Court
damages with interest at the rate of twelve (12%) per cent per annum from
has resolved to give due course to the Petition, with private respondent's Comment being its
the filing of the complaint until fully paid;
Answer, and to consider this case submitted for decision.

2. The sum of P50,000.00 as temperate and exemplary damages;

The basic relevant facts have been stated by respondent Appellate Court as follows:

3. The sum of P10,000.00 as attorney's fees;;

Shorn of non-essentials, the facts are: Plaintiff Air Cargo and Travel
Corporation is the owner of Account Number 19842-01-2 with defendant
Bank of America. Defendant Toshiyuki Minami, President of plaintiff 4. The costs of this suit.
corporation in Japan, is the owner of Account Number 24506-01-7 with
defendant Bank.
SO ORDERED.

On March 10, 1981, the Bank received a tested telex advise from Kyowa
Upon appeal taken by BANKAMERICA, Respondent Court "affirmed in toto, " except that the
Bank of Japan stating,
dollar-peso rate of ex-change would be that "at the time of payment." Said respondent Court:

ADVISE PAY USDLS 23,595. — TO YOUR A/C NBR 24506-01-7 OF A. C.

We must say that the Bank personnel were in fact confused or in doubts as
TRAVEL CORPORATION MR. TOSHIYUKO MINAMI.
to the real payee.

and the Bank Credited the amount of US$23,595.00 to Account Number

The Senior Clerk who initially received the tested telex had called up Mr.
24506-07-1 (should be 24506-01-7) owned, as aforesaid, by Minami.
Colegado, Mr. Ichiban, Miss Mayagama and Atty. Villanueva, all of plaintiff-
appellee, but he received "no answer."(Exh. 3; pp. 9-10, t.s.n., Dec. 2,
On March 12, 1981, Minami withdrew the sum of P180,000.00 the 1982).
equivalent in Philippine Pesos of the sum of US$23,595.00 from the Bank
on his Account Number 24506-07-1 (should be 24506-01-7)
Thereupon, the processor checked the alphabetical listings and he saw that
the payee, Account Number 24506-01-7, matched the name appearing in
It may be explained that the "tested" telex advice is a message signed in "code". Evidently, there the tested telex advise (p. 10, t.s.n., Dec. 2, 1981).
was a previous contractual agreement between Kyowa Bank of Japan (KYOWA) and Petitioner
(BANKAMERICA) that, from time to time, KYOWA can ask BANKAMERICA to pay amounts to a
The gross negligence then of appellant Bank may be sum (sic) up as
third party (beneficiary) with BANKAMERICA afterwards billing KYOWA the indicated amount
follows; The words "A.C. TRAVEL CORPORATION MR. TOSHIYUKO
given to the beneficiary. To assure itself that an Order received from KYOWA really comes from
MINAMI" engendered or cast doubt
KYOWA, it is usually agreed that KYOWA's signature will be in accordance with a confidential
code.
on the part of the Senior Clerk as to the real payee
despite the "A.C. NBR 24506-01-7" and
According to ACTC in its Comment, in the early part of 1981, it was Tokyo Tourist Corporation in
Japan which applied with Kyowa Bank, Ltd. also based in Tokyo, Japan, for telegraphic transfer
of the sum of US$23,595.00 payable to ACTC's account with BANKAMERICA, Manila. should have consulted higher officials of plaintiff before giving the advise to
the processor who sent the same to the computer center for ultimate
processing (p. 11, Appellant's Brief).
When the tested telex was received on May 10, 1981, employees of BANKAMERICA noted its
patent ambiguity. Notwithstanding, on the following day, BANKAMERICA credited the amount of
US$23,595.00 to the account of Minami. ACTC claimed that the amount should have been The processor verified that Account Number 24506-01-7 belonged to
credited to its account and demanded restitution, but BANKAMERICA refused. TOSHIYUKO MINAMI' only and not to "A.C. TRAVEL CORPORATION MR.
 TOSHIYUKO MINAMI" and this circumstance should have moved the
processor to be more prudent and to consult higher officials instead of
sending the advise to the computer center for processing or crediting the
remittance to the account of Toshiyuko Minami, (Emphasis supplied)

We are constrained to reverse.

It is our considered opinion that, in the tested telex, considered either as a patent ambiguity or
as a latent ambiguity, the beneficiary is Minami. The mention of Account No. 24506-01-7, as well
as the name of Minami, has to be given more weight than the mention of the name of ACTC.
BANKAMERICA could not have very well disregarded that account number. It could also be that
the mention of ACTC's name was a further identification of Minami, to prevent payment to a
possible another "Toshiyuko Minami" who may not be connected with ACTC. On the other hand,
it should be difficult to concede that, in the tested telex, Account No. 24506-01-7 was
erroneously written and should be substituted by Account No. 19842-01-2 in the name of ACTC.

In Vargas Plow Factory, Inc. vs. Central Bank, it was held that "the opening of a letter of credit in
favor of the exporter becomes ultimately but the result of a stipulation pour autrui" (27 SCRA 84
[1969]). Similarly, when KYOWA asked BANK-AMERICA to pay an amount to a beneficiary
(either ACTC or Minami), the contract was between KYOWA and BANK-AMERICA and it had a
stipulation pour autrui.

It should be recalled that the tested telex originated from KYOWA at the behest of Tokyo Tourist
Corporation with whom ACTC had business dealings. Minami, on the other hand, was the liaison
officer of ACTC in Japan. As the entity responsible for the tested telex was Tokyo Tourist
Corporation, it can reasonably be concluded that if it had intended that the US$23,595.00 should
be credited to ACTC, upon learning that the amount was credited to Minami, it should have
gone, together with the representatives of ACTC, in protest to KYOWA and lodged a protest.
Since that was not done, it could well be that Tokyo Tourist Corporation had really intended its
remittance to be credited to Minami. The identity of the beneficiary should be in accordance with
the identification made by KYOWA, and ACTC cannot question that identification as it is not a
party to the arrangement between KYOWA and BANKAMERICA (see Manila Railroad Co. vs.
Compañia Trasatlantica, 38 Phil. 875 [1918]).

WHEREFORE, the Decision of Respondent Court, in its case AC-G.R. CV No. 03985, is hereby
reversed in so far as Bank of America, NT & SA is concerned.

Without pronouncement as to costs.

SO ORDERED.
 G.R. No. L-40234 December 14, 1987
MARIMPERIO COMPAÑIA NAVIERA, S.A., petitioner,
vs.
COURT OF APPEALS and UNION IMPORT & EXPORT CORPORATION and PHILIPPINES
TRADERS CORPORATION, respondents.
PARAS, J.:
This is a petition for certiorari under Section 1, Rule 65 of the Rules of Court seeking the
annulment and setting aside of the decision of the Court of Appeals * and promulgated on
September 2, 1974 in CA-G.R. No. 48521-R entitled "Union Import and Export Corporation, et
al., Plaintiffs-Appellees v. Marimperio Compañia Naviera, S.A., Defendant-Appellant", ordering
petitioner to pay respondent the total sum of US $265,482.72 plus attorney's fees of
US$100,000.00 and (b) the resolution of the said Court of Appeals in the same case, dated
February 17, 1975 fixing the amount of attorney, s fees to Pl00,000.00 instead of $100,000.00
as erroneously stated in the decision but denying petitioner's motion for reconsideration and/or
new trial.
The dispositive portion of the decision sought to be annulled (Rollo, p. 215) reads as follows:
For all the foregoing, and in accordance therewith, let judgment be entered
(a) affirming the decision appealed from insofar as it directs the defendant-
appellant: (1) to pay plaintiffs the sum of US $22,500.00 representing the
remittance of plaintiffs to said defendant for the first 15-day hire of the
vessel "SS PAXOI" including overtime and an overpayment of US $254.00;
(2) to pay plaintiffs the sum of US $16,000.00, corresponding to the
remittance of plaintiffs to defendant for the second 15-day hire of the
aforesaid vessel; (3) to pay plaintiffs the sum of US $6,982.72, representing
the cost of bunker oil, survey and watering of the said vessel; (4) to pay
plaintiffs the sum of US $100,000.00 as and for attorney's fees; and, (b)
reversing the portion granting commission to the intervenor-appellee and
hereby dismissing the complaint-in-intervention. The order of the court a
quo denying the plaintiffs' Motion for Partial Reconsideration, is likewise,
affirmed, without any special pronouncement as to costs.
The facts of the case as gathered from the amended decision of the lower court (Amended
Record on Appeal, p. 352), are as follows:
In 1964 Philippine Traders Corporation and Union Import and Export Corporation entered into a
joint business venture for the purchase of copra from Indonesia for sale in Europe. James Liu
President and General Manager of the Union took charge of the European market and the
chartering of a vessel to take the copra to Europe. Peter Yap of Philippine on the other hand,
found one P.T. Karkam in Dumai Sumatra who had around 4,000 tons of copra for sale.
Exequiel Toeg of Interocean was commissioned to look for a vessel and he found the vessel "SS
Paxoi" of Marimperio available. Philippine and Union authorized Toeg to negotiate for its charter
but with instructions to keep confidential the fact that they are the real charterers.
Consequently on March 21, 1965, in London England, a "Uniform Time Charter" for the hire of
vessel "Paxoi" was entered into by the owner, Marimperio Compania Naviera, S.A. through its
agents N. & J. Vlassopulos Ltd. and Matthews Wrightson, Burbridge, Ltd. to be referred to
simply as Matthews, representing Interocean Shipping Corporation, which was made to appear
as charterer, although it merely acted in behalf of the real charterers, private respondents herein.
The pertinent provisions or clauses of the Charter Party read:
1. The owners let, and the Charterers hire the Vessel for a period of 1 (one)
trip via safe port or ports Hong Kong, Philippine Islands and/or INDONESIA
from the time the Vessel is delivered and placed at the disposal of the
Charterers on sailing HSINKANG ... .
4. The Charterers are to provide and pay for oil-fuel, water for boilers, port
charges, pilotages ... .
6. The Charterers to pay as hire s.21 (Twenty-one Shillings per deadweights
ton per 30 days or pro rata commencing in accordance with Clause 1 until
her redelivery to the owners.
Payment of hire to be made in cash as per Clause 40 without discount,
every 15 days in advance.
In default of payment of the Owners to have the right of withdrawing the
vessel from the services of the Charterers, without noting any protest and
without interference by any court or any formality whatsoever and without
prejudice the Owners may otherwise have on the Charterers under the
Charter.
7. The Vessel to be redelivered on the expiration of the Charter in the same
good order as when delivered to the Charterers (fair wear and tear
expected) in the Charterer's option in ANTWERP HAMBURG RANGE.
20. The Charterers to have the option of subletting the Vessel, giving due
notice to the Owners, but the original Charterers always to remain
responsible to the Owners for due performance of the Charter.
29. Export and/or import permits for Charterers'cargo to the Charterers'risk
and expense. Charterers to obtain and be responsible for all the necessary
permits to enter and/or trade in and out of all ports during the currency of
the Charter at their risk and expense. ...
33. Charterers to pay as overtime, bonus and premiums to Master, Officers
and crew, the sum of 200 (Two Hundred Pounds) per month to be paid
together with hire.
37. Bunkers on delivery as on board. Bunkers on redelivery maximum 110
tons. Prices of bunkers at 107' per long ton at both ends.
38. Upon sailing from each loading port, Master to cable SEASHIPS
MANILA advising the quantity loaded and the time of completion.
40. The hire shall be payable in external sterling or at Charterers' option in
U.S. dollars in London; - Williams Deacon's Vlassopulos Ltd., Account No.
861769.
In view of the aforesaid Charter, on March 30, 1965 plaintiff Charterer cabled a firm offer to P.T.
Karkam to buy the 4,000 tons of copra for U.S.$180.00 per ton, the same to be loaded either in
April or May, 1965. The offer was accepted and plaintiffs opened two irrevocable letters of Credit
in favor of P.T. Karkam
On March 29, 1965, the Charterer was notified by letter by Vlassopulos through Matthews that
the vessel "PAXOI" had sailed from Hsinkang at noontime on March 27, 196-5 and that it had
left on hire at that time and date under the Uniform Time-Charter.
The Charterer was however twice in default in its payments which were supposed to have been
done in advance. The first 15-day hire comprising the period from March 27 to April 1-1, 1965
was paid despite follow-ups only on April 6, 1965 and the second 15-day hire for the period from
April 12 to April 27, 1965 was paid also despite follow-ups only on April 26, 1965. On April 14,
1965 upon representation of Toeg, the Esso Standard Oil (Hongkong) Company supplied the
vessel with 400 tons of bunker oil at a cost of US $6,982.73.
Although the late payments for the charter of the vessel were received and acknowledged by
Vlassopulos without comment or protest, said agent notified Matthews, by telex on April 23,
1965 that the shipowners in accordance with Clause 6 of the Charter Party were withdrawing the
vessel from Charterer's service and holding said Charterer responsible for unpaid hirings and all
legal claims.
On April 29, 1965, the shipowners entered into another charter agreement with another
Charterer, the Nederlansche Stoomvart of Amsterdam, the delivery date of which was around
May 3, 1965 for a trip via Indonesia to Antwep/Hamburg at an increase charter cost.
Meanwhile, the original Charterer again remitted on April 30, 1965, the amount corresponding to
the 3rd 15-day hire of the vessel "PAXOI" but this time the remittance was refused.
On May 3,1965, respondents Union Import and Export Corporation and Philippine Traders
Corporation filed a complaint with the Court of First Instance of Manila, Branch VIII, against the
Unknown Owners of the Vessel "SS Paxoi" for specific performance with prayer for preliminary
attachment, alleging, among other things, that the defendants (unknown owners) through their
duly authorized agent in London, the N & J Vlassopulos Ltd., ship brokers, entered into a
contract of Uniform Time-Charter with the Interocean Shipping Company of Manila through the
latter's duly authorized broker, the Overseas Steamship Co., Inc., for the Charter of the vessel
SS PAXOI' under the terms and conditions appearing therein ...; that, immediately thereafter, the
Interocean Shipping Company sublet,the said vessel to the plaintiff Union Import & Export,
Corporation which in turn sublet the same to the other plaintiff, the Philippine Traders
Corporation (Amended Record on Appeal, p. 17). Respondents as plaintiffs in the complaint
obtained a writ of preliminary attachment of vessel PAXOI' " which was anchored at Davao on
May 5, 1969, upon the filing of the corresponding bond of P1,663,030.00 (Amended Record on
Appeal, p. 27). However, the attachment was lifted on May 15, 1969 upon defendant's motion
and filing of a counterbond for P1,663,030 (Amended Record on Appeal, p. 62).
On May 11, 1965, the complaint was amended to Identify the defendant as Marimperio
Compania Naviera S.A., petitioner herein (Amended Record on Appeal, p. 38). In answer to the
amended complaint, by way of special defenses defendant (petitioner herein) alleged among
others that the Charter Party covering its vessel "SS PAXOI" was entered into by defendant with
Interocean Shipping Co. which is not a party in the complaint; that defendant has no agreement
or relationship whatsoever with the plaintiffs; that plaintiffs are unknown to defendant; that the
charter party entered into by defendant with the Interocean Shipping Co. over the vessel "SS
PAXOI" does not authorize a sub-charter of said vessel to other parties; and that at any rate, any
such sub-charter was without the knowledge or consent of defendant or defendant's agent, and
therefore, has no effect and/or is not binding upon defendant. By way of counterclaim, defendant
prayed that plaintiffs be ordered to pay defendant (1) the sum of 5,085.133d or its equivalent, in
Philippine currency of P54,929.60, which the defendant failed to realize under the substitute
charter, from May 3, 1965 to May 16, 1965, while the vessel was under attachment; (2) the sum
of E68.7.10 or its equivalent of P7,132.83, Philippine currency, as premium for defendant's
counterbond for the first year, and such other additional premiums that will have to be paid by
defendant for additional premiums while the case is pending; and (3) a sum of not less than
P200,000.00 for and as attomey's fees and expenses of litigations (Amended Record on Appeal,
p. 64).
On March 16, 1966, respondent Interocean Shipping Corporation filed a complaint-in-
intervention to collect what it claims to be its loss of income by way of commission and expenses
in the amount of P15,000.00 and the sum of P2,000.00 for attorney's fees (Amended Record on
Appeal, p. 87). In its amended answer to the complaint-in-intervention petitioner, by way of
special defenses alleged that (1) the plaintiff-in-intervention, being the charterer, did not notify
the defendant shipowner, petitioner, herein, about any alleged sub-charter of the vessel "SS
PAXOI" to the plaintiffs; consequently, there is no privity of contract between defendant and
plaintiffs and it follows that plaintiff-in-intervention, as charterer, is responsible for defendant
shipowner for the proper performance of the charter party; (2) that the charter party provides that
any dispute arising from the charter party should be referred to arbitration in London; that
Charterer plaintiff-in-intervention has not complied with this provision of the charter party;
consequently its complaint-in intervention is premature; and (3) that the alleged commission of 2
1/2 and not become due for the reason, among others, that the charterer violated the contract,
and the full hiring fee due the shipowner was not paid in accordance with the terms and
conditions of the charter party. By way of counterclaim defendant shipowner charged the
plaintiff-in-intervention attorney's fees and expenses of litigation in the sum of P10,000.00
(Amended Record on Appeal, p. 123).
On November 22, 1969 the Court of First Instance of Manila, Branch VIII rendered its
decision ** in favor of defendant Marimperio Compania Naviera, S.A., petitioner herein, and
against plaintiffs Union Import and Export Corporation and Philippine Traders Corporation,
respondents herein, dismissing the amended complaint, and ordering said plaintiff on the
counterclaim to pay defendant, jointly and severally, the amount of f 8,011.38 or its equivalent in
Philippine currency of P75,303.40, at the exchange rate of P9.40 to 1 for the unearned charter
hire due to the attachment of the vessel "PAXOI" in Davao, plus premiums paid on the
counterbond as of April 22, 1968 plus the telex and cable charges and the sum of P10,000.00 as
attorney's fees and costs. The trial court dismissed the complaint-in-intervention, ordering the
intervenor, on the counterclaim, to pay defendant the sum of P10,000.00 as attorney's fees, and
the costs (Amended Record on Appeal, p. 315).
Plaintiffs filed a Motion for Reconsideration and/or new trial of the decision of the trial court on
December 23, 1969 (Amended Record on Appeal, p. 286); the intervenor filed its motion for
reconsideration and/or new trial on January 7, 1970 (Amended Record on Appeal, p. 315).
Acting on the two motions for reconsideration, the trial court reversed its stand in its amended
decision dated January 24, 1978. The dispositive portion of the amended decision states:
FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders
judgment for the plaintiffs Union Import & Export Corporation and Philin
Traders Corporation, and plaintiff-in-intervention, Interocean Shipping
Corporation, and consequently orders the defendant, Marimperio Compania
Naveria S.A.:
 (1) To pay plaintiffs the sum of US$22,500.00 After deliberating on the petition, the Court resolved to require the respondents to comment
representing the remittance of plaintiffs to said thereon, in its resolution dated April 2, 1975 (rollo, p. 225).
defendant for the first 15-day hire of the vessel "SS
PAXOI" including overtime and an overpayment of
The comment on petition for review by certiorari was filed by respondents on April 21, 1975,
US$254.00;
praying that the petition for review by certiorari dated March 18, 1975 be dismissed for lack of
merit Rollo p. 226). The reply to comment was filed on May 8, 1975 (Rollo, p. 259). The rejoinder
(2) To pay plaintiffs the sum of US$16,000.00 to reply to comment was filed on May 13, 197 5 (Rollo, p. 264).
corresponding to the remittance of plaintiffs to
defendant for the second 15-day hire of the aforesaid
On October 20, 1975, the Court resolved (a) to give due course to the petition; (b) to treat the
vessel;
petition for review as a special civil action; and (c) to require both parties to submit their
respective memoranda within thirty (30) days from notice hereof (Rollo, p. 27).
(3) To pay plaintiffs the sum of US$6,982.72
representing the cost of bunker oil, survey and watering
Respondents filed their memoranda on January 27, 1976 (Rollo, p. 290); petitioner, on February
of the said vessel;
26, 1976 (Rollo, p. 338). Respondents' reply memorandum was filed on April 14, 1976 (Rollo, p.
413) and Rejoinder to respondents' reply memorandum was filed on May 28, 1976 (Rollo, p.
(4) To pay plaintiffs the sum of US$220,0,00.00 460).
representing the unrealized profits; and
On June 11, 1976, the Court resolved to admit petitioner's rejoinder to respondents' reply
(5) To pay plaintiffs the sum of P100,000.00, as and for memorandum and to declare this case submitted for decision (Rollo, p. 489).
attorney's fees (Moran, Comments on the Rules of
Court, Vol. III, 1957 5d 644, citing Haussermann vs.
The main issues raised by petitioner are:
Rahmayer, 12 Phil. 350; and others)" (Francisco vs.
Matias, G.R. No. L-16349, January 31, 1964; Sison vs.
Suntay, G.R. No. L-1000 . December 28, 1957). 1. Whether or not respondents have the legal capacity to bring the suit for
specific performance against petitioner based on the charter party, and
The Court further orders defendant to pay plaintiff-in-
intervention the amount of P15,450.44, representing the 2. Whether or not the default of Charterer in the payment of the charter hire
latter's commission as broker, with interest thereon at within the time agreed upon gives petitioner a right to rescind the charter
6% per annum from the date of the filing of the party extra judicially.
complaint-in-intervention, until fully paid, plus the sum
of P2,000.00 as attorney's fees.
I.

The Court finally orders the defendant to pay the costs.

In view of the above conclusion, the Court orders the dismissal of the
counterclaims filed by defendant against the plaintiffs and plaintiff-in-
intervention, as wen as its motion for the award of damages in connection
with the issuance of the writ of preliminary attachment.
Defendant (petitioner herein), filed a motion for reconsideration and/or new trial of the amended
decision on February 19, 1970 (Amended Record on Appeal, p. 382). Meanwhile a new Judge
was assigned to the Trial Court (Amended Record on Appeal, p. 541). On September 10, 1970
the trial court issued its order of September 10, 1970 *** denying defendant's motion for
reconsideration (Amended Record on Appeal, p. 583).
On Appeal, the Court of Appeals affirmed the amended decision of the lower court except the
portion granting commission to the intervenor- appellee, which it reversed thereby dismissing the
complaint-in- intervention. Its two motions (1) for reconsideration and/or new trial and (2) for new
trial having been denied by the Court of Appeals in its Resolution of February 17, 1975 which,
however, fixed the amount of attorney's fees at P100,000.00 instead of $100,000.00 (Rollo, p.
81), petitioner filed with this Court its petition for review on certiorari on March 19, 197 5 (Rollo,
p. 86).
According to Article 1311 of the Civil Code, a contract takes effect between the parties who
made it, and also their assigns and heirs, except in cases where the rights and obligations
arising from the contract are not transmissible by their nature, or by stipulation or by provision of
law. Since a contract may be violated only by the parties, thereto as against each other, in an
action upon that contract, the real parties in interest, either as plaintiff or as defendant, must be
parties to said contract. Therefore, a party who has not taken part in it cannot sue or be sued for
performance or for cancellation thereof, unless he shows that he has a real interest affected
thereby (Macias & Co. v. Warner Barners & Co., 43 Phil. 155 [1922] and Salonga v. Warner
Barnes & Co., Ltd., 88 Phil. 125 [1951]; Coquia v. Fieldmen's Insurance Co., Inc., 26 SCRA 178
[1968]).
It is undisputed that the charter party, basis of the complaint, was entered into between
petitioner Marimperio Compañia Naviera, S.A., through its duly authorized agent in London, the
N & J Vlassopulos Ltd., and the Interocean Shipping Company of Manila through the latter's duly
authorized broker, the Overseas Steamship Co., Inc., represented by Matthews, Wrightson
Burbridge Ltd., for the Charter of the 'SS PAXOI' (Amended Complaint, Amended Record on
Appeal, p. 33; Complaint-in-Intervention, Amended Record on Appeal, p. 87). It is also alleged in
both the Complaint (Amended Record on Appeal 18) and the Amended Complaint (Amended
Record on Appeal, p. 39) that the Interocean Shipping Company sublet the said vessel to
respondent Union Import and Export Corporation which in turn sublet the same to respondent
Philippine Traders Corporation. It is admitted by respondents that the charterer is the Interocean
Shipping Company. Even paragraph 3 of the complaint-in-intervention alleges that respondents
were given the use of the vessel "pursuant to paragraph 20 of the Uniform Time Charter ..."
which precisely provides for the subletting of the vessel by the charterer (Rollo, p. 24).
Furthermore, Article 652 of the Code of Commerce provides that the charter party shall contain,
among others, the name, surname, and domicile of the charterer, and if he states that he is
acting by commission, that of the person for whose account he makes the contract. It is obvious
from the disclosure made in the charter party by the authorized broker, the Overseas Steamship
Co., Inc., that the real charterer is the Interocean Shipping Company (which sublet the vessel to
Union Import and Export Corporation which in turn sublet it to Philippine Traders Corporation).
In a sub-lease, there are two leases and two distinct judicial relations although intimately
connected and related to each other, unlike in a case of assignment of lease, where the lessee
transmits absolutely his right, and his personality disappears; there only remains in the juridical
relation two persons, the lessor and the assignee who is converted into a lessee (Moreno,
Philippine Law Dictionary, 2nd ed., p. 594). In other words, in a contract of sub-lease, the
personality of the lessee does not disappear; he does not transmit absolutely his rights and
obligations to the sub-lessee; and the sub-lessee generally does not have any direct action
against the owner of the premises as lessor, to require the compliance of the obligations
contracted with the plaintiff as lessee, or vice versa (10 Manresa, Spanish Civil Code, 438).
However, there are at least two instances in the Civil Code which allow the lessor to bring an
action directly (accion directa) against the sub-lessee (use and preservation of the premises
under Art. 1651, and rentals under Article 1652).
Art. 1651 reads:
Without prejudice to his obligation toward the sub-lessor, the sub-lessee is
bound to the lessor for all acts which refer to the use and preservation of the
thing leased in the manner stipulated between the lessor and the lessee.
Article 1652 reads:
The sub-lessee is subsidiarily liable to the lessor for any rent due from the
lessee. However, the sub-lessee shall not be responsible beyond the
amount of rent due from him, in accordance with the terms of the sub-lease,
at the time of the extra-judicial demand by the lessor.
Payments of rent in advance by the sub-lessee shall be deemed not to have
been made, so far as the lessor's claim is concerned, unless said payments
were effected in virtue of the custom of the place.
It will be noted however that in said two Articles it is not the sub-lessee, but the lessor, who can
bring the action. In the instant case, it is clear that the sub-lessee as such cannot maintain the
suit they filed with the trial court (See A. Maluenda and Co. v. Enriquez, 46 Phil. 916).
In the law of agency "with an undisclosed principal, the Civil Code in Article 1883 reads:
If an agent acts in his own name, the principal has no right of action against
the persons with whom the agent has contracted; neither have such
persons against the principal.
In such case the agent is the one directly bound in favor of the person with
whom he has contracted, as if the transaction were his own, except when
the contract involves things belonging to the principal.
The provisions of this article shag be understood to be without prejudice to
the actions between the principal and agent.
While in the instant case, the true charterers of the vessel were the private respondents herein
and they chartered the vessel through an intermediary which upon instructions from them did not
disclose their names. Article 1883 cannot help the private respondents, because although they
were the actual principals in the charter of the vessel, the law does not allow them to bring any
action against the adverse party and vice, versa.
II.
The answer to the question of whether or not the default of charterer in the payment of the
charter hire within the time agreed upon gives petitioner a right to rescind the charter party
extrajudicially, is undoubtedly in the affirmative.
Clause 6 of the Charter party specifically provides that the petitioner has the right to withdraw
the vessel fromthe service of the charterers, without noting any protest and without interference
of any court or any formality in the event that the charterer defaults in the payment of hire. The
payment of hire was to be made every fifteen (1 5) days in advance.
It is undisputed that the vessel "SS PAXOI" came on hire on March 27, 1965. On March 29,
Vlassopulos notified by letter the charterer through Matthews of that fact, enclosing therein
owner's debit note for a 15-day hire payable in advance. On March 30, 1965 the shipowner
again notified Matthews that the payment for the first 15-day hire was overdue. Again on April 2
the shipowner telexed Matthews insisting on the payment, but it was only on April 7 that the
amount of US $22,500.00 was remitted to Williams Deacons Bank, Ltd. through the Rizal
Commercial Banking Corporation for the account of Vlassopulos, agent of petitioner,
corresponding to the first 15-day hire from March 27 to April 11, 1965.
On April 8, 1965, Vlassopulos acknowledged receipt of the payment, again with a debit note for
the second 15-day hire and overtime which was due on April 11, 1965. On April 23, 1965,
Vlassopulos notified Matthews by telex that charterers were in default and in accordance with
Clause 6 of the charter party, the vessel was being withdrawn from charterer's service, holding
them responsible for unpaid hire and all other legal claims of the owner. Respondents remitted
the sum of US$6,000.00 and US$10,000.00 to the bank only on April 26, 1965 representing
payment for the second 15-day hire from April 12 to April 27, 1965, received and accepted by
the payee, Vlassopulos without any comment or protest.
Unquestionably, as of April 23, 1965, when Vlassopulos notified Matthews of the withdrawal of
the vessel from the Charterers' service, the latter was already in default. Accordingly, under
Clause 6 of the charter party the owners had the right to withdraw " SS PAXO I " from the
service of charterers, which withdrawal they did.
The question that now arises is whether or not petitioner can rescind the charter party extra-
judicially. The answer is also in the affirmative. A contract is the law between the contracting
parties, and when there is nothing in it which is contrary to law, morals, good customs, public
policy or public order, the validity of the contract must be sustained (Consolidated Textile Mills,
Inc. v. Reparations Commission, 22 SCRA 674 [19681; Lazo v. Republic Surety & Insurance
Co., Inc., 31 SCRA 329 [1970]; Castro v. Court of Appeals, 99 SCRA 722 [1980]; Escano v.
Court of Appeals, 100 SCRA 197 [1980]). A judicial action for the rescission of a contract is not
necessary where the contract provides that it may be revoked and cancelled for violation of any
of its terms and conditions (Enrile v. Court of Appeals, 29 SCRA 504 [1969]; University of the
Philippines v. De los Angeles, 35 SCRA 102 [1970]; Palay, Inc. v. Clave, 124 SCRA 638 [1983]).

PREMISES CONSIDERED, (1) the decision of the Court of Appeals affirming the amended
decision of the Court of First Instance of Manila, Branch VIII, is hereby REVERSED and SET
ASIDE except for that portion of the decision dismissing the complaint-in-intervention; and (2)
the original decision of the trial court is hereby REINSTATED.

SO ORDERED.
 G.R. No. L-13505 February 4, 1919
GEO. W. DAYWALT, plaintiff-appellant,
vs.
LA CORPORACION DE LOS PADRES AGUSTINOS RECOLETOS, ET AL., defendants-
appellees.
STREET, J.:
In the year 1902, Teodorica Endencia, an unmarried woman, resident in the Province of
Mindoro, executed a contract whereby she obligated herself to convey to Geo. W. Daywalt, a
tract of land situated in the barrio of Mangarin, municipality of Bulalacao, now San Jose, in said
province. It was agreed that a deed should be executed as soon as the title to the land should
be perfected by proceedings in the Court of Land Registration and a Torrens certificate should
be produced therefore in the name of Teodorica Endencia. A decree recognizing the right of
Teodorica as owner was entered in said court in August 1906, but the Torrens certificate was not
issued until later. The parties, however, met immediately upon the entering of this decree and
made a new contract with a view to carrying their original agreement into effect. This new
contract was executed in the form of a deed of conveyance and bears date of August 16, 1906.
The stipulated price was fixed at P4,000, and the area of the land enclosed in the boundaries
defined in the contract was stated to be 452 hectares and a fraction.
all the important matters of business was accustomed to seek, and was given, the advice of
father Sanz and other members of his order with whom she came in contact.
Father Sanz was fully aware of the existence of the contract of 1902 by which Teodorica
Endencia agreed to sell her land to the plaintiff as well as of the later important developments
connected with the history of that contract and the contract substituted successively for it; and in
particular Father Sanz, as well as other members of the defendant corporation, knew of the
existence of the contract of October 3, 1908, which, as we have already seen finally fixed the
rights of the parties to the property in question. When the Torrens certificate was finally issued in
1909 in favor of Teodorica Endencia, she delivered it for safekeeping to the defendant
corporation, and it was then taken to Manila where it remained in the custody and under the
control of P. Juan Labarga the procurador and chief official of the defendant corporation, until
the deliver thereof to the plaintiff was made compulsory by reason of the decree of the Supreme
Court in 1914.
When the defendant corporation sold the San Jose Estate, it was necessary to bring the cattle
off of that property; and, in the first half of 1909, some 2,368 head were removed to the estate of
the corporation immediately adjacent to the property which the plaintiff had purchased from
Teodorica Endencia. As Teodorica still retained possession of said property Father Sanz
entered into an arrangement with her whereby large numbers of cattle belonging to the
defendant corporation were pastured upon said land during a period extending from June 1,
1909, to May 1, 1914.

The second contract was not immediately carried into effect for the reason that the Torrens
Under the first cause stated in the complaint in the present action the plaintiff seeks to recover
certificate was not yet obtainable and in fact said certificate was not issued until the period of
from the defendant corporation the sum of P24,000, as damages for the use and occupation of
performance contemplated in the contract had expired. Accordingly, upon October 3, 1908, the
the land in question by reason of the pasturing of cattle thereon during the period stated. The
parties entered into still another agreement, superseding the old, by which Teodorica Endencia
trial court came to the conclusion that the defendant corporation was liable for damages by
agreed upon receiving the Torrens title to the land in question, to deliver the same to the
reason of the use and occupation of the premises in the manner stated; and fixed the amount to
Hongkong and Shanghai Bank in Manila, to be forwarded to the Crocker National Bank in San
be recovered at P2,497. The plaintiff appealed and has assigned error to this part of the
Francisco, where it was to be delivered to the plaintiff upon payment of a balance of P3,100.
judgment of the court below, insisting that damages should have been awarded in a much larger
sum and at least to the full extent of P24,000, the amount claimed in the complaint.
The Torrens certificate was in time issued to Teodorica Endencia, but in the course of the
proceedings relative to the registration of the land, it was found by official survey that the area of
As the defendant did not appeal, the property of allowing damages for the use and occupation of
the tract inclosed in the boundaries stated in the contract was about 1.248 hectares of 452
the land to the extent o P2,497, the amount awarded, is not now in question an the only thing
hectares as stated in the contract. In view of this development Teodorica Endencia became
here to be considered, in connection with this branch of the case, is whether the damages
reluctant to transfer the whole tract to the purchaser, asserting that she never intended to sell so
allowed under this head should be increased. The trial court rightly ignored the fact that the
large an amount of land and that she had been misinformed as to its area.
defendant corporation had paid Teodorica Endencia of ruse and occupation of the same land
during the period in question at the rate of P425 per annum, inasmuch as the final decree of this
This attitude of hers led to litigation in which Daywalt finally succeeded, upon appeal to the court in the action for specific performance is conclusive against her right, and as the defendant
Supreme Court, in obtaining a decree for specific performance; and Teodorica Endencia was corporation had notice of the rights of the plaintiff under this contract of purchase, it can not be
ordered to convey the entire tract of land to Daywalt pursuant to the contract of October 3, 1908, permitted that the corporation should escape liability in this action by proving payment of rent to
which contract was declared to be in full force and effect. This decree appears to have become a person other than the true owner.
finally effective in the early part of the year 1914.1
With reference to the rate of which compensation should be estimated the trial court came to the
The defendant, La Corporacion de los Padres Recoletos, is a religious corporation, with its following conclusion:
domicile in the city of Manila. Said corporation was formerly the owner of a large tract of land,
known as the San Jose Estate, on the island of Mindoro, which was sold to the Government of
As to the rate of the compensation, the plaintiff contends that the defendant
the Philippine Islands in the year 1909. The same corporation was at this time also the owner of
corporation maintained at leas one thousand head of cattle on the land and that the
another estate on the same island immediately adjacent to the land which Teodorica Endencia
pasturage was of the value of forty centavos per head monthly, or P4,800 annually, for
had sold to Geo. W. Daywalt; and for many years the Recoletos Fathers had maintained large
the whole tract. The court can not accept this view. It is rather improbable that 1,248
herds of cattle on the farms referred to. Their representative, charged with management of these
hectares of wild Mindoro land would furnish sufficient pasturage for one thousand
farms, was father Isidoro Sanz, himself a members of the order. Father Sanz had long been well
head of cattle during the entire year, and, considering the locality, the rate of forty
acquainted with Teodorica Endencia and exerted over her an influence and ascendency due to
centavos per head monthly seems too high. The evidence shows that after having
his religious character as well as to the personal friendship which existed between them.
recovered possession of the land the plaintiff rented it to the defendant corporation for
Teodorica appears to be a woman of little personal force, easily subject to influence, and upon
 fifty centavos per hectares annually, the tenant to pay the taxes on the land, and this
appears to be a reasonable rent. There is no reason to suppose that the land was
worth more for grazing purposes during the period from 1909 to 1913, than it was at
the later period. Upon this basis the plaintiff is entitled to damages in the sum of
p2,497, and is under no obligation to reimburse the defendants for the land taxes paid
by either of them during the period the land was occupied by the defendant
corporation. It may be mentioned in this connection that the Lontok tract adjoining the
land in question and containing over three thousand hectares appears to have been
leased for only P1,000 a year, plus the taxes.
From this it will be seen that the trial court estimated the rental value of the land for grazing
purposes at 50 centavos per hectare per annum, and roughly adopted the period of four years
as the time for which compensation at that rate should be made. As the court had already found
that the defendant was liable for these damages from June, 1, 1909, to May 1, 1914, or a period
of four years and eleven months, there seems some ground for the contention made in the
appellant's first assignment of error that the court's computation was erroneous, even accepting
the rule upon which the damages were assessed, as it is manifest that at the rate of 50 centavos
per hectare per annum, the damages for four years and eleven months would be P3,090.
Notwithstanding this circumstance, we are of the opinion that the damages assessed are
sufficient to compensate the plaintiff for the use and occupation of the land during the whole time
it was used. There is evidence in the record strongly tending to show that the wrongful use of the
land by the defendant was not continuous throughout the year but was confined mostly to the
reason when the forage obtainable on the land of the defendant corporation was not sufficient to
maintain its cattle, for which reason it became necessary to allow them to go over to pasture on
the land in question; and it is not clear that the whole of the land was used for pasturage at any
time. Considerations of this character probably led the trial court to adopt four years as roughly
being the period during which compensation should be allowed. But whether this was
advertently done or not, we see no sufficient reason, in the uncertainty of the record with
reference to the number of the cattle grazed and the period when the land was used, for
substituting our guess for the estimate made by the trial court.
In the second cause of action stated in the complaint the plaintiff seeks to recover from the
defendant corporation the sum of P500,000, as damages, on the ground that said corporation,
for its own selfish purposes, unlawfully induced Teodorica Endencia to refrain from the
performance of her contract for the sale of the land in question and to withhold delivery to the
plaintiff of the Torrens title, and further, maliciously and without reasonable cause, maintained
her in her defense to the action of specific performance which was finally decided in favor of the
plaintiff in this court. The cause of action here stated is based on liability derived from the
wrongful interference of the defendant in the performance of the contract between the plaintiff
and Teodorica Endencia; and the large damages laid in the complaint were, according to the
proof submitted by the plaintiff, incurred as a result of a combination of circumstances of the
following nature: In 1911, it appears, the plaintiff, as the owner of the land which he had bought
from Teodorica Endencia entered into a contract (Exhibit C) with S. B. Wakefield, of San
Francisco, for the sale and disposal of said lands to a sugar growing and milling enterprise, the
successful launching of which depended on the ability of Daywalt to get possession of the land
and the Torrens certificate of title. In order to accomplish this end, the plaintiff returned to the
Philippine Islands, communicated his arrangement to the defendant,, and made repeated efforts
to secure the registered title for delivery in compliance with said agreement with Wakefield.
Teodorica Endencia seems to have yielded her consent to the consummation of her contract,
but the Torrens title was then in the possession of Padre Juan Labarga in Manila, who refused to
deliver the document. Teodorica also was in the end contract with the plaintiff, with the result
that the plaintiff was kept out of possession until the Wakefield project for the establishment of a
large sugar growing and milling enterprise fell through. In the light of what has happened in
recent years in the sugar industry, we feel justified in saying that the project above referred to, if
carried into effect, must inevitably have proved a great success.
The determination of the issue presented in this second cause of action requires a consideration
of two points. The first is whether a person who is not a party to a contract for the sale of land
makes himself liable for damages to the vendee, beyond the value of the use and occupation, by
colluding with the vendor and maintaining him in the effort to resist an action for specific
performance. The second is whether the damages which the plaintiff seeks to recover under this
head are too remote and speculative to be the subject of recovery.
As preliminary to a consideration of the first of these questions, we deem it well it dispose of the
contention that the members of the defendants corporation, in advising and prompting Teodorica
Endencia not to comply with the contract of sale, were actuated by improper and malicious
motives. The trial court found that this contention was not sustained, observing that while it was
true that the circumstances pointed to an entire sympathy on the part of the defendant
corporation with the efforts of Teodorica Endencia to defeat the plaintiff's claim to the land, the
fact that its officials may have advised her not to carry the contract into effect would not
constitute actionable interference with such contract. It may be added that when one considers
the hardship that the ultimate performance of that contract entailed on the vendor, and the doubt
in which the issue was involved — to the extent that the decision of the Court of the First
Instance was unfavorable to the plaintiff and the Supreme Court itself was divided — the attitude
of the defendant corporation, as exhibited in the conduct of its procurador, Juan Labarga, and
other members of the order of the Recollect Fathers, is not difficult to understand. To our mind a
fair conclusion on this feature of the case is that father Juan Labarga and his associates
believed in good faith that the contract cold not be enforced and that Teodorica would be
wronged if it should be carried into effect. Any advice or assistance which they may have given
was, therefore, prompted by no mean or improper motive. It is not, in our opinion, to be denied
that Teodorica would have surrendered the documents of title and given possession of the land
but for the influence and promptings of members of the defendants corporation. But we do not
credit the idea that they were in any degree influenced to the giving of such advice by the desire
to secure to themselves the paltry privilege of grazing their cattle upon the land in question to the
prejudice of the just rights of the plaintiff.
The attorney for the plaintiff maintains that, by interfering in the performance of the contract in
question and obstructing the plaintiff in his efforts to secure the certificate of tittle to the land, the
defendant corporation made itself a co-participant with Teodorica Endencia in the breach of said
contract; and inasmuch as father Juan Labarga, at the time of said unlawful intervention
between the contracting parties, was fully aware of the existence of the contract (Exhibit C)
which the plaintiff had made with S. B. Wakefield, of San Francisco, it is insisted that the
defendant corporation is liable for the loss consequent upon the failure of the project outlined in
said contract.
In this connection reliance is placed by the plaintiff upon certain American and English decisions
in which it is held that a person who is a stranger to contract may, by an unjustifiable
interference in the performance thereof, render himself liable for the damages consequent upon
non-performance. It is said that the doctrine of these cases was recognized by this court in
Gilchrist vs. Cuddy (29 Phil. Rep., 542); and we have been earnestly pressed to extend the rule
there enunciated to the situation here presente.
Somewhat more than half a century ago the English Court of the Queen's Bench saw its way
clear to permit an action for damages to be maintained against a stranger to a contract
wrongfully interfering in its performance. The leading case on this subject is Lumley vs. Gye
([1853], 2 El. & Bl., 216). It there appeared that the plaintiff, as manager of a theatre, had
entered into a contract with Miss Johanna Wagner, an opera singer,, whereby she bound herself
for a period to sing in the plaintiff's theatre and nowhere else. The defendant, knowing of the
existence of this contract, and, as the declaration alleged, "maliciously intending to injure the
plaintiff," enticed and produced Miss Wagner to leave the plaintiff's employment. It was held that
the plaintiff was entitled to recover damages. The right which was here recognized had its origin
in a rule, long familiar to the courts of the common law, to the effect that any person who entices
a servant from his employment is liable in damages to the master. The master's interest in the
service rendered by his employee is here considered as a distinct subject of juridical right. It
being thus accepted that it is a legal wrong to break up a relation of personal service, the
question now arose whether it is illegal for one person to interfere with any contract relation
subsisting between others. Prior to the decision of Lumley vs. Gye [supra] it had been supposed
that the liability here under consideration was limited to the cases of the enticement of menial
servants, apprentices, and others to whom the English Statutes of Laborers were applicable. But
in the case cited the majority of the judges concurred in the opinion that the principle extended to
all cases of hiring. This doctrine was followed by the Court of Appeal in Bowen vs. Hall ([1881], 6
Q. B., Div., 333); and in Temperton vs. Russell ([1893], Q. B., 715), it was held that the right of
action for maliciously procuring a breach of contract is not confined to contracts for personal
services, but extends to contracts in general. In that case the contract which the defendant had
procured to be breached was a contract for the supply of building material.
Malice in some form is generally supposed to be an essential ingredient in cases of interference
with contract relations. But upon the authorities it is enough if the wrong-doer, having knowledge
of the existence of the contract relations, in bad faith sets about to break it up. Whether his
motive is to benefit himself or gratify his spite by working mischief to the employer is immaterial.
Malice in the sense of ill-will or spite is not essential.
Upon the question as to what constitutes legal justification, a good illustration was put in the
leading case. If a party enters into contract to go for another upon a journey to a remote and
unhealthful climate, and a third person, with a bona fide purpose of benefiting the one who is
under contract to go, dissuades him from the step, no action will lie. But if the advice is not
disinterested and the persuasion is used for "the indirect purpose of benefiting the defendant at
the expense of the plaintiff," the intermedler is liable if his advice is taken and the contract
broken.
The doctrine embodied in the cases just cited has sometimes been found useful, in the
complicated relations of modern industry, as a means of restraining the activities of labor unions
and industrial societies when improperly engaged in the promotion of strikes. An illustration of
the application of the doctrine in question in a case of this kind is found in South Wales Miners
Federation vs. Glamorgan Coal Co. ([1905]), A. C., 239). It there appeared that certain miners
employed in the plaintiff's collieries, acting under the order of the executive council of the
defendant federation, violated their contract with the plaintiff by abstaining from work on certain
days. The federation and council acted without any actual malice or ill-will towards the plaintiff,
and the only object of the order in question was that the price of coal might thereby be kept up, a
factor which affected the miner's wage scale. It was held that no sufficient justification was
shown and that the federation was liable.
In the United States, the rule established in England by Lumley vs. Gye [supra] and subsequent
cases is commonly accepted, though in a few of the States the broad idea that a stranger to a
contract can be held liable upon its is rejected, and in these jurisdictions the doctrine, if accepted
at all, is limited to the situation where the contract is strictly for personal service.
(Boyson vs. Thorn, 98 Cal., 578; Chambers & Marshall vs. Baldwin 91 Ky., 121;
Bourlier vs. Macauley, 91 Ky., 135; Glencoe Land & Gravel Co. vs. Hudson Bros. Com. Co., 138
Mo., 439.)
It should be observed in this connection that, according to the English and American authorities,
no question can be made as to the liability to one who interferes with a contract existing between
others by means which, under known legal cannons, can be denominated an unlawful means.
Thus, if performance is prevented by force, intimidation, coercion, or threats, or by false or
defamatory statements, or by nuisance or riot, the person using such unlawful means is, under
all the authorities, liable for the damage which ensues. And in jurisdictions where the doctrine of
Lumley vs. Gye [supra] is rejected, no liability can arise from a meddlesome and malicious
interference with a contract relation unless some such unlawful means as those just indicated
are used. (See cases last above cited.)
This brings us to the decision made by this court in Gilchrist vs. Cuddy (29 Phil. Rep., 542). It
there appeared that one Cuddy, the owner of a cinematographic film, let it under a rental
contract to the plaintiff Gilchrist for a specified period of time. In violation of the terms of this
agreement, Cuddy proceeded to turn over the film also under a rental contract, to the defendants
Espejo and Zaldarriaga. Gilchrist thereupon restored to the Court of First Instance and produced
an injunction restraining the defendants from exhibiting the film in question in their theater during
the period specified in the contract of Cuddy with Gilchrist. Upon appeal to this court it was in
effect held that the injunction was not improperly granted, although the defendants did not, at the
time their contract was made, know the identity of the plaintiff as the person holding the prior
contract but did know of the existence of a contract in favor of someone. It was also
said arguendo, that the defendants would have been liable in damages under article 1902 of the
Civil Code, if the action had been brought by the plaintiff to recover damages. The force of the
opinion is, we think, somewhat weakened by the criticism contain in the concurring opinion,
where it is said that the question of breach of contract by inducement was not really involved in
the case. Taking the decision upon the point which was rally decided, it is authority for the
proposition that one who buys something which he knows has been sold to some other person
can be restrained from using that thing to the prejudice of the person having the prior and better
right.
Translated into terms applicable to the case at bar, the decision in Gilchrist vs. Cuddy (29 Phil.
Rep., 542), indicates that the defendant corporation, having notice of the sale of the land in
question to Daywalt, might have been enjoined by the latter from using the property for grazing
its cattle thereon. That the defendant corporation is also liable in this action for the damage
resulting to the plaintiff from the wrongful use and occupation of the property has also been
already determined. But it will be observed that in order to sustain this liability it is not necessary
to resort to any subtle exegesis relative to the liability of a stranger to a contract for unlawful
interference in the performance thereof. It is enough that defendant use the property with notice
that the plaintiff had a prior and better right.
Article 1902 of the Civil Code declares that any person who by an act or omission, characterized
by fault or negligence, causes damage to another shall be liable for the damage so done.
Ignoring so much of this article as relates to liability for negligence, we take the rule to be that a
person is liable for damage done to another by any culpable act; and by "culpable act" we mean
any act which is blameworthy when judged by accepted legal standards. The idea thus
expressed is undoubtedly broad enough to include any rational conception of liability for the
tortious acts likely to be developed in any society. Thus considered, it cannot be said that the
doctrine of Lumley vs. Gye [supra] and related cases is repugnant to the principles of the civil
law.
Nevertheless, it must be admitted that the codes and jurisprudence of the civil law furnish a
somewhat uncongenial field in which to propagate the idea that a stranger to a contract may
sued for the breach thereof. Article 1257 of the Civil Code declares that contracts are binding
only between the parties and their privies. In conformity with this it has been held that a stranger
to a contract has no right of action for the nonfulfillment of the contract except in the case
especially contemplated in the second paragraph of the same article. (Uy Tam and Uy
Yet vs. Leonard, 30 Phil. Rep., 471.) As observed by this court in Manila Railroad
Co. vs. Compañia Transatlantica, R. G. No. 11318 (38 Phil. Rep., 875), a contract, when
effectually entered into between certain parties, determines not only the character and extent of
the liability of the contracting parties but also the person or entity by whom the obligation is
exigible. The same idea should apparently be applicable with respect to the person against
whom the obligation of the contract may be enforced; for it is evident that there must be a certain
mutuality in the obligation, and if the stranger to a contract is not permitted to sue to enforce it,
he cannot consistently be held liable upon it.
If the two antagonistic ideas which we have just brought into juxtaposition are capable of
reconciliation, the process must be accomplished by distinguishing clearly between the right of
action arising from the improper interference with the contract by a stranger thereto, considered
as an independent act generate of civil liability, and the right of action ex contractu against a
party to the contract resulting from the breach thereof. However, we do not propose here to
pursue the matter further, inasmuch as, for reasons presently to be stated, we are of the opinion
that neither the doctrine of Lumley vs. Gye [supra] nor the application made of it by this court in
Gilchrist vs. Cuddy (29 Phil. Rep., 542), affords any basis for the recovery of the damages which
the plaintiff is supposed to have suffered by reason of his inability to comply with the terms of the
Wakefield contract.
Whatever may be the character of the liability which a stranger to a contract may incur by
advising or assisting one of the parties to evade performance, there is one proposition upon
which all must agree. This is, that the stranger cannot become more extensively liable in
damages for the nonperformance of the contract than the party in whose behalf he intermeddles.
To hold the stranger liable for damages in excess of those that could be recovered against the
immediate party to the contract would lead to results at once grotesque and unjust. In the case
at bar, as Teodorica Endencia was the party directly bound by the contract, it is obvious that the
liability of the defendant corporation, even admitting that it has made itself coparticipant in the
breach of the contract, can in no even exceed hers. This leads us to consider at this point the
extent of the liability of Teodorica Endencia to the plaintiff by reason of her failure to surrender
the certificate of title and to place the plaintiff in possession.
It should in the first place be noted that the liability of Teodorica Endencia for damages resulting
from the breach of her contract with Daywalt was a proper subject for adjudication in the action
for specific performance which Daywalt instituted against her in 1909 and which was litigated by
him to a successful conclusion in this court, but without obtaining any special adjudication with
reference to damages. Indemnification for damages resulting from the breach of a contract is a
right inseparably annexed to every action for the fulfillment of the obligation (art. 1124, Civil
Code); and its is clear that if damages are not sought or recovered in the action to enforce
performance they cannot be recovered in an independent action. As to Teodorica Endencia,
therefore, it should be considered that the right of action to recover damages for the breach of
the contract in question was exhausted in the prior suit. However, her attorneys have not seen fit
to interpose the defense of res judicata in her behalf; and as the defendant corporation was not
a party to that action, and such defense could not in any event be of any avail to it, we proceed
to consider the question of the liability of Teodorica Endencia for damages without refernce to
this point.
The most that can be said with refernce to the conduct of Teodorica Endencia is that she
refused to carry out a contract for the sale of certain land and resisted to the last an action for
specific performance in court. The result was that the plaintiff was prevented during a period of
several years from exerting that control over the property which he was entitled to exert and was
meanwhile unable to dispose of the property advantageously. Now, what is the measure of
damages for the wrongful detention of real property by the vender after the time has come for
him to place the purchaser in possession?
The damages ordinarily and normally recoverable against a vendor for failure to deliver land
which he has contracted to deliver is the value of the use and occupation of the land for the time
during which it is wrongfully withheld. And of course where the purchaser has not paid the
purchaser money, a deduction may be made in respect to the interest on the money which
constitutes the purchase price. Substantially the same rule holds with respect to the liability of a
landlord who fails to put his tenant in possession pursuant to contract of lease. The measure of
damages is the value of the leasehold interest, or use and occupation, less the stipulated rent,
where this has not been paid. The rule that the measure of damages for the wrongful detention
of land is normally to be found in the value of use and occupation is, we believe, one of the
things that may be considered certain in the law (39 cyc., 1630; 24 Cyc., 1052 Sedgewick on
Damages, Ninth ed., sec. 185.) — almost as wellsettled, indeed, as the rule that the measure of
damages for the wrongful detention of money is to be found in the interest.
We recognize the possibility that more extensive damages may be recovered where, at the time
of the creation of the contractual obligation, the vendor, or lessor, is aware of the use to which
the purchaser or lessee desires to put the property which is the subject of the contract, and the
contract is made with the eyes of the vendor or lessor open to the possibility of the damage
which may result to the other party from his own failure to give possession. The case before us
is not this character, inasmuch as at the time when the rights of the parties under the contract
were determined, nothing was known to any to them about the San Francisco capitalist who
would be willing to back the project portrayed in Exhibit C.
The extent of the liability for the breach of a contract must be determined in the light of the
situation in existence at the time the contract is made; and the damages ordinarily recoverable
are in all events limited to such as might be reasonable are in all events limited to such as might
be reasonably foreseen in the light of the facts then known to the contracting parties. Where the
purchaser desires to protect himself, in the contingency of the failure of the vendor promptly to
give possession, from the possibility of incurring other damages than such as the incident to the
normal value of the use and occupation, he should cause to be inserted in the contract a clause
providing for stipulated amount to the paid upon failure of the vendor to give possession; and not
case has been called to our attention where, in the absence of such a stipulation, damages have
been held to be recoverable by the purchaser in excess of the normal value of use and
occupation. On the contrary, the most fundamental conceptions of the law relative to the
assessment of damages are inconsistent with such idea.
The principles governing this branch of the law were profoundly considered in the case
Hadley vs. Baxendale (9 Exch., 341), decided in the English Court of Exchequer in 1854; and a
few words relative to the principles governing will here be found instructive. The decision in that
case is considered a leading authority in the jurisprudence of the common law. The plaintiffs in
that case were proprietors of a mill in Gloucester, which was propelled by steam, and which was
engaged in grinding and supplying meal and flour to customers. The shaft of the engine got
broken, and it became necessarily that the broken shaft be sent to an engineer or foundry man
at Greenwich, to serve as a model for casting or manufacturing another that would fit into the
machinery. The broken shaft could be delivered at Greenwich on the second day after its
receipts by the carrier it. It was delivered to the defendants, who were common carriers engaged
in that business between these points, and who had told plaintiffs it would be delivered at
Greenwich on the second day after its delivery to them, if delivered at a given hour. The carriers
were informed that the mill was stopped, but were not informed of the special purpose for which
the broken shaft was desired to forwarded, They were not told the mill would remain idle until the
new shaft would be returned, or that the new shaft could not be manufactured at Greenwich until
the broken one arrived to serve as a model. There was delay beyond the two days in delivering
the broken shaft at Greenwich, and a corresponding delay in starting the mill. No explanation of
the delay was offered by the carriers. The suit was brought to recover damages for the lost
profits of the mill, cause by the delay in delivering the broken shaft. It was held that the plaintiff
could not recover.
The discussion contained in the opinion of the court in that case leads to the conclusion that the
damages recoverable in case of the breach of a contract are two sorts, namely, (1) the ordinary,
natural, and in a sense necessary damage; and (2) special damages.
Ordinary damages is found in all breaches of contract where the are no special circumstances to
distinguish the case specially from other contracts. The consideration paid for an unperformed
promise is an instance of this sort of damage. In all such cases the damages recoverable are
such as naturally and generally would result from such a breach, "according to the usual course
of things." In case involving only ordinary damage no discussion is ever indulged as to whether
that damage was contemplated or not. This is conclusively presumed from the immediateness
and inevitableness of the damage, and the recovery of such damage follows as a necessary
legal consequence of the breach. Ordinary damage is assumed as a matter of law to be within
the contemplation of the parties.

Special damage, on the other hand, is such as follows less directly from the breach than
ordinary damage. It is only found in case where some external condition, apart from the actual
terms to the contract exists or intervenes, as it were, to give a turn to affairs and to increase
damage in a way that the promisor, without actual notice of that external condition, could not
reasonably be expected to foresee. Concerning this sort of damage, Hadley vs. Baxendale
(1854) [supra] lays down the definite and just rule that before such damage can be recovered
the plaintiff must show that the particular condition which made the damage a possible and likely
consequence of the breach was known to the defendant at the time the contract was made.

The statement that special damages may be recovered where the likelihood of such damages
flowing from the breach of the contract is contemplated and foreseen by the parties needs to be
supplemented by a proposition which, though not enunciated in Hadley vs. Baxendale, is yet
clearly to be drawn from subsequent cases. This is that where the damage which a plaintiff
seeks to recover as special damage is so far speculative as to be in contemplation of law
remote, notification of the special conditions which make that damage possible cannot render
the defendant liable therefor. To bring damages which would ordinarily be treated as remote
within the category of recoverable special damages, it is necessary that the condition should be
made the subject of contract in such sense as to become an express or implied term of the
engagement. Horne vs. Midland R. Co. (L. R., 8 C. P., 131) is a case where the damage which
was sought to be recovered as special damage was really remote, and some of the judges
rightly places the disallowance of the damage on the ground that to make such damage
recoverable, it must so far have been within the contemplation of the parties as to form at least
an implied term of the contract. But others proceeded on the idea that the notice given to the
defendant was not sufficiently full and definite. The result was the same in either view. The facts
in that case were as follows: The plaintiffs, shoe manufacturers at K, were under contract to
supply by a certain day shoes to a firm in London for the French government. They delivered the
shoes to a carrier in sufficient time for the goods to reach London at the time stipulated in the
contract and informed the railroad agent that the shoes would be thrown back upon their hands if
they did not reach the destination in time. The defendants negligently failed to forward the good
in due season. The sale was therefore lost, and the market having fallen, the plaintiffs had to sell
at a loss.

In the preceding discussion we have considered the plaintiff's right chiefly against Teodorica
Endencia; and what has been said suffices in our opinion to demonstrate that the damages laid
under the second cause of action in the complaint could not be recovered from her, first,
because the damages laid under the second cause of action in the complaint could not be
recovered from her, first, because the damages in question are special damages which were not
within contemplation of the parties when the contract was made, and secondly, because said
damages are too remote to be the subject of recovery. This conclusion is also necessarily fatal
to the right of the plaintiff to recover such damages from the defendant corporation, for, as
already suggested, by advising Teodorica not to perform the contract, said corporation could in
no event render itself more extensively liable than the principle in the contract.

Our conclusion is that the judgment of the trial court should be affirmed, and it is so ordered, with
costs against the appellant.
 G.R. No. L-9356 February 18, 1915
C. S. GILCHRIST, plaintiff-appellee,
vs.
E. A. CUDDY, ET AL., defendants.
JOSE FERNANDEZ ESPEJO and MARIANO ZALDARRIAGA, appellants.
TRENT, J.:
An appeal by the defendants, Jose Fernandez Espejo and Mariano Zaldarriaga, from a judgment
of the Court of First Instance of Iloilo, dismissing their cross-complaint upon the merits for
damages against the plaintiff for the alleged wrongful issuance of a mandatory and a preliminary
injunction.
Upon the application of the appellee an ex parte mandatory injunction was issued on the 22d of
May, 1913, directing the defendant, E. A. Cuddy, to send to the appellee a certain
cinematograph film called "Zigomar" in compliance with an alleged contract which had been
entered into between these two parties, and at the time an ex parte preliminary injunction was
issued restraining the appellants from receiving and exhibiting in their theater the Zigomar until
further orders of the court. On the 26th of that month the appellants appeared and moved the
court to dissolve the preliminary injunction. When the case was called for trial on August 6, the
appellee moved for the dismissal of the complaint "for the reason that there is no further
necessity for the maintenance of the injunction." The motion was granted without objection as to
Cuddy and denied as to the appellants in order to give them an opportunity to prove that the
injunction were wrongfully issued and the amount of damages suffered by reason thereof.
The pertinent part of the trial court's findings of fact in this case is as follows:
It appears in this case that Cuddy was the owner of the film Zigomar and that on the
24th of April he rented it to C. S. Gilchrist for a week for P125, and it was to be
delivered on the 26th of May, the week beginning that day. A few days prior to this
Cuddy sent the money back to Gilchrist, which he had forwarded to him in Manila,
saying that he had made other arrangements with his film. The other arrangements
was the rental to these defendants Espejo and his partner for P350 for the week and
the injunction was asked by Gilchrist against these parties from showing it for the
week beginning the 26th of May.
It appears from the testimony in this case, conclusively, that Cuddy willfully violated
his contract, he being the owner of the picture, with Gilchrist because the defendants
had offered him more for the same period. Mr. Espejo at the trial on the permanent
injunction on the 26th of May admitted that he knew that Cuddy was the owner of the
film. He was trying to get it through his agents Pathe Brothers in Manila. He is the
agent of the same concern in Iloilo. There is in evidence in this case on the trial today
as well as on the 26th of May, letters showing that the Pathe Brothers in Manila
advised this man on two different occasions not to contend for this film Zigomar
because the rental price was prohibitive and assured him also that he could not get
the film for about six weeks. The last of these letters was written on the 26th of April,
which showed conclusively that he knew they had to get this film from Cuddy and from
this letter that the agent in Manila could not get it, but he made Cuddy an offer himself
and Cuddy accepted it because he was paying about three times as much as he had
contracted with Gilchrist for. Therefore, in the opinion of this court, the defendants
failed signally to show the injunction against the defendant was wrongfully procured.
The appellants duly excepted to the order of the court denying their motion for new trial on the
ground that the evidence was insufficient to justify the decision rendered. There is lacking from
the record before us the deposition of the defendant Cuddy, which apparently throws light upon
a contract entered into between him and the plaintiff Gilchrist. The contents of this deposition are
discussed at length in the brief of the appellants and an endeavor is made to show that no such
contract was entered into. The trial court, which had this deposition before it, found that there
was a contract between Cuddy and Gilchrist. Not having the deposition in question before us, it
is impossible to say how strongly it militates against this findings of fact. By a series of decisions
we have construed section 143 and 497 (2) of the Code of Civil Procedure to require the
production of all the evidence in this court. This is the duty of the appellant and, upon his failure
to perform it, we decline to proceed with a review of the evidence. In such cases we rely entirely
upon the pleadings and the findings of fact of the trial court and examine only such assigned
errors as raise questions of law. (Ferrer vs. Neri Abejuela, 9 Phil. Rep., 324; Valle vs. Galera, 10
Phil. Rep., 619; Salvacion vs. Salvacion, 13 Phil. Rep., 366; Breta vs. Smith, Bell & Co., 15 Phil.
Rep., 446; Arroyo vs. Yulo, 18 Phil. Rep., 236; Olsen & Co. vs. Matson, Lord & Belser Co., 19
Phil. Rep., 102; Blum vs. Barretto, 19 Phil. Rep., 161; Cuyugan vs. Aguas, 19 Phil. Rep., 379;
Mapa vs. Chaves, 20 Phil. Rep., 147; Mans vs. Garry, 20 Phil. Rep., 134.) It is true that some of
the more recent of these cases make exceptions to the general rule. Thus, in Olsen &
Co. vs. Matson, Lord & Belser Co., (19 Phil. Rep., 102), that portion of the evidence before us
tended to show that grave injustice might result from a strict reliance upon the findings of fact
contained in the judgment appealed from. We, therefore, gave the appellant an opportunity to
explain the omission. But we required that such explanation must show a satisfactory reason for
the omission, and that the missing portion of the evidence must be submitted within sixty days or
cause shown for failing to do so. The other cases making exceptions to the rule are based upon
peculiar circumstances which will seldom arise in practice and need not here be set forth, for the
reason that they are wholly inapplicable to the present case. The appellants would be entitled to
indulgence only under the doctrine of the Olsen case. But from that portion of the record before
us, we are not inclined to believe that the missing deposition would be sufficient to justify us in
reversing the findings of fact of the trial court that the contract in question had been made. There
is in the record not only the positive and detailed testimony of Gilchrist to this effect, but there is
also a letter of apology from Cuddy to Gilchrist in which the former enters into a lengthy
explanation of his reasons for leasing the film to another party. The latter could only have been
called forth by a broken contract with Gilchrist to lease the film to him. We, therefore, fail to find
any reason for overlooking the omission of the defendants to bring up the missing portion of the
evidence and, adhering to the general rule above referred to, proceed to examine the questions
of law raised by the appellants.
From the above-quoted findings of fact it is clear that Cuddy, a resident of Manila, was the owner
of the "Zigomar;" that Gilchrist was the owner of a cinematograph theater in Iloilo; that in
accordance with the terms of the contract entered into between Cuddy and Gilchrist the former
leased to the latter the "Zigomar" for exhibition in his (Gilchrist's) theater for the week beginning
May 26, 1913; and that Cuddy willfully violate his contract in order that he might accept the
appellant's offer of P350 for the film for the same period. Did the appellants know that they were
inducing Cuddy to violate his contract with a third party when they induced him to accept the
P350? Espejo admitted that he knew that Cuddy was the owner of the film. He received a letter
from his agents in Manila dated April 26, assuring him that he could not get the film for about six
weeks. The arrangement between Cuddy and the appellants for the exhibition of the film by the
latter on the 26th of May were perfected after April 26, so that the six weeks would include and
extend beyond May 26. The appellants must necessarily have known at the time they made their
offer to Cuddy that the latter had booked or contracted the film for six weeks from April 26.
Therefore, the inevitable conclusion is that the appellants knowingly induced Cuddy to violate his
contract with another person. But there is no specific finding that the appellants knew the identity
of the other party. So we must assume that they did not know that Gilchrist was the person who
had contracted for the film.
The appellants take the position that if the preliminary injunction had not been issued against
them they could have exhibited the film in their theater for a number of days beginning May 26,
and could have also subleased it to other theater owners in the nearby towns and, by so doing,
could have cleared, during the life of their contract with Cuddy, the amount claimed as damages.
Taking this view of the case, it will be unnecessary for us to inquire whether the mandatory
injunction against Cuddy was properly issued or not. No question is raised with reference to the
issuance of that injunction.
The right on the part of Gilchrist to enter into a contract with Cuddy for the lease of the film must
be fully recognized and admitted by all. That Cuddy was liable in an action for damages for the
breach of that contract, there can be no doubt. Were the appellants likewise liable for interfering
with the contract between Gilchrist and Cuddy, they not knowing at the time the identity of one of
the contracting parties? The appellants claim that they had a right to do what they did. The
ground upon which the appellants base this contention is, that there was no valid and binding
contract between Cuddy and Gilchrist and that, therefore, they had a right to compete with
Gilchrist for the lease of the film, the right to compete being a justification for their acts. If there
had been no contract between Cuddy and Gilchrist this defense would be tenable, but the mere
right to compete could not justify the appellants in intentionally inducing Cuddy to take away the
appellee's contractual rights.
Chief Justice Wells in Walker vs. Cronin (107 Mass., 555), said: "Everyone has a right to enjoy
the fruits and advantages of his own enterprise, industry, skill and credit. He has no right to be
free from malicious and wanton interference, disturbance or annoyance. If disturbance or loss
come as a result of competition, or the exercise of like rights by others, it is damnum absque
injuria, unless some superior right by contract or otherwise is interfered with."
In Read vs. Friendly Society of Operative Stonemasons ([1902] 2 K. B., 88), Darling, J., said: "I
think the plaintiff has a cause of action against the defendants, unless the court is satisfied that,
when they interfered with the contractual rights of plaintiff, the defendants had a sufficient
justification for their interference; . . . for it is not a justification that `they acted bona fide in the
best interests of the society of masons,' i. e., in their own interests. Nor is it enough that `they
were not actuated by improper motives.' I think their sufficient justification for interference with
plaintiff's right must be an equal or superior right in themselves, and that no one can legally
excuse himself to a man, of whose contract he has procured the breach, on the ground that he
acted on a wrong understanding of his own rights, or without malice, or bona fide, or in the best
interests of himself, or even that he acted as an altruist, seeking only good of another and
careless of his own advantage." (Quoted with approval in Beekman vs. Marsters, 195 Mass.,
205.)
It is said that the ground on which the liability of a third party for interfering with a contract
between others rests, is that the interference was malicious. The contrary view, however, is
taken by the Supreme Court of the United States in the case of Angle vs. Railway Co. (151 U.
S., 1). The only motive for interference by the third party in that case was the desire to make a
profit to the injury of one of the parties of the contract. There was no malice in the case beyond
the desire to make an unlawful gain to the detriment of one of the contracting parties.
In the case at bar the only motive for the interference with the Gilchrist — Cuddy contract on the
part of the appellants was a desire to make a profit by exhibiting the film in their theater. There
was no malice beyond this desire; but this fact does not relieve them of the legal liability for
interfering with that contract and causing its breach. It is, therefore, clear, under the above
authorities, that they were liable to Gilchrist for the damages caused by their acts, unless they
are relieved from such liability by reason of the fact that they did not know at the time the identity
of the original lessee (Gilchrist) of the film.
The liability of the appellants arises from unlawful acts and not from contractual obligations, as
they were under no such obligations to induce Cuddy to violate his contract with Gilchrist. So
that if the action of Gilchrist had been one for damages, it would be governed by chapter 2, title
16, book 4 of the Civil Code. Article 1902 of that code provides that a person who, by act or
omission, causes damages to another when there is fault or negligence, shall be obliged to
repair the damage do done. There is nothing in this article which requires as a condition
precedent to the liability of a tort-feasor that he must know the identity of a person to whom he
causes damages. In fact, the chapter wherein this article is found clearly shows that no such
knowledge is required in order that the injured party may recover for the damage suffered.
But the fact that the appellants' interference with the Gilchrist contract was actionable did not of
itself entitle Gilchrist to sue out an injunction against them. The allowance of this remedy must
be justified under section 164 of the Code of Civil Procedure, which specifies the circumstance
under which an injunction may issue. Upon the general doctrine of injunction we said in
Devesa vs. Arbes (13 Phil. Rep., 273):
An injunction is a "special remedy" adopted in that code (Act No. 190) from American
practice, and originally borrowed from English legal procedure, which was there
issued by the authority and under the seal of a court of equity, and limited, as in order
cases where equitable relief is sought, to cases where there is no "plain, adequate,
and complete remedy at law," which "will not be granted while the rights between the
parties are undetermined, except in extraordinary cases where material and
irreparable injury will be done," which cannot be compensated in damages, and where
there will be no adequate remedy, and which will not, as a rule, be granted, to take
property out of the possession of one party and put it into that of another whose title
has not been established by law.
We subsequently affirmed the doctrine of the Devesa case in Palafox vs. Madamba (19 Phil.,
Rep., 444), and we take this occasion of again affirming it, believing, as we do, that the
indiscriminate use of injunctions should be discouraged.
Does the fact that the appellants did not know at the time the identity of the original lessee of the
film militate against Gilchrist's right to a preliminary injunction, although the appellant's incurred
civil liability for damages for such interference? In the examination of the adjudicated cases,
where in injunctions have been issued to restrain wrongful interference with contracts by
strangers to such contracts, we have been unable to find any case where this precise question
was involved, as in all of those cases which we have examined, the identity of both of the
contracting parties was known to the tort-feasors. We might say, however, that this fact does not
seem to have a controlling feature in those cases. There is nothing in section 164 of the Code of
Civil Procedure which indicates, even remotely, that before an injunction may issue restraining
the wrongful interference with contrast by strangers, the strangers must know the identity of both
parties. It would seem that this is not essential, as injunctions frequently issue against municipal
corporations, public service corporations, public officers, and others to restrain the commission
of acts which would tend to injuriously affect the rights of person whose identity the respondents
could not possibly have known beforehand. This court has held that in a proper case injunction
will issue at the instance of a private citizen to restrain ultra vires acts of public officials.
(Severino vs. Governor-General, 16 Phil. Rep., 366.) So we proceed to the determination of the
main question of whether or not the preliminary injunction ought to have been issued in this
case.
As a rule, injunctions are denied to those who have an adequate remedy at law. Where the
choice is between the ordinary and the extraordinary processes of law, and the former are
sufficient, the rule will not permit the use of the latter. (In re Debs, 158 U. S., 564.) If the injury is
irreparable, the ordinary process is inadequate. In Wahle vs. Reinbach (76 Ill., 322), the
supreme court of Illinois approved a definition of the term "irreparable injury" in the following
language: "By `irreparable injury' is not meant such injury as is beyond the possibility of repair,
or beyond possible compensation in damages, nor necessarily great injury or great damage, but
that species of injury, whether great or small, that ought not to be submitted to on the one hand
or inflicted on the other; and, because it is so large on the one hand, or so small on the other, is
of such constant and frequent recurrence that no fair or reasonable redress can be had therefor
in a court of law." (Quoted with approval in Nashville R. R. Co. vs. McConnell, 82 Fed., 65.)
The case at bar is somewhat novel, as the only contract which was broken was that between
Cuddy and Gilchrist, and the profits of the appellee depended upon the patronage of the public,
for which it is conceded the appellants were at liberty to complete by all fair does not deter the
application of remarked in the case of the "ticket scalpers" (82 Fed., 65), the novelty of the facts
does not deter the application of equitable principles. This court takes judicial notice of the
general character of a cinematograph or motion-picture theater. It is a quite modern form of the
play house, wherein, by means of an apparatus known as a cinematograph or cinematograph, a
series of views representing closely successive phases of a moving object, are exhibited in rapid
sequence, giving a picture which, owing to the persistence of vision, appears to the observer to
be in continuous motion. (The Encyclopedia Britanica, vol. 6, p. 374.) The subjects which have
lent themselves to the art of the photographer in this manner have increased enormously in
recent years, as well as have the places where such exhibition are given. The attendance, and,
consequently, the receipts, at one of these cinematograph or motion-picture theaters depends in
no small degree upon the excellence of the photographs, and it is quite common for the
proprietor of the theater to secure an especially attractive exhibit as his "feature film" and
advertise it as such in order to attract the public. This feature film is depended upon to secure a
larger attendance that if its place on the program were filled by other films of mediocre quality. It
is evident that the failure to exhibit the feature film will reduce the receipts of the theater.
Hence, Gilchrist was facing the immediate prospect of diminished profits by reason of the fact
that the appellants had induced Cuddy to rent to them the film Gilchrist had counted upon as his
feature film. It is quite apparent that to estimate with any decree of accuracy the damages which
Gilchrist would likely suffer from such an event would be quite difficult if not impossible. If he
allowed the appellants to exhibit the film in Iloilo, it would be useless for him to exhibit it again,
as the desire of the public to witness the production would have been already satisfied. In this
extremity, the appellee applied for and was granted, as we have indicated, a mandatory
injunction against Cuddy requiring him to deliver the Zigomar to Gilchrist, and a preliminary
injunction against the appellants restraining them from exhibiting that film in their theater during
the weeks he (Gilchrist) had a right to exhibit it. These injunction saved the plaintiff harmless
from damages due to the unwarranted interference of the defendants, as well as the difficult task
which would have been set for the court of estimating them in case the appellants had been
allowed to carry out their illegal plans. As to whether or not the mandatory injunction should have
been issued, we are not, as we have said, called upon to determine. So far as the preliminary
injunction issued against the appellants is concerned, which prohibited them from exhibiting the
Zigomar during the week which Gilchrist desired to exhibit it, we are of the opinion that the
circumstances justified the issuance of that injunction in the discretion of the court.
We are not lacking in authority to support our conclusion that the court was justified in issuing
the preliminary injunction against the appellants. Upon the precise question as to whether
injunction will issue to restrain wrongful interference with contracts by strangers to such
contracts, it may be said that courts in the United States have usually granted such relief where
the profits of the injured person are derived from his contractual relations with a large and
indefinite number of individuals, thus reducing him to the necessity of proving in an action
against the tort-feasor that the latter was responsible in each case for the broken contract, or
else obliging him to institute individual suits against each contracting party and so exposing him
to a multiplicity of suits. Sperry & Hutchinson Co. vs. Mechanics' Clothing Co. (128 Fed., 800);
Sperry & Hutchinson Co. vs. Louis Weber & Co. (161 Fed., 219); Sperry & Hutchinson
Co. vs. Pommer (199 Fed., 309); were all cases wherein the respondents were inducing retail
merchants to break their contracts with the company for the sale of the latters' trading stamps.
Injunction issued in each case restraining the respondents from interfering with such contracts.
In the case of the Nashville R. R. Co. vs. McConnell (82 Fed., 65), the court, among other
things, said: "One who wrongfully interferes in a contract between others, and, for the purpose of
gain to himself induces one of the parties to break it, is liable to the party injured thereby; and his
continued interference may be ground for an injunction where the injuries resulting will be
irreparable."
In Hamby & Toomer vs. Georgia Iron & Coal Co. (127 Ga., 792), it appears that the respondents
were interfering in a contract for prison labor, and the result would be, if they were successful,
the shutting down of the petitioner's plant for an indefinite time. The court held that although
there was no contention that the respondents were insolvent, the trial court did not abuse its
discretion in granting a preliminary injunction against the respondents.
In Beekman vs. Marsters (195 Mass., 205), the plaintiff had obtained from the Jamestown Hotel
Corporation, conducting a hotel within the grounds of the Jamestown Exposition, a contract
whereby he was made their exclusive agent for the New England States to solicit patronage for
the hotel. The defendant induced the hotel corporation to break their contract with the plaintiff in
order to allow him to act also as their agent in the New England States. The court held that an
action for damages would not have afforded the plaintiff adequate relief, and that an injunction
was proper compelling the defendant to desist from further interference with the plaintiff's
exclusive contract with the hotel company.
In Citizens' Light, Heat & Power Co. vs. Montgomery Light & Water Power Co. (171 Fed., 553),
the court, while admitting that there are some authorities to the contrary, held that the current
authority in the United States and England is that:
The violation of a legal right committed knowingly is a cause of action, and that it is a
violation of a legal right to interfere with contractual relations recognized by law, if
there be no sufficient justification for the interference. (Quinn vs. Leatham, supra, 510;
Angle vs. Chicago, etc., Ry. Co., 151 U. S., 1; 14 Sup. Ct., 240; 38 L. Ed., 55;
Martens vs. Reilly, 109 Wis., 464, 84 N. W., 840; Rice vs. Manley, 66 N. Y., 82; 23
Am. Rep., 30; Bitterman vs. L. & N. R. R. Co., 207 U. S., 205; 28 Sup. Ct., 91; 52 L.
Ed., 171; Beekman vs. Marsters, 195 Mass., 205; 80 N. E., 817; 11 L. R. A. [N. S.]
201; 122 Am. St. Rep., 232; South Wales Miners' Fed. vs. Glamorgan Coal Co.,
Appeal Cases, 1905, p. 239.)
See also Nims on Unfair Business Competition, pp. 351- 371.
In 3 Elliot on Contracts, section 2511, it is said: "Injunction is the proper remedy to prevent a
wrongful interference with contract by strangers to such contracts where the legal remedy is
insufficient and the resulting injury is irreparable. And where there is a malicious interference
with lawful and valid contracts a permanent injunction will ordinarily issue without proof of
express malice. So, an injunction may be issued where the complainant to break their contracts
with him by agreeing to indemnify who breaks his contracts of employment may be adjoined
from including other employees to break their contracts and enter into new contracts with a new
employer of the servant who first broke his contract. But the remedy by injunction cannot be
used to restrain a legitimate competition, though such competition would involve the violation of
a contract. Nor will equity ordinarily enjoin employees who have quit the service of their
employer from attempting by proper argument to persuade others from taking their places so
long as they do not resort to force or intimidations on obstruct the public thoroughfares."
Beekman vs. Marster, supra, is practically on all fours with the case at bar in that there was only
one contract in question and the profits of the injured person depended upon the patronage of
the public. Hamby & Toomer vs. Georgia Iron & Coal Co., supra, is also similar to the case at
bar in that there was only one contract, the interference of which was stopped by injunction.

For the foregoing reasons the judgment is affirmed, with costs, against the appellants.
 G.R. No. L-8437 November 28, 1956
ESTATE OP K. H. HBMADY, Deceased,
vs.
LUZON SURETY CO., INC. Claimant and Appellant.
DECISION
REYES, J.B.L., J.:
Appeal by Luzon Surety Co., Inc., from an order of the Court of First Instance of Rizal, presided
by Judge Hermogenes Caluag, dismissing its claim against the Estate of K. H. Hemady (Special
roceeding No. Q-293) for failure to state a cause of action.
The Luzon Surety Co. had filed a claim against the Estate based on twenty different indemnity
agreements, or counter bonds, each subscribed by a distinct principal and by the deceased K.
H. Hemady, a surety solidary guarantor) in all of them, in consideration of the Luzon Surety Co.'s
of having guaranteed, the various principals in favor of different creditors. The twenty
counterbonds, or indemnity agreements, all contained the following stipulations:
"Premiums. As consideration for this suretyship, the undersigned jointly and severally, agree to
pay the COMPANY the sum of _________________(P_____________) pesos, Philippines '
Currency, in advance as premium there of for every _______________ months or fractions
thereof, this ___________ or any renewal or substitution thereof is in effect.
Indemnity. The undersigned, jointly and severally, agree at all times to indemnify the company
and keep it indemnified and hold and save it harmless from and against any and all damages,
losses, coats, stamps, taxes, penalties, charges, and expenses of whatsoever kind and nature
which the company shall or may, at any time sustain or incur in consequence of having become
surety upon this bond or any extension, renewal, substitution or alteration thereof made at the
instance of the undersigned or any of them or any order executed on behalf of the undersigned
or any of them; and to pay, reimburse and make good to the company, its successors and
assigns, all sums and amount of money which it or its representatives shall pay or cause to be
paid, or become liable to pay, on account of the undersigned or any of them, of whatsoever kind
and nature, including 15% of the amount involved in the litigation or other matters growing out of
or connected therewith for counsel or attorney's fees, but in no case less than P25. It
is hereby further agreed that in case of extension or renewal of this ___________we equally
bind ourselves for the payment thereof under the same terms and conditions as above
mentioned without the necessity of executing another indemnity agreement for the purpose and
that we hereby equally waive our right to be notified of any renewal or extension of
this____________ which may be granted under this indemnity agreement.
Interest on amount paid by the Company. Any and all sums of money so paid by the company
shall bear interest at the rate of 12% per annum which interest, if not paid, will be accummulated
and added to the capital quarterly order to earn, the same interests as the capital and the total
sum thereof, the capital and interest, shall be paid to the Company as soon as the Company
shall have become liable therefore, whether it shall have paid out such sums of money or any
part thereof or not.
* * * * * * * While in our successional system the responsibility of the heirs for the debts of their decedent
Waiver. It is hereby agreed upon by and between the undersigned that any question which may
arise between them by reason of this document and which has to be submitted for decision to
Courts of Justice shall be brought before the Court of competent jurisdiction in the City of Manila,
waiving for this purpose any other venue. Our right to be notified of the acceptance and approval
of this indemnity agreement is hereby likewise waived.
* * * * * * * death to another or others either by his will or by operation of law."
Our Liability Hereunder. It shall not be necessary for the Company to bring suit .against the
principal upon his default, or to exhaust the property of the principal, but the liability hereunder of
the undersigned indemnitor shall be jointly and severally, a primary one, the same as that of the
principal, and shall be exigible immediately upon the occurrence of such default." (Rec. App.
pp. 98-102.)
The Luzon Surety Co., prayed for allowance, as a contingent claim, of the value of the twenty
bonds it had executed in consideration of the counterbonds, and further asked for judgment for
the unpaid premiums and documentary stamps affixed to the bonds, with 12 per cent interest
thereon
Before answer was filed, and upon motion of the administratrix of Hemady's estate, the lower
court, by order of September 23, 1953, dismissed the claims of Luzon Surety Co., on two
grounds: (1) that the premiums due and cost of documentary stamps were not contemplated
under the indemnity agreements to be a part of the undertaking of the guarantor (Hemady),
since they were not liabilities incurred after the execution of the counter-bonds; and (2) that
"whatever losses may occur after Hemady's death, .are not chargeable to his estate, because
upon his death he ceased to be guarantor."
Taking up the latter point first, since it is the one more far reaching in effects, the reasoning of
the court below ran as follows:
"The administratrix further contends that upon the death of Hemady, his liability as a guarantor
terminated, and therefore, in the absence of a showing that a loss or damage was suffered, the
claim cannot be considered contingent. This Court believes that there is merit in this contention
and finds support in Article 2046 of the new Civil Code. It should be noted that a new
requirement has been added for a person to qualify as a guarantor, that is: integrity. As correctly
pointed out by the Administratrix, integrity is something purely personal and is not transmissible.
Upon the death of Hemady, his integrity was not transmitted to his estate or successors.
Whatever loss therefore, may occur after Hemady's death, are not chargeable to his estate
because upon his death he ceased to be a guarantor.
Another clear and strong indication that the surety company has exclusively relied on the
personality, character, honesty and integrity of the now deceased K. H. Hemady, was the fact
that in the printed form of the indemnity agreement there is a paragraph entitled 'Security by way
of first mortgage, which was expressly waived and renounced by the security company. The
security company has not demanded from K. H. Hemady to comply with this requirement of
giving security by way of firat mortgage. In the supporting papers of the claim presented by
Luzon Surety Company, no real property was mentioned in the list of properties mortgaged
which appears at the back of the indemnity agreement." (Rec. App., pp. 407 408).
We find this reasoning untenable. Under the present Civil Code (Article 1311), as well as under
the Civil Code of 1889 (Article 1257), the rule is that:-
"Contracts take effect only as between the parties, their assigns and heirs, except in the case
where the rights and obligations arising from the contract are not transmissible by their nature,
or by stipulation or by provision of law."
cannot exceed the value of the inheritance they receive from him, the principle remains intact
that these heirs succeed not only to the rights of the deceased but also to his obligations.
Articles 774 and 776 of the New Civil Code (and Articles 659 and 661 of the preceding one)
expressely so provide, thereby confirming Article 1311 already qouted.
"Art. 774. Succession is a mode of acquisition by virtue of which the property, rights and
obligations to the extent of the value of the inheritance, of a person are transmitted through his
"Art. 776, The inheritance includes all the property, rights and obligations of a person which are
not extinguished by his death."
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court ruled:
"Under the Civil Code the heirs, by virtue of the rights of succession are subrogated to all the
rights and obligations of the deceased (Article 661) and can not be regarded as third parties with
respect to a contract to which the deceased was a party, touching the estate of the deceased
(Barrios vs. Dolor, 2 Phil. 44).
* * * * * * * tirminos claramente se deduzca la concresion a del concreto a las mismas personas que lo
"The principle on which these decisions rest is not affected by the provisions of the new Code of
Civil Procedure, and, in accordance with that principle, the heirs of a deceased person cannot be
held to be "third persons" in relation to any contracts touching the real estate of their decedent
which comes in to their hands by right of inheritance; they take such property subject to all the
obligations resting thereon in the hands of him from whom they derive their rights."
(See also Galasinao vs. Austria, 51 Off. Gaz. (No. 6) p. 2874 and de Guzman vs. Salak, 91 Phil.,
265).
The binding effect of contracts upon the heirs of the deceased party is not altered by the
provision in our Rules of Court that money debts of a deceased must be liquidated and paid from
his estate before the residue is distributed among said heirs (Rule 89). The reason is that
whatever payment is thus made from the estate is ultimately a payment by the heirs and
distributees, since the amount of the paid claim in fact diminishes or reduces the shares that the
heirs would have been entitled to receive.
Under our law, therefore, the general rule is that a party's contractual rights and obligations are
transmissible to the successors. The rule is a consequence of the progressive
"depersonalization" of patrimonial rights and duties that, as observed by Victorio Polacco, has
characterized the history of these institutions? From the Roman concept of a relation from
person to person, the obligation has evolved into a relation from patrimony to patrimony, with the
persons occupying only a representative position;, barring those rare cases where the obligation
is strictly personal, i.e., is contracted intuitu personae, in consideration of its performance by a
specific person and by no other. The transition is marked by the disappearance of the
imprisonment for debt.
Of the three exceptions fixed by Article 1311, the nature of the obligation of the surety or
guarantor does not warrant the conclusion that his peculiar individual qualities are contemplated
as a principal inducement for the contract. What did the creditor Luzon Surety Co. expect of K.
H. Hemady when it accepted the latter as surety in the counterbonds? Nothing but the
reimbursement of the moneys that the Luzon Surety Co. might have to disburse on account of
the obligations of the principal debtors. This reimbursement is a payment of a sum of money,
resulting from an obligation to give; and to the Luzon Surety Co., it was indifferent that the
reimbursement should be made by Hemady himself or by some one else in his behalf, so long
as the money was paid to it.
The second exception of Article 1311, p. 1, is intransmissibility by stipulation of the parties.
Being exceptional and contrary to the general rule, this intransmissibility should not be easily
implied, but must be expressly established, or at the very least, clearly inferable from the
provisions of the contract itself, and the text of the agreements sued upon nowhere indicate that
they are non-transferable.
"(b) Intransmisibilidad por pacto. Lo general es la transmisibilidad de darechos y
obligaciones; le excepcion, la intransmisibilidad. Mientras nada se diga en contrario impera
el principio de la transmision, como elemento natural a toda relacion juridical salvo las
personalisimas. Asi, para la no transmision, es menester el pacto expreso, porque si no, lo
convenido ehtre partes trasciende a sus herederos.
Siendo estos los continuadores de la personalidad del causante, sobre ellos recaen los efectos
de los vinculos juridicos creados por sus antecesores, y para evitarld, si asi se quiere, es
indispensable convention terminante en tal sentido.
Por su esencia, el derecho y la obligacion tienden a ir mas alia de las personas que les
dieron vida, y a ejercer presion sobre los sucesores de esa persona; cuando no se quiera
esto, se impone una eetipulacion limitativa expresamente de la transmisibilidad o de cuyos
otorgon." (Scaevola, Oodigo Civil, Tomo XX, p. 541-542) (Italics supplied.)
Because under the law (Article 1311), a person who enters into a contract is deemed to have
contracted for himself and hid heirs and assigns, it is unnecessary for him to expressly stipulate
to that effect; hence, his failure to do so, is no sign that he intended his bargain to terminate
upon his death. Similarly, that the Luzon Surety Co,. did not require bondsman Hemady to
execute a mortgage indicates nothing more than the company's faith and confidence in the
financial stability of the surety, but not that his obligation was strictly personal.
The third exception to the transmissibility of obligations under Article 1311 exists when they are
"not transmissible by operation of law". The provision makes reference to those cases where
the law expresses that the rights or obligations are extinguished by death, as is the case in legal
support (Article 300), parental authority (Article 327), usufruct (Article 603), contracts for a piece
of work (Article 1726), partnership (Article 1830 and agency (Article 1919). By contract, the
articles of the Civil Code that regulate guaranty or suretyship (Articles 2047 to 2084) contain no
provision that the guaranty is extinguished upon the death of the guarantor or the surety.
The lower court sought to infer such a limitation from Art. 2056, to the effect that "one who is
obliged to furnish a guarantor must present a person who possesses integrity, capacity to bind
himself, and sufficient property to answer for the obligation, which he guarantees. It will be
noted, however, that the law requires these qualities to be present only at the time of the
perfection of the contract of guaranty. It is self-evident that once the contract has become
perfected and binding, the supervening incapacity of the guarantor would not operate to
exonerate him of the eventual liability he has contracted; and if that be true of his capacity to
bind himself, it should also be true of his integrity, which is a quality mentioned in the article
alongside the capacity.
The foregoing concept is confirmed by the next Article 2057, that runs as follows:
"ART. 2057. If the guarantor should be convicted in first instance of a crime involving dishonesty
or should become insolvent, the creditor may demand another who has all the qualifications
required in the preceding article. The case is excepted where the creditor has required and
stipulated that a specified person should be guarantor."
From this article it should be immediately apparent that the supervening dishonesty of the
guarantor (that is to say, the disappearance of his integrity after he has become bound)
does not terminate the contract but merely entitles the creditor to demand a replacement of the
guarantor. But the step remains optional in the creditor: it is his right, not his duty; he may
waive it if he chooses, and hold the guarantor to his bargain. Hence Article. 2057 of the present
Civil Code is incompatible with the trial court's stand that the requirement of integrity in the
guarantor or surety makes the latter's undertaking strictly personal, so linked to his individual ity
that the guaranty automatically terminates upon his death.
The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not being
rendered intransmissible due to the nature of the undertaking, nor by the stipulations of the
contracts themselves, nor by provision of law, his eventual liability thereunder necessarily
passed upon his death to his heirs. The conT tracts, therefore, give rise to contingent claims
provable against his estate under section 5, Rule 87 (2 Moran, 1952 ed., p. 437; Gaskell &
Co. vs. Tan Sit, 43 Phil. 810, 814).

"The most common example of the continent claim is that which arises when a person is bound
as surety or guarantor for a principal who is insolvent or dead. Under the ordinary contract of
suretyship the surety has no claim whatever against his principal until he himself pays something
by way of satisfaction upon the obligation which is secured. When he does this, there instantly
arises in favor of the surety the right to compel the principal to exonerate the surety. But until the
surety has contributed something to the payment of the debt, . or has performed the secured
obligation in whole or in part, he has no right of action against anybody no claim that could be
reduced to judgment. (May vs. Vann, 15 Pla., 553; Gibson vs. Mithell, 16 Pla., 519; Maxey vs.
Carter, 10 Yarg. [Tenn.J, 531 Reeves vs. Pulliam, 7 Baxt. [Tenn.], 119; Ernst vs. Nou, 63 Wis.,
134.)"

For defendant administratrix it is averred that the above doctrine refers to a case where the
surety files claims against the estate of the principal debtor; and it is urged that .the rule does not
apply to the case before us, where the late Hemady was a surety, not principal debtor. The
argument evinces a superficial view of the relations between parties. If under the Gaskell ruling,
the Luzon Surety Co., as guarantor, could file a contingent claim against the estate of the
principal debtors if the latter should die, there is absolutely no reason why it could not file such a
claim against the estate of Hemady, since Hemady is a solidary co-debtor of his principals. What
the Luzon Surety Co. may claim from the estate of a principal debtor it may equally claim from
the estate of Hemady, since, in view of the existing solidarity, the latter does not even enjoy the
benefit of exhaustion of the assets of the principal debtor.

The foregoing ruling is of course without prejudice to the remedies of the administratrix against
the principal debtors under Articles 2071 and 2067 of the New Civil Code.

Our conclusion is that the solidary guarantor's liability is not extinguished by his death, and that
in such event, the Luzon Surety Co., had the right to file against the estate a contingent claim for
reimbursement. It becomes unnecessary now to discuss the estate's liability for premiums and
stamp taxes, because irrespective of the solution to this question, the Luzon Surety's claim did
state a cause of action, and its dismissal was erroneous.

Wherefore, the order appealed from is reversed, and the records are ordered remanded to the
court of origin, with instructions to proceed in accordance with law. Costs against the
Administratrix-Appellee. So ordered.
 G.R. No. 120554 September 21, 1999 Mr. So Ping Bun

SO PING BUN, petitioner, 930 Soler Street

vs.
COURT OF APPEALS, TEK HUA ENTERPRISES CORP. and MANUEL C.
Binondo, Manila
TIONG, respondents.

Dear Mr. So,

QUISUMBING, J.:

Due to my closed (sic) business associate (sic) for three decades with your
This petition for certiorari challenges the Decision 1 of the Court of Appeals dated October 10,
late grandfather Mr. So Pek Giok and late father, Mr. So Chong Bon, I
1994, and the Resolution 2 dated June 5, 1995, in CA-G.R. CV No. 38784. The appellate court
allowed you temporarily to use the warehouse of Tek Hua Enterprising
affirmed the decision of the Regional Trial Court of Manila, Branch 35, except for the award of
Corp. for several years to generate your personal business.
attorney's fees, as follows:

Since I decided to go back into textile business, I need a warehouse

WHEREFORE, foregoing considered, the appeal of respondent-appellant
immediately for my stocks. Therefore, please be advised to vacate all your
So Ping Bun for lack of merit is DISMISSED. The appealed decision dated
stocks in Tek Hua Enterprising Corp. Warehouse. You are hereby given 14
April 20, 1992 of the court a quo is modified by reducing the attorney's fees
days to vacate the premises unless you have good reasons that you have
awarded to plaintiff Tek Hua Enterprising Corporation from P500,000.00 to
the right to stay. Otherwise, I will be constrained to take measure to protect
P200,000.00. 3
my interest.

The facts are as follows:

Please give this urgent matter your preferential attention to avoid
inconvenience on your part.
In 1963, Tek Hua Trading Co, through its managing partner, So Pek Giok, entered into lease
agreements with lessor Dee C. Chuan & Sons Inc. (DCCSI). Subjects of four (4) lease contracts
Very truly yours,
were premises located at Nos. 930, 930-Int., 924-B and 924-C, Soler Street, Binondo, Manila.
Tek Hua used the areas to store its textiles. The contracts each had a one-year term. They
provided that should the lessee continue to occupy the premises after the term, the lease shall (Sgd) Manuel C. Tiong
be on a month-to-month basis.
MANUEL C. TIONG
When the contracts expired, the parties did not renew the contracts, but Tek Hua continued to
occupy the premises. In 1976, Tek Hua Trading Co. was dissolved. Later, the original members
President 4
of Tek Hua Trading Co. including Manuel C. Tiong, formed Tek Hua Enterprising Corp., herein
respondent corporation.
Petitioner refused to vacate. On March 4, 1992, petitioner requested formal contracts of lease
So Pek Giok, managing partner of Tek Hua Trading, died in 1986. So Pek Giok's grandson, with DCCSI in favor Trendsetter Marketing. So Ping Bun claimed that after the death of his
petitioner So Ping Bun, occupied the warehouse for his own textile business, Trendsetter grandfather, So Pek Giok, he had been occupying the premises for his textile business and
Marketing. religiously paid rent. DCCSI acceded to petitioner's request. The lease contracts in favor of
Trendsetter were executed.

On August 1, 1989, lessor DCCSI sent letters addressed to Tek Hua Enterprises, informing the
latter of the 25% increase in rent effective September 1, 1989. The rent increase was later on In the suit for injunction, private respondents pressed for the nullification of the lease contracts
reduced to 20% effective January 1, 1990, upon other lessees' demand. Again on December 1, between DCCSI and petitioner. They also claimed damages.
1990, the lessor implemented a 30% rent increase. Enclosed in these letters were new lease
contracts for signing. DCCSI warned that failure of the lessee to accomplish the contracts shall After trial, the trial court ruled:
be deemed as lack of interest on the lessee's part, and agreement to the termination of the
lease. Private respondents did not answer any of these letters. Still, the lease contracts were not
rescinded. WHEREFORE, judgment is rendered:

On March 1, 1991, private respondent Tiong sent a letter to petitioner which reads as follows: 1. Annulling the four Contracts of
Lease (Exhibits A, A-1 to A-3,
inclusive) all dated March 11, 1991,
March 1, 1991 between defendant So Ping Bun,
doing business under the name
and style of "Trendsetter
 Marketing", and defendant Dee C.
Chuan & Sons, Inc. over the
premises located at Nos. 924-B,
924-C, 930 and 930, Int.,
respectively, Soler Street, Binondo
Manila;
2. Making permanent the writ of
preliminary injunction issued by this
Court on June 21, 1991;
3. Ordering defendant So Ping Bun
to pay the aggrieved party, plaintiff
Tek Hua Enterprising Corporation,
the sum of P500,000.00, for
attorney's fees;
4. Dismissing the complaint, insofar
as plaintiff Manuel C. Tiong is
concerned, and the respective
counterclaims of the defendant;
5. Ordering defendant So Ping Bun
to pay the costs of this lawsuit;
This judgment is without prejudice to the rights of plaintiff Tek Hua
Enterprising Corporation and defendant Dee C. Chuan & Sons, Inc. to
negotiate for the renewal of their lease contracts over the premises located
at Nos. 930, 930-Int., 924-B and 924-C Soler Street, Binondo, Manila, under
such terms and conditions as they agree upon, provided they are not
contrary to law, public policy, public order, and morals.
SO ORDERED. 5
Petitioner's motion for reconsideration of the above decision was denied.
On appeal by So Ping Bun, the Court of Appeals upheld the trial court. On motion for
reconsideration, the appellate court modified the decision by reducing the award of attorney's
fees from five hundred thousand (P500,000.00) pesos to two hundred thousand (P200,000.00)
pesos.
Petitioner is now before the Court raising the following issues:
I. WHETHER THE APPELLATE COURT
ERRED IN AFFIRMING THE TRIAL
COURT'S DECISION FINDING SO PING
BUN GUILTY OF TORTUOUS
INTERFERENCE OF CONTRACT?
II. WHETHER THE APPELLATE COURT
ERRED IN AWARDING ATTORNEY'S FEES
OF P200,000.00 IN FAVOR OF PRIVATE
RESPONDENTS.
The foregoing issues involve, essentially, the correct interpretation of the applicable law on
tortuous conduct, particularly unlawful interference with contract. We have to begin, obviously,
with certain fundamental principles on torts and damages.
Damage is the loss, hurt, or harm which results from injury, and damages are the recompense or
compensation awarded for the damage suffered. 6 One becomes liable in an action for damages
for a nontrespassory invasion of another's interest in the private use and enjoyment of asset if
(a) the other has property rights and privileges with respect to the use or enjoyment interfered
with, (b) the invasion is substantial, (c) the defendant's conduct is a legal cause of the invasion,
and (d) the invasion is either intentional and unreasonable or unintentional and actionable under
general negligence rules. 7
The elements of tort interference are: (1) existence of a valid contract; (2) knowledge on the part
of the third person of the existence of contract; and (3) interference of the third person is without
legal justification or excuse. 8
A duty which the law of torts is concerned with is respect for the property of others, and a cause
of action ex delicto may be predicated upon an unlawful interference by one person of the
enjoyment by the other of his private
property.9 This may pertain to a situation where a third person induces a party to renege on or
violate his undertaking under a contract. In the case before us, petitioner's Trendsetter
Marketing asked DCCSI to execute lease contracts in its favor, and as a result petitioner
deprived respondent corporation of the latter's property right. Clearly, and as correctly viewed by
the appellate court, the three elements of tort interference above-mentioned are present in the
instant case.
Authorities debate on whether interference may be justified where the defendant acts for the
sole purpose of furthering his own financial or economic interest. 10 One view is that, as a
general rule, justification for interfering with the business relations of another exists where the
actor's motive is to benefit himself. Such justification does not exist where his sole motive is to
cause harm to the other. Added to this, some authorities believe that it is not necessary that the
interferer's interest outweigh that of the party whose rights are invaded, and that an individual
acts under an economic interest that is substantial, not merely de minimis, such that wrongful
and malicious motives are negatived, for he acts in self-protection. 11 Moreover justification for
protecting one's financial position should not be made to depend on a comparison of his
economic interest in the subject matter with that of others. 12 It is sufficient if the impetus of his
conduct lies in a proper business interest rather than in wrongful motives. 13
As early as Gilchrist vs. Cuddy, 14 we held that where there was no malice in the interference of
a contract, and the impulse behind one's conduct lies in a proper business interest rather than in
wrongful motives, a party cannot be a malicious interferer. Where the alleged interferer is
financially interested, and such interest motivates his conduct, it cannot be said that he is an
officious or malicious intermeddler. 15
In the instant case, it is clear that petitioner So Ping Bun prevailed upon DCCSI to lease the
warehouse to his enterprise at the expense of respondent corporation. Though petitioner took
interest in the property of respondent corporation and benefited from it, nothing on record
imputes deliberate wrongful motives or malice on him.
Sec. 1314 of the Civil Code categorically provides also that, "Any third person who induces
another to violate his contract shall be liable for damages to the other contracting party."
Petitioner argues that damage is an essential element of tort interference, and since the trial
court and the appellate court ruled that private respondents were not entitled to actual, moral or
exemplary damages, it follows that he ought to be absolved of any liability, including attorney's
fees.

It is true that the lower courts did not award damages, but this was only because the extent of
damages was not quantifiable. We had a similar situation in Gilchrist, where it was difficult or
impossible to determine the extent of damage and there was nothing on record to serve as basis
thereof. In that case we refrained from awarding damages. We believe the same conclusion
applies in this case.

While we do not encourage tort interferers seeking their economic interest to intrude into existing
contracts at the expense of others, however, we find that the conduct herein complained of did
not transcend the limits forbidding an obligatory award for damages in the absence of any
malice. The business desire is there to make some gain to the detriment of the contracting
parties. Lack of malice, however, precludes damages. But it does not relieve petitioner of the
legal liability for entering into contracts and causing breach of existing ones. The respondent
appellate court correctly confirmed the permanent injunction and nullification of the lease
contracts between DCCSI and Trendsetter Marketing, without awarding damages. The injunction
saved the respondents from further damage or injury caused by petitioner's interference.

Lastly, the recovery of attorney's fees in the concept of actual or compensatory damages, is
allowed under the circumstances provided for in Article 2208 of the Civil Code. 16 One such
occasion is when the defendant's act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest. 17 But we have consistently held that the
award of considerable damages should have clear factual and legal bases. 18 In connection with
attorney's fees, the award should be commensurate to the benefits that would have been
derived from a favorable judgment. Settled is the rule that fairness of the award of damages by
the trial court calls for appellate review such that the award if far too excessive can be
reduced. 19 This ruling applies with equal force on the award of attorney's fees. In a long line of
cases we said, "It is not sound policy to place in penalty on the right to litigate. To compel the
defeated party to pay the fees of counsel for his successful opponent would throw wide open the
door of temptation to the opposing party and his counsel to swell the fees to undue
proportions."20

Considering that the respondent corporation's lease contract, at the time when the cause of
action accrued, ran only on a month-to-month basis whence before it was on a yearly basis, we
find even the reduced amount of attorney's fees ordered by the Court of Appeals still exorbitant
in the light of prevailing jurisprudence. 21 Consequently, the amount of two hundred thousand
(P200,000.00) awarded by respondent appellate court should be reduced to one hundred
thousand (P100,000.00) pesos as the reasonable award or attorney's fees in favor of private
respondent corporation.

WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the
Court of Appeals in CA-G.R. CV No. 38784 are hereby AFFIRMED, with MODIFICATION that
the award of attorney's fees is reduced from two hundred thousand (P200,000.00) to one
hundred thousand (P100,000.00) pesos. No pronouncement as to costs.1âwphi1.nêt

SO ORDERED.