SECOND DIVISION In the First Memorandum of Agreement, Wellex and U-Land agreed to Shares.
nt, Wellex and U-Land agreed to Shares. The parties may agree on such other terms and conditions governing
G.R. No. 167519 January 14, 2015
THE WELLEX GROUP, INC., Petitioner,
vs.
U-LAND AIRLINES, CO., LTD., Respondent.
DECISION
LEONEN, J.:
This is a Petition1 for Review on Certiorari under Rule 45 of the Rules of
Court. The Wellex Group, Inc. (Wellex) prays that the Decision2 dated July
30, 2004 of the Court of Appeals in CA-GR. CV No. 74850 be reversed and
set aside.3
The Court of Appeals affirmed the Decision4 of the Regional Trial Court,
Branch 62 of Makati City in Civil Case No. 99-1407. The Regional Trial Court
rendered judgment in favor of U-Land Airlines, Co., Ltd. (ULand) and ordered
the rescission of the Memorandum of Agreement5 between Wellex and U-
Land.6
Wellex is a corporation established under Philippine law and it maintains
airline operations in the Philippines.7 It owns shares of stock in several
corporations including Air Philippines International Corporation (APIC),
Philippine Estates Corporation (PEC), and Express Savings Bank
(ESB).8 Wellex alleges that it owns all shares of stock of Air Philippines
Corporation (APC).9
U-Land Airlines Co. Ltd. (U-Land) "is a corporation duly organized and
existing under the laws of Taiwan, registered to do business . . . in the
Philippines."10 It is engaged in the business of air transportation in Taiwan
and in other Asian countries.11
On May 16, 1998, Wellex and U-Land entered into a Memorandum of
Agreement12 (First Memorandum of Agreement) to expand their respective
airline operations in Asia.13
Terms of the First Memorandum of Agreement
The preambular clauses of the First Memorandum of Agreement state:
WHEREAS, U-LAND is engaged in the business of airline transportation in
Taiwan, Philippines and/or in other countries in the Asian region, and desires
to expand its operation and increase its market share by, among others,
pursuing a long-term involvement in the growing Philippine airline industry;
WHEREAS, WELLEX, on the other hand, has current airline operation in the
Philippines through its majority-owned subsidiary Air Philippines International
Corporation and the latter’s subsidiary, Air Philippines Corporation, and in like
manner also desires to expand its operation in the Asian regional markets, a
Memorandum of Agreement on ______, a certified copy of which is attached
hereto as Annex "A" and is hereby made an integral part hereof, which sets
forth, among others, the basis for WELLEX’s present ownership of shares in
Air Philippines International Corporation. WHEREAS, the parties recognize
the opportunity to develop a long-term profitable relationship by combining
such of their respective resources in an expanded airline operation as well as
in property development and in other allied business activities in the
Philippines, and desire to set forth herein the basic premises and their
understanding with respect to their joint cooperation and undertakings.14
develop a long-term business relationship through the creation of joint
interest in airline operations and property development projects in the
Philippines.15 This long-term business relationship would be implemented
through the following transactions, stated in Section 1 of the First
Memorandum of Agreement:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR
PHILIPPINES INTERNATIONAL CORPORATION ("APIC") equivalent
to at least 35% of the outstanding capital stock of APIC, but in any
case, not less than 1,050,000,000 shares . . . [;]
(b) U-LAND shall acquire from WELLEX, shares of stock of
PHILIPPINE ESTATES CORPORATION ("PEC") equivalent to at
least 35% of the outstanding capital stock of PEC, but in any case, not
less than 490,000,000 shares . . . [;]
(c) U-LAND shall enter into a joint development agreement with PEC .
. . [; and]
(d) U-LAND shall be given the option to acquire from WELLEX shares
of stock of EXPRESS SAVINGS BANK ("ESB") up to 40% of the
outstanding capital stock of ESB . . . under terms to be mutually
agreed.16
I. Acquisition of APIC and PEC shares
The First Memorandum of Agreement stated that within 40 days from its
execution date, Wellex and U-Land would execute a share purchase
agreement covering U-Land’s acquisition of the shares of stock of both APIC
(APIC shares) and PEC (PEC shares).17 In this share purchase agreement,
U-Land would purchase from Wellex its APIC shares and PEC shares.18
Wellex and U-Land agreed to an initial purchase price of P0.30 per share of
APIC and 0.65 per share of PEC. However, they likewise agreed that the final
price of the shares of stock would be reflected in the actual share purchase
agreement.19
Both parties agreed that the purchase price of APIC shares and PEC shares
would be paid upon the execution of the share purchase agreement and
Wellex’s delivery of the stock certificates covering the shares of stock. The
transfer of APIC shares and PEC shares to U-Land was conditioned on the
full remittance of the final purchase price as reflected in the share purchase
agreement. Further, the transfer was conditioned on the approval of the
Securities and Exchange Commission of the issuance of the shares of stock
and the approval by the Taiwanese government of U-Land’s acquisition of
these shares of stock.20
Thus, Section 2 of the First Memorandum of Agreement reads:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date
hereof (unless extended by mutual agreement), U-LAND and WELLEX shall
execute a Share Purchase Agreement ("SHPA") covering the acquisition by
U-LAND of the APIC Shares and PEC Shares (collectively, the "Subject
Shares"). Without prejudice to any subsequent agreement between the
parties, the purchase price for the APIC Shares to be reflected in the SHPA
shall be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares
at SIXTY FIVE CENTAVOS (P0.65) per share.
The purchase price for the Subject Shares as reflected in the SHPA shall be
paid in full upon execution of the SHPA against delivery of the Subject
the acquisition of the Subject Shares to be provided in a separate instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided that:
(i) the purchase price reflected in the SHPA has been fully paid; (ii) the
Philippine Securities & Exchange Commission (SEC) shall have approved the
issuance of the Subject Shares; and (iii) any required approval by the
Taiwanese government of the acquisition by U-LAND of the Subject Shares
shall likewise have been obtained.21
II. Operation and management of APIC/PEC/APC
U-Land was "entitled to a proportionate representation in the Board of
Directors of APIC and PEC in accordance with Philippine law." 22 Operational
control of APIC and APC would be exercised jointly by Wellex and U-Land
"on the basis of mutual agreement and consultations."23 The parties intended
that U-Land would gain primary control and responsibility for the international
operations of APC.24 Wellex manifested that APC is a subsidiary of APIC in
the second preambular clause of the First Memorandum of Agreement.25
Section 3 of the First Memorandum of Agreement reads:
3. Operation/Management of APIC/APC. - U-LAND shall be entitled to a
proportionate representation in the Board of Directors of APIC and PEC in
accordance with Philippine law. For this purpose, WELLEX shall cause the
resignation of its nominated Directors in APIC and PEC to accommodate U-
LAND’s pro rata number of Directors. Subject to applicable Philippine law and
regulations, operational control of APIC and Air Philippines Corporation
("APC") shall be lodged jointly to WELLEX and U-LAND on the basis of
mutual agreement and consultations. Further, U-LAND may second technical
and other consultants into APIC and/or APC with the view to increasing
service, productivity and efficiency, identifying and implementing profit-
service opportunities, developing technical capability and resources, and
installing adequate safety systems and procedures. In addition, U-LAND shall
arrange for the lease by APC of at least three (3) aircrafts owned by ULAND
under such terms as the parties shall mutually agree upon. It is the intent of
the parties that U-LAND shall have primary control and responsibility for
APC’s international operations.26
III. Entering into and funding a joint development agreement
Wellex and U-Land also agreed to enter into a joint development agreement
simultaneous with the execution of the share purchase agreement. The joint
development agreement shall cover housing and other real estate
development projects.27
U-Land agreed to remit the sum ofUS$3 million not later than May 22, 1998.
This sum was to serve as initial funding for the development projects that
Wellex and U-Land were to undertake pursuant to the joint development
agreement. In exchange for the US$3 million, Wellex would deliver stock
certificates covering 57,000,000 PEC shares to U-Land.28
The execution of a joint development agreement was also conditioned on the
execution of a share purchase agreement.29
Section 4 of the First Memorandum of Agreement reads:
4. Joint Development Agreement with PEC. – Simultaneous with the
execution of the SHPA, U-LAND and PEC shall execute a joint development
agreement ("JDA") to pursue property development projects in the
Philippines. The JDA shall cover specific housing and other real estate
development projects as the parties shall agree. All profits derived from the
projects covered by the JDA shall be shared equally between ULAND and
PEC. U-LAND shall, not later than May 22, 1998, remit the sum of US$3.0
million as initial funding for the aforesaid development projects against
delivery by WELLEX of 57,000,000 shares of PEC as security for said
amount in accordance with Section 9 below.30
In case of conflict between the provisions of the First Memorandum of
Agreement and the provisions of the share purchase agreement or its
implementing agreements, the terms of the First Memorandum of Agreement
would prevail, unless the parties specifically stated otherwise or the context of
any agreement between the parties would reveal a different intent.31 Thus, in
Section 6 of the First Memorandum of Agreement:
6. Primacy of Agreement. – It is agreed that in case of conflict between the
provisions of this Agreement and those of the SHPA and the implementing
agreements of the SHPA, the provisions of this Agreement shall prevail,
unless the parties specifically state otherwise, or the context clearly reveal a
contrary intent.32
Finally, Wellex and U-Land agreed that if they were unable to agree on the
terms of the share purchase agreement and the joint development agreement
within 40 days from signing, then the First Memorandum of Agreement would
cease to be effective.33
In case no agreements were executed, the parties would be released from
their respective undertakings, except that Wellex would be required to refund
within three (3) days the US$3 million given as initial funding by U-Land for
the development projects. If Wellex was unable to refund the US$3 million to
U-Land, U-Land would have the right to recover on the 57,000,000 PEC
shares that would be delivered to it.34 Section 9 of the First Memorandum of
Agreement reads:
9. Validity. - In the event the parties are unable to agree on the terms of the
SHPA and/or the JDA within forty (40) days from date hereof (or such period
as the parties shall mutually agree), this Memorandum of Agreement shall
cease to be effective and the parties released from their respective
undertakings herein, except that WELLEX shall refund the US$3.0 million
provided under Section 4 within three (3) days therefrom, otherwise U-LAND
shall have the right to recover on the 57,000,000 PEC shares delivered to U-
LAND under Section 4.35
The First Memorandum of Agreement was signed by Wellex Chairman and
President William T. Gatchalian (Mr. Gatchalian) and U-Land Chairman Ker
Gee Wang (Mr. Wang) on May 16, 1998.36
Annex "A" or the Second Memorandum of Agreement
Attached and made an integral part of the First Memorandum of Agreement
was Annex "A," as stated in the second preambular clause. It is a document
denoted as a "Memorandum of Agreement" entered into by Wellex, APIC,
and APC.37
The Second Memorandum of Agreement states:
This Memorandum of Agreement, made and executed this ___th day of
______ at Makati City, by and between:
THE WELLEX GROUP, INC., a corporation duly organized and existing
under the laws of the Philippines, with offices at 22F Citibank Tower, 8741
Paseo de Roxas, Makati City (hereinafter referred to as "TWGI"),
AIR PHILIPPINES INTERNATIONAL CORPORATION (formerly FORUM billion to ₱3.5 _____ (illegible in rollo) shall have been approved by the
PACIFIC, INC.), likewise a corporation duly organized and existing under the Securities and Exchange Commission.
laws of the Philippines, with offices at 8F Rufino Towers, Ayala Avenue,
Makati City (hereinafter referred to as "APIC"), IN WITNESS WHEREOF, the parties have caused these presents to be
signed on the date _____ (illegible in rollo) first above
- and – written.38 (Emphasis supplied)
AIR PHILIPPINES CORPORATION, corporation duly organized and existing This Second Memorandum of Agreement was allegedly incorporated into the
under the laws of the Philippines, with offices at Multinational Building, Ayala First Memorandum of Agreement as a "disclosure to [U-Land] [that] . . .
Avenue, Makati City (hereinafter referred to as "APC"). [Wellex] was still in the process of acquiring and consolidating its title to
shares of stock of APIC."39 It "included the terms of a share swap whereby
W I T N E S S E T H: That - [Wellex] agreed to transfer to APIC its shareholdings and advances to APC in
WHEREAS, TWGI is the registered and beneficial owner, or has otherwise exchange for the issuance by APIC of shares of stock to [Wellex]."40
acquired _____ (illegible in rollo) rights to the entire issued and outstanding
The Second Memorandum of Agreement was signed by Mr. Gatchalian,
capital stock (the "APC SHARES") of AIR PHILIPPINES CORPORATION APIC President Salud,41 and APC President Augustus C. Paiso.42 It was not
("APC") and has made stockholder advances to APC for the _____ (illegible
dated, and no place was indicated as the place of signing.43 It was not
in rollo) of aircraft, equipment and for working capital used in the latter’s notarized either, and no other witnesses signed the document.44
operations (the "_____ (illegible in rollo) ADVANCES").
The 40-day period lapsed on June 25, 1998.45 Wellex and U-Land were not
WHEREAS, APIC desires to obtain full ownership and control of APC, able to enter into any share purchase agreement although drafts were
including all of _____ (illegible in rollo) assets, franchise, goodwill and
exchanged between the two.
operations, and for this purpose has offered to acquire the _____ (illegible in
rollo) 302SHARES of TWGI in APC, including the APC ADVANCES due to Despite the absence of a share purchase agreement, U-Land remitted to
TWGI from APC, with _____ (illegible in rollo) of acquiring all the assets, Wellex a total of US$7,499,945.00.46These were made in varying amounts
franchise, goodwill and operations of APC; and TWGI has _____ (illegible in and through the issuance of post-dated checks.47 The dates of remittances
rollo) to the same in consideration of the conveyance by APIC to TWGI of were the following:
certain investments, _____ (illegible in rollo) issuance of TWGI of shares of
stock of APIC in exchange for said APC SHARES and the _____ (illegible in Date Amount (in US$)
rollo) ADVANCES, as more particularly described hereunder. June 30, 1998 990,000.00
NOW, THEREFORE, the parties agree as follows:
July 2, 1998 990,000.00
1. TWGI agrees to transfer the APC ADVANCES in APIC in exchange
20,000.00
for the _____ (illegible in rollo) by APIC to TWGI of investment shares of
APIC in Express Bank, Petro Chemical _____ (illegible in rollo) of Asia July 30, 1998 990,000.00
Pacific, Republic Resources & Development Corporation and Philippine
_____ (illegible in rollo) Corporation (the "APIC INVESTMENTS"). 490,000.00
2. TWGI likewise agrees to transfer the APC SHARES to APIC in 490,000.00
exchange solely _____ (illegible in rollo) the issuance by APIC of One
Billion Seven Hundred Ninety-Seven Million Eight Hundred Fifty Seven August 1, 1998 990,000.00
Thousand Three Hundred Sixty Four (1,797,857,364) shares of its
490,000.00
capital stock of a _____ (illegible in rollo) value of ₱1.00 per share (the
"APIC SHARES"), taken from the currently authorized but _____ 490,000.00
(illegible in rollo) shares of the capital stock of APIC, as well as from the
increase in the authorized capital _____ (illegible in rollo) of APIC from August 3, 1998 990,000.00
₱2.0 billion to ₱3.5 billion.
70,000.00
3. It is the basic understanding of the parties hereto that the transfer of
the APC _____ (illegible in rollo) as well as the APC ADVANCES to September 25, 1998 399,972.50
APIC shall be intended to enable APIC to obtain _____ (illegible in rollo) 99, 972.50
and control of APC, including all of APC’s assets, franchise, goodwill
and _____ (illegible in rollo). Total US$7,499,945.0048
4. Unless the parties agree otherwise, the effectivity of this Agreement Wellex acknowledged the receipt of these remittances in a confirmation letter
and transfers _____ (illegible in rollo) APC ADVANCES in exchange for addressed to U-Land dated September 30, 1998.49
the APIC INVESTMENTS, and the transfer of the _____ (illegible in
rollo) SHARES in exchange for the issuance of new APIC SHARES, According to Wellex, the parties agreed to enter into a security arrangement.
shall be subject to _____ (illegible in rollo) due diligence as the parties If the sale of the shares of stock failed to push through, the partial payments
shall see fit, and the condition subsequent that the _____ (illegible in or remittances U-Land made were to be secured by these shares of stock
rollo) for increase in the authorized capital stock of the APIC from ₱2.0 and parcels of land.50 This meant that U-Land could recover the amount it
paid to Wellex by selling these shares of stock and land titles or using them to
generate income.
Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land stock
certificates representing 60,770,000 PEC shares and 72,601,000 APIC
shares.51 These were delivered to U-Land on July 1, 1998, September 1,
1998, and October 1, 1998.52
In addition, Wellex delivered to U-Land Transfer Certificates of Title (TCT)
Nos. T-216769, T-216771, T-228231, T-228227, T-211250, and T-216775
covering properties owned by Westland Pacific Properties Corporation in
Bulacan; and TCT Nos. T-107306, T-115667, T-105910, T-120250, T-
1114398, and T-120772 covering properties owned by Rexlon Realty Group,
Inc.53 On October 1, 1998,54 U-Land received a letter from Wellex, indicating
a list of stock certificates that the latter was giving to the former by way of
"security."55
Despite these transactions, Wellex and U-Land still failed to enter into the
share purchase agreement and the joint development agreement.
In the letter56 dated July 22, 1999, 10 months57 after the last formal
communication between the two parties, U-Land, through counsel, demanded
the return of the US$7,499,945.00.58 This letter was sent 14 months after the
signing of the First Memorandum of Agreement.
Counsel for U-Land claimed that "[Wellex] ha[d] unjustifiably refused to enter
into the. . . Share Purchase Agreement."59 As far as U-Land was concerned,
the First Memorandum of Agreement was no longer in effect, pursuant to
Section 9.60 As such, U-Land offered to return all the stock certificates
covering APIC shares and PEC shares as well as the titles to real property
given by Wellex as security for the amount remitted by U-Land.61
Wellex sent U-Land a letter62 dated August 2, 1999, which refuted U-Land’s
claims. Counsel for Wellex stated that the two parties carried out several
negotiations that included finalizing the terms of the share purchase
agreement and the terms of the joint development agreement. Wellex
asserted that under the joint development agreement, U-Land agreed to remit
the sum of US$3 million by May 22,1998 as initial funding for the
development projects.63
Wellex further asserted that it conducted extended discussions with U-Land
in the hope of arriving at the final terms of the agreement despite the failure
of the remittance of the US$3 million on May 22, 1998.64 That remittance
pursuant to the joint development agreement "would have demonstrated [U-
Land’s] good faith in finalizing the agreements."65
Wellex averred that, "[s]ave for a few items, [Wellex and U-Land] virtually
agreed on the terms of both [the share purchase agreement and the joint
development agreement.]"66 Wellex believed that the parties had already
"gone beyond the ‘intent’ stage of the [First Memorandum of Agreement] and
[had already] effected partial implementation of an over-all agreement."67 U-
Land even delivered a total of 12 post-dated checks to Wellex as payment for
the APIC shares and PEC shares.68 "[Wellex] on the other hand, had
[already] delivered to[U-Land] certificates of stock of APEC [sic] and PEC as
well as various land titles to cover actual remittances."69 Wellex alleged that
the agreements were not finalized because U-Land was "forced to suspend
operations because of financial problems spawned by the regional economic
turmoil."70
Thus, Wellex maintained that "the inability of the parties to execute the [share
purchase agreement] and the [joint development agreement] principally arose
from problems at [U-Land’s] side, and not due to [Wellex’s] ‘unjustified refusal
to enter into [the] [share purchase agreement][.]’"71
On July 30, 1999, U-Land filed a Complaint72 praying for rescission of the
First Memorandum of Agreement and damages against Wellex and for the
issuance of a Writ of Preliminary Attachment.73 From U-Land’s point of view,
its primary reason for purchasing APIC shares from Wellex was APIC’s
majority ownership of shares of stock in APC (APC shares).74 After
verification with the Securities and Exchange Commission, U-Land
discovered that "APIC did not own a single share of stock in APC."75 U-Land
alleged that it repeatedly requested that the parties enter into the share
purchase agreement.76 U-Land attached the demand letter dated July 22,
1999 to the Complaint.77 However, the 40-day period lapsed, and no share
purchase agreement was finalized.78
U-Land alleged that, as of the date of filing of the Complaint, Wellex still
refused to return the amount of US$7,499,945.00 while refusing to enter into
the share purchase agreement.79 U-Land stated that it was induced by Wellex
to enter into and execute the First Memorandum of Agreement, as well as
release the amount of US$7,499,945.00.80
In its Answer with Compulsory Counterclaim,81 Wellex countered that U-Land
had no cause of action.82 Wellex maintained that under the First
Memorandum of Agreement, the parties agreed to enter into a share
purchase agreement and a joint development agreement.83 Wellex alleged
that to bring the share purchase agreement to fruition, it would have to
acquire the corresponding shares in APIC.84 It claimed that U-Land was fully
aware that the former "still ha[d] to consolidate its title over these
shares."85 This was the reason for Wellex’s attachment of the Second
Memorandum of Agreement to the First Memorandum of Agreement. Wellex
attached the Second Memorandum of Agreement as evidence to refute U-
Land’s claim of misrepresentation.86
Wellex further alleged that U-Land breached the First Memorandum of
Agreement since the payment for the shares was to begin during the 40-day
period, which began on May 16, 1998.87 In addition, U-Land failed to remit the
US$3 million by May 22, 1998 that would serve as initial funding for the
development projects.88 Wellex claimed that the remittance of the US$3
million on May 22, 1998 was a mandatory obligation on the part of U-
Land.89 Wellex averred that it presented draft versions of the share purchase
agreement, which were never finalized.90 Thus, it believed that there was an
implied extension of the 40-day period within which to enter into the share
purchase agreement and the joint development agreement since U-Land
began remitting sums of money in partial payment for the purchase of the
shares of stock.91
In its counterclaim against U-Land, Wellex alleged that it had already set in
motion building and development of real estate projects on four (4) major
sites in Cavite, Iloilo, and Davao. It started initial construction on the basis of
its agreement with U-Land to pursue real estate development projects.92
Wellex claims that, had the development projects pushed through, the parties
would have shared equally in the profits of these projects.93 These projects
would have yielded an income of ₱2,404,948,000.00, as per the study Wellex
conducted, which was duly recognized by U-Land.94 Half of that amount,
₱1,202,474,000.00, would have redounded to Wellex.95 Wellex, thus, prayed
for the rescission of the First Memorandum of Agreement and the payment of
₱1,202,474,000 in damages for loss of profit.96 It prayed for the payment of
moral damages, exemplary damages, attorney’s fees, and costs of suit.97
In its Reply,98 U-Land denied that there was an extension of the 40-day
period within which to enter into the share purchase agreement and the joint
development agreement. It also denied requesting for an extension of the 40-
day period. It further raised that there was no provision in the First
Memorandum of Agreement that required it to remit payments for Wellex’s
shares of stock in APIC and PEC within the 40-day period. Rather, the
remittances were supposed to begin upon the execution of the share
purchase agreement.99
As for the remittance of the US$3 million, U-Land stated that the issuance of
this amount on May 22, 1998 was supposed to be simultaneously made with
Wellex’s delivery of the stock certificates for 57,000,000 PEC shares. These
stock certificates were not delivered on that date.100
With regard to the drafting of the share purchase agreement, U-Land denied
that it was Wellex that presented versions of the agreement. U-Land averred
that it was its own counsel who drafted versions of the share purchase
agreement and the joint development agreement, which Wellex refused to
sign.101
U-Land specifically denied that it had any knowledge prior to or during the
execution of the First Memorandum of Agreement that Wellex still had to
"consolidate its title over" its shares in APIC. U-Land averred that it relied on
Wellex’s representation that it was a majority owner of APIC shares and that
APIC owned a majority of APC shares.102
Moreover, U-Land denied any knowledge of the initial steps that Wellex
undertook to pursue the development projects and denied any awareness of
a study conducted by Wellex regarding the potential profit of these
projects.103
The case proceeded to trial.
U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief
Executive Officer, as its sole witness.104 Mr. Tseng testified that "[s]ometime
in 1997, Mr. William Gatchalian who was in Taiwan invited [U-Land] to join in
the operation of his airline company[.]"105 U-Land did not accept the offer at
that time.106 During the first quarter of 1998, Mr. Gatchalian "went to Taiwan
and invited [U-Land] to invest in Air Philippines[.]"107 This time, U-Land
alleged that subsequent meetings were held where Mr. Gatchalian,
representing Wellex, "claimed ownership of a majority of the shares of APIC
and ownership by APIC of a majority of the shares of [APC,] a domestic
carrier in the Philippines."108Wellex, through Mr. Gatchalian, offered to sell to
U-Land PEC shares as well.109
According to Mr. Tseng, the parties agreed to enter into the First
Memorandum of Agreement after their second meeting.110 Mr. Tseng testified
that under this memorandum of agreement, the parties would enter into a
share purchase agreement "within forty (40) days from its execution which
[would] put into effect the sale of the shares [of stock] of APIC and
PEC[.]"111 However, the "[s]hare [p]urchase [a]greement was not executed
within the forty-day period despite the draft . . . given [by U-Land to
Wellex]."112
Mr. Tseng further testified that it was only after the lapse of the 40-day period
that U-Land discovered that Wellex needed money for the transfer of APC
shares to APIC. This allegedly shocked U-Land since under the First
Memorandum of Agreement, APIC was supposed to own a majority of APC
shares. Thus, U-Land remitted to Wellex a total of US$7,499,945.00 because
of its intent to become involved in the aviation business in the Philippines.
These remittances were confirmed by Wellex through a confirmation letter.
Despite the remittance of this amount, no share purchase agreement was
entered into by the parties.113
Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice President
of Wellex. She admitted her knowledge of the First Memorandum of
Agreement as she was involved in its drafting. She testified that the First
Memorandum of Agreement made reference, under its second preambular
clause, to the Second Memorandum of Agreement entered into by Wellex,
APIC, and APC. She testified that under the First Memorandum of
Agreement, U-Land’s purchase of APIC shares and PEC shares from Wellex
would take place within 40 days, with the execution of a share purchase
agreement.114
According to Ms. Ting, after the 40-day period lapsed, U-Land Chairman Mr.
Wang requested sometime in June of 1998 for an extension for the execution
of the share purchase agreement and the remittance of the US$3 million. As
proof that Mr. Wang made this request, Ms. Ting testified that Mr. Wang sent
several post-dated checks to cover the payment of the APIC shares and PEC
shares and the initial funding of US$3 million for the joint development
agreement. She testified that Mr. Wang presented a draft of the share
purchase agreement, which Wellex rejected. Wellex drafted a new version of
the share purchase agreement.115 However, the share purchase agreement
was not executed because during the period of negotiation, Wellex learned
from other sources that U-Land "encountered difficulties starting October of
1998."116 Ms. Ting admitted that U-Land made the remittances to Wellex in
the amount of US$7,499,945.00.117
Ms. Ting testified that U-Land was supposed to make an initial payment of
US$19 million under the First Memorandum of Agreement. However, U-Land
only paid US$7,499,945.00. The total payments should have amounted to
US$41 million.118
Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a
meeting to thresh out the problems of the First Memorandum of Agreement,
but U-Land did not reply. Instead, Wellex only received communication from
U-Land regarding their subsequent negotiations through the latter’s demand
letter dated July 22, 1999. In response, Wellex wrote to U-Land requesting
another meeting to discuss the demands. However, U-Land already filed the
Complaint for rescission and caused the attachment against the properties of
Wellex, causing embarrassment to Wellex.119
In the Decision dated April 10, 2001, the Regional Trial Court of Makati City
held that rescission of the First Memorandum of Agreement was proper:
The first issue must be resolved in the negative. Preponderance of evidence
leans in favor of plaintiff that it is entitled to the issuance of the writ of
preliminary attachment. Plaintiff’s evidence establishes the facts that it is
engaged in the airline business in Taiwan, was approached by defendant,
through its Chairman William Gatchalian, and was invited by the latter to
invest in an airline business in the Philippines, Air Philippines Corporation
(APC); that plaintiff became interested in the invitation of defendant; that
during the negotiations between plaintiff and defendant, defendant induced
plaintiff to buy shares in Air Philippines International Corporation (APIC) since
it owns majority of the shares of APC; that defendant also induced plaintiff to
buy shares of APIC in Philippine Estates Corporation (PEC); that the
negotiations between plaintiff and defendant culminated into the parties
executing a MOA (Exhs. "C" to "C-3", also Exh. "1"); that in the second
"Whereas" clause of the MOA, defendant represented that it has a current
airline operation through its majority-owned subsidiary APIC, that under the
MOA, the parties were supposed to enter into a Share Purchase Agreement
(SPA) within forty (40) days from May 16, 1998, the date the MOA in order to
effect the transfer of APIC and PEC shares of defendant to plaintiff; that
plaintiff learned from defendant that APIC does not actually own a single
share in APC; that plaintiff verified with the Securities and Exchange
Commission (SEC), by obtaining a General Information Sheet therefrom
(Exh. "C-Attachment"); that APIC does not in fact own APC; that defendant
induced plaintiff to still remit its investment to defendant, which plaintiff did as
admitted by defendant per its Confirmation Letter (Exh. "D") in order that APC
shares could be transferred to APIC; that plaintiff remitted a total of
US$7,499,945.00 to defendant; and that during the forty-day period stipulated
in the MOA and even after the lapse of the said period, defendant has not
entered into the SPA, nor has defendant caused the transfer of APC shares
to APIC.
In the second "Whereas" clause of the MOA (Exh. "C"), defendant’s
misrepresentation that APIC owns APC is made clear, as follows:
"WHEREAS, WELLEX, on the other hand, has current airline operation in the
Philippines through its majority-owned subsidiary Air Philippines International
Corporation (Exh. "C") and the latter’s subsidiary, Air Philippines Corporation,
and in like manner also desires to expand its operation in the Asian regional
markets; x x x" (Second Whereas of Exh. "C")
On the other hand, defendant’s evidence failed to disprove plaintiff’s
evidence. The testimony of defendant’s sole witness Elvira Ting, that plaintiff
knew at the time of the signing of the MOA that APIC does not own a majority
of the shares of APC because another Memorandum of Agreement was
attached to the MOA (Exh "1") pertaining to the purchase of APC shares by
APIC is unavailing. The second "Whereas" clause of the MOA leaves no
room for interpretation. . . . The second MOA purportedly attached as Annex
"A" of this MOA merely enlightens the parties on the manner by which APIC
acquired the shares of APC. Besides, . . . the second MOA was not a certified
copy and did not contain a marking that it is an Annex "A" when it was
supposed to be an Annex "A" and a certified copy per the MOA between
plaintiff and defendant. As can be also gathered from her testimony, Ms. Ting
does not have personal knowledge that plaintiff was not informed that APIC
did not own shares of APC during the negotiations as she was not present
during the negotiations between plaintiff and defendant’s William Gatchalian.
Her participation in the agreement between the parties [was] merely limited to
the preparation of the documents to be signed. Ms. Ting testified, as follows:
"Q During the negotiation, you did not know anything about that?"
A I was not involved in the negotiation, sir.
Q And you are just making your statement that U-Land knew about the
intended transfer of shares from APC to APIC because of this WHEREAS
CLAUSE and the Annex to this Memorandum of Agreement?
A Yes, it was part of the contract."
(TSN, Elvira Ting, June 6, 2000, pp. 8-10)
Defendant’s fraud in the performance of its obligation under the MOA is
further revealed when Ms. Ting testified on cross-examination that
notwithstanding the remittances made by plaintiff in the total amountn [sic] of
US$7,499, 945.00 to partially defray the cost of transferring APC shares to
APIC even as of the year 2000, as follows:
"Q Ms. Ting, can you please tell the Court if you know who owns shares of Air
Philippines Corporation at this time?
A Air Philippines Corporation right now is own [sic] by Wellex Group and
certain individual.
Q How much shares of Air Philippines Corporation is owned by Wellex
Group?
A Around twenty...at this moment around twenty five percent (25%).
Q Can you tell us if you know who are the other owners of the shares of Air
Philippines?
A There are several individual owners, I cannot recall the names.
Q Could [sic] you know if Air Philippines Int’l. Corporation is one of the
owners?
A As of this moment, no sir."
(lbid, p. 16)
That defendant represented to plaintiff that it needed the remittances of
plaintiff, even if no SPA was executed yet between the parties, to effect the
transfer of APC shares to APIC is admitted by its same witness also in this
wise:
"Q You said that remittances were made to the Wellex Group, Incorporated
by plaintiff for the period from June 1998 to September 1998[,] is that correct?
A Yes, Sir.
Q During all these times, that remittances were made in the total amount of
more than seven million dollars, did you ever know if plaintiff asked for
evidence from your company that AIR PHILIPPINES INTERNATIONAL
CORPORATION has already acquired shares of AIR PHILIPPINES
CORPORATION?
A There were queries on the matter.
Q And what was your answer to those queries, Madam Witness?
A We informed them that the decision was still in the process.
Q Even up to the time that plaintiff U-Land stopped the remittances sometime
in September 1998 you have not effected the transfer of shares of AIR
PHILIPPINES CORPORATION to AIR PHILIPPINES INTERNATIONCAL
[sic] CORPORATION[,] am I correct?
A APC to APIC, well at that time it’s still in the process.
Q In fact, Madam Witness, is it not correct for me to say that one of the
reasons why U-Land Incorporated was convinced to remit the amounts of
money totalling seven million dollars plus,
was that your company said that it needed funds to effect these transfers, is
that correct?
A Yes, sir."
(lbid, pp. 25-29)
As the evidence adduced by the parties stand, plaintiff has established the
fact that it had made remittances in the total amount of US$7,499,945.00 to
defendant in order that defendant will make good its representation that APC
is a subsidiary of APIC. The said remittances are admitted by defendant.
Notwithstanding the said remittances, APIC does not own a single share of
APC. On the other hand, defendant could not even satisfactorily substantiate
its claim that at least it had the intention to cause the transfer of APC shares
to APIC. [D]efendant obviously did not enter into the stipulated SPA because
it did not have the shares of APC transferred to APIC despite its
representations. Under the circumstances, it is clear that defendant
fraudulently violated the provisions of the MOA.120 (Emphasis supplied)
On appeal, the Court of Appeals affirmed the ruling of the Regional Trial
Court.121 In its July 30, 2004 Decision, the Court of Appeals held that the
Regional Trial Court did not err in granting the rescission:
Records show that in the answer filed by defendant-appellant, the latter itself
asked for the rescission of the MOA. Thus, in effect, it prays for the return of
what has been given or paid under the MOA, as the law creates said
obligation to return the things which were the object of the contract, and the
same could be carried out only when he who demands rescission can return
whatever he may be obliged to restore. The law says:
"Rescission creates the obligation to return the things which were the object
of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission
can return whatever he may be obliged to restore."
Appellant, therefore, cannot ask for rescission of the MOA and yet refuse to
return what has been paid to it. Further, appellant’s claim that the lower court
erred in ruling for the rescission of the MOA is absurd and ridiculous because
rescission thereof is prayed for by the former. . . . This Court agrees with the
lower court that appellee is the injured party in this case, and therefore is
entitled to rescission, because the rescission referred to here is predicated on
the breach of faith by the appellant which breach is violative of the reciprocity
between the parties. It is noted that appellee has partly complied with its own
obligation, while the appellant has not. It is, therefore, the right of the injured
party to ask for rescission because the guilty party cannot ask for rescission.
The lower court . . . correctly ruled that:
". . . This Court agrees with plaintiff that defendant’s misrepresentations
regarding APIC’s not owning shares in APC vitiates its consent to the MOA.
Defendant’s continued misrepresentation that it will cause the transfer of APC
shares in APIC inducing plaintiff to remit money despite the lapse of the
stipulated forty day period, further establishes plaintiff’s right to have the MOA
rescinded.
Section 9 of the MOA itself provides that in the event of the non-execution of
an SPA within the 40 day period, or within the extensions thereof, the
payments made by plaintiff shall be returned to it, to wit:
"9 Validity.- In the event that the parties are unable to agree on the terms of
the SHPA and/or JDA within forty (40) days from the date hereof (or such
period as the parties shall mutually agree), this Memorandum of Agreement
shall cease to be effective and the parties released from their respective
undertakings herein, except that WELLEX shall refund the US$3.0 million
under Section 4 within three (3) days therefrom, otherwise U-LAND shall
have the right to recover the 57,000,000 PEC shares delivered to ULAND
under Section 4."
Clearly, the parties were not able to agree on the terms of the SPA within and
even after the lapse of the stipulated 40 day period. There being no SPA
entered into by and between the plaintiff and defendant, defendant’s return of
the remittances [of] plaintiff in the total amount of US$7,499,945 is only
proper, in the same vein, plaintiff should return to defendant the titles and
certificates of stock given to it by defendant.122 (Citations omitted)
Hence, this Petition was filed.
Petitioner’s Arguments
Petitioner Wellex argues that contrary to the finding of the Court of Appeals,
respondent U-Land was not entitled to rescission because the latter itself
violated the First Memorandum of Agreement. Petitioner Wellex states that
respondent U-Land was actually bound to pay US$17.5 million for all of APIC
shares and PEC shares under the First Memorandum of Agreement and the
US$3 million to pursue the development projects under the joint development
agreement. In sum, respondent U-Land was liable to petitioner Wellex for the
total amount of US$20.5 million. Neither the Court of Appeals nor the
Regional Trial Court made any mention of the legal effect of respondent U-
Land’s failure to pay the full purchase price.123
On the share purchase agreement, petitioner Wellex asserts that its
obligation to deliver the totality of the shares of stock would become
demandable only upon remittance of the full purchase price of US$17.5
million.124 The full remittance of the purchase price of the shares of stock was
a suspensive condition for the execution of the share purchase agreement
and delivery of the shares of stock. Petitioner Wellex argues that the use of
the term "upon" in Section 2 of the First Memorandum of Agreement clearly
provides that the full payment of the purchase price must be given
"simultaneously" or "concurrent" with the execution of the share purchase
agreement.125
Petitioner Wellex raises that the Court of Appeals erred in saying that the
rescission of the First Memorandum of Agreement was proper because
petitioner Wellex itself asked for this in its Answer before the trial court.126 It
asserts that "there can be no rescission of a non-existent obligation, such as
[one] whose suspensive condition has not yet happened[,]"127 as held in
Padilla v. Spouses Paredes.128 Citing Villaflor v. Court of Appeals129 and
Spouses Agustin v. Court of Appeals,130 it argues that "the vendor. . . has no
obligation to deliver the thing sold. . . if the buyer. . . fails to fully pay the price
as required by the contract."131 In this case, petitioner Wellex maintains that
respondent U-Land’s remittance of US$7,499,945.00 constituted mere partial
performance of a reciprocal obligation.132 Thus, respondent U-Land was not
entitled to rescission. The nature of this reciprocal obligation requires both
parties’ simultaneous fulfillment of the totality of their reciprocal obligations
and not only partial performance on the part of the allegedly injured party.
As to the finding of misrepresentations, petitioner Wellex raises that a seller
may sell a thing not yet belonging to him at the time of the transaction,
provided that he will become the owner at the time of delivery so that he can
transfer ownership to the buyer. Contrary to the finding of the lower courts,
petitioner Wellex was obliged to be the owner of the shares only when the
time came to deliver these to respondent U-Land and not during the
perfection of the contract itself.133
Finally, petitioner Wellex argues that respondent U-Land could have
recovered through the securities given to the latter.134 Petitioner Wellex
invokes Suria v. Intermediate Appellate Court,135 which held that an "action
for rescission is not a principal action that is retaliatory in character [under
Article 1191 of the Civil Code, but] a subsidiary one which. . . is available only
in the absence of any other legal remedy [under Article 1384 of the Civil
Code]."136Respondent’s Arguments
Respondent U-Land argues that it was the execution of the share purchase
agreement that would result in its purchase of the APIC shares and PEC
shares.137 It was not the full remittance of the purchase price of the shares of
stock as indicated in the First Memorandum of Agreement, as alleged by
petitioner Wellex.138 Respondent U-Land asserts that the First Memorandum
of Agreement provides that the exact number of APIC shares and PEC
shares to be purchased under the share purchase agreement and the final
price of these shares were not yet determined by the parties.139
Respondent U-Land reiterates that it was petitioner Wellex that requested for
the remittances amounting to US$7,499,945.00 to facilitate APIC’s purchase
of APC shares.140 Thus, it was petitioner Wellex’s refusal to enter into the
share purchase agreement that led to respondent U-Land demanding
rescission of the First Memorandum of Agreement and the return of the
US$7,499,945.00.141 Respondent U-Land further argues before this court that
petitioner Wellex failed to present evidence as to how the money was spent,
stating that Ms. Ting admitted that the Second Memorandum of Agreement
"was not consummated at any time."142 Respondent U-Land raises that
petitioner Wellex was guilty of fraud by making it appear that APC was a
subsidiary of APIC.143 It reiterates that, as an airline company, its primary
reason for entering into the First Memorandum of Agreement was to acquire
management of APC, another airline company.144 Under Article 1191 of the
Civil Code, respondent U-Land, as the injured party, was entitled to
rescission due to the fatal misrepresentations committed by petitioner
Wellex.145
Respondent U-Land further asserts that the "shareholdings in APIC and APC
were never in question."146 Rather, it was petitioner Wellex’s
misrepresentation that APIC was a majority shareholder of APC that
compelled it to enter into the agreement.147
As for Suria, respondent U-land avers that this case was inapplicable
because the pertinent provision in Suria was not Article 1191 but rescission
under Article 1383 of the Civil Code.148 The "rescission" referred to in Article
1191 referred to "resolution" of a contract due to a breach of a mutual
obligation, while Article 1384 spoke of "rescission" because of lesion and
damage.149 Thus, the rescission that is relevant to the present case is that of
Article 1191, which involves breach in a reciprocal obligation. It is, in fact,
resolution, and not rescission as a result of fraud or lesion, as found in
Articles 1381, 1383, and 1384 of the Civil Code.150
The Issue
The question presented in this case is whether the Court of Appeals erred in
affirming the Decision of the Regional Trial Court that granted the rescission
of the First Memorandum of Agreement prayed for by U-Land.
The Petition must be denied.
I The requirement of a share
purchase agreement
The Civil Code provisions on the interpretation of contracts are controlling to
this case, particularly Article 1370, which reads:
ART. 1370. If the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall
control.
If the words appear to be contrary to the evident intention of the parties, the
latter shall prevail over the former.
In Norton Resources and Development Corporation v. All Asia Bank
Corporation:151
The cardinal rule in the interpretation of contracts is embodied in the first
paragraph of Article 1370 of the Civil Code: "[i]f the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control." This provision is akin to the
"plain meaning rule" applied by Pennsylvania courts, which assumes that the
intent of the parties to an instrument is "embodied in the writing itself, and
when the words are clear and unambiguous the intent is to be discovered
only from the express language of the agreement." It also resembles the "four
corners" rule, a principle which allows courts in some cases to search
beneath the semantic surface for clues to meaning. A court's purpose in
examining a contract is to interpret the intent of the contracting parties, as
objectively manifested by them. The process of interpreting a contract
requires the court to make a preliminary inquiry as to whether the contract
before it is ambiguous. A contract provision is ambiguous if it is susceptible of
two reasonable alternative interpretations. Where the written terms of the
contract are not ambiguous and can only be read one way, the court will
interpret the contract as a matter of law. If the contract is determined to be
ambiguous, then the interpretation of the contract is left to the court, to
resolve the ambiguity in the light of the intrinsic evidence.152 (Emphasis
supplied)
As held in Norton, this court must first determine whether a provision or
stipulation contained in a contract is ambiguous. Absent any ambiguity, the
provision on its face will be read as it is written and treated as the binding law
of the parties to the contract.
The parties have differing interpretations of the terms of the First
Memorandum of Agreement. Petitioner Wellex even admits that "the facts of
the case are fairly undisputed [and that] [i]t is only the parties’ respective
[understanding] of these facts that are not in harmony."153
The second preambular clause of the First Memorandum of Agreement
reads:
WHEREAS, WELLEX, on the other hand, has current airline operation in the
Philippines through its majority-owned subsidiary Air Philippines International
Corporation and the latter’s subsidiary, Air Philippines Corporation, and in like
manner also desires to expand its operation in the Asian regional markets; a
Memorandum of Agreement on ______, a certified copy of which is attached
hereto as Annex "A" and is hereby made an integral part hereof, which sets
forth, among others, the basis for WELLEX’s present ownership of shares in
Air Philippines International Corporation.154 (Emphasis supplied)
Section 1 of the First Memorandum of Agreement reads:
I. Basic Agreement. - The parties agree to develop a long-term business
relationship initially through the creation of joint interest in airline operations
as well as in property development projects in the Philippines to be
implemented as follows:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR
PHILIPPINES INTERNATIONAL CORPORATION ("APIC") equivalent to
at least 35% of the outstanding capital stock of APIC, but in any case,
not less than 1,050,000,000 shares (the "APIC Shares").
(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE
ESTATES CORPORATION ("PEC") equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares (the "PEC Shares").
(c) U-LAND shall enter into a joint development agreement with PEC to
jointly pursue property development projects in the Philippines.
(d) U-LAND shall be given the option to acquire from WELLEX shares of
stock of EXPRESS SAVINGS BANK ("ESB") up to 40% of the
outstanding capital stock of ESB (the "ESB Shares") under terms to be
mutually agreed.155
The First Memorandum of Agreement contained the following stipulations
regarding the share purchase agreement:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date
hereof (unless extended by mutual agreement), U-LAND and WELLEX shall
execute a Share Purchase Agreement ("SHPA") covering the acquisition by
U-LAND of the APIC Shares and PEC Shares (collectively, the "Subject
Shares"). Without prejudice to any subsequent agreement between the
parties, the purchase price for the APIC Shares to be reflected in the SHPA
shall be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares
at SIXTY FIVE CENTAVOS (P0.65) per share.
The purchase price for the Subject Shares as reflected in the SHPA shall be
paid in full upon execution of the SHPA against delivery of the Subject
Shares. The parties may agree on such other terms and conditions governing
the acquisition of the Subject Shares to be provided in a separate instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided that:
(i) the purchase price reflected in the SHPA has been fully paid; (ii) the
Philippine Securities & Exchange Commission (SEC) shall have approved the
issuance of the Subject Shares; and (iii) any required approval by the
Taiwanese government of the acquisition by U-LAND of the Subject Shares
shall likewise have been obtained.156 (Emphasis supplied)
As for the joint development agreement, the First Memorandum of Agreement
contained the following stipulation:
4. Joint Development Agreement with PEC. – Simultaneous with the
execution of the SHPA, U-LAND and PEC shall execute a joint development
agreement ("JDA") to pursue property development projects in the
Philippines. The JDA shall cover specific housing and other real estate
development projects as the parties shall agree. All profits derived from the
projects covered by the JDA shall be shared equally between ULAND and
PEC. U-LAND shall, not later than May 22, 1998, remit the sum of US$3.0
million as initial funding for the aforesaid development projects against
delivery by WELLEX of 57,000,000 shares of PEC as security for said
amount in accordance with Section 9 below.157 (Emphasis provided)
Finally, the parties included the following stipulation in case of a failure to
agree on the terms of the share purchase agreement or the joint development
agreement:
9. Validity. - In the event the parties are unable to agree on the terms of the
SHPA and/or the JDA within forty (40) days from date hereof (or such period
as the parties shall mutually agree), this Memorandum of Agreement shall
cease to be effective and the parties released from their respective
undertakings herein, except that WELLEX shall refund the US$3.0 million
provided under Section 4 within three (3) days therefrom, otherwise U-LAND
shall have the right to recover on the 57,000,000 PEC shares delivered to U-
LAND under Section 4.158
Section 2 of the First Memorandum of Agreement clearly provides that the
execution of a share purchase agreement containing mutually agreeable
terms and conditions must first be accomplished by the parties before
respondent U-Land purchases any of the shares owned by petitioner Wellex.
A perusal of the stipulation on its face allows for no other interpretation.
The need for a share purchase agreement to be entered into before payment
of the full purchase price can further be discerned from the other stipulations
of the First Memorandum of Agreement.
In Section 1, the parties agreed to enter into a joint business venture, through
entering into two (2) agreements: a share purchase agreement and a joint
development agreement. However, Section 1 provides that in the share
purchase agreement, "U-LAND shall acquire from WELLEX, shares of stock
of AIR PHILIPPINES INTERNATIONAL CORPORATION (‘APIC’) equivalent
to at least 35% of the outstanding capital stock of APIC, but in any case, not
less than 1,050,000,000 shares (the ‘APIC Shares’)."159
As for the PEC shares, Section 1 provides that respondent U-Land shall
purchase from petitioner Wellex "shares of stock of PHILIPPINE ESTATES
CORPORATION (‘PEC’) equivalent to at least 35% of the outstanding capital
stock of PEC, but in any case, not less than 490,000,000 shares(the ‘PEC
Shares’)."160
The use of the terms "at least 35% of the outstanding capital stock of APIC,
but in any case, not less than 1,050,000,000 shares" and "at least 35% of the
outstanding capital stock of PEC, but in any case, not less than 490,000,000
shares" means that the parties had yet to agree on the number of shares of
stock to be purchased.
The need to execute a share purchase agreement before payment of the
purchase price of the shares is further shown by the clause, "[w]ithout
prejudice to any subsequent agreement between the parties, the purchase
price for the APIC Shares to be reflected in the [share purchase agreement]
shall be... P0.30 per share and that for the PEC Shares at... P0.65 per
share."161 This phrase clearly shows that the final price of the shares of stock
was to be reflected in the share purchase agreement. There being no share
purchase agreement executed, respondent U-Land was under no obligation
to begin payment or remittance of the purchase price of the shares of stock.
Petitioner Wellex argues that the use of "upon" in Section 2162 of the First
Memorandum of Agreement means that respondent U-Land must pay the
purchase price of the shares of stock in its entirety when they are transferred.
This argument has no merit.
Article 1373 of the Civil Code provides:
ART. 1373. If some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.
It is necessary for the parties to first agree on the final purchase price and the
number of shares of stock to be purchased before respondent U-Land is
obligated to pay or remit the entirety of the purchase price. Thus, petitioner
Wellex’s argument cannot be sustained since the parties to the First
Memorandum of Agreement were clearly unable to agree on all the terms
concerning the share purchase agreement. It would be absurd for petitioner
Wellex to expect payment when respondent U-Land did not yet agree to the
final amount to be paid for the totality of an indeterminate number of shares
of stock.
The third paragraph of Section 2163 provides that the "transfer of the Subject
Shares" shall take place upon the fulfillment of certain conditions, such as full
payment of the purchase price "as reflected in the [share purchase
agreement]." The transfer of the shares of stock is different from the
execution of the share purchase agreement. The transfer of the shares of
stock requires full payment of the final purchase price. However, that final
purchase price must be reflected in the share purchase agreement. The
execution of the share purchase agreement will require the existence of a
final agreement.
In its Answer with counterclaim before the trial court, petitioner Wellex argued
that the payment of the shares of stock was to begin within the 40-day period.
Petitioner Wellex’s claim is not in any of the stipulations of the contract. Its
subsequent claim that respondent U-Land was actually required to remit a
total of US$20.5 million is likewise bereft of basis since there was no final
purchase price of the shares of stock that was agreed upon, due to the failure
of the parties to execute a share purchase agreement. In addition, the parties
had yet to agree on the final number of APIC shares and PEC shares that
respondent U-Land would acquire from petitioner Wellex.
Therefore, the understanding of the parties captured in the First
Memorandum of Agreement was to continue their negotiation to determine
the price and number of the shares to be purchased. Had it been otherwise,
the specific number or percentage of shares and its price should already
have been provided clearly and unambiguously. Thus, they agreed to a 40-
day period of negotiation.
Section 9 of the First Memorandum of Agreement explicitly provides that:
In the event the parties are unable to agree on the terms of the SHPA and/or
the JDA within forty (40)days from date hereof (or such period as the parties
shall mutually agree), this Memorandum of Agreement shall cease to be
effective and the parties released from their respective undertakings herein . .
.164
The First Memorandum of Agreement was, thus, an agreement to enter into a
share purchase agreement. The share purchase agreement should have
been executed by the parties within 40 days from May 16, 1998, the date of
the signing of the First Memorandum of Agreement.
When the 40-day period provided for in Section 9 lapsed, the efficacy of the
First Memorandum of Agreement ceased. The parties were "released from
their respective undertakings." Thus, from June 25, 1998, the date when the
40-day period lapsed, the parties were no longer obliged to negotiate with
each other in order to enter into a share purchase agreement.
However, Section 9 provides for another period within which the parties could
still be required to negotiate. The clause "or such period as the parties shall
mutually agree" means that the parties should agree on a period within which
to continue negotiations for the execution of an agreement. This means that
after the 40-day period, the parties were still allowed to negotiate, provided
that they could mutually agree on a new period of negotiation.
Based on the records and the findings of the lower courts, the parties were
never able to arrive at a specific period within which they would bind
themselves to enter into an agreement. There being no other period
specified, the parties were no longer under any obligation to negotiate and
enter into a share purchase agreement. Section 9 clearly freed them from this
undertaking.
II There was no express or implied
novation of the First Memorandum
of Agreement
The subsequent acts of the parties after the 40-day period were, therefore,
independent of the First Memorandum of Agreement.
In its Appellant’s Brief before the Court of Appeals, petitioner Wellex
mentioned that there was an "implied partial objective or real novation"165 of
the First Memorandum of Agreement. Petititoner did not raise this argument
of novation before this court. In Gayos v. Gayos,166 this court held that "it is a
cherished rule of procedure that a court should always strive to settle the
entire controversy in a single proceeding leaving no root or branch to bear the
seeds of future litigation[.]"167
Articles 1291 and 1292 of the Civil Code provides how obligations may be
modified:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
Article 1292. In order that an obligation may be extinguished by another
which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other.
In Arco Pulp and Paper Co. v. Lim,168 this court discussed the concept of
novation:
Novation extinguishes an obligation between two parties when there is a
substitution of objects or debtors or when there is subrogation of the creditor.
It occurs only when the new contract declares so "in unequivocal terms" or
that "the old and the new obligations be on every point incompatible with
each other."
....
For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with the
old one on every point. The test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence.
(Emphasis from the original omitted)
Because novation requires that it be clear and unequivocal, it is never
presumed, thus:
In the civil law setting, novatiois literally construed as to make new. So it is
deeply rooted in the Roman Law jurisprudence, the principle — novatio non
praesumitur— that novation is never presumed. At bottom, for novation to be
a jural reality, its animus must be ever present, debitum pro debito— basically
extinguishing the old obligation for the new one.169 (Emphasis from the
original omitted, citations omitted)
Applying Arco, it is clear that there was no novation of the original obligation.
After the 40-day period, the parties did not enter into any subsequent written
agreement that was couched in unequivocal terms. The transaction of the
First Memorandum of Agreement involved large amounts of money from both
parties. The parties sought to participate in the air travel industry, which has
always been highly regulated and subject to the strictest commercial scrutiny.
Both parties admitted that their counsels participated in the crafting and
execution of the First Memorandum of Agreement as well as in the efforts to
enter into the share purchase agreement. Any subsequent agreement would
be expected to be clearly agreed upon with their counsels’ assistance and in
writing, as well.
Given these circumstances, there was no express novation.
There was also no implied novation of the original obligation. In Quinto v.
People:170
[N]o specific form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two contracts.
While there is really no hard and fast rule to determine what might constitute
to be a sufficient change that can bring about novation, the touchstone for
contrariety, however, would be an irreconcilable incompatibility between the
old and the new obligations.
....
. . . The test of incompatibility is whether or not the two obligations can stand
together, each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first. Corollarily, changes
that breed incompatibility must be essential in nature and not merely
accidental. The incompatibility must take place in any of the essential
elements of the obligation, such as its object, cause or principal conditions
thereof; otherwise, the change would be merely modificatory in nature and
insufficient to extinguish the original obligation.171(Citations omitted)
There was no incompatibility between the original terms of the First
Memorandum of Agreement and the remittances made by respondent U-
Land for the shares of stock. These remittances were actually made with the
view that both parties would subsequently enter into a share purchase
agreement. It is clear that there was no subsequent agreement inconsistent
with the provisions of the First Memorandum of Agreement.
Thus, no implied novation took place. In previous cases,172 this court has
consistently ruled that presumed novation or implied novation is not deemed
favorable. In United Pulp and Paper Co., Inc. v. Acropolis Central Guaranty
Corporation:173
Neither can novation be presumed in this case. As explained in Duñgo v.
Lopena:
"Novation by presumption has never been favored. To be sustained, it need
be established that the old and new contracts are incompatible in all points,
or that the will to novate appears by express agreement of the parties or in
acts of similar import."174 (Emphasis supplied)
There being no novation of the First Memorandum of Agreement, respondent
U-Land is entitled to the return of the amount it remitted to petitioner Wellex.
Petitioner Wellex is likewise entitled to the return of the certificates of shares
of stock and titles of land it delivered to respondent U-Land. This is simply an
enforcement of Section 9 of the First Memorandum of Agreement. Pursuant
to Section 9, only the execution of a final share purchase agreement within
either of the periods contemplated by this stipulation will justify the parties’
retention of what they received or would receive from each other.
III Applying Article 1185 of the Civil
Code, the parties are obligated to
return to each other all they have
received
Article 1185 of the Civil Code provides that:
ART. 1185. The condition that some event will not happen at a determinate
time shall render the obligation effective from the moment the time indicated
has elapsed, or if it has become evident that the event cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such time
as may have probably been contemplated, bearing in mind the nature of the
obligation.
Article 1185 provides that if an obligation is conditioned on the nonoccurrence
of a particular event at a determinate time, that obligation arises (a) at the
lapse of the indicated time, or(b) if it has become evident that the event
cannot occur.
Petitioner Wellex and respondent U-Land bound themselves to negotiate with
each other within a 40-day period to enter into a share purchase agreement.
If no share purchase agreement was entered into, both parties would be
freed from their respective undertakings.
It is the non-occurrence or non-execution of the share purchase agreement
that would give rise to the obligation to both parties to free each other from
their respective undertakings. This includes returning to each other all that
they received in pursuit of entering into the share purchase agreement.
At the lapse of the 40-day period, the parties failed to enter into a share
purchase agreement. This lapse is the first circumstance provided for in
Article 1185 that gives rise to the obligation. Applying Article 1185, the parties
were then obligated to return to each other all that they had received in order
to be freed from their respective undertakings.
However, the parties continued their negotiations after the lapse of the 40-
day period. They made subsequent transactions with the intention to enter
into the share purchase agreement. Despite that, they still failed to enter into
a share purchase agreement. Communication between the parties ceased,
and no further transactions took place.
It became evident that, once again, the parties would not enter into the share
purchase agreement. This is the second circumstance provided for in Article
1185. Thus, the obligation to free each other from their respective
undertakings remained.
As such, petitioner Wellex is obligated to return the remittances made by
respondent U-Land, in the same way that respondent U-Land is obligated to
return the certificates of shares of stock and the land titles to petitioner
Wellex.
IV Respondent U-Land is praying for
rescission or resolution under
Article 1191, and not rescission
under Article 1381
The arguments of the parties generally rest on the propriety of the rescission
of the First Memorandum of Agreement. This requires a clarification of
rescission under Article 1191, and rescission under Article 1381 of the Civil
Code.
Article 1191 of the Civil Code provides:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who
have acquired the thing, in accordance with articles 1385 and 1388 and the
Mortgage Law.
Articles 1380 and 1381, on the other hand, provide an enumeration of
rescissible contracts: ART. 1380. Contracts validly agreed upon may be
rescinded in the cases established by law. ART. 1381. The following
contracts are rescissible:
(1) Those which are entered into by guardians whenever the
wards whom they represent suffer lesion by more than one-
fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the
latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot
in any other manner collect the claims due them;
(4) Those which refer to things under litigation if they have been
entered into by the defendant without the knowledge and
approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to
rescission.
Article 1383 expressly provides for the subsidiary nature of rescission:
ART. 1383. The action for rescission is subsidiary; it cannot be instituted
except when the party suffering damage has no other legal means to obtain
reparation for the same.
Rescission itself, however, is defined by Article 1385:
ART. 1385. Rescission creates the obligation to return the things which were
the object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore. Neither shall
rescission take place when the things which are the object of the contract are
legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person
causing the loss. Gotesco Properties v. Fajardo175 categorically stated that
Article 1385 is applicable to Article 1191:
At this juncture, it is noteworthy to point out that rescission does not merely
terminate the contract and release the parties from further obligations to each
other, but abrogates the contract from its inception and restores the parties to
their original positions as if no contract has been made. Consequently,
mutual restitution, which entails the return of the benefits that each party may
have received as a result of the contract, is thus required. To be sure, it has
been settled that the effects of rescission as provided for in Article 1385 of
the Code are equally applicable to cases under Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving rescission under Article 1191.
This means bringing the parties back to their original status prior to the
inception of the contract. Article 1385 of the Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the things which were
the object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obligated to restore. Neither shall
rescission take place when the things which are the object of the contract are
legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person
causing the loss.
This Court has consistently ruled that this provision applies to rescission
under Article 1191: [S]ince Article 1385 of the Civil Code expressly and
clearly states that "rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price with its
interest," the Court finds no justification to sustain petitioners’ position that
said Article 1385 does not apply to rescission under Article 1191. x x
x176 (Emphasis from the original, citations omitted)
Rescission, as defined by Article 1385, mandates that the parties must return
to each other everything that they may have received as a result of the
contract. This pertains to rescission or resolution under Article 1191, as well
as the provisions governing all forms of rescissible contracts.
For Article 1191 to be applicable, however, there must be reciprocal
prestations as distinguished from mutual obligations between or among the
parties. A prestation is the object of an obligation, and it is the conduct
required by the parties to do or not to do, or to give.177 Parties may be
mutually obligated to each other, but the prestations of these obligations are
not necessarily reciprocal. The reciprocal prestations must necessarily
emanate from the same cause that gave rise to the existence of the contract.
This distinction is best illustrated by an established authority in civil law, the
late Arturo Tolentino:
This article applies only to reciprocal obligations. It has no application to
every case where two persons are mutually debtor and creditor of each other.
There must be reciprocity between them. Both relations must arise from the
same cause, such that one obligation is correlative to the other. Thus, a
person may be the debtor of another by reason of an agency, and his creditor
by reason of a loan. They are mutually obligated, but the obligations are not
reciprocal. Reciprocity arises from identity of cause, and necessarily the two
obligations are created at the same time.178(Citation omitted)
Ang Yu Asuncion v. Court of Appeals179 provides a clear necessity of the
cause in perfecting the existence of an obligation:
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil
Code). The obligation is constituted upon the concurrence of the essential
elements thereof, viz: (a) The vinculum juris or juridical tie which is the
efficient cause established by the various sources of obligations (law,
contracts, quasi-contracts, delicts and quasi-delicts); (b) the object which is
the prestation or conduct, required to be observed (to give, to do or not to
do); and (c) the subject-persons who, viewed from the demandability of the
obligation, are the active (obligee) and the passive (obligor) subjects.180
The cause is the vinculum juris or juridical tie that essentially binds the parties
to the obligation. This linkage between the parties is a binding relation that is
the result of their bilateral actions, which gave rise to the existence of the
contract.
The failure of one of the parties to comply with its reciprocal prestation allows
the wronged party to seek the remedy of Article 1191. The wronged party is
entitled to rescission or resolution under Article 1191, and even the payment
of damages. It is a principal action precisely because it is a violation of the
original reciprocal prestation.
Article 1381 and Article 1383, on the other hand, pertain to rescission where
creditors or even third persons not privy to the contract can file an action due
to lesion or damage as a result of the contract. In Ong v. Court of
Appeals,181 this court defined rescission:
Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code,
is a remedy granted by law to the contracting parties and even to third
persons, to secure the reparation of damages caused to them by a contract,
even if this should be valid, by restoration of things to their condition at the
moment prior to the celebration of the contract. It implies a contract, which
even if initially valid, produces a lesion or a pecuniary damage to
someone.182(Citations omitted)
Ong elaborated on the confusion between "rescission" or resolution under
Article 1191 and rescission under Article 1381:
On the other hand, Article 1191 of the New Civil Code refers to rescission
applicable to reciprocal obligations. Reciprocal obligations are those which
arise from the same cause, and in which each party is a debtor and a creditor
of the other, such that the obligation of one is dependent upon the obligation
of the other. They are to be performed simultaneously such that the
performance of one is conditioned upon the simultaneous fulfillment of the
other. Rescission of reciprocal obligations under Article 1191 of the New Civil
Code should be distinguished from rescission of contracts under Article 1383.
Although both presuppose contracts validly entered into and subsisting and
both require mutual restitution when proper, they are not entirely identical.
While Article 1191 uses the term "rescission," the original term which was
used in the old Civil Code, from which the article was based, was "resolution."
Resolution is a principal action which is based on breach of a party, while
rescission under Article 1383 is a subsidiary action limited to cases of
rescissionfor lesion under Article 1381 of the New Civil Code, which
expressly enumerates the following rescissible contracts:
1. Those which are entered into by guardians whenever the
wards whom they represent suffer lesion by more than one fourth
of the value of the things which are the object thereof;
2. Those agreed upon in representation of absentees, if the latter
suffer the lesion stated in the preceding number;
3. Those undertaken in fraud of creditors when the latter cannot
in any manner collect the claims due them;
4. Those which refer to things under litigation if they have been
entered into by the defendant without the knowledge and
approval of the litigants or of competent judicial authority; [and]
5. All other contracts specially declared by law to be subject to
rescission.183 (Citations omitted)
When a party seeks the relief of rescission as provided in Article 1381, there
is no need for reciprocal prestations to exist between or among the parties.
All that is required is that the contract should be among those enumerated in
Article 1381 for the contract to be considered rescissible. Unlike Article 1191,
rescission under Article 1381 must be a subsidiary action because of Article
1383.
Contrary to petitioner Wellex’s argument, this is not rescission under Article
1381 of the Civil Code. This case does not involve prejudicial transactions
affecting guardians, absentees, or fraud of creditors. Article 1381(3) pertains
in particular to a series of fraudulent actions on the part of the debtor who is
in the process of transferring or alienating property that can be used to satisfy
the obligation of the debtor to the creditor. There is no allegation of fraud for
purposes of evading obligations to other creditors. The actions of the parties
involving the terms of the First Memorandum of Agreement do not fall under
any of the enumerated contracts that may be subject of rescission.
Further, respondent U-Land is pursuing rescission or resolution under Article
1191, which is a principal action. Justice J.B.L. Reyes’ concurring opinion in
the landmark case of Universal Food Corporation v. Court of Appeals184gave
a definitive explanation on the principal character of resolution under Article
1191 and the subsidiary nature of actions under Article 1381:
The rescission on account of breach of stipulations is not predicated on injury
to economic interests of the party plaintiff but on the breach of faith by the
defendant, that violates the reciprocity between the parties. It is not a
subsidiary action, and Article 1191 may be scanned without disclosing
anywhere that the action for rescission thereunder is subordinated to
anything other than the culpable breach of his obligations by the defendant.
This rescission is a principal action retaliatory in character, it being unjust that
a party be held bound to fulfill his promises when the other violates his. As
expressed in the old Latin aphorism: "Non servanti fidem, non est fides
servanda." Hence, the reparation of damages for the breach is purely
secondary.
On the contrary, in the rescission by reason of lesion or economic prejudice,
the cause of action is subordinated to the existence of that prejudice,
because it is the raison detre as well as the measure of the right to rescind.
Hence, where the defendant makes good the damages caused, the action
cannot be maintained or continued, as expressly provided in Articles 1383
and 1384. But the operation of these two articles is limited to the cases of
rescission for lesión enumerated in Article 1381 of the Civil Code of the
Philippines, and does not apply to cases under Article 1191.185
Rescission or resolution under Article 1191, therefore, is a principal action
that is immediately available to the party at the time that the reciprocal
prestation was breached. Article 1383 mandating that rescission be deemed
a subsidiary action cannot be applicable to rescission or resolution under
Article 1191. Thus, respondent U-Land correctly sought the principal relief of
rescission or resolution under Article 1191.
The obligations of the parties gave rise to reciprocal prestations, which arose
from the same cause: the desire of both parties to enter into a share
purchase agreement that would allow both parties to expand their respective
airline operations in the Philippines and other neighboring countries.
V The jurisprudence relied upon by
petitioner Wellex is not applicable
The cases that petitioner Wellex cited to advance its arguments against
respondent U-Land’s right to rescission are not in point.
Suria v. Intermediate Appellate Court is not applicable. In that case, this court
specifically stated that the parties entered into a contract of sale, and their
reciprocal obligations had already been fulfilled:186
There is no dispute that the parties entered into a contract of sale as
distinguished from a contract to sell.
By the contract of sale, the vendor obligates himself to transfer the ownership
of and to deliver a determinate thing to the buyer, who in turn, is obligated to
pay a price certain in money or its equivalent (Art. 1458, Civil Code). From
the respondents’ own arguments, we note that they have fully complied with
their part of the reciprocal obligation. As a matter of fact, they have already
parted with the title as evidenced by the transfer certificate of title in the
petitioners’ name as of June 27, 1975.
The buyer, in turn, fulfilled his end of the bargain when he executed the deed
of mortgage. The payments on an installment basis secured by the execution
of a mortgage took the place of a cash payment. In other words, the
relationship between the parties is no longer one of buyer and seller because
the contract of sale has been perfected and consummated. It is already one
of a mortgagor and a mortgagee. In consideration of the petitioners’ promise
to pay on installment basis the sum they owe the respondents, the latter have
accepted the mortgage as security for the obligation.
The situation in this case is, therefore, different from that envisioned in the
cited opinion of Justice J.B.L. Reyes. The petitioners’ breach of obligations is
not with respect to the perfected contract of sale but in the obligations created
by the mortgage contract. The remedy of rescission is not a principal action
retaliatory in character but becomes a subsidiary one which by law is
available only in the absence of any other legal remedy. (Art. 1384, Civil
Code). Foreclosure here is not only a remedy accorded by law but, as earlier
stated, is a specific provision found in the contract between the
parties.187 (Emphasis supplied)
In Suria, this court clearly applied rescission under Article 1384 and not
rescission or resolution under Article 1191. In addition, the First
Memorandum of Agreement is not a contract to sell shares of stock. It is an
agreement to negotiate with the view of entering into a share purchase
agreement.
Villaflor v. Court of Appealsis not applicable either. In Villaflor, this court held
that non-payment of consideration of contracts only gave rise to the right to
sue for collection, but this non-payment cannot serve as proof of a simulated
contract.188 The case did not rule that the vendor has no obligation to deliver
the thing sold if the buyer fails to fully pay the price required by the contract.
In Villaflor:
Petitioner insists that nonpayment of the consideration in the contracts proves
their simulation. We disagree. Nonpayment, at most, gives him only the right
to sue for collection. Generally, in a contract of sale, payment of the price is a
resolutory condition and the remedy of the seller is to exact fulfillment or, in
case of a substantial breach, to rescind the contract under Article 1191 of the
Civil Code. However, failure to pay is not even a breach, but merely an event
which prevents the vendor’s obligation to convey title from acquiring binding
force.189 (Citations omitted) This court’s statement in Villaflor regarding
rescission under Article 1191 was a mere obiter dictum. In Land Bank of the
Philippines v. Suntay,190 this court discussed the nature of an obiter dictum:
An obiter dictum has been defined as an opinion expressed by a court upon
some question of law that is not necessary in the determination of the case
before the court. It is a remark made, or opinion expressed, by a judge, in his
decision upon a cause by the way, that is, incidentally or collaterally, and not
directly upon the question before him, or upon a point not necessarily
involved in the determination of the cause, or introduced by way of
illustration, or analogy or argument. It does not embody the resolution or
determination of the court, and is made without argument, or full
consideration of the point. It lacks the force of an adjudication, being a mere
expression of an opinion with no binding force for purposes of res
judicata.191 (Citations omitted)
Petitioner Wellex’s reliance on Padilla v. Spouses Paredes and Spouses
Agustin v. Court of Appeals is also misplaced. In these cases, this court held
that there can be no rescission for an obligation that is nonexistent,
considering that the suspensive condition that will give rise to the obligation
has not yet happened. This is based on an allegation that the contract
involved is a contract to sell. In a contract to sell, the failure of the buyer to
pay renders the contract without effect. A suspensive condition is one whose
non-fulfillment prevents the existence of the obligation.192 Payment of the
purchase price, therefore, constitutes a suspensive condition in a contract to
sell. Thus, this court held that non-remittance of the full price allowed the
seller to withhold the transfer of the thing to be sold.
In this case, the First Memorandum of Agreement is not a contract to sell.
Entering into the share purchase agreement or the joint development
agreement remained a stipulation that the parties themselves agreed to
pursue in the First Memorandum of Agreement.
Based on the First Memorandum of Agreement, the execution of the share
purchase agreement was necessary to put into effect respondent U-Land’s
purchase of the shares of stock. This is the stipulation indicated in this
memorandum of agreement. There was no suspensive condition of full
payment of the purchase price needed to execute either the share purchase
agreement or the joint development agreement. Upon the execution of the
share purchase, the obligation of petitioner Wellex to transfer the shares of
stock and of respondent U-Land to pay the price of these shares would have
arisen.
Enforcement of Section 9 of the First Memorandum of Agreement has the
same effect as rescission or resolution under Article 1191 of the Civil Code.
The parties are obligated to return to each other all that they may have
received as a result of the breach by petitioner Wellex of the reciprocal
obligation. Therefore, the Court of Appeals did not err in affirming the
rescission granted by the trial court.
VI Petitioner Wellex was not guilty of
fraud but of violating Article 1159
of the Civil Code
In the issuance of the Writ of Preliminary Attachment, the lower court found
that petitioner Wellex committed fraud by inducing respondent U-Land to
purchase APIC shares and PEC shares and by leading the latter to believe
that APC was a subsidiary of APIC.
Determining the existence of fraud is not necessary in an action for rescission
or resolution under Article 1191. The existence of fraud must be established if
the rescission prayed for is the rescission under Article 1381.
However, the existence of fraud is a question that the parties have raised
before this court. To settle this question with finality, this court will examine
the established facts and determine whether petitioner Wellex indeed
defrauded respondent U-Land.
In Tankeh v. Development Bank of the Philippines,193 this court enumerated
the relevant provisions of the Civil Code on fraud:
Fraud is defined in Article 1338 of the Civil Code as:
x x x fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which, without
them, he would not have agreed to.
This is followed by the articles which provide legal examples and illustrations
of fraud.
....
Art. 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion does not signify fraud, unless
made by an expert and the other party has relied on the former’s special
knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate consent,
unless such misrepresentation has created substantial mistake and the same
is mutual. (n)
Art. 1343. Misrepresentation made in good faith is not fraudulent but may
constitute error. (n) The distinction between fraud as a ground for rendering a
contract voidable or as basis for an award of damages is provided in Article
1344:
In order that fraud may make a contract voidable, it should be serious and
should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
(1270)194
Tankeh further discussed the degree of evidence needed to prove the
existence of fraud:
[T]he standard of proof required is clear and convincing evidence. This
standard of proof is derived from American common law. It is less than proof
beyond reasonable doubt (for criminal cases) but greater than preponderance
of evidence (for civil cases). The degree of believability is higher than that of
an ordinary civil case. Civil cases only require a preponderance of evidence
to meet the required burden of proof. However, when fraud is alleged in an
ordinary civil case involving contractual relations, an entirely different
standard of proof needs to be satisfied. The imputation of fraud in a civil case
requires the presentation of clear and convincing evidence. Mere allegations
will not suffice to sustain the existence of fraud. The burden of evidence rests
on the part of the plaintiff or the party alleging fraud. The quantum of
evidence is such that fraud must be clearly and convincingly shown.195
To support its allegation of fraud, Mr. Tseng, respondent U-Land’s witness
before the trial court, testified that Mr. Gatchalian approached respondent U-
Land on two (2) separate meetings to propose entering into an agreement for
joint airline operations in the Philippines. Thus, the parties entered into the
First Memorandum of Agreement. Respondent U-Land primarily anchors its
allegation of fraud against petitioner Wellex on the existence of the second
preambular clause of the First Memorandum of Agreement.
In its Appellant’s Brief before the Court of Appeals, petitioner Wellex admitted
that "[t]he amount of US$7,499,945.00 was remitted for the purchase of APIC
and PEC shares."196 In that brief, it argued that the parties were already in the
process of partially executing the First Memorandum of Agreement.
As held in Tankeh, there must be clear and convincing evidence of fraud.
Based on the established facts, respondent U-Land was unable to clearly
convince this court of the existence of fraud.
Respondent U-Land had every reasonable opportunity to ascertain whether
APC was indeed a subsidiary of APIC. This is a multimillion dollar
transaction, and both parties admitted that the share purchase agreement
underwent several draft creations. Both parties admitted the participation of
their respective counsels in the drafting of the First Memorandum of
Agreement. Respondent U-Land had every opportunity to ascertain the
ownership of the shares of stock. Respondent U-Land itself admitted that it
was not contesting petitioner Wellex’s ownership of the APIC shares or APC
shares; hence, it was not contesting the existence of the Second
Memorandum of Agreement. Upon becoming aware of petitioner Wellex’s
representations concerning APIC’s ownership or control of APC as a
subsidiary, respondent U-Land continued to make remittances totalling the
amount sought to be rescinded. It had the option to opt out of negotiations
after the lapse of the 40-day period. However, it proceeded to make the
remittances to petitioner Wellex and proceed with negotiations.
Respondent U-Land was not defrauded by petitioner Wellex to agree to the
First Memorandum of Agreement.1awp++i1 To constitute fraud under Article
1338, the words and machinations must have been so insidious or deceptive
that the party induced to enter into the contract would not have agreed to be
bound by its terms if that party had an opportunity to be aware of the
truth.197 Respondent U-Land was already aware that APC was not a
subsidiary of APIC after the 40-day period. Still, it agreed to be bound by the
First Memorandum of Agreement by making the remittances from June 30 to
September 25, 1998.198 Thus, petitioner Wellex’s failure to inform respondent
U-Land that APC was not a subsidiary of APIC when the First Memorandum
of Agreement was being executed did not constitute fraud.
However, the absence of fraud does not mean that petitioner Wellex is free of
culpability. By failing to inform respondent U-Land that APC was not yet a
subsidiary of APIC at the time of the execution of the First Memorandum of
Agreement, petitioner Wellex violated Article 1159 of the Civil Code. Article
1159 reads:
ART. 1159. Obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith.
In Ochoa v. Apeta,199 this court defined good faith:
Good faith is an intangible and abstract quality with no technical meaning or
statutory definition, and it encompasses, among other things, an honest
belief, the absence of malice and the absence of design to defraud or to seek
an unconscionable advantage. It implies honesty of intention, and freedom
from knowledge of circumstances which ought to put the holder upon inquiry.
The essence of good faith lies in an honest belief in the validity of one’s right,
ignorance of a superior claim and absence of intention to overreach
another.200 (Citations omitted)
It was incumbent upon petitioner Wellex to negotiate the terms of the pending
share purchase agreement in good faith. This duty included providing a full
disclosure of the nature of the ownership of APIC in APC. Unilaterally
compelling respondent U-Land to remit money to finalize the transactions
indicated in the Second Memorandum of Agreement cannot constitute good
faith.
The absence of fraud in a transaction does not mean that rescission under
Article 1191 is not proper. This case is not an action to declare the First
Memorandum of Agreement null and void due to fraud at the inception of the
contract or dolo causante. This case is not an action for fraud based on
Article 1381 of the Civil Code. Rescission or resolution under Article 1191 is
predicated on the failure of one of the parties in a reciprocal obligation to fulfill
the prestation as required by that obligation. It is not based on vitiation of
consent through fraudulent misrepresentations.
VII Respondent U-Land was not bound
to pay the US$3 million under the
joint development agreement
The alleged failure of respondent U-Land to pay the amount of US$3 million
to petitioner Wellex does not justify the actions of the latter in refusing to
return the US$7,499,945.00.
Article 1374 of the Civil Code provides that:
ART. 1374. The various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from all
of them taken jointly.
The execution of the joint development agreement was contingent on the
execution of the share purchase agreement.1âwphi1 This is provided for in
Section 4 of the First Memorandum of Agreement, which stated that the
execution of the two agreements is "[s]imultaneous."201 Thus, the failure of
the share purchase agreement’s execution would necessarily mean the
failure of the joint development agreement’s execution.
Section 9 of the First Memorandum of Agreement provides that should the
parties fail to execute the agreement, they would be released from their
mutual obligations. Had respondent U-Land paid the US$3 million and
petitioner Wellex delivered the 57,000,000 PEC shares for the purpose of the
joint development agreement, they would have been obligated to return these
to each other.
Section 4 and Section 9 of the First Memorandum of Agreement must be
interpreted together. Since the parties were unable to agree on a final share
purchase agreement and there was no exchange of money or shares of stock
due to the continuing negotiations, respondent U-Land was no longer obliged
to provide the money for the real estate development projects. The payment
of the US$3 million was for pursuing the real estate development projects
under the joint development agreement. There being no joint development
agreement, the obligation to deliver the US$3 million and the delivery of the
PEC shares for that purpose were no longer incumbent upon the parties.
VIII Respondent U-Land was not
obligated to exhaust the "securities"
given by petitioner Wellex
Contrary to petitioner Wellex’s assertion, there is no obligation on the part of
respondent U-Land to exhaust the "securities" given by petitioner Wellex. No
such meeting of the minds to create a guarantee or surety or any other form
of security exists. The principal obligation is not a loan or an obligation
subject to the conditions of sureties or guarantors under the Civil Code. Thus,
there is no need to exhaust the securities given to respondent U-Land, and
there is no need for a legal condition where respondent U-Land should
pursue other remedies.
Neither petitioner Wellex nor respondent U-Land stated that there was
already a transfer of ownership of the shares of stock or the land titles.
Respondent U-Land itself maintained that the delivery of the shares of stock
and the land titles were not in the nature of a pledge or mortgage.202 It
received the certificates of shares of stock and the land titles with an
understanding that the parties would subsequently enter a share purchase
agreement. There being no share purchase agreement, respondent U-Land
is obligated to return the certificates of shares of stock and the land titles to
petitioner Wellex.
The parties are bound by the 40-day period provided for in the First
Memorandum of Agreement. Adherence by the parties to Section 9 of the
First Memorandum of Agreement has the same effect as the rescission or
resolution prayed for and granted by the trial court.
Informal acts are prone to ambiguous legal interpretation. This will be based
on the say-so of each party and is a fragile setting for good business
transactions. It will contribute to the unpredictability of the market as it would
provide courts with extraordinary expectations to determine the business
actor's intentions. The parties appear to be responsible businessmen who
know that their expectations and obligations should be clearly articulated
between them. They have the resources to engage legal representation.
Indeed, they have reduced their agreement in writing.
Petitioner Wellex now wants this court to define obligations that do not
appear in these instruments. We cannot do so. This court cannot interfere in
the bargains, good or bad, entered into by the parties. Our duty is to affirm
legal expectations, not to guarantee good business judgments.
WHEREFORE, the petition is DENIED. The Decision of the Regional Trial
Court in Civil Case No. 99-1407 and the Decision of the Court of Appeals in
CA-G.R. CV No. 74850 are AFFIRMED. Costs against petitioner The Wellex
Group, Inc.
SO ORDERED.
G.R. No. 212375
KABISIG REAL WEALTH DEV., INC. and FERNANDO C. TIO,, Petitioners
vs.
YOUNG BUILDERS CORPORATION, Respondent
DECISION
PERALTA, J.:
This is a Petition for Review which petitioners Kabisig Real Wealth Dev., Inc. and
Fernando C. Tio filed assailing the Court of Appeals (CA) Decision 1 dated June 28,
2013 and Resolution2 dated March 28, 2014 in CAG.R. CV No. 02945, affirming
the Decision of the Regional Trial Court (RTC) of Cebu City, Branch 12, dated July
31, 2008 in Civil Case No. CEB- 27950.
The following are the pertinent antecedents of the case, as shown by the records:
Sometime in April 2001, Kabisig Real Wealth Dev., Inc. (Kabisig), through
Ferdinand Tio (Tio), contracted the services of Young Builders Corporation (Young
Builders) to supply labor, tools, equipment, and materials for the renovation of its
building in Cebu City. Young Builders then finished the work in September 2001
and billed Kabisig for P4,123,320.95. However, despite numerous demands,
Kabisig failed to pay. It contended that no written contract was ever entered into
between the parties and it was never informed of the estimated cost of the
renovation. Thus, Young Builders filed an action for Collection of Sum of Money
against Kabisig.
On July 31, 2008, the RTC of Cebu City rendered a Decision finding for Young
Builders, thus:
WHEREFORE, judgment is hereby rendered ordering the defendants to pay
plaintiff P4,123,320.95 representing the value of services rendered and materials
used in the renovation of the building of defendant Kabisig Real Wealth Dev., Inc.
into a restaurant of defendant Ferdinand Tio, by way of actual damages, plus
12% per annum from September 11, 2001 until it is fully paid. Costs against
defendants.
SO ORDERED.3
Therefore, Kabisig elevated the case to the CA. On June 28, 2013, the appellate
court affirmed the RTC Decision, with modification, viz.:
WHEREFORE, foregoing premises considered, the Decision dated July 31, 2008
rendered by the Regional Trial Court of Cebu City, Branch 12 in Civil Case No.
CEB-27950 is hereby AFFIRMED with MODIFICATION, deleting the award for
actual damages. As modified, the defendants Kabisig Real Wealth Dev., Inc. and
Ferdinand Tio are ordered to jointly pay the plaintiff Young Builders
Corporation Two Million Four Hundred Thousand (₱2,400,000.00) Pesos as
TEMPERATE DAMAGES for the value of services, rendered and materials used in
the renovation of defendants-appellants building. In addition, the total amount
adjudged shall earn interest at the rate of 12% per annum from September 11,
2001, until it is fully paid. Costs against defendants.
SO ORDERED.4
Subsequently, Young Builders and Kabisig moved for reconsideration, but both
were denied by the CA.5
Hence, Kabisig filed the instant petition.
The sole issue is whether or not Kabisig is liable to Young Builders for the
damages claimed:
Under the Civil Code, a contract is a meeting of minds, with respect to the other, to
give something or to render some service. Article 1318 reads:
Art. 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract; and
(3) Cause of the obligation which is established. Notwithstanding the absence of sufficient proof, Young Builders still deserves to be
recompensed for actually completing the work. In the absence of competent proof
Accordingly, for a contract to be valid, it must have the following essential
on the amount of actual damages, the courts allow the party to receive temperate
elements: (1) consent of the contracting parties; (2) object certain, which is the
damages. Temperate or moderate damages, which are more than nominal but
subject matter of the contract; and (3) cause of the obligation which is established.
less than compensatory damages, may be recovered when the court finds that
Consent must exist, otherwise, the contract is nonexistent. Consent is manifested
some pecuniary loss has been suffered but its amount cannot, from the nature of
by the meeting of the offer and the acceptance of the thing and the cause, which
the case, be proved with certainty.10
are to constitute the contract. By law, a contract of sale, is perfected at the
moment there is a meeting of the minds upon the thing that is the object of the To determine the compensation due and to avoid unjust enrichment from resulting
contract and upon the price. Indeed, it is a consensual contract which is perfected out of a fulfilled contract, the principle of quantum meruit may be used. Under this
by mere consent.6 principle, a contractor is allowed to recover the reasonable value of the services
rendered despite the lack of a written contract. The measure of recovery under the
Through the testimonies of both Young Builders' and Kabisig's witnesses, Tio
principle should relate to the reasonable value of the services performed. The
commissioned the company of his friend, Nelson Yu, to supply labor, tools,
principle prevents undue enrichment based on the equitable postulate that it is
equipment, and materials for the renovation of Kabisig's building into a restaurant.
unjust for a person to retain any benefit without paying for it. Being predicated on
While Tio argues that the renovation was actually for the benefit of his partners,
equity, said principle should only be applied if no express contract was entered
Fernando Congmon, Gold En Burst Foods Co., and Sunburst Fried Chicken, Inc.,
into, and no specific statutory provision was applicable.11
and therefore, they should be the ones who must shoulder the cost of the
renovation, said persons were never impleaded in the instant case. Moreover, all The principle of quantum meruit justifies the payment of the reasonable value of
the documents pertaining to the project, such as official receipts of payment for the the services rendered and should apply in the absence of an express agreement
building permit application, are under the names of Kabisig and Tio. on the fees. It is notable that the issue revolves around the parties' inability to
agree on the fees that Young Builders should receive. Considering the absence of
Further, Kabisig's claim as to the absence of a written contract between it and
an agreement, and in view of the completion of the renovation, the Court has to
Young Builders simply does not hold water.1avvphi1 It is settled that once
apply the principle of quantum meruit in determining how much is due to Young
perfected, a contract is generally binding in whatever form, whether written or oral,
Builders. Under the established circumstances, the total amount of ₱2,400,000.00
it may have been entered into, provided the aforementioned essential requisites
which the CA awarded is deemed to be a reasonable compensation under the
for its validity are present.7 Article 1356 of the Civil Code provides:
principle of quantum meruit since the renovation of Kabisig's building had already
Art. 1356. Contracts shall be obligatory in whatever form they may have been been completed in 2001. 12
entered into, provided all the essential requisites for their validity are present.
Finally, the rate of interest should be modified. When the obligation is breached,
xxxx and it consists in the payment of a sum of money, as in this case, the interest due
There is nothing in the law that requires a written contract for the agreement in should be that which may have been stipulated in writing. In the absence of
question to be valid and enforceable. Also, the Court notes that neither Kabisig nor stipulation, the rate of interest shall be 12%, later reduced to 6%,13 per annum to
Tio had objected to the renovation work, until it was already time to settle the bill. be computed from default, i.e., from judicial or extrajudicial demand, subject to the
provisions of Article 116914 of the Civil Code. Here, the records would show that
Likewise, the appellate court aptly reduced the amount of damages awarded by Young Builders made the demand on September 11, 2001. Also, the rate of legal
the RTC. Under Article 2199 of the Civil Code, actual or compensatory damages interest for a judgment awarding a sum of money shall be 6% per annum from the
are those awarded in satisfaction of, or in recompense for, loss or injury sustained. time such judgment becomes final and executory until its satisfaction, this interim
They proceed from a sense of natural justice and are designed to repair the wrong period being deemed to be by then an equivalent to a forbearance of credit. 15
that has been done, to compensate for the injury inflicted. They either refer to the
loss of what a person already possesses (dano emergente ), or the failure to WHEREFORE, PREMISES CONSIDERED, the Court DISMISSES the petition for
receive as a benefit that which would have pertained to him (lucro cesante ),8 as in lack of merit and AFFIRMS the Decision of the Court of Appeals dated June 28,
this case. 2013, and its Resolution dated March 28, 2014, in CA-G.R. CV No. 02945,
with MODIFICATION as to the interest which must be twelve percent (12%) per
For an injured party to recover actual damages, however, he is required to prove annum of the amount awarded from the time of demand on September 11, 2001 to
the actual amount of loss with reasonable degree of certainty premised upon June 30, 2013, and six percent (6%) per annum from July 1, 2013 until its full
competent proof and on the best evidence available. The burden of proof is on the satisfaction. SO ORDERED.
party who would be defeated if no evidence would be presented on either side. He
must establish his case by a preponderance of evidence, which means that the
evidence adduced by one side is superior to that of the other. In other words,
damages cannot be presumed and courts, in making an award, must point out
specific facts that could afford a basis for measuring compensatory damages. A
court cannot merely rely on speculations, conjectures, or guesswork as to the fact
and amount of damages as well as hearsay or uncorroborated testimony whose
truth is suspect. A party is entitled to adequate compensation only for such
pecuniary loss actually suffered and duly proved. Indeed, to recover actual
damages, the amount of loss must not only be capable of proof but must actually
be proven with a reasonable degree of certainty, premised upon competent proof
or best evidence obtainable of its actual amount.9 Here, the evidence reveals that
Young Builders failed to submit any competent proof of the specific amount of
actual damages being claimed. The documents submitted by Young Builders
either do not bear the name of Kabisig or Tio, their conformity, or signature, or do
not indicate in any way that the amount reflected on its face actually refers to the
renovation project.
G.R. No. 171428 November 11, 2013
ALEJANDRO V. TANKEH, Petitioner,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, STERLING SHIPPING
LINES, INC., RUPERTO V. TANKEH, VICENTE ARENAS, and ASSET
PRIVATIZATION TRUST, Respondents.
DECISION
LEONEN, J.:
This is a Petition for Review on Certiorari praying that the assailed October
25, 2005 Decision and the February 9, 2006 Resolution of the Court of
Appeals1 be reversed, and that the January 4, 1996 Decision of the Regional
Trial Court of Manila Branch 32 be affirmed. Petitioner prays that this Court
grant his claims for moral damages and attorney’s fees, as proven by the
evidence.
Respondent Ruperto V. Tankeh is the president of Sterling Shipping Lines,
Inc. It was incorporated on April 23, 1979 to operate ocean-going vessels
engaged primarily in foreign trade.2 Ruperto V. Tankeh applied for a $3.5
million loan from public respondent Development Bank of the Philippines for
the partial financing of an ocean-going vessel named the M/V Golden Lilac.
To authorize the loan, Development Bank of the Philippines required that the
following conditions be met:
1) A first mortgage must be obtained over the vessel, which by then had been
renamed the M/V Sterling Ace;
2) Ruperto V. Tankeh, petitioner Dr. Alejandro V. Tankeh, Jose Marie Vargas,
as well as respondents Sterling Shipping Lines, Inc. and Vicente Arenas
should become liable jointly and severally for the amount of the loan;
3) The future earnings of the mortgaged vessel, including proceeds of
Charter and Shipping Contracts, should be assigned to Development Bank of
the Philippines; and
4) Development Bank of the Philippines should be assigned no less than 67%
of the total subscribed and outstanding voting shares of the company. The
percentage of shares assigned should be maintained at all times, and the
assignment was to subsist as long as the assignee, Development Bank of the
Philippines, deemed it necessary during the existence of the loan.3
According to petitioner Dr. Alejandro V. Tankeh, Ruperto V. Tankeh
approached him sometime in 1980.4 Ruperto informed petitioner that he was
operating a new shipping line business. Petitioner claimed that respondent,
who is also petitioner’s younger brother, had told him that petitioner would be
given one thousand (1,000) shares to be a director of the business. The
shares were worth ₱1,000,000.00.5
On May 12, 1981, petitioner signed the Assignment of Shares of Stock with
Voting Rights.6 Petitioner then signed the May 12, 1981 promissory note in
December 1981. He was the last to sign this note as far as the other
signatories were concerned.7 The loan was approved by respondent
Development Bank of the Philippines on March 18, 1981. The vessel was
acquired on September 29, 1981 for $5.3 million.8 On December 3, 1981,
respondent corporation Sterling Shipping Lines, Inc. through respondent
Ruperto V. Tankeh executed a Deed of Assignment in favor of Development
Bank of the Philippines. The deed stated that the assignor, Sterling Shipping
Lines, Inc.:
x x x does hereby transfer and assign in favor of the ASSIGNEE (DBP), its
successors and assigns, future earnings of the mortgaged M/V "Sterling
Ace," including proceeds of charter and shipping contracts, it being
understood that this assignment shall continue to subsist for as long as the
ASSIGNOR’S obligation with the herein ASSIGNEE remains unpaid.9
On June 16, 1983, petitioner wrote a letter to respondent Ruperto V. Tankeh
saying that he was severing all ties and terminating his involvement with
Sterling Shipping Lines, Inc.10 He required that its board of directors pass a
resolution releasing him from all liabilities, particularly the loan contract with
Development Bank of the Philippines. In addition, petitioner asked that the
private respondents notify Development Bank of the Philippines that he had
severed his ties with Sterling Shipping Lines, Inc.11
The accounts of respondent Sterling Shipping Lines, Inc. in the Development
Bank of the Philippines were transferred to public respondent Asset
Privatization Trust on June 30, 1986.12
Presently, respondent Asset Privatization Trust is known as the Privatization
and Management Office. Asset Privatization Trust was a government agency
created through Presidential Proclamation No. 50, issued in 1986. Through
Administrative Order No. 14, issued by former President Corazon Aquino
dated February 3, 1987, assets including loans in favor of Development Bank
of the Philippines were ordered to be transferred to the national government.
In turn, the management and facilitation of these assets were delegated to
Asset Privatization Trust, pursuant to Presidential Proclamation No. 50. In
1999, Republic Act No. 8758 was signed into law, and it provided that the
corporate term of Asset Privatization Trust would end on December 31, 2000.
The same law empowered the President of the Philippines to determine
which office would facilitate the management of assets held by Asset
Privatization Trust. Thus, on December 6, 2000, former President Joseph E.
Estrada signed Executive Order No. 323, creating the Privatization
Management Office. Its present function is to identify disposable assets,
monitor the progress of privatization activities, and approve the sale or
divestment of assets with respect to price and buyer.13
On January 29, 1987, the M/V Sterling Ace was sold in Singapore for
$350,000.00 by Development Bank of the Philippines’ legal counsel Atty.
Prospero N. Nograles. When petitioner came to know of the sale, he wrote
respondent Development Bank of the Philippines to express that the final
price was inadequate, and therefore, the transaction was irregular. At this
time, petitioner was still bound as a debtor because of the promissory note
dated May 12, 1981, which petitioner signed in December of 1981. The
promissory note subsisted despite Sterling Shipping Lines, Inc.’s assignment
of all future earnings of the mortgaged M/V Sterling Ace to Development
Bank of the Philippines. The loan also continued to bind petitioner despite
Sterling Shipping Lines, Inc.’s cash equity contribution of ₱13,663,200.00
which was used to cover part of the acquisition cost of the vessel, pre-
operating expenses, and initial working capital.14
Petitioner filed several Complaints15 against respondents, praying that the
promissory note be declared null and void and that he be absolved from any
liability from the mortgage of the vessel and the note in question.
In the Complaints, petitioner alleged that respondent Ruperto V. Tankeh,
together with Vicente L. Arenas, Jr. and Jose Maria Vargas, had exercised
deceit and fraud in causing petitioner to bind himself jointly and severally to
pay respondent Development Bank of the Philippines the amount of the
mortgage loan.16 Although he had been made a stockholder and director of
the respondent corporation Sterling Shipping Lines, Inc., petitioner alleged
that he had never invested any amount in the corporation and that he had
never been an actual member of the board of directors.17 He alleged that all
the money he had supposedly invested was provided by respondent Ruperto
V. Tankeh.18 He claimed that he only attended one meeting of the board. In
that meeting, he was introduced to two directors representing Development
Bank of the Philippines, namely, Mr. Jesus Macalinag and Mr. Gil Corpus.
Other than that, he had never been notified of another meeting of the board
of directors.
Petitioner further claimed that he had been excluded deliberately from
participating in the affairs of the corporation and had never been
compensated by Sterling Shipping Lines, Inc. as a director and
stockholder.19 According to petitioner, when Sterling Shipping Lines, Inc. was
organized, respondent Ruperto V. Tankeh had promised him that he would
become part of the administration staff and oversee company operations.
Respondent Ruperto V. Tankeh had also promised petitioner that the latter’s
son would be given a position in the company.20 However, after being
designated as vice president, petitioner had not been made an officer and
had been alienated from taking part in the respondent corporation.21
Petitioner also alleged that respondent Development Bank of the Philippines
had been inexcusably negligent in the performance of its duties.22 He alleged
that Development Bank of the Philippines must have been fully aware of
Sterling Shipping Lines, Inc.’s financial situation. Petitioner claimed that
Sterling Shipping Lines, Inc. was controlled by the Development Bank of the
Philippines because 67% of voting shares had been assigned to the
latter.23Furthermore, the mortgage contracts had mandated that Sterling
Shipping Lines, Inc. "shall furnish the DBP with copies of the minutes of each
meeting of the Board of Directors within one week after the meeting. Sterling
Shipping Lines Inc. shall likewise furnish DBP its annual audited financial
statements and other information or data that may be needed by DBP as its
accommodations [sic] with DBP are outstanding."24 Petitioner further alleged
that the Development Bank of the Philippines had allowed "highly
questionable acts"25 to take place, including the gross undervaluing of the
M/V Sterling Aces.26 Petitioner alleged that one day after Development Bank
of the Philippines’ Atty. Nograles sold the vessel, the ship was re-sold by its
buyer for double the amount that the ship had been bought.27
As for respondent Vicente L. Arenas, Jr., petitioner alleged that since Arenas
had been the treasurer of Sterling Shipping Lines, Inc. and later on had
served as its vice president, he was also responsible for the financial situation
of Sterling Shipping Lines, Inc.
Lastly, in the Amended Complaint dated April 16, 1991, petitioner impleaded
respondent Asset Privatization Trust for being the agent and assignee of the
M/V Sterling Ace.
In their Answers28 to the Complaints, respondents raised the following
defenses against petitioner: Respondent Development Bank of the
Philippines categorically denied receiving any amount from Sterling Shipping
Lines, Inc.’s future earnings and from the proceeds of the shipping contracts.
It maintained that equity contributions could not be deducted from the
outstanding loan obligation that stood at ₱245.86 million as of December 31,
1986. Development Bank of the Philippines also maintained that it is
immaterial to the case whether the petitioner is a "real stockholder" or merely
a "pseudo-stockholder" of the corporation.29 By affixing his signature to the
loan agreement, he was liable for the obligation. According to Development
Bank of the Philippines, he was in pari delicto and could not be discharged
from his obligation. Furthermore, petitioner had no cause of action against
Development Bank of the Philippines since this was a case between family
members, and earnest efforts toward compromise should have been
complied with in accordance with Article 222 of the Civil Code of the
Philippines.30
Respondent Ruperto V. Tankeh stated that petitioner had voluntarily signed
the promissory note in favor of Development Bank of the Philippines and with
full knowledge of the consequences. Respondent Tankeh also alleged that he
did not employ any fraud or deceit to secure petitioner’s involvement in the
company, and petitioner had been fully aware of company operations. Also,
all that petitioner had to do to avoid liability had been to sell his shareholdings
in the company.31
Respondent Asset Privatization Trust raised that petitioner had no cause of
action against them since Asset Privatization Trust had been mandated under
Proclamation No. 50 to take title to and provisionally manage and dispose the
assets identified for privatization or deposition within the shortest possible
period. Development Bank of the Philippines had transferred and conveyed
all its rights, titles, and interests in favor of the national government in
accordance with Administrative Order No. 14. In line with that, Asset
Privatization Trust was constituted as trustee of the assets transferred to the
national government to effect privatization of these assets, including
respondent Sterling Shipping Lines, Inc.32 Respondent Asset Privatization
Trust also filed a compulsory counterclaim against petitioner and its co-
respondents Sterling Shipping Lines, Inc., Ruperto V. Tankeh, and Vicente L.
Arenas, Jr. for the amount of ₱264,386,713.84.
Respondent Arenas did not file an Answer to any of the Complaints of
petitioner but filed a Motion to Dismiss that the Regional Trial Court denied.
Respondent Asset Privatization Trust filed a Cross Claim against Arenas. In
his Answer33 to Asset Privatization Trust’s Cross Claim, Arenas claimed that
he had been released from any further obligation to Development Bank of the
Philippines and its successor Asset Privatization Trust because an extension
had been granted by the Development Bank of the Philippines to the debtors
of Sterling Shipping Lines, Inc. and/or Ruperto V. Tankeh, which had been
secured without Arenas’ consent.
The trial proceeded with the petitioner serving as a sole witness for his case.
In a January 4, 1996 Decision,34 the Regional Trial Court ruled:
Here, we find –
1. Plaintiff being promised by his younger brother, Ruperto V. Tankeh,
1,000 shares with par value of ₱1 Million with all the perks and
privileges of being stockholder and director of SSLI, a new international
shipping line;
2. That plaintiff will be part of the administration and operation of the
business, so with his son who is with the law firm Romulo Ozaeta Law
Offices;
3. But this was merely the come-on or appetizer for the Real McCoy or
the primordial end of congregating the incorporators proposed - - that he
sign the promissory note (Exhibit "C"), the mortgage contract (Exhibit
"A"), and deed of assignment so SSLI could get the US $3.5 M loan from
DBP to partially finance the importation of vessel M.V. "Golden Lilac"
renamed M.V. "Sterling ACE";
4. True it is, plaintiff was made a stockholder and director and Vice-
President in 1979 but he was never notified of any meeting of the Board
except only once, and only to be introduced to the two (2) directors
representing no less than 67% of the total subscribed and outstanding
voting shares of the company. Thereafter, he was excluded from any
board meeting, shorn of his powers and duties as director or Vice-
President, and was altogether deliberately demeaned as an outsider.
5. What kind of a company is SSLI who treated one of their
incorporators, one of their Directors and their paper Vice-President in
1979 by preventing him access to corporate books, to corporate
earnings, or losses, and to any compensation or remuneration
whatsoever? Whose President and Treasurer did not submit the
required SEC yearly report? Who did not remit to DBP the proceeds on
charter mortgage contracts on M/V Sterling Ace?
6. The M/V Sterling Ace was already in the Davao Port when it was then
diverted to Singapore to be disposed on negotiated sale, and not by
public bidding contrary to COA Circular No. 86-264 and without COA’s
approval. Sterling Ace was seaworthy but was sold as scrap in
Singapore. No foreclosure with public bidding was made in
contravention of the Promissory Note to recover any deficiency should
DBP seeks [sic] to recover it on the outstanding mortgage loan.
Moreover the sale was done after the account and asset (nay, now only
a liability) were transferred to APT. No approval of SSLI Board of
Directors to the negotiated sale was given.
7. Plaintiff’s letter to his brother President, Ruperto V. Tankeh, dated
June 15, 1983 (Exhibit "D") his letter thru his lawyer to DBP (Exhibit "J")
and another letter to it (Exhibit "K") show no estoppel on his part as he
consistently and continuously assailed the several injurious acts of
defendants while assailing the Promissory Note itself x x x (Citations
omitted) applying the maxim: Rencintiatio non praesumitur. By this Dr.
Tankeh never waived the right to question the Promissory Note contract
terms. He did not ratify, by concurring acts, express or tacit, after the
reasons had surfaced entitling him to render the contract voidable,
defendants’ acts in implementing or not the conditions of the mortgage,
the promissory note, the deed of assignment, the lack of audit and
accounting, and the negotiated sale of MV Sterling Ace. He did not ratify
defendants [sic] defective acts (Art. 1396, New Civil Code (NCC).
The foregoing and the following essays, supported by evidence, the fraud
committed by plaintiff’s brother before the several documents were signed
(SEC documents, Promissory Note, Mortgage (MC) Contract, assignment
(DA)), namely:
1. Ruperto V. Tankeh approaches his brother Alejandro to tell the latter
of his new shipping business. The project was good business proposal
[sic].
2. Ruperto tells Alejandro he’s giving him shares worth ₱1 Million and
he’s going to be a Director.
3. He tells his brother that he will be part of the company’s
Administration and Operations and his eldest son will be in it, too.
4. Ruperto tells his brother they need a ship, they need to buy one for
the business, and they therefore need a loan, and they could secure a
loan from DBP with the vessel brought to have a first mortgage with DBP
but anyway the other two directors and comptroller will be from DBP with
a 67% SSLI shares voting rights.
Without these insidious, devastating and alluring words, without the
machinations used by defendant Ruperto V. Tankeh upon the doctor, without
the inducement and promise of ownership of shares and the exercise of
administrative and operating functions, and the partial financing by one of the
best financial institutions, the DBP, plaintiff would not have agreed to join his
brother; and the safeguarding of the Bank’s interest by its nominated two (2)
directors in the Board added to his agreeing to the new shipping business.
His consent was vitiated by the fraud before the several contracts were
consummated.
This alone convenes [sic] this Court to annul the Promissory Note as it relates
to plaintiff himself.
Plaintiff also pleads annulment on ground of equity. Article 19, NCC, provides
him the way as it requires every person, in the exercise of his rights and
performance of his duties, to act with justice, give everyone his due, and
observe honesty and good faith (Velayo vs. Shell Co. of the Phils., G.R. L-
7817, October 31, 1956). Not to release him from the clutch of the
Promissory Note when he was never made a part of the operation of the
SSLI, when he was not notified of the Board Meetings, when the corporation
nary remitted earnings of M/V Sterling Ace from charter or shipping contracts
to DBP, when the SSLI did not comply with the deed of assignment and
mortgage contract, and when the vessel was sold in Singapore (he, learning
of the sale only from the newspapers) in contravention of the Promissory
Note, and which he questioned, will be an injustice, inequitable, and even
iniquitous to plaintiff. SSLI and the private defendants did not observe
honesty and good faith to one of their incorporators and directors. As to DBP,
the Court cannot put demerits on what plaintiff’s memorandum has pointed
out:
While defendant DBP did not exercise the caution and prudence in the
discharge of their functions to protect its interest as expected of them and
worst, allowed the perpetuation of the illegal acts committed in contrast to the
virtues they publicly profess, namely: "palabra de honor, delicadeza,
katapatan, kaayusan, pagkamasinop at kagalingan" Where is the vision
banking they have for our country?
Had DBP listened to a cry in the wilderness – that of the voice of the doctor –
the doctor would not have allowed the officers and board members to defraud
DBP and he would demand of them to hew and align themselves to the deed
of assignment.
Prescinding from the above, plaintiff’s consent to be with SSLI was vitiated by
fraud. The fact that defendant Ruperto Tankeh has not questioned his liability
to DBP or that Jose Maria Vargas has been declared in default do not detract
from the fact that there was attendant fraud and that there was continuing
fraud insofar as plaintiff is concerned.
Ipinaglaban lang ni Doctor ang karapatan niya. Kung wala siyang sense of
righteous indignation and fairness, tatahimik na lang siya, sira naman ang
pinangangalagaan niyang pangalan, honor and family prestige [sic]
(Emphasis provided).35
xxxx
All of the defendants’ counterclaims and cross-claims x x x including plaintiff’s
and the other defendants’ prayer for damages are not, for the moment,
sourced and proven by substantial evidence, and must perforce be denied
and dismissed.
WHEREFORE, this Court, finding and declaring the Promissory Note (Exhibit
"C") and the Mortgage Contract (Exhibit "A") null and void insofar as plaintiff
DR. ALEJANDRO V. TANKEH is concerned, hereby ANNULS and VOIDS
those documents as to plaintiff, and it is hereby further ordered that he be
released from any obligation or liability arising therefrom.
All the defendants’ counterclaims and cross-claims and plaintiff’s and
defendants’ prayer for damages are hereby denied and dismissed, without
prejudice.
SO ORDERED.36
Respondents Ruperto V. Tankeh, Asset Privatization Trust, and Arenas
immediately filed their respective Notices of Appeal with the Regional Trial
Court. The petitioner filed a Motion for Reconsideration with regard to the
denial of his prayer for damages. After this Motion had been denied, he then
filed his own Notice of Appeal.
In a Decision37 promulgated on October 25, 2005, the Third Division of the
Court of Appeals reversed the trial court’s findings. The Court of Appeals held
that petitioner had no cause of action against public respondent Asset
Privatization Trust. This was based on the Court of Appeals’ assessment of
the case records and its findings that Asset Privatization Trust did not commit
any act violative of the right of petitioner or constituting a breach of Asset
Privatization Trust’s obligations to petitioner. The Court of Appeals found that
petitioner’s claim for damages against Asset Privatization Trust was based
merely on his own self-serving allegations.38
As to the finding of fraud, the Court of Appeals held that:
xxxx
In all the complaints from the original through the first, second and third
amendments, the plaintiff imputes fraud only to defendant Ruperto, to wit:
4. That on May 12, 1981, due to the deceit and fraud exercised by Ruperto V.
Tankeh, plaintiff, together with Vicente L. Arenas, Jr. and Jose Maria Vargas
signed a promissory note in favor of the defendant, DBP, wherein plaintiff
bound himself to jointly and severally pay the DBP the amount of the
mortgage loan. This document insofar as plaintiff is concerned is a simulated
document considering that plaintiff was never a real stockholder of Sterling
Shipping Lines, Inc. (Emphasis provided)
More allegations of deceit were added in the Second Amended Complaint,
but they are also attributed against Ruperto:
6. That THE DECEIT OF DEFENDANT RUPERTO V. TANKEH IS SHOWN
BY THE FACT THAT when the Sterling Shipping Lines, Inc. was organized in
1980, Ruperto V. Tankeh promised plaintiff that he would be a part of the
administration staff so that he could oversee the operation of the company.
He was also promised that his son, a lawyer, would be given a position in the
company. None of these promsies [sic] was complied with. In fact he was not
even allowed to find out the data about the income and expenses of the
company.
7. THAT THE DECEIT OF RUPERTO V. TANKEH IS ALSO SHOWN BY
THE FACT THAT PLAINTIFF WAS INVITED TO ATTEND THE BOARD
MEETING OF THE STERLING SHIPPING LINES INC. ONLY ONCE,
WHICH WAS FOR THE SOLE PURPOSE OF INTRODUCING HIM TO THE
TWO DIRECTORS OF THE DBP IN THE BOARD OF THE STERLING
SHIPPING LINES, INC., NAMELY, MR. JESUS MACALINAG AND MR. GIL
CORPUS. THEREAFTER HE WAS NEVER INVITED AGAIN. PLAINTIFF
WAS NEVER COMPENSATED BY THE STERLING SHIPPING LINES, INC.
FOR HIS BEING A SO-CALLED DIRECTOR AND STOCKHOLDER.
xxxx
8-A THAT A WEEK AFTER SENDING THE ABOVE LETTER PLAINTIFF
MADE EARNEST EFFORTS TOWARDS A COMPROMISE BETWEEN HIM
AND HIS BROTHER RUPERTO V. TANKEH, WHICH EFFORTS WERE
SPURNED BY RUPERTO V. TANKEH, AND ALSO AFTER THE NEWS OF
THE SALE OF THE ‘STERLING ACE’ WAS PUBLISHED AT THE
NEWSPAPER, PLAINTIFF TRIED ALL EFFORTS TO CONTACT RUPERTO
V. TANKEH FOR THE PURPOSE OF ARRIVING AT SOME COMPROMISE,
BUT DEFENDANT RUPERTO V. TANKEH AVOIDED ALL CONTACTS
WITH THE PLAINTIFF UNTIL HE WAS FORCED TO SEEK LEGAL
ASSISTANCE FROM HIS LAWYER.
In the absence of any allegations of fraud and/or deceit against the other
defendants, namely, the DBP, Vicente Arenas, Sterling Shipping Lines, Inc.,
and the Asset Privatization Trust, the plaintiff’s evidence thereon should only
be against Ruperto, since a plaintiff is bound to prove only the allegations of
his complaint. In any case, no evidence of fraud or deceit was ever presented
against defendants DBP, Arenas, SSLI and APT.
As to the evidence against Ruperto, the same consists only of the testimony
of the plaintiff. None of his documentary evidence would prove that Ruperto
was guilty of fraud or deceit in causing him to sign the subject promissory
note.39
xxxx
Analyzing closely the foregoing statements, we find no evidence of fraud or
deceit. The mention of a new shipping lines business and the promise of a
free 1,000-share and directorship in the corporation do not amount to
insidious words or machinations. In any case, the shipping business was
indeed established, with the plaintiff himself as one of the incorporators and
stockholders with a share of 4,000, worth ₱4,000,000.00 of which
₱1,000,000.00 was reportedly paid up. As such, he signed the Articles of
Incorporation and the corporation’s By-Laws which were registered with the
Securities and Exchange Commission in April 1979. It was not until May 12,
1981 that he signed the questioned promissory note. From his own
declaration at the witness stand, the plaintiff signed the promissory note
voluntarily. No pressure, force or intimidation was made to bear upon him. In
fact, according to him, only a messenger brought the paper to him for
signature. The promised shares of stock were given and recorded in the
plaintiff’s name. He was made a director and Vice-President of SSLI.
Apparently, only the promise that his son would be given a position in the
company remained unfulfilled. However, the same should have been
threshed out between the plaintiff and his brother, defendant Ruperto, and its
non-fulfillment did not amount to fraud or deceit, but was only an unfulfilled
promise.
It should be pointed out that the plaintiff is a doctor of medicine and a
seasoned businessman. It cannot be said that he did not understand the
import of the documents he signed. Certainly he knew what he was signing.
He should have known that being an officer of SSLI, his signing of the
promissory note together with the other officers of the corporation was
expected, as the other officers also did. It cannot therefore be said that the
promissory note was simulated. The same is a contract validly entered into,
which the parties are obliged to comply with.40 (Citations omitted)
The Court of Appeals ruled that in the absence of any competent proof,
Ruperto V. Tankeh did not commit any fraud. Petitioner Alejandro V. Tankeh
was unable to prove by a preponderance of evidence that fraud or deceit had
been employed by Ruperto to make him sign the promissory note. The Court
of Appeals reasoned that:
Fraud is never presumed but must be proved by clear and convincing
evidence, mere preponderance of evidence not even being adequate.
Contentions must be proved by competent evidence and reliance must be
had on the strength of the party’s evidence and not upon the weakness of the
opponent’s defense. The plaintiff clearly failed to discharge such
burden.41 (Citations omitted)
With that, the Court of Appeals reversed and set aside the judgment and
ordered that plaintiff’s Complaint be dismissed. Petitioner filed a Motion for
Reconsideration dated October 25, 2005 that was denied in a
Resolution42promulgated on February 9, 2006.
Hence, this Petition was filed.
In this Petition, Alejandro V. Tankeh stated that the Court of Appeals
seriously erred and gravely abused its discretion in acting and deciding as if
the evidence stated in the Decision of the Regional Trial Court did not exist.
He averred that the ruling of lack of cause of action had no leg to stand on,
and the Court of Appeals had unreasonably, whimsically, and capriciously
ignored the ample evidence on record proving the fraud and deceit
perpetrated on the petitioner by the respondent. He stated that the appellate
court failed to appreciate the findings of fact of the lower court, which are
generally binding on appellate courts. He also maintained that he is entitled to
damages and attorney's fees due to the deceit and machinations committed
by the respondent.
In his Memorandum, respondent Ruperto V. Tankeh averred that petitioner
had chosen the wrong remedy. He ought to have filed a special civil action of
certiorari and not a Petition for Review. Petitioner raised questions of fact,
and not questions of law, and this required the review or evaluation of
evidence. However, this is not the function of this Court, as it is not a trier of
facts. He also contended that petitioner had voluntarily entered into the loan
agreement and the position with Sterling Shipping Lines, Inc. and that he did
not fraudulently induce the petitioner to enter into the contract.
Respondents Development Bank of the Philippines and Asset Privatization
Trust also contended that petitioner's mode of appeal had been wrong, and
he had actually sought a special civil action of certiorari. This alone merited
its dismissal.
The main issue in this case is whether the Court of Appeals erred in finding
that respondent Rupert V. Tankeh did not commit fraud against the petitioner.
The Petition is partly granted.
Before disposing of the main issue in this case, this Court needs to address a
procedural issue raised by respondents. Collectively, respondents argue that
the Petition is actually one of certiorari under Rule 65 of the Rules of
Court43 and not a Petition for Review on Certiorari under Rule 45.44 Thus,
petitioner’s failure to show that there was neither appeal nor any other plain,
speedy or adequate remedy merited the dismissal of the Complaint.
Contrary to respondent’s imputation, the remedy contemplated by petitioner
is clearly that of a Rule 45 Petition for Review. In Tagle v. Equitable PCI
Bank,45 this Court made the distinction between a Rule 45 Petition for Review
on Certiorari and a Rule 65 Petition for Certiorari:
Certiorari is a remedy designed for the correction of errors of jurisdiction, not
errors of judgment.1âwphi1 In Pure Foods Corporation v. NLRC, we
explained the simple reason for the rule in this light: When a court exercises
its jurisdiction, an error committed while so engaged does not deprive it of the
jurisdiction being exercised when the error is committed x x x. Consequently,
an error of judgment that the court may commit in the exercise of its
jurisdiction is not correctable through the original civil action of certiorari.
xxxx
Even if the findings of the court are incorrect, as long as it has jurisdiction
over the case, such correction is normally beyond the province of certiorari.
Where the error is not one of jurisdiction, but of an error of law or fact a
mistake of judgment, appeal is the remedy.
In this case, what petitioner seeks to rectify may be construed as errors of
judgment of the Court of Appeals. These errors pertain to the petitioner’s
allegation that the appellate court failed to uphold the findings of facts of the
lower court. He does not impute any error with respect to the Court of
Appeals’ exercise of jurisdiction. As such, this Petition is simply a
continuation of the appellate process where a case is elevated from the trial
court of origin, to the Court of Appeals, and to this Court via Rule 45.
Contrary to respondents’ arguments, the allegations of petitioner that the
Court of Appeals "committed grave abuse of discretion"46 did not ipso facto
render the intended remedy that of certiorari under Rule 65 of the Rules of
Court.47
In any case, even if the Petition is one for the special civil action of certiorari,
this Court has the discretion to treat a Rule 65 Petition for Certiorari as a Rule
45 Petition for Review on Certiorari. This is allowed if (1) the Petition is filed
within the reglementary period for filing a Petition for review; (2) when errors
of judgment are averred; and (3) when there is sufficient reason to justify the
relaxation of the rules.48 When this Court exercises this discretion, there is no
need to comply with the requirements provided for in Rule 65.
In this case, petitioner filed his Petition within the reglementary period of filing
a Petition for Review.49 His Petition assigns errors of judgment and
appreciation of facts and law on the part of the Court of Appeals. Thus, even
if the Petition was designated as one that sought the remedy of certiorari, this
Court may exercise its discretion to treat it as a Petition for Review in the
interest of substantial justice.
We now proceed to the substantive issue, that of petitioner’s imputation of
fraud on the part of respondents. We are required by the circumstances of
this case to review our doctrines of fraud that are alleged to be present in
contractual relations.
Types of Fraud in Contracts
Fraud is defined in Article 1338 of the Civil Code as:
x x x fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which, without
them, he would not have agreed to.
This is followed by the articles which provide legal examples and illustrations
of fraud.
Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as
when the parties are bound by confidential relations, constitutes fraud. (n)
Art. 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion does not signify fraud, unless
made by an expert and the other party has relied on the former's special
knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate consent,
unless such misrepresentation has created substantial mistake and the same
is mutual. (n)
Art. 1343. Misrepresentation made in good faith is not fraudulent but may
constitute error. (n)
The distinction between fraud as a ground for rendering a contract voidable
or as basis for an award of damages is provided in Article 1344:
In order that fraud may make a contract voidable, it should be serious and
should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages. (1270)
There are two types of fraud contemplated in the performance of contracts:
dolo incidente or incidental fraud and dolo causante or fraud serious enough
to render a contract voidable.
In Geraldez v. Court of Appeals,50 this Court held that:
This fraud or dolo which is present or employed at the time of birth or
perfection of a contract may either be dolo causante or dolo incidente. The
first, or causal fraud referred to in Article 1338, are those deceptions or
misrepresentations of a serious character employed by one party and without
which the other party would not have entered into the contract. Dolo
incidente, or incidental fraud which is referred to in Article 1344, are those
which are not serious in character and without which the other party would
still have entered into the contract. Dolo causante determines or is the
essential cause of the consent, while dolo incidente refers only to some
particular or accident of the obligation. The effects of dolo causante are the
nullity of the contract and the indemnification of damages, and dolo incidente
also obliges the person employing it to pay damages.51
In Solidbank Corporation v. Mindanao Ferroalloy Corporation, et al.,52 this
Court elaborated on the distinction between dolo causante and dolo
incidente:
Fraud refers to all kinds of deception -- whether through insidious
machination, manipulation, concealment or misrepresentation -- that would
lead an ordinarily prudent person into error after taking the circumstances into
account. In contracts, a fraud known as dolo causante or causal fraud is
basically a deception used by one party prior to or simultaneous with the
contract, in order to secure the consent of the other. Needless to say, the
deceit employed must be serious. In contradistinction, only some particular or
accident of the obligation is referred to by incidental fraud or dolo incidente,
or that which is not serious in character and without which the other party
would have entered into the contract anyway.53
Under Article 1344, the fraud must be serious to annul or avoid a contract
and render it voidable. This fraud or deception must be so material that had it
not been present, the defrauded party would not have entered into the
contract. In the recent case of Spouses Carmen S. Tongson and Jose C.
Tongson, et al., v. Emergency Pawnshop Bula, Inc.,54 this Court provided
some examples of what constituted dolo causante or causal fraud:
Some of the instances where this Court found the existence of causal fraud
include: (1) when the seller, who had no intention to part with her property,
was "tricked into believing" that what she signed were papers pertinent to her
application for the reconstitution of her burned certificate of title, not a deed of
sale; (2) when the signature of the authorized corporate officer was forged; or
(3) when the seller was seriously ill, and died a week after signing the deed of
sale raising doubts on whether the seller could have read, or fully understood,
the contents of the documents he signed or of the consequences of his
act.55 (Citations omitted)
However, Article 1344 also provides that if fraud is incidental, it follows that
this type of fraud is not serious enough so as to render the original contract
voidable.
A classic example of dolo incidente is Woodhouse v. Halili.56 In this case, the
plaintiff Charles Woodhouse entered into a written agreement with the
defendant Fortunato Halili to organize a partnership for the bottling and
distribution of soft drinks. However, the partnership did not come into fruition,
and the plaintiff filed a Complaint in order to execute the partnership. The
defendant filed a Counterclaim, alleging that the plaintiff had defrauded him
because the latter was not actually the owner of the franchise of a soft drink
bottling operation. Thus, defendant sought the nullification of the contract to
enter into the partnership. This Court concluded that:
x x x from all the foregoing x x x plaintiff did actually represent to defendant
that he was the holder of the exclusive franchise. The defendant was made to
believe, and he actually believed, that plaintiff had the exclusive franchise. x x
x The record abounds with circumstances indicative that the fact that the
principal consideration, the main cause that induced defendant to enter into
the partnership agreement with plaintiff, was the ability of plaintiff to get the
exclusive franchise to bottle and distribute for the defendant or for the
partnership. x x x The defendant was, therefore, led to the belief that plaintiff
had the exclusive franchise, but that the same was to be secured for or
transferred to the partnership. The plaintiff no longer had the exclusive
franchise, or the option thereto, at the time the contract was perfected. But
while he had already lost his option thereto (when the contract was entered
into), the principal obligation that he assumed or undertook was to secure
said franchise for the partnership, as the bottler and distributor for the Mission
Dry Corporation. We declare, therefore, that if he was guilty of a false
representation, this was not the causal consideration, or the principal
inducement, that led plaintiff to enter into the partnership agreement.
But, on the other hand, this supposed ownership of an exclusive franchise
was actually the consideration or price plaintiff gave in exchange for the
share of 30 percent granted him in the net profits of the partnership business.
Defendant agreed to give plaintiff 30 per cent share in the net profits because
he was transferring his exclusive franchise to the partnership. x x x.
Plaintiff had never been a bottler or a chemist; he never had experience in
the production or distribution of beverages. As a matter of fact, when the
bottling plant being built, all that he suggested was about the toilet facilities
for the laborers.
We conclude from the above that while the representation that plaintiff had
the exclusive franchise did not vitiate defendant's consent to the contract, it
was used by plaintiff to get from defendant a share of 30 per cent of the net
profits; in other words, by pretending that he had the exclusive franchise and
promising to transfer it to defendant, he obtained the consent of the latter to
give him (plaintiff) a big slice in the net profits. This is the dolo incidente
defined in article 1270 of the Spanish Civil Code, because it was used to get
the other party's consent to a big share in the profits, an incidental matter in
the agreement.57
Thus, this Court held that the original agreement may not be declared null
and void. This Court also said that the plaintiff had been entitled to damages
because of the refusal of the defendant to enter into the partnership.
However, the plaintiff was also held liable for damages to the defendant for
the misrepresentation that the former had the exclusive franchise to soft drink
bottling operations.
To summarize, if there is fraud in the performance of the contract, then this
fraud will give rise to damages. If the fraud did not compel the imputing party
to give his or her consent, it may not serve as the basis to annul the contract,
which exhibits dolo causante. However, the party alleging the existence of
fraud may prove the existence of dolo incidente.
This may make the party against whom fraud is alleged liable for damages.
Quantum of Evidence to Prove the Existence of Fraud and the Liability of the
Parties
The Civil Code, however, does not mandate the quantum of evidence
required to prove actionable fraud, either for purposes of annulling a contract
(dolo causante) or rendering a party liable for damages (dolo incidente). The
definition of fraud is different from the quantum of evidence needed to prove
the existence of fraud. Article 1338 provides the legal definition of fraud.
Articles 1339 to 1343 constitute the behavior and actions that, when in
conformity with the legal provision, may constitute fraud.
Jurisprudence has shown that in order to constitute fraud that provides basis
to annul contracts, it must fulfill two conditions. First, the fraud must be dolo
causante or it must be fraud in obtaining the consent of the party. Second,
this fraud must be proven by clear and convincing evidence. In Viloria v.
Continental Airlines,58 this Court held that:
Under Article 1338 of the Civil Code, there is fraud when, through insidious
words or machinations of one of the contracting parties, the other is induced
to enter into a contract which, without them, he would not have agreed to. In
order that fraud may vitiate consent, it must be the causal (dolo causante),
not merely the incidental (dolo incidente), inducement to the making of the
contract. In Samson v. Court of Appeals, causal fraud was defined as "a
deception employed by one party prior to or simultaneous to the contract in
order to secure the consent of the other." Also, fraud must be serious and its
existence must be established by clear and convincing evidence. (Citations
omitted)59
In Viloria, this Court cited Sierra v. Court of Appeals60 stating that mere
preponderance of evidence will not suffice in proving fraud.
Fraud must also be discounted, for according to the Civil Code:
Art. 1338. There is fraud when, through insidious words or machinations of
one of the contracting parties, the other is induced to enter into a contract
which without them, he would not have agreed to.
Art. 1344. In order that fraud may make a contract voidable, it should be
serious and should not have been employed by both contracting parties.
To quote Tolentino again, the "misrepresentation constituting the fraud must
be established by full, clear, and convincing evidence, and not merely by a
preponderance thereof. The deceit must be serious. The fraud is serious
when it is sufficient to impress, or to lead an ordinarily prudent person into
error; that which cannot deceive a prudent person cannot be a ground for
nullity. The circumstances of each case should be considered, taking into
account the personal conditions of the victim."61
Thus, to annul a contract on the basis of dolo causante, the following must
happen: First, the deceit must be serious or sufficient to impress and lead an
ordinarily prudent person to error. If the allegedly fraudulent actions do not
deceive a prudent person, given the circumstances, the deceit here cannot
be considered sufficient basis to nullify the contract. In order for the deceit to
be considered serious, it is necessary and essential to obtain the consent of
the party imputing fraud. To determine whether a person may be sufficiently
deceived, the personal conditions and other factual circumstances need to be
considered.
Second, the standard of proof required is clear and convincing evidence. This
standard of proof is derived from American common law. It is less than proof
beyond reasonable doubt (for criminal cases) but greater than preponderance
of evidence (for civil cases). The degree of believability is higher than that of
an ordinary civil case. Civil cases only require a preponderance of evidence
to meet the required burden of proof. However, when fraud is alleged in an
ordinary civil case involving contractual relations, an entirely different
standard of proof needs to be satisfied. The imputation of fraud in a civil case
requires the presentation of clear and convincing evidence. Mere allegations
will not suffice to sustain the existence of fraud. The burden of evidence rests
on the part of the plaintiff or the party alleging fraud. The quantum of
evidence is such that fraud must be clearly and convincingly shown.
The Determination of the Existence of Fraud in the Present Case
We now determine the application of these doctrines regarding fraud to
ascertain the liability, if any, of the respondents.
Neither law nor jurisprudence distinguishes whether it is dolo incidente or
dolo causante that must be proven by clear and convincing evidence. It
stands to reason that both dolo incidente and dolo causante must be proven
by clear and convincing evidence. The only question is whether this fraud,
when proven, may be the basis for making a contract voidable (dolo
causante), or for awarding damages (dolo incidente), or both.
Hence, there is a need to examine all the circumstances thoroughly and to
assess the personal circumstances of the party alleging fraud. This may
require a review of the case facts and the evidence on record.
In general, this Court is not a trier of facts. It makes its rulings based on
applicable law and on standing jurisprudence. The findings of the Court of
Appeals are generally binding on this Court provided that these are supported
by the evidence on record. In the recent case of Medina v. Court of
Appeals,62 this Court held that:
It is axiomatic that a question of fact is not appropriate for a petition for review
on certiorari under Rule 45. This rule provides that the parties may raise only
questions of law, because the Supreme Court is not a trier of facts. Generally,
we are not duty-bound to analyze again and weigh the evidence introduced in
and considered by the tribunals below. When supported by substantial
evidence, the findings of fact of the Court of Appeals are conclusive and
binding on the parties and are not reviewable by this Court, unless the case
falls under any of the following recognized exceptions: (1) When the
conclusion is a finding grounded entirely on speculation, surmises and
conjectures; (2) When the inference made is manifestly mistaken, absurd or
impossible; (3) Where there is a grave abuse of discretion; (4) When the
judgment is based on a misapprehension of facts; (5) When the findings of
fact are conflicting; (6) When the Court of Appeals, in making its findings,
went beyond the issues of the case and the same is contrary to the
admissions of both appellant and appellee; (7) When the findings are contrary
to those of the trial court; (8) When the findings of fact are conclusions
without citation of specific evidence on which they are based; (9) When the
facts set forth in the petition as well as in the petitioner’s main and reply briefs
are not disputed by the respondents; and (10) When the findings of fact of the
Court of Appeals are premised on the supposed absence of evidence and
contradicted by the evidence on record. (Emphasis provided)63
The trial court and the Court of Appeals had appreciated the facts of this case
differently.
The Court of Appeals was not correct in saying that petitioner could only raise
fraud as a ground to annul his participation in the contract as against
respondent Rupert V. Tankeh, since the petitioner did not make any
categorical allegation that respondents Development Bank of the Philippines,
Sterling Shipping Lines, Inc., and Asset Privatization Trust had acted
fraudulently. Admittedly, it was only in the Petition before this Court that the
petitioner had made the allegation of a "well-orchestrated fraud"64 by the
respondents. However, Rule 10, Section 5 of the Rules of Civil Procedure
provides that:
Amendment to conform to or authorize presentation of evidence. — When
issues not raised by the pleadings are tried with the express or implied
consent of the parties they shall be treated in all respects as if they had been
raised in the pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to raise these
issues may be made upon motion of any party at any time, even after
judgment; but failure to amend does not effect the result of the trial of these
issues. If evidence is objected to at the trial on the ground that it is not within
the issues made by the pleadings, the court may allow the pleadings to be
amended and shall do so with liberality if the presentation of the merits of the
action and the ends of substantial justice will be subserved thereby. The court
may grant a continuance to enable the amendment to be made. (5a)
In this case, the commission of fraud was an issue that had been tried with
the implied consent of the respondents, particularly Sterling Shipping Lines,
Inc., Asset Privatization Trust, Development Bank of the Philippines, and
Arenas. Hence, although there is a lack of a categorical allegation in the
pleading, the courts may still be allowed to ascertain fraud.
The records will show why and how the petitioner agreed to enter into the
contract with respondent Ruperto V. Tankeh:
ATTY. VELAYO: How did you get involved in the business of the Sterling
Shipping Lines, Incorporated" [sic]
DR. TANKEH: Sometime in the year 1980, I was approached by Ruperto
Tankeh mentioning to me that he is operating a new shipping lines business
and he is giving me free one thousand shares (1,000) to be a director of this
new business which is worth one million pesos (₱1,000,000.00.),
ATTY. VELAYO: Are you related to Ruperto V. Tankeh?
DR. TANKEH: Yes, sir. He is my younger brother.
ATTY. VELAYO: Did you accept the offer?
DR. TANKEH: I accepted the offer based on his promise to me that I will be
made a part of the administration staff so that I can oversee the operation of
the business plus my son, the eldest one who is already a graduate lawyer
with a couple of years of experience in the law firm of Romulo Ozaeta Law
Offices (TSN, April 28, 1988, pp. 10-11.).65
The Second Amended Complaint of petitioner is substantially reproduced
below to ascertain the claim:
xxxx
2. That on May 12, 1981, due to the deceit and fraud exercised by
Ruperto V. Tankeh, plaintiff, together with Vicente L. Arenas, Jr. and
Jose Maria Vargas, signed a promissory note in favor of the defendant
DBP, wherein plaintiff bound himself to jointly and severally pay the DBP
the amount of the mortgage loan. This document insofar as plaintiff is
concerned is a simulated document considering that plaintiff was never a
real stockholder of the Sterling Shipping Lines, Inc.
3. That although plaintiff’s name appears in the records of Sterling
Shipping Lines, Inc. as one of its incorporators, the truth is that he had
never invested any amount in said corporation and that he had never
been an actual member of said corporation. All the money supposedly
invested by him were put by defendant Ruperto V. Tankeh. Thus, all the
shares of stock under his name in fact belongs to Ruperto V. Tankeh.
Plaintiff was invited to attend the board meeting of the Sterling Shipping
Lines, Inc. only once, which was for the sole purpose of introducing him
to the two directors of the DBP, namely, Mr. Jesus Macalinag and Mr.
Gil Corpus. Thereafter he was never invited again. Plaintiff was never
compensated by the Sterling Shipping Lines, Inc. for his being a so-
called director and stockholder. It is clear therefore that the DBP knew
all along that plaintiff was not a true stockholder of the company.
4. That THE DECEIT OF DEFENDANT RUPERTO V. TANKEH IS
SHOWN BY THE FACT THAT when the Sterling Shipping Lines, Inc.
was organized in 1980, Ruperto V. Tankeh promised plaintiff that he
would be a part of the administration staff so that he could oversee the
operation of the company. He was also promised that his son, a lawyer,
would be given a position in the company. None of these promises was
complied with. In fact, he was not even allowed to find out the data about
the income and expenses of the company.
5. THAT THE DECEIT OF RUPERTO V. TANKEH IS ALSO SHOWN
BY THE FACT THAT PLAINTIFF WAS INVITED TO ATTEND THE
BOARD MEETING OF THE STERLING SHIPPING LINES, INC. ONLY
ONCE, WHICH WAS FOR THE SOLE PUPOSE OF INTRODUCING
HIM TO THE TWO DIRECTORS OF THE DBP IN THE BOARD OF THE
STERLING SHIPPING LINES, INC., NAMELY, MR. JESUS
MACALINAG AND MR. GIL CORPUS. THEREAFTER HE WAS NEVER
INVITED AGAIN. PLAINTIFF WAS NEVER COMPENSATED BY THE
STERLING SHIPPING LINES, INC. FOR HIS BEING A SO-CALLED
DIRECTOR AND STOCKHOLDER.
6. That in 1983, upon realizing that he was only being made a tool to
realize the purposes of Ruperto V. Tankeh, plaintiff officially informed the
company by means of a letter dated June 15, 1983 addressed to the
company that he has severed his connection with the company, and
demanded among others, that the company board of directors pass a
resolution releasing him from any liabilities especially with reference to
the loan mortgage contract with the DBP and to notify the DBP of his
severance from the Sterling Shipping Lines, Inc.
8-A. THAT A WEEK AFTER SENDING THE ABOVE LETTER,
PLAINTIFF MADE EARNEST EFFORTS TOWARDS A COMPROMISE
BETWEEN HIM AND HIS BROTHER RUPERTO V. TANKEH, WHICH
EFFORTS WERE SPURNED BY RUPERTO V. TANKEH, AND ALSO
AFTER THE NEWS OF THE SALE OF THE "STERLING ACE" WAS
PUBLISHED AT THE NEWSPAPER [sic], PLAINTIFF TRIED ALL
EFFORTS TO CONTACT RUPERTO V. TANKEH FOR THE PURPOSE
OF ARRIVING AT SOME COMPROMISE, BUT DEFENDANT
RUPERTO V. TANKEH AVOIDED ALL CONTACTS [sic] WITH THE
PLAINTIFF UNTIL HE WAS FORCED TO SEEK LEGAL ASSISTANCE
FROM HIS LAWYER.66
In his Answer, respondent Ruperto V. Tankeh stated that:
COMES NOW defendant RUPERTO V. TANKEH, through the undersigned
counsel, and to the Honorable Court, most respectfully alleges:
xxxx
3. That paragraph 4 is admitted that herein answering defendant
together with the plaintiff signed the promissory note in favor of DBP but
specifically denied that the same was done through deceit and fraud of
herein answering defendant the truth being that plaintiff signed said
promissory note voluntarily and with full knowledge of the consequences
thereof; it is further denied that said document is a simulated document
as plaintiff was never a real stockholder of the company, the truth being
those alleged in the special and affirmative defenses;
4. That paragraphs 5,6,7,8 and 8-A are specifically denied specially the
imputation of deceit and fraud against herein answering defendant, the
truth being those alleged in the special and affirmative defenses;
xxxx
SPECIAL AND AFFIRMATIVE DEFENSES x x x
8. The complaint states no cause of action as against herein answering
defendant;
9. The Sterling Shipping Lines, Inc. was a legitimate company organized
in accordance with the laws of the Republic of the Philippines with the
plaintiff as one of the incorporators;
10. Plaintiff as one of the incorporators and directors of the board was
fully aware of the by-laws of the company and if he attended the board
meeting only once as alleged, the reason thereof was known only to
him;
11. The Sterling Shipping Lines, Inc. being a corporation acting through
its board of directors, herein answering defendant could not have
promised plaintiff that he would be a part of the administration staff;
12. As member of the board, plaintiff had all the access to the data and
records of the company; further, as alleged in the complaint, plaintiff has
a son who is a lawyer who could have advised him;
13. Assuming plaintiff wrote a letter to the company to sever his
connection with the company, he should have been aware that all he
had to do was sell all his holdings in the company;
14. Herein answering defendant came to know only of plaintiff’s alleged
predicament when he received the summons and copy of the complaint;
x x x.67
An assessment of the allegations in the pleadings and the findings of fact of
both the trial court and appellate court based on the evidence on record led to
the conclusion that there had been no dolo causante committed against the
petitioner by Ruperto V. Tankeh.
The petitioner had given his consent to become a shareholder of the
company without contributing a single peso to pay for the shares of stock
given to him by Ruperto V. Tankeh. This fact was admitted by both petitioner
and respondent in their respective pleadings submitted to the lower court.
In his Amended Complaint,68 the petitioner admitted that "he had never
invested any amount in said corporation and that he had never been an
actual member of said corporation. All the money supposedly invested by him
were put up by defendant Ruperto V. Tankeh."69 This fact alone should have
already alerted petitioner to the gravity of the obligation that he would be
undertaking as a member of the board of directors and the attendant
circumstances that this undertaking would entail. It also does not add any
evidentiary weight to strengthen petitioner’s claim of fraud. If anything, it only
strengthens the position that petitioner’s consent was not obtained through
insidious words or deceitful machinations.
Article 1340 of the Civil Code recognizes the reality of some exaggerations in
trade which negates fraud. It reads:
Art. 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent.
Given the standing and stature of the petitioner, he was in a position to
ascertain more information about the contract.
Songco v. Sellner70 serves as one of the key guidelines in ascertaining
whether a party is guilty of fraud in obtaining the consent of the party claiming
that fraud existed. The plaintiff Lamberto Songco sought to recover earnings
from a promissory note that defendant George Sellner had made out to him
for payment of Songco’s sugar cane production. Sellner claimed that he had
refused to pay because Songco had promised that the crop would yield 3,000
piculs of sugar, when in fact, only 2,017 piculs of sugar had been produced.
This Court held that Sellner would still be liable to pay the promissory note,
as follows:
Notwithstanding the fact that Songco's statement as to the probable output of
his crop was disingenuous and uncandid, we nevertheless think that Sellner
was bound and that he must pay the price stipulated. The representation in
question can only be considered matter of opinion as the cane was still
standing in the field, and the quantity of the sugar it would produce could not
be known with certainty until it should be harvested and milled. Undoubtedly
Songco had better experience and better information on which to form an
opinion on this question than Sellner. Nevertheless the latter could judge with
his own eyes as to the character of the cane, and it is shown that he
measured the fields and ascertained that they contained 96 1/2 hectares.
xxxx
The law allows considerable latitude to seller's statements, or dealer's talk;
and experience teaches that it is exceedingly risky to accept it at its face
value. The refusal of the seller to warrant his estimate should have
admonished the purchaser that that estimate was put forth as a mere opinion;
and we will not now hold the seller to a liability equal to that which would have
been created by a warranty, if one had been given.
xxxx
It is not every false representation relating to the subject matter of a contract
which will render it void. It must be as to matters of fact substantially affecting
the buyer's interest, not as to matters of opinion, judgment, probability, or
expectation. (Long vs. Woodman, 58 Me., 52; Hazard vs. Irwin, 18 Pick.
[Mass.], 95; Gordon vs. Parmelee, 2 Allen [Mass.], 212; Williamson vs.
McFadden, 23 Fla., 143, 11 Am. St. Rep., 345.) When the purchaser
undertakes to make an investigation of his own, and the seller does nothing
to prevent this investigation from being as full as he chooses to make it, the
purchaser cannot afterwards allege that the seller made misrepresentations.
(National Cash Register Co. vs. Townsend, 137 N. C., 652, 70 L. R. A., 349;
Williamson vs. Holt, 147 N. C., 515.)
We are aware that where one party to a contract, having special or expert
knowledge, takes advantage of the ignorance of another to impose upon him,
the false representation may afford ground for relief, though otherwise the
injured party would be bound. But we do not think that the fact that Songco
was an experienced farmer, while Sellner was, as he claims, a mere novice in
the business, brings this case within that exception.71
The following facts show that petitioner was fully aware of the magnitude of
his undertaking:
First, petitioner was fully aware of the financial reverses that Sterling Shipping
Lines, Inc. had been undergoing, and he took great pains to release himself
from the obligation.
Second, his background as a doctor, as a bank organizer, and as a
businessman with experience in the textile business and real estate should
have apprised him of the irregularity in the contract that he would be
undertaking. This meant that at the time petitioner gave his consent to
become a part of the corporation, he had been fully aware of the
circumstances and the risks of his participation. Intent is determined by the
acts.
Finally, the records showed that petitioner had been fully aware of the effect
of his signing the promissory note. The bare assertion that he was not privy to
the records cannot counteract the fact that petitioner himself had admitted
that after he had severed ties with his brother, he had written a letter seeking
to reach an amicable settlement with respondent Rupert V. Tankeh.
Petitioner’s actions defied his claim of a complete lack of awareness
regarding the circumstances and the contract he had been entering.
The required standard of proof – clear and convincing evidence – was not
met. There was no dolo causante or fraud used to obtain the petitioner’s
consent to enter into the contract. Petitioner had the opportunity to become
aware of the facts that attended the signing of the promissory note. He even
admitted that he has a lawyer-son who the petitioner had hoped would assist
him in the administration of Sterling Shipping Lines, Inc. The totality of the
facts on record belies petitioner’s claim that fraud was used to obtain his
consent to the contract given his personal circumstances and the applicable
law.
However, in refusing to allow petitioner to participate in the management of
the business, respondent Ruperto V. Tankeh was liable for the commission of
incidental fraud. In Geraldez, this Court defined incidental fraud as "those
which are not serious in character and without which the other party would
still have entered into the contract."72
Although there was no fraud that had been undertaken to obtain petitioner’s
consent, there was fraud in the performance of the contract. The records
showed that petitioner had been unjustly excluded from participating in the
management of the affairs of the corporation. This exclusion from the
management in the affairs of Sterling Shipping Lines, Inc. constituted fraud
incidental to the performance of the obligation.
This can be concluded from the following circumstances.
First, respondent raised in his Answer that petitioner "could not have
promised plaintiff that he would be a part of the administration staff"73 since
petitioner had been fully aware that, as a corporation, Sterling Shipping Lines,
Inc. acted through its board of directors. Respondent admitted that petitioner
had been "an incorporator and member of the board of directors"74 and that
petitioner "was fully aware of the by-laws of the company."75 It was incumbent
upon respondent to act in good faith and to ensure that petitioner would not
be excluded from the affairs of Sterling Shipping Lines, Inc. After all,
respondent asserted that petitioner had entered into the contract voluntarily
and with full consent.
Second, respondent claimed that if petitioner was intent on severing his
connection with the company, all that petitioner had to do was to sell all his
holdings in the company. Clearly, the respondent did not consider the fact
that the sale of the shares of stock alone did not free petitioner from his
liability to Development Bank of the Philippines or Asset Privatization Trust,
since the latter had signed the promissory and had still been liable for the
loan. A sale of petitioners’ shares of stock would not have negated the
petitioner’s responsibility to pay for the loan.
Third, respondent Ruperto V. Tankeh did not rebuff petitioner’s claim that the
latter only received news about the sale of the vessel M/V Sterling Ace
through the media and not as one of the board members or directors of
Sterling Shipping Lines, Inc.
All in all, respondent Ruperto V. Tankeh’s bare assertion that petitioner had
access to the records cannot discredit the fact that the petitioner had been
effectively deprived of the opportunity to actually engage in the operations of
Sterling Shipping Lines, Inc. Petitioner had a reasonable expectation that the
same level of engagement would be present for the duration of their working
relationship. This would include an undertaking in good faith by respondent
Ruperto V. Tankeh to be transparent with his brother that he would not
automatically be made part of the company’s administration.
However, this Court finds there is nothing to support the assertion that
Sterling Shipping Lines, Inc. and Arenas committed incidental fraud and must
be held liable. Sterling Shipping Lines, Inc. acted through its board of
directors, and the liability of respondent Tankeh cannot be imposed on
Sterling Shipping Lines, Inc. The shipping line has a separate and distinct
personality from its officers, and petitioner’s assertion that the corporation
conspired with the respondent Ruperto V. Tankeh to defraud him is not
supported by the evidence and the records of the case.
As for Arenas, in Lim Tanhu v. Remolete,76 this Court held that:
In all instances where a common cause of action is alleged against several
defendants, some of whom answer and the others do not, the latter or those
in default acquire a vested right not only to own the defense interposed in the
answer of their co-defendant or co-defendants not in default but also to
expect a result of the litigation totally common with them in kind and in
amount whether favorable or unfavorable. The substantive unity of the
plaintiffs’ cause against all the defendants is carried through to its adjective
phase as ineluctably demanded by the homogeneity and indivisibility of
justice itself.77
As such, despite Arenas’ failure to submit his Answer to the Complaint or his
declaration of default, his liability or lack thereof is concomitant with the
liability attributed to his co-defendants or co-respondents. However, unlike
respondent Ruperto V. Tankeh’s liability, there is no action or series of
actions that may be attributed to Arenas that may lead to an inference that he
was liable for incidental fraud. In so far as the required evidence for both
Sterling Shipping Lines, Inc. and Arenas is concerned, there is no basis to
justify the claim of incidental fraud.
In addition, respondents Development Bank of the Philippines and Asset
Privatization Trust or Privatization and Management Office cannot be held
liable for fraud. Incidental fraud cannot be attributed to the execution of their
actions, which were undertaken pursuant to their mandated functions under
the law. "Absent convincing evidence to the contrary, the presumption of
regularity in the performance of official functions has to be upheld."78
The Obligation to Pay Damages
As such, respondent Ruperto V. Tankeh is liable to his older brother,
petitioner Alejandro, for damages. The obligation to pay damages to
petitioner is based on several provisions of the Civil Code.
Article 1157 enumerates the sources of obligations.
Article 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts. (1089a)
This enumeration does not preclude the possibility that a single action may
serve as the source of several obligations to pay damages in accordance with
the Civil Code. Thus, the liability of respondent Ruperto V. Tankeh is based
on the law, under Article 1344, which provides that the commission of
incidental fraud obliges the person employing it to pay damages.
In addition to this obligation as the result of the contract between petitioner
and respondents, there was also a patent abuse of right on the part of
respondent Tankeh. This abuse of right is included in Articles 19 and 21 of
the Civil Code which provide that:
Article 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.
Article 21. Any person who willfully causes loss or injury to another in manner
that is contrary to morals, good customs or public policy shall compensate the
latter for the damage.
Respondent Ruperto V. Tankeh abused his right to pursue undertakings in
the interest of his business operations. This is because of his failure to at
least act in good faith and be transparent with petitioner regarding Sterling
Shipping Lines, Inc.’s daily operations.
In National Power Corporation v. Heirs of Macabangkit Sangkay,79 this Court
held that:
When a right is exercised in a manner not conformable with the norms
enshrined in Article 19 and like provisions on human relations in the Civil
Code, and the exercise results to [sic] the damage of [sic] another, a legal
wrong is committed and the wrongdoer is held responsible.80
The damage, loss, and injury done to petitioner are shown by the following
circumstances.
First, petitioner was informed by Development Bank of the Philippines that it
would still pursue his liability for the payment of the promissory note. This
would not have happened if petitioner had allowed himself to be fully apprised
of Sterling Shipping Lines, Inc.’s financial straits and if he felt that he could
still participate in the company’s operations. There is no evidence that
respondent Ruperto V. Tankeh showed an earnest effort to at least allow the
possibility of making petitioner part of the administration a reality. The
respondent was the brother of the petitioner and was also the primary party
that compelled petitioner Alejandro Tankeh to be solidarily bound to the
promissory note. Ruperto V. Tankeh should have done his best to ensure that
he had exerted the diligence to comply with the obligations attendant to the
participation of petitioner.
Second, respondent Ruperto V. Tankeh’s refusal to enter into an agreement
or settlement with petitioner after the latter’s discovery of the sale of the M/V
Sterling Ace was an action that constituted bad faith. Due to Ruperto’s
refusal, his brother, petitioner Alejandro, became solidarily liable for an
obligation that the latter could have avoided if he had been given an
opportunity to participate in the operations of Sterling Shipping Lines, Inc.
The simple sale of all of petitioner’s shares would not have solved petitioner’s
problems, as it would not have negated his liability under the terms of the
promissory note.
Finally, petitioner is still bound to the creditors of Sterling Shipping Lines, Inc.,
namely, public respondents Development Bank of the Philippines and Asset
Privatization Trust. This is an additional financial burden for petitioner.
Nothing in the records suggested the possibility that Development Bank of
the Philippines or Asset Privatization Trust through the Privatization
Management Office will not pursue or is precluded from pursuing its claim
against the petitioner. Although petitioner Alejandro voluntarily signed the
promissory note and became a stockholder and board member, respondent
should have treated him with fairness, transparency, and consideration to
minimize the risk of incurring grave financial reverses.
In Francisco v. Ferrer,81 this Court ruled that moral damages may be awarded
on the following bases:
To recover moral damages in an action for breach of contract, the breach
must be palpably wanton, reckless, malicious, in bad faith, oppressive or
abusive.
Under the provisions of this law, in culpa contractual or breach of contract,
moral damages may be recovered when the defendant acted in bad faith or
was guilty of gross negligence (amounting to bad faith) or in wanton disregard
of his contractual obligation and, exceptionally, when the act of breach of
contract itself is constitutive of tort resulting in physical injuries.
Moral damages may be awarded in breaches of contracts where the
defendant acted fraudulently or in bad faith.
Bad faith does not simply connote bad judgment or negligence, it imports a
dishonest purpose or some moral obliquity and conscious doing of a wrong, a
breach of known duty through some motive or interest or ill will that partakes
of the nature of fraud.
xxxx
The person claiming moral damages must prove the existence of bad faith by
clear and convincing evidence for the law always presumes good faith. It is
not enough that one merely suffered sleepless nights, mental anguish,
serious anxiety as the result of the actuations of the other party. Invariably
such action must be shown to have been willfully done in bad faith or will ill
motive. Mere allegations of besmirched reputation, embarrassment and
sleepless nights are insufficient to warrant an award for moral damages. It
must be shown that the proximate cause thereof was the unlawful act or
omission of the [private respondent] petitioners.
An award of moral damages would require certain conditions to be met, to
wit: (1) first, there must be an injury, whether physical, mental or
psychological, clearly sustained by the claimant; (2) second, there must be
culpable act or omission factually established; (3) third, the wrongful act or
omission of the defendant is the proximate cause of the injury sustained by
the claimant; and (4) fourth, the award of damages is predicated on any of
the cases stated in Article 2219 of the Civil Code. (Citations omitted)82
In this case, the four elements cited in Francisco are present. First, petitioner
suffered an injury due to the mental duress of being bound to such an
onerous debt to Development Bank of the Philippines and Asset Privatization
Trust. Second, the wrongful acts of undue exclusion done by respondent
Ruperto V. Tankeh clearly fulfilled the same requirement. Third, the
proximate cause of his injury was the failure of respondent Ruperto V.
Tankeh to comply with his obligation to allow petitioner to either participate in
the business or to fulfill his fiduciary responsibilities with candor and good
faith. Finally, Article 221983 of the Civil Code provides that moral damages
may be awarded in case of acts and actions referred to in Article 21, which,
as stated, had been found to be attributed to respondent Ruperto V. Tankeh.
In the Appellant’s Brief,84 petitioner asked the Court of Appeals to demand
from respondents, except from respondent Asset Privatization Trust, the
amount of five million pesos (₱5,000,000.00). This Court finds that the
amount of five hundred thousand pesos (₱500,000.00) is a sufficient amount
of moral damages.
In addition to moral damages, this Court may also impose the payment of
exemplary damages.1âwphi1 Exemplary damages are discussed in Article
2229 of the Civil Code, as follows:
ART. 2229. Exemplary or corrective damages are imposed, by way of
example or correction of the public good, in addition to moral, temperate,
liquidated or compensatory damages.
Exemplary damages are further discussed in Articles 2233 and 2234,
particularly regarding the pre-requisites of ascertaining moral damages and
the fact that it is discretionary upon this Court to award them or not:
ART. 2233. Exemplary damages cannot be recovered as a matter of right;
the court will decide whether or not they should be adjudicated.
ART. 2234. While the amount of the exemplary damages need not be proven,
the plaintiff must show that he is entitled to moral, temperate or
compensatory damages before the court may consider the question of
whether or not exemplary damages should be awarded x x x
The purpose of exemplary damages is to serve as a deterrent to future and
subsequent parties from the commission of a similar offense. The case of
People v. Rante85 citing People v. Dalisay86 held that:
Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective
damages are intended to serve as a deterrent to serious wrong doings, and
as a vindication of undue sufferings and wanton invasion of the rights of an
injured or a punishment for those guilty of outrageous conduct. These terms
are generally, but not always, used interchangeably. In common law, there is
preference in the use of exemplary damages when the award is to account
for injury to feelings and for the sense of indignity and humiliation suffered by
a person as a result of an injury that has been maliciously and wantonly
inflicted, the theory being that there should be compensation for the hurt
caused by the highly reprehensible conduct of the defendant—associated
with such circumstances as willfulness, wantonness, malice, gross
negligence or recklessness, oppression, insult or fraud or gross fraud—that
intensifies the injury. The terms punitive or vindictive damages are often used
to refer to those species of damages that may be awarded against a person
to punish him for his outrageous conduct. In either case, these damages are
intended in good measure to deter the wrongdoer and others like him from
similar conduct in the future.87
To justify an award for exemplary damages, the wrongful act must be
accompanied by bad faith, and an award of damages would be allowed only if
the guilty party acted in a wanton, fraudulent, reckless or malevolent
manner.88 In this case, this Court finds that respondent Ruperto V. Tankeh
acted in a fraudulent manner through the finding of dolo incidente due to his
failure to act in a manner consistent with propriety, good morals, and
prudence.
Since exemplary damages ensure that future litigants or parties are enjoined
from acting in a similarly malevolent manner, it is incumbent upon this Court
to impose the damages in such a way that will serve as a categorical warning
and will show that wanton actions will be dealt with in a similar manner. This
Court finds that the amount of two hundred thousand pesos (₱200,000.00) is
sufficient for this purpose.
In sum, this Court must act in the best interests of all future litigants by
establishing and applying clearly defined standards and guidelines to
ascertain the existence of fraud.
WHEREFORE, this Petition is PARTIALLY GRANTED. The Decision of the
Court of Appeals as to the assailed Decision in so far as the finding of fraud is
SUSTAINED with the MODIFICATION that respondent RUPERTO V.
TANKEH be ordered to pay moral damages in the amount of FIVE
HUNDRED THOUSAND PESOS (₱500,000.00) and the amount of TWO
HUNDRED THOUSAND PESOS (₱200,000.00) by way of exemplary
damages.
SO ORDERED.
G.R. No. 156038 October 11, 2010
SPOUSES VICTORIANO CHUNG and DEBBIE CHUNG, Petitioners,
vs.
ULANDAY CONSTRUCTION, INC.,* Respondent.
DECISION
BRION, J.:
We resolve the petition for review on certiorari1 filed by petitioners Spouses
Victoriano Chung and Debbie Chung (petitioners) to challenge the
decision2 and resolution3 of the Court of Appeals (CA) in CA-G.R. CV No.
61583.4
FACTUAL BACKGROUND
The facts of the case, gathered from the records, are briefly summarized
below.
In February 1985, the petitioners contracted with respondent Ulanday
Construction, Inc. (respondent) to construct, within a 150-day period,5 the
concrete structural shell of the former’s two-storey residential house in
Urdaneta Village, Makati City at the contract price of ₱3,291,142.00.6
The Contract7 provided that: (a) the respondent shall supply all the necessary
materials, labor, and equipment indispensable for the completion of the
project, except for work to be done by other contractors;8 (b) the petitioners
shall pay a ₱987,342.609 downpayment, with the balance to be paid in
progress payments based on actual work completed;10 (c) the Construction
Manager or Architect shall check the respondent’s request for progress
payment and endorse it to the petitioners for payment within 3 days from
receipt;11 (d) the petitioners shall pay the respondents within 7 days from
receipt of the Construction Manager’s or Architect’s certificate; (e) the
respondent cannot change or alter the plans, specifications, and works
without the petitioners’ prior written approval;12 (f) a penalty equal to 0.01% of
the contract amount shall be imposed for each day of delay in completion, but
the respondent shall be granted proportionate time extension for delays
caused by the petitioners;13 (g) the respondent shall correct, at its expense,
defects appearing during the 12-month warranty period after the petitioners’
issuance of final acceptance of work.14
Subsequently, the parties agreed to exclude from the contract the roofing and
flushing work, for ₱321,338.00,15reducing the contract price to
₱2,969,804.00. On March 17, 1995, the petitioners paid the ₱987,342.60
downpayment,16 with the balance of ₱1,982,461.40 to be paid based on the
progress billings. While the building permit was issued on April 10,
1995,17 actual construction started on March 7, 1995.18
As the actual construction went on, the respondent submitted 12 progress
billings.19 While the petitioners settled the first 7 progress billings, amounting
to ₱1,270,641.59,20 payment was made beyond the seven (7)-day period
provided in the contract. The petitioner subsequently granted the respondent
a ₱100,000.00 cash advance,21leaving the unpaid progress billings at
₱445,922.13.22
During the construction, the respondent also effected 19 change orders
without the petitioners’ prior written approval, amounting to
₱912,885.91.23 The petitioners, however, paid ₱42,298.61 for Change Order
No. 124 and partially paid ₱130,000.00 for Change Order Nos. 16 and
17.25Petitioner Debbie Chung acknowledged in writing that the balance for
Change Order Nos. 16 and 17 would be paid upon completion of the
contract.26 The outstanding balance on the change orders totaled
₱740,587.30.
On July 4, 1995, the respondent notified the petitioners that the delay in the
payment of progress billings delays the accomplishment of the contract
work.27 The respondent made similar follow-up letters between July 1995 to
February 1996.28 On March 28, 1996, the respondent demanded full payment
for progress billings and change orders.29 On April 8, 1996, the respondent
demanded payment of ₱1,310,670.56 as outstanding balance on progress
billings and change orders.30
In a letter dated April 16, 1996, the petitioners denied liability, asserting that
the respondent violated the contract provisions by, among others, failing to
finish the contract within the 150-day stipulated period, failing to comply with
the provisions on change orders, and overstating its billings.31
On May 8, 1996, the respondent filed a complaint with the Regional Trial
Court (RTC), Branch 145, Makati City, for collection of the unpaid balance of
the contract and the unpaid change orders, plus damages and attorney’s
fees.32
In their answer with counterclaim,33 the petitioners complained of the
respondent’s delayed and defective work. They demanded payment of
liquidated damages for delay in the completion, the construction errors, loss
or non-usage of specified construction materials, unconstructed and non-
completed works, plus damages and attorney’s fees.
THE RTC RULING
In a decision34 dated December 11, 1997, the RTC found that both parties
have not complied strictly with the requirements of the contract. It observed
that change orders were made without the parties’ prescribed written
agreement, and that each party should bear their respective costs. It noted
that the respondent could not demand from the petitioners the payment for
change orders undertaken upon instruction of the project architect without the
petitioners’ written approval. Applying Article 1724 of the Civil Code, the RTC
found that when the respondent performed the change orders without the
petitioners’ written agreement, it did so at its own risk and it could not compel
the petitioners to pay.
The RTC noted that the petitioners were nonetheless liable for ₱130,000.00
under Change Order Nos. 16 and 17, because petitioner Debbie Chung
ratified and acknowledged that such amount was still due upon completion. It
also noted that the respondent should not be faulted or penalized for the
delay in the completion of the contract within the 150-day period due to the
petitioners’ delay in the payment of the progress billings. It found, however,
that the petitioners are liable for the construction defect on the roof leak
traceable to the shallow concrete gutter.
Thus, the RTC ordered the respondent to repair, at its expense, the defective
concrete gutter of the petitioners’ house and to restore other affected
structures according to the architectural plans and specifications. It likewise
ordered the petitioners to pay the respondent ₱629,819.84 as unpaid
balance on the progress billings and ₱130,000.00 as unpaid balance on the
ratified change orders.
Both parties elevated the case to the CA by way of ordinary appeal under
Rule 41 of the Rules of Court. The respondent averred that the RTC failed to
consider evidence of the petitioners’ bad faith in violating the contract, while
the petitioners argued that the RTC should have quantified the cost of the
repairs and simply ordered the respondent to reimburse the petitioners’
expenses.
THE CA RULING
The CA decided the appeal on June 28, 2002. 35 It found Article 1724
inapplicable because the provision pertains to disputes arising from the
higher cost of labor and materials, while the respondent demands payment of
change order billings and there was no demand for increase in the costs of
labor and materials. Applying the principle of estoppel in pais, the appellate
court noted that the petitioners impliedly consented or tacitly ratified the
change orders by payment of several change order billings and their inaction
or non-objection to the construction of the projects covered by the change
orders.
Thus, the CA affirmed the RTC decision, but increased the payment on the
unpaid balance of the change orders to ₱740,587.11. It likewise ordered the
petitioners to pay 6% interest on the unpaid amounts from the day of formal
demand and until the finality of the decision, and 12% interest after finality of
the decision, plus ₱50,000.00 as exemplary damages.
Both parties filed motions for reconsideration. On November 15, 2002, the CA
issued a resolution denying the petitioners’ motion for reconsideration, but
partially granting the respondent’s motion for reconsideration by awarding it
attorney’s fees equal to 10% of the total award. 36
Hence, the petitioners came to us through the present petition.
THE PETITION
The petitioners insist that the CA should have quantified the cost of the
repairs on the defective gutter and simply ordered the respondent to
reimburse the petitioners’ expenses because repairing the defective gutter
requires the demolition of the existing cement gutter, the removal of the entire
roofing and the dismantling of the second floor steel trusses; they are entitled
to liquidated damages for the unjust delay in the completion of the
construction within the 150-day contract period; the award of ₱629,819.84 for
progress billings is unwarranted since only ₱545,920.00 is supported by the
respondent’s evidence; the respondent’s construction errors should set-off or
limit the petitioners’ liability, if any; the CA misinterpreted Article 1724 of the
Civil Code and misapplied the principle of estoppel in pais since the contract
specifically provides the petitioners’ prior written approval for change orders;
the respondent is not entitled to exemplary damages and attorney’s fees
since the respondent was at fault for the defective gutter.
THE CASE FOR THE RESPONDENT
The respondent submits that the petition is merely dilatory since it seeks to
review the lower courts’ factual findings and conclusions, and it raised no
legal issue cognizable by this Court. 37
THE ISSUE
The core issue is whether the CA erred in: (a) affirming the RTC decision for
payment of progress billings; (b) in increasing the amount due for change
orders; and, (c) in awarding exemplary damages and attorney’s fees to the
respondent.
OUR RULING
We find the petition meritorious.
This Court is not a trier of facts. However, when the inference drawn by the
CA from the facts is manifestly mistaken, as in the present case, we can
review the evidence to allow us to arrive at the correct factual conclusions
based on the record.38
Contract is the law between the parties
In contractual relations, the law allows the parties leeway and considers their
agreement as the law between them.39 Contract stipulations that are not
contrary to law, morals, good customs, public order or public policy shall be
binding40 and should be complied with in good faith.41 No party is permitted to
change his mind or disavow and go back upon his own acts, or to proceed
contrary thereto, to the prejudice of the other party.42 In the present case, we
find that both parties failed to comply strictly with their contractual stipulations
on the progress billings and change orders that caused the delays in the
completion of the project.
Amount awarded for unpaid progress billings is unsupported by
evidence
There is no dispute that the petitioners failed to pay progress billings nos. 8 to
12. However, we find no basis to hold the petitioners liable for ₱629,819.84,
the balance of the total contract price, without deducting the discount of
₱18,000.00 granted by the respondent. The petitioners likewise cannot be
held liable for the balance of the total contract price because that amount is
clearly unsupported by the evidence; only ₱545,922.1343 is actually
supported by progress billings nos. 8 to 12. Deducting the respondent’s
₱100,000.00 cash advance,44 the unpaid progress billings amount to only
₱445,922.13.
Article 1724 of the Civil Code applies
The CA erred in ruling that Article 1724 of the Civil Code does not apply
because the provision pertains to disputes arising from the higher cost of
labor and materials and there was no demand for increase in the costs of
labor and materials.
incurred, save for the change orders the petitioners accepted and paid for as
discussed below.
CA misapplied the principle of estoppel in pais
The petitioners’ payment of Change Order Nos. 1, 16, and 17 and their non-
objection to the other change orders effected by the respondent cannot give
rise to estoppel in pais that would render the petitioners liable for the payment
of all change orders.
Estoppel in pais, or equitable estoppel, arises when one, by his acts,
representations or admissions or by his silence when he ought to speak out,
intentionally or through culpable negligence, induces another to believe
certain facts to exist and the other rightfully relies and acts on such beliefs so
that he will be prejudiced if the former is permitted to deny the existence of
such facts.48 The real office of the equitable norm of estoppel is limited to
supplying deficiency in the law, but it should not supplant positive law.49
In this case, the requirement for the petitioners’ written consent to any
change or alteration in the specifications, plans and works is explicit in Article
1724 of the Civil Code and is deemed written in the contract between the
parties.50 The contract also expressly provides that a mere act of tolerance
does not constitute approval. Thus, the petitioners did not, by accepting and
paying for Change Order Nos. 1, 16, and 17, do away with the contractual
term on change orders nor with the application of Article 1724. The payments
for Change Order Nos. 1, 16, and 17 are, at best, acts of tolerance on the
petitioners’ part that could not modify the contract.
Consistent with this ruling, the petitioners are still liable for the ₱130,000.00
balance on Change Order Nos. 16 and 17 that, to date, remain unpaid.51
Accordingly, the petitioners’ outstanding liabilities amount to ₱445,922.13 for
the unpaid progress billings and ₱130,000.00 for the ratified change orders,
or a total of ₱575,922.13.
Award of exemplary damages and attorney’s fees is unwarranted.
Under the circumstances, fairness and reason dictate that we simply order
the set-off of the petitioners’ contractual liabilities totaling ₱575,922.13
against the repair cost for the defective gutter, pegged at
₱717,524.00,55 leaving the amount of ₱141,601.87 still due from the
respondent. Support in law for this ruling for partial legal compensation
proceeds from Articles 1278,56 1279,57 1281,58 and 128359 of the Civil Code.
In short, both parties are creditors and debtors of each other, although in
different amounts that are already due and demandable.
Monetary award is subject to legal interest
Pursuant to our definitive ruling in Eastern Shipping Lines, Inc. v. Court of
Appeals,60 we hold that the amount of ₱141, 601.87 is subject to the legal
interest of 6% per annum computed from the time the RTC rendered
judgment on December 11, 1997 since it was the respondent who filed the
complaint.61 After the finality of this decision, the judgment award inclusive of
interest shall bear interest at 12% per annum until full satisfaction.
WHEREFORE, the petition is hereby GRANTED. The assailed decision and
resolution of the Court of Appeals in CA-G.R. CV Nos. 61583 are
REVERSED and SET ASIDE. The respondent is ORDERED to pay the
petitioners ₱141,601.87 representing the balance of the repair costs for the
defective gutter in the petitioners’ house, with interest at 6% per annum to be
computed from the date of the filing of the complaint until finality of this
decision and 12% per annum thereafter until full payment.
No pronouncement as to costs.
SO ORDERED.

Article 172445 governs the recovery of additional costs in contracts for
a stipulated price (such as fixed lump-sum contracts), and the increase in
price for additional work due to change in plans and specifications. Such
added cost can only be allowed upon the: (a) written authority from the
developer or project owner ordering or allowing the written changes in work,
and (b) written agreement of parties with regard to the increase in price or
cost due to the change in work or design modification. Compliance with these
two requisites is a condition precedent for the recovery. The absence of one
or the other condition bars the recovery of additional costs. Neither the
authority for the changes made nor the additional price to be paid therefor
may be proved by any other evidence.46
In the present case, Article I, paragraph 6, of the Contract incorporates this
provision:
The CONTRACTOR shall make no change or alteration in the plans, and
specifications as well as in the works subject hereof without the prior written
approval of the OWNER. A mere act of tolerance shall not constitute
approval.47
Significantly, the respondent did not secure the required written approval of
the petitioners before making the changes in the plans, specifications and
works. Thus, for undertaking change orders without the stipulated written
approval of the petitioners, the respondent cannot claim the additional costs it
We cannot allow the award for exemplary damages and attorney’s fees. It is
a requisite in the grant of exemplary damages that the act of the offender
must be accompanied by bad faith or done in a wanton, fraudulent, or
malevolent manner.52 On the other hand, attorney’s fees may be awarded
only when a party is compelled to litigate or to incur expenses to protect his
interest by reason of an unjustified act of the other party, as when the
defendant acted in gross and evident bad faith in refusing the plaintiff’s plainly
valid, just and demandable claim.53 We do not see the presence of these
circumstances in the present case. As previously discussed, the petitioners’
refusal to pay the change orders was based on a valid ground – lack of their
prior written approval. There, too, is the matter of defective construction
discussed below.
Petitioners’ liability is set-off by respondent’s construction defect
We cannot sustain the lower courts’ order to repair the defective concrete
gutter. The considerable lapse of time between the filing of the complaint in
May 1996 and the final resolution of the present case renders the order to
repair at this time highly impractical, if not manifestly absurd. Besides, under
the contract, the respondent’s repair of construction defects, at its expense,
pertains to the 12-month warranty period after the petitioners’ issuance of the
final acceptance of work.54 This provision does not apply since the petitioners
have not even issued a certificate of completion and final acceptance of work.
G.R. No. 135602 April 28, 2000
HEIRS OF QUIRICO SERASPI AND PURIFICACION R.
SERASPI, petitioners,
vs.
COURT OF APPEALS AND SIMEON RECASA, respondents.
MENDOZA, J.:
This case is here for review of the decision 1 of the Court of Appeals, dated
May 15, 1998, reversing the decision of Branch 1 of the Regional Trial Court,
Kalibo, Aklan and dismissing, on the ground of prescription, the complaint
filed by petitioners for the recovery of possession and ownership of two
parcels of land in Banga, Aklan.
The facts are as follows:
Marcelino Recasa was the owner of two parcels of land described as follows:
PARCEL I: A parcel of cocal land located at Barangay Lapnag, Banga,
Aklan, with an area of 770 square meters, more or less; bounded North
by Lazaro Navarra, now Flocerfina Ibit; South by Celsa Retis; East by
Banga-Libacao Provincial Road; and West by Aklan River, which parcel
of land declared in the name of Marcelino Recasa under Tax Declaration
No. 3721, Series of 1984, with an assessed value of P2,440.00;
PARCEL II: A parcel of cocal land with an area of 3,648 square meters,
more or less, located in Barangay Lapnag, Banga, Aklan; bounded North
by Concepcion Navarra; South Diosdado Navarra; East by Gabriel Reloj;
and West by National Road; covered by Tax Declaration No. 11079 in
the name of Purificacion Seraspi, Series of 1984, and having an
assessed value of P1,650.00.
During his lifetime, Marcelino contracted three (3) marriages. At the time of
his death in 1943, he had fifteen (15) children from his three marriages. In
1948, his intestate estate was partitioned into three parts by his heirs, each
part corresponding to the share of the heirs in each marriage.
In the same year, Patronicio Recasa, representing the heirs of the first
marriage, sold the share of the heirs in the estate to Dominador Recasa, an
heir of the second marriage. On June 15, 1950, Dominador, representing the
heirs of the second marriage, in turn sold the share of the heirs to Quirico and
Purificacion Seraspi whose heirs are the present petitioners. Included in this
sale was the property sold by Patronicio to Dominador.
In 1958, the Seraspis obtained a loan from the Kalibo Rural Bank, Inc. (KRBI)
on the security of the lands in question to finance improvements on the lands.
However, they failed to pay the loan for which reason the mortgage was
foreclosed and the lands were sold to KRBI as the highest bidder.
Subsequently, the lands were sold by KRBI to Manuel Rata, brother-in-law of
Quirico Seraspi. It appears that Rara, as owner of the property, allowed
Quirico Seraspi to administer the property.
In 1974, private respondent Simeon Recasa, Marcelino's child by his third
wife, taking advantage of the illness of Quirico Seraspi, who had been
paralyzed due to a stroke, forcibly entered the lands in question and took
possession thereof.
In 1983, the Seraspis purchased the lands from Manuel Rata and afterwards
filed a complaint against Simeon Recasa for recovery of possession of the
lands.
The trial court ruled in favor of the Seraspis, stating that they had acquired
the property through a sale and acquisitive prescription. However, on appeal,
the Court of Appeals reversed on the ground that the action of the Seraspis
was barred by the statute of limitations. Hence, this petition filed by Quirico
Seraspi who, in the meantime, had passed away and was thus substituted by
his heirs.
Two issues are presented: (1) whether petitioners' action is barred by
extinctive prescription; and (2) whether private respondent Simeon Recasa
acquired ownership of the properties in question through acquisitive
prescription.
We rule for petitioners.
The Court of Appeals, while ruling that petitioners were able to establish the
identity of the property as well as the credibility of their title — the elements
required to prove one's claim for recovery of property 2 — nonetheless held
that the action was barred by prescription. Citing Arradaza v. Court of
Appeals, 3 it held that an action for recovery of title or possession of real
property or an interest therein can only be brought within ten (10) years after
the cause of action has accrued. Since the action for recovery of possession
and ownership was filed by petitioners only on April 12, 1987, i.e., thirteen
(13) years after their predecessor-in-interest had been allegedly deprived of
the possession of the property by private respondent, it was held that the
action had prescribed.
Arradaza involves acquisitive, not extinctive, prescription. What is more, the
facts in that case arose before the effectivity of the Civil Code. Accordingly,
what was applied was §41 of the Code of Civil Procedure which provides that
title by prescription is acquired after ten (10) years, in whatever manner
possession may have been commenced or continued, and regardless of
good faith or with just title. On the other hand, what is involved here is
extinctive prescription, and the applicable law is Art. 1141 of the Civil Code
which provides:
Real actions over immovables prescribe after thirty years.
This provision is without prejudice to what is established for the
acquisition of ownership and other real rights by prescription.
The question, therefore, is whether private respondent has acquired the
ownership of the two lands by prescription. On this point, the Civil Code
provides:
Art. 1117. Acquisitive prescription of dominion and other real rights may
be ordinary or extraordinary.
Ordinary acquisitive prescription requires possession of things in good
faith and with just title for the time fixed by law.
Art. 1134. Ownership and other real rights over immovable property are
acquired by ordinary prescription through possession of ten years.
Art. 1137. Ownership and other real rights over immovables also
prescribe through uninterrupted adverse possession thereof for thirty
years, without need of title or of good faith.
Thus, acquisitive prescription of dominion and other real rights may be
ordinary or extraordinary, depending on whether the property is possessed in
good faith and with just title for the time fixed by law. 4 Private respondent
contends that he acquired the ownership of the questioned property by
ordinary prescription through adverse possession for ten (10) years.
The contention has no merit, because he has neither just title nor good faith.
As Art. 1129 provides:
For the purposes of prescription, there is just title when the adverse
claimant came into possession of the property through one of the modes
recognized by law for the acquisition of ownership or other real rights,
but the grantor was not the owner or could not transmit any right.
In the case at bar, private respondent did not acquire possession of the
property through any of the modesrecognized by the Civil Code, to wit: (1)
occupation, (2) intellectual creation, (3) law, (4) donation, (5) succession, (6)
tradition in consequence of certain contracts, and (7) prescription. 5
Private respondent could not have acquired ownership over the property
through occupation since, under Art. 714 of the Civil Code, the ownership of a
piece of land cannot be acquired by occupation. Nor can he base his
ownership on succession for the property was not part of those distributed to
the heirs of the third marriage, to which private respondent belongs. It must
be remembered that in the partition of the intestate estate of Marcelino
Recasa, the properties were divided into three parts, each part being
reserved for each group of heirs belonging to one of the three marriages
Marcelino entered into. Since the contested parcels of land were adjudicated
to the heirs of the first and second marriages, it follows that private
respondent, as heir of the third marriage, has no right over the parcels of
land. While, as heir to the intestate estate of his father, private respondent
was co-owner of all of his father's properties, such co-ownership rights were
effectively dissolved by the partition agreed upon by the heirs of Marcelino
Recasa.
Neither can private respondent claim good faith in his favor.1âwphi1 Good
faith consists in the reasonable belief that the person from whom the
possessor received the thing was its owner but could not transmit the
ownership thereof. 6Private respondent entered the property without the
consent of the previous owner. For all intents and purposes, he is a mere
usurper.
Like private respondent, petitioners have not acquired the property through
any of the modes recognized by law for the acquisition of ownership. The
basis of petitioners' claim of ownership is the contract of sale they had with
Rata, but this by itself is insufficient to make them owners of the property. For
while a contract of sale is perfected by the meeting of minds upon the thing
which is the object of the contract and upon the price, 7 the ownership of the
thing sold is not transferred to the vendee until actual or constructive delivery
of the property. 8 Hence, the maxim non nudis pactis, sed traditione dominia
dominica rerum transferuntur (not mere agreements but tradition transfers the
ownership of things).
Consequently, petitioners are not the owners of the property since it has not
been delivered to them. At the time they bought the property from Rata in
1983, the property was in the possession of private respondent.
However, this does not give private respondent a right to remain in
possession of the property. Petitioners' title to the property prevails over
private respondents' possession in fact but without basis in law. As held
in Waite v. Peterson, 9 when the property belonging to a person is unlawfully
taken by another, the former has the right of action against the latter for the
recovery of the property. Such right may be transferred by the sale or
assignment of the property, and the transferee can maintain such action
against the wrongdoer.
WHEREFORE, the decision of the respondent Court of Appeals is hereby
REVERSED, and private respondent Simeon Recasa is ordered to return the
possession of the contested parcels of land to petitioners as heirs of Quirico
and Purificacion Seraspi.1âwphi1.nêt
SO ORDERED.