ASSIGNEN T #2 - CONFLICTS OF LAW –
Plaintiff may not, by choice of an inconvenient forum, ‘vex,’ ‘harass,’ or ‘oppress’
SAUDI ARABIAN AIRLINES, Petitioner, vs. COURT OF APPEALS, MILAGROS P. MORADA and
HON. RODOLFO A. ORTIZ, in his capacity as Presiding Judge of Branch 89, Regional Trial Court
of Quezon City, Respondents. G.R. No. 122191 October 8, 1998
QUISUMBING, J.:
Conflict of Laws; Actions; Where the factual antecedents satisfactorily establish the existence
of a foreign element, the problem could present a “conflicts” case.—Where the factual
antecedents satisfactorily establish the existence of a foreign element, we agree with
petitioner that the problem herein could present a “conflicts” case. A factual situation that
cuts across territorial lines and is affected by the diverse laws of two or more states is said to
contain a “foreign element.” The presence of a foreign element is inevitable since social and
economic affairs of individuals and associations are rarely confined to the geographic limits of
their birth or conception.
Same; Same; The forms in which a foreign element may appear are many, such as the fact that
one party is a resident Philippine national, and that the other is a resident foreign
corporation.—The forms in which this foreign element may appear are many. The foreign
element may simply consist in the fact that one of the parties to a contract is an alien or has a
foreign domicile, or that a contract between nationals of one State involves properties situated
in another State. In other cases, the foreign element may assume a complex form. In the
instant case, the foreign element consisted in the fact that private respondent Morada is a
resident Philippine national, and that petitioner SAUDIA is a resident foreign corporation. Also,
by virtue of the employment of Morada with the petitioner SAUDIA as a flight stewardess,
events did transpire during her many occasions of travel across national borders, particularly
from Manila, Philippines to Jeddah, Saudi Arabia, and vice versa, that caused a “conflicts”
situation to arise.
Same; Same; Damages; While Article 19 of the Civil Code merely declares a principle of law,
Article 21 gives flesh to its provisions; Violations of Articles 19 and 21 are actionable, with
judicially enforceable remedies in the municipal forum.—Although Article 19 merely declares
a principle of law, Article 21 gives flesh to its provisions. Thus, we agree with private
respondent’s assertion that violations of Articles 19 and 21 are actionable, with judicially
enforceable remedies in the municipal forum. Based on the allegations in the Amended
Complaint, read in the light of the Rules of Court on jurisdiction we find that the Regional Trial
Court (RTC) of Quezon City possesses jurisdiction over the subject matter of the suit. Its
authority to try and hear the case is provided for under Section 1 of Republic Act No. 7691.
Same; Same; Forum Non Conveniens; Forum Shopping; Plaintiff may not, by choice of an
inconvenient forum, ‘vex,’ ‘harass,’ or ‘oppress’ the defendant, e.g. by inflicting upon him
needless expense or disturbance, but unless the balance is strongly in favor of the defendant,
the plaintiff’s choice of forum should rarely be disturbed.—Pragmatic considerations, including
the convenience of the parties, also weigh heavily in favor of the RTC Quezon City assuming
jurisdiction. Paramount is the private interest of the litigant. Enforceability of a judgment if
one is obtained is quite obvious. Relative advantages and obstacles to a fair trial are equally
important.
the defendant, e.g. by inflicting upon him needless expense or disturbance. But unless the
balance is strongly in favor of the defendant, the plaintiff’s choice of forum should rarely be
disturbed.
Same; Same; Forcing a party to seek remedial action in a place where she no longer maintains
substantial connections would cause a fundamental unfairness to her.—Weighing the relative
claims of the parties, the court a quo found it best to hear the case in the Philippines. Had it
refused to take cognizance of the case, it would be forcing plaintiff (private respondent now)
to seek remedial action elsewhere, i.e. in the Kingdom of Saudi Arabia where she no longer
maintains substantial connections. That would have caused a fundamental unfairness to her.
Same; Same; A party effectively submits to the trial court’s jurisdiction by praying for the
dismissal of the complaint on grounds other than lack of jurisdiction.—The records show that
petitioner SAUDIA has filed several motions praying for the dismissal of Morada’s Amended
Complaint. SAUDIA also filed an Answer In Ex Abundante Cautelam dated February 20, 1995.
What is very patent and explicit from the motions filed, is that SAUDIA prayed for other reliefs
under the premises. Undeniably, petitioner SAUDIA has effectively submitted to the trial
court’s jurisdiction by praying for the dismissal of the Amended Complaint on grounds other
than lack of jurisdiction.
Same; Choice-of-law problems seek to answer two important questions: (1) What legal system
should control a given situation where some of the significant facts occurred in two or more
states; and (2) to what extent should the chosen legal system regulate the situation.—As to
the choice of applicable law, we note that choice-of-law problems seek to answer two
important questions: (1) What legal system should control a given situation where some of the
significant facts occurred in two or more states; and (2) to what extent should the chosen legal
system regulate the situation.
Same; Although ideally, all choice-of-law theories should intrinsically advance both notions of
justice and predictability, they do not always do so, in which case the forum is then faced with
the problem of deciding which of these two important values should be stressed.—Several
theories have been propounded in order to identify the legal system that should ultimately
control. Although ideally, all choice-of-law theories should intrinsically advance both notions
of justice and predictability, they do not always do so. The forum is then faced with the
problem of deciding which of these two important values should be stressed.
Same; Characterization or Doctrine of Qualification; Words and Phrases; Characterization is
the “process of deciding whether or not the facts relate to the kind of question specified in a
conflicts rule.”—Before a choice can be made, it is necessary for us to determine under what
category a certain set of facts or rules fall. This process is known as “characterization,” or the
“doctrine of qualification.” It is the “process of deciding whether or not the facts relate to the
kind of question specified in a conflicts rule.” The purpose of “characterization” is to enable
the forum to select the proper law.
Same; Same; An essential element of conflict rules is the indication of a “test” or “connecting
factor” or “point of contact.”—Our starting point of analysis here is not a legal relation, but a
factual situation, event, or operative fact. An essential element of conflict rules is the indication
of a “test” or “connecting factor” or “point of contact.” Choice-of-law rules invariably consist
of a factual relation- ship (such as property right, contract claim) and a connecting factor or
point of contact, such as the situs of the res, the place of celebration, the place of performance,
or the place of wrongdoing.
Same; Same; “Test Factors” or “Points of Contact” or “Connecting Factors.”—Note that one or
more circumstances may be present to serve as the possible test for the determination of the
applicable law. These “test factors” or “points of contact” or “connecting factors” could be any
of the following: “(1) the nationality of a person, his domicile, his residence, his place of
sojourn, or his origin; (2) the seat of a legal or juridical person, such as a corporation; (3) the
situs of a thing, that is, the place where a thing is, or is deemed to be situated. In particular,
the lex situs is decisive when real rights are involved; (4) the place where an act has been done,
the locus actus, such as the place where a contract has been made, a marriage celebrated, a
will signed or a tort committed. The lex loci actus is particularly important in contracts and
torts; (5) the place where an act is intended to come into effect, e.g., the place of performance
of contractual duties, or the place where a power of attorney is to be exercised; (6) the
intention of the contracting parties as to the law that should govern their agreement, the lex
loci intentionis; (7) the place where judicial or administrative proceedings are instituted or
done. The lex fori—the law of the forum—is particularly important because, as we have seen
earlier, matters of ‘procedure’ not going to the substance of the claim involved are governed
by it; and because the lex fori applies whenever the content of the otherwise applicable foreign
law is excluded from application in a given case for the reason that it falls under one of the
exceptions to the applications of foreign law; and (8) the flag of a ship, which in many cases is
decisive of practically all legal relationships of the ship and of its master or owner as such. It
also covers contractual relationships particularly contracts of affreightment.” (Italics ours.)
Same; Same; Same; Torts; Where the action is one involving torts, the “connecting factor” or
“point of contact” could be the place or places where the tortious conduct or lex loci actus
occurred; The Philippines is the situs of the tort where it is in the Philippines where the
defendant allegedly deceived the plaintiff, a citizen residing and working here, and the fact
that certain acts or parts of the injury occurred in another country is of no moment, for what
is important is the place where the over-all harm or the totality of the injury to the person,
reputation, social standing and human rights of the plaintiff had lodged.—Considering that the
complaint in the court a quo is one involving torts, the “connecting factor” or “point of contact”
could be the place or places where the tortious conduct or lex loci actus occurred. And applying
the torts principle in a conflicts case, we find that the Philippines could be said as a situs of the
tort (the place where the alleged tortious conduct took place). This is because it is in the
Philippines where petitioner allegedly deceived private respondent, a Filipina residing and
working here. According to her, she had honestly believed that petitioner would, in the
exercise of its rights and in the performance of its duties, “act with justice, give her her due
and observe honesty and good faith.” Instead, petitioner failed to protect her, she claimed.
That certain acts or parts of the injury allegedly occurred in another country is of no moment.
For in our view what is important here is the place where the over-all harm or the totality of
the alleged injury to the person, reputation, social standing and human rights of complainant,
had lodged, according to the plaintiff below (herein private respondent). All told, it is not
without basis to identify the Philippines as the situs of the alleged tort.
Same; Same; Same; Same; “State of the Most Significant Relationship” Rule; The “State of the
most significant relationship” rule is the appropriate modern theory on tort liability to apply in
the instant case.—With the widespread criticism of the traditional rule of lex loci delicti
commissi, modern theories and rules on tort liability have been advanced to offer fresh judicial
approaches to arrive at just results. In keeping abreast with the modern theories on tort
liability, we find here an occasion to apply the “State of the most significant relationship” rule,
which in our view should be appropriate to apply now, given the factual context of this case.
In applying said principle to determine the State which has the most significant relationship,
the following contacts are to be taken into account and evaluated according to their relative
importance with respect to the particular issue: (a) the place where the injury occurred; (b)
the place where the conduct causing the injury occurred; (c) the domicile, residence,
nationality, place of incorporation and place of business of the parties; and (d) the place where
the relationship, if any, between the parties is centered.
Same; Same; Same; Same; Same; Where the Philippines is the situs of the tort complained of
and the place “having the most interest in the problem,” the Philippine law on tort liability
should have paramount application to and control in the resolution of the legal issues arising
therein.—As already discussed, there is basis for the claim that over-all injury occurred and
lodged in the Philippines. There is likewise no question that private respondent is a resident
Filipina national, working with petitioner, a resident foreign corporation engaged here in the
business of international air carriage. Thus, the “relationship” between the parties was
centered here, although it should be stressed that this suit is not based on mere labor law
violations. From the record, the claim that the Philippines has the most significant contact with
the matter in this dispute, raised by private respondent as plaintiff below against defendant
(herein petitioner), in our view, has been properly established. Prescinding from this premise
that the Philippines is the situs of the tort complained of and the place “having the most
interest in the problem,” we find, by way of recapitulation, that the Philippine law on tort
liability should have paramount application to and control in the resolution of the legal issues
arising out of this case. Further, we hold that the respondent Regional Trial Court has
jurisdiction over the parties and the subject matter of the complaint; the appropriate venue is
in Quezon City, which could properly apply Philippine law.
Same; Pleadings and Practice; Evidence; A party whose cause of action is based on a Philippine
law has no obligation to plead and prove the law of another State.—We find untenable
petitioner’s insistence that “[s]ince private respondent instituted this suit, she has the burden
of pleading and proving the applicable Saudi law on the matter.” As aptly said by private
respondent, she has “no obligation to plead and prove the law of the Kingdom of Saudi Arabia
since her cause of action is based on Articles 19 and 21” of the Civil Code of the Philippines. In
her Amended Complaint and subsequent pleadings, she never alleged that Saudi law should
govern this case. And as correctly held by the respondent appellate court, “considering that it
was the petitioner who was invoking the applicability of the law of Saudi Arabia, then the
burden was on it [petitioner] to plead and to establish what the law of Saudi Arabia is
------------------------- ---------------------- --------------------------------
This petition for certiorari pursuant to Rule 45 of the Rules of Court seeks to annul and set
aside the Resolution 1 dated September 27, 1995 and the Decision 2 dated April 10, 1996 of the
Court of Appeals 3 in CA-G.R. SP No. 36533, 4 and the Orders 5 dated August 29, 1994 6 and
February 2, 1995 7 that were issued by the trial court in Civil Case No. Q-93-18394. 8
The pertinent antecedent facts which gave rise to the instant petition, as stated in the
questioned Decision 9, are as follows:
On January 21, 1988 defendant SAUDIA hired plaintiff as a Flight Attendant for its airlines
based in Jeddah, Saudi Arabia. . . .
On April 27, 1990, while on a lay-over in Jakarta, Indonesia, plaintiff went to a disco dance with
fellow crew members Thamer Al-Gazzawi and Allah Al-Gazzawi, both Saudi nationals. Because
it was almost morning when they returned to their hotels, they agreed to have breakfast
together at the room of Thamer. When they were in te (sic) room, Allah left on some pretext.
Shortly after he did, Thamer attempted to rape plaintiff. Fortunately, a roomboy and several
security personnel heard her cries for help and rescued her. Later, the Indonesian police came
and arrested Thamer and Allah Al-Gazzawi, the latter as an accomplice.
When plaintiff returned to Jeddah a few days later, several SAUDIA officials interrogated her
about the Jakarta incident. They then requested her to go back to Jakarta to help arrange the
release of Thamer and Allah. In Jakarta, SAUDIA Legal Officer Sirah Akkad and base manager
Baharini negotiated with the police for the immediate release of the detained crew members
but did not succeed because plaintiff refused to cooperate. She was afraid that she might be
tricked into something she did not want because of her inability to understand the local dialect.
She also declined to sign a blank paper and a document written in the local dialect. Eventually,
SAUDIA allowed plaintiff to return to Jeddah but barred her from the Jakarta flights.
Plaintiff learned that, through the intercession of the Saudi Arabian government, the
Indonesian authorities agreed to deport Thamer and Allah after two weeks of detention.
Eventually, they were again put in service by defendant SAUDI (sic). In September 1990,
defendant SAUDIA transferred plaintiff to Manila.
On January 14, 1992, just when plaintiff thought that the Jakarta incident was already behind
her, her superiors requested her to see Mr. Ali Meniewy, Chief Legal Officer of SAUDIA, in
Jeddah, Saudi Arabia. When she saw him, he brought her to the police station where the police
took her passport and questioned her about the Jakarta incident. Miniewy simply stood by as
the police put pressure on her to make a statement dropping the case against Thamer and
Allah. Not until she agreed to do so did the police return her passport and allowed her to catch
the afternoon flight out of Jeddah.
One year and a half later or on lune 16, 1993, in Riyadh, Saudi Arabia, a few minutes before
the departure of her flight to Manila, plaintiff was not allowed to board the plane and instead
ordered to take a later flight to Jeddah to see Mr. Miniewy, the Chief Legal Officer of SAUDIA.
When she did, a certain Khalid of the SAUDIA office brought her to a Saudi court where she
was asked to sign a document written in Arabic. They told her that this was necessary to close
the case against Thamer and Allah. As it turned out, plaintiff signed a notice to her to appear
before the court on June 27, 1993. Plaintiff then returned to Manila.
Shortly afterwards, defendant SAUDIA summoned plaintiff to report to Jeddah once again and
see Miniewy on June 27, 1993 for further investigation. Plaintiff did so after receiving
assurance from SAUDIA's Manila manager, Aslam Saleemi, that the investigation was routinary
and that it posed no danger to her.
In Jeddah, a SAUDIA legal officer brought plaintiff to the same Saudi court on June 27, 1993.
Nothing happened then but on June 28, 1993, a Saudi judge interrogated plaintiff through an
interpreter about the Jakarta incident. After one hour of interrogation, they let her go. At the
airport, however, just as her plane was about to take off, a SAUDIA officer told her that the
airline had forbidden her to take flight. At the Inflight Service Office where she was told to go,
the secretary of Mr. Yahya Saddick took away her passport and told her to remain in Jeddah,
at the crew quarters, until further orders.
On July 3, 1993 a SAUDIA legal officer again escorted plaintiff to the same court where the
judge, to her astonishment and shock, rendered a decision, translated to her in English,
sentencing her to five months imprisonment and to 286 lashes. Only then did she realize that
the Saudi court had tried her, together with Thamer and Allah, for what happened in Jakarta.
The court found plaintiff guilty of (1) adultery; (2) going to a disco, dancing and listening to the
music in violation of Islamic laws; and (3) socializing with the male crew, in contravention of
Islamic tradition. 10
Facing conviction, private respondent sought the help of her employer, petitioner SAUDIA.
Unfortunately, she was denied any assistance. She then asked the Philippine Embassy in
Jeddah to help her while her case is on appeal. Meanwhile, to pay for her upkeep, she worked
on the domestic flight of SAUDIA, while Thamer and Allah continued to serve in the
international
flights. 11
Because she was wrongfully convicted, the Prince of Makkah dismissed the case against her
and allowed her to leave Saudi Arabia. Shortly before her return to Manila, 12 she was
terminated from the service by SAUDIA, without her being informed of the cause.
On November 23, 1993, Morada filed a Complaint 13 for damages against SAUDIA, and Khaled
Al-Balawi ("Al-Balawi"), its country manager.
On January 19, 1994, SAUDIA filed an Omnibus Motion To Dismiss 14 which raised the following
grounds, to wit: (1) that the Complaint states no cause of action against Saudia; (2) that
defendant Al-Balawi is not a real party in interest; (3) that the claim or demand set forth in the
Complaint has been waived, abandoned or otherwise extinguished; and (4) that the trial court
has no jurisdiction to try the case.
On February 10, 1994, Morada filed her Opposition (To Motion to Dismiss) 15. Saudia filed a
reply 16 thereto on March 3, 1994.
On June 23, 1994, Morada filed an Amended Complaint 17 wherein Al-Balawi was dropped as
party defendant. On August 11, 1994, Saudia filed its Manifestation and Motion to Dismiss
Amended Complaint 18.
The trial court issued an Order 19 dated August 29, 1994 denying the Motion to Dismiss
Amended Complaint filed by Saudia.
From the Order of respondent Judge 20 denying the Motion to Dismiss, SAUDIA filed on
September 20, 1994, its Motion for Reconsideration 21 of the Order dated August 29, 1994. It
alleged that the trial court has no jurisdiction to hear and try the case on the basis of Article
21 of the Civil Code, since the proper law applicable is the law of the Kingdom of Saudi Arabia.
On October 14, 1994, Morada filed her Opposition 22 (To Defendant's Motion for
Reconsideration).
In the Reply 23 filed with the trial court on October 24, 1994, SAUDIA alleged that since its
Motion for Reconsideration raised lack of jurisdiction as its cause of action, the Omnibus
Motion Rule does not apply, even if that ground is raised for the first time on appeal.
Additionally, SAUDIA alleged that the Philippines does not have any substantial interest in the
prosecution of the instant case, and hence, without jurisdiction to adjudicate the same.
Respondent Judge subsequently issued another Order 24 dated February 2, 1995, denying
SAUDIA's Motion for Reconsideration. The pertinent portion of the assailed Order reads as
follows:
Acting on the Motion for Reconsideration of defendant Saudi Arabian Airlines filed, thru
counsel, on September 20, 1994, and the Opposition thereto of the plaintiff filed, thru counsel,
on October 14, 1994, as well as the Reply therewith of defendant Saudi Arabian Airlines filed,
thru counsel, on October 24, 1994, considering that a perusal of the plaintiffs Amended
Complaint, which is one for the recovery of actual, moral and exemplary damages plus
attorney's fees, upon the basis of the applicable Philippine law, Article 21 of the New Civil Code
of the Philippines, is, clearly, within the jurisdiction of this Court as regards the subject matter,
and there being nothing new of substance which might cause the reversal or modification of
the order sought to be reconsidered, the motion for reconsideration of the defendant, is
DENIED.
SO ORDERED. 25
Consequently, on February 20, 1995, SAUDIA filed its Petition for Certiorari and Prohibition
with Prayer for Issuance of Writ of Preliminary Injunction and/or Temporary Restraining
Order 26 with the Court of Appeals.
Respondent Court of Appeals promulgated a Resolution with Temporary Restraining
Order 27 dated February 23, 1995, prohibiting the respondent Judge from further conducting
any proceeding, unless otherwise directed, in the interim.
In another Resolution 28 promulgated on September 27, 1995, now assailed, the appellate
court denied SAUDIA's Petition for the Issuance of a Writ of Preliminary Injunction dated
February 18, 1995, to wit:
The Petition for the Issuance of a Writ of Preliminary Injunction is hereby DENIED, after
considering the Answer, with Prayer to Deny Writ of Preliminary Injunction (Rollo, p. 135) the
Reply and Rejoinder, it appearing that herein petitioner is not clearly entitled thereto (Unciano
Paramedical College, et. Al., v. Court of Appeals, et. Al., 100335, April 7, 1993, Second Division).
SO ORDERED.
On October 20, 1995, SAUDIA filed with this Honorable Court the instant Petition 29 for Review
with Prayer for Temporary Restraining Order dated October 13, 1995.
However, during the pendency of the instant Petition, respondent Court of Appeals rendered
the Decision 30 dated April 10, 1996, now also assailed. It ruled that the Philippines is an
appropriate forum considering that the Amended Complaint's basis for recovery of damages
is Article 21 of the Civil Code, and thus, clearly within the jurisdiction of respondent Court. It
further held that certiorari is not the proper remedy in a denial of a Motion to Dismiss,
inasmuch as the petitioner should have proceeded to trial, and in case of an adverse ruling,
find recourse in an appeal.
On May 7, 1996, SAUDIA filed its Supplemental Petition for Review with Prayer for Temporary
Restraining Order 31 dated April 30, 1996, given due course by this Court. After both parties
submitted their Memoranda, 32 the instant case is now deemed submitted for decision.
Petitioner SAUDIA raised the following issues:
I
The trial court has no jurisdiction to hear and try Civil Case No. Q-93-18394 based on Article
21 of the New Civil Code since the proper law applicable is the law of the Kingdom of Saudi
Arabia inasmuch as this case involves what is known in private international law as a "conflicts
problem". Otherwise, the Republic of the Philippines will sit in judgment of the acts done by
another sovereign state which is abhorred.
II
Leave of court before filing a supplemental pleading is not a jurisdictional requirement.
Besides, the matter as to absence of leave of court is now moot and academic when this
Honorable Court required the respondents to comment on petitioner's April 30, 1996
Supplemental Petition For Review With Prayer For A Temporary Restraining Order Within Ten
(10) Days From Notice Thereof. Further, the Revised Rules of Court should be construed with
liberality pursuant to Section 2, Rule 1 thereof.
III
Petitioner received on April 22, 1996 the April 10, 1996 decision in CA-G.R. SP NO. 36533
entitled "Saudi Arabian Airlines v. Hon. Rodolfo A. Ortiz, et al." and filed its April 30, 1996
Supplemental Petition For Review With Prayer For A Temporary Restraining Order on May 7,
1996 at 10:29 a.m. or within the 15-day reglementary period as provided for under Section 1,
Rule 45 of the Revised Rules of Court. Therefore, the decision in CA-G.R. SP NO. 36533 has not
yet become final and executory and this Honorable Court can take cognizance of this case. 33
From the foregoing factual and procedural antecedents, the following issues emerge for our
resolution:
I.
WHETHER RESPONDENT APPELLATE COURT ERRED IN HOLDING THAT THE REGIONAL TRIAL
COURT OF QUEZON CITY HAS JURISDICTION TO HEAR AND TRY CIVIL CASE NO. Q-93-18394
ENTITLED "MILAGROS P. MORADA V. SAUDI ARABIAN AIRLINES".
II.
WHETHER RESPONDENT APPELLATE COURT ERRED IN RULING THAT IN THIS CASE PHILIPPINE
LAW SHOULD GOVERN.
Petitioner SAUDIA claims that before us is a conflict of laws that must be settled at the outset.
It maintains that private respondent's claim for alleged abuse of rights occurred in the Kingdom
of Saudi Arabia. It alleges that the existence of a foreign element qualifies the instant case for
the application of the law of the Kingdom of Saudi Arabia, by virtue of the lex loci delicti
commissi rule. 34
On the other hand, private respondent contends that since her Amended Complaint is based
on Articles 19 35 and 21 36 of the Civil Code, then the instant case is properly a matter of
domestic law. 37
Under the factual antecedents obtaining in this case, there is no dispute that the interplay of
events occurred in two states, the Philippines and Saudi Arabia.
As stated by private respondent in her Amended Complaint 38 dated June 23, 1994:
2. Defendant SAUDI ARABIAN AIRLINES or SAUDIA is a foreign airlines corporation doing
business in the Philippines. It may be served with summons and other court processes at Travel
Wide Associated Sales (Phils.). Inc., 3rd Floor, Cougar Building, 114 Valero St., Salcedo Village,
Makati, Metro Manila.
xxx xxx xxx
6. Plaintiff learned that, through the intercession of the Saudi Arabian government, the
Indonesian authorities agreed to deport Thamer and Allah after two weeks of detention.
Eventually, they were again put in service by defendant SAUDIA. In September 1990, defendant
SAUDIA transferred plaintiff to Manila.
7. On January 14, 1992, just when plaintiff thought that the Jakarta incident was already
behind her, her superiors reauested her to see MR. Ali Meniewy, Chief Legal Officer of SAUDIA
in Jeddah, Saudi Arabia. When she saw him, he brought her to the police station where the
police took her passport and questioned her about the Jakarta incident. Miniewy simply stood
by as the police put pressure on her to make a statement dropping the case against Thamer
and Allah. Not until she agreed to do so did the police return her passport and allowed her to
catch the afternoon flight out of Jeddah.
8. One year and a half later or on June 16, 1993, in Riyadh, Saudi Arabia, a few minutes before
the departure of her flight to Manila, plaintiff was not allowed to board the plane and instead
ordered to take a later flight to Jeddah to see Mr. Meniewy, the Chief Legal Officer of SAUDIA.
When she did, a certain Khalid of the SAUDIA office brought her to a Saudi court where she
was asked to sigh a document written in Arabic. They told her that this was necessary to close
the case against Thamer and Allah. As it turned out, plaintiff signed a notice to her to appear
before the court on June 27, 1993. Plaintiff then returned to Manila.
9. Shortly afterwards, defendant SAUDIA summoned plaintiff to report to Jeddah once again
and see Miniewy on June 27, 1993 for further investigation. Plaintiff did so after receiving
assurance from SAUDIA's Manila manger, Aslam Saleemi, that the investigation was routinary
and that it posed no danger to her.
10. In Jeddah, a SAUDIA legal officer brought plaintiff to the same Saudi court on June 27, 1993.
Nothing happened then but on June 28, 1993, a Saudi judge interrogated plaintiff through an
interpreter about the Jakarta incident. After one hour of interrogation, they let her go. At the
airport, however, just as her plane was about to take off, a SAUDIA officer told her that the
airline had forbidden her to take that flight. At the Inflight Service Office where she was told
to go, the secretary of Mr. Yahya Saddick took away her passport and told her to remain in
Jeddah, at the crew quarters, until further orders.
11. On July 3, 1993 a SAUDIA legal officer again escorted plaintiff to the same court where the
judge, to her astonishment and shock, rendered a decision, translated to her in English,
sentencing her to five months imprisonment and to 286 lashes. Only then did she realize that
the Saudi court had tried her, together with Thamer and Allah, for what happened in Jakarta.
The court found plaintiff guilty of (1) adultery; (2) going to a disco, dancing, and listening to
the music in violation of Islamic laws; (3) socializing with the male crew, in contravention of
Islamic tradition.
12. Because SAUDIA refused to lend her a hand in the case, plaintiff sought the help of the
Philippines Embassy in Jeddah. The latter helped her pursue an appeal from the decision of the
court. To pay for her upkeep, she worked on the domestic flights of defendant SAUDIA while,
ironically, Thamer and Allah freely served the international flights. 39
Where the factual antecedents satisfactorily establish the existence of a foreign element, we
agree with petitioner that the problem herein could present a "conflicts" case.
A factual situation that cuts across territorial lines and is affected by the diverse laws of two or
more states is said to contain a "foreign element". The presence of a foreign element is
inevitable since social and economic affairs of individuals and associations are rarely confined
to the geographic limits of their birth or conception. 40
The forms in which this foreign element may appear are many. 41 The foreign element may
simply consist in the fact that one of the parties to a contract is an alien or has a foreign
domicile, or that a contract between nationals of one State involves properties situated in
another State. In other cases, the foreign element may assume a complex form. 42
In the instant case, the foreign element consisted in the fact that private respondent Morada
is a resident Philippine national, and that petitioner SAUDIA is a resident foreign corporation.
Also, by virtue of the employment of Morada with the petitioner Saudia as a flight stewardess,
events did transpire during her many occasions of travel across national borders, particularly
from Manila, Philippines to Jeddah, Saudi Arabia, and vice versa, that caused a "conflicts"
situation to arise.
We thus find private respondent's assertion that the case is purely domestic, imprecise.
A conflicts problem presents itself here, and the question of jurisdiction 43 confronts the
court a quo.
After a careful study of the private respondent's Amended Complaint, 44 and the Comment
thereon, we note that she aptly predicated her cause of action on Articles 19 and 21 of the
New Civil Code.
On one hand, Article 19 of the New Civil Code provides:
Art. 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.
On the other hand, Article 21 of the New Civil Code provides:
Art. 21. Any person who willfully causes loss or injury to another in a manner that is contrary
to morals, good customs or public policy shall compensate the latter for damages.
Thus, in Philippine National Bank (PNB) vs. Court of Appeals, 45 this Court held that:
The aforecited provisions on human relations were intended to expand the concept of torts in
this jurisdiction by granting adequate legal remedy for the untold number of moral wrongs
which is impossible for human foresight to specifically provide in the statutes.
Although Article 19 merely declares a principle of law, Article 21 gives flesh to its provisions.
Thus, we agree with private respondent's assertion that violations of Articles 19 and 21 are
actionable, with judicially enforceable remedies in the municipal forum.
Based on the allegations 46 in the Amended Complaint, read in the light of the Rules of Court
on jurisdiction 47 we find that the Regional Trial Court (RTC) of Quezon City possesses
jurisdiction over the subject matter of the suit. 48 Its authority to try and hear the case is
provided for under Section 1 of Republic Act No. 7691, to wit:
Sec. 1. Section 19 of Batas Pambansa Blg. 129, otherwise known as the "Judiciary
Reorganization Act of 1980", is hereby amended to read as follows:
Sec. 19. Jurisdiction in Civil Cases. - Regional Trial Courts shall exercise exclusive jurisdiction:
xxx xxx xxx
(8) In all other cases in which demand, exclusive of interest, damages of whatever kind,
attorney's fees, litigation expenses, and cots or the value of the property in controversy
exceeds One hundred thousand pesos (P100,000.00) or, in such other cases in Metro Manila,
where the demand, exclusive of the above-mentioned items exceeds Two hundred Thousand
pesos (P200,000.00). (Emphasis ours)
xxx xxx xxx
And following Section 2 (b), Rule 4 of the Revised Rules of Court - the venue, Quezon City, is
appropriate:
Sec. 2 Venue in Courts of First Instance. - [Now Regional Trial Court]
(a) xxx xxx xxx
(b) Personal actions. - All other actions may be commenced and tried where the defendant or
any of the defendants resides or may be found, or where the plaintiff or any of the plaintiff
resides, at the election of the plaintiff.
Pragmatic considerations, including the convenience of the parties, also weigh heavily in favor
of the RTC Quezon City assuming jurisdiction. Paramount is the private interest of the litigant.
Enforceability of a judgment if one is obtained is quite obvious. Relative advantages and
obstacles to a fair trial are equally important. Plaintiff may not, by choice of an inconvenient
forum, "vex", "harass", or "oppress" the defendant, e.g. by inflicting upon him needless
expense or disturbance. But unless the balance is strongly in favor of the defendant, the
plaintiffs choice of forum should rarely be disturbed. 49
Weighing the relative claims of the parties, the court a quo found it best to hear the case in
the Philippines. Had it refused to take cognizance of the case, it would be forcing plaintiff
(private respondent now) to seek remedial action elsewhere, i.e. in the Kingdom of Saudi
Arabia where she no longer maintains substantial connections. That would have caused a
fundamental unfairness to her.
Moreover, by hearing the case in the Philippines no unnecessary difficulties and inconvenience
have been shown by either of the parties. The choice of forum of the plaintiff (now private
respondent) should be upheld.
Similarly, the trial court also possesses jurisdiction over the persons of the parties herein. By
filing her Complaint and Amended Complaint with the trial court, private respondent has
voluntary submitted herself to the jurisdiction of the court.
The records show that petitioner SAUDIA has filed several motions 50 praying for the dismissal
of Morada's Amended Complaint. SAUDIA also filed an Answer In Ex Abundante
Cautelam dated February 20, 1995. What is very patent and explicit from the motions filed, is
that SAUDIA prayed for other reliefs under the premises. Undeniably, petitioner SAUDIA has
effectively submitted to the trial court's jurisdiction by praying for the dismissal of the
Amended Complaint on grounds other than lack of jurisdiction.
As held by this Court in Republic vs. Ker and Company, Ltd.: 51
We observe that the motion to dismiss filed on April 14, 1962, aside from disputing the lower
court's jurisdiction over defendant's person, prayed for dismissal of the complaint on the
ground that plaintiff's cause of action has prescribed. By interposing such second ground in its
motion to dismiss, Ker and Co., Ltd. availed of an affirmative defense on the basis of which it
prayed the court to resolve controversy in its favor. For the court to validly decide the said plea
of defendant Ker & Co., Ltd., it necessarily had to acquire jurisdiction upon the latter's person,
who, being the proponent of the affirmative defense, should be deemed to have abandoned
its special appearance and voluntarily submitted itself to the jurisdiction of the court.
Similarly, the case of De Midgely vs. Ferandos, held that;
When the appearance is by motion for the purpose of objecting to the jurisdiction of the court
over the person, it must be for the sole and separate purpose of objecting to the jurisdiction
of the court. If his motion is for any other purpose than to object to the jurisdiction of the court
over his person, he thereby submits himself to the jurisdiction of the court. A special
appearance by motion made for the purpose of objecting to the jurisdiction of the court over
the person will be held to be a general appearance, if the party in said motion should, for
example, ask for a dismissal of the action upon the further ground that the court had no
jurisdiction over the subject matter. 52
Clearly, petitioner had submitted to the jurisdiction of the Regional Trial Court of Quezon City.
Thus, we find that the trial court has jurisdiction over the case and that its exercise thereof,
justified.
As to the choice of applicable law, we note that choice-of-law problems seek to answer two
important questions: (1) What legal system should control a given situation where some of the
significant facts occurred in two or more states; and (2) to what extent should the chosen legal
system regulate the situation. 53
Several theories have been propounded in order to identify the legal system that should
ultimately control. Although ideally, all choice-of-law theories should intrinsically advance
both notions of justice and predictability, they do not always do so. The forum is then faced
with the problem of deciding which of these two important values should be stressed. 54
Before a choice can be made, it is necessary for us to determine under what category a certain
set of facts or rules fall. This process is known as "characterization", or the "doctrine of
qualification". It is the "process of deciding whether or not the facts relate to the kind of
question specified in a conflicts rule." 55 The purpose of "characterization" is to enable the
forum to select the proper law. 56
Our starting point of analysis here is not a legal relation, but a factual situation, event, or
operative fact. 57 An essential element of conflict rules is the indication of a "test" or
"connecting factor" or "point of contact". Choice-of-law rules invariably consist of a factual
relationship (such as property right, contract claim) and a connecting factor or point of contact,
such as the situs of the res, the place of celebration, the place of performance, or the place of
wrongdoing. 58
Note that one or more circumstances may be present to serve as the possible test for the
determination of the applicable law. 59 These "test factors" or "points of contact" or
"connecting factors" could be any of the following:
(1) The nationality of a person, his domicile, his residence, his place of sojourn, or his origin;
(2) the seat of a legal or juridical person, such as a corporation;
(3) the situs of a thing, that is, the place where a thing is, or is deemed to be situated. In
particular, the lex situs is decisive when real rights are involved;
(4) the place where an act has been done, the locus actus, such as the place where a contract
has been made, a marriage celebrated, a will signed or a tort committed. The lex loci actus is
particularly important in contracts and torts;
(5) the place where an act is intended to come into effect, e.g., the place of performance of
contractual duties, or the place where a power of attorney is to be exercised;
(6) the intention of the contracting parties as to the law that should govern their agreement,
the lex loci intentionis;
(7) the place where judicial or administrative proceedings are instituted or done. The lex fori -
the law of the forum - is particularly important because, as we have seen earlier, matters of
"procedure" not going to the substance of the claim involved are governed by it; and because
the lex fori applies whenever the content of the otherwise applicable foreign law is excluded
from application in a given case for the reason that it falls under one of the exceptions to the
applications of foreign law; and
(8) the flag of a ship, which in many cases is decisive of practically all legal relationships of the
ship and of its master or owner as such. It also covers contractual relationships particularly
contracts of affreightment. 60 (Emphasis ours.)
After a careful study of the pleadings on record, including allegations in the Amended
Complaint deemed admitted for purposes of the motion to dismiss, we are convinced that
there is reasonable basis for private respondent's assertion that although she was already
working in Manila, petitioner brought her to Jeddah on the pretense that she would merely
testify in an investigation of the charges she made against the two SAUDIA crew members for
the attack on her person while they were in Jakarta. As it turned out, she was the one made to
face trial for very serious charges, including adultery and violation of Islamic laws and tradition.
There is likewise logical basis on record for the claim that the "handing over" or "turning over"
of the person of private respondent to Jeddah officials, petitioner may have acted beyond its
duties as employer. Petitioner's purported act contributed to and amplified or even
proximately caused additional humiliation, misery and suffering of private respondent.
Petitioner thereby allegedly facilitated the arrest, detention and prosecution of private
respondent under the guise of petitioner's authority as employer, taking advantage of the
trust, confidence and faith she reposed upon it. As purportedly found by the Prince of Makkah,
the alleged conviction and imprisonment of private respondent was wrongful. But these
capped the injury or harm allegedly inflicted upon her person and reputation, for which
petitioner could be liable as claimed, to provide compensation or redress for the wrongs done,
once duly proven.
Considering that the complaint in the court a quo is one involving torts, the "connecting factor"
or "point of contact" could be the place or places where the tortious conduct or lex loci
actus occurred. And applying the torts principle in a conflicts case, we find that the Philippines
could be said as a situs of the tort (the place where the alleged tortious conduct took place).
This is because it is in the Philippines where petitioner allegedly deceived private respondent,
a Filipina residing and working here. According to her, she had honestly believed that
petitioner would, in the exercise of its rights and in the performance of its duties, "act with
justice, give her due and observe honesty and good faith." Instead, petitioner failed to protect
her, she claimed. That certain acts or parts of the injury allegedly occurred in another country
is of no moment. For in our view what is important here is the place where the over-all harm
or the totality of the alleged injury to the person, reputation, social standing and human rights
of complainant, had lodged, according to the plaintiff below (herein private respondent). All
told, it is not without basis to identify the Philippines as the situs of the alleged tort.
Moreover, with the widespread criticism of the traditional rule of lex loci delicti commissi,
modern theories and rules on tort liability 61 have been advanced to offer fresh judicial
approaches to arrive at just results. In keeping abreast with the modern theories on tort
liability, we find here an occasion to apply the "State of the most significant relationship" rule,
which in our view should be appropriate to apply now, given the factual context of this case.
In applying said principle to determine the State which has the most significant relationship,
the following contacts are to be taken into account and evaluated according to their relative
importance with respect to the particular issue: (a) the place where the injury occurred; (b)
the place where the conduct causing the injury occurred; (c) the domicile, residence,
nationality, place of incorporation and place of business of the parties, and (d) the place where
the relationship, if any, between the parties is centered. 62
As already discussed, there is basis for the claim that over-all injury occurred and lodged in the
Philippines. There is likewise no question that private respondent is a resident Filipina national,
working with petitioner, a resident foreign corporation engaged here in the business of
international air carriage. Thus, the "relationship" between the parties was centered here,
although it should be stressed that this suit is not based on mere labor law violations. From
the record, the claim that the Philippines has the most significant contact with the matter in
this dispute, 63 raised by private respondent as plaintiff below against defendant (herein
petitioner), in our view, has been properly established.
Prescinding from this premise that the Philippines is the situs of the tort complained of and
the place "having the most interest in the problem", we find, by way of recapitulation, that the
Philippine law on tort liability should have paramount application to and control in the
resolution of the legal issues arising out of this case. Further, we hold that the respondent
Regional Trial Court has jurisdiction over the parties and the subject matter of the complaint;
the appropriate venue is in Quezon City, which could properly apply Philippine law. Moreover,
we find untenable petitioner's insistence that "[s]ince private respondent instituted this suit,
she has the burden of pleading and proving the applicable Saudi law on the matter." 64 As aptly
said by private respondent, she has "no obligation to plead and prove the law of the Kingdom
of Saudi Arabia since her cause of action is based on Articles 19 and 21" of the Civil Code of the
Philippines. In her Amended Complaint and subsequent pleadings, she never alleged that Saudi
law should govern this case. 65 And as correctly held by the respondent appellate court,
"considering that it was the petitioner who was invoking the applicability of the law of Saudi
Arabia, then the burden was on it [petitioner] to plead and to establish what the law of Saudi
Arabia is". 66
Lastly, no error could be imputed to the respondent appellate court in upholding the trial
court's denial of defendant's (herein petitioner's) motion to dismiss the case. Not only was
jurisdiction in order and venue properly laid, but appeal after trial was obviously available, and
expeditious trial itself indicated by the nature of the case at hand. Indubitably, the Philippines
is the state intimately concerned with the ultimate outcome of the case below, not just for the
benefit of all the litigants, but also for the vindication of the country's system of law and justice
in a transnational setting. With these guidelines in mind, the trial court must proceed to try
and adjudge the case in the light of relevant Philippine law, with due consideration of the
foreign element or elements involved. Nothing said herein, of course, should be construed as
prejudging the results of the case in any manner whatsoever.
WHEREFORE, the instant petition for certiorari is hereby DISMISSED. Civil Case No. Q-93-18394
entitled "Milagros P. Morada vs. Saudi Arabia Airlines" is hereby REMANDED to Regional Trial
Court of Quezon City, Branch 89 for further proceedings.
SO ORDERED.
KOREA TECHNOLOGIES CO., LTD., petitioner,
vs.
HON. ALBERTO A. LERMA, in his capacity as Presiding Judge of Branch 256 of Regional Trial
Court of Muntinlupa City, and PACIFIC GENERAL STEEL MANUFACTURING
CORPORATION, respondents.
G.R. No. 143581 January 7, 2008
DE C I S I O N
VELASCO, JR., J.:
Contracts; Arbitration; Conflict of Laws; While it is established in this jurisdiction is the rule
that the law of the place where the contract is made governs—lex loci contractus—Art. 2044
of the Civil Code sanctions the validity of mutually agreed arbitral clause or the finality and
binding effect of an arbitral award.—Established in this jurisdiction is the rule that the law of
the place where the contract is made governs. Lex loci contractus. The contract in this case
was perfected here in the Philippines. Therefore, our laws ought to govern. Nonetheless, Art.
2044 of the Civil Code sanctions the validity of mutually agreed arbitral clause or the finality
and binding effect of an arbitral award. Art. 2044 provides, “Any stipulation that the
arbitrators’ award or decision shall be final, is valid, without prejudice to Articles 2038, 2039
and 2040.” (Emphasis supplied.) Arts. 2038, 2039, and 2040 abovecited refer to instances
where a compromise or an arbitral award, as applied to Art. 2044 pursuant to Art. 2043, may
be voided, rescinded, or annulled, but these would not denigrate the finality of the arbitral
award
Same; Same; Same; Model Law on International Commercial Arbitration of the United Nations
Commission on International Trade Law (UNCITRAL Model Law); Alternative Dispute
Resolution Act of 2004 (R.A. 9285); As signatory to the Arbitration Rules of the United Nations
Commission on International Trade Law (UN-CITRAL) Model Law on International Commercial
Arbitration of the UNCITRAL in the New York Convention on 21 June 1985, the Phil-ippines
committed itself to be bound by the Model Law; The Philip-pines has incorporated the Model
Law in Alternative Dispute Resolution Act of 2004.—For domestic arbitration proceedings, we
have particular agencies to arbitrate disputes arising from contractual relations. In case a
foreign arbitral body is chosen by the parties, the arbitration rules of our domestic arbitration
bodies would not be applied. As signatory to the Arbitration Rules of the UNCITRAL Model Law
on International Commercial Arbitration of the United Nations Commission on International
Trade Law (UNCITRAL) in the New York Convention on June 21, 1985, the Philippines
committed itself to be bound by the Model Law. We have even incorporated the Model Law
in Republic Act No. (RA) 9285, otherwise known as the Alternative Dispute Resolution Act of
2004 entitled An Act to Institutionalize the Use of an Alternative Dispute Resolution System in
the Philippines and to Establish the Office for Alternative Dispute Resolution, and for Other
Purposes, promulgated on April 2, 2004. Secs. 19 and 20 of Chapter 4 of the Model Law are
the pertinent provisions.
wise, KOGIES filed its application for arbitration before the KCAB on July 1, 1998 and it is still
pending because no arbitral award has yet been rendered. Thus, RA 9285 is applicable to the
instant case. Well-settled is the rule that procedural laws are construed to be applicable to
actions pending and undetermined at the time of their passage, and are deemed retroactive
in that sense and to that extent. As a general rule, the retroactive application of procedural
laws does not violate any personal rights because no vested right has yet attached nor arisen
from them.
Same; Same; Same; Same; Same; Under Sec. 24 of R.A. 9285, the Regional Trial Court does not
have jurisdiction over disputes that are properly the subject of arbitration pursuant to an
arbitration clause, and mandates the referral to arbitration in such cases.—Under Sec. 24, the
RTC does not have jurisdiction over disputes that are properly the subject of arbitration
pursuant to an arbitration clause, and mandates the referral to arbitration in such cases, thus:
SEC. 24. Referral to Arbitration.—A court before which an action is brought in a matter which
is the subject matter of an arbitration agreement shall, if at least one party so requests not
later than the pre-trial conference, or upon the request of both parties thereafter, refer the
parties to arbitration unless it finds that the arbitration agreement is null and void, inoperative
or incapable of being performed.
Same; Same; Same; Same; Same; Judicial Review; Even if foreign arbitral awards are mutually
stipulated by the parties in the arbitration clause to be final and binding, the same are not
immediately enforceable or cannot be implemented immediately—they must still be
confirmed by the Regional Trial Court.—Foreign arbitral awards while mutually stipulated by
the parties in the arbitration clause to be final and binding are not immediately enforceable or
cannot be implemented immediately. Sec. 35 of the UNCITRAL Model Law stipulates the
requirement for the arbitral award to be recognized by a competent court for enforcement,
which court under Sec. 36 of the UNCITRAL Model Law may refuse recognition or enforcement
on the grounds provided for. RA 9285 incorporated these provisos to Secs. 42, 43, and 44
relative to Secs. 47 and 48.
Same; Same; Same; Same; Same; Same; It is now clear that foreign arbitral awards when
confirmed by the Regional Trial Court are deemed not as a judgment of a foreign court but as
a foreign arbitral award, and when confirmed, are enforced as final and executory decisions of
our courts of law—the concept of a final and binding arbitral award is similar to judgments or
awards given by some quasi-judicial bodies, like the National Labor Relations Commission and
the Mines Adjudication Board.—It is now clear that foreign arbitral awards when confirmed by
the RTC are deemed not as a judgment of a foreign court but as a foreign arbitral award, and
when confirmed, are enforced as final and executory decisions of our courts of law. Thus, it
can be gleaned that the concept of a final and binding arbitral award is similar to judgments or
awards given by some of our quasi-judicial bodies, like the National Labor Relations
Commission and Mines Adjudication Board, whose final judgments are stipulated to be final
and binding, but not immediately executory in the sense that they may still be judicially
reviewed, upon the instance of any party. Therefore, the final foreign arbitral awards are
similarly situated in that they need first to be confirmed by the RTC.
Same; Same; Same; Same; Same; Same; While the Regional Trial Court (RTC) does not have
jurisdiction over disputes governed by arbitration mutually agreed upon by the parties, still
the foreign arbitral award is subject to judicial review by the RTC which can set aside, reject,
or vacate it.—While the RTC does not have jurisdiction over disputes governed by arbitration
mutually agreed upon by the parties, still the foreign arbitral award is subject to judicial review
by the RTC which can set aside, reject, or vacate it. In this sense, what this Court held in Chung
Fu Industries (Phils.), Inc., 206 SCRA 545 (1992), relied upon by KOGIES is applicable insofar as
the foreign arbitral awards, while final and binding, do not oust courts of jurisdiction since
these arbitral awards are not absolute and without exceptions as they are still judicially
reviewable. Chapter 7 of RA 9285 has made it clear that all arbitral awards, whether domestic
or foreign, are subject to judicial review on specific grounds provided for.
Same; Same; Same; Same; Same; Same; Grounds for judicial review different in domestic and
foreign arbitral awards—for foreign or international arbitral awards, the grounds for setting
aside, rejecting or vacating the award by the Regional Trial Court (RTC) are provided under Art.
34(2) of the United Nations Commission on International Trade Law (UNCITRAL) Model Law,
while for final domestic arbitral awards, they may only be assailed before the RTC and vacated
on the grounds provided under Sec. 25 of RA 876.—The differences between a final arbitral
award from an international or foreign arbitral tribunal and an award given by a local arbitral
tribunal are the specific grounds or conditions that vest jurisdiction over our courts to review
the awards. For foreign or international arbitral awards which must first be confirmed by the
RTC, the grounds for setting aside, rejecting or vacating the award by the RTC are provided
under Art. 34(2) of the UNCITRAL Model Law. For final domestic arbitral awards, which also
need confirmation by the RTC pursuant to Sec. 23 of RA 876 and shall be recognized as final
and executory decisions of the RTC, they may only be assailed before the RTC and vacated on
the grounds provided under Sec. 25 of RA 876.
Same; Same; Same; Same; Same; Same; An arbitration clause, stipulating that the arbitral
award is final and binding, does not oust our courts of jurisdiction as the international arbitral
award is still judicially reviewable under certain conditions provided for by the United Nations
Commission on International Trade Law (UN-CITRAL) Model Law on International Commercial
Arbitration (ICA) as applied and incorporated in RA 9285.—Petitioner is correct in its
contention that an arbitration clause, stipulating that the arbitral award is final and binding,
does not oust our courts of jurisdiction as the international arbitral award, the award of which
is not absolute and without exceptions, is still judicially reviewable under certain conditions
provided for by the UNCITRAL Model Law on ICA as applied and incorporated in RA 9285.
Same; Same; Rescission; Where an arbitration clause in a contract is availing, neither of the
parties can unilaterally treat the contract as rescinded since whatever infractions or breaches
by a party or differences arising from the contract must be brought first and resolved by
arbitration, and not through an extrajudicial rescission or judicial action.—What this Court held
in University of the Philippines v. De Los Angeles, 35 SCRA 102 (1970) and reiterated in
succeeding cases, that the act of treating a contract as rescinded on account of infractions by
the other contracting party is valid albeit provisional as it can be judicially assailed, is not
applicable to the instant case on account of a valid stipulation on arbitration. Where an
arbitration clause in a contract is availing, neither of the parties can unilaterally treat the
contract as rescinded since whatever infractions or breaches by a party or differences arising
from the con- tract must be brought first and resolved by arbitration, and not through an
extrajudicial rescission or judicial action.
Same; Same; Court Personnel; Sheriffs; A sheriff is not technically competent to ascertain the
actual status of the equipment and machineries as installed in the plant.—Whatever findings
and conclusions made by the RTC Branch Sheriff from the inspection made on October 28,
1998, as ordered by the trial court on October 19, 1998, is of no worth as said Sheriff is not
technically competent to ascertain the actual status of the equipment and machineries as
installed in the plant.
Same; Same; Alternative Dispute Resolution Act of 2004 (R.A. 9285); The pendency of an
arbitral proceeding does not foreclose resort to the courts for provisional reliefs—the RTC has
authority and jurisdiction to grant interim measures of protection.—In the recent 2006 case of
Transfield Philippines, Inc. v. Luzon Hydro Corporation, 490 SCRA 14 (2006), we were explicit
that even “the pendency of an arbitral proceeding does not foreclose resort to the courts for
provisional reliefs.” We explicated this way: As a fundamental point, the pendency of arbitral
proceedings does not foreclose resort to the courts for provisional reliefs. The Rules of the ICC,
which governs the parties’ arbitral dispute, allows the application of a party to a judicial
authority for interim or conservatory measures. Likewise, Section 14 of Republic Act (R.A.) No.
876 (The Arbitration Law) recognizes the rights of any party to petition the court to take
measures to safeguard and/or conserve any matter which is the subject of the dispute in
arbitration. In addition, R.A. 9285, otherwise known as the “Alternative Dispute Resolution Act
of 2004,” allows the filing of provisional or interim measures with the regular courts whenever
the arbitral tribunal has no power to act or to act effectively. It is thus beyond cavil that the
RTC has authority and jurisdiction to grant interim measures of protection
Same; Same; Same; Same; Same; Statutory Construction; RA 9285 is a procedural law which
has a retroactive effect.—While RA 9285 was passed only in 2004, it nonetheless applies in the
instant case since it is a procedural law which has a retroactive effect. Like Korea Technologies
Co., Ltd. vs. Lerma, 542 SCRA 1, G.R. No. 143581 January 7, 2008
================== ============ ====================
In our jurisdiction, the policy is to favor alternative methods of resolving disputes, particularly
in civil and commercial disputes. Arbitration along with mediation, conciliation, and
negotiation, being inexpensive, speedy and less hostile methods have long been favored by
this Court. The petition before us puts at issue an arbitration clause in a contract mutually
agreed upon by the parties stipulating that they would submit themselves to arbitration in a
foreign country. Regrettably, instead of hastening the resolution of their dispute, the parties
wittingly or unwittingly prolonged the controversy.
Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean corporation which is engaged in
the supply and installation of Liquefied Petroleum Gas (LPG) Cylinder manufacturing plants,
while private respondent Pacific General Steel Manufacturing Corp. (PGSMC) is a domestic
corporation.
On March 5, 1997, PGSMC and KOGIES executed a Contract1 whereby KOGIES would set up an
LPG Cylinder Manufacturing Plant in Carmona, Cavite. The contract was executed in the
Philippines. On April 7, 1997, the parties executed, in Korea, an Amendment for Contract No.
KLP-970301 dated March 5, 19972 amending the terms of payment. The contract and its
amendment stipulated that KOGIES will ship the machinery and facilities necessary for
manufacturing LPG cylinders for which PGSMC would pay USD 1,224,000. KOGIES would install
and initiate the operation of the plant for which PGSMC bound itself to pay USD 306,000 upon
the plant’s production of the 11-kg. LPG cylinder samples. Thus, the total contract price
amounted to USD 1,530,000.
On October 14, 1997, PGSMC entered into a Contract of Lease3 with Worth Properties, Inc.
(Worth) for use of Worth’s 5,079-square meter property with a 4,032-square meter warehouse
building to house the LPG manufacturing plant. The monthly rental was PhP 322,560
commencing on January 1, 1998 with a 10% annual increment clause. Subsequently, the
machineries, equipment, and facilities for the manufacture of LPG cylinders were shipped,
delivered, and installed in the Carmona plant. PGSMC paid KOGIES USD 1,224,000.
However, gleaned from the Certificate4 executed by the parties on January 22, 1998, after the
installation of the plant, the initial operation could not be conducted as PGSMC encountered
financial difficulties affecting the supply of materials, thus forcing the parties to agree that
KOGIES would be deemed to have completely complied with the terms and conditions of the
March 5, 1997 contract.
For the remaining balance of USD306,000 for the installation and initial operation of the plant,
PGSMC issued two postdated checks: (1) BPI Check No. 0316412 dated January 30, 1998 for
PhP 4,500,000; and (2) BPI Check No. 0316413 dated March 30, 1998 for PhP 4,500,000.5
When KOGIES deposited the checks, these were dishonored for the reason "PAYMENT
STOPPED." Thus, on May 8, 1998, KOGIES sent a demand letter6 to PGSMC threatening criminal
action for violation of Batas Pambansa Blg. 22 in case of nonpayment. On the same date, the
wife of PGSMC’s President faxed a letter dated May 7, 1998 to KOGIES’ President who was
then staying at a Makati City hotel. She complained that not only did KOGIES deliver a different
brand of hydraulic press from that agreed upon but it had not delivered several equipment
parts already paid for.
On May 14, 1998, PGSMC replied that the two checks it issued KOGIES were fully funded but
the payments were stopped for reasons previously made known to KOGIES.7
On June 1, 1998, PGSMC informed KOGIES that PGSMC was canceling their Contract dated
March 5, 1997 on the ground that KOGIES had altered the quantity and lowered the quality of
the machineries and equipment it delivered to PGSMC, and that PGSMC would dismantle and
transfer the machineries, equipment, and facilities installed in the Carmona plant. Five days
later, PGSMC filed before the Office of the Public Prosecutor an Affidavit-Complaint
for Estafa docketed as I.S. No. 98-03813 against Mr. Dae Hyun Kang, President of KOGIES.
On June 15, 1998, KOGIES wrote PGSMC informing the latter that PGSMC could not unilaterally
rescind their contract nor dismantle and transfer the machineries and equipment on mere
imagined violations by KOGIES. It also insisted that their disputes should be settled by
arbitration as agreed upon in Article 15, the arbitration clause of their contract.
On June 23, 1998, PGSMC again wrote KOGIES reiterating the contents of its June 1, 1998 letter
threatening that the machineries, equipment, and facilities installed in the plant would be
dismantled and transferred on July 4, 1998. Thus, on July 1, 1998, KOGIES instituted an
Application for Arbitration before the Korean Commercial Arbitration Board (KCAB) in Seoul,
Korea pursuant to Art. 15 of the Contract as amended.
On July 3, 1998, KOGIES filed a Complaint for Specific Performance, docketed as Civil Case No.
98-1178 against PGSMC before the Muntinlupa City Regional Trial Court (RTC). The RTC granted
a temporary restraining order (TRO) on July 4, 1998, which was subsequently extended until
July 22, 1998. In its complaint, KOGIES alleged that PGSMC had initially admitted that the
checks that were stopped were not funded but later on claimed that it stopped payment of
the checks for the reason that "their value was not received" as the former allegedly breached
their contract by "altering the quantity and lowering the quality of the machinery and
equipment" installed in the plant and failed to make the plant operational although it earlier
certified to the contrary as shown in a January 22, 1998 Certificate. Likewise, KOGIES averred
that PGSMC violated Art. 15 of their Contract, as amended, by unilaterally rescinding the
contract without resorting to arbitration. KOGIES also asked that PGSMC be restrained from
dismantling and transferring the machinery and equipment installed in the plant which the
latter threatened to do on July 4, 1998.
On July 9, 1998, PGSMC filed an opposition to the TRO arguing that KOGIES was not entitled
to the TRO since Art. 15, the arbitration clause, was null and void for being against public policy
as it ousts the local courts of jurisdiction over the instant controversy.
On July 17, 1998, PGSMC filed its Answer with Compulsory Counterclaim9 asserting that it had
the full right to dismantle and transfer the machineries and equipment because it had paid for
them in full as stipulated in the contract; that KOGIES was not entitled to the PhP 9,000,000
covered by the checks for failing to completely install and make the plant operational; and that
KOGIES was liable for damages amounting to PhP 4,500,000 for altering the quantity and
lowering the quality of the machineries and equipment. Moreover, PGSMC averred that it has
already paid PhP 2,257,920 in rent (covering January to July 1998) to Worth and it was not
willing to further shoulder the cost of renting the premises of the plant considering that the
LPG cylinder manufacturing plant never became operational.
After the parties submitted their Memoranda, on July 23, 1998, the RTC issued an Order
denying the application for a writ of preliminary injunction, reasoning that PGSMC had paid
KOGIES USD 1,224,000, the value of the machineries and equipment as shown in the contract
such that KOGIES no longer had proprietary rights over them. And finally, the RTC held that
Art. 15 of the Contract as amended was invalid as it tended to oust the trial court or any other
court jurisdiction over any dispute that may arise between the parties. KOGIES’ prayer for an
injunctive writ was denied.10 The dispositive portion of the Order stated:
WHEREFORE, in view of the foregoing consideration, this Court believes and so holds
that no cogent reason exists for this Court to grant the writ of preliminary injunction
to restrain and refrain defendant from dismantling the machineries and facilities at
the lot and building of Worth Properties, Incorporated at Carmona, Cavite and
transfer the same to another site: and therefore denies plaintiff’s application for a
writ of preliminary injunction.
On July 29, 1998, KOGIES filed its Reply to Answer and Answer to Counterclaim. 11 KOGIES
denied it had altered the quantity and lowered the quality of the machinery, equipment, and
facilities it delivered to the plant. It claimed that it had performed all the undertakings under
the contract and had already produced certified samples of LPG cylinders. It averred that
whatever was unfinished was PGSMC’s fault since it failed to procure raw materials due to lack
of funds. KOGIES, relying on Chung Fu Industries (Phils.), Inc. v. Court of Appeals,12 insisted that
the arbitration clause was without question valid.
After KOGIES filed a Supplemental Memorandum with Motion to Dismiss13 answering PGSMC’s
memorandum of July 22, 1998 and seeking dismissal of PGSMC’s counterclaims, KOGIES, on
August 4, 1998, filed its Motion for Reconsideration14 of the July 23, 1998 Order denying its
application for an injunctive writ claiming that the contract was not merely for machinery and
facilities worth USD 1,224,000 but was for the sale of an "LPG manufacturing plant" consisting
of "supply of all the machinery and facilities" and "transfer of technology" for a total contract
price of USD 1,530,000 such that the dismantling and transfer of the machinery and facilities
would result in the dismantling and transfer of the very plant itself to the great prejudice of
KOGIES as the still unpaid owner/seller of the plant. Moreover, KOGIES points out that the
arbitration clause under Art. 15 of the Contract as amended was a valid arbitration stipulation
under Art. 2044 of the Civil Code and as held by this Court in Chung Fu Industries (Phils.), Inc.15
In the meantime, PGSMC filed a Motion for Inspection of Things16 to determine whether there
was indeed alteration of the quantity and lowering of quality of the machineries and
equipment, and whether these were properly installed. KOGIES opposed the motion positing
that the queries and issues raised in the motion for inspection fell under the coverage of the
arbitration clause in their contract.
On September 21, 1998, the trial court issued an Order (1) granting PGSMC’s motion for
inspection; (2) denying KOGIES’ motion for reconsideration of the July 23, 1998 RTC Order; and
(3) denying KOGIES’ motion to dismiss PGSMC’s compulsory counterclaims as these
counterclaims fell within the requisites of compulsory counterclaims.
On October 2, 1998, KOGIES filed an Urgent Motion for Reconsideration17 of the September
21, 1998 RTC Order granting inspection of the plant and denying dismissal of PGSMC’s
compulsory counterclaims.
Ten days after, on October 12, 1998, without waiting for the resolution of its October 2, 1998
urgent motion for reconsideration, KOGIES filed before the Court of Appeals (CA) a petition for
certiorari18 docketed as CA-G.R. SP No. 49249, seeking annulment of the July 23, 1998 and
September 21, 1998 RTC Orders and praying for the issuance of writs of prohibition,
mandamus, and preliminary injunction to enjoin the RTC and PGSMC from inspecting,
dismantling, and transferring the machineries and equipment in the Carmona plant, and to
direct the RTC to enforce the specific agreement on arbitration to resolve the dispute.
In the meantime, on October 19, 1998, the RTC denied KOGIES’ urgent motion for
reconsideration and directed the Branch Sheriff to proceed with the inspection of the
machineries and equipment in the plant on October 28, 1998.19
Thereafter, KOGIES filed a Supplement to the Petition20 in CA-G.R. SP No. 49249 informing the
CA about the October 19, 1998 RTC Order. It also reiterated its prayer for the issuance of the
writs of prohibition, mandamus and preliminary injunction which was not acted upon by the
CA. KOGIES asserted that the Branch Sheriff did not have the technical expertise to ascertain
whether or not the machineries and equipment conformed to the specifications in the contract
and were properly installed.
On November 11, 1998, the Branch Sheriff filed his Sheriff’s Report21 finding that the
enumerated machineries and equipment were not fully and properly installed.
The Court of Appeals affirmed the trial court and declared
the arbitration clause against public policy
On May 30, 2000, the CA rendered the assailed Decision22 affirming the RTC Orders and
dismissing the petition for certiorari filed by KOGIES. The CA found that the RTC did not gravely
abuse its discretion in issuing the assailed July 23, 1998 and September 21, 1998 Orders.
Moreover, the CA reasoned that KOGIES’ contention that the total contract price for USD
1,530,000 was for the whole plant and had not been fully paid was contrary to the finding of
the RTC that PGSMC fully paid the price of USD 1,224,000, which was for all the machineries
and equipment. According to the CA, this determination by the RTC was a factual finding
beyond the ambit of a petition for certiorari.
On the issue of the validity of the arbitration clause, the CA agreed with the lower court that
an arbitration clause which provided for a final determination of the legal rights of the parties
to the contract by arbitration was against public policy.
On the issue of nonpayment of docket fees and non-attachment of a certificate of non-forum
shopping by PGSMC, the CA held that the counterclaims of PGSMC were compulsory ones and
payment of docket fees was not required since the Answer with counterclaim was not an
initiatory pleading. For the same reason, the CA said a certificate of non-forum shopping was
also not required.
Furthermore, the CA held that the petition for certiorari had been filed prematurely since
KOGIES did not wait for the resolution of its urgent motion for reconsideration of the
September 21, 1998 RTC Order which was the plain, speedy, and adequate remedy available.
According to the CA, the RTC must be given the opportunity to correct any alleged error it has
committed, and that since the assailed orders were interlocutory, these cannot be the subject
of a petition for certiorari.
Hence, we have this Petition for Review on Certiorari under Rule 45.
The Issues
Petitioner posits that the appellate court committed the following errors:
a. PRONOUNCING THE QUESTION OF OWNERSHIP OVER THE MACHINERY AND
FACILITIES AS "A QUESTION OF FACT" "BEYOND THE AMBIT OF A PETITION FOR
CERTIORARI" INTENDED ONLY FOR CORRECTION OF ERRORS OF JURISDICTION OR
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF (SIC) EXCESS OF
JURISDICTION, AND CONCLUDING THAT THE TRIAL COURT’S FINDING ON THE SAME
QUESTION WAS IMPROPERLY RAISED IN THE PETITION BELOW;
b. DECLARING AS NULL AND VOID THE ARBITRATION CLAUSE IN ARTICLE 15 OF THE
CONTRACT BETWEEN THE PARTIES FOR BEING "CONTRARY TO PUBLIC POLICY" AND
FOR OUSTING THE COURTS OF JURISDICTION;
c. DECREEING PRIVATE RESPONDENT’S COUNTERCLAIMS TO BE ALL COMPULSORY
NOT NECESSITATING PAYMENT OF DOCKET FEES AND CERTIFICATION OF NON-
FORUM SHOPPING;
d. RULING THAT THE PETITION WAS FILED PREMATURELY WITHOUT WAITING FOR
THE RESOLUTION OF THE MOTION FOR RECONSIDERATION OF THE ORDER DATED
SEPTEMBER 21, 1998 OR WITHOUT GIVING THE TRIAL COURT AN OPPORTUNITY TO
CORRECT ITSELF;
e. PROCLAIMING THE TWO ORDERS DATED JULY 23 AND SEPTEMBER 21, 1998 NOT
TO BE PROPER SUBJECTS OF CERTIORARI AND PROHIBITION FOR BEING
"INTERLOCUTORY IN NATURE;"
f. NOT GRANTING THE RELIEFS AND REMEDIES PRAYED FOR IN HE (SIC) PETITION
AND, INSTEAD, DISMISSING THE SAME FOR ALLEGEDLY "WITHOUT MERIT."23
 The Court’s Ruling
The petition is partly meritorious.
Before we delve into the substantive issues, we shall first tackle the procedural issues.
The rules on the payment of docket fees for counterclaims
and cross claims were amended effective August 16, 2004
KOGIES strongly argues that when PGSMC filed the counterclaims, it should have paid docket
fees and filed a certificate of non-forum shopping, and that its failure to do so was a fatal
defect.
We disagree with KOGIES.
As aptly ruled by the CA, the counterclaims of PGSMC were incorporated in its Answer with
Compulsory Counterclaim dated July 17, 1998 in accordance with Section 8 of Rule 11, 1997
Revised Rules of Civil Procedure, the rule that was effective at the time the Answer with
Counterclaim was filed. Sec. 8 on existing counterclaim or cross-claim states, "A compulsory
counterclaim or a cross-claim that a defending party has at the time he files his answer shall
be contained therein."
On July 17, 1998, at the time PGSMC filed its Answer incorporating its counterclaims against
KOGIES, it was not liable to pay filing fees for said counterclaims being compulsory in nature.
We stress, however, that effective August 16, 2004 under Sec. 7, Rule 141, as amended by
A.M. No. 04-2-04-SC, docket fees are now required to be paid in compulsory counterclaim or
cross-claims.
As to the failure to submit a certificate of forum shopping, PGSMC’s Answer is not an initiatory
pleading which requires a certification against forum shopping under Sec. 524 of Rule 7, 1997
Revised Rules of Civil Procedure. It is a responsive pleading, hence, the courts a quo did not
commit reversible error in denying KOGIES’ motion to dismiss PGSMC’s compulsory
counterclaims.
Interlocutory orders proper subject of certiorari
Citing Gamboa v. Cruz,25 the CA also pronounced that "certiorari and Prohibition are neither
the remedies to question the propriety of an interlocutory order of the trial court." 26 The CA
erred on its reliance on Gamboa. Gamboa involved the denial of a motion to acquit in a
criminal case which was not assailable in an action for certiorari since the denial of a motion
to quash required the accused to plead and to continue with the trial, and whatever objections
the accused had in his motion to quash can then be used as part of his defense and
subsequently can be raised as errors on his appeal if the judgment of the trial court is adverse
to him. The general rule is that interlocutory orders cannot be challenged by an appeal.27 Thus,
in Yamaoka v. Pescarich Manufacturing Corporation, we held:
The proper remedy in such cases is an ordinary appeal from an adverse
judgment on the merits, incorporating in said appeal the grounds for assailing the
interlocutory orders. Allowing appeals from interlocutory orders would result in the
‘sorry spectacle’ of a case being subject of a counterproductive ping-pong to and
from the appellate court as often as a trial court is perceived to have made an error
in any of its interlocutory rulings. However, where the assailed interlocutory order
was issued with grave abuse of discretion or patently erroneous and the remedy of
appeal would not afford adequate and expeditious relief, the Court allows certiorari
as a mode of redress.28
Also, appeals from interlocutory orders would open the floodgates to endless occasions for
dilatory motions. Thus, where the interlocutory order was issued without or in excess of
jurisdiction or with grave abuse of discretion, the remedy is certiorari.29
The alleged grave abuse of discretion of the respondent court equivalent to lack of jurisdiction
in the issuance of the two assailed orders coupled with the fact that there is no plain, speedy,
and adequate remedy in the ordinary course of law amply provides the basis for allowing the
resort to a petition for certiorari under Rule 65.
Prematurity of the petition before the CA
Neither do we think that KOGIES was guilty of forum shopping in filing the petition for
certiorari. Note that KOGIES’ motion for reconsideration of the July 23, 1998 RTC Order which
denied the issuance of the injunctive writ had already been denied. Thus, KOGIES’ only remedy
was to assail the RTC’s interlocutory order via a petition for certiorari under Rule 65.
While the October 2, 1998 motion for reconsideration of KOGIES of the September 21, 1998
RTC Order relating to the inspection of things, and the allowance of the compulsory
counterclaims has not yet been resolved, the circumstances in this case would allow an
exception to the rule that before certiorari may be availed of, the petitioner must have filed a
motion for reconsideration and said motion should have been first resolved by the court a quo.
The reason behind the rule is "to enable the lower court, in the first instance, to pass upon and
correct its mistakes without the intervention of the higher court."30
The September 21, 1998 RTC Order directing the branch sheriff to inspect the plant,
equipment, and facilities when he is not competent and knowledgeable on said matters is
evidently flawed and devoid of any legal support. Moreover, there is an urgent necessity to
resolve the issue on the dismantling of the facilities and any further delay would prejudice the
interests of KOGIES. Indeed, there is real and imminent threat of irreparable destruction or
substantial damage to KOGIES’ equipment and machineries. We find the resort to certiorari
based on the gravely abusive orders of the trial court sans the ruling on the October 2, 1998
motion for reconsideration to be proper.
The Core Issue: Article 15 of the Contract
We now go to the core issue of the validity of Art. 15 of the Contract, the arbitration clause. It
provides:
Article 15. Arbitration.—All disputes, controversies, or differences which may arise
between the parties, out of or in relation to or in connection with this Contract or
for the breach thereof, shall finally be settled by arbitration in Seoul, Korea in
accordance with the Commercial Arbitration Rules of the Korean Commercial
Arbitration Board. The award rendered by the arbitration(s) shall be final and
binding upon both parties concerned. (Emphasis supplied.)
Petitioner claims the RTC and the CA erred in ruling that the arbitration clause is null and void.
Petitioner is correct.
Established in this jurisdiction is the rule that the law of the place where the contract is made
governs. Lex loci contractus. The contract in this case was perfected here in the Philippines.
Therefore, our laws ought to govern. Nonetheless, Art. 2044 of the Civil Code sanctions the
validity of mutually agreed arbitral clause or the finality and binding effect of an arbitral award.
Art. 2044 provides, "Any stipulation that the arbitrators’ award or decision shall be final, is
valid, without prejudice to Articles 2038, 2039 and 2040." (Emphasis supplied.)
Arts. 2038,31 2039,32 and 204033 abovecited refer to instances where a compromise or an
arbitral award, as applied to Art. 2044 pursuant to Art. 2043,34 may be voided, rescinded, or
annulled, but these would not denigrate the finality of the arbitral award.
The arbitration clause was mutually and voluntarily agreed upon by the parties. It has not been
shown to be contrary to any law, or against morals, good customs, public order, or public
policy. There has been no showing that the parties have not dealt with each other on equal
footing. We find no reason why the arbitration clause should not be respected and complied
with by both parties. In Gonzales v. Climax Mining Ltd.,35 we held that submission to arbitration
is a contract and that a clause in a contract providing that all matters in dispute between the
parties shall be referred to arbitration is a contract.36 Again in Del Monte Corporation-USA v.
Court of Appeals, we likewise ruled that "[t]he provision to submit to arbitration any dispute
arising therefrom and the relationship of the parties is part of that contract and is itself a
contract."37
Arbitration clause not contrary to public policy
The arbitration clause which stipulates that the arbitration must be done in Seoul, Korea in
accordance with the Commercial Arbitration Rules of the KCAB, and that the arbitral award is
final and binding, is not contrary to public policy. This Court has sanctioned the validity of
arbitration clauses in a catena of cases. In the 1957 case of Eastboard Navigation Ltd. v. Juan
Ysmael and Co., Inc.,38 this Court had occasion to rule that an arbitration clause to resolve
differences and breaches of mutually agreed contractual terms is valid. In BF Corporation v.
Court of Appeals, we held that "[i]n this jurisdiction, arbitration has been held valid and
constitutional. Even before the approval on June 19, 1953 of Republic Act No. 876, this Court
has countenanced the settlement of disputes through arbitration. Republic Act No. 876 was
adopted to supplement the New Civil Code’s provisions on arbitration." 39 And in LM Power
Engineering Corporation v. Capitol Industrial Construction Groups, Inc., we declared that:
Being an inexpensive, speedy and amicable method of settling disputes, arbitration–
–along with mediation, conciliation and negotiation––is encouraged by the Supreme
Court. Aside from unclogging judicial dockets, arbitration also hastens the resolution
of disputes, especially of the commercial kind. It is thus regarded as the "wave of the
future" in international civil and commercial disputes. Brushing aside a contractual
agreement calling for arbitration between the parties would be a step backward.
Consistent with the above-mentioned policy of encouraging alternative dispute
resolution methods, courts should liberally construe arbitration clauses. Provided
such clause is susceptible of an interpretation that covers the asserted dispute, an
order to arbitrate should be granted. Any doubt should be resolved in favor of
arbitration.40
Having said that the instant arbitration clause is not against public policy, we come to the
question on what governs an arbitration clause specifying that in case of any dispute arising
from the contract, an arbitral panel will be constituted in a foreign country and the arbitration
rules of the foreign country would govern and its award shall be final and binding.
RA 9285 incorporated the UNCITRAL Model law
to which we are a signatory
For domestic arbitration proceedings, we have particular agencies to arbitrate disputes arising
from contractual relations. In case a foreign arbitral body is chosen by the parties, the
arbitration rules of our domestic arbitration bodies would not be applied. As signatory to the
Arbitration Rules of the UNCITRAL Model Law on International Commercial Arbitration41 of the
United Nations Commission on International Trade Law (UNCITRAL) in the New York
Convention on June 21, 1985, the Philippines committed itself to be bound by the Model Law.
We have even incorporated the Model Law in Republic Act No. (RA) 9285, otherwise known as
the Alternative Dispute Resolution Act of 2004 entitled An Act to Institutionalize the Use of an
Alternative Dispute Resolution System in the Philippines and to Establish the Office for
Alternative Dispute Resolution, and for Other Purposes, promulgated on April 2, 2004. Secs. 19
and 20 of Chapter 4 of the Model Law are the pertinent provisions:
CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION
SEC. 19. Adoption of the Model Law on International Commercial Arbitration.––
International commercial arbitration shall be governed by the Model Law on
International Commercial Arbitration (the "Model Law") adopted by the United
Nations Commission on International Trade Law on June 21, 1985 (United Nations
Document A/40/17) and recommended for enactment by the General Assembly in
Resolution No. 40/72 approved on December 11, 1985, copy of which is hereto
attached as Appendix "A".
 SEC. 20. Interpretation of Model Law.––In interpreting the Model Law, regard shall
be had to its international origin and to the need for uniformity in its interpretation
and resort may be made to the travaux preparatories and the report of the Secretary
General of the United Nations Commission on International Trade Law dated March
25, 1985 entitled, "International Commercial Arbitration: Analytical Commentary on
Draft Trade identified by reference number A/CN. 9/264."
While RA 9285 was passed only in 2004, it nonetheless applies in the instant case since it is a
procedural law which has a retroactive effect. Likewise, KOGIES filed its application for
arbitration before the KCAB on July 1, 1998 and it is still pending because no arbitral award has
yet been rendered. Thus, RA 9285 is applicable to the instant case. Well-settled is the rule that
procedural laws are construed to be applicable to actions pending and undetermined at the
time of their passage, and are deemed retroactive in that sense and to that extent. As a general
rule, the retroactive application of procedural laws does not violate any personal rights
because no vested right has yet attached nor arisen from them.42
Among the pertinent features of RA 9285 applying and incorporating the UNCITRAL Model Law
are the following:
(1) The RTC must refer to arbitration in proper cases
Under Sec. 24, the RTC does not have jurisdiction over disputes that are properly the subject
of arbitration pursuant to an arbitration clause, and mandates the referral to arbitration in
such cases, thus:
SEC. 24. Referral to Arbitration.––A court before which an action is brought in a
matter which is the subject matter of an arbitration agreement shall, if at least one
party so requests not later than the pre-trial conference, or upon the request of both
parties thereafter, refer the parties to arbitration unless it finds that the arbitration
agreement is null and void, inoperative or incapable of being performed.
(2) Foreign arbitral awards must be confirmed by the RTC
Foreign arbitral awards while mutually stipulated by the parties in the arbitration clause to be
final and binding are not immediately enforceable or cannot be implemented immediately.
Sec. 3543 of the UNCITRAL Model Law stipulates the requirement for the arbitral award to be
recognized by a competent court for enforcement, which court under Sec. 36 of the UNCITRAL
Model Law may refuse recognition or enforcement on the grounds provided for. RA 9285
incorporated these provisos to Secs. 42, 43, and 44 relative to Secs. 47 and 48, thus:
SEC. 42. Application of the New York Convention.––The New York Convention shall
govern the recognition and enforcement of arbitral awards covered by said
Convention.
The recognition and enforcement of such arbitral awards shall be filed with
the Regional Trial Court in accordance with the rules of procedure to be
promulgated by the Supreme Court. Said procedural rules shall provide that the
party relying on the award or applying for its enforcement shall file with the court
the original or authenticated copy of the award and the arbitration agreement. If the
award or agreement is not made in any of the official languages, the party shall
supply a duly certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign arbitration award was
made in party to the New York Convention.
xxxx
SEC. 43. Recognition and Enforcement of Foreign Arbitral Awards Not Covered by the
New York Convention.––The recognition and enforcement of foreign arbitral awards
not covered by the New York Convention shall be done in accordance with
procedural rules to be promulgated by the Supreme Court. The Court may, on
grounds of comity and reciprocity, recognize and enforce a non-convention award
as a convention award.
SEC. 44. Foreign Arbitral Award Not Foreign Judgment.––A foreign arbitral award
when confirmed by a court of a foreign country, shall be recognized and enforced as
a foreign arbitral award and not as a judgment of a foreign court.
A foreign arbitral award, when confirmed by the Regional Trial Court, shall be
enforced in the same manner as final and executory decisions of courts of law of the
Philippines
xxxx
SEC. 47. Venue and Jurisdiction.––Proceedings for recognition and enforcement of
an arbitration agreement or for vacations, setting aside, correction or modification
of an arbitral award, and any application with a court for arbitration assistance and
supervision shall be deemed as special proceedings and shall be filed with the
Regional Trial Court (i) where arbitration proceedings are conducted; (ii) where the
asset to be attached or levied upon, or the act to be enjoined is located; (iii) where
any of the parties to the dispute resides or has his place of business; or (iv) in the
National Judicial Capital Region, at the option of the applicant.
SEC. 48. Notice of Proceeding to Parties.––In a special proceeding for recognition and
enforcement of an arbitral award, the Court shall send notice to the parties at their
address of record in the arbitration, or if any part cannot be served notice at such
address, at such party’s last known address. The notice shall be sent al least fifteen
(15) days before the date set for the initial hearing of the application.
It is now clear that foreign arbitral awards when confirmed by the RTC are deemed not as a
judgment of a foreign court but as a foreign arbitral award, and when confirmed, are enforced
as final and executory decisions of our courts of law.
Thus, it can be gleaned that the concept of a final and binding arbitral award is similar to
judgments or awards given by some of our quasi-judicial bodies, like the National Labor
Relations Commission and Mines Adjudication Board, whose final judgments are stipulated to
be final and binding, but not immediately executory in the sense that they may still be judicially
reviewed, upon the instance of any party. Therefore, the final foreign arbitral awards are
similarly situated in that they need first to be confirmed by the RTC.
(3) The RTC has jurisdiction to review foreign arbitral awards
Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested the RTC with specific authority
and jurisdiction to set aside, reject, or vacate a foreign arbitral award on grounds provided
under Art. 34(2) of the UNCITRAL Model Law. Secs. 42 and 45 provide:
SEC. 42. Application of the New York Convention.––The New York Convention shall
govern the recognition and enforcement of arbitral awards covered by said
Convention.
The recognition and enforcement of such arbitral awards shall be filed with
the Regional Trial Court in accordance with the rules of procedure to be
promulgated by the Supreme Court. Said procedural rules shall provide that the
party relying on the award or applying for its enforcement shall file with the court
the original or authenticated copy of the award and the arbitration agreement. If the
award or agreement is not made in any of the official languages, the party shall
supply a duly certified translation thereof into any of such languages.
The applicant shall establish that the country in which foreign arbitration award was
made is party to the New York Convention.
If the application for rejection or suspension of enforcement of an award has been
made, the Regional Trial Court may, if it considers it proper, vacate its decision and
may also, on the application of the party claiming recognition or enforcement of the
award, order the party to provide appropriate security.
xxxx
SEC. 45. Rejection of a Foreign Arbitral Award.––A party to a foreign arbitration
proceeding may oppose an application for recognition and enforcement of the
arbitral award in accordance with the procedures and rules to be promulgated by
the Supreme Court only on those grounds enumerated under Article V of the New
York Convention. Any other ground raised shall be disregarded by the Regional Trial
Court.
Thus, while the RTC does not have jurisdiction over disputes governed by arbitration mutually
agreed upon by the parties, still the foreign arbitral award is subject to judicial review by the
RTC which can set aside, reject, or vacate it. In this sense, what this Court held in Chung Fu
Industries (Phils.), Inc. relied upon by KOGIES is applicable insofar as the foreign arbitral
awards, while final and binding, do not oust courts of jurisdiction since these arbitral awards
are not absolute and without exceptions as they are still judicially reviewable. Chapter 7 of RA
9285 has made it clear that all arbitral awards, whether domestic or foreign, are subject to
judicial review on specific grounds provided for.
(4) Grounds for judicial review different in domestic and foreign arbitral awards
The differences between a final arbitral award from an international or foreign arbitral tribunal
and an award given by a local arbitral tribunal are the specific grounds or conditions that vest
jurisdiction over our courts to review the awards.
For foreign or international arbitral awards which must first be confirmed by the RTC, the
grounds for setting aside, rejecting or vacating the award by the RTC are provided under Art.
34(2) of the UNCITRAL Model Law.
For final domestic arbitral awards, which also need confirmation by the RTC pursuant to Sec.
23 of RA 87644 and shall be recognized as final and executory decisions of the RTC,45 they may
only be assailed before the RTC and vacated on the grounds provided under Sec. 25 of RA
876.46
(5) RTC decision of assailed foreign arbitral award appealable
Sec. 46 of RA 9285 provides for an appeal before the CA as the remedy of an aggrieved party
in cases where the RTC sets aside, rejects, vacates, modifies, or corrects an arbitral award,
thus:
SEC. 46. Appeal from Court Decision or Arbitral Awards.—A decision of the Regional
Trial Court confirming, vacating, setting aside, modifying or correcting an arbitral
award may be appealed to the Court of Appeals in accordance with the rules and
procedure to be promulgated by the Supreme Court.
The losing party who appeals from the judgment of the court confirming an arbitral
award shall be required by the appellate court to post a counterbond executed in
favor of the prevailing party equal to the amount of the award in accordance with
the rules to be promulgated by the Supreme Court.
Thereafter, the CA decision may further be appealed or reviewed before this Court through a
petition for review under Rule 45 of the Rules of Court.
PGSMC has remedies to protect its interests
Thus, based on the foregoing features of RA 9285, PGSMC must submit to the foreign
arbitration as it bound itself through the subject contract. While it may have misgivings on the
foreign arbitration done in Korea by the KCAB, it has available remedies under RA 9285. Its
interests are duly protected by the law which requires that the arbitral award that may be
rendered by KCAB must be confirmed here by the RTC before it can be enforced.
With our disquisition above, petitioner is correct in its contention that an arbitration clause,
stipulating that the arbitral award is final and binding, does not oust our courts of jurisdiction
as the international arbitral award, the award of which is not absolute and without exceptions,
is still judicially reviewable under certain conditions provided for by the UNCITRAL Model Law
on ICA as applied and incorporated in RA 9285.
Finally, it must be noted that there is nothing in the subject Contract which provides that the
parties may dispense with the arbitration clause.
Unilateral rescission improper and illegal
Having ruled that the arbitration clause of the subject contract is valid and binding on the
parties, and not contrary to public policy; consequently, being bound to the contract of
arbitration, a party may not unilaterally rescind or terminate the contract for whatever cause
without first resorting to arbitration.
What this Court held in University of the Philippines v. De Los Angeles47 and reiterated in
succeeding cases,48 that the act of treating a contract as rescinded on account of infractions
by the other contracting party is valid albeit provisional as it can be judicially assailed, is not
applicable to the instant case on account of a valid stipulation on arbitration. Where an
arbitration clause in a contract is availing, neither of the parties can unilaterally treat the
contract as rescinded since whatever infractions or breaches by a party or differences arising
from the contract must be brought first and resolved by arbitration, and not through an
extrajudicial rescission or judicial action.
The issues arising from the contract between PGSMC and KOGIES on whether the equipment
and machineries delivered and installed were properly installed and operational in the plant in
Carmona, Cavite; the ownership of equipment and payment of the contract price; and whether
there was substantial compliance by KOGIES in the production of the samples, given the
alleged fact that PGSMC could not supply the raw materials required to produce the sample
LPG cylinders, are matters proper for arbitration. Indeed, we note that on July 1, 1998, KOGIES
instituted an Application for Arbitration before the KCAB in Seoul, Korea pursuant to Art. 15 of
the Contract as amended. Thus, it is incumbent upon PGSMC to abide by its commitment to
arbitrate.
Corollarily, the trial court gravely abused its discretion in granting PGSMC’s Motion for
Inspection of Things on September 21, 1998, as the subject matter of the motion is under the
primary jurisdiction of the mutually agreed arbitral body, the KCAB in Korea.
In addition, whatever findings and conclusions made by the RTC Branch Sheriff from the
inspection made on October 28, 1998, as ordered by the trial court on October 19, 1998, is of
no worth as said Sheriff is not technically competent to ascertain the actual status of the
equipment and machineries as installed in the plant.
For these reasons, the September 21, 1998 and October 19, 1998 RTC Orders pertaining to the
grant of the inspection of the equipment and machineries have to be recalled and nullified.
Issue on ownership of plant proper for arbitration
Petitioner assails the CA ruling that the issue petitioner raised on whether the total contract
price of USD 1,530,000 was for the whole plant and its installation is beyond the ambit of a
Petition for Certiorari.
Petitioner’s position is untenable.
It is settled that questions of fact cannot be raised in an original action for certiorari.49 Whether
or not there was full payment for the machineries and equipment and installation is indeed a
factual issue prohibited by Rule 65.
However, what appears to constitute a grave abuse of discretion is the order of the RTC in
resolving the issue on the ownership of the plant when it is the arbitral body (KCAB) and not
the RTC which has jurisdiction and authority over the said issue. The RTC’s determination of
such factual issue constitutes grave abuse of discretion and must be reversed and set aside.
RTC has interim jurisdiction to protect the rights of the parties
Anent the July 23, 1998 Order denying the issuance of the injunctive writ paving the way for
PGSMC to dismantle and transfer the equipment and machineries, we find it to be in order
considering the factual milieu of the instant case.
Firstly, while the issue of the proper installation of the equipment and machineries might well
be under the primary jurisdiction of the arbitral body to decide, yet the RTC under Sec. 28 of
RA 9285 has jurisdiction to hear and grant interim measures to protect vested rights of the
parties. Sec. 28 pertinently provides:
SEC. 28. Grant of interim Measure of Protection.—(a) It is not incompatible with an
arbitration agreement for a party to request, before constitution of the tribunal,
from a Court to grant such measure. After constitution of the arbitral tribunal and
during arbitral proceedings, a request for an interim measure of protection, or
modification thereof, may be made with the arbitral or to the extent that the
arbitral tribunal has no power to act or is unable to act effectivity, the request may
be made with the Court. The arbitral tribunal is deemed constituted when the sole
arbitrator or the third arbitrator, who has been nominated, has accepted the
nomination and written communication of said nomination and acceptance has been
received by the party making the request.
(b) The following rules on interim or provisional relief shall be observed:
Any party may request that provisional relief be granted against the adverse party.
Such relief may be granted:
 (i) to prevent irreparable loss or injury;
(ii) to provide security for the performance of any obligation;
(iii) to produce or preserve any evidence; or
(iv) to compel any other appropriate act or omission.
(c) The order granting provisional relief may be conditioned upon the provision of
security or any act or omission specified in the order.
(d) Interim or provisional relief is requested by written application transmitted by
reasonable means to the Court or arbitral tribunal as the case may be and the party
against whom the relief is sought, describing in appropriate detail the precise relief,
the party against whom the relief is requested, the grounds for the relief, and the
evidence supporting the request.
(e) The order shall be binding upon the parties.
(f) Either party may apply with the Court for assistance in implementing or enforcing
an interim measure ordered by an arbitral tribunal.
(g) A party who does not comply with the order shall be liable for all damages
resulting from noncompliance, including all expenses, and reasonable attorney's
fees, paid in obtaining the order’s judicial enforcement. (Emphasis ours.)
Art. 17(2) of the UNCITRAL Model Law on ICA defines an "interim measure" of protection as:
Article 17. Power of arbitral tribunal to order interim measures
xxx xxx xxx
(2) An interim measure is any temporary measure, whether in the form of an award
or in another form, by which, at any time prior to the issuance of the award by which
the dispute is finally decided, the arbitral tribunal orders a party to:
(a) Maintain or restore the status quo pending determination of the dispute;
(b) Take action that would prevent, or refrain from taking action that is likely to
cause, current or imminent harm or prejudice to the arbitral process itself;
(c) Provide a means of preserving assets out of which a subsequent award may be
satisfied; or
(d) Preserve evidence that may be relevant and material to the resolution of the
dispute.
Art. 17 J of UNCITRAL Model Law on ICA also grants courts power and jurisdiction to issue
interim measures:
Article 17 J. Court-ordered interim measures
A court shall have the same power of issuing an interim measure in relation to
arbitration proceedings, irrespective of whether their place is in the territory of this
State, as it has in relation to proceedings in courts. The court shall exercise such
power in accordance with its own procedures in consideration of the specific
features of international arbitration.
In the recent 2006 case of Transfield Philippines, Inc. v. Luzon Hydro Corporation, we were
explicit that even "the pendency of an arbitral proceeding does not foreclose resort to the
courts for provisional reliefs." We explicated this way:
As a fundamental point, the pendency of arbitral proceedings does not foreclose
resort to the courts for provisional reliefs. The Rules of the ICC, which governs the
parties’ arbitral dispute, allows the application of a party to a judicial authority for
interim or conservatory measures. Likewise, Section 14 of Republic Act (R.A.) No. 876
(The Arbitration Law) recognizes the rights of any party to petition the court to take
measures to safeguard and/or conserve any matter which is the subject of the
dispute in arbitration. In addition, R.A. 9285, otherwise known as the "Alternative
Dispute Resolution Act of 2004," allows the filing of provisional or interim measures
with the regular courts whenever the arbitral tribunal has no power to act or to act
effectively.50
It is thus beyond cavil that the RTC has authority and jurisdiction to grant interim measures of
protection.
Secondly, considering that the equipment and machineries are in the possession of PGSMC, it
has the right to protect and preserve the equipment and machineries in the best way it can.
Considering that the LPG plant was non-operational, PGSMC has the right to dismantle and
transfer the equipment and machineries either for their protection and preservation or for the
better way to make good use of them which is ineluctably within the management discretion
of PGSMC.
Thirdly, and of greater import is the reason that maintaining the equipment and machineries
in Worth’s property is not to the best interest of PGSMC due to the prohibitive rent while the
LPG plant as set-up is not operational. PGSMC was losing PhP322,560 as monthly rentals or
PhP3.87M for 1998 alone without considering the 10% annual rent increment in maintaining
the plant.
 Fourthly, and corollarily, while the KCAB can rule on motions or petitions relating to the
preservation or transfer of the equipment and machineries as an interim measure, yet on
hindsight, the July 23, 1998 Order of the RTC allowing the transfer of the equipment and
machineries given the non-recognition by the lower courts of the arbitral clause, has accorded
an interim measure of protection to PGSMC which would otherwise been irreparably
damaged.
Fifth, KOGIES is not unjustly prejudiced as it has already been paid a substantial amount based
on the contract. Moreover, KOGIES is amply protected by the arbitral action it has instituted
before the KCAB, the award of which can be enforced in our jurisdiction through the RTC.
Besides, by our decision, PGSMC is compelled to submit to arbitration pursuant to the valid
arbitration clause of its contract with KOGIES.
PGSMC to preserve the subject equipment and machineries
Finally, while PGSMC may have been granted the right to dismantle and transfer the subject
equipment and machineries, it does not have the right to convey or dispose of the same
considering the pending arbitral proceedings to settle the differences of the parties. PGSMC
therefore must preserve and maintain the subject equipment and machineries with the
diligence of a good father of a family51 until final resolution of the arbitral proceedings and
enforcement of the award, if any.
WHEREFORE, this petition is PARTLY GRANTED, in that:
(1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249 is REVERSED and SET ASIDE;
(2) The September 21, 1998 and October 19, 1998 RTC Orders in Civil Case No. 98-117
are REVERSED and SET ASIDE
(3) The parties are hereby ORDERED to submit themselves to the arbitration of their dispute
and differences arising from the subject Contract before the KCAB; and
(4) PGSMC is hereby ALLOWED to dismantle and transfer the equipment and machineries, if
it had not done so, and ORDERED to preserve and maintain them until the finality of
whatever arbitral award is given in the arbitration proceedings.
No pronouncement as to costs.
SO ORDERED.
UNITED AIRLINES, INC., Petitioner vs.COURT OF APPEALS, ANICETO FONTANILLA, in his
personal capacity and in behalf of his minor son MYCHAL ANDREW
FONTANILLA, Respondents.
G.R. No. 124110 April 20, 2001
KAPUNAN, J.:
Civil Procedure; Evidence; The general rule in civil cases is that the party having the burden of
proof of an essential fact must produce a preponderance of evidence thereon; Although
plaintiffs evidence is stronger than that presented by the defendant a judgment cannot be
entered in favor of the former if his evidence is not sufficient to sustain his cause of action.—
It must be remembered that the general rule in civil cases is that the party having the burden
of proof of an essential fact must produce a preponderance of evidence thereon. Although the
evidence adduced by the plaintiff is stronger than that presented by the defendant, a judgment
cannot be entered in favor of the former, if his evidence is not sufficient to sustain his cause
of action. The plaintiff must rely on the strength of his own evidence and not upon the
weakness of the defendant’s.
Same; Same; Appeals; Appellate courts should not, unless for strong and cogent reasons,
reverse the findings of facts of trial courts.—Time and again, the Court has pronounced that
appellate courts should not, unless for strong and cogent reasons, reverse the findings of facts
of trial courts. This is so because trial judges are in a better position to examine real evidence
and at a vantage point to observe the actuation and the demeanor of the witnesses. While not
the sole indicator of the credibility of a witness, it is of such weight that it has been said to be
the touchstone of credibility.
Civil Law; Private International Law; Doctrine of lex loci contractus; According to the doctrine,
as a general rule, the law of the place where a contract is made or entered into governs with
respect to its nature and validity, obligation and interpretation.—In the case of Zalamea vs.
Court of Appeals, this Court applied the doctrine of lex loci contractus. According to the
doctrine, as a general rule, the law of the place where a contract is made or entered into
governs with respect to its nature and validity, obligation and interpretation. This has been
said to be the rule even though the place where the contract was made is different from the
place where it is to be performed, and particularly so, if the place of the making and the place
of performance are the same. Hence, the court should apply the law of the place where the
airline ticket was issued, when the passengers are residents and nationals of the forum and
the ticket is issued in such State by the defendant airline.
Same; Damages; For the plaintiff to be entitled to an award of moral damages arising from a
breach of contract of carriage, the carrier must have acted with fraud or bad faith.—As to the
award of moral and exemplary damages, we find error in the award of such by the Court of
Appeals. For the plaintiff to be entitled to an award of moral damages arising from a breach of
contract of carriage, the carr United Airlines, Inc. vs. Court of Appeals, 357 SCRA 99, G.R. No.
124110 April 20, 2001
On March 1, 1989, private respondent Aniceto Fontanilla purchased from petitioner United
Airlines, through the Philippine Travel Bureau in Manila three (3) "Visit the U.S.A." tickets for
himself, his wife and his minor son Mychal for the following routes:
a. San Francisco to Washinton (15 April 1989);
b. Washington to Chicago (25 April 1989);
c. Chicago to Los Angeles (29 April 1989);
d. Los Angeles to San Francisco (01 may 1989 for petitioner’s wife and 05 May 1989 for
petitioner and his son). 1
All flights had been confirmed previously by United Airlines. 2
The Fontanillas proceeded to the United States as planned, where they used the first coupon
from San Francisco to Washington. On April 24, 1989, Aniceto Fontanilla bought two (2)
additional coupons each for himself, his wife and his son from petitioner at its office in
Washington Dulles Airport. After paying the penalty for rewriting their tickets, the Fontanillas
were issued tickets with corresponding boarding passes with the words "CHECK-IN REQUIRED,"
for United Airlines Flight No. 1108, set to leave from Los Angeles to San Francisco at 10:30 a.m.
on May 5, 1989.3
The cause of the non-boarding of the Fontanillas on United Airlines Flight No. 1108 makes up
the bone of contention of this controversy.1âwphi1.nêt
Private respondents’ version is as follows:
Aniceto Fontanilla and his son Mychal claim that on May 5, 1989, upon their arrival at the los
Angeles Airport for their flight, they proceeded to united Airlines counter where they were
attended by an employee wearing a nameplate bearing the name "LINDA." Linda examined
their tickets, punched something into her computer and then told them that boarding would
be in fifteen minutes.4
When the flight was called, the Fontanillas proceeded to the plane. To their surprise, the
stewardess at the gate did not allow them to board the plane, as they had no assigned seat
numbers. They were then directed to go back to the "check-in" counter where Linda
subsequently informed them that the flight had been overbooked and asked them to wait.5
The Fontanillas tried to explain to Linda the special circumstances of their visit. However, Linda
told them in arrogant manner, "So what, I can not do anything about it."6
Subsequently, three other passengers with Caucasian features were graciously allowed to
baord, after the Fontanillas were told that the flight had been overbooked.7
The plane then took off with the Fontanillas’ baggage in tow, leaving them behind.8
The Fontanillas then complained to Linda, who in turn gave them an ugly stare and rudely
uttered, "it’s not my fault. It’s the fault of the company. Just sit down and wait." 9 When Mr.
Fontanilla reminded Linda of the inconvenience being caused to them, she bluntly retorted,
"Who do you think you are? You lousy Flips are good for nothing beggars. You always ask for
American aid." After which she remarked "Don’t worry about your baggage. Anyway there is
nothing in there. What are you doing here anyway? I will report you to immigration. You
Filipinos should go home."10 Such rude statements were made in front of other people in the
airport causing the Fontanillas to suffer shame, humiliation and embarrassment. The
chastening situation even caused the younger Fontanilla to break into tears.11
After some time, Linda, without any explanation, offered the Fontanillas $50.00 each. She
simply said "Take it or leave it." This, the Fontanillas declined.12
The Fontanillas then proceeded to the United Airlines customer service counter to plead their
case. The male employee at the counter reacted by shouting that he was ready for it and left
without saying anything.13
The Fontanillas were not booked on the next flight, which departed for San Francisco at 11:00
a.m. It was only at 12:00 noon that they were able to leave Los Angeles on United Airlines
Flight No. 803.
Petitioner United Airlines has a different version of what occurred at the Los Angeles Airport
on May 5, 1989.
According to United Airlines, the Fontanillas did not initially go to the check-in counter to get
their seat assignments for UA Flight 1108. They instead proceeded to join the queue boarding
the aircraft without first securing their seat assignments as required in their ticket and
boarding passes. Having no seat assignments, the stewardess at the door of the plane
instructed them to go to the check-in counter. When the Fontanillas proceeded to the check-
in counter, Linda Allen, the United Airlines Customer Representative at the counter informed
them that the flight was overbooked. She booked them on the next available flight and offered
them denied boarding compensation. Allen vehemently denies uttering the derogatory and
racist words attributed to her by the Fontanillas.14
The incident prompted the Fontanillas to file Civil Case No. 89-4268 for damages before the
Regional Trial Court of Makati. After trial on the merits, the trial court rendered a decision, the
dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered dismissing the complaint. The
counterclaim is likewise dismissed as it appears that plaintiffs were not
actuated by legal malice when they filed the instant complaint.15
On appeal, the Court of Appeals ruled in favor of the Fontanillas. The appellate court found
that there was an admission on the part of United Airlines that the Fontanillas did in fact
observe the check-in requirement. It ruled further that even assuming there was a failure to
observe the check-in requirement, United Airlines failed to comply with the procedure laid
down in cases where a passenger is denied boarding. The appellate court likewise gave
credence to the claim of Aniceto Fontanilla that the employees of United Airlines were
discourteous and arbitrary and, worse, discriminatory. In light of such treatment, the
Fontanillas were entitled to moral damages. The dispositive portion of the decision of the
respondent Court of Appeals dated 29 September 1995, states as follows:
WHEREFORE, in view of the foregoing, judgment appealed herefrom is
hereby REVERSED and SET ASIDE, and a new judgment is entered ordering
defendant-appellee to pay plaintiff-appellant the following:
a. P200,000.00 as moral damages;
b. P200,000.00 as exemplary damages;
 c. P50,000.00 as attorney’s fees;
No pronouncement as to costs.
SO ORDERED.16
Petitioner United Airlines now comes to this Court raising the following assignments of errors;
I to form a belief as to the truth of an averment giving such answer is asserted is so plainly and
RESPONDENT COURT OF APPEALS GRVAELY ERRED IN RULING THAT THE TRIAL COURT WAS
WRONG IN FAILING TO CONSIDER THE ALLEGED ADMISSION THAT PRIVATE RESPONDENT
OBSERVED THE CHECK-IN REQUIREMENT.
II
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN RULING THAT PRIVATE RESPONDENT’S
FAILURE TO CHECK-IN WILL NOT DEFEAT HIS CLAIMS BECAUSE THE DENIED BOARDING RULES
WERE NOT COMPLIED WITH.
III
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN RULING THAT PRIVATE RESPONDENT IS
ENTITLED TO MORAL DAMAGES OF P200,000.
IV
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN RULING THAT PRIVATE RESPONDENT IS
ENTITLED TO EXEMPLARY DAMAGES OF P200,000.
V The object of the rule is to relieve a party of the trouble and expense in proving in the first
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN RULING THAT PRIVATE RESPONDENT IS
ENTITLED TO ATTORNEY’S FEES OF P50,000.17
On the first issue raised by the petitioner, the respondent Court of Appeals ruled that when
Rule 9, Section 1 of the Rules of Court,18 there was an implied admission in petitioner’s answer
in the allegations in the complaint that private respondent and his son observed the "check-in
requirement at the Los Angeles Airport." Thus:
A perusal of the above pleadings filed before the trial court disclosed that there exist a
blatant admission on the part of the defendant-appellee that the plaintiffs-appellants
indeed observed the "check-in" requirement at the Los Angeles Airport on May 5, 1989.
In view of defendant-appellee’s admission of plaintiffs-appellants’ material averment in
the complaint. We find no reason why the trial court should rule against such admission.19
We disagree with the above conclusion reached by respondent Court of Appeals. Paragraph 7
of private respondents’ complaint states:
7. On May 5, 1989 at 9:45 a.m., plaintiff and his son checked in at defendant’s designated
counter at the airport in Los Angeles for their scheduled flight to San Francisco on
defendant’s Flight No. 1108.20
Responding to the above allegations, petitioner averred in paragraph 4 of its answer, thus:
4. Admits the allegation set forth in paragraph 7 of the complaint except to deny that
plaintiff and his son checked in at 9:45 a.m., for lack of knowledge or information at this
point in time as to the truth thereof.21
The rule authorizing an answer that the defendant has no knowledge or information sufficient
necessarily within the defendant’s knowledge that his averment of ignorance must be palpably
untrue.22 Whether or not private respondents checked in at petitioner’s designated counter at
the airport at 9:45 a.m. on May 5, 1989 must necessarily be within petitioner’s knowledge.
While there was no specific denial as to the fact of compliance with the "check-in" requirement
by private respondents, petitioner presented evidence to support its contention that there
indeed was no compliance.
Private respondents then are said to have waived the rule on admission. It not only presented
evidence to support its contention that there was compliance with the check-in requirement,
it even allowed petitioner to present rebutal evidence. In the case of Yu Chuck vs. "Kong Li
Po," we ruled that:
instance an alleged fact, the existence or non-existence of which is necessarily within the
knowledge of the adverse party, and of the necessity (to his opponent’s case) of
establishing which such adverse party is notified by his opponent’s pleadings.
The plaintiff may, of course, waive the rule and that is what must be considered to have
done (sic) by introducing evidence as to the execution of the document and failing to
object to the defendant’s evidence in refutation; all this evidence is now competent and
the case must be decided thereupon.23
The determination of the other issues raised is dependent on whether or not there was a
breach of contract in bad faith on the part of the petitioner in not allowing the Fontanillas to
board United Airlines Flight 1108.
It must be remembered that the general rule in civil cases is that the party having the burden
of proof of an essential fact must produce a preponderance of evidence thereon. 24 Although
the evidence adduced by the plaintiff is stronger than that presented by the defendant, a
judgment cannot be entered in favor of the former, if his evidence is not sufficient to sustain
his cause of action. The plaintiff must rely on the strength of his own evidence and not upon
the weakness of the defendant’s.25 Proceeding from this, and considering the contradictory
findings of facts by the Regional Trial Court and the Court of Appeals, the question before this
Court is whether or not private respondents were able to prove with adequate evidence his
allegations of breach of contract in bad faith.
We rule in the negative.
Time and again, the Court has pronounced that appellate courts should not, unless for strong
and cogent reasons, reverse the findings of facts of trial courts. This is so because trial judges
are in better position to examine real evidence and at a vantage point to observe the actuation
and the demeanor of the witnesses.26 While not the sole indicator of the credibility of a
witness, it is of such weight that it has been said to be the touchstone of credibility.27
Aniceto Fontanilla’s assertion that upon arrival at the airport at 9:45 a.m., he immediately
proceeded to the check-in counter, and that Linda Allen punched in something into the
computer is specious and not supported by the evidence on record. In support of their
allegations, private respondents submitted a copy of the boarding pass. Explicitly printed on
the boarding pass are the words "Check-In Required." Curiously, the said pass did not indicate
any seat number. If indeed the Fontanillas checked in at the designated time as they claimed,
why then were they not assigned seat numbers? Absent any showing that Linda was so
motivated, we do not buy into private respondents’ claim that Linda intentionally deceived
him, and made him the laughing stock among the passengers. 28 Hence, as correctly observed
by the trial court:
Plaintiffs fail to realize that their failure to check in, as expressly required in their
boarding passes, is they very reason why they were not given their respective seat
numbers, which resulted in their being denied boarding.29
Neither do we agree with the conclusion reached by the appellate court that private
respondents’ failure to comply with the check-in requirement will not defeat his claim as the
denied boarding rules were not complied with. Notably, the appellate court relied on the Code
of Federal Regulation Part on Oversales which states:
250.6 Exceptions to eligibility for denied boarding compensation.
A passenger denied board involuntarily from an oversold flight shall not be eligible for
denied board compensation if:
a. The passenger does not comply with the carrier’s contract of carriage or tariff provisions
regarding ticketing, reconfirmation, check-in, and acceptability for transformation.
The appellate court, however, erred in applying the laws of the United States as, in the case at
bar, Philippine law is the applicable law. Although, the contract of carriage was to be
performed in the United States, the tickets were purchased through petitioner’s agent in
Manila. It is true that the tickets were "rewritten" in Washington, D.C. however, such fact did
not change the nature of the original contract of carriage entered into by the parties in Manila.
In the case of Zalanea vs. Court of Appeals,30 this Court applied the doctrine of lex loci
contractus. According to the doctrine, as a general rule, the law of the place where a contract
is made or entered into governs with respect to its nature and validity, obligation and
interpretation. This has been said to be the rule even though the place where the contract was
made is different from the place where it is to be performed, and particularly so, if the place
of the making and the place of performance are the same. Hence, the court should apply the
law of the place where the airline ticket was issued, when the passengers are residents and
nationals of the forum and the ticket is issued in such State by the defendant airline.
The law of the forum on the subject matter is Economic Regulations No. 7 as amended by
Boarding Priority and Denied Board Compensation of the Civil Aeronautics Board which
provides that the check-in requirement be complied with before a passenger may claim against
a carrier for being denied boarding:
Sec. 5. Amount of Denied Boarding Compensation Subject to the exceptions provided
hereinafter under Section 6, carriers shall pay to passengers holding confirmed
reserved space and who have presented themselves at the proper place and time and
fully complied with the carrier’s check-in and reconfirmation procedures and who are
acceptable for carriage under the Carrier’s tariff but who have been denied boarding
for lack of space, a compensation at the rate of: xxx
Private respondents’ narration that they were subjected to harsh and derogatory remarks
seems incredulous. However, this Court will not attempt to surmise what really happened,
suffice to say, private respondent was not able to prove his cause of action, for as the trial
court correctly observed:
xxx plaintiffs claim to have been discriminated against and insulted in the presence of
several people. Unfortunately, plaintiffs limited their evidence to the testimony of
Aniceto Fontanilla, without any corroboration by the people who saw or heard the
discriminatory remarks and insults; while such limited testimony could possibly be true,
it does not enable the Court to reach the conclusion that plaintiffs have, by a
preponderance of evidence, proven that they are entitled to P1,650,000.00 damages
from defendant.31
As to the award of moral and exemplary damages, we find error in the award of such by the
Court of Appeals. For the plaintiff to be entitled to an award of moral damages arising from a
breach of contract of carriage, the carrier must have acted with fraud or bad faith. The
appellate court predicated its award on our pronouncement in the case of Zalanea vs. Court
of Appeals, supra, where we stated:
Existing jurisprudence explicitly states that overbooking amounts to bad faith, entitling
passengers concerned to an award of moral damages. In Alitalia Airways vs. Court of
Appeals, where passengers with confirmed booking were refused carriage on the last
minute, this Court held that when an airline issues a ticket to a passenger confirmed on a
particular flight, on a certain date, a contract of carriage arises, and the passenger has every
right to except that he would fly on that flight and on that date. If he does not, then the
carrier opens itself to a suit for breach of contract of carriage. Where an airline had
deliberately overbooked, it took the risk of having to deprive some passengers of their
seats in case all of them would show up for check in. For the indignity and inconvenience
of being refused a confirmed seat on the last minute, said passenger is entitled to moral
damages. (Emphasis supplied).
However, the Court’s ruling in said case should be read in consonance with existing laws,
particularly, Economic Regulations No. 7, as amended, of the Civil Aeronautics Board:
Sec. 3. Scope. – This regulation shall apply to every Philippine and foreign air carrier with
respect to its operation of flights or portions of flights originating from or terminating at,
or serving a point within the territory of the Republic of the Philippines insofar as it denies
boarding to a passenger on a flight, or portion of a flight inside or outside the Philippines,
for which he holds confirmed reserved space. Furthermore, this Regulation is designed to
cover only honest mistakes on the part of the carriers and excludes deliberate and willful
acts of non-accommodation. Provided, however, that overbooking not exceeding 10% of
the seating capacity of the aircraft shall not be considered as a deliberate and willful act of
non-accommodation.
What this Court considers as bad faith is the willful and deliberate overbooking on the part of
the airline carrier. The above-mentioned law clearly states that when the overbooking does
not exceed ten percent (10%), it is not considered as deliberate and therefore does not amount
to bad faith. While there may have been overbooking in this case, private respondents were
not able to prove that the overbooking on United Airlines Flight 1108 exceeded ten percent.
As earlier stated, the Court is of the opinion that the private respondents were not able to
prove that they were subjected to coarse and harsh treatment by the ground crew of united
Airlines. Neither were they able to show that there was bad faith on part of the carrier airline.
Hence, the award of moral and exemplary damages by the Court of Appeals is improper.
Corollarily, the award of attorney’s fees is, likewise, denied for lack of any legal and factual
basis.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals in CA-G.R. CV No.
37044 is hereby REVERSED and SET ASIDE. The decision of the Regional Trial Court of Makati
City in Civil Case No. 89-4268 dated April 8, 1991 is hereby REINSTATED. SO ORDERED.
G.R. No. 140047 July 13, 2004
PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner,
vs.
V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO;
SOLEDAD C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST INTEGRATED
BONDING AND INSURANCE COMPANY, INC., respondents.
DECISION
DAVIdE, JR., C.J.:
Civil Law; Contracts; Guaranty; Distinguished from Suretyship; By guaranty a person, called the
guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case
the latter should fail to do so; if the person binds himself solidarily with the principal debtor,
the contract is called suretyship.—By guaranty a person, called the guarantor, binds himself to
the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do
so. If a person binds himself solidarily with the principal debtor, the contract is called
suretyship. Strictly speaking, guaranty and surety are nearly related, and many of the principles
are common to both. In both contracts, there is a promise to answer for the debt or default of
another. However, in this jurisdiction, they may be distinguished thus: 1. A surety is usually
bound with his principal by the same instrument executed at the same time and on the same
consideration. On the other hand, the contract of guaranty is the guarantor’s own separate
undertaking often supported by a consideration separate from that supporting the contract of
the principal; the original contract of his principal is not his contract; 2. A surety assumes
liability as a regular party to the undertaking; while the liability of a guarantor is conditional
depending on the failure of the primary debtor to pay the obligation; 3. The obligation of a
surety is primary, while that of a guarantor is secondary; 4. A surety is an original promissor
and debtor from the beginning, while a guarantor is charged on his own undertaking; 5. A
surety is, ordinarily, held to know every default of his principal; whereas a guarantor is not
bound to take notice of the non-performance of his principal; 6. Usually, a surety will not be
discharged either by the mere indulgence of the creditor to the principal or by want of notice
of the default of the principal, no matter how much he may be injured thereby. A guarantor is
often discharged by the mere indulgence of the creditor to the principal, and is usually not
liable unless notified of the default of the principal.
Same; Same; Same; Conditional Guaranty; That the guarantee issued by the petitioner is
unconditional and irrevocable does not make the petitioner a surety.—That the guarantee
issued by the petitioner is uncon- ditional and irrevocable does not make the petitioner a
surety. As a guaranty, it is still characterized by its subsidiary and conditional quality because
it does not take effect until the fulfillment of the condition, namely, that the principal obligor
should fail in his obligation at the time and in the form he bound himself. In other words, an
unconditional guarantee is still subject to the condition that the principal debtor should default
in his obligation first before resort to the guarantor could be had. A conditional guaranty, as
opposed to an unconditional guaranty, is one which depends upon some extraneous event,
beyond the mere default of the principal, and generally upon notice of the principal’s default
and reasonable diligence in exhausting proper remedies against the principal.
Same; Same; Evidence; Appeals; It is a fundamental and settled rule that the findings of fact of
the trial court and the Court of Appeals are binding or conclusive upon this Court unless they
are not supported by the evidence or unless strong and cogent reasons dictate otherwise.—It
is a fundament and settled rule that the findings of fact of the trial court and the Court of
Appeals are binding or conclusive upon this Court unless they are not supported by the
evidence or unless strong and cogent reasons dictate otherwise. The factual findings of the
Court of Appeals are normally not reviewable by us under Rule 45 of the Rules of Court except
when they are at variance with those of the trial court. The trial court and the Court of Appeals
were in unison that the respondent contractor cannot be considered to have defaulted in its
obligations because the cause of the delay was not primarily attributable to it.
Same; Same; Lex Contractus; No conflicts rule on essential validity of contracts is expressly
provided for in our laws.—No conflicts rule on essential validity of contracts is expressly
provided for in our laws. The rule followed by most legal systems, however, is that the intrinsic
validity of a contract must be governed by the lex contractus or “proper law of the contract.”
This is the law voluntarily agreed upon by the parties (the lex loci voluntatis) or the law
intended by them either expressly or implicitly (the lex loci intentionis). The law selected may
be implied from such factors as substantial connection with the transaction, or the nationality
or domicile of the parties. Philippine courts would do well to adopt the first and most basic
rule in most legal systems, namely, to allow the parties to select the law applicable to their
contract, subject to the limitation that it is not against the law, morals, or public policy of the
forum and that the chosen law must bear a substantive relationship to the transaction.
Same; Same; Foreign Law; Processual Presumption; Where foreign law is not pleaded or, even
if pleaded, is not proved, the presumption is that foreign law is the same as ours.—Since that
foreign law was not properly pleaded or proved, the presumption of identity or similarity,
otherwise known as the processual presumption, comes into play. Where foreign law is not
pleaded or, even if pleaded, is not proved, the presumption is that foreign law is the same as
ours.
Same; Same; Default; Default or mora on the part of the debtor is the non-fulfillment of an
obligation with respect to time.—Our law, specifically Article 1169, last paragraph, of the Civil
Code, provides: “In reciprocal obligations, neither party incurs in delay if the other party does
not comply or is not ready to comply in a proper manner with what is incumbent upon him.”
Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by
reason of a cause imputable to the former. It is the non-fulfillment of an obligation with respect
to time.
Same; Same; Same; Requisites; In order that the debtor may be in default it is necessary that
the following requisites be present.—In order that the debtor may be in default it is necessary
that the following requisites be present: (1) that the obligation be demandable and already
liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the
performance because it must appear that the tolerance or benevolence of the creditor must
have ended.
Same; Same; Same; Demand; Demand is generally necessary even if a period has been fixed in
the obligation.—Demand is generally necessary even if a period has been fixed in the
obligation. And default generally begins from the moment the creditor demands judicially or
extra-judicially the performance of the obligation. Without such demand, the effects of default
will not arise. Philippine Export and Foreign Loan Guarantee Corporation vs. V.P. Eusebio
Construction, Inc., 434 SCRA 202, G.R. No. 140047 July 13, 2004
============= ============================================ ===========
This case is an offshoot of a service contract entered into by a Filipino construction firm with
the Iraqi Government for the construction of the Institute of Physical Therapy-Medical Center,
Phase II, in Baghdad, Iraq, at a time when the Iran-Iraq war was ongoing.
In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No. 91-
1906 and assigned to Branch 58, petitioner Philippine Export and Foreign Loan Guarantee
Corporation1 (hereinafter Philguarantee) sought reimbursement from the respondents of the
sum of money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee it issued for respondent
V.P. Eusebio Construction, Inc. (VPECI).
The factual and procedural antecedents in this case are as follows:
On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and
Construction, Baghdad, Iraq, awarded the construction of the Institute of Physical Therapy–
Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, (hereinafter the Project) to Ajyal
Trading and Contracting Company (hereinafter Ajyal), a firm duly licensed with the Kuwait
Chamber of Commerce for a total contract price of ID5,416,089/046 (or about
US$18,739,668).2
On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of respondent
3-Plex International, Inc. (hereinafter 3-Plex), a local contractor engaged in construction
business, entered into a joint venture agreement with Ajyal wherein the former undertook the
execution of the entire Project, while the latter would be entitled to a commission of 4% of the
contract price.3 Later, or on 8 April 1981, respondent 3-Plex, not being accredited by or
registered with the Philippine Overseas Construction Board (POCB), assigned and transferred
all its rights and interests under the joint venture agreement to VPECI, a construction and
engineering firm duly registered with the POCB.4 However, on 2 May 1981, 3-Plex and VPECI
entered into an agreement that the execution of the Project would be under their joint
management.5
The SOB required the contractors to submit (1) a performance bond of ID271,808/610
representing 5% of the total contract price and (2) an advance payment bond of ID541,608/901
representing 10% of the advance payment to be released upon signing of the contract.6 To
comply with these requirements, respondents 3-Plex and VPECI applied for the issuance of a
guarantee with petitioner Philguarantee, a government financial institution empowered to
issue guarantees for qualified Filipino contractors to secure the performance of approved
service contracts abroad.7
Petitioner Philguarantee approved respondents' application. Subsequently, letters of
guarantee8 were issued by Philguarantee to the Rafidain Bank of Baghdad covering 100% of
the performance and advance payment bonds, but they were not accepted by SOB. What SOB
required was a letter-guarantee from Rafidain Bank, the government bank of Iraq. Rafidain
Bank then issued a performance bond in favor of SOB on the condition that another foreign
bank, not Philguarantee, would issue a counter-guarantee to cover its exposure. Al Ahli Bank
of Kuwait was, therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it
required a similar counter-guarantee in its favor from the petitioner. Thus, three layers of
guarantees had to be arranged.9
Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor
of Al Ahli Bank of Kuwait Letter of Guarantee No. 81-194-F 10 (Performance Bond Guarantee)
in the amount of ID271,808/610 and Letter of Guarantee No. 81-195-F11 (Advance Payment
Guarantee) in the amount of ID541,608/901, both for a term of eighteen months from 25 May
1981. These letters of guarantee were secured by (1) a Deed of Undertaking 12 executed by
respondents VPECI, Spouses Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex, and Spouses
Eduardo E. Santos and Iluminada Santos; and (2) a surety bond13 issued by respondent First
Integrated Bonding and Insurance Company, Inc. (FIBICI). The Surety Bond was later amended
on 23 June 1981 to increase the amount of coverage from P6.4 million to P6.967 million and
to change the bank in whose favor the petitioner's guarantee was issued, from Rafidain Bank
to Al Ahli Bank of Kuwait.14
On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract 15 for
the construction of the Institute of Physical Therapy – Medical Rehabilitation Center, Phase II,
in Baghdad, Iraq, wherein the joint venture contractor undertook to complete the Project
within a period of 547 days or 18 months. Under the Contract, the Joint Venture would supply
manpower and materials, and SOB would refund to the former 25% of the project cost in Iraqi
Dinar and the 75% in US dollars at the exchange rate of 1 Dinar to 3.37777 US Dollars.16
The construction, which was supposed to start on 2 June 1981, commenced only on the last
week of August 1981. Because of this delay and the slow progress of the construction work
due to some setbacks and difficulties, the Project was not completed on 15 November 1982 as
scheduled. But in October 1982, upon foreseeing the impossibility of meeting the deadline and
upon the request of Al Ahli Bank, the joint venture contractor worked for the renewal or
extension of the Performance Bond and Advance Payment Guarantee. Petitioner's Letters of
Guarantee Nos. 81-194-F (Performance Bond) and 81-195-F (Advance Payment Bond) with
expiry date of 25 November 1982 were then renewed or extended to 9 February 1983 and 9
March 1983, respectively.17 The surety bond was also extended for another period of one year,
from 12 May 1982 to 12 May 1983.18 The Performance Bond was further extended twelve
times with validity of up to 8 December 1986,19 while the Advance Payment Guarantee was
extended three times more up to 24 May 1984 when the latter was cancelled after full refund
or reimbursement by the joint venture contractor.20 The surety bond was likewise extended to
8 May 1987.21
As of March 1986, the status of the Project was 51% accomplished, meaning the structures
were already finished. The remaining 47% consisted in electro-mechanical works and the 2%,
sanitary works, which both required importation of equipment and materials.22
On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full
payment of its performance bond counter-guarantee.
Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI requested
Iraq Trade and Economic Development Minister Mohammad Fadhi Hussein to recall the telex
call on the performance guarantee for being a drastic action in contravention of its mutual
agreement with the latter that (1) the imposition of penalty would be held in abeyance until
the completion of the project; and (2) the time extension would be open, depending on the
developments on the negotiations for a foreign loan to finance the completion of the
project.23 It also wrote SOB protesting the call for lack of factual or legal basis, since the failure
to complete the Project was due to (1) the Iraqi government's lack of foreign exchange with
which to pay its (VPECI's) accomplishments and (2) SOB's noncompliance for the past several
years with the provision in the contract that 75% of the billings would be paid in US
dollars.24 Subsequently, or on 19 November 1986, respondent VPECI advised the petitioner not
to pay yet Al Ahli Bank because efforts were being exerted for the amicable settlement of the
Project.25
On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that
it had already paid to Rafidain Bank the sum of US$876,564 under its letter of guarantee, and
demanding reimbursement by the petitioner of what it paid to the latter bank plus interest
thereon and related expenses.26
Both petitioner Philguarantee and respondent VPECI sought the assistance of some
government agencies of the Philippines. On 10 August 1987, VPECI requested the Central Bank
to hold in abeyance the payment by the petitioner "to allow the diplomatic machinery to take
its course, for otherwise, the Philippine government , through the Philguarantee and the
Central Bank, would become instruments of the Iraqi Government in consummating a clear act
of injustice and inequity committed against a Filipino contractor."27
On 27 August 1987, the Central Bank authorized the remittance for its account of the amount
of US$876,564 (equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of the
performance counter-guarantee for VPECI's project in Iraq. 28
On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli
Bank, and reiterated the joint and solidary obligation of the respondents to reimburse the
petitioner for the advances made on its counter-guarantee.29
The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January
1988.30 Then, on 6 May 1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83
representing interest and penalty charges demanded by the latter bank.31
On 19 June 1991, the petitioner sent to the respondents separate letters demanding full
payment of the amount of P47,872,373.98 plus accruing interest, penalty charges, and 10%
attorney's fees pursuant to their joint and solidary obligations under the deed of undertaking
and surety bond.32 When the respondents failed to pay, the petitioner filed on 9 July 1991 a
civil case for collection of a sum of money against the respondents before the RTC of Makati
City.
After due trial, the trial court ruled against Philguarantee and held that the latter had no valid
cause of action against the respondents. It opined that at the time the call was made on the
guarantee which was executed for a specific period, the guarantee had already lapsed or
expired. There was no valid renewal or extension of the guarantee for failure of the petitioner
to secure respondents' express consent thereto. The trial court also found that the joint
venture contractor incurred no delay in the execution of the Project. Considering the Project
owner's violations of the contract which rendered impossible the joint venture contractor's
performance of its undertaking, no valid call on the guarantee could be made. Furthermore,
the trial court held that no valid notice was first made by the Project owner SOB to the joint
venture contractor before the call on the guarantee. Accordingly, it dismissed the complaint,
as well as the counterclaims and cross-claim, and ordered the petitioner to pay attorney's fees
of P100,000 to respondents VPECI and Eusebio Spouses and P100,000 to 3-Plex and the Santos
Spouses, plus costs. 33
In its 14 June 1999 Decision,34 the Court of Appeals affirmed the trial court's decision, …PETITIONER CANNOT CLAIM SUBROGATION.
ratiocinating as follows:
III
First, appellant cannot deny the fact that it was fully aware of the status of project
implementation as well as the problems besetting the contractors, between 1982 to …IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE
1985, having sent some of its people to Baghdad during that period. The successive UNDER THEIR DEED OF UNDERTAKING.36
renewals/extensions of the guarantees in fact, was prompted by delays, not solely
attributable to the contractors, and such extension understandably allowed by the
The main issue in this case is whether the petitioner is entitled to reimbursement of what it
SOB (project owner) which had not anyway complied with its contractual
paid under Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the
commitment to tender 75% of payment in US Dollars, and which still retained
deed of undertaking and surety bond from the respondents.
overdue amounts collectible by VPECI.

The petitioner asserts that since the guarantee it issued was absolute, unconditional, and
…
irrevocable the nature and extent of its liability are analogous to those of suretyship. Its liability
accrued upon the failure of the respondents to finish the construction of the Institute of
Second, appellant was very much aware of the violations committed by the SOB of Physical Therapy Buildings in Baghdad.
its contractual undertakings with VPECI, principally, the payment of foreign currency
(US$) for 75% of the total contract price, as well as of the complications and injustice
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation
that will result from its payment of the full amount of the performance guarantee,
of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily
as evident in PHILGUARANTEE's letter dated 13 May 1987 ….
with the principal debtor, the contract is called suretyship. 37

…
Strictly speaking, guaranty and surety are nearly related, and many of the principles are
common to both. In both contracts, there is a promise to answer for the debt or default of
Third, appellant was fully aware that SOB was in fact still obligated to the Joint another. However, in this jurisdiction, they may be distinguished thus:
Venture and there was still an amount collectible from and still being retained by the
project owner, which amount can be set-off with the sum covered by the
1. A surety is usually bound with his principal by the same instrument executed at
performance guarantee.
the same time and on the same consideration. On the other hand, the contract of
guaranty is the guarantor's own separate undertaking often supported by a
… consideration separate from that supporting the contract of the principal; the
original contract of his principal is not his contract.
Fourth, well-apprised of the above conditions obtaining at the Project site and
cognizant of the war situation at the time in Iraq, appellant, though earlier has made 2. A surety assumes liability as a regular party to the undertaking; while the liability
representations with the SOB regarding a possible amicable termination of the of a guarantor is conditional depending on the failure of the primary debtor to pay
Project as suggested by VPECI, made a complete turn-around and insisted on acting the obligation.
in favor of the unjustified "call" by the foreign banks.35
3. The obligation of a surety is primary, while that of a guarantor is secondary.
The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the Court
of Appeals erred in affirming the trial court's ruling that
4. A surety is an original promissor and debtor from the beginning, while a guarantor
is charged on his own undertaking.
I
5. A surety is, ordinarily, held to know every default of his principal; whereas a
…RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY guarantor is not bound to take notice of the non-performance of his principal.
EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF ITS
COUNTER-GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO RESPONDENTS
6. Usually, a surety will not be discharged either by the mere indulgence of the
WHAT IT HAD PAID UNDER THE SAID COUNTER-GUARANTEE.
creditor to the principal or by want of notice of the default of the principal, no matter
how much he may be injured thereby. A guarantor is often discharged by the mere
II
 indulgence of the creditor to the principal, and is usually not liable unless notified of
the default of the principal. 38
In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-194-F,
which provides in part as follows:
In consideration of your issuing the above performance guarantee/counter-
guarantee, we hereby unconditionally and irrevocably guarantee, under our Ref. No.
LG-81-194 F to pay you on your first written or telex demand Iraq Dinars Two
Hundred Seventy One Thousand Eight Hundred Eight and fils six hundred ten
(ID271,808/610) representing 100% of the performance bond required of V.P.
EUSEBIO for the construction of the Physical Therapy Institute, Phase II, Baghdad,
Iraq, plus interest and other incidental expenses related thereto.
In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation
unpaid but in no case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus
interest and other incidental expenses…. (Emphasis supplied)39
Guided by the abovementioned distinctions between a surety and a guaranty, as well as the
factual milieu of this case, we find that the Court of Appeals and the trial court were correct in
ruling that the petitioner is a guarantor and not a surety. That the guarantee issued by the
petitioner is unconditional and irrevocable does not make the petitioner a surety. As a
guaranty, it is still characterized by its subsidiary and conditional quality because it does not
take effect until the fulfillment of the condition, namely, that the principal obligor should fail
in his obligation at the time and in the form he bound himself. 40 In other words, an
unconditional guarantee is still subject to the condition that the principal debtor should default
in his obligation first before resort to the guarantor could be had. A conditional guaranty, as
opposed to an unconditional guaranty, is one which depends upon some extraneous event,
beyond the mere default of the principal, and generally upon notice of the principal's default
and reasonable diligence in exhausting proper remedies against the principal. 41
It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default
by respondent VPECI the petitioner shall pay, the obligation assumed by the petitioner was
simply that of an unconditional guaranty, not conditional guaranty. But as earlier ruled the fact
that petitioner's guaranty is unconditional does not make it a surety. Besides, surety is never
presumed. A party should not be considered a surety where the contract itself stipulates that
he is acting only as a guarantor. It is only when the guarantor binds himself solidarily with the
principal debtor that the contract becomes one of suretyship.42
Having determined petitioner's liability as guarantor, the next question we have to grapple
with is whether the respondent contractor has defaulted in its obligations that would justify
resort to the guaranty. This is a mixed question of fact and law that is better addressed by the
lower courts, since this Court is not a trier of facts.
It is a fundamental and settled rule that the findings of fact of the trial court and the Court of
Appeals are binding or conclusive upon this Court unless they are not supported by the
evidence or unless strong and cogent reasons dictate otherwise.43 The factual findings of the
Court of Appeals are normally not reviewable by us under Rule 45 of the Rules of Court except
when they are at variance with those of the trial court. 44 The trial court and the Court of
Appeals were in unison that the respondent contractor cannot be considered to have
defaulted in its obligations because the cause of the delay was not primarily attributable to it.
A corollary issue is what law should be applied in determining whether the respondent
contractor has defaulted in the performance of its obligations under the service contract. The
question of whether there is a breach of an agreement, which
includes default or mora,45 pertains to the essential or intrinsic validity of a contract. 46
No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule
followed by most legal systems, however, is that the intrinsic validity of a contract must be
governed by the lex contractus or "proper law of the contract." This is the law voluntarily
agreed upon by the parties (the lex loci voluntatis) or the law intended by them either expressly
or implicitly (the lex loci intentionis). The law selected may be implied from such factors as
substantial connection with the transaction, or the nationality or domicile of the
parties.47 Philippine courts would do well to adopt the first and most basic rule in most legal
systems, namely, to allow the parties to select the law applicable to their contract, subject to
the limitation that it is not against the law, morals, or public policy of the forum and that the
chosen law must bear a substantive relationship to the transaction. 48
It must be noted that the service contract between SOB and VPECI contains no express choice
of the law that would govern it. In the United States and Europe, the two rules that now seem
to have emerged as "kings of the hill" are (1) the parties may choose the governing law; and
(2) in the absence of such a choice, the applicable law is that of the State that "has the most
significant relationship to the transaction and the parties." 49 Another authority proposed that
all matters relating to the time, place, and manner of performance and valid excuses for non-
performance are determined by the law of the place of performance or lex loci solutionis,
which is useful because it is undoubtedly always connected to the contract in a significant
way.50
In this case, the laws of Iraq bear substantial connection to the transaction, since one of the
parties is the Iraqi Government and the place of performance is in Iraq. Hence, the issue of
whether respondent VPECI defaulted in its obligations may be determined by the laws of Iraq.
However, since that foreign law was not properly pleaded or proved, the presumption of
identity or similarity, otherwise known as the processual presumption, comes into play. Where
foreign law is not pleaded or, even if pleaded, is not proved, the presumption is that foreign
law is the same as ours.51
Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: "In reciprocal
obligations, neither party incurs in delay if the other party does not comply or is not ready to
comply in a proper manner with what is incumbent upon him."
Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by
reason of a cause imputable to the former. 52 It is the non-fulfillment of an obligation with
respect to time.53
It is undisputed that only 51.7% of the total work had been accomplished. The 48.3%
unfinished portion consisted in the purchase and installation of electro-mechanical equipment
and materials, which were available from foreign suppliers, thus requiring US Dollars for their
importation. The monthly billings and payments made by SOB54 reveal that the agreement
between the parties was a periodic payment by the Project owner to the contractor depending
on the percentage of accomplishment within the period. 55 The payments were, in turn, to be
used by the contractor to finance the subsequent phase of the work. 56 However, as explained
by VPECI in its letter to the Department of Foreign Affairs (DFA), the payment by SOB purely in
Dinars adversely affected the completion of the project; thus:
4. Despite protests from the plaintiff, SOB continued paying the accomplishment
billings of the Contractor purely in Iraqi Dinars and which payment came only after
some delays.
5. SOB is fully aware of the following:
… the draft of the loan Agreement between SOB as the Borrower and Agent. The
5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign
currency (US$), to finance the purchase of various equipment, materials, supplies,
tools and to pay for the cost of project management, supervision and skilled labor
not available in Iraq and therefore have to be imported and or obtained from the
Philippines and other sources outside Iraq.
5.3 That the Ministry of Labor and Employment of the Philippines requires the
remittance into the Philippines of 70% of the salaries of Filipino workers working
abroad in US Dollars;
…
5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot
be used to purchase equipment, materials, supplies, etc. outside of Iraq;
5.6 That most of the materials specified by SOB in the CONTRACT are not available
in Iraq and therefore have to be imported;
5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui
Dinars) out of Iraq and hence, imported materials, equipment, etc., cannot be
purchased or obtained using Iraqui Dinars as medium of acquisition.
… is quite contrary to its previous representations. In his 26 March 1987 letter to the Office of
8. Following the approved construction program of the CONTRACT, upon completion
of the civil works portion of the installation of equipment for the building, should
immediately follow, however, the CONTRACT specified that these equipment which
are to be installed and to form part of the PROJECT have to be procured outside Iraq
since these are not being locally manufactured. Copy f the relevant portion of the
Technical Specification is hereto attached as Annex "C" and made an integral part
hereof;
…
10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist
the Iraqi government in completing the PROJECT, the Contractor without any
obligation on its part to do so but with the knowledge and consent of SOB and the
Ministry of Housing & Construction of Iraq, offered to arrange on behalf of SOB, a
foreign currency loan, through the facilities of Circle International S.A., the
Contractor's Sub-contractor and SACE MEDIO CREDITO which will act as the
guarantor for this foreign currency loan.
Arrangements were first made with Banco di Roma. Negotiation started in June
1985. SOB is informed of the developments of this negotiation, attached is a copy of
Several Banks, as Lender, and counter-guaranteed by Istituto Centrale Per II Credito
A Medio Termine (Mediocredito) Sezione Speciale Per L'Assicurazione Del Credito
All'Exportazione (Sace). Negotiations went on and continued until it suddenly
collapsed due to the reported default by Iraq in the payment of its obligations with
Italian government, copy of the news clipping dated June 18, 1986 is hereto attached
as Annex "D" to form an integral part hereof;
15. On September 15, 1986, Contractor received information from Circle
International S.A. that because of the news report that Iraq defaulted in its
obligations with European banks, the approval by Banco di Roma of the loan to SOB
shall be deferred indefinitely, a copy of the letter of Circle International together
with the news clippings are hereto attached as Annexes "F" and "F-1", respectively.57
As found by both the Court of Appeals and the trial court, the delay or the non-completion of
the Project was caused by factors not imputable to the respondent contractor. It was rather
due mainly to the persistent violations by SOB of the terms and conditions of the contract,
particularly its failure to pay 75% of the accomplished work in US Dollars. Indeed, where one
of the parties to a contract does not perform in a proper manner the prestation which he is
bound to perform under the contract, he is not entitled to demand the performance of the
other party. A party does not incur in delay if the other party fails to perform the obligation
incumbent upon him.
The petitioner, however, maintains that the payments by SOB of the monthly billings in purely
Iraqi Dinars did not render impossible the performance of the Project by VPECI. Such posture
the Middle Eastern and African Affairs (OMEAA), DFA, Manila, petitioner's Executive Vice-
President Jesus M. Tañedo stated that while VPECI had taken every possible measure to
complete the Project, the war situation in Iraq, particularly the lack of foreign exchange, was
proving to be a great obstacle; thus:
 VPECI has taken every possible measure for the completion of the project but the
war situation in Iraq particularly the lack of foreign exchange is proving to be a great
obstacle. Our performance counterguarantee was called last 26 October 1986 when
the negotiations for a foreign currency loan with the Italian government through
Banco de Roma bogged down following news report that Iraq has defaulted in its
obligation with major European banks. Unless the situation in Iraq is improved as to
allay the bank's apprehension, there is no assurance that the project will ever be
completed. 58
In order that the debtor may be in default it is necessary that the following requisites be
present: (1) that the obligation be demandable and already liquidated; (2) that the debtor
delays performance; and (3) that the creditor requires the performance because it must
appear that the tolerance or benevolence of the creditor must have ended. 59
As stated earlier, SOB cannot yet demand complete performance from VPECI because it has
not yet itself performed its obligation in a proper manner, particularly the payment of the 75%
of the cost of the Project in US Dollars. The VPECI cannot yet be said to have incurred in delay.
Even assuming that there was delay and that the delay was attributable to VPECI, still the
effects of that delay ceased upon the renunciation by the creditor, SOB, which could be implied
when the latter granted several extensions of time to the former. 60 Besides, no demand has
yet been made by SOB against the respondent contractor. Demand is generally necessary even
if a period has been fixed in the obligation. And default generally begins from the moment the
creditor demands judicially or extra-judicially the performance of the obligation. Without such
demand, the effects of default will not arise.61
Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot
be compelled to pay the creditor SOB unless the property of the debtor VPECI has been
exhausted and all legal remedies against the said debtor have been resorted to by the
creditor.62 It could also set up compensation as regards what the creditor SOB may owe the
principal debtor VPECI.63 In this case, however, the petitioner has clearly waived these rights
and remedies by making the payment of an obligation that was yet to be shown to be rightfully
due the creditor and demandable of the principal debtor.
As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor
had collectibles from SOB which could be set off with the amount covered by the performance
guarantee. In February 1987, the OMEAA transmitted to the petitioner a copy of a telex dated
10 February 1987 of the Philippine Ambassador in Baghdad, Iraq, informing it of the note
verbale sent by the Iraqi Ministry of Foreign Affairs stating that the past due obligations of the
joint venture contractor from the petitioner would "be deducted from the dues of the two
contractors."64
Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the
petitioner raised as among the arguments to be presented in support of the cancellation of
the counter-guarantee the fact that the amount of ID281,414/066 retained by SOB from the
Project was more than enough to cover the counter-guarantee of ID271,808/610; thus:
6.1 Present the following arguments in cancelling the counterguarantee:
· The Iraqi Government does not have the foreign exchange to fulfill its
contractual obligations of paying 75% of progress billings in US dollars.
· It could also be argued that the amount of ID281,414/066 retained by
SOB from the proposed project is more than the amount of the
outstanding counterguarantee.65
In a nutshell, since the petitioner was aware of the contractor's outstanding receivables from
SOB, it should have set up compensation as was proposed in its project situationer.
Moreover, the petitioner was very much aware of the predicament of the respondents. In fact,
in its 13 May 1987 letter to the OMEAA, DFA, Manila, it stated:
VPECI also maintains that the delay in the completion of the project was mainly due
to SOB's violation of contract terms and as such, call on the guarantee has no basis.
While PHILGUARANTEE is prepared to honor its commitment under the guarantee,
PHILGUARANTEE does not want to be an instrument in any case of inequity
committed against a Filipino contractor. It is for this reason that we are constrained
to seek your assistance not only in ascertaining the veracity of Al Ahli Bank's claim
that it has paid Rafidain Bank but possibly averting such an event. As any payment
effected by the banks will complicate matters, we cannot help underscore the
urgency of VPECI's bid for government intervention for the amicable termination of
the contract and release of the performance guarantee. 66
But surprisingly, though fully cognizant of SOB's violations of the service contract and VPECI's
outstanding receivables from SOB, as well as the situation obtaining in the Project site
compounded by the Iran-Iraq war, the petitioner opted to pay the second layer guarantor not
only the full amount of the performance bond counter-guarantee but also interests and
penalty charges.
This brings us to the next question: May the petitioner as a guarantor secure reimbursement
from the respondents for what it has paid under Letter of Guarantee No. 81-194-F?
As a rule, a guarantor who pays for a debtor should be indemnified by the latter 67 and would
be legally subrogated to the rights which the creditor has against the debtor. 68 However, a
person who makes payment without the knowledge or against the will of the debtor has the
right to recover only insofar as the payment has been beneficial to the debtor. 69 If the
obligation was subject to defenses on the part of the debtor, the same defenses which could
have been set up against the creditor can be set up against the paying guarantor.70
From the findings of the Court of Appeals and the trial court, it is clear that the payment made
by the petitioner guarantor did not in any way benefit the principal debtor, given the project
status and the conditions obtaining at the Project site at that time. Moreover, the respondent
contractor was found to have valid defenses against SOB, which are fully supported by
evidence and which have been meritoriously set up against the paying guarantor, the
petitioner in this case. And even if the deed of undertaking and the surety bond secured
petitioner's guaranty, the petitioner is precluded from enforcing the same by reason of the
petitioner's undue payment on the guaranty. Rights under the deed of undertaking and the
surety bond do not arise because these contracts depend on the validity of the enforcement
of the guaranty.
The petitioner guarantor should have waited for the natural course of guaranty: the debtor
VPECI should have, in the first place, defaulted in its obligation and that the creditor SOB
should have first made a demand from the principal debtor. It is only when the debtor does
not or cannot pay, in whole or in part, that the guarantor should pay. 71 When the petitioner
guarantor in this case paid against the will of the debtor VPECI, the debtor VPECI may set up
against it defenses available against the creditor SOB at the time of payment. This is the hard
lesson that the petitioner must learn.
As the government arm in pursuing its objective of providing "the necessary support and
assistance in order to enable … [Filipino exporters and contractors to operate viably under the
prevailing economic and business conditions,"72 the petitioner should have exercised prudence
and caution under the circumstances. As aptly put by the Court of Appeals, it would be the
height of inequity to allow the petitioner to pass on its losses to the Filipino contractor VPECI
which had sternly warned against paying the Al Ahli Bank and constantly apprised it of the
developments in the Project implementation.
WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the
decision of the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED.
No pronouncement as to costs.SO ORDERED.
Spouses PATRICK JOSE and RAFAELA JOSE, Petitioners, v. Spouses HELEN BOYON and
ROMEO BOYON, Respondents. G.R. No. 147369 : October 23, 2003
DECISION
Remedial Law; Actions; Summons; Jurisdictions; Generally, trial courts acquire jurisdiction over
the person of the defendant by the service of summons.—In general, trial courts acquire
jurisdiction over the person of the defendant by the service of summons. Where the action is
in personam and the defendant is in the Philippines, such service may be done by personal or
substituted service, following the procedures laid out in Sections 6 and 7 of Rule 14 of the
Revised Rules of Court.
Same; Same; Same; Same; Substituted Service; Personal service of summons is preferred to
substituted service; Only if the former cannot be made promptly can the process server resort
to the latter; Circumstances which must be indicated in the proof of summons; Failure to
comply faithfully, strictly and fully with all the foregoing requirements of substituted service
renders the service of summons ineffective.—As can be gleaned from the above-quoted
Sections, personal service of summons is preferred to substituted service. Only if the former
cannot be made promptly can the process server resort to the latter. Moreover, the proof of
service of summons must (a) indicate the impossibility of service of summons within a
reasonable time; (b) specify the efforts exerted to locate the defendant; and (c) state that the
summons was served upon a person of sufficient age and discretion who is residing in the
address, or who is in charge of the office or regular place of business, of the defendant. It is
likewise required that the pertinent facts proving these circumstances be stated in the proof
of service or in the officer’s return. The failure to comply faithfully, strictly and fully with all the
foregoing requirements of substituted service renders the service of summons ineffective.
Same; Same; Same; Same; Same; A general statement that such efforts were made will not
suffice for purposes of complying with the rules of substituted service of summons.—The
Return of Summons shows that no effort was actually exerted and no positive step taken by
either the process server or petitioners to locate and serve the summons personally on
respondents. At best, the Return merely states the alleged whereabouts of respondents
without indicating that such information was verified from a person who had knowledge
thereof. Certainly, without specifying the details of the attendant circumstances or of the
efforts exerted to serve the summons, a general statement that such efforts were made will
not suffice for purposes of complying with the rules of substituted service of summons.
Same; Same; Same; Same; Extraterritorial Service; Extraterritorial service of summons or
summons by publication applies only when the action is in rem or quasi in rem.—It must be
noted that extraterritorial service of summons or summons by publication applies only when
the action is in rem or quasi in rem. The first is an action against the thing itself instead of
against the defendant’s person; in the latter, an individual is named as defendant, and the
purpose is to subject that individual’s interest in a piece of property to the obligation or loan
burdening it.
Same; Same; Same; Same; Same; An action for specific performance is an action in
personam.—In the instant case, what was filed before the trial court was an action for specific
performance directed against respondents. While the suit incidentally involved a piece of land,
the ownership or possession thereof was not put in issue, since they did not assert any interest
or right over it. Moreover, this Court has consistently declared that an action for specific
performance is an action in personam. Jose vs. Boyon, 414 SCRA 216, G.R. No. 147369 October
23, 2003
============= ========================================= ============
PANGANIBAN, J.:
In general, substituted service can be availed of only after a clear showing that personal service
of summons was not legally possible. Also, service by publication is applicable in actions in
rem and quasi in rem, but not in personal suits such as the present one which is for specific
performance.
The Case
Before the Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court,
assailing the February 26, 2001 Decision2 of the Court of Appeals (CA) in CA-GR SP No. 60888.
The dispositive portion of the CA Decision is worded as follows:
WHEREFORE, on the basis of what prescinds, the assailed resolution and orders issued by the
public respondent are perforce ANNULLED and SET ASIDE. This pronouncement is nonetheless
rendered without prejudice to the refiling of the same case by the private respondents with
the court a quo.3
The Facts
The factual antecedents of the case are narrated by the CA in this wise:
On July 2, 1998, [petitioners] Patrick and Rafaela Jose lodged a complaint for specific
performance against [respondents] Helen and Romeo Boyon to compel them to facilitate the
transfer of ownership of a parcel of land subject of a controverted sale. The action was lodged
before the Regional Trial Court of Muntinlupa which is presided by herein public respondent
Judge N.C. Perello. On July 21, 1998, respondent judge, through the acting Branch Clerk of
Court of Branch 276 of the RTC of Muntinlupa City, issued summons to the [respondents]. As
per return of the summons, substituted service was resorted to by the process server allegedly
because efforts to serve the summons personally to the [respondents] failed. On December 9,
1998, [petitioners] filed before the trial court an Ex-parte Motion for Leave of Court to Effect
Summons by Publication. On December 28, 1998, public respondent issued an Order granting
the Ex-parte Motion for Leave of Court to Effect Summons by Publication. On July 30, 1999,
the respondent judge, sans a written motion, issued an Order declaring herein [respondents]
in default for failure to file their respective answers. As a consequence of the declaration of
default, [petitioners] were allowed to submit their evidence ex-parte. Ultimately,
on December 7, 1999, respondent judge issued the assailed resolution, the dispositive portion
of which reads as follows:
x x x Therefore, Spouses Helen and Romeo Boyon are directed to execute the necessary
document with the effect of withdrawing the Affidavit of Loss they filed and annotated with
the Register of Deeds of Makati City so that title to the parcel of land subject of the Deed of
Absolute Sale in favor of the Plaintiffs be transferred in their names. Thereafter the Register of
Deeds of Makati City or Muntinlupa City may cancel Transfer of Certificate of Title No. 149635
of the Defendants and issue another to Plaintiff under the deed of sale, clean and free of any
reported encumbrance.
Defendants are also directed to pay Plaintiffs actual expenses in the amount of P20,000 and
attorneys fees of P20,000 including costs of this suit.
xxx
On January 5, 2000, [respondent] Helen Boyon, who was then residing in the United States of
America, was surprised to learn from her sister Elizabeth Boyon, of the resolution issued by
the respondent court. On January 18, 2000, [respondents] filed an Ad Cautelam motion
questioning, among others, the validity of the service of summons effected by the court a
quo. On March 17, 2000, the public respondent issued an Order denying the said motion on
the basis of the defaulted [respondents] supposed loss of standing in court. On March 29,
2000, the [respondents] once again raised the issue of jurisdiction of the trial court via a motion
for reconsideration. On June 22, 2000, however, an Order was issued by the public respondent
denying the said motion. The [petitioners] moved for the execution of the controverted
judgment which the respondent judge ultimately granted.4cräläwvirtualibräry
Thereafter, respondents filed before the CA a Petition for certiorari under Rule 65 of the
Revised Rules of Civil Procedure, questioning the jurisdiction of the regional trial court (RTC).
Ruling of the Court of Appeals
The CA held that the trial court had no authority to issue the questioned Resolution and Orders.
According to the appellate court, the RTC never acquired jurisdiction over respondents
because of the invalid service of summons upon them. First, the sheriff failed to comply with
the requirements of substituted service of summons, because he did not specify in the Return
of Summons the prior efforts he had made to locate them and the impossibility of promptly
serving the summons upon them by personal service. Second, the subsequent summons by
publication was equally infirm, because the Complaint was a suit for specific performance and
therefore an action in personam. Consequently, the Resolution and the Orders were null and
void, since the RTC had never acquired jurisdiction over respondents.
Hence, this Petition.5
Issues
In their Memorandum, petitioners raise the following issues for our consideration:
A. The Honorable Court of Appeals erred in not holding that the assailed Resolution
dated December 7, 1999 was already final and executory
B. The Honorable Court of Appeals erred in giving due course to the Petition for Certiorari of
private respondents despite the pendency of an appeal earlier filed
C. The Honorable Court erred in not holding that the Petition for Certiorari was time barred
D. The Honorable Court of Appeals erred in holding that the proceedings in the lower court are
null and void due to invalid and defective service of summons and the court did not acquire
jurisdiction over the person of the respondents.6cräläwvirtualibräry
In sum, the main issue revolves around the validity of the service of summons on respondents.
The Courts Ruling
The Petition has no merit.
Main Issue:
Validity of the Service of Summons
Petitioners aver that the CA erred in ruling that the service of summons on respondents was
invalid. They submit that although the case filed before the trial court was denominated as an
action for specific performance, it was actually an action quasi in rem, because it involved a
piece of real property located in the Philippines. They further argue that in actions quasi in
rem involving ownership of a parcel of land, it is sufficient that the trial court acquire
jurisdiction over the res. Thus, the summons by publication, which they effected subsequent
to the substituted service of summons, was allegedly sufficient.
On the other hand, respondents maintain that the proceedings in the trial court were null and
void because of the invalid and defective service of summons. According to them, the Return
of Summons issued by the process server of the RTC failed to state that he had exerted earnest
efforts to effect the service of summons. He allegedly tried to serve it personally on them
on July 22, 1998 at No. 32 Ariza Drive, Camella Homes, Alabang. He, however, resorted to
substituted service on that same day, supposedly because he could not find respondents in
the above address. They further allege that the person to whom he gave the summons was
not even a resident of that address.
Respondents contend that when summons is served by substituted service, the return must
show that it was impossible to serve the summons personally, and that efforts had been
exerted toward that end. They add that noncompliance with the rule on substituted service
renders invalid all proceedings relative thereto.
As to the summons by publication subsequently effected by petitioners, respondents argue
that the case filed before the trial court was an action for specific performance and, therefore,
an action in personam. As such, the summons by publication was insufficient to enable the trial
court to acquire jurisdiction over the persons of respondents.
Respondents conclude that even granting that the service of summons by publication was
permissible under the circumstances, it would still be defective and invalid because of the
failure of petitioners to observe the requirements of law, like an Affidavit attesting that the
latter deposited in the post office a copy of the summons and of the order of publication, paid
the postage, and sent the documents by registered mail to the formers last known address.
We agree with respondents. In general, trial courts acquire jurisdiction over the person of the
defendant by the service of summons. Where the action is in personam and the defendant is
in the Philippines, such service may be done by personal or substituted service, following the
procedures laid out in Sections 6 and 7 of Rule 14 of the Revised Rules of Court, which read:
Section 6. Service in person on defendant. - Whenever practicable, the summons shall be
served by handing a copy thereof to the defendant in person, or, if he refuses to receive and
sign for it, by tendering it to him.
Section 7. Substituted service. - If, for justifiable causes, the defendant cannot be served within
a reasonable time as provided in the preceding section, service may be effected (a) by leaving
copies of the summons at the defendant's residence with some person of suitable age and
discretion then residing therein, or (b) by leaving the copies at defendants office or regular
place of business with some competent person in charge thereof.
As can be gleaned from the above-quoted Sections, personal service of summons is preferred
to substituted service. Only if the former cannot be made promptly can the process server
resort to the latter. Moreover, the proof of service of summons must (a) indicate the
impossibility of service of summons within a reasonable time; (b) specify the efforts exerted
to locate the defendant; and (c) state that the summons was served upon a person of sufficient
age and discretion who is residing in the address, or who is in charge of the office or regular
place of business, of the defendant.7 It is likewise required that the pertinent facts proving
these circumstances be stated in the proof of service or in the officers return. The failure to
comply faithfully, strictly and fully with all the foregoing requirements of substituted service
renders the service of summons ineffective.8
Defective Personal
Service of Summons
In the instant case, it appears that the process server hastily and capriciously resorted to
substituted service of summons without actually exerting any genuine effort to locate
respondents. A review of the records9 reveals that the only effort he exerted was to go to No.
32 Ariza Drive, Camella Homes, Alabang on July 22, 1998, to try to serve the summons
personally on respondents. While the Return of Summons states that efforts to do so were
ineffectual and unavailing because Helen Boyon was in the United States and Romeo Boyon
was in Bicol, it did not mention exactly what efforts -- if any -- were undertaken to find
respondents. Furthermore, it did not specify where or from whom the process server obtained
the information on their whereabouts. The pertinent portion of the Return of Summons is
reproduced as follows:
That efforts to serve the said Summons personally upon defendants Sps. Helen and Romeo
Boyon were made but the same were ineffectual and unavailing for the reason that defendant
Helen Boyon is somewhere in the United States of America and defendant Romeo Boyon is in
Bicol thus substituted service was made in accordance with Section 7, Rule 14, of the Revised
Rules of Court.10cräläwvirtualibräry
The Return of Summons shows that no effort was actually exerted and no positive step taken
by either the process server or petitioners to locate and serve the summons personally on
respondents. At best, the Return merely states the alleged whereabouts of respondents
without indicating that such information was verified from a person who had knowledge
thereof. Certainly, without specifying the details of the attendant circumstances or of the
efforts exerted to serve the summons, a general statement that such efforts were made will
not suffice for purposes of complying with the rules of substituted service of summons.
The necessity of stating in the process servers Return or Proof of Service the material facts and
circumstances sustaining the validity of substituted service was explained by this Court
in Hamilton v. Levy,11 from which we quote:
x x x The pertinent facts and circumstances attendant to the service of summons must be
stated in the proof of service or Officers Return; otherwise, any substituted service made in
lieu of personal service cannot be upheld. This is necessary because substituted service is in
derogation of the usual method of service. It is a method extraordinary in character and hence
may be used only as prescribed and in the circumstances authorized by statute. Here, no such
explanation was made. Failure to faithfully, strictly, and fully comply with the requirements of
substituted service renders said service ineffective.12cräläwvirtualibräry
Moreover, the requirements of substituted service of summons and the effect of
noncompliance with the subsequent proceedings therefor were discussed in Madrigal v. Court
of Appeals13 as follows:
In a long line of cases, this Court held that the impossibility of personal service justifying
availment of substituted service should be explained in the proof of service; why efforts
exerted towards personal service failed. The pertinent facts and circumstances attendant to
the service of summons must be stated in the proof of service or Officers Return; otherwise,
the substituted service cannot be upheld. It bears stressing that since service of summons,
especially for actions in personam, is essential for the acquisition of jurisdiction over the
person of the defendant, the resort to a substituted service must be duly justified. Failure to
do so would invalidate all subsequent proceedings on jurisdictional grounds.14
Summons by
Publication Improper
It must be noted that extraterritorial service of summons or summons by publication applies
only when the action is in rem or quasi in rem. The first is an action against the thing itself
instead of against the defendants person; in the latter, an individual is named as defendant,
and the purpose is to subject that individuals interest in a piece of property to the obligation
or loan burdening it.15
In the instant case, what was filed before the trial court was an action for specific performance
directed against respondents. While the suit incidentally involved a piece of land, the
ownership or possession thereof was not put in issue, since they did not assert any interest or
right over it. Moreover, this Court has consistently declared that an action for specific
performance is an action in personam.16cräläwvirtualibräry
Having failed to serve the summons on respondents properly, the RTC did not validly acquire
jurisdiction over their persons. Consequently, due process demands that all the proceedings
conducted subsequent thereto should be deemed null and void.17cräläwvirtualibräry
WHEREFORE, the Petition is DENIED and the assailed Decision and Resolution AFFIRMED.
Costs against petitioners.SO ORDERED.
G.R. No. L-82330 May 31, 1988
THE DIAL CORPORATION, C & T REFINERY INC., NALIN Sdn. Bhb. BERISFORD COMMODITIES,
LTD., and PACIFIC MOLASSES COMPANY, petitioners,
vs.
THE HON. CLEMENTE M. SORIANO, Presiding Judge, Regional Trial Court, Branch 3, MANILA
PUBLIC RESPONDENT and IMPERIAL VEGETABLE OIL COMPANY, INC., respondents.
Guerrero & Torres Law Office for petitioners.
Abad & Associates for respondents.
GRIÑO-AQUINO, J.:
Remedial Law; Civil Procedure; Summons; Instances where extraterritorial service of summons
is proper.—Only in four (4) instances is extraterritorial service of summons proper, namely:
"(1) when the action affects the personal status of the plaintiffs; (2) when the action relates
to, or the subject of which is, property within the Philippines, in which the defendant has or
claims a lien or interest, actual or contingent; (3) when the relief demanded in such action
consists, wholly or in part, in excluding the defendant from any interest in property located in
the Philippines; and (4) when the defendant nonresident’s property has been attached within
the Philippines” (De Midgely vs. Ferandos, 64 SCRA 23).
Same; Same; Same; Actions; Complaint in case at bar does not involve the personal status of
plaintiff but an action for injunction; Distinctions between an action in personal and an action
in rem.—The complaint in this case does not involve the personal status of the The plaintiff,
nor any property in the Philippines in which the defendants have or claim an interest, or which
the plaintiff has attached. The action is purely an action for injunction to restrain the
defendants from enforcing against IVO (“abusing and harassing”) its contracts for the delivery
of coconut oil to the defendants, and to recover from the defendants P21 million in damages
for such “harassment.” It is clearly a personal action as well as an action in personam, not an
action in rem or quasi in rem. “An action in personam is an action against a person on the basis
of his personal liability, while an action in rem is an action against the thing itself, instead of
against the person.” (Hernandez vs. Rural Bank of Lucena, Inc., 76 SCRA 85). A personal action
is one brought for the recovery of personal property, for the enforcement of some contract of
recovery of damages for its breach, or for the recovery of damages for the commission of an
injury to the person or property (Hernandez vs. Development Bank of the Philippines, 71 SCRA
292).
Same; Same; Same; Jurisdiction; Where the civil case is a personal action, personal or
substituted service of summons on the defendants, not extraterritorial service, is necessary to
confer jurisdiction on the court.—As Civil Case No. 87–40166 is a personal action, personal or
substituted service of summons on the defendants, not extxaterritorial service, is necessary to
confer jurisdiction on the court.
Same; Same; Same; In an action for injunction; Extra-territorial service of summons and
complaint upon the non-resident defendants cannot subject them to the processes of the
regional trial courts which are powerless to reach them outside their jurisdictional area.—In
an action for injunction, extraterritorial service of summons and complaint upon the non-
resident defendants cannot subject them to the processes of the regional trial courts which
are powerless to reach them outside the region over which they exercise their authority (Sec.
3-a, Interim Rules of Court; Sec. 21, subpar. 1, B.P. Blg. 129). Extraterritorial service of
summons will not confer on the court jurisdiction or power to compel them to obey its orders.
Same; Same; Same; Rule that jurisdiction in personam over nonresidents so as to sustain a
money judgment, must be based upon personal service within the state which renders the
judgment.—Neither may the court by extraterritorial service of summons acquire jurisdiction
to render and enforce a money judgment against a non-resident defendant who has no
property in the Philippines for “the fundamental rule is that jurisdiction in personam over non-
residents, so as to sustain a money judgment, must be based upon personal service within the
state which renders the judgment” (Boudard vs. Tait, 67 Same; Same; Same; Contractual rights
of petitioners are not property found in the Philippines absent an action filed in local courts to
enforce said rights.—Respondents’ contention that “the action below is related to property
within the Philippines, specifically contractual rights that petitioners are enforcing against IVO"
is specious for the “contractual rights” of the petitioners are not property found in the
Philippines for the petitioners have not filed an action in the local courts to enforce said rights.
They have not submitted to the jurisdiction of our courts.
Same; Same; Corporation; Foreign Corporation; The Corporation Code did not repeal the rules
requiring proper service of summons to foreign corporations doing business in the
Philippines.—The lower court invoked Section 33 of the Corporation Code which provides that
a”foreign corporation transacting business in the Philippines without a license may be sued or
proceeded against before Philippine courts or administrative tribunal on any valid cause of
action recognized under Philippine laws,” It assumed that the defendants (herein petitioners)
are doing business in the Philippines, which allegation the latter denied. Even if they can be
considered as such, the Corporation Code did not repeal the rules requiring proper service of
summons to such corporations as provided in Rule 14 of the Rules of Court and Section 128 of
the Corporation Code.
Same; Same; Motion to dismiss; Finding of court that by filing a motion to dismiss the
petitioners hypothetically admitted the allegations of the complaint, contradicted by its order
authorizing service of summons by extraterritorial service.—The respondent court’s finding
that, by filing motions to dismiss, the petitioners hypothetically admitted the allegations of the
complaint that they are doing business in the Philippines without any license, and that they
may be served with summons and other court processes through their agents or
representatives enumerated in paragraph 2 of the complaint, is contradicted by its order
authorizing IVO to summon them by extraterritorial service, a mode of service which is
resorted to when the defendant is not found in the Philippines, does not transact business
here, and has no resident agent on whom the summons may be served. The Dial Corporation
vs. Soriano, 161 SCRA 737, No. L-82330 May 31, 1988
============== ======================================= ===================
The petitioners are foreign corporations organized and existing under the laws of the United
States, the United Kingdom, and Malaysia, are not domiciled in the Philippines, nor do they
have officers or agents, place of business, or property in the Philippines; they are not licensed
to engage, and are not engaged, in business here. The respondent Imperial Vegetable Oil
Company, Inc. (or "IVO" for brevity) is a Philippine corporation which through its president,
Dominador Monteverde, had entered into several contracts for the delivery of coconut oil to
the petitioners. Those contracts stipulate that any dispute between the parties will be settled
through arbitration under the rules of either the Federation of Oils Seeds and Fats Association
(FOSFA) or the National Institute of Oil Seed Products (NIOP). Because IVO defaulted under the
contracts, the petitioners and 15 others, initiated arbitration proceedings abroad, and some
have already obtained arbitration awards against IVO.
On April 8, 1987, IVO filed a complaint for injunction and damages against nineteen (19)
foreign coconut oil buyers including the petitioners, with whom its president, Dominador
Monteverde, had entered into contracts for the delivery of coconut oil (Civil Case No. 87-
40166, RTC Manila entitled "Imperial Vegetable Oil Co., Inc. vs. Dial Corporation et al."). IVO
repudiated Monteverde's contracts on the grounds that they were mere "paper trading in
futures" as no actual delivery of the coconut oil was allegedly intended by the parties; that the
Board of Directors of IVO convened in a special meeting on March 21, 1987 and removed
Dominador Monteverde from his position as president of the corporation, named in his place,
Rodrigo Monteverde, and disowned Dominador Monteverde's allegedly illegal and
unauthorized acts; that the defendants have allegedly "harassed" IVO to comply with
Dominador's contracts and to come to a settlement with them. IVO prayed for the issuance of
a temporary restraining order or writ of preliminary injunction to stop the defendants from
harassing IVO with their insistent demands to recognize the contracts entered into by
Dominador Monteverde and from portraying the IVO as one that defaults on its contracts and
obligations and has fallen into bad times and from interfering with IVO's normal conduct of
business. IVO also prayed that the defendants pay it moral damages of P5 million, actual
damages of P10 million, exemplary damages of P5 million, attorney's fees of P1 million, P3,000
per appearance of counsel, and litigation expenses.
On motion of IVO, respondent Judge authorized it to effect extraterritorial service of summons
to all the defendants through DHL Philippines corporation (Annex B). Pursuant to that order,
the petitioners were served with summons and copy of the complaint by DHL courier service.
On April 25, 1987, without submitting to the court's jurisdiction and only for the purpose of
objecting to said jurisdiction over their persons, the petitioners filed motions to dismiss the
complaint against them on the ground that the extraterritorial service of summons to them
was improper and that hence the court did not acquire jurisdiction over them. On December
15, 1987, the court denied their motions to dismiss and upheld the validity of the
extraterritorial service of summons to them on the ground that "the present action relates to
property rights which lie in contracts within the Philippines, or which defendants claim liens or
interests, actual or inchoate, legal or equitable (par. 2, complaint). And one of the reliefs
demanded consists, wholly or in part, in excluding the defendants from any interest in such
property for the reason that their transactions with plaintiff's former president are ultra vires."
Furthermore, "as foreign corporations doing business in the Philippines without a license, they
opened themselves to suit before Philippine courts, pursuant to Sec. 133 of the Corporation
Code of the Philippines." (Annex H) The petitioners' motions for reconsideration of that order
were also denied by the court (Annex M), hence this petition for certiorari with a prayer for
the issuance of a temporary retraining order which We granted.
The petition is meritorious.
Section 17, Rule 14 of the Rules of Court provides:
Section 17. Extraterritorial service. — When the defendant does not reside and is not found in
the Philippines and the action affects the personal status of the plaintiff or relates to, or the
subject of which is, property within the Philippines, in which the defendant has or claims a lien
or interest, actual or contingent, or in which the relief demanded consists, wholly or in part, in
excluding the defendant from any interest therein, or the property of the defendant has been
attached within the Philippines, service may, by leave of court, be effected out of the
Philippines by personal service as under section 7; or by publication in a newspaper of general
circulation in such places and for such time as the court may order, in which case a copy of the
summons and order of the court shall be sent by registered mail to the last known address of
the defendant, or in any other manner the court may deem sufficient. Any order granting such
leave shall specify a reasonable time, which shag not be less than sixty (60) days after notice,
within which the defendant must answer.
Only in four (4) instances is extraterritorial service of summons proper, namely: "(1) when the
action affects the personal status of the plaintiffs; (2) when the action relates to, or the subject
of which is, property within the Philippines, in which the defendant has or claims a lien or
interest, actual or contingent; (3) when the relief demanded in such action consists, wholly or
in part, in excluding the defendant from any interest in property located in the Philippines; and
(4) when the defendant non-resident's property has been attached within the Philippines" (De
Midgely vs. Fernandos, 64 SCRA 23).
The complaint in this case does not involve the personal status of the plaintiff, nor any property
in the Philippines in which the defendants have or claim an interest, or which the plaintiff has
attached. The action is purely an action for injunction to restrain the defendants from
enforcing against IVO ("abusing and harassing") its contracts for the delivery of coconut oil to
the defendants, and to recover from the defendants P21 million in damages for such
"harassment." It is clearly a personal action as well as an action in personam, not an action in
rem or quasi in rem. "An action in personam is an action against a person on the basis of his
personal liability, while an action in remedies is an action against the thing itself, instead of
against the person." (Hernandez vs. Rural Bank of Lucena, Inc., 76 SCRA 85). A personal action
is one brought for the recovery of personal property, for the enforcement of some contract or
recovery of damages for its breach, or for the recovery of damages for the commission of an
injury to the person or property (Hernandez vs. Development Bank of the Philippines, 71 SCRA
292).<äre||anº•1àw>
As Civil Case No. 87-40166 is a personal action, personal or substituted service of summons on
the defendants, not extraterritorial service, is necessary to confer jurisdiction on the court. The
rule is explained in Moran's Comments on the Rules of Court thus:
As a general rule, when the defendant is not residing and is not found in the Philippines, the
Philippine courts cannot try any case against him because of the impossibility of acquiring
jurisdiction over his person unless he voluntarily appears in court. But, when the action affects
the personal status of the plaintiff residing in the Philippines, or is intended to seize or dispose
of any property, real or personal, of the defendant located in the Philippines, it may be validly
tried by the Philippine courts, for then, they have jurisdiction over the res, i.e., the personal
status of the plaintiff or the property of the defendant and their jurisdiction over the person
of the non-resident defendant is not essential. Venue in such cases may be laid in the province
where the property of the defendant or a part thereof involved in the litigation is located. (5
Moran's Comments on the Rules of Court, 2nd Ed., p. 105.)
In an action for injunction, extraterritorial service of summons and complaint upon the non-
resident defendants cannot subject them to the processes of the regional trial courts which
are powerless to reach them outside the region over which they exercise their authority (Sec.
3-a, Interim Rules of Court; Sec. 21, subpar. 1, B.P. Blg. 129). Extraterritorial service of
summons will not confer on the court jurisdiction or power to compel them to obey its orders.
Neither may the court by extraterritorial service of summons acquire jurisdiction to render and
enforce a money judgment against a non-resident defendant who has no property in the
Philippines for "the fundamental rule is that jurisdiction in personam over non-residents, so as
to sustain a money judgment, must be based upon personal service within the state which
renders the judgment "(Boudard vs. Tait, 67 Phil. 170, 174).
Respondents' contention that "the action below is related to property within the Philippines,
specifically contractual rights that petitioners are enforcing against IVO" is specious for the
"contractual rights" of the petitioners are not property found in the Philippines for the
petitioners have not filed an action in the local courts to enforce said rights. They have not
submitted to the jurisdiction of our courts.
The lower court invoked Section 33 of the Corporation Code which provides that a "foreign
corporation transacting business in the Philippines without a license may be sued or proceeded
against before Philippine courts or administrative tribunal on any valid cause of action
recognized under Philippine laws." It assumed that the defendants (herein petitioners) are
doing business in the Philippines, which allegation the latter denied. Even if they can be
considered as such, the Corporation Code did not repeal the rules requiring proper service of
summons to such corporations as provided in Rule 14 of the Rules of Court and Section 128 of
the Corporation Code.
The respondent court's finding that, by filing motions to dismiss, the petitioners hypothetically
admitted the allegations of the complaint that they are doing business in the Philippines
without any license, and that they may be served with summons and other court processes
through their agents or representatives enumerated in paragraph 2 of the complaint, is
contradicted by its order authorizing IVO to summon them by extraterritorial service, a mode
of service which is resorted to when the defendant is not found in the Philippines, does not
transact business here, and has no resident agent on whom the summons may be served.
WHEREFORE, We hold that the extraterritorial service of summons on the petitioners was
improper, hence null and void. The petition for certiorari is granted.
The orders dated April 24, 1987 (Annex B) and December 15, 1987 (Annex H) of the respondent
Judge are hereby set aside. The complaint in Civil Case No. 87-40166 is hereby dismissed as
against the petitioners for failure of the court to acquire jurisdiction over them.
SO ORDERED.
G.R. No. L-68741 January 28, 1988
NATIONAL GRAINS AUTHORITY, plaintiff-appellee,
vs.
INTERMEDIATE APPELLATE COURT, MELECIO MAGCAMIT, NENA COSICO and EMELITA
MAGCAMIT, defendants-appellants.
PARAS, J.:
Land Titles; While the registration of the conditional sale with right of repurchase may be
binding on third persons, it is by provision of law “understood to be without prejudice to third
party who has the better right” (Sec. 194 of Administrative Code, as amended by Act No.
3344.—It is axiomatic, that while the registration of the conditional sale with right of
repurchase may be binding on third persons, it is by provision of law “understood to be without
prejudice to third party who has better right” (Section 194 of the Administrative Code, as
amended by Act No. 3344).
Same; Same; Proceedings for registration of title to land under the Torrens System is an action
in rem, hence, personal notice to all claimants of the res is not necessary in order that the court
may have jurisdiction.—Time and time again, this Court has ruled that the proceedings for the
registration of title to land under the Torrens System is an action in rem, not inpersonam, hence,
personal notice to all claimants of the res is not necessary in order that the court may have
jurisdiction to deal with and dispose of the res. Neither may lack of such personal notice vitiate
or invalidate the decree or title issued in a registration proceeding, for the State, as sovereign
over the land situated within it, may provide for the adjudication of title in a proceeding in rem
or one in the nature of or akin a proceeding in rem which shall be binding upon all persons,
known or unknown (Moscoso vs. Court of Appeals, 128 SCRA 719 [1984], citing: City of Manila
vs. Lack, et al., 19 Phil. 324, 337; Roxas vs. Enriquez, 29 Phil. 31; Director of Lands vs. Roman
Catholic Archbishop of Manila, 41 Phil. 120; Aguilar vs. Caogdan, 105 Phil. 661). It is thus
evident that respondents’ right over the property was barred by res judicata when the decree
of registration was issued to spouses Vivas and Lizardo. It does not matter that they may have
had some right even the right of ownership, BEFORE the grant of the Torrens Title.
Same; Same; Effect of issuance of certificate of title under Sec. 44 of P.D. 1529.—Thus, under
Section 44 of P.D. 1529, every registered owner receiving a certificate of title in pursuance of a
decree of registration, and every subsequent purchaser of registered land taking a certificate
of title for value and in good faith, shall hold the same free from all encumbrances except those
noted on the certificate and any of the encumbrances which may be subsisting, and
enumerated in the law. Under said provision, claims and liens of whatever character, except
those mentioned by law as existing, against the land prior to the issuance of certificate of title,
are cut off by such certificate if not noted thereon, and the certificate so issued binds the whole
world, including the government (Aldecoa and Co. vs. Warner Barns & Co., 30 Phil. 209 [1915];
Snyder vs. Fiscal of Cebu and Avila, 42 Phil. 766 [1922]). Under said ruling, if the purchaser is
the only party who appears in the deeds and the registration of titles in the property registry,
no one except such purchaser may be deemed by law to be the owner of the properties in
question (Ibid). Moreover, no title to registered land in derogation to that of the registered
owner shall be acquired by prescription or adverse possession (Umbay vs. Alecha, 135 SCRA
427 [1985]).
Same; Same; Purpose of Torrens System; Indirect or collateral attack not allowed.—Thus, it has
been invariably restated by this Court, that “The real purpose of the Torrens System is to quiet
title to land and to stop forever any question as to its legality. ‘Once a title is registered, the
owner may rest secure, without the necessity of waiting in the portals of the court, or sitting
on the ‘mirador su casa,’ to avoid the possibility of losing his land.’” An indirect or collateral
attack on a Torrens Title is not allowed (Dominga vs. Santos, 55 Phil. 361; Singian vs. Manila
Railroad, 62 Phil. 467).
Same; Same; Same; Exception where the person who obtains a certificate of title is guilty of
fraud.—The only exception to this rule is where a person obtains a certificate of title to a land
belonging to another and he has full knowledge of the rights of the true owner. He is then
considered as guilty of fraud and he may be compelled to transfer the land to the defrauded
owner so long as the property has not passed to the hands of an innocent purchaser for value
(Angeles vs. Sania, 66 Phil. 444 [1938], italics supplied).
Same; Same; Same; Same; Principle that a petition for review will not prosper even if filed
within one year from the entry of the decree if the title has passed into the hands of an innocent
purchaser for value (P.D. 1529, Sec. 32); NGA, lawful owner of the property in question by virtue
of its indefeasible title; Case at Bar.—Under the circumstances, the Regional Trial Court could
not have erred in ruling that plaintiffs’ (private respondents herein) complaint insofar as it prays
that they be declared owners of the land in question can not prosper in view of the doctrine of
indefeasibility of title under the Torrens System, because it is an established principle that a
petition for review of the decree of registration will not prosper even if filed within one year
from the entry of the decree if the title has passed into the hands of an innocent purchaser for
value (Pres. Decree No. 1529, Sec. 32). The setting aside of the decree of registration issued in
land registration proceedings is operative only between the parties to the fraud and the parties
defrauded and their privies, but not against acquirers in good faith and for value and the
successors in interest of the latter; as to them the decree shall remain in full force and effect
forever (Domingo vs. The Mayon Realty Corp., et al., 102 Phil. 32 [1957]). Assuming, therefore,
that there was fraud committed by the sellers against the buyers in the instant case, petitioner
NGA who was not privy therein cannot be made to suffer the consequences thereof. As correctly
declared by the trial court, the National Grains Authority is the lawful owner of the property in
question by virtue of its indefeasible title. National Grains Authority vs. Intermediate Appellate
Court, 157 SCRA 380, No. L-68741 January 28, 1988
===================================== ===================================
This is a petition for review of the decision of the then Intermediate Appellate Court * (now
Court of Appeals) dated January 31, 1984, reversing the decision of the Court of First Instance
of Laguna and San Pablo City, 8th Judicial District, Branch III, and of the resolution dated August
28, 1984 denying the motion for reconsideration filed thereof.
The undisputed facts of this case as found by the Trial Court and the Intermediate Appellate
Court are as follows:
On December 2,1971, the spouses Paulino Vivas and Engracia Lizards, as owners of a parcel of
land situated in Bo. San Francisco, Victoria, Laguna, comprising more or less 105,710 square
meters, sold for P30,000.00 said property in favor of spouses Melencio Magcamit and Nena
Cosico, and Amelita Magcamit (herein private respondents) as evidenced by "Kasulatan Ng
Bilihang Mabiling Muli." This sale with right to repurchase was recorded in the Office of the
Register of Deeds of Laguna on December 6,1971 under Act No. 3344. On January 31,1972 the
sale was made absolute by the spouses Vivas and Lizardo in favor of the private respondents
for the sum of P90,000.00; P50,000.00 of which was paid upon the execution of the
instrument, entitled "Kasulatan Ng Bilihan Tuluyan," after being credited with the P30,000.00
consideration of the "Kasulatan Ng Mabibiling Muli," and the balance of P40,000.00 was to be
paid the moment that the certificate of title is issued. From the execution of said Kasulatan,
private respondent have remained in peaceful, adverse and open possession of subject
property.
On February 26, 1975, an Original Certificate of Title No. T-1728 covering the property in
question was issued to and in the name of the spouses Vivas and Lizardo without the
knowledge of the private respondents and on April 30, 1975, said Spouses executed a Special
Power of Attorney in favor of Irenea Ramirez authorizing the latter to mortgage the property
with the petitioner, National Grains Authority.
On May 2, 1974, the counsel for the petitioner wrote the Provincial Sheriff in Sta. Cruz, Laguna,
requesting for the extrajudicial foreclosure of the mortgage executed by Irenea Ramirez on
May 18, 1975, covering, among others, the property involved in this case covered by OCT No.
T-1728, for unpaid indebtedness in the amount of P63,948.80 in favor of the petitioner.
On May 31, 1974, the Provincial Sheriff caused the issuance of the notice of sale of the property
in question, scheduling the public auction sale on June 28, 1974. The petitioner was the highest
and successful bidder so that a Certificate of Sale was issued in its favor on the same date by
the Provincial Sheriff.
On July 10, 1974, the petitioner in its capacity as attorney-in-fact of the mortgagor sold the
subject real property in favor of itself. By virtue of the deed of absolute sale, TCT No. T-75171
of the Register of Deeds for the Province of Laguna was issued in the name of the petitioner
on July 16, 1974. It was only in July 1974, that private respondents learned that a title in the
name of the Vivas spouses had been issued covering the property in question and that the
same property had been mortgaged in favor of the petitioner. Private respondent Nena
Magcamit offered to pay the petitioner NGA the amount of P40,000.00 which is the balance
of the amount due the Vivas spouses under the terms of the absolute deed of sale but the
petitioner refused to accept the payment. On July 31, 1974, counsel for private respondents
made a formal demand on the spouses Vivas and Lizardo to comply with their obligation under
the terms of the absolute deed of sale; and soon after reiterated to the NGA, the offer to pay
the balance of P40,000.00 due under the absolute deed of sale. On August 13, 1974 petitioner
in its reply informed counsel of private respondents that petitioner is now the owner of the
property in question and has no intention of disposing of the same.
The private respondents, who as previously stated, are in possession of subject property were
asked by petitioner to vacate it but the former refused. Petitioner filed a suit for ejectment
against private respondents in the Municipal Court of Victoria, Laguna, but the case was
dismissed.
On June 4, 1975, private respondents filed a complaint before the then Court of First Instance
of Laguna and San Pablo City, Branch III, San Pablo City, against the petitioner and the spouses
Vivas and Lizardo, praying, among others, that they be declared the owners of the property in
question and entitled to continue in possession of the same, and if the petitioner is declared
the owner of the said property, then, to order it to reconvey or transfer the ownership to them
under such terms and conditions as the court may find just, fair and equitable under the
premises. (Record on Appeal, pp. 2-11).
In its answer to the complaint, the petitioner (defendant therein) maintained that it was never
a privy to any transaction between the private respondents (plaintiffs therein) and the spouses
Paulino Vivas and Engracia Lizardo that it is a purchaser in good faith and for value of the
property formerly covered by OCT No. 1728; and that the title is now indefeasible, hence,
private respondents' cause of action has' already prescribed. (Record on Appeal, pp. 16-22).
After due hearing, the trial court ** rendered its decision on March 17, 1981, in favor of the
petitioner, the dispositive portion of said judgment reading as follows:
WHEREFORE, judgment is hereby rendered as follows:
(1) declaring defendant National Grains Authority the lawful owner of the
property in question by virtue of its indefeasible title to the same;
(2) ordering plaintiffs to turn over possession of the land to defendant
National Grains Authority;
(3) ordering defendants-spouses Paulino Vivas and Engracia Lizardo to pay
plaintiffs the sum of P56,000.00 representing the amount paid pursuant to
the Kasulatan Ng Bilihang Tuluyan marked Exhibit "3", with legal interest
thereon from January 31, 1972 until the amount is paid, to pay an
additional amount of P5,000.00 for and as attorney's fees, an additional
amount of Pl0,000.00 as moral damages, another amount of P5,000.00 by
way of exemplary damages and to pay the costs of this suit. (Rollo, P. 35).
The private respondents interposed an appeal from the decision of the trial court to the
Intermediate Appellate Court.
After proper proceedings, the appellate court rendered its decision on January 31, 1984,
reversing and setting aside the decision of the trial court as follows:
WHEREFORE, the decision of the lower court is hereby reversed and set
aside and another one is rendered ordering the National Grains Authority
to execute a deed of reconveyance sufficient in law for purposes of
registration and cancellation of transfer Certificate of Title No. T-75171
and the issuance of another title in the names of plaintiff-appellants, and
ordering defendants-appellees Paulino Vivas and Engracia Lizardo to pay
the National Grains Authority the sum of P78,375.00 (Exh. 3) within thirty
(30) days from the receipts of the writ of execution. No damages and costs.
(Rollo, p. 19).
The petitioner filed a motion for reconsideration of the said decision but the same was denied.
(Rollo, p. 26).
Hence, this petition.
In the resolution of May 20, 1985, the petition was given due course and the parties were
required to submit simultaneous memoranda (Rollo, p. 128). The memorandum for the
petitioner was filed on July 3, 1985 (Rollo, p. 129) while the memorandum for the private
respondents was filed on August 26, 1985 1 Rollo p. 192).
The main issue in this case is whether or not violation of the terms of the agreement between
the spouses Vivas and Lizardo, the sellers, and private respondents, the buyers, to deliver the
certificate of title to the latter, upon its issuance, constitutes a breach of trust sufficient to
defeat the title and right acquired by petitioner NGA, an innocent purchaser for value.
It is undisputed that: (1) there are two deeds of sale of the same land in favor of private
respondents, namely: (a) the conditional sale with right to repurchase or the 'Kasulatan Ng
Bilihang Mabibiling Muli" which was registered under Act 3344 and (b) the deed of absolute
sale or "Kasulatan ng Bilihang Tuluyan" which was not registered; (2) the condition that the
Certificate of Title will be delivered to the buyers upon its issuance and upon payment of the
balance of P40,000.00 is contained in the deed of absolute sale; and (3) the land in question at
the time of the execution of both sales was not yet covered by the Torrens System of
registration.
It is axiomatic, that while the registration of the conditional sale with right of repurchase may
be binding on third persons, it is by provision of law "understood to be without prejudice to
third party who has better right" (Section 194 of the Administrative Code, as amended by Act
No. 3344). In this case, it will be noted that the third party NGA, is a registered owner under
the Torrens System and has obviously a better right than private respondents and that the
deed of absolute sale with the suspensive condition is not registered and is necessarily binding
only on the spouses Vivas and Lizardo and private respondents.
In their complaint at the Regional Trial Court, private respondents prayed among others, for
two alternative reliefs, such as: (a) to be declared the owners of the property in question or
(b) to order the declared owner to reconvey or transfer the ownership of the property in their
favor.
Private respondents claim a better right to the property in question by virtue of the Conditional
Sale, later changed to a deed of Absolute Sale which although unregistered under the Torrens
System allegedly transferred to them the ownership and the possession of the property in
question. In fact, they argue that they have been and are still in possession of the same openly,
continuously, publicly under a claim of ownership adverse to all other claims since the
purchase on December 2, 1971 (Rollo, p. 165). It is stressed that not until the month of July,
1974 did the plaintiff learn that a title had been issued covering the property in question (Rollo,
p. 15).
Time and time again, this Court has ruled that the proceedings for the registration of title to
land under the Torrens System is an action in rem not in personam, hence, personal notice to
all claimants of the res is not necessary in order that the court may have jurisdiction to deal
with and dispose of the res. Neither may lack of such personal notice vitiate or invalidate the
decree or title issued in a registration proceeding, for the State, as sovereign over the land
situated within it, may provide for the adjudication of title in a proceeding in rem or one in the
nature of or akin a to proceeding in rem which shall be binding upon all persons, known or
unknown (Moscoso vs. Court of appeals, 128 SCRA 719 [1984], citing: City of Manila vs. Lack,
et al., 19 Phil. 324, 337; Roxas vs. Enriquez, 29 Phil. 31; Director of Lands vs. Roman Catholic
Archbishop of Manila, 41 Phil. 120; Aguilar vs. Caogdan, 105 Phil. 661). It is thus evident that
respondents' right over the property was barred by res judicata when the decree of
registration was issued to spouses Vivas and Lizards. It does not matter that they may have
had some right even the right of ownership, BEFORE the grant of the Torrens Title.
Thus, under Section 44 of P.D. 1529, every registered owner receiving a certificate of title in
pursuance of a decree of registration, and every subsequent purchaser of registered land
taking a certificate of title for value and in good faith, shall hold the same free from all
encumbrances except those noted on the certificate and any of the encumbrances which may
be subsisting, and enumerated in the law. Under said provision, claims and liens of whatever
character, except those mentioned by law as existing, against the land prior to the issuance of
certificate of title, are cut off by such certificate if not noted thereon, and the certificate so
issued binds the whole world, including the government (Aldecoa and Co. vs. Warner Barns &
Co., 30 Phil. 209 [1915]; Snyder vs. Fiscal of Cebu and Avila, 42 Phil. 766 [1922]). Under said
ruling, if the purchaser is the only party who appears in the deeds and the registration of titles
in the property registry, no one except such purchaser may be deemed by law to be the owner
of the properties in question (Ibid). Moreover, no title to registered land in derogation to that
of the registered owner shall be acquired by prescription or adverse possession (Umbay vs.
Alecha, 135 SCRA 427 [1985]).
It does not appear that private respondents' claim falls under any of the exceptions provided
for under Section 44 of P.D. 1529 which can be enforced against petitioner herein.
Thus, it has been invariably restated by this Court, that "The real purpose of the Torrens System
is to quiet title to land and to stop forever any question as to its legality. "Once a title is
registered, the owner may rest secure, without the necessity of waiting in the portals of the
court, or sitting on the "mirador su casato," avoid the possibility of losing his land." "An indirect
or collateral attack on a Torrens Title is not allowed (Dominga vs. Santos, 55 Phil. 361; Singian
vs. Manila Railroad, 62 Phil. 467)."
The only exception to this rule is where a person obtains a certificate of title to a land belonging
to another and he has full knowledge of the rights of the true owner. He is then considered as
guilty of fraud and he may be compelled to transfer the land to the defrauded owner so long
as the property has not passed to the hands of an innocent purchaser for value (Angeles vs.
Sania, 66 Phil. 444 [1938], emphasis supplied).
It will be noted that the spouses Vivas and Lizardo never committed any fraud in procuring the
registration of the property in question. On the contrary, their application for registration
which resulted in the issuance of OCT No. 1728 was with complete knowledge and implied
authority of private respondents who retained a portion of the consideration until the issuance
to said spouses of a certificate of title applied for under the Torrens Act and the corresponding
delivery of said title to them. The question therefore, is not about the validity of OCT No. 1728
but in the breach of contract between private respondents and the Vivas spouses. Petitioner
NGA was never a privy to this transaction. Neither was it shown that it had any knowledge at
the time of the execution of the mortgage, of the existence of the suspensive condition in the
deed of absolute sale much less of its violation. Nothing appeared to excite suspicion. The
Special Power of Attorney was regular on its face; the OCT was in the name of the mortgagor
and the NGA was the highest bidder in the public auction. Unquestionably, therefore, the NGA
is an innocent purchaser for value, first as an innocent mortgagee under Section 32 of P.D.
1529 and later as innocent purchaser for value in the public auction sale.
Private respondents claim that NGA did not even field any representative to the land which
was not even in the possession of the supposed mortgagors, nor present any witness to prove
its allegations in the ANSWER nor submit its DEED OF MORTGAGE to show its being a
mortgages in good faith and for value (Rollo, p. 110).
Such contention is, however, untenable. Well settled is the rule that all persons dealing with
property covered by a torrens certificate of title are not required to go beyond what appears
on the face of the title. When there is nothing on the certificate of title to indicate any cloud
or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not
required to explore further than what the torrens title upon its face indicates in quest for any
hidden defect or inchoate right that may subsequently defeat his right thereto (Centeno vs.
Court of Appeals, 139 SCRA 545 [1985]).

More specifically, the Court has ruled that a bank is not required before accepting a mortgage
to make an investigation of the title of the property being given as security (Phil. National
Cooperative Bank vs. Carandang Villalon, 139 SCRA 570 [1985]), and where innocent third
persons like mortgagee relying on the certificate of title acquire rights over the property, their
rights cannot be disregarded (Duran vs. IAC, 138 SCRA 489 [1985]).

Under the circumstances, the Regional Trial Court could not have erred in ruling that plaintiffs
(private respondents herein) complaint insofar as it prays that they be declared owners of the
land in question can not prosper in view of the doctrine of indefeasibility of title under the
Torrens System, because it is an established principle that a petition for review of the decree
of registration will not prosper even if filed within one year from the entry of the decree if the
title has passed into the hands of an innocent purchaser for value (Pres. Decree No. 1529, Sec.
32). The setting aside of the decree of registration issued in land registration proceedings is
operative only between the parties to the fraud and the parties defrauded and their privies,
but not against acquirers in good faith and for value and the successors in interest of the latter;
as to them the decree shall remain in full force and effect forever (Domingo vs. The Mayon
Realty Corp. et al., 102 Phil. 32 [19571). Assuming, therefore, that there was fraud committed
by the sellers against the buyers in the instant case, petitioner NGA who was not privy therein
cannot be made to suffer the consequences thereof As correctly declared by the trial court,
the National Grains Authority is the lawful owner of the property in question by virtue of its
indefeasible title.

As to private respondents' alternative prayer that the declared owner be ordered to reconvey
or transfer the ownership of the property in their favor, it is clear that there is absolutely no
reason why petitioner, an innocent purchaser for value, should reconvey the land to the
private respondents.

PREMISES CONSIDERED, the decision of the Court of Appeals is REVERSED and SET ASIDE, and
the decision of the Court of First Instance of Laguna and San Pablo City, now Regional Trial
Court, is REINSTATED.

SO ORDERED.